Case Law Details
Citicorp Trustee Company Ltd. Vs DCIT (ITAT Mumbai)
ITAT Mumbai held that the material/information on which AO have re-opened the assessment is no longer existing being legally incorrect. Hence, action of AO to have issued notice of re-opening of assessment u/s 148 of the Act itself fails.
Facts- The assessee is a company incorporated in the United Kingdom. The assessee company acted as a trustee for bond issuance in the capital markets M/s. Bharat Forge Ltd which had issued earlier US 39.9 millions Zero Coupon, Tranche B Convertible bonds; and redeemed the bonds and the total redemption payable was US $ 22.535 million. Though, M/s. Bharat Forge Ltd deducted tax on redemption premium of US$ 15.48 million no tax was deducted for redemption of US$ 7.06 million.
Accordingly, the AO of M/s. Bharat Forge Ltd. held it to be assessee in default u/s. 201(1) r.w.s 195 of the Act and taxed the interest on Foreign Currency Convertible Bonds (FCCB) as accrued in India as per the provisions of section 5(2)(b) of the Act and held that the interest to the tune of Rs.42,84,48,114/- was deemed to accrue or arise in India and the TDS liability was to the tune of Rs.4,46,54,333/-. Based on the aforesaid information, the AO of assessee taking note that the assessee having received funds amounting to Rs.42,84,48,114/- during the year, failed to file return of income despite having taxable income, opinioned that he has “reason to believe” income chargeable to tax amounting to Rs.42,84,48,114/- has escaped assessment.
AO rejected such a plea and proceeded to pass the assessment. This action of AO is being assailed before us by raising the legal issue.
Conclusion- Held that the information given by the AO (TDS) of M/s. Bharat Forge Ltd. which was the foundation on which was the AO of assessee has re-opened the assessment of assessee is no longer existing being legally incorrect. Therefore, the material/information on which AO have re-opened the assessment having been removed, the action of AO to have issued notice of re-opening of assessment u/s 148 of the Act itself fails. For that we rely on the legal Maxim “Sublato Fundamento credit opus” meaning in case foundation is removed, the super-structure falls. In the case of Badarinath Vs. Tamilnadu, the Hon’ble Supreme Court has held that once the basis of proceeding is gone, all consequential order and acts would fall on the ground automatically which is applicable to judicial and quasi-judicial proceedings.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
1. This is an appeal preferred by the assessee against the order of the Assessing Officer (AO) dated 19.01.2023 passed u/s 143(3) r.w.s. 144C(13) r.w.s 147 of the Income Tax Act, 1961 (hereinafter “the Act”).
2. At the outset, the Ld. AR of the assessee brought to our notice the ground no. 2 wherein the assessee has raised the legal issue against the action of the AO to have reopened the assessment u/s 147 of the Act without satisfying the essential condition prescribed under the Act; and therefore contends that the action of the AO is ab-initio-void.
3. In order to examine the legal issue raised by the assessee, it is necessary to look into the reasons recorded by AO to reopen the assessment which is reproduced as under: –
“The assessee Citcorp Trustee Company Ltd, has not filed return of income for the assessment year 2014-15. In this case information is received from DCIT(IT), Circle-1, Pune. The AO has passed an order u/s 201(1) r.w.s. 195 of the Act treating the assessee, Bharat Forge Ltd. as an assessee in default within the meaning of Sec. 201(1) of the Act. The Bharat Forge Ltd issued the FCCB, constituted by a Trust Deed dated 28.04.2006 between Bharat Forge Ltd. and Citicorp Trustee Company Ltd UK. The AO has taxed the interest on FCCB accrued in India as per the provisions of section 5(2)(b) of the Income Tax Ac, 1961. The amount of interest of Rs.42,84,48,114/- held to be deemed to accrue or arise in India and the TDS liability has been worked out on such interest remitted at Rs.4,46,54,333/- (USD 828812 x 54,31).
2. The assessee M/s Citycorp Trustee Company Ltd has not filed return of income for the assessment year 2014-15. However, the assessee has received funds amounting to Rs.42,84,48,114/-being income during the year. The assessee has failed to file its return of income despite having taxable income as per the provision of IT Act.
3. In view of the above facts of the case and reasons described above, I have reason to believe income chargeable to tax amounting to Rs.42,84,48,114/- has escaped assessment by reason of failure on the part of assessee to disclose fully and truly all material facts necessary for assessment of income and tax thereon in respect of the said transaction for AY. 2014-15. Accordingly, the case is fit for reopening u/s 147 of the Act.”
4. As noted, on the aforesaid reason, the AO has resorted to re-open the assessment of the assessee which is a non-resident company which action of AO has been challenged for non-fulfillment of the condition- precedent to usurp the re-opening jurisdiction. Brief facts regarding this issue are that the assessee (Citicorp Trustee) is a company incorporated in United Kingdom (UK) and is a non-resident as per section 6 of the Act. And according to assessee, since it has not earned any taxable income in India, it did not file any return of income for AY. 2014-15. The assessee company acted as a trustee for bond issuance in the capital markets M/s. Bharat Forge Ltd which had issued earlier US 39.9 millions Zero Coupon, Tranche B Convertible bonds; and redeemed the bonds on 26.04.2013 and the total redemption payable was US $ 22.535 million. Though, M/s. Bharat Forge Ltd deducted tax on redemption premium of US$ 15.48 million no tax was deducted for redemption of US$ 7.06 million. Accordingly, the AO of M/s. Bharat Forge Ltd. held it to be assessee in default u/s 201(1) r.w.s 195 of the Act and taxed the interest on Foreign Currency Convertible Bonds (FCCB) as accrued in India as per the provisions of section 5(2)(b) of the Act and thus held that the interest to the tune of Rs.42,84,48,114/- was deemed to accrue or arise in India and the TDS liability was to the tune of Rs.4,46,54,333/-. Based on the aforesaid information, the AO of assessee taking note that the assessee having received funds amounting to Rs.42,84,48,114/- during the year, failed to file return of income despite having taxable income, opinioned that he has “reason to believe” income chargeable to tax amounting to Rs.42,84,48,114/- has escaped assessment.
5. The assessee pursuant to receiving the “reasons recorded” (supra) has filed its objection to the proposed reopening of assessment by stating that during the relevant AY. 2014-15, the assessee company was appointed as a trustee for issuance of Foreign Currency Convertible Bond (FCCBs) amounting to Rs.42,84,48,114/- of M/s. Bharat Forge Ltd [BFL], a company which was incorporated in India. The mechanism as per which the FCCBs are issued was brought to the notice of AO by submitting that in order to simplify the administration of large numbers of investors, the issue of FCCBs is usually coordinated with the involvement of a trustee (in this case the assessee), which is appointed on the terms of the Trust Deed with limited tasks such as receiving an annual certificate, agreeing to documentation amendments in certain situations and in case the issuer (in this case M/s. Bharat Forge Ltd.) defaults in its obligations under such FCCBs, the trustee shall assist in enforcing the rights of the ultimate investors/ultimate owners on the instructions and at the cost of the ultimate investors ultimate owners. Further, a paying agent is appointed by the Issuer to convey payments from the Issuer to clearing systems through which ultimate investors / ultimate owners hold their interest in the FCCBs and receive payment. Thus, the assessee explained to AO that payments as such do not pass through the hands of the Trustee (assessee in this case) unless there is an enforcement following an event of default and a conversion agent is appointed by the Issuer (M/s. Bharat Forge Ltd.) to administer conversion of the FCCBs into shares in accordance with the terms of the FCCBs and its own appointment agreement. It was brought to the notice of AO that an offering memorandum is published and circulated to potential investors (i.e. potential noteholders) which contains the principal trust deed clauses (so that the potential investor has an insight into the nature of the relationship between the parties involved), some background information about the issuer and its business, and the terms pursuant to which the notes are issued. The potential investors subscribe to the notes for a particular value. Potential investors who subscribe to the notes will be allocated either the full amount requested, or a part thereof (where the issuance has been oversubscribed by the investors). An agreement is established, because an offer (by way of the offering circular) has been made and an acceptance (by way of subscription to the notes) has occurred. Thus, it was contended by the assessee non-resident that the income received on redemption of bonds issued by M/s. Bharat Forge Ltd even if chargeable to tax would be in the hands of the ultimate beneficiaries and not the Trustee/nominee of the bonds. And therefore according to assessee, question of income escaping assessment doesn’t arise in this case and pleaded to AO to drop the proposed re-opening of assessment. However AO rejected such a plea and proceeded to pass the assessment. This action of AO is being assailed before us by raising the legal issue.
6. Assailing the action of AO to have re-opened the assessment for AY. 2014-15, the Ld. AR of the assessee pointed out that the foundation on which the AO has reopened the assessment of assessee (non-resident) was based on information received from AO of M/s. Bharat Forge Ltd. that it was an assessee in default for non-deduction of tax while issuing FCCB to the tune of Rs.42,84,48,114/- to the nonresident assessee company. According to the Ld. AR, certain development happened after the impugned re-opening of assessment. It was brought to our notice that the issuer of FCCB i.e. M/s. Bharat Forge Ltd had challenged the action of AO (TDS) to have declared it as “assessee in default” u/s 201(1) of the Act and the lis finally came up for adjudication before the Tribunal (Pune) [DCIT Vs. Bharat Forge Ltd. (ITA. No.341 & 461/Pun/2021 for AY. 2014-15 dated 03.01.2023] and the Tribunal has held that M/s. Bharat Forge Ltd. was not an assessee in default and consequently need not have deducted the TDS on the said amount by holding as under: –
“1. The Ld.CIT(A), has erred in law and on facts in holding that the appellant company was not liable to deduct tax at source u/s 196C r.w.s. 115 AC on the interest payable on FCCBs.
2. The Ld. CIT(A) has erred in law and facts in not considering the issue that the assessee has taken a liability of issuing FCCBs from India after taking approval of RBI (Indian authority), as per rules and guidelines of RBI and has remitted interest from India as its liability duly recognized in its books of account prepared for Indian regulatory authorities, resulting into income accruing and arising to the nonresident under section 5(2) of the Act for which the deeming provisions of section 9(1) are not applicable.
3. The Ld. CIT(A) erred in law and on facts in holding that both sections 5(2) and 9(1)(v) of the Act, are applicable to determine the situs of interest income in case of non-resident.
4. The Ld. CIT(A) erred in law and on facts in holding that the interest paid by the appellant on its FCCBs is covered by exception to Section 9(1)(v)(b) of the Act and consequently it falls outside the ambit of deemed income arising and accruing in India and as a result out of Section 5 also.
5. The Ld. CIT(A) has erred in law to appreciate that the provisions of section 115AC of the Act, is a code in itself and then travelling to another charging section 5(2) of the Act for deciding the taxability of interest income.
6. On the facts and in circumstances of the case the Ld. CIT(A), ought to have upheld the order of the Assessing Officer.
7. Appellant craves leave to add, amend and alter any other grounds of appeal.”
5. Briefly, the facts of the case are as under :-
The respondent-assessee is a company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of manufacturing and selling of automotive components. During the course of scrutiny of e-TDS returns filed by the respondent-assessee for the financial year 2013-14, the Dy. Commissioner of the Income Tax (International Taxation)-I, Pune (hereinafter called as ‘TDS Officer’) observed that the respondent-assessee had remitted USD 70,60,125 as Foreign Currency Convertible Bonds (‘FCCBs’) redemption premium without deduction of tax at source. Accordingly, the TDS Officer had called upon the respondent-assessee to show cause as to why it should not be treated as “an assessee in default” u/s 201(1) of the Income Tax Act, 1961 (‘the Act’) vide show-cause notice dated 24.06.2013.
6. In response to the said show-cause notice, the respondent-assessee had filed a detailed explanation stating that the respondent-assessee was liable to redeem Tranche B Bonds on 26.04.2013 at 56.481% of their principal amount, if these were not previously converted, redeemed or purchases and cancelled. The total redemption premium payable was USD 22.535 million. It is seen from the details filed that the respondent-assessee has duly deducted and paid tax on redemption premium of USD 15.48 million, whereas no tax is deducted from redemption premium of USD 7.06 million as above. It is submitted that no tax deduction is required to be made in respect of redemption of premium of USD 70,60,125 as the bonds in respect of which premium was redeemed were utilized outside India for the purpose of investment/loans to overseas subsidiaries, were parked outside India and those funds were not brought into in India. The respondent-assessee company also filed copies of ECB-2 filed with Reserve Bank of India in support of above contention. It is submitted that the premium paid on such redemption partakes the character of interest as defined u/s 2(28A) of the Act. It is submitted that the recipient of interest paid in respect of any debt incurred or money borrowed and utilized for purpose of business outside India or for the purpose of making or earning any income from any source outside India is not liable to tax in India as there is no income that had accrued or arisen in India to recipient within the meaning of section 9(1)(v) of the Act. Therefore, the question of deduction of tax at source does not arise. Reliance in this regard also placed on the decision of the Coordinate Bench of the Tribunal in the case of Adani Enterprises Ltd. (ITA No.3072/Ahd/2009 & Co.No.291/Ahd/2009).
7. However, the TDS Officer had rejected the above contention of the respondent-assessee by holding that the issue of FCCBs is governed by “issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993” notified by Department of Economic Affairs No.GSR 700(E), dated 12.11.1993 and Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme is the notified scheme for purposes of section 115CA(1)(a), in respect of assessment year 2002-03 and subsequent assessment years vide CBDT Notification No.SO987(E), dated 10.09.2002 and no exclusion is provided in the scheme of taxation of FCCBs in respect of ends use of proceeds from the FCCBs. Accordingly, the TDS Officer held that the respondent-assessee is “an assessee in default” for non-deduction of tax at source on redemption premium of USD 70,60,125. Accordingly, the TDS Officer called upon the respondent-assessee to deduct tax at source of Rs.4,50,12,763/- along with interest u/s 201(1A) of Rs.99,02,807/-.
8. Being aggrieved by the above assessment order, an appeal was filed before the ld. CIT(A) who originally vide order dated 29.09.2017 had dismissed the appeal in limine without condoning of delay of 921 days. However, on appeal before the Income Tax Appellate Tribunal (ITAT), the matter was remanded to CIT(A) vide order dated 17.05.2019 to decide the issue in appeal on merits by condoning the delay. Pursuant to the order of remand by the Tribunal, the ld. CIT(A) vide order dated 30.03.2021 had allowed the appeal of the respondent-assessee by holding that no interest income had accrued to the non-recipient in terms of provisions of section 5(2) r.w.s. 9(1)(v) of the Act placing reliance on the decision of the Co-ordinate Bench of the Tribunal in the case of Adani Enterprises Ltd. (supra).
9. Being aggrieved, the Revenue is in appeal before us in the present appeal.
10. The ld. Sr. DR submits that the ld. CIT(A) ought not to have quashed the order passed by the TDS Officer u/s 201(1) of the Act. He further submitted that the income had arisen from issue of FCCBs should be held to have accrued in India within the meaning of section 5(2) of the Act. The interest that had accrued to non-recipient u/s 5(2) is taxable and the deeming provisions of section 9(1)(v) have no role to play.
11. On the other hand, ld. AR submitted that the accrual of income does not depend upon the Jurisdiction Court to decide the issues that had arisen after entering into the contract. The ld. AR placing reliance on the decision of the Madras High court in the case of C.G. Krishnaswami Naidu vs. CIT, 62 ITR 686 (Mad.) submitted that money was lent in the foreign country and money had been borrowed from outside India and utilized for the purpose of making investments in foreign subsidiaries and, therefore, any interest accrued on such FCCBs is not taxable in India.
12. We heard the rival submissions and perused the material on record. The issue in the present appeal relates to the chargeability of redemption premium on FCCBs borrowed from outside India and utilized for the purpose of making investments or loans to overseas subsidiaries in the hands of the recipient of such premium. It is not the case of the respondent-assessee that the redemption premium does not partake the character of interest. The provisions of section 2(45) defines the total income as total amount referred to in section 5 computed in the manner laid down in that section of the Act. The provisions of section 4 provide that the total income of the previous year subject to the charge of income tax. The provisions of section 5 define the scope of total income referred to the provisions of section 4 of the Act. The provisions of section 5 classify the assessee probably in three categories, namely, resident, ordinarily resident or non-resident. The criteria for determination of Residential status of the assessee is laid down u/s 6 with which we are not concerned in the present appeal. The scope of the provisions of section 5 defines as to what type of income would constitute total income in the case, when the assessee belonging to each of the three categories. The provisions of section 5(2) defines total income of any previous year of a person who is non-resident to include income which is received or deemed to have received in India during such year or accrued or deemed to have accrued to him during the previous year. The provisions of section 9 indicate as to what type of income to have accrued, arisen in India. The provisions of section 9 spells out the instance of the income as non-resident would be liable to tax in India. The provisions of section 9(1)(v) spells out when the interest income is deemed to have accrued arisen in India, received or interest income received or deemed to have received in India which reads as under :-
“9(1) …….
(v) income by way of interest payable by—
(a) the Government; or
(b) a person who is a resident, except where the interest is payable in respect of any debt incurred, or moneys borrowed and used, for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or
(c) a person who is a non-resident, where the interest is payable in respect of any debt incurred, or moneys borrowed and used, for the purposes of a business or profession carried on by such person in India.
Explanation.—For the purposes of this clause,—
(a) it is hereby declared that in the case of a non-resident, being a person engaged in the business of banking, any interest payable by the permanent establishment in India of such nonresident to the head office or any permanent establishment or any other part of such non-resident outside India shall be deemed to accrue or arise in India and shall be chargeable to tax in addition to any income attributable to the permanent establishment in India and the permanent establishment in India shall be deemed to be a person separate and independent of the non-resident person of which it is a permanent establishment and the provisions of the Act relating to computation of total income, determination of tax and collection and recovery shall apply accordingly; (b) “permanent establishment” shall have the meaning assigned to it in clause (iiia) of
section 92F;”
13. The scope of the provisions of section 9(1)(v) explained by the CBDT Circular dated 05.07.1976 which is reproduced as follows :-
“Scope and sweep of s.9(1)(v).- The effect of the omission of the fourth lime of section 9(1)(i), and the scope and effect of the new inserted section 9(1)(v), have been elaborated in the following portion of the departmental circular no.202, 5-7-1976:- Source rule for “interest” – Section 9(1)(i) and (v).- 14.1 A non-resident taxpayer is chargeable to tax in India in respect of income from whatever source derived which is received or is deemed to be received in India or which accrues or arises or is deemed to accrue or arise in India. Under section 9(1)(i) of the Income-tax Act, as it stood prior to its amendment by the Finance Act, 1976 (66 of 1976), any income accruing or arising “through or from any money lent at interest and brought into India in cash or in kind” was deemed to accrue or arise in India. It was judicially held that to satisfy the test of taxability, the lending of money abroad and the bringing of the same into India should be an integral part of a composite transaction and the bringing of money into India should be with the knowledge of the lender. Thus, interest on moneys borrowed abroad and brought without the knowledge of the lender was not chargeable to tax in India.
14.2 Section 9(1) has now been amended to replace the aforesaid provision by a simple and comprehensive source rule. Under the amended provision, interest income of the following types will be deemed to accrue or arise in India :
(a) Interest payable by the Central Government or any State Government.
(b) Interest payable by a resident except in the following cases:-
(i) interest payable by a resident in respect of any debt incurred, or any moneys borrowed and used, for the purposes of a business or profession carried on by him outside India ; and
(ii ) interest payable by a resident in respect of any debt incurred, or any moneys borrowed and used, for the purposes of making or earning any income from any source outside India.
It may be noted that where moneys borrowed by a resident for the purposes of a business or profession carried on by him outside India are actually used for any other purpose, interest payable thereon will be deemed to accrue or arise in India. Similarly, interest payable on moneys borrowed by a resident for the purposes of making or earning any income from any source outside India will be deemed to accrue or arise in India if the moneys are actually used for any purpose in India. (c) Interest payable by a non-resident in respect of any debt incurred, or money borrowed and used, for purposes of a business or profession carried on by him in India.
It may be noted that interest payable by a non-resident in respect of any debt incurred, or moneys borrowed and used, for the purposes of making or earning any income from any source, other than a business or profession carried on by him in India, will not be deemed to accrue or arise in India. Thus, if a nonresident “A” borrows moneys from a non-resident “B” and invests the same in share of an Indian company, interest payable by “A” to “B” will not be deemed to accrue or arise in India. Similarly, if a lead bank obtains loans outside India from a consortium of foreign banks and lends the same to an Indian concern, interest paid by the lead bank to the members of the consortium will not attract liability towards income-tax in India.
14.3 The aforesaid amendment has come into force with effect from 1-6-1976 and is, accordingly, applicable for the deduction of income tax at source from income by way of interest paid on or after that date and for assessment of such income for the assessment year 1977-78 and subsequent years.”
14. On carefully perusal of the above CBDT Circular, it would be cleared that the interest paid by the resident in respect of loan that was incurred or money borrowed utilized for the purpose of making or earning any income from outside India is not taxable in India. In the present case, it is not disputed that FCCBs to the extent of Rs.12.5 millions USD were utilized for the purpose of making investments in share of overseas subsidiaries or on the loans given to overseas subsidiaries. No doubt, the redemption premium partakes interest as defined u/s 2(28A) of the Act, however, by virtue of exclusive clause of the provisions of section 9(1)(v), the interest income in the hands of recipient cannot be said to have accrued or arisen in India. When the income has not arisen in India in the hands of recipient/non-resident, there is no obligation on the part of the respondent-assessee to deduct tax at source on payment of interest as held by the Hon’ble Supreme Court in the case of GE India Technology Cen. (P.) Ltd. vs. CIT, 327 ITR 456 (SC) followed by the Hon’ble Karnataka High Court in the case of Karnataka Power Transmission Corporation Ltd. vs. DCIT, 383 ITR 59 (Karnataka). We find that the order of the ld. CIT(A) is in consonance with the legal position discussed above. Therefore, the order of the ld. CIT(A) is just, proper and reasoned order. Thus, we do not find any reason to interfere with order of the ld. CIT(A).
15. In the result, the appeal filed by the Revenue in ITA No.341/PUN/2021 for A.Y. 2014-15 stands dismissed.”
7. It is noted that the Tribunal (Pune) has held that the interest paid by the resident (M/s. Bharat Forge Ltd.) in respect of loan that was incurred for money borrowed/utilized for the purpose of making or earning any income from outside India is not taxable in India. The Tribunal held that the FCCBs to the extent of Rs.12.5 Millions USD were utilized for the purpose of making investments in share of overseas subsidiaries or on the loans given to overseas subsidiaries. The Tribunal observed that even though, the redemption premium partakes character of interest as defined u/s 2(28A) of the Act, but, by virtue of exclusion clause of the provisions of section 9(1)(v) of the Act, the interest income in the hands of recipient cannot be said to have accrued or arisen in India. Accordingly, the Tribunal held that when the income has not arisen in India in the hands of recipient/non-resident, there was no obligation on the part of M/s. Bharat Forge Ltd. to deduct tax at source on payment of interest as held by the Hon’ble Supreme Court in the case of GE India Technology Cen. (P.) Ltd. Vs. CIT [327 ITR 456 (SC)]. In the light of the aforesaid decision of the Tribunal in the case of the payer M/s. Bharat Forge Ltd., according to the Ld. AR, the foundation/information on which the AO of assessee company has reopened the assessment [information from AO of M/s Bharat Forge Ltd. that M/s Bharat Forge Ltd. is an assessee in default u/s 201(1A) of the Act for non-deduction of tax at source on redemption premium given to the assessee (Citicorp Trustee Company Ltd.) had directed M/s. Bharat Forge Ltd. to deduct tax at source of Rs.4,50,12,763/- along with interest u/s 201(1A) of the Act to the tune of Rs.99,02,807/-], has been found to be erroneous and legally unsustainable in the light of the Hon’ble Supreme Court decision GE India Technology Cen. (P.) Ltd. (supra), and thus Tribunal upheld the action of the Ld. CIT(A) in the case of M/s. Bharat Forge Ltd. deleting the decision of the AO/TDS directing M/s. Bharat Forge Ltd to deduct tax at source of Rs.4,50,12,763/- along with interest u/s 201(1A) of the Act of Rs.99,02,807/-. Therefore, according to the Ld. AR, when the foundational facts on which the AO of the assessee (Citicorp Trustee Ltd.) who was recipient of the interest from M/s. Bharat Forge Ltd was legally un-sustainable, the same cannot be the material on which the AO could have formed “reason to believe escapement of income”. And therefore, the Ld. AR contended that the foundation on the basis of which AO of assessee have resorted to reopening of the assessment having being removed by the order of the Tribunal in the case of payer/M/s. Bharat Forge Ltd (supra), the impugned action of the assessee’s AO to have reopened the assesment on the strength of the said information also has to fall. Therefore, he pleaded the action of the AO to have reopened the assessment was legally un-tenable without jurisdiction and should be quashed.
8. Per contra, the Ld. DR supported the decision of the Ld. DRP/AO and drew our attention to the decision of the Ld. DRP on the legal issue against the reopening of the assessment and does not want us to interfere with the action of the AO to have reopened the assessment.
9. In his rejoinder, the Ld. AR fairly conceded the fact that when the Ld. DRP adjudicated the legal issue of reopening by order dated 31.12.2022, the order of the Tribunal (Pune) in the case of payer/M/s. Bharat Forge Ltd dated 03.01.2023 was not on record. And therefore, the aforesaid submission could not have been made before the Ld. DRP. However, according to the Ld. AR since this is a legal issue and the Pune Tribunal order in the case of M/s. Bharat Forge Ltd needs to be taken judicial notice for adjudicating the legal issue raised by the assessee in the instant case.
10. We have heard both the parties and perused the records. On the legal issue, we note that the essential condition prescribed under the Act for reopening the assessment u/s 147 of the Act AO is that he has to firstly record his “reasons to believe, escapement of income”. It is well settled that the “reason to believe” postulates a foundation based an information and belief based on reason. In this case, the AO of assessee received an information from the AO (TDS) of the payer M/s. Bharat Forge Ltd that interest/redemption premium paid to assessee trust was without deducting TDS; and since the amount of interest of Rs.42,84,48,114/- was held to be deemed to accrue or arise in India, the payer/M/s. Bharat Forge Ltd. was held to be an assessee in default u/s 201(1A) of the Act. Based on this information, the AO of assessee has reopened the assessment. Based on this action of AO(TDS) of M/s Bharat Forge Ltd, the AO of assessee recorded his reason to believe that income chargeable to tax amounting to Rs.42,84,48,114/- has escaped assessment. However, we note that subsequently the action of the AO (TDS) of M/s. Bharat Forge Ltd. was challenged by M/s. Bharat Forge Ltd before the Ld. CIT(A) who was pleased to delete the direction of AO (TDS) to deduct the tax at source on the redemption premium. And this action of the Ld. CIT(A) has been upheld by the Tribunal (Pune) by order dated 03.01.2023 (supra) by holding that the income has not arisen in India in the hands of the recipient/non-resident and therefore there was no obligation on the part of the M/s. Bharat Forge Ltd. to deduct tax at source on the payment of interest (redemption premium) as held by the Hon’ble Supreme Court in the case of GE India Technology Cen. (P.) Ltd. (supra). In the light of the aforesaid action of the Tribunal in the case of payer/M/s. Bharat Forge Ltd., the information given by the AO (TDS) of M/s. Bharat Forge Ltd. which was the foundation on which was the AO of assessee has re-opened the assessment of assessee is no longer existing being legally incorrect. Therefore, the material/information on which AO have re-opened the assessment having been removed, the action of AO to have issued notice of re-opening of assessment u/s 148 of the Act itself fails. For that we rely on the legal Maxim “Sublato Fundamento credit opus” meaning in case foundation is removed, the super-structure falls. In the case of Badarinath Vs. Tamilnadu AIR 2000 (Supreme Court) 3243 the Hon’ble Supreme Court has held that once the basis of proceeding is gone, all consequential order and acts would fall on the ground automatically which is applicable to judicial and quasi-judicial proceedings.
11. In the light of the aforesaid discussion, the legal issue raised by the assessee is allowed and the action of the AO to reopen the assessment is quashed.
12. And other grounds raised by the assessee are not adjudicated since it has become academic in nature.
13. In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on this 21/08/2023.
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