Full Text
ORDINARY ORIGINAL CIVIL JURISDICTION
INCOME TAX APPEAL NO.1857 OF 2018
Pr. Commissioner of Income Tax-1, ]
Thane, Ashar I.T. Park, ‘B’ Wing, ]
6th floor, Wagle Industrial Estate, ]
Thane (W)-400 604. ]…..Appellant
(now merged with Agfa Healthcare ]
India Pvt. Ltd.), Technosoft Knowledge ]
Gateway, 2nd
Floor, B-14, Road No.1, ]
Wagle Industrial Estate, ]
Thane (West) – 400604 ]
PAN: AABCB256K ]
(Assessment Year 2007-08) ]…..Respondents
Mr P. J. Pardiwalla, Senior Advocate a/w Mr Harsh Kothari i/by Mr Atul K. Jasani, for the Respondent.
JUDGMENT
1. Heard learned counsel for the parties.
2. This Appeal is directed against the Income Tax Appellate Tribunal’s (ITAT) order dated 15 September 2017 allowing the Respondent-Assessee’s Appeal and setting aside the order dated 30 April 2015 made by the Commissioner of Income Tax (Appeals)-I, Thane, for the Assessment Year 2007-08.
3. The assessee, engaged in the business of distributing photographic and electronic imaging systems, filed its return of income on 31 October 2007, declaring a total income of Rs.11,42,17,803/-. This return was revised on 07 November 2007, declaring a total income of Rs.12,30,39,783/-.
4. The Respondent’s return was selected for scrutiny assessment, and the original assessment was completed under Section 143(3) of the Income Tax Act, 1961 (“IT Act”) on 22 December 2010 by accepting the returned income of Rs.12,30,39,783/-. This was in conformity with the price determination by the Transfer Price Officer (“TPO”), who suggested no adjustments to the value of the assessee's international transactions.
5. For the Assessment Year 2008-09, the TPO, while finalizing its order under Section 92CA (3), suggested an adjustment of Rs. 11,22,74,613/-. Based on this, the assessee’s case was reopened by invoking the provisions of Section 147 of the IT Act. A notice under Section 148 was issued on 19 January 2012, followed by notices under Section 143(2) and Section 143(1) issued on 30 July 2012 and 11 September 2012, respectively.
6. An order under Section 143 read with Section 147 was passed on 25 March 2013 without referring to the TPO. The Pr. CIT-1, Thane, vide order dated 05 February 2015, exercised revisional jurisdiction under Section 263 of the IT Act and set aside the AO’s order dated 25 March 2013, being erroneous and prejudicial to the interest of Revenue. The AO was directed to undertake de novo assessment after referring to the TPO. Accordingly, an order under Section 143(3) read with Section 144C(13) of the IT Act was passed on 24 October 2017 by assessing the income at Rs.23,53,14,390/- after making an addition of Rs.11,62,91,948/- to the total income of the assessee.
7. The assessee appealed the above orders, but the CIT(A)- 1, Thane, vide order dated 30 April 2015, dismissed the assessee’s appeal. The assessee assailed the order dated 30 April 2015 before the ITAT, which has allowed the assessee’s appeal vide the impugned order dated 15 September 2017. Hence, this Appeal by the Revenue under Section 260A of the IT Act.
8. Mr Sharma, learned counsel for the Appellant-Revenue, urges the formulation of the following substantial question of law, which, according to him, arises in this Appeal. “ Whether, on the facts and in the circumstances of the case and in law, the tribunal was justified in quashing the re-assessment proceedings without appreciating the fact that the A. O. while recording the reasons for re-opening, recorded his own satisfaction after analysis of the information received?”
9. This Appeal was admitted on the above substantial question of law, and with the consent of the learned counsel for the parties, the Appeal was taken up for final disposal.
10. Mr Sharma, learned counsel for the Appellant, submitted that the Additional CIT, Transfer Pricing-1(1), Mumbai, vide a letter informed the Jt. CIT, Range-1, Thane, that income had escaped during the relevant assessment year. Accordingly, the Jt. CIT, Range-1, Thane, was duty-bound to pass on the information to the AO with a direction to take necessary action. He submitted that in such a matter, the determination of the TPO binds the AO, and there is no further option left with the AO than to initiate re-assessment proceedings. He submitted that nothing was illegal or improper in initiating re-assessment proceedings, and the ITAT seriously erred in interfering with such initiation.
11. Mr Sharma submitted that this was a case of reopening the assessment within four years. Still, he pointed out that the assessee had failed to disclose all material facts fully and truly, when filing its return of income. He submitted that the TPO, in this case, had determined the Arm’s length price of the international transaction for the next assessment year and, based upon the same, opined that the income had escaped assessment for the relevant assessment year as well. Mr Sharma submitted that this was a sufficient ground to reopen the assessment.
12. Mr Sharma submitted that this was not a case of the AO acting on some borrowed satisfaction or under dictation from the TPO. He pointed out that under the scheme of the IT Act, the AO is bound by the determination of the TPO and must act in conformity with the directions of the TPO. He submitted that the ITAT had not adequately appreciated all these aspects, and the impugned order warrants interference on the substantial question of law formulated in this Appeal.
13. Mr Pardiwalla, learned senior counsel for the Respondent, submitted that this was a clear case where the AO had not himself had no reason to believe that income had escaped assessment. He submitted that this was a case where the TPO passed on some information to the Joint Commissioner. Based on such information, the Joint Commissioner instructed the AO to reopen the assessment. He submitted that the sequence of events prescribed by the IT Act was completely reversed, and the notice to reassess was in complete violation of the provisions of the IT Act.
14. Mr Pardiwalla submitted that there was no independent application of mind by the AO, and this was an instance of the AO acting under dictation. He submitted that the AO incorrectly thought that he was bound by the determination by the TPO for the subsequent assessment year and, based thereupon, issued the impugned notices for reassessment.
15. Mr Pardiwalla submitted that this approach was entirely erroneous, and based on the same, the proceedings were vitiated.
16. Mr Pardiwalla submitted that the ITAT’s reasoning was correct and the Appeal involved no substantial questions of law. In any event, he submitted that substantial question of law must be answered in favour of the assessee and against the Revenue.
17. Mr Pardiwalla relied on the following Judgments in support of his contentions.
(i) Anirudhsinhji K Jadeja v. State of Gujarat, (1995) 5
(ii) Sodexo India Services (P) Ltd. v. ACIT, (141
(iii) Balaji Mines and Minerals (P) Ltd. v. ACIT, (163
(iv) PCIT v. Shodiman Investments (P) Ltd., (422 ITR 337).
(v) Aroni Commercials Ltd v. DCIT-2(1), (362 ITR 403)
(vi) Sheo Narain Jaiswal v. ITO, (1989) 176 ITR 352
(vii) CIT v T R Rajakumari, (1974) 96 ITR 78 (Mad)
(viii) Yeshwant Talkies v. CIT, (1986) 157 ITR 103 (MP)
18. Rival contentions now fall for our determination.
19. This is a case of reopening within the prescribed period of four years. Therefore, the parameters about the assessee failing to fully and truly disclose all material facts would not apply.
20. Section 147 of the IT Act, at the relevant time, provided that if the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year).
21. In this matter, we are not concerned with the provisos or the explanation to this Section.
22. The crucial words, therefore, are “if the assessing has reason to believe …”. This means that the Assessing Officer and not any other officer, whether superior to the Assessing Officer or not, must have had reason to believe that income had escaped assessment. Only then could the Assessing Officer exercise powers under Section 147 of the IT Act.
23. Section 148 of the IT Act had provided that before making the assessment, reassessment or recomputation under section 147, the AO shall serve on the assessee a notice, along with a copy of the order passed, and comply with the other procedural requirements prescribed therein. The proviso sets out that no notice under Section 148 shall be issued unless there is information with the AO which suggests that income chargeable to tax has escaped assessment in the case of the assessee for the relevant assessment year and the AO has obtained prior approval of the specified authority to issue such notice. The specified authority for the grant of approval would be the Commissioner or the Joint Commissioner.
24. In the present case, the satisfaction note based upon which the AO initiated the reassessment proceedings reads as follows: In this case, the Addl, CIT, Transfer Pricing-1(1), Mumbai, by virtue of letter No. Addl.CIT/TP-1(1)/2011-12/ dated 09.01.2008, has informed the Jt.CIT, Range-1, Thane, on 12.01.2012, that income has escaped assessment during the year in question. The requisite details/bifurcation of the arms length price has been submitted, wherein it is informed that income amounting to more than Rs.11 crores has escaped assessment for both the years, I.e. 2007-08 and 2008-09 since the assessee has purchased goods from its AE's by paying prices far more than the ALP. Thus the assessee has wrongly manipulated the benchmarking of its international transactions relating to its medical imaging activity. The Jt. CIT, Range-1, Thane, as per directions, has informed this office on 13.01.2012 to issue necessary notice. Armed with the Transfer Pricing information, the CIT-1, Thane too, vide letter No. THN/CIT-1/TP/AI/2011-12/2395 dated 16.01.2012, has given directions to take necessary action. Based on the above facts and perusal of the information, it is seen that the assessee has overpaid its AE in transaction of import from AE relating to medical imaging segment. The difference had been worked out after holding the benchmark margin of 4.17%. The communication received from the Addl. CIT, Transfer Pricing-1(1), Mumbai is self explanatory in this aspect. As per requirements by the law, the assessee was required to benchmark each international transaction separately. The assessee has clubbed the international transactions of medical imaging segments with its entity level results wherein income has escaped assessment. Considering the above facts, I have reason to believe that income chargeable to tax has escaped assessment due to the proceedings conducted by the Transfer Pricing Wing within the meaning of sec. 147 of the I.T. Act, 1961. Issued notice u/s. 148 of the I.T. Act, 1961.
25. The above note suggests that the Additional CIT, Transfer Pricing, vide letter dated 09 January 2008, informed the Jt. CIT, Range-1, Thane on 12 January 2012, that income had escaped assessment during the relevant year. The Jt. CIT, Range-1, Thane, as per the directions, informed the AO on 13 January 2012 that he should issue the necessary notice. Armed with the Transfer Pricing information, the Jt. CIT-1, Thane, too, vide letter dated 16 January 2012 issued directions to the AO to take necessary actions. Considering all this, the AO, in his satisfaction note, has stated that he had reason to believe that the income chargeable to tax had escaped assessment due to the proceedings conducted by the Transfer Pricing Wing within the meaning of Section 147 of the IT Act.
26. Thus, it is apparent that the entire process of initiating reassessment proceedings commenced with the letter of Additional CIT, Transfer Pricing to the Jt. CIT. The Jt. CIT and the CIT, acting upon the letter from the Additional CIT, Transfer pricing, virtually directed the AO to initiate proceedings for reassessment. Nothing on record indicates any independent application of mind by the AO. There is nothing to suggest that the AO who issued the notice under Section 147-148 had, himself, any reason to believe. This AO, regarding himself, to be bound by the directions of his superiors, i.e. the Jt. CIT and the Additional CIT-Transfer Pricing to his Joint Commissioner issued the impugned notices. Thus, the record does show that this was not a case where the AO himself had any reason to believe or the AO, after independent application of mind, believed or had any reason to believe that the income had escaped assessment.
27. In Anirudhsinhji (supra), the Hon’ble Supreme Court held that the power conferred on one authority could be said to be exercised by another authority where such authority acts under the dictates of the other authority. The Court explained that if a statutory authority has been vested with jurisdiction, it has to exercise it according to its own discretion. If discretion is exercised under the direction of or in compliance with some higher authority’s instruction, then it will be a case of failure to exercise discretion altogether.
28. In Anirudhsinhji (supra), the Hon’ble Supreme Court quoted the following passage from Administrative Law 7th Edition by Wade and Forsyth under the heading “surrender”, Abdication, Dictation” and sub-heading “Power in the wrong hands” as below: “Closely akin to delegation, and scarcely distinguishable from it in some cases, is any arrangement by which a power conferred upon one authority is in substance exercised by another. The proper authority may share its power with someone else, or may allow someone else to dictate to it by declining to act without their consent or by submitting to their wishes or instructions. The effect then is that the discretion conferred by Parliament is exercised, at least in part, by the wrong authority, and the resulting decision is ultra vires and void. So strict are the courts in applying this principle that they condemn some administrative arrangements which must seem quite natural and proper to those who make them.… Ministers and their departments have several times fallen foul of the same rule, no doubt equally to their surprise....”
29. In the case of Sodexo India Services (supra), this Court quashed a notice issued under Section 148 IT Act, which was found to have been issued based on the dictates of the revenue audit. This Court held that the reasons for reopening must be that of the AO alone, and the AO cannot act merely on the dictates of any other person or authority for issuing the notice.
30. In Balaji Mines and Minerals (P.) Ltd (supra), this Court, quashed the reassessment notice because the reason to believe was recorded only on the borrowed satisfaction from the Directorate of Revenue Intelligence. The Court found that there was no independent application of mind on the part of the AO to the information he received to come to his own conclusion that income had indeed escaped assessment. This Court followed the decision in the case of Principal Commissioner of Income Tax Vs Shodiman Investments (P.) Ltd[1].
31. In Aroni Commercials (supra), this Court held that the reasons for reopening of an assessment should be that an AO alone who is issuing the notice and the AO, in such matters, cannot act merely on the dictates of any other person or authority. A similar view was taken by the Patna High Court in Shivnarayan Jaiswal (supra), Madras High Court in T R Rajkumari (supra) and the Madhya Pradesh High Court in Yashwant Talkies (supra). In all these cases, notices for reopening assessments issued on the directions of the superior authorities were quashed and set aside.
32. Mr Sharma’s contention that the TPO’s determination bound the AO may not be correct. The AO would indeed be bound by the TPO’s determination during the assessment for the relevant assessment year. The TPO’s determination binds the AO only when the AO makes a reference to the TPO under Section 92CA(1) during the course of pending assessment proceedings, and the order is made by the TPO determining [2018] 93 taxmann.com 153 the arm’s length price. This is clarified by Section 92CA (4) which states that on the receipt of the TPO’s order, the AO shall proceed to compute the total income of the assesses in conformity with the arm’s length price determined by the TPO.
33. In this case, it is apparent that the AO regarded himself to be bound by the TPO’s determination for the subsequent assessment year and felt that he had no option but to issue the notice for reopening the assessment. The directions of the Joint Commissioner of Income Tax or the Commissioner of Income Tax left the AO in no doubt about the bindingness of the TPO’s determination and the Commissioner’s directions. All this is sufficient to vitiate the initiation of reassessment proceedings. This is a classic case of the AO acting under dictation or on borrowed satisfaction.
34. The ITAT in this case, has allowed the assessee’s Appeal upon analysing the material on record and correctly concluding that this was not a case where the AO had independently applied his mind to the materials on record. The materials on record showed that the AO had acted under the dictation of his superiors and had issued the notice to reopen the assessment without himself having any reason to believe that the income had indeed escaped assessment.
35. The ITAT has relied on the decision of the Full Bench of the Delhi High Court in the case of Commissioner of Income Tax Vs. Kelvinator of India Ltd[2]., where it was held that one of the preconditions for reopening is that the AO must have reason to believe that the income chargeable to tax has escaped assessment.
36. Accordingly, we find no error in the ITAT's reasoning. The substantial question of law must, therefore, be answered against the revenue in this case.
37. The Appeal is liable to be dismissed and is hereby dismissed. No costs.
38. All concerned can act on an authenticated copy of this order. (Jitendra Jain, J) (M.S. Sonak, J)