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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRIMANOJ KUMAR AGGARWAL
The captioned appeal has been filed by the assessee challenging the order dated 9th February 2015, passed by the learned Commissioner of Income Tax (Appeals)–10, Mumbai, pertaining to the assessment year 2008–09.
In grounds no.1 and 2 of the modified grounds, the assessee has challenged the validity of re–opening of the assessment under section 147 of the Income Tax Act, 1961 (for short "the Act").
2 Eagle Burgmann India Pvt. Ltd.
Brief facts are, the assessee, a resident company, is engaged in the business of manufacturing of fluid control devices, finance and power generation through wind mills. For the assessment year under dispute, the assessee filed its return of income on 28th September 2008, declaring total income of ` 29,65,58,978. Assessment in case of the assessee was originally completed under section 143(3) of the Act vide order dated 2nd December 2010, determining the total income at ` 30,01,05,440. Subsequently, the Assessing Officer on verifying the details of miscellaneous expenditure debited to the Profit & Loss Account noticed that an amount of ` 95,05,298 was paid towards royalty to Eagle Industries Company Ltd., Japan, an Associated Enterprise (AE). Thus, he formed a belief that such payment made to non–resident AE was subject to deduction of tax at source. Whereas, the assessee has not deducted any tax at source while making such payment. Further, he observed that business development expenditure of ` 2,14,92,188 paid to Eagle Burgmann Middle East, another A.E., requires verification whether it is subject to TDS provision. Thus, being of the view that the royalty payment of `` 95,05,298, has escaped assessment, the Assessing Officer re–opened the assessment under section 147 of the Act. In course of re–assessment proceedings, the Assessing Officer called upon the assessee to explain why tax was not deducted at source while making payment of ` 2,14,92,188, to its AE.
3 Eagle Burgmann India Pvt. Ltd.
In response to the query raised by the Assessing Officer, the assessee submitted that since the amount paid to the AE was towards the effort made by it for development of export market in Middle East, it is not in the nature of either royalty or fee for technical services so as to bring it within the ambit of section 9 of the Act. It was submitted, since the AE did not have any permanent establishment (PE) in India, the amount is otherwise not taxable. The Assessing Officer, however, did not find merit in the submissions of the assessee and concluded that the payment made by the assessee is in the nature of fee for technical services, hence, liable for deduction of tax under section 195 of the Act. The assessee having failed to deduct tax at source while making such payment, the Assessing Officer held that the amount is liable for disallowance under section 40(a)(i) of the Act. Against the assessment order so passed, the assessee preferred appeal before the first appellate authority, inter–alia, on the ground that re–opening of assessment under section 147 of the Act is invalid.
Learned Commissioner (Appeals), however, did not find merit in the submissions made by the assessee. Accordingly, not only he upheld the validity of re–opening of assessment under section 147 of the Act, but he also upheld the disallowance made under section 40(a)(i) of the Act.
4 Eagle Burgmann India Pvt. Ltd.
The learned Authorised Representative, challenging the re– opening of the assessment under section 147 of the Act submitted, the return of income filed by the assessee was taken up for scrutiny and in the course of scrutiny assessment proceedings, the Assessing Officer verified the allowability of the expenditure debited to the profit and loss account including the payment of royalty and business development expenditure to the AE. He submitted, after verifying all the details and properly applying his mind the Assessing Officer completed the assessment under section 143(3) of the Act. He submitted, after completion of assessment under section 143(3) of the Act, the Assessing Officer did not have any fresh tangible material in his possession indicating escapement of income. Drawing our attention to the reasons recorded for re–opening of assessment, a copy of which is at Page–95 of the paper book, he submitted, the re–opening of assessment was basically made for escapement of income on account of royalty payment of ` 95,05,298. He submitted, insofar as the business development expenditure of ` 2,14,92,188 is concerned, the Assessing Officer merely mentioned that the applicability of TDS provision requires verification. Thus, he has not formed any belief that the amount of ` 2,14,92,188 has escaped assessment. He submitted, the aforesaid fact gets strengthened from the concluding observations of the Assessing Officer in the reasons recorded, wherein, he has 5 Eagle Burgmann India Pvt. Ltd.
specifically mentioned that he has reason to believe that the amount of ` 95,05,298, has escaped assessment. No such belief has been recorded by him with regard to the amount of ` 2,14,92,188. Thus, he submitted, the Assessing Officer has not formed any opinion regarding escapement of Rs 2,14,92,188, in the reasons recorded. Therefore, in the absence of any reason to belief recorded for escapement of the aforesaid income, the re–opening of assessment for assessing the said income is invalid. Further, he submitted, the Assessing Officer is not in possession of any tangible material indicating escapement of income which he has found after completion of original assessment. He submitted, the reasons recorded clearly reveal that only on re– examining the very same material which was available before the Assessing Officer during the original assessment proceedings, the Assessing Officer has formed the belief of escapement of income. Therefore, in the absence of any tangible material, the re–opening of assessment is invalid. He submitted, the material on the basis of which the Assessing Officer re–opened the assessment under section 147 of the Act having already been examined by the Assessing Officer during the original assessment proceedings, it cannot form the basis of re– opening. Without prejudice, the learned Authorised Representative submitted, as per the reasons recorded, the Assessing Officer has re– opened the assessment for assessing the escaped income of 6 Eagle Burgmann India Pvt. Ltd.
`95,05,298. However, while completing the assessment under section 143(2) r/w section 147 of the Act, the Assessing Officer has not brought the aforesaid amount to tax. Whereas, he has added an amount of ` 2,14,92,188, which is not the escaped income for which the assessment was re–opened as per the reasons recorded. Thus, he submitted, since the Assessing Officer made an addition other than the escaped income for which the assessment was re–opened, the addition made cannot survive. In support of his contention, the learned Authorised Representative relied upon the following decisions:–
Le Passage to India Tours And Travels P. Ltd. vs. Addl. CIT [2014] 369 ITR 109 (Delhi) CIT vs. Kelvinator of India Ltd. [2010] 187 Taxman 312 (SC) CIT vs. Amitabh Bachchan [2013] 33 taxmann.com 535 (Bombay) CIT vs. Jet Airways (I) Ltd. [2010] 195 Taxman 117 (Bombay) Hindustan Lever Ltd. vs. ACIT & Ors [2004] 268 ITR 332 (Bombay)
The learned Departmental Representative submitted, before re– opening the assessment, the Assessing Officer has recorded reason to believe indicating escapement of income. He submitted, such reason to 7 Eagle Burgmann India Pvt. Ltd.
believe was formed on the basis of tangible material available on record. He submitted, at the time of recording reasons it is not necessary for the Assessing Officer to give a conclusive finding regarding escapement of income. He has to only form a belief on the basis of material on record that income has escaped assessment. That being the case, the re–opening of assessment cannot be challenged.
We have considered rival submissions and perused the material on record. We have also applied our mind to the decisions relied upon. As far as the factual aspect of the issue is concerned, there is no dispute that the assessment in case of the assessee was originally completed under section 143(3) of the Act. In other words, the return of income filed by the assessee was subjected to scrutiny and after verification of the books of account and audited financial statement of the assessee along with the other materials, the Assessing Officer completed the assessment under section 143(3) of the Act. A perusal of the original assessment order passed on 2nd December 2010, a copy of which is at Page–89 of the paper book, clearly reveals that in pursuance to the statutory notices issued under section 143(2) and 142(1) of the Act, the assessee from time to time filed various documents, such as, books of account, audited financial statements, etc. A reading of the said assessment order further reveals that the 8 Eagle Burgmann India Pvt. Ltd.
Assessing Officer in the course of assessment proceedings has examined the details called for and after application of mind has passed the assessment order. This is evident from the discussions made by him in the assessment order with regard to certain issues on which he has made additions. Thus, it is not a case where the Assessing Officer has passed a stereo typed non–speaking assessment order. Having said so, it is necessary to look into the reasons recorded for re–opening of assessment which reads as under:–
“It is observed from the details of miscellaneous expenses that royalty of Rs.95,05,298/- was debited to Profit & Loss A/c. This royalty was payable to Eagle Industry Company Ltd., Japan and was covered u/s 40A(2)(b) of the I.T.Act. Audit report in form No.3CD, Point no.18. As per party-wise details of all TDS deducted on record, no tax was deducted at source on Royalty payment to Eagle Industry Co. Ltd. As per section 40(a)(i), the royalty should not be deducted in computing the income chargeable under the head “Profit & Gains of Business or Profession” which was outside India on which tax was deductible at source under chapter XVII-Band such tax has not been deducted. Further the assessee claimed business development expenses of Rs 2,14,92,188/- to Eagle Burgmann Middle East covered u/s. 40A(2)(b) of the I.T.Act. As per Schedule-G to Audit Report in Form no.3CD, Point no.18. As per Clause 10 of Form no.3CEB u/s 92E regarding business development expenses. Therefore, it cannot be ascertained if these services so entered were liable for taxation at source or not. Therefore, I have reason to believe that a sum of Rs 95,05,298/- has escaped assessment. Hence, the assessment for A.Y. 2008- 09 is re-opened as per the provisions of section 147 of the I.T.Act, 1961 and notice u/s. 148 is issued.”
9 Eagle Burgmann India Pvt. Ltd.
On a perusal of the reasons recorded, the following facts emerge:–
i) The Assessing Officer has only re–examined the details of miscellaneous expenditure debited to the Profit & Loss account which were already filed in the course of original assessment proceedings. Meaning thereby, no fresh tangible material has come to the possession of the Assessing Officer after completion of the original assessment; ii) The issue on which the Assessing Officer formed the belief of escapement of income is royalty payment of ` 95,05,298, which is evident from the last few sentences of the reasons recorded. Insofar as the business development expenditure of ` 2,14,92,188, is concerned, the Assessing Officer has not formed any belief of escapement of income in the reasons recorded. The only observation made by the him is “it cannot be ascertained if the service so rendered were liable for tax deduction at source or not”.
It is fairly well settled, for re–opening of assessment the Assessing Officer must record reason to believe that a particular item
10 Eagle Burgmann India Pvt. Ltd. of income has escaped assessment. On a reading of the reasons recorded by the Assessing Officer, it is very much clear that the only item of income which, according to the Assessing Officer, requires re– opening of assessment due to escapement of income is the amount of ` 95,05,298. Therefore, it has to be concluded that there is no formation of belief for escapement of income in respect of ` 2,14,92,188, in the reasons recorded. However, while completing the assessment under section 143(3) r/w section 147 of the Act, the Assessing Officer has not added the amount of ` 95,05,298. Whereas, he has added the amount of ` 2,14,92,188. In fact, to put it simply, in the re–assessment order the Assessing Officer has not even whispered a single word about the royalty payment of ` 95,05,298. On the contrary, though, he has not formed any belief with regard to escapement of income of ` 2,14,92,188, nevertheless, he proceeded to disallow the said amount invoking the provisions of section 40(a)(i) of the Act. As held by the Hon'ble Jurisdictional High Court in case of Jet Airways India Ltd. (supra), without making addition in respect of the income for which the assessment was re–opened, the Assessing Officer cannot make any other addition. The decision of the Hon’ble Delhi High Court in Oriental Bank of Commerce v/s CIT and Hon’ble Calcutta High Court in Mohammad Shahbuddin (supra) also express similar view. That being the case, the amount of `2,14,98,188, could not have been 11 Eagle Burgmann India Pvt. Ltd. added on a stand-alone basis without making addition of the escaped income for which the assessment was re–opened i.e., the amount of ` 95,05,298. For this reason alone, the addition of ` 2,14,92,188, has to be deleted. Even, otherwise also, on a perusal of material on record including the reasons recorded, we are of the view that the re–opening of assessment under section 147 of the Act was made without any tangible material indicating escapement of income. The reasons recorded itself reveals that the Assessing Officer on re–examining the details of expenditure debited to the Profit & Loss account which were not only available during the assessment proceedings, but were also examined by the Assessing Officer, has formed the opinion that the assessee was required to deduct tax at source on royalty payment and having failed to do so, the amount was required to be disallowed under section 40(a)(i) of the Act. In our view, the reasons recorded clearly reveal that there was absolutely no material before the Assessing Officer for forming belief that the amount of `2,14,92,188, has escaped assessment. The Assessing Officer in the reasons recorded has only raised some doubt regarding the applicability of TDS provisions to the payment of ` 2,14,92,188. Thus, it is clear from the reasons recorded that there is no escapement of income insofar as the amount of ` 2,14,92,188. In any case of the matter, all these materials including the details of expenditure having been examined
12 Eagle Burgmann India Pvt. Ltd. by the Assessing Officer during the original assessment proceedings, cannot be subject matter of re–opening as it will amount to review of the original assessment order. The decisions cited by the learned Counsel for the assessee also support this view. In fact, a perusal of the order passed by the learned Commissioner (Appeals) would reveal that he himself is not sure whether the amount paid by the assessee is in the nature of technical service or towards some routine assignment. Thus, when the Departmental Authorities are not sure about the nature of payment, it is not understood how they can come to a conclusion that TDS provisions are applicable. In the aforesaid view of the matter, we hold that re–opening of the assessment in the facts of the present case is invalid. Accordingly, we quash the assessment order passed under section 143(3) r/w section 147 of the Act.
In view of our decision in grounds no.1 and 2, the merits of the issue as raised in grounds no.3 and 4, having become redundant do not require adjudication.
In the result, appeal stands partly allowed. Order pronounced in the open Court on 23.12.2019