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Income Tax Appellate Tribunal, DELHI BENCH ‘D’ NEW DELHI
Before: SHRI G.D. AGRAWAL & SHRI SUDHANSHU SRIVASTAVA
final assessment order dated 22/12/2014 passed by the assessing officer under section 148 read with section 143 (3) of the Income Tax Act, 1961 (‘the Act’) for assessment year 2006 – 07.
2.0 The brief facts of the case are that the assessee company is a company incorporated under the laws of the United States of America (USA) and is a tax resident of USA. The return of income was filed declaring total income of Rs. 86,81,330/- and the original assessment was completed on 24/12/2008 under section 143 (3) of the Act at an income of Rs. 1,92,04,231/-. In this assessment, the royalty income of Rs. 1,56,81,330/- was taxed at the rate of 15% by the Assessing Officer (AO). The assessee preferred an appeal before the Ld. first appellate authority challenging the rate of tax for royalty income at the rate of 15% under section 115A and the Ld. Commissioner of Income Tax (Appeals) allowed the assessee’s appeal by holding that the assessee was entitled to beneficial provision of taxation at the rate of 10% on the royalty.
2.1 Subsequently, the AO reached a conclusion that the assessee company had not disclosed its income fully and truly and, therefore, notice under section 148 of the act was issued on 28/03/2013. The reason for initiating the reassessment proceedings was that it was observed by the AO that the income of the assessee had royalty income of Rs. 1,56,81,330/- which had been taxed at the rate of 15% on gross basis under the Double Taxation Avoidance Agreement with the USA. However, as
per the AO, the income had been earned from Permanent Establishment (PE) based on an agreement and the same should have been taxed at the rate of 20% under the Income Tax Act instead of at the rate of 15% under the Double Taxation Avoidance Agreement. The assessee filed objections against the initiation of reassessment proceedings before the AO which were rejected. The Ld. Disputes Resolution Panel (DRP) gave directions to the AO to compute the income after duly examining the issue as to whether the impugned income was royalty income or business income. The final assessment was passed taxing the royalty income at the rate of 20%.
2.2 The assessee has now approached the ITAT and has challenged the initiation of reassessment proceedings in this appeal before us.
3.0 The Ld. Authorised Representative (AR) submitted that the original assessment was framed holding the royalty income taxable at the rate of 15% under the provisions of Double Taxation Avoidance Agreement. It was submitted that, thus, the issue had already been considered and examined at the assessment stage. It was submitted that, subsequently, the 3 matter was also considered and adjudicated by the Ld. first appellate authority who had allowed the assessee’s appeal challenging the imposition of tax on the royalty income at the rate of 15% instead of 10%. The Ld. authorised representative submitted that the return of income had been filed on 31/03/2008 and the assessment under section 143 (3) was completed on 24/12/2008. It was after lapse of 4 years from the close of the relevant assessment year that the assessee was served with the notice dated 28/03/2013 under section 148 of the Act proposing reassessment of income. It was submitted that the notice for reassessment had been issued without any fresh information/material on record or without any new facts having come to the knowledge of the AO after the completion of the original assessment proceedings under section 143 (3) of the Act and, thus, the reassessment under section 147 of the Act was barred by limitation. It was submitted that there was no failure or omission on the part of the assessee to disclose fully and truly all material facts which were necessary for the assessment and that further there was no allegation of the same in the reassessment order. It was submitted that the primary material and facts had already been considered while completing the original assessment. It was submitted that the pre-requisite condition for initiating reassessment proceedings was that the AO should have ‘reason to believe’ that income had escaped assessment. However, there was no material on record which would prima facie show that income had escaped assessment. It was submitted that it was a case of change of opinion by the AO.
The Ld. authorised representative vehemently argued that the reassessment order deserved to be set-aside.
4.0 In response, the Ld. CIT DR submitted that the term ‘failure on the part of the assessee’ was not restricted only to the return of income and the columns of the return or the tax audit report and there could be omission and failure on the part of the assessee to disclose material facts factually and truly during the course of assessment proceedings also. It was submitted that the assessee had earlier submitted before the AO that there was no PE which had been accepted by the AO but subsequently the AO had reached the conclusion that there existed a PE of the assessee and, therefore, it could not be said that the reassessment proceedings were wrongly initiated. He also drew our attention to paragraph 5.2 of the directions of the Ld. DRP and submitted that the Ld. DRP has directed the AO to verify and reach a conclusion as to whether the income was to be taxed simply as royalty under section 115A or it was to be taxed as business income under section 44DA if such royalty was effectively connected with the PE and, thereafter, apply the correct rate of tax expert the provisions of the Act and the Double Taxation Avoidance Agreement. The Ld. CIT DR placed reliance on the orders of the AO and directions of the Ld. DRP and submitted that the issue of existence of PE had not been disclosed by the assessee during the course of original assessment proceedings and, therefore, the reassessment was valid in the eyes of law.
5.0 We have heard the rival submissions and have also perused the material on record. It is undisputed that the issue of taxability of royalty was considered both during the original assessment proceedings as well as during the course of first appellate proceedings emanating from the original assessment proceedings. It is also apparent from the records that AO has earlier accepted the assessee’s claim that there was no PE of the assessee in India but later on initiated the reassessment proceedings on the ground that the assessee did have a PE in India. However, it is seen that while passing the reassessment order the AO did not consider whether the assessee’s income was to be taxed as royalty under section 115A or was to be taxed as business income under section 44DA if such royalty was effectively connected with the PE. This is evident from the directions of the Ld. DRP also. Thus, it is very much apparent that the assessing officer, even after initiating the reassessment proceedings, did not examine the matter in the way it was expected during the course of reassessment proceedings but reached the conclusion without giving any cogent reason for reaching the said conclusion. It is also apparent that the AO was not in possession of any fresh evidence or material which came into his possession subsequent to the original assessment proceedings which would indicate that the assessee had concealed material facts during the course of original assessment proceedings leading to under-assessment of income. It is undisputed in this case that the reassessment proceedings were initiated after the expiry of four years and, therefore, the proviso to Section 147 will necessarily come into play. A perusal of the original assessment order shows that the issue of royalty was duly considered in the original assessment order and, thus, it is not the case of the Department that the issue was not considered at all during the original assessment proceedings. Further, the reasons recorded also do not record AO’s satisfaction to the effect that the assessee had failed to disclose fully and truly all material facts necessary for the assessment. Thus, it cannot be said that there was any failure on the part of the assessee to disclose fully and truly all material facts necessary for the purpose of assessment. The Hon’ble Delhi High Court in the case of Haryana Acrylic Manufacturing Company vs. CIT reported in 308 ITR 38 (Del.) has opined as under:
“In the reasons supplied to the petitioner, there is no whisper, what to speak of any allegation, that the petitioner had failed to disclose fully and truly all material facts necessary for assessment and that because of this failure there has been an escapement of income chargeable to tax. Merely having a reason to believe that income had escaped assessment is not sufficient to reopen assessments beyond the four year period indicated above. The escapement of income from assessment must also be occasioned by the failure on the part of the assessee to disclose material facts, fully and truly. This a necessary condition for overcoming the bar set up by the proviso to Section 147. If this condition is not satisfied, the bar would operate and no action u/s 147 could be taken. We have 8 already mentioned above that the reasons supplied to the petitioner does not contain any such allegation. Consequently, one of the conditions precedent for removing the bar against taking action after the said four year period remains unfulfilled. In our recent decision in Wel Intertrade Private Ltd. (2009) 308 ITR 22 (Del.) we had agreed with the view taken by the Punjab and Haryana High Court in the case of Duli Chand Singhania (2004) 269 ITR 192 that, in the absence of an allegation in the reasons recorded that the escapement of income had occurred by reason of failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment, any action taken by the Assessing Officer u/s 147 beyond the four year period would be wholly without jurisdiction. Reiterating our view-point, we hold that the notice dated March 29, 2004, u/s 148 based on the recorded reasons as supplied to the petitioner as well as the consequent order dated March 2, 2005, are without jurisdiction as no action u/s 147 could be taken beyond the four year’s period in the circumstances narrated above.” 5.1 A perusal of the reasons recorded in the instant case also shows that there is no mention or allegation that there has been any failure or omission on the part of the assessee to disclose fully and truly all material facts necessary for the purpose of assessment. The contents of the reason fail to meet the statutory requirement. Respectfully following the ratio of the judgment in Haryana Acrylic Manufacturing Company vs. CIT (supra), we have no alternative but to quash the reassessment proceedings.
6.0 In the final result, the appeal of the assessee stands allowed.
Order pronounced in the open court on 20th November, 2018.