Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “C” BENCH: KOLKATA
Per Shri A.T.Varkey, JM
This appeal preferred by the assessee is against the order of the DRP-2, New Delhi, dated 07.08.2017 for AY 2009-10.
Though the assessee has raised grounds both on the legal issue of reopening of the assessment as well as on merits of the addition on account of international transaction and transfer pricing. However, the Ld. Counsel for the Assessee Shri Ketan K. Ved at the first instance advanced arguments on the issue of reopening of the assessment, since if found to be valid then it goes to root of the very reopening of the assessment itself. Hence, we would like to deal with it first i e, the issue of the validity of the reopening of the assessment.
Brief facts are that the assessee filed its return declaring total income of Rs.8,11,360/- on 04.09.2009. The case was selected for scrutiny and assessment order was passed u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”) on 16.05.2011 by accepting the returned income. Subsequently information was received from DIT (Inv.), Kolkata vide letter no. 8/OE/2014-15/2023-25 dated 02.09.2014 in which it has
2 ITA No. 2177/Kol/2017 Devansh Exports, AY 2009-10 been mentioned that the assessee M/s. Devansh Exports had exported iron ore to its Associated Enterprises (AE), M/s. SK Resources Ltd., situated at Hong Kong [M/s. SKR (HK)]. The assessee as well as the buyer M/s SKR(HK) is AE within the meaning contained in sec. 92A of the Act. It has also been mentioned in the said letter of DIT(Inv.), that assessee has exported the iron ore to various end users located at China and these were routed through its sister concern M/s. SKR (HK) during the year. The price at which the assessee charged from Associated Enterprises M/s. SKR (HK) was much less than the prevailing market price at China but the said M/s. SKR (HK) would sell the goods to the end users at the prevailing market price. So, according to information, the entire arrangement thus resulted in profit being shifted from India to Hong Kong. Based on this information, the AO proposed to reopen the original assessment framed on 16.05.2011 u/s. 143(3) of the Act.
Assailing the action of AO to reopen the original assessment after 4 years, the Ld. AR of the assessee contended that the assessment of the assessee company in respect of AY 2009-10 was completed u/s. 143(3) of the Act after thorough examination of the company’s Books of account and other particulars and details and evidences with regard to purchase and sale effected during the year. The Ld. AR drew our attention to the fact that during the course of regular Assessment proceedings the assessee produced before the AO the Audited accounts, Tax Audit report u/s. 44AB and Audit Report in Form 3CEB dt. 22.09.2009 prepared by its Chartered Accountant M/s. Deloitte Haskins & Sells in view of the Section 92E relating to International transaction were filed and the facts relating to sale to associated enterprises was duly reflected in the Audited accounts and Tax Audit report u/s. 44AB of the Act. According to Ld. AR, the entire sale of Iron ore to M/s. S.K Resources Ltd was at the prevailing market price and there was proper compliance relating to International transaction within the meaning of Section 92B of the Act, and the scrutiny Assessment was completed accordingly u/s. 143(3) of the Act after proper appreciation of the facts of the case.
3 ITA No. 2177/Kol/2017 Devansh Exports, AY 2009-10 5. The Ld. AR urged before us that in the present case the regular assessment for AY 2009-10 was completed on 16.05.2011 u/s. 143(3) of the Act and the period of 4 years from the end of the relevant assessment year expired on 31.03.2014 and, therefore, the proviso u/s. 147 is attracted in this case. And so, the AO had to satisfy the condition precedent provided for in the proviso to sec. 147 before venturing to reopen the original assessment. According to Ld. AR, since in the course of regular assessment the assessee had furnished all the relevant information including Audit Report u/s. 92F in Form 3CEB, the scrutinized assessment completed u/s. 143(3) of the Act cannot be tinkered with, unless the condition precedent as provided for in proviso to section 147 of the Act is satisfied that is the AO have to point out in the reasons recorded to reopen the failure on the part of assessee to disclose fully and truly all material facts necessary for assessment of the original assessment, then only the AO can venture to reopen regular assessment completed u/s. 143(3) of the Act. The Ld. AR brought to our notice that in the recorded reason there is not even a whisper or suggestion that assessee’s income for AY 2009-10 had escaped assessment as a result of any omission on its part to disclose truly and fully all material facts necessary for assessment. In absence of any such failure on the part of the assessee during original assessment, according to Ld. AR, reopening and thereafter reassessment proceedings are not legally permissible in view of the first proviso to sec. 147 of the Act.
The Ld. AR contended that the reasons recorded by the AO are based only on hearsay and bald allegations which have not been substantiated by any cogent material or evidence. According to him, the reasons recorded by AO u/s 148(2) bear no logical correlation with the facts of the company's case. It was stressed by the Ld. AR that there has been no independent application of mind by the AO to the relevant facts before recording reasons to believe that company's income chargeable to tax for the AY 2009-10 escaped assessment. According to Ld. AR, the AO after making a reference to the information received from DIT(Inv) Kolkata blindly without even verifying in any manner the prevailing market price of Iron ore in China during the said period and without independent application of mind have recorded a satisfaction that the iron ore were exported to M/s. S.K Resources Ltd at a price lesser than the prevailing market price in China and the said M/s.
4 ITA No. 2177/Kol/2017 Devansh Exports, AY 2009-10 S.K Resources Ltd sold the goods to the end users at China at the prevailing market price which resulted into profit being shifted from India to Hong-kong which action of AO, according to Ld. AR vitiates the very initiation of reopening of the original assessment. So, it was contended by Ld. AR that merely on the basis of some theoretical calculations or generalized allegations the AO without independent application of mind to the facts of the assessee's case ought not to have recorded his satisfaction about escapement of income. On the other hand the Ld Sr. DR defended the action of AO & CIT(A) and does not want us to interfere with the action of authorities below.
We have heard rival submissions and gone through the facts and circumstances of the case. We note that the original assessment was framed u/s. 143(3) of the Act on 16.05.2011 and the period of four years from the end of the relevant assessment year expired on 31.03.2014. And the notice conveying the intention of AO to reopen u/s. 148 of the Act was issued on 08.09.2014, so the reopening of original assessment framed u/s. 143(3) on 16.05.2011 was after 4 years and so the proviso to sec. 147 of the Act comes into play and the procedural safeguard provided to by the Parliament has to be satisfied before the AO ventures to reopen such an assessment. So, first let us look at sec. 147 of the Act which is as under:
“Income escaping assessment. 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) : Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year:”(Emphasis given by us)
5 ITA No. 2177/Kol/2017 Devansh Exports, AY 2009-10 8. Reading of the proviso to section 147 makes it clear 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 section 147, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the concerned assessment year. However, where an assessment under sub- section (3) of section 143 has been made for the relevant assessment year, no action can be taken under section 147 after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to disclose all material facts necessary for his assessment for that assessment year.
So when the original assessment was framed u/s. 143(3) and four years have expired as in the present case before us, the jurisdictional fact for usurpation of jurisdiction u/s. 147 read with sec. 148 of the Act is that the AO has to record in the reason for reopening as to which fact or material was not disclosed by the assessee fully and truly necessary for assessment of the original assessment framed u/s. 143(3) of the Act and a perusal of the reasons recorded to reopen the completed assessment u/s. 143(3),(supra) we need to examine from the reasons recorded by the AO as to whether there is any whisper/averment to the effect which fact/material that assessee has not truly and fully disclosed any facts or material to assess the income of the assessee in the original assessment. In a similar case the Hon’ble Bombay High court in the case of Hindustan Lever Ltd. Vs. ACIT 268 ITR 332 (Bom) has laid the law on the issue as under:
“The reasons recorded by the Assessing Officer nowhere state that there was failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment of that assessment year. It is needless to mention that the reasons are required to be read as they were recorded by the Assessing Officer. No substitution or deletion is permissible. No additions can be made to those reasons. No inference can be allowed to be drawn based on reasons not recorded. It is for the Assessing Officer to disclose and open his mind through reasons recorded by him. He has to speak through his reasons. It is for the Assessing Officer to reach the conclusion as to whether there was failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the concerned assessment year. It is for the Assessing Officer to form his opinion; It is for him to put his opinion on
6 ITA No. 2177/Kol/2017 Devansh Exports, AY 2009-10 record in black and white. The reasons recorded should be clear and unambiguous and should not suffer from any vagueness. The reasons recorded must disclose his mind. The reasons are the manifestation of the mind of the Assessing Officer. The reasons recorded should be self- explanatory and should not keep the assessee guessing for the reasons. Reasons provide the link between conclusion and evidence. The reasons recorded must be based on evidence. The Assessing Officer, in the event of challenge to the reasons, must be able to justify the same based on material available on record. He must disclose in the reasons as to which fact or material was not disclosed by the assessee fully and truly necessary for assessment of that assessment year, so as to establish the vital link between the reasons and evidence. That vital link is· the safeguard against arbitrary reopening of the concluded assessment. The reasons recorded by the Assessing Officer cannot be supplemented by filing an affidavit or making an oral submission, otherwise, the reasons which were lacking in the material particulars would get supplemented, by the time the matter reaches the court, on the strength of the affidavit or oral submissions advanced.”(Emphasis given by us)
Keeping in mind the aforesaid ratio of the decision we have to examine as to whether the jurisdictional fact for usurpation of jurisdiction u/s. 147 read with sec. 148 of the Act is found in the reasons recorded by the AO and for that let us now look at the reasons recorded by the AO to reopen the assessment –
"An information has been received from D.I.T (Inv.), Kolkata by his letter No.8/0E/2014- 15/2023-25 dated 2/9/2014 in which it has been mentioned that the assessee-M/s. Devansh Exports had exported Iron ore to M/s. S.K. Resources Ltd, Hong Kong. The assessee as well as the buyer i.e. M/s. S.K. Resources Ltd. are Associated Enterprises within the meaning contained in sec. 92A of the Act. It has also been mentioned in the said letter of D.I. T. (Inv.) that assessee has exported the iron ore to various end users located in China and that these were routed through its sister concern M/s. S.K. Resources Ltd. The price at which the iron ore were exported to M/s. S.K. Resources during the year was much less than the prevailing market price of China but the said M/s. S.K. Resources Ltd. would sell the goods to the end users at the prevailing market price. This entire arrangement thus resulted in profit being shifted from India to Hong Kong. It is seen from the audited accounts and other details available in assessment record of the assessee that during the financial year 2008-09, it exported 1,15,937 MT of iron ore to0 M/s. S.K. Resources Ltd. at a total consideration of Rs.31,13,81,312/-. As per D.l. T. (inv.) 's above letter, the F.O.B rate of such sale were @ varying/ram $32 to $90 per MT depending on the date of shipment. However, the market price of the same goods prevailing in China during that period varied from $55.50 to $142.50 per MT. It is therefore clear that the transaction between the assessee and M/s. S. K. Resources Ltd. is in the nature of International Transaction within the meaning contained in sec. 92B of the Act and the rate of transaction as disclosed by assessee to its Associate Enterprise is much less than the prevailing market price or below the arm’s length price as defined in sec. 92 of the Act. The assessee, therefore, violated the provisions of sec. 92 of the Act and I, therefore, have sufficient reason to believe that the assessment of assessee’s case for the relevant year escaped assessment.”
7 ITA No. 2177/Kol/2017 Devansh Exports, AY 2009-10 11. Thus, as discussed above, while recording ‘Reasons’, it is incumbent upon the AO to firstly make an allegation in the ‘Reasons’ recorded and then also to make out a case that there was a failure on the part of the assessee in disclosing fully and truly all material facts necessary for his assessment for the impugned assessment year. Perusal of the ‘Reasons’ recorded by the AO reveals that no such allegation has been made in the ‘Reasons’. Thus, the condition precedent to enable the AO to reopen the original assessment completed order dated 16-05-2011 passed u/s 143(3), is found to be clearly missing here. So much so, even in the re-assessment proceedings, the AO has nowhere been able to show anything from which it could be inferred that there was any failure on the part of the assessee in disclosing fully and truly all material facts necessary for the assessment of the assessee. The Ld. DRP did not adjudicate the challenge to the reopening of assessment on the ground that it has no power to annul the proceeding and in case the assessee wanted such a relief it should have preferred appeal before Ld. CIT(A) and did not touch the issue. The Ld. DR urged before us that the DRP has mentioned in the order that assessee has not pressed this ground. However, the Ld. AR brought to our notice that Ld. DRP incorrectly recorded such a plea and the assessee has not made any such concession before the Ld. DRP. In order to bolster his argument, the Ld. AR drew our attention to page 268 of paper book which is a letter dated 29.08.2017 filed before the Ld. DRP u/s. 154 of the Act (Rectification Application) wherein page 271 the assessee has pleaded as under:
“We would like to specifically draw your attention to the above in light of the statement forming part of the DRP Directions, wherein your Honours have mistakenly stated that the Assessee did not insist on the report to be received from the AO and subsequently disposed off the primary ground of the assessee without providing any basis for the same. Further, your Honours have also inadvertently directed the AO to dispose off the said ground before passing the final assessment order without providing due consideration to the same as stated vide para 2 (refer page 2) the aforesaid directions for both the AYs under consideation that “…. The assessee did not press this ground of objection. This ground of objections is therefore rejected as not pressed.” We would like to reiterate that the ground has been pressed by the Assessee in the course of all submissions filed in the course of TP Assessment proceedings as well as the hearings and submissions before your Honours, and hence the same be considered as a ground duly pressed by the Assessee.”
The Ld. AR brought to our attention that the Ld. DRP disposed off the sec. 154 petition of assessee on 10.11.2017 which is placed at pages 277 to 281 of paper book, however, we note that the ld. DRP has not touched upon the aforesaid plea of the assessee
8 ITA No. 2177/Kol/2017 Devansh Exports, AY 2009-10 which goes on to show that assessee had not made any concession before the Ld. DRP on the legal challenge against reopening. Moreover, there is no estoppel against law and any legal issue can be raised even for the first time before the Tribunal and since the legal issue raised before us is in respect to the jurisdiction of AO to reopen the assessment itself, there is no restriction to adjudicate this legal issue before us.
We note that in the case of Hindustan Lever Ltd vs R.B. Wadekar (supra) it has been emphasized by the Hon’ble Bombay High Court that reasons recorded by the AO must contain the finding with regard to the alleged failure on the part of the assessee to disclose fully and truly all material facts. It has also been observed by the Hon’ble High Court that the ‘Reasons’ recorded by the AO have to be read as it is. The AO has to speak through his ‘Reasons’ and should disclose an open mind through ‘Reasons’ recorded by him. Thus, it is for the AO to reach to the conclusion in his ‘Reasons’ as to whether there was failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment for the concerned assessment year.
At the cost of repetition in the facts of the case before us and in the light of law as explained in aforesaid judgments, it is noted that nothing has been recorded by the AO in the ‘Reasons’ about any failure on the part of the assessee to disclose fully and truly all material facts necessary for the framing of original assessment. It has nowhere been mentioned by the AO which fact or material was not disclosed by the assessee. Thus, vital link between ‘Reasons’ and his findings has not been established by him. This vital link is the safeguard against arbitrary reopening of the concluded assessment. The ‘Reasons’ recorded cannot be supplemented by way of further observations in the assessment order or in any other manner. The validity of the reopening can be examined on the basis of ‘Reasons’ alone and not in supplementary material. Thus, taking into account all the facts and circumstances of the case, we find that the reopening has been done without complying with the mandatory jurisdictional condition precedent as stipulated in first proviso to section 147. Thus, reopening is invalid on this ground and the assessee succeeds on the legal issue challenged before us. Therefore, we hold that the AO without satisfying the jurisdictional pre-condition as stipulated in the first proviso to sec. 147 of the Act lacks jurisdiction to
9 ITA No. 2177/Kol/2017 Devansh Exports, AY 2009-10 reopen the original assessment completed u/s. 143(3) of the Act on 16.05.2011 after four years. Therefore, all proceeding subsequently made is ‘null’ in the eyes of law and so, we quash the notice of reopening u/s. 148 and subsequent AO and DRP’s order is null in the eyes of law.
In the result, the appeal of assessee is allowed.
Order is pronounced in the open court on 05/09/2018 Sd/- Sd/- (M. Balaganesh) (A. T. Varkey) Accountant Member Judicial Member Dated: 5th September, 2018 Jd.(Sr.P.S.)
Copy of the order forwarded to: 1 Appellant – M/s. Devansh Exports, 1, Sarojini Naidu Sarani, Shubham, 5th floor, Kolkata-700 017. 2 Respondent – ACIT, Cir-32, Kolkata. 3 CIT(A)-, Kolkata. (sent through e-mail) CIT , Kolkata 4 DR, Kolkata Benches, Kolkata (sent through e-mail) 5
/True Copy, By order,
Sr. Pvt. Secretary