DCIT(IT)-2(2)(2), AIR INDIA BUILDING vs. THE HONGKONG AND SHANGHAI BANKING CORPORATION LTD, BANDRA

The second reason relates to interest payments to HO/Branches treated as income of Indian Branch. The reason derives its roots from the finding given by the AO in AY 2016-17. During the course of original assessment proceedings, the AO interalia raised the following query:- “25. Details of income earned by head office or overseas branches of the bank from India and whether it is offered for tax.” 6.1. To which the assessee replied as under:-

The third reason relates to the disallowance of other payments made to the HO at Rs. 2,76,90,66,089/-. This issue also has roots in AY 2016-17 following which the AO has reopened the assessment. This was also questioned during the course of the original assessment proceedings when following query was raised:- “31. Why the interest paid to overseas branches & head office should not be disallowed on the basis of decision of ABN Amro case.” 7.1. To which the assessee replied as under:-

The Hon'ble Supreme Court in the case of Ganga Saran & Sons 130 ITR 1, has remarked “The words “has reason to believe” are stronger than the words "is satisfied.". The belief entertained by the Income Tax Officer must not be arbitrary or irrational. It must be reasonable or, in other words, it must be based on reasons which are relevant and material.

In light of the afore stated observations, we are of the view that the belief of the Assessing Officer is a condition precedent for assuming jurisdiction and without such belief, the Assessing Officer would not have jurisdiction to initiate proceedings u/s 147 of the Act. We are of the view that the fulfillment of this condition is not a mere formality but it is mandatory and failure to fulfill that condition would vitiate the entire proceedings.

There must be direct nexus or live link coming to the notice of the Assessing Officer and formation of his belief that there has been escapement of income of the company from assessment in a particular year. Therefore, for every Assessment Year, there should be some tangible material evidence to form such a belief which we find absent in the reasons recorded mentioned elsewhere for the years under appeal.

Further the Hon’ble Supreme Court in the case of Kelvinator of India Limited (supra), under identical circumstances, has held as under:- “…..Therefore, post 1-4-1989 , power to reopen is much wider. However, one needs to give a schematic interpretation to the words "reason to believe" failing which, we are afraid, section 147 would give arbitrary powers to the Assessing Officer to re- open assessments on the basis of "mere change of opinion", which cannot be per se reason to reopen. We must also keep in mind the conceptual difference between power to review and power to re-assess. The Assessing Officer has no power to review; he has the power to reassess. But reassessment has to be based on fulfilment of certain pre-condition and if the concept of "change of opinion" is removed, as contended on behalf of the Department, then, in the garb of re-opening the assessment, review would take place. One must treat the concept of "change of opinion" as an in-built test to check abuse of power by the Assessing Officer. Hence, after 1-4-1989 , Assessing Officer has power to reopen, provided there is "tangible material" to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief.

The Hon'ble Delhi High Court in the case of Donaldson India Filters Systems (P.) Ltd. vs. DCIT 371 ITR 87 has very lucidly reconciled Explanation 1 and the first proviso to section 147 of the Act. The relevant findings read as under: “20. The first proviso to Section 147 quoted earlier makes it abundantly clear that no action there under is ordinarily permissible in cases where I.T.A. No. 2203/Mum/2 I.T.A. No. 1334/Mum/2024 19 assessment for the relevant assessment year has already been made under Section 143(3), after expiry of four years from the end of the relevant assessment year. But, it is clear that this limitation would apply only if there has been a scrutiny assessment and not otherwise. There is, however, an exception available even to the four year rule wherein such re-opening of the assessment proceedings is permitted if any income chargeable to tax has escaped assessment on account of failure on the part of the assessee "to disclose fully and truly all material facts necessary" for assessment for the assessment year in question. Noticeably, the re- opening of the assessment after expiry of four years is permitted only if there has been a default on the part of the assessee to disclose. To put it conversely, the law does not provide for re-opening of the assessment, through the route of Section 147 Income Tax Act, if any income has escaped assessment on account of failure on the part of the assessing authority to gather necessary information within the prescribed period or to make proper inquiry or subject the available material to proper scrutiny.

Thus, it emerges that generally the assessing authority is vested by the amended law in Section 147 to re-assess (re-compute etc.) if he has reasons to believe that income has escaped assessment but this he can do only within four year period. On elapse of such period, the matter must attain finality. Yet, if the Assessing Officer also finds material giving rise to reasons to believe that the escapement was due to default of assessee to truly disclose, the bar of limitation would get lifted.

Undoubtedly, explanation - 1 to Section 147 indicates that mere production of account books or other evidence before the Assessing Officer would not necessarily amount to disclosure of the material information by the assessee. But then, the explanation clarifies the said general refrain by the words "not necessarily". Therefore, the burden is equally placed on the Assessing Officer to exercise due diligence in examining the record (account books or evidence) produced before him in the light of declarations made in the return or responses (to the notices, questionnaire etc.). As has been noted above, the sine quo non for action under Section 147 (to deal with escapement of income) is gathering or I.T.A. No. 2203/Mum/2 I.T.A. No. 1334/Mum/2024 20 availability of some "tangible material" requiring the matter to be re- opened.

The impugned order passed by the ITAT quotes the reasons recorded by the assessing authority for re-opening the assessment under Sections 147/148 of Income Tax Act as under:— "The assessment was completed and order u/s 143(3) of the Act was passed on 30. 11.2005. After going through the records, it is revealed that the calculation of deduction admissible u/s 80HHE of the IT Act, the assessee adopted the total turnover of the business as Rs. 1,63,58,001/- whereas the P & L account shows that the total turnover as Rs. 14,54,12,662/- (Sales gross + Services). Adoption of incorrect total turnover resulted in excess allowance of deduction u/s 80HHE to the tune of Rs. 42,17,556/- entailing short levy of tax of Rs. 21,27,313/-. Therefore, I have reason to believe that the income of the assessee has escaped the assessment as per the section 147 of the IT Act. Issued Notice u/s 148. The approval of Commissioner of Income Tax, Delhi-IV, has been obtained on 19.02.2010."

It is clear from bare reading of the aforementioned satisfaction note recorded by the assessing authority for re-opening the assessment five years after the assessment had been completed under Section 143(3) (on 30.11.2005) that the only indication set out as to the grounds which had triggered such action is through the words "after going through the records". The assessing authority would not elaborate as to which records had been adverted to and what was the event which had occurred that had impelled such perusal of the records for a fresh view to be taken. Noticeably, the Assessing Officer while recording his satisfaction by note dated 19.03.2010 that a case had been made out for the income to be re- assessed would not attribute any act of commission or omission on the part of the assessee so as to constitute a failure to discuss fully and truly of the material facts. Indeed, the assessing authority expressed that reasons to believe existed that a part of the income had escaped assessment. But, it would not clarify even remotely as to how the said failure had occurred.

A relevant part of the re-assessment order that came to be eventually passed by the assessing authority on 21.12.2010 needs to be extracted. It reads as under:— "The reply filed by the assessee company has been considered, however, no found to tenable. In the absence of any substantiating submissions filed by the assessee company it is presumed that it has nothing to say in the matter. On going through the P&L A/c submitted by the Assessee it appears that Net Sales was of Rs.10,89,05,293/- and after adding back services and others total turnover comes to Rs.13,16,12,262/- whereas on perusal of the Annexure-2 regarding deduction under chapter VI-A the assessee in computation of deduction under section 80HHE the total turnover claimed was Rs. 1,63,58,001/-. Thus details relating to the claim by the exporter computer software for deduction under section 80HHE of the I.T. Act, shows that as per Form No. 10CCAF the total turnover of the assessee company for the year under consideration has been taken at Rs.1,63,58,001/- instead of Rs.13,54,12,662/- (Sales Gross + Services). In view of the above, it is quite evident that the assessee company, while computing the deduction u/s 80HHE has adopted incorrect turnover which has resulted excess claim of deduction u/s 80HHE to the tune of Rs.46,65,749/-..."

The Revenue has placed reliance on Honda Siel Power Products Ltd. v. Dy. CIT [2012] 340 ITR 53/197 Taxman 415/[2010] 10 taxmann.com 2 (Delhi) to argue that mere production of books of account or other evidence was not sufficient in view of explanation - 1 to Section 147 noted earlier. In our considered view, the factual matrix of Honda Siel Power Products Ltd. (supra) is distinguishable. The court had found on that occasion omission or failure on the part of the assessee which attracted initiation of action under Section 147(1) on account of the first proviso thereto coming into play.

The order passed by the assessing authority extracted above unmistakably shows that even at that stage it had no fresh material available to it so as to exercise the jurisdiction available under Sections I.T.A. No. 2203/Mum/2 I.T.A. No. 1334/Mum/2024 22 147/148 of Income Tax Act. It was, thus, taking a fresh call on the subject of assessment of income (i.e. re-assessment), drawing conclusions and inferences from the same very material that had been scrutinized in the original assessment proceedings. The case at hand is concededly not covered by other exceptions as indicated by second and third proviso or explanation to Section 147 quoted earlier.

The re-opening of the assessment in the case at hand through notice under Section 148 of Income Tax Act issued on 22.03.2010 fails to pass the muster on both the tests. The satisfaction note does not disclose the foundation of "reasons to believe" as it vaguely refers to the perusal of "the records" without specifying the fresh "tangible material" that had come to light giving rise to a need for such action. Since the assessment had earlier been concluded under Section 143(3) by order dated 21.09.2007, the restrictions on the exercise of the power of re-assessment as contained in the first proviso to Section 147 would inhibit further action in absence of material showing default by the assessee to fully or truly disclose.

In the above facts and circumstances, we concur with the view taken by the CIT(A) that it is a case of impermissible change of opinion. The order whereby the proceedings have been re-opened for assessment under Section 147/148 of Income Tax Act, thus, is found to suffer from jurisdictional error. Consequently, the proceedings taken out in its wake cannot sustain.

We, thus, answer the question of law formulated as above in affirmative against the Revenue.”

Considering the facts in totality, in light of the judicial decisions discussed hereinabove, we are of the considered view that the AO has erred in assuming jurisdiction u/s 147 of the Act, therefore, we do not have any hesitation in setting aside the notice u/s 148 of the Act thereby quashing the resultant re-assessment order.

As mentioned elsewhere, the reasons for reopening the assessment for AY 2014-15 & 2015-16, are pari materia the same as discussed hereinabove. Therefore, for our detailed discussion hereinabove, the notice for AY 2014-15 and 2015-16 are also set aside and assessment orders are quashed.

Since we have quashed the impugned assessment orders, we do not find it necessary to delve into the merits of the case.

In the result, appeals by the revenue are accordingly dismissed and those by the assessee are allowed.