THE PR. COMMISSIONER OF INCOME-TAX vs. M/S FIBRES AND FABRICS INTERNATIONAL PVT. LTD.,

1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 17TH DAY OF AUGUST 2021 PRESENT THE HON’BLE MR. JUSTICE ALOK ARADHE AND THE HON’BLE MR. JUSTICE HEMANT CHANDANGOUDAR I.T.A. NO.542 OF 2016 BETWEEN: 1. THE PR. COMMISSIONER OF INCOME-TAX 5TH FLOOR, BMTC BUILDING 80 FEET ROAD, KORMANGALA BENGALURU 560 095. 2. THE DEPUTY COMMISSIONER OF INCOME-TAX CIRCLE-11(3), PRESENT ADDRESS CIRCLE-3(1)(1), 2ND FLOOR, BMTC BUILDING 80 FEET ROAD, KORMANGALA BENGALURU 560 095. ... APPELLANTS (BY MR. K.V. ARAVIND, ADV.,) AND: M/S. FIBRES AND FABRICS INTERNATIONAL PVT. LTD., NO.21, E-1, 2ND STAGE PEENYA INDUSTRIAL AREA BENGALURU 560 058. PAN - AAACF 6841M. ... RESPONDENT (BY MR. SURYANARAYANA T A/W MISS. MAHIMA GOUD, ADVS.) - - - THIS I.T.A. IS FILED UNDER SEC. 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 10.02.2016 PASSED

2 IN ITA NO.1352/BANG/2014 FOR THE ASSESSMENT YEAR 2005- 06, PRAYING TO: (i) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED ABOVE. (ii) ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE ITAT, BENGALURU IN ITA NO. 1352/BANG/2014 DATED:10/02/2016 AND CONFIRM THE ORDER OF THE APPELLATE COMMISSIONER CONFIRMING THE ORDER PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-3(1)(1), BENGALURU.

(iii) PASS SUCH OTHER SUITABLE ORDERS AS THIS HON'BLE COURT DEEMS FIT TO GRANT IN THE FACTS AND CIRCUMSTANCES OF THE CASE IN THE INTEREST OF JUSTICE AND EQUITY. THIS I.T.A. COMING ON FOR FINAL HEARING, THIS DAY, ALOK ARADHE J., DELIVERED THE FOLLOWING: JUDGMENT This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act for short) has been preferred by the assessee against the order dated 31.10.2014 passed by Income Tax Appellate Tribunal (hereinafter referred to as 'the tribunal' for short). The subject matter of the appeal pertains to the Assessment year 1999-00. The appeal was admitted by a bench of this Court on the following substantial questions of law:

3 (i) Whether on the facts and circumstances of the case, the Tribunal is right in law in holding that the re-assessment order passed in the case of assesse is null and void on the ground that the said proceedings are initiated based on the same set of information as was available at the time of original assessment proceedings and therefore it amounts to mere change of opinion even when the re-assessment proceedings are initiated n the basis of the incriminating documents collected during survey and belief for re-opening the assessment is based on the tangible materials and the all the ingredients for initiating re- assessment proceedings under section 147 are satisfied in the case of the assessee? (ii) Whether on the facts and circumstances of the case, the Tribunal's order can be said as perverse in nature as the Tribunal has failed to apply the principle laid down by Apex Court in case M/s. Ess Kay Kay Engg Co. V/s CIT (reported in 247 ITR page 818) and Phool chand Bajrang Lal V/s ITO (reported in 203 ITR page 456)?

4 2. Facts leading to filing of this appeal briefly stated are that assessee is a company which is engaged in the business of manufacture and export of garments. The assessee filed the return of income for the Assessment Year 2005-06 on 31.10.2005. The return filed by the assessee was selected for scrutiny under Section 143(2) of the Act. The assessee furnished the details pertaining to liabilities which included details relating to sale commissions paid to certain foreign companies and tax deducted at source on such sale commissions. The Assessing Officer after examining the details furnished by the assessee passed an original order of assessment on 31.12.2008 without making any disallowance pertaining to sales commission. The contention of the assessee that payments were made the assessee to non residents and since, the services were rendered outside India, therefore, no income accrued or arose in India and therefore, sales commission were not exigible to tax was rejected.

5 3. The Assessing Officer issued a notice dated 12.03.2010 under Section 148 of the Act proposing to re-assess the income of the assessee on the ground that he has reasons to believe that income chargeable to tax had escaped assessment. The assessee sought reasons for re-opening the assessment which was supplied to it and thereafter, the assessee filed objections to the notice for reopening assessment on the ground that the same was based on a mere change of opinion. The Assessing Officer passed an order of re-assessment under Section 143(3) read with Section 147 of the Act disallowing the deduction claimed by the assessee towards sales commission to the tune of Rs.16,93,91,847/- and added the same to the total income of the assessee. 4. The assessee thereupon preferred an appeal before the Commissioner of Income Tax (Appeals) who by an order dated 01.08.2014 dismissed the appeal preferred by the assessee and upheld the order of re-

6 assessment. The assessee thereupon preferred an appeal before the tribunal. The tribunal by an order dated 10.02.2016 inter alia held that the proceeding for re-assessment were initiated on the same set of information which was called for by the Assessing Officer and was looked into at the time of original assessment and therefore, the order of re-assessment was based on change of opinion, which is not a valid ground for re- opening the assessment. In the aforesaid factual background, this appeal has been filed. 5. Learned counsel for the revenue submitted that proceeding for re-assessment were initiated under Section 147 of the Act, which was in existence at relevant point of time and the proceeding for re- assessment could be invoked provided the Assessing Officer had reason to believe that any income chargeable to tax had escaped assessment. It is further submitted that the assessment as re-opened on the basis of survey conducted under Section 133A of the Act for Assessment

7 Year 2006-07 and the finding recorded by the tribunal is contrary to the reasons recorded by the Assessing Officer. It is also submitted that even if a detailed scrutiny is conducted, the power of Assessing Officer to issue notice under Section 147 of the Act is not taken away and tangible material need not be in the form of documentary evidence only. It is also submitted that order of the tribunal is contrary to law laid down by Supreme Court. In support of aforesaid submissions, reliance has been placed on decisions in 'KALYANJI MAVJI & CO. VS. COMMISSIONEROF INCOME-TAX', (1976) 102 ITR 287 (SC), 'INDIAN & EASTERN NEWSPAPER SOCIETY VS. COMMISSIONER OF INCOME-TAX', (1979) 2 TAXMAN 197 (SC), 'A.L.A.FIRM VS. COMMISSIONER OF INCOME-TAX', (1991) 55 TAXMAN 497 (SC), 'ASSISTANT COMMISSIONER OF INCOME-TAX VS. RAJESH JHAVERI STOCK BROKERS (P.) LTD.', (2007) 161 TAXMAN 316 (SC), 'NEW DELHI TELEVISION LTD.

8 VS. DEPUTY COMMISSIONER OF INCOME-TAX', (2020) 116 TAXMANN.COM 151 (SC). 6. On the other hand, learned counsel for the assessee submitted that there was no tangible material before the Assessing Officer to initiate the proceeding under Section 147 of the Act and the reasons recorded by the Assessing Officer do not disclose any tangible material in possession of the Assessing Officer on the basis of which he could form a reason to believe that income had escaped assessment. It is submitted that an inference cannot be a tangible material leading to a reason to believe that income has escaped assessment. It is further submitted that in the original order of assessment, the Assessing Officer has formed an opinion and the proceeding for re-assessment have been initiated only on the basis of change of opinion. In support of aforesaid submissions, reliance has been placed on decisions 'CALCUTTA DISCOUNT CO. LTD. VS. ITO', (1961) 41 ITR 191 (SC), 'CIT VS.

9 KELVINATOR OF INDIA LTD.', (2002) 123 TAXMAN 433 (DELHI) (FB), 'CIT VS. KELVINATOR OF INDIA LTD.', (2010) 187 TAXMAN 312 (SC), 'NYK LINE (INDIA) LTD. VS. DCIT', (2012) 28 TAXMANN.COM 229 (BOM.), 'CIT VS. USHA INTERNATIONAL LTD.', (2012) 25 TAXMANN.COM 200 (DELHI) (FB) AND 'ACIT VS. MARICO LTD.', (2020) 117 TAXMANN.COM 244 (SC). 7. We have considered the rival submissions made on both sides and have perused the record. The Supreme Court in KALYANJI MAVJI & CO. supra held as under:

"13. On a combined review of the decisions of this Court the following tests and principles would apply to determine the applicability of Section 34(1)(b) to the following categories of cases: "(1) Where the information is as to the true and correct state of the law derived from relevant judicial decisions;

10 (2) Where in the original assessment the income liable to tax has escaped assessment due to oversight, inadvertence or a mistake committed by the Income Tax Officer. This is obviously based on the principle that the tax- payer would not be allowed to take advantage of an oversight or mistake committed by the taxing authority; (3) Where the information is derived from an external source of any kind. Such external source would include discovery of new and important matters or knowledge of fresh facts which were not present at the time of the original assessment; (4) Where the information may be obtained even from the record of the original assessment from an investigation of the materials on the record, or the facts disclosed thereby or from other enquiry or research into facts or law." If these conditions are satisfied then the Income Tax Officer would have complete jurisdiction to reopen the original assessment. It is obvious that where the Income Tax Officer gets no subsequent information, but merely proceeds to reopen the original assessment without any fresh facts or materials or without any enquiry into the materials which form part of the original

11 assessment, Section 34(1)(b) would have no application." If these conditions are satisfied then the Income-Tax Officer would have complete jurisdiction to reopen the original assessment. It is obvious that where the Income-Tax Officer gets no subsequent information, but merely proceeds to reopen the original assessment without any fresh facts or materials or without any enquiry into the materials which form part of the original assessment, Section 34(1)(b) would have no application. 8. A Full Bench of this Court in 'DELL INDIA PVT. LTD. Vs. JOINT COMMISSIONER OF INCOME-TAX, BANGALORE' (2021) 123 TAXMANN.COM 468 (KAR) dealt with the question whether 'reason to believe' in the context of Section 147 of the Income Tax Act can be based on mere change of opinion of the Assessing Officer and answered the reference as follows: "17. Thus, what is held by the Apex Court is that when a power under Section 147 is to be exercised, concept of change of opinion must be treated as an inbuilt test to check abuse of power of the Assessing

12 Officer. Further, it is held that after 1st April 1989, the Assessing Officer has power to reopen provided there is a tangible material to come to the conclusion that there is escapement of income from assessment. The Apex Court held that mere change of opinion on consideration of the same material is no ground to invoke Section 147 of the said Act. 19. Therefore, in the light of law laid down in the case of M/s. Indian and Eastern Newspaper Society (supra), the first question will have to be answered in the negative by holding that the decision in the case of Rinku Chakraborthy does not lay down correct position law to the extent to which it follows what is held in clause (2) of paragraph 13 of the decision of the Apex Court in the case of Kalyanji Mavji and Company (supra). The second question will have to be answered in the affirmative. In view of the consistent decisions of the Apex Court holding that "reason to believe" in the context of Section 147 of the Income Tax cannot be based on mere change of opinion of the Assessing Officer, the third question will have to be answered in the negative. In fact, in view of settled law, framing of question No.3 was not warranted at all."

13 9. The Assessing Officer has recorded the following reasons for re-opening the assessment. The assessee filed return of income for the Assessment Year 2005-06 on 31.10.2005 declaring an income of Rs.28,94,18,182/-. Assessment in this case was completed under Section 143(3) on 31.12.2008 determining a total income of Rs.31,04,68,388/-. In this case a survey under Section 133A was conducted on 5.11.2009 and during the course of survey, along with other issues, expenses debited to the p & L a/c were verified and it was found that the assessee has incurred huge expenses in the nature of Info Trekking and Delivery schedule which is paid to a foreign company namely M/s South Elegant Limited, Hong Kong as per the Service Agreement entered into between the assessee company and M/s South Elgant Limited dated 01.07.2002. During the course of post survey proceedings statement of the Managing Director of the company Shri Anupam Kothari was recorded

14 and was asked to substantiate this agreement and payments made in pursuance to this agreement and it is found that the reply of the Managing Director to most of the queries were evasive in nature and surprisingly, to quote a few, he could not substantiate with whom from South Elegant he had interacted or even to say where this deal was entered into and when. Surprisingly this service agreement was cancelled on 26.10.2005 though it was made for a period upto 2012 and the so called termination is done again through a three line letter and huge sum running into tens of crores rupees has been paid by the assessee company towards termination fee. The genuineness of this Info Trekking and Delivery schedule expenditure was not proved by the assessee to the satisfaction of the Assessing Officer and even the assessee could not prove the legality of this document as the document in question was a plaint sheet of paper, neither registered nor notarized or either witnessed by any person or even does not have the name of the company could not prove

15 beyond doubt the necessity of such expenditure and this kind of expenditure is unknown in this line of trade. Accordingly, in the order passed under Section 143(3) for A.Y.2006-07 the expenses debited under this head of Rs.10,68,71,384/- was disallowed and added to the returned income. Similar nature of expenditure has been debited by the assessee company for the financial year 2003-04, 2004-05 also. On verification of records of the assessee for the A.Y.2005-06 it was found that similar expenses has been paid by the assessee in the name of commission - Sales amounting to Rs.16,93,91,847/- and these commission payments have been paid to M/s South Elegant Limited, Hong Kong and M/s Gryters of Netherland along with others. As this issue was not examined in the original assessment proceeding and has come to light on account of survey under Section 133A, I have reason to believe that income chargeable to tax has escaped assessment within the meaning of Section 147 of the Income-Tax Act, 1961 for the A.Y.2005-06.

16 10. During the course of original assessment proceeding, details pertaining to expenditure incurred by the assessee towards sales commission were furnished. Thus, the assessee had furnished all primary facts before the Assessing Officer and the Assessing Officer on the basis of facts available with him had passed an original order of assessment without making any disallowance of the aforesaid expenditure. The re-assessment proceeding are based on the basis of same information which was available with the Assessing Officer at the time of original order of assessment and inferences drawn by the Assessing Officer on the same set of facts cannot be said to be tangible material. It is also noteworthy that mere fact that expenses were huge in the opinion of the Assessing Officer cannot be a ground for re-opening the assessment and necessity of incurring expenditure cannot be gone into by the Assessing Officer.

17 11. It is pertinent to mention that no material was gathered in the survey proceeding to suggest that expenditure incurred towards sales commission is not an allowable expenditure and disallowance made in respect of the expenditure for the subsequent Assessment Year 2006-07 cannot be a ground for re-opening the assessment. The tribunal has therefore, rightly recorded the findings of fact that there is no tangible material on the basis of which assessment for Assessment Year 2005-06 was re-opened and the assessment of the subsequent Assessment Year is based on the inferences drawn from certain facts which cannot be construed as tangible material. The reasons mentioned in the notice for re-assessment are based on mere change of opinion and therefore, the re-opening of the assessment proceeding is not permissible in the facts and circumstances of the case. The aforesaid finding cannot be said to be perverse. For the aforementioned reasons, the substantial questions of law involved in this appeal

18 are answered against the revenue and in favour of the assessee. In the result, we do not find any merit in this appeal, the same fails and is hereby dismissed. Sd/- JUDGE Sd/ JUDGE ss