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Income Tax Appellate Tribunal, DELHI BENCH “H” NEW DELHI
Before: SHRI I.C. SUDHIR & SHRI PRASHANT MAHARISHI
ORDER
PER I.C. SUDHIR: JUDICIAL MEMBER The Revenue has questioned first appellate order basically on two grounds. Firstly, the Learned CIT(Appeals) has erred in directing the Assessing Officer to allow deduction under section 10A of the Income-tax Act, 1961 and secondly in directing the Assessing Officer to set off the loss of Rs.1,18,99,508.
2 2. The assessee on the other hand in its cross objection has raised several objections including the action of the Learned CIT(Appeals) in upholding the validity of initiation of proceedings under sec. 147 of the Act (Objection Nos. 1 and 2). In objection No.3, the action of the Learned CIT(Appeals) in recording a finding that assessee had not claimed any deduction under sec. 10A of the Act has been objected and in objection No.4, it has been pleaded that the Learned CIT(Appeals) ought to have held that loss suffered by the assessee was allowable business loss to be carried forward by recording a further finding that the invoices were raised at arm’s length price.
2.1 Along with the cross objection, the assessee has also moved an application for condonation of delay of 498 days in filing the cross objection. In alternative, it has been also prayed that the grounds raised in the cross objection be treated as moved under Rule 27 of the ITAT Rules and be allowed for the adjudication after hearing.
2.2 Reiterating the contents of the application for condonation of delay, the Learned AR explained that appeal preferred by the revenue was fixed for hearing before the ITAT on 07.08.2008 and noting the same, the assessee requested the Bench to adjourn the hearing since the assessee had to file a 3 paper book . When the appeals were being prepared, it was advised by the counsel to the assessee that the assessee ought to have filed a cross objection as the assessee has not filed any cross objection on earlier occasion since the Learned CIT(Appeals) had allowed the first appeal preferred by the assessee. However, as an abundant precaution, it was advised to file the present cross objection raising the legal issues which has not been allowed by the Learned CIT(Appeals). The application is also supported with an affidavit of the director of the assessee company.
2.3 The Learned Senior DR on the other hand opposed the application with the submission that the reason for the delay in preferring the cross objection by the assessee is not sufficient. 2.4 Considering the above submissions, we find that there was sufficient reason for the delay by around 498 days in preferring the cross objection by the assessee in absence of proper advice for which the assessee was not at fault. The application is accordingly allowed.
Since the issue raised in objections Nos. 1 and 2 of the cross objection preferred by the assessee questioning the validity of initiation of proceedings under sec. 147 of the Act is legal in nature going to the root of the matter, we 4 prefer to adjudicate this issue firstly. The parties were directed to advance their respective arguments in this regard.
The Learned AR submitted that there was no any material for reasons to believe that an income had escaped assessment. He contended that the reopening proceedings were initiated only for collateral purposes and not for the purpose of bringing to tax an income, alleged to have been escaped assessment. The Learned AR submitted that the assessee company had started its business during the previous year relevant to assessment year 2000-01 under consideration. The assessee did not claim any deduction under sec. 10A of the Act during the assessment year as it had no profit to claim the same. He submitted that return of income declaring loss at Rs.1,18,99,508 on 30.11.2000 which was processed under sec. 143(1) on 26.7.2001. No notice under sec. 143(2) of the Act was issued to scrutinize the return, despite the fact that it was the first year of return of income. On 17.9.2004, notice under sec. 148 of the Act was issued and in response thereto, the assessee filed return of income with objection on 21.10.2004. On 25.11.2-004, copy of reasons recorded was supplied to the assessee and on 21.12.2004, the assessee filed objections thereto. The said objections were rejected by the Assessing Officer on 17.8.2005 and the assessment was framed on 31.3.2006.
5 4.1 The Learned AR submitted that in the assessment order, it was held that the assessee company has undercharged the cost of services of software provided to holding company. The Assessing Officer held that the loss suffered and claimed needs to be reduced to nil but the same was not the reason recorded for initiation of reopening proceedings. He contended that there was no tangible material available at any stage even at the time of initiation of proceedings or in the order of assessment that the assessee has undercharged the cost of services. The assessment is based on mere surmises and conjecture. There remained no reason with the Assessing Officer to hold that the loss suffered could not be carried forward. The assessment has been framed by the Assessing Officer on the basis that assessee had undercharged its holding company and there was no loss. This finding in the assessment order is not based on the reasons to believe recorded for the initiation of reopening proceedings as the same was on the basis that the loss suffered could not be carried forward. The Learned AR submitted that even otherwise the reasons recorded for initiation of reopening proceeding was not sustainable in view of the decision of Hon’ble jurisdictional High Court of Delhi in the case of CIT vs. Tei Technologies Pvt. Ltd. (2014) – 361 ITR 36 (Del.) that the loss suffered under sec. 10A units can be carried forward and set off in the subsequent assessment years. The Learned AR submitted 6 further that in the present case, no notice under sec. 143(2) of the Act was issued, hence, there was no question of escapement of income. In this regard, he placed reliance on the decision of Hon'ble Delhi High Court in the case of CIT vs. Ved & Co. – 302 ITR 328 (Del.). He contended that subsequent to the order dated 26.7.2008 when the return was processed under sec. 143(1) of the Act, no fresh material surfaced and thus in view of the judgment of Hon'ble Delhi High Court in the case of CIT vs. Orient Craft Ltd. – 354 ITR 356 (Del.) even otherwise the exemption of jurisdiction to frame assessment is untenable. 4.2 The Learned AR submitted further that even otherwise the assessee has got good case on the merits of the additions of the disallowance which has been deleted by the Learned CIT(Appeals) by passing a detailed order and the issue raised regarding eligibility of deduction under sec. 10A of the Act to the assessee and set off the losses claimed are also covered in favour of the assessee by the decisions relied upon by the Learned CIT(Appeals) and by the ITAT in the case of assessee itself for the assessment year 2001- 02, 2002-03, 2003-04 and 2004-05 in 4656, 2557 and 3406/Del/2007 - order dated 31.3.2010.
7 4.3 The Learned Senior DR on the other hand placed reliance on the orders of the authorities below.
Having gone through the above cited decisions relied upon by the Learned AR, we find that in the case of CIT vs. Orient Craft Ltd. (supra), the assessee had filed return claiming deduction under sec. 80HHC and 10B of the Act, the Assessing Officer issued intimation accepting return under sec. 143(1) of the Act. Later on, the Assessing Officer sought to reopen proceedings on the ground that there was escapement of income. There was no whisper in the reasons recorded of any tangible material which came to the possession of the Assessing Officer subsequent to issue of intimation. The Hon'ble High Court was pleased to hold that it was a case of arbitrary exercise of powers conferred under sec. 147 of the Act hence the reassessment proceedings were not validly initiated. Similar are the facts of present case before us. As in the present case of the assessee after issuance of intimation on 26.7.2001 under sec. 143(1) of the Act accepting the return of income filed on 30.11.2000, no tangible material was available at any stage even at the time of initiation of proceedings that the assessee had undercharged the cost of services. We thus respectfully following the ratios laid down by the Hon'ble jurisdictional High Court of Delhi in the case of CIT vs. Orient Craft Ltd. (supra) hold that initiation of reopening 8 proceedings in the present case before us was not valid and the reassessment framed in furtherance to such invalid initiation under sec. 148 of the Act is also held invalid and void-ab-initio. The same is quashed as such. It is also pertinent to mention over here that the Learned CIT(Appeals) has decided the issue on the validity of initiation of reopening proceedings and the assessment made in furtherance thereto with this finding that the Assessing Officer wanted to verify the facts regarding carry forward or set off of losses related to the concerned assessment year since according to him the assessee was not entitled to claim the loss and carry it forward to be set off against the assessable income of the years in future and, therefore, he has reason to believe that the same has escaped assessment and should be brought to tax. The very ground on the basis of which the Learned CIT(Appeals) has rejected the objection of the assessee in our view is not tenable since the provisions of under sec. 147 of the Act cannot be invoked for mere verification of the fact to ascertain that there was some income which has escaped assessment. The issue raised in the objection Nos. 1 and 2 of the cross objection are thus decided in favour of the assessee. These objections are accordingly allowed.
In view of the above findings on the very validity of initiation of reopening proceedings and the reassessment made in furtherance thereto,