HDFC SECURITIES LTD,MUMBAI vs. DCIT 4(1), MUMBAI

This appeal by the assessee is directed against the order of the CIT (Appeals)-8, Mumbai dated 03/02/2014 for Asst. Year 2007-08.

2.1 The assessee company, a member of BSE and NSE and engaged in the business of share and stock broker and share trading filed its return of income for Asst. year 2007-08 on 29/10/2007. A revised return was subsequently filed on 29/03/2008 declaring total income of Rs. 9,22,22,770/-. The return was processed u/s 143(1) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) and the case was subsequently taken up for scrutiny. The assessment was completed u/s 143(3) of the Act vide order dt. 24/11/2009 wherein the income of the assessee was determined at Rs. 10,26,09,230 in view additions inter alia disallowances made u/s 40(a)(ia) of the Act for non deduction of tax at source on payments made towards transaction charges, v-sat charges and LAN charges, disallowance of penalty paid to stock exchange etc. On appeal by the assessee, the CIT(A) disposed off the assessee’s appeal allowing the assessee partial relief, whereby the assessee’s, income came to be determined at Rs. 9,23,97,956/-.

2.2 Subsequently, the Assessing Officer (‘AO’) initiated proceedings u/s 147 of the Act and after recording the reason for formation of belief that income of the assesse exigible to the tax had escaped assessment, the AO issued notice u/s 148 of the Act dt. 29/03/2012 to the assessee. In response thereto, the assessee vide letter dt.23/10/2012 submitted that the return of income filed on 29/03/2008 be treated as filed in compliance to the notice u/s 148 of the Act. The re-assessment was completed vide u/s 143(3) r.w.s 147 of the Act vide order dt. 14/02/2013 wherein the income of the assessee was determined at Rs.. 10,11,49,370/- in view of a disallowance u/s 40(a)(ia) of the Act in respect of non deduction of tax at source u/s 194J of the Act on payment of data circuit/ bandwith charges amounting to Rs. 87,51,410/-.

2.3 Aggrieved by the order of assessment for Asst. year 2007-08 dt. 14/02/2013 passed u/s 143(3) r.w.s.147 of the Act, the assessee preferred an appeal before the Ld. CIT(Appeals)-8, Mumbai. The Ld. CIT(A) disposed off the appeal vide order dt. 03/02/2014 allowing the assessee partial relief.

GROUND NO. 1 REOPENING OF ASSESSMENT UNDER SECTION 147 OF THE ACT IS BAD IN LAW:

1. On the facts and circumstances of the case and in law, the Learned CIT(A) erred in upholding the action of the Deputy Commissioner of Income-tax, Range - 4(1), Mumbai ("the AO") that the reopening of assessment under section 147 of the Act was justified and in accordance with the provisions of the law.

2. The Appellant prays that it be held that the re-assessment order under section 147 of the Act be annulled as void ab-initio and/or otherwise bad in law.

WITHOUT PREJUDICE TO GROUND NO. I:

GROUND NO. II DISALLOWANCE OF DATA CIRCUIT/BANDWIDTH CHARGES AMOUNTING TO RS. 87,51,410/- UNDER SECTION 40(a)(ia) OF THE ACT FOR PURPORTED NON DEDUCTION OF TAXES UNDER SECTION 194J OF THE ACT:

1. On the facts and circumstances of the case and in law, the Learned CIT(A) erred in upholding the action of the AO of disallowing the data circuit/bandwidth charges amounting to Rs. 87,51,4101- under section 40(a)(ia) of the Act on the alleged ground that such charges is in the nature of 'fee for technical services' and the Appellant is liable to deduct tax at source under section 194J of the Act.

2. The Appellant prays that the aforesaid disallowance of data circuit! bandwidth charges amounting to Rs. 87,51,4101- under section 40(a)(ia) of the Act be deleted.

WITHOUT PREJUDICE TO GROUND NO. I:

GROUND NO. III

NON-ADJUDICATING THE WITHOUT PREJUDICE GROUND OF APPEAL FILED BEFORE HON'BLE CIT(A):

2. The Appellant prays that the without prejudice .ground of appeal filed before Hon'ble CIT(A) be adjudicated.

GROUND NO. IV:

GENERAL:

The Appellant craves leave to add, to alter and /or amend the above ground of appeal.

4. Ground No. 1 Reopening of Assessment u/s 147 of the Act 4.1.1 At the outset, the Ld. AR for the assessee challenged the re- opening of the assessment for Astt. Year 2007-08 u/s 147 of the Act. The Ld. AR for the assessee drew the attention of the bench to the reasons recorded by the AO which are extracted at para 4 on page 2 of the relevant order of re-assessment dt. 14/02/2013. It was submitted by the Ld. AR that the reason recorded by the AO for initiation of re- assessment proceedings u/s 147 of the Act was bad in law as there was no fresh tangible material that came into the possession of the AO after completion of the original scrutiny order of assessment u/s 143(3) of the Act vide order 24/11/2009. It is contended that the reasons were recorded on the basis of the very same material which was available at the time of passing the original order of assessment u/s 143(3) of the Act and therefore the re-opening of assessment was nothing but a change of opinion.

4.1.2 In this regard, the Ld. AR drew the attention of the bench to the paper book filled by the assessee, and particularly to pages 66a and 66b thereof which is a copy of notice u/s 142(1) of the Act issued by the AO to the assessee calling for submission of various details including party wise/head wise break up of expenditure to be filed in connection with assessment proceedings. It is submitted that in reply thereto, the assessee filed letter dt. 22/07/2009 submitting, inter alia, the detailed breakup of expenditures, placed at page 67 to 70 of the Paper Book. Drawing the attention of the bench to pages 68 and 69 of the paper book, the Ld. AR submitted that it is on the basis of these details filed by the assessee that the AO made the following disallowances. u/s 40(a)(ia) of the Act, in the original order of assessment at para 4 on page 2 thereof :-

(i) Transactional charges paid to Stock Exchange Rs. 86,24,480/- (ii) V- Set Charges Rs. 4,74,000/- (iii) LAN Charges Rs. 66,000/- ------------------------- Total Rs. 91,64,480/- 4.1.3 It is submitted that it is on the basis of the very same submission of the assessee i.e. particularly at page 69 thereof under the head communication charges, that the item ‘Data circuit/Bandwith charges Rs. 15,863,802/- has been taken by the AO, on the basis of which the reasons have been recorded by the AO for initiation of re- assessment proceedings, as recorded at page 2 of the re-assessment order dt. 14/02/2013. The Ld.AR contends that the aforesaid facts on record clearly establish that the AO has recorded the reasons for initiation of re-assessment proceedings on a change of opinion based on the same set of material which were already formed a part of the record considered by him while making the original assessment u/s 143(3) of the Act as no fresh material had come to the possession of the AO thereafter. In support of his contentions that, in the above factual matrix of the case, the initiation of proceedings u/s 147 of the Act for the second reopening of the assessment for Asst. year 2007-08 is bad in law, the Ld. AR placed reliance on the following judicial pronouncements:- (i) CIT vs. Orient Craft Ltd. of the Hon’ble Delhi High court in dt. 12/12/2012. (ii) Wadia Ghandiy & Co in ITA No. 7191/Mum/2011 dt. 30/06/2015. (iii) Saf Yeast Co.Pvt. Ltd, ITA No. 2984/Mum/2011 dt. 31/07/2015. (iv) Motilal R. Todi, in ITA No. 2910/Mum/2013, dt. 22/09/2015. (v) M. Sayarchand Mehta (HUF) in ITA No. 1997/Mum/2012 dt. 30/09/2015. (vi) Delta Air Lines INC vs. ITO in ITA 3476/Mum/2008 dt. 30/11/2012.

4.2 Per contra, the Ld. DR for revenue vehemently supported the orders of the authorities below on the issue of validity of initiation of proceedings for re-assessment for Asst. year 2007-08. It was contended that the Ld. CIT(A) had addressed this issue and rejected the assessee’s contentions on the ground that the assessee had not made full discloses of material pertaining to the provisions of section 40(a)(ia) of the Act and therefore this was not a case of change of opinion. On being queried as to any fresh material coming into the possession of the AO after completion of the original assessment u/s 143(3) vide order dt. 24/11/2009, the Ld. DR could not controvert the submission of the Ld. AR that no fresh tangible material had come into the possession of the AO before recording the reasons for re-opening the assessment u/s 147 of the Act for a second time.

4.3.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncements cited (supra). At the outset it is necessary to examine, whether at the time of re-opening the assessment for the second time u/s 147 of the Act, the AO had in his possession some new tangible material which was not available with him at the time of original assessment so that it does not amount to a change of opinion. For this purpose it is necessary to examine the reasons recorded which are as under:- The assessee filed its return of income for A.Y. 2007-08 on 29.03.2008 declaring total income at Rs. 9,22,22,769/- and was subsequently taken for scrutiny and assessed at an income of Rs. 102,60,92,030/-.

As per section 40(a)(ia) of I.T.Act, 1961 no deduction is to be allowed in respect of any interest, commission, brokerage, royalty fees for professional services, or fees for technical services payable to resident, being resident, for carrying out any work on which tax is deductible at source under Chapter XVIIB and such tax has been deducted or, after deduction has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of section 200.

The scrutiny of Profit and Loss account revealed that the assessed had debited an amount of Rs. 1,58,63,802/- towards Data Circuit/Band with charges as per schedule’11(P)’. This payment qualifies to be called a ‘technical services’ as for this entire highly sophisticated system and services involving specialized knowledge, experience; the transaction would not have been possible. Just because these services are being provided through highly sophisticated computerized automated, payment made for Data circuit/Band with charges should have been treated as professional fees u/s 194J.

As the assessee has not deducted any tax on the payment made of Rs. 1,58,63,802/- towards Data Circuit/ Bank with charges, the same should be added by the assessee in the statement computation of income under the provisions of section 40(a)(ia) of the I. T.Act, 1961.

Failure to disallow the amount resulted in under assessment of income chargeable to tax by Rs. 1,58,63,802/-. There to tax the amount of Rs. 1,58,63,802/- which has escaped assessment proceedings u/s 147 is required to be initiated in the assessee case”.

4.3.2 It is seen from a perusal of the reasons recorded by the AO for initiating re-assessment proceedings a second time for Assessment Year 2007-08, vis-à-vis the details available on record with the Assessing Officer, placed at page 66a to 70 of the assessee’s paper book, that the reasons are recorded on the basis of material on record available with the Assessing Officer from the original assessment proceedings culminating in the order of assessment u/s.143(3) of the Act dated 24/11/2009 for Assessment Year 2007-08. This, in our view, clearly constitutes a change of opinion by the Assessing Officer, based on the existing material on record and not in view of any fresh material having into his possession. Thus, since we find that it is amply clear that the Assessing Officer had already considered these materials at page- 66a to 70 of the paper book while completing the original assessment u/s.143(3) of the Act, initiation of re-assessment proceedings under section 147 of the Act on the basis of the very same material amounts to change of opinion.

4.3.3 As held by the Hon’ble Apex Court while affirming the view expressed by the Full Bench of the Hon’ble Delhi High Court in Kelvinator of India Ltd. (2010) 320 ITR 561(SC), there should be tangible material before the Assessing Officer from which he could entertain the belief that income of the assessee chargeable to tax had escaped assessment. In the case on hand, we find that it is apparent from the reasons recorded that there is no such new tangible material that came into the possession of the AO when he recorded the reasons for initiating re-assessment proceedings u/s. 147 of the Act for Assessment Year 2007-08. In this view of the matter, the re-opening of assessment on re-appreciation or re- examination of the same set of facts and material which were available with the Assessing Officer at the time of completing the original assessment completed u/s.143(3) of the Act on 24/11/2009, is tantamount to change of opinion which is not permissible in law. In the above factual legal matrix of the case on hand and the judicial precedents cited in the matter, we hold that initiation of re-assessment proceedings u/s. 147 of the Act is invalid and consequently, the impugned order of assessment for the AY 2007-08 passed under section143 (3) r.w.s. 147 of the Act vide order dated 14.2.2013 passed in pursuance thereto is to be quashed. We hold and direct accordingly. Consequently, Ground No.1 raised by the assessee is allowed.

Order pronounced in the open court on 20th January, 2016