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2025 (2) TMI 1175 - HC - Income TaxReopening of assessment u/s 147 - reasons to believe - scope of assumptions of facts - HELD THAT - A perusal of the reasons for reassessment would establish beyond a measure of doubt that the same were prompted by the survey which was conducted in 2007 and 2019 on various constituents of the GE Group in India. We had while dealing with an identical issue in Grid Solutions OY (Ltd.) 2025 (1) TMI 911 - DELHI HIGH COURT as held a survey report pertaining to a particular tax period cannot ipso facto be read or countenanced as being relevant and binding for independent assessment years. Suspicion cannot take the place of a belief and that too a belief which is based on reasons. Thus we find ourselves unable to sustain the impugned reassessment action. Appeal allowed.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Court in these writ petitions challenging reassessment actions for Assessment Years (AY) 2013-14 and 2014-15 are:
2. ISSUE-WISE DETAILED ANALYSIS Validity of Reassessment Proceedings Based on Survey Findings from Different Years The Court examined whether reassessment notices issued for AYs 2013-14 and 2014-15 could validly rely on survey findings conducted in 2007 and 2019, which are temporally disconnected from the AYs under reassessment. The legal framework requires that the AO must have a "reason to believe" that income has escaped assessment for the specific AY before initiating reassessment under Sections 147/148 of the Income Tax Act. The Court referred to its earlier decision in Grid Solutions OY (Ltd.) v Assistant Commissioner of Income Tax, which held that the AO cannot blindly adopt survey findings from unrelated years without specific application of mind to the facts of the AYs in question. The respondents conceded that the reassessment reasons did not refer to any facts specific to AYs 2013-14 to 2017-18. The AO merely reiterated survey findings and a previous judgment without demonstrating that the business model or facts remained unchanged during the AYs concerned. The Court underscored that the AO's failure to identify any AY-specific facts or changes meant the reassessment lacked a valid foundation. The Court also highlighted the Supreme Court's ruling in CIT v Gupta Abhushan (P) Ltd, which held that survey reports pertaining to a particular tax period cannot be extrapolated to other assessment years, as such extrapolation amounts to suspicion rather than a reasoned belief. Therefore, the reassessment notices based on survey findings from unrelated years were held to be invalid. Requirement of Application of Mind to AY-Specific Facts for Reassessment The Court emphasized that for reassessment to be valid, the AO must apply their mind to the facts and circumstances prevailing during the AY under consideration. The AO's reasons must indicate a prima facie belief that income has escaped assessment based on specific facts relevant to that year. In the instant case, the AO failed to point to any such facts for AYs 2013-14 and 2014-15. The AO's reliance on an "assumption" that facts and business models remained unchanged was rejected. The Court noted that an assumption does not equate to a reasoned belief and cannot justify reassessment. The Court further clarified that the AO's reliance on Raymond Woollen Mills Ltd. was misplaced because the Supreme Court in that case dealt with reopening based on material discovered during subsequent assessments, not on assumptions of unchanged facts. Applicability of Res Judicata and Consistency Principles in Income Tax Proceedings The Court discussed the principle of res judicata, which is generally not applicable in tax proceedings because each AY is treated as a separate and distinct unit. The Court cited Supreme Court precedents establishing that a decision for one AY does not bind assessments for other AYs. However, the Court also acknowledged the principle of consistency, which requires that once a fundamental aspect has been conclusively found in one year, it should ordinarily be followed in subsequent years unless there are strong and compelling reasons to depart from it. This principle promotes certainty and predictability in tax administration. The Court referred to the decision in Galileo Nederland BV, which held that while res judicata does not apply, the AO should not ignore prior findings unless valid reasons exist to do so. The Court noted that the petitioner relied on this principle to argue against reassessment, citing earlier findings of no PE in certain years. Nonetheless, the Court observed that the facts and contracts relevant to each AY may differ. For example, the R-series contract dated February 7, 2018, had not been considered in earlier proceedings, and the indivisibility of contracts meant that receipts could not simply be bifurcated into inside and outside India components. The question of PE existence is fact-specific and must be determined separately for each AY. Permanent Establishment as a Fact-Specific Issue and Its Determination The Court reiterated that the existence of a PE is a question of fact dependent on the scope, nature, extent, and duration of activities in India during the relevant AY. The Court relied on the OECD Commentary on Article 5, which states that business arrangements evolve and the existence of a PE must be determined based on facts applicable during the relevant period, not on past or future circumstances. Consequently, survey reports or findings from other years cannot conclusively determine PE status for the AYs under reassessment. The Court highlighted the necessity for the AO to examine the contracts and activities specific to each AY to determine PE status. Treatment of Competing Arguments Regarding Consistency and Change of Position The petitioner argued that the respondents should adhere to the settled position from earlier years to maintain consistency and certainty, invoking the Supreme Court's decision in Radhasoami Satsang, which prevents changing a fundamental aspect across years without strong reasons. The Court rejected this contention, distinguishing Radhasoami Satsang on the facts. In that case, the issue was the charitable status of the assessee, which was uncontested for many years. In contrast, the existence of PE is a fact-specific, year-wise determination that can vary with changing contracts and business models. The Court further noted that the reassessment years involved contracts not previously considered and that the indivisibility of contracts precluded simple bifurcation of income for tax purposes. Thus, the petitioner's plea for consistency did not outweigh the need for fresh factual inquiry. 3. SIGNIFICANT HOLDINGS "The AO has merely proceeded to adopt and reiterate what was found in the course of the survey undertaken in 2007 and 2019 read alongside the judgment of this Court rendered in GE Energy. ... No such finding has either been returned nor conclusion recorded in the 'reason to believe' drawn by the AO." "The principle that res judicata is not applicable to Income-tax proceedings because assessment for each year is final only for that year and does not cover later years." "Whether the appellant had permanent establishment or not, during the assessment year in question, is a disputed factual issue, which has to be determined on the basis of the scope, extent, nature and duration of activities in India." "A survey report pertaining to a particular tax period cannot ipso facto be read or countenanced as being relevant and binding for independent assessment years... Such suspicion cannot take the place of a belief and that too a belief which is based on reasons." "The reassessment action is thus liable to be set aside on this short score alone." The Court conclusively held that reassessment notices issued without application of mind to facts specific to the AYs, relying solely on survey findings from unrelated years and assumptions of unchanged facts, are invalid. The principle of res judicata does not apply across AYs, but consistency should be maintained unless valid reasons exist for departure. The existence of PE is a fact-intensive inquiry requiring year-wise determination based on relevant contracts and activities. Accordingly, the impugned reassessment notices under Section 148 dated 31 March 2021 and 30 June 2021 were quashed and set aside, and the writ petitions allowed.
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