2022 (12) TMI 1571 - AT - Income Tax

Validity of reassessment u/s 147 - reason to believe that income chargeable to tax had escaped assessment - Mandation to dispose of the objections of assessee against reopening - as per AO assessee had not furnished Return of Income for the year under consideration - existence of a Permanent Establishment (PE) or business connection (BC) in India - HELD THAT - AO s submissions are factually incorrect as it is evident from paragraph 1 of the reasons recorded by AO which clearly records the fact that the assessee had filed the Return of Income for Assessment Year 2001-02 on 29.10.2001 declaring total income of Rs. 3, 07, 33, 066/- and that the assessment was completed u/s 143(3) of the Act on 29.01.2004 accepting the Return of Income. Hence it can be safely concluded that reopening is made in the instant case by incorrect assumption of fact that the assessee had not filed the Return of Income. Consequentially the formation of belief based on incorrect assumption of fact also fails. Assessment in this case has been originally framed under section 143(3) of the Act on 29.01.2004. Admittedly the notice u/s 148 of the Act dt. 31.3.2008 is issued beyond the period of four years from the end of the relevant assessment year. Hence the proviso to section 147 of the Act would come into operation which mandates the learned AO to clearly mention in the reasons recorded itself as to whether there was any failure on the part of the assessee to disclose true and full material facts that are relevant and material for the purpose of assessment. This aspect of assessee s failure to disclose true and full material facts is conspicuously absent in the reasons recorded. There is absolutely no whisper in the reasons recorded regarding the failure on the assessee part. Hence it can be safely concluded that the learned Assessing Officer had not complied with the proviso to section 147 of the Act. Similar matter came up for adjudication in the case of Hindustan Lever Ltd. Vs. R.B. Wadkar 2004 (2) TMI 41 - BOMBAY HIGH COURT wherein it was held vital link is the safeguard against arbitrary reopening of the concluded assessment. The reasons recorded by the AO cannot be supplemented by filing affidavit or making oral submission otherwise the reasons which were lacking in the material particulars would get supplemented by the time the matter reaches to the Court on the strength of affidavit or oral submissions advanced. We find from the reasons recorded by AO which are reproduced herein above AO had only resorted to make very doubtful and vague observations. The name of the assessee is not mentioned in the said reasons. It merely talks about the activities carried on by the GE group. Further as stated earlier it is a fact on record that the learned Assessing Officer had not disposed of the objections filed by the assessee for the reasons recorded by way of a separate speaking order. The assessee had sought for the reasons recorded way back on 29.05.2008 and again on 26.11.2008. AO for reasons best known to him decided to provide the reasons recorded to the assessee only on 17.12.2008. The objections to the same were filed by the assessee immediately after the receipt of the said reasons recorded. If the learned Assessing Officer had consciously delayed the communication of the reasons recorded for reopening to the assessee then he cannot cry over non-availability of time for disposing the objections filed by a separate speaking order. In the instant case AO had not even bothered to dispose of the objections even in the reassessment order framed on 31.12.2008. Hence it can be safely concluded that the objections filed by the assessee for reopening the assessment were never disposed of by the AO in the instant case. Thus we hold that the reasons recorded for reopening of the assessment suffers from various factual and legal infirmities. No hesitation to hold that AO had invalidly assumed his jurisdiction for reopening the assessment u/s 147 in the instant case. Accordingly the reopening is hereby quashed. Decided in favour of assessee.

Summary

The core legal questions considered by the Tribunal in this matter primarily revolve around the validity of the reassessment proceedings initiated under section 147 of the Income Tax Act, 1961 ("the Act") for the Assessment Year (AY) 2001-02. The issues include:

1. Whether the Assessing Officer (AO) had a valid reason to believe that income chargeable to tax had escaped assessment, justifying reopening under section 147/148 of the Act.

2. Whether the material on which the reassessment was based pertained specifically to the assessee and the relevant AY, or was general and related to other group entities and/or subsequent years.

3. Whether the reassessment was initiated on a mere change of opinion rather than new material coming to the AO's knowledge.

4. Whether the AO complied with the mandatory procedural requirements, including disposal of objections filed by the assessee against the reasons recorded for reopening.

5. Whether the existence of a Permanent Establishment (PE) or business connection (BC) in India was rightly assumed by the AO based on material relating to the GE group entities in general, rather than specific to the assessee and the AY in question.

Issue-wise Detailed Analysis

1. Validity of Reopening under Section 147/148 of the Act

Legal Framework and Precedents: Section 147 permits reopening of an assessment if the AO has reason to believe that income chargeable to tax has escaped assessment. The Supreme Court has held that such reason to believe must be based on tangible material and cannot be a mere change of opinion. The proviso to section 147 mandates that where reopening is beyond four years from the end of the relevant AY, the AO must record reasons indicating failure on the part of the assessee to disclose fully and truly all material facts.

Court's Interpretation and Reasoning: The Tribunal observed that the AO's reasons recorded for reopening were factually incorrect in stating that the assessee had not filed a return for AY 2001-02, whereas the return was filed and assessment completed under section 143(3). This incorrect assumption undermined the formation of belief that income had escaped assessment. Further, the AO issued the notice under section 148 beyond four years from the end of the AY, yet the reasons recorded failed to mention any failure on the part of the assessee to disclose material facts, violating the proviso to section 147.

Key Evidence and Findings: The reasons recorded were reproduced and examined. They broadly referred to activities of the GE group in India but did not specifically link any material to the assessee or the AY. The AO's failure to mention any failure to disclose material facts was noted as a critical omission.

Application of Law to Facts: The Tribunal applied the legal requirement that reasons recorded must disclose a clear nexus between material and formation of belief. The absence of such nexus and the factual error regarding filing of return rendered the reopening invalid.

Treatment of Competing Arguments: The Revenue relied on a coordinate bench decision upholding reopening for group entities operating from the same address and common material found during survey. The Tribunal distinguished this decision on facts, noting that in the present case, objections filed by the assessee were not disposed of by a speaking order, unlike the other case.

Conclusion: The reopening was held invalid due to incorrect factual basis, non-compliance with proviso to section 147, and absence of a rational connection between material and belief.

2. Material Pertaining to Assessee and Relevant AY

Legal Framework and Precedents: The formation of belief for reopening must be based on material relevant to the assessee and the AY under consideration. Material relating to other group companies or subsequent years cannot justify reopening.

Court's Interpretation and Reasoning: The Tribunal noted that the reasons recorded referred generally to the GE group entities and their activities in India without specific reference to the assessee or the AY 2001-02. The material on which reopening was based was general and related to other group companies and subsequent years.

Key Evidence and Findings: The survey and statements recorded related to multiple GE group entities, and the AO's reasons did not specify how such material related to the assessee's income or PE status for AY 2001-02.

Application of Law to Facts: The Tribunal emphasized that reopening on the basis of general or unrelated material amounts to fishing enquiry and is impermissible.

Treatment of Competing Arguments: The Revenue argued that the group entities operated from a common office and the material was common, justifying reopening. The Tribunal rejected this on the ground that specific nexus to the assessee and AY was not demonstrated.

Conclusion: The material did not pertain specifically to the assessee or AY, invalidating the reopening.

3. Reopening as Change of Opinion

Legal Framework and Precedents: Reopening on the basis of mere change of opinion is impermissible. The AO must have new tangible material to justify reopening.

Court's Interpretation and Reasoning: The Tribunal found that the AO's reasons did not disclose any new material discovered post original assessment. Instead, the reopening appeared to be based on a change of opinion regarding the existence of PE and business connection.

Key Evidence and Findings: The original assessment accepted the return without additions. The reasons recorded relied on survey material and information available at the time of reopening, but no new material directly linked to the assessee was identified.

Application of Law to Facts: The Tribunal held that the reopening was effectively a change of opinion, which is not a valid ground for reopening.

Treatment of Competing Arguments: The Revenue contended that the survey revealed new facts about the group's operations. However, the Tribunal emphasized the need for a direct nexus to the assessee and AY.

Conclusion: The reopening was invalid as it was based on change of opinion rather than new material.

4. Compliance with Procedural Requirements - Disposal of Objections

Legal Framework and Precedents: The Supreme Court in GKN Driveshafts Ltd. held that when an assessee files objections to the reasons recorded for reopening, the AO must dispose of such objections by a separate speaking order before proceeding with reassessment. Failure to do so renders the reopening invalid.

Court's Interpretation and Reasoning: The Tribunal found that the assessee had repeatedly sought reasons recorded and filed detailed objections. However, the AO neither disposed of these objections by a speaking order nor addressed them in the reassessment order.

Key Evidence and Findings: The assessee's letters requesting reasons and filing objections were on record. The reassessment order did not contain any disposal of these objections.

Application of Law to Facts: The Tribunal held that the AO's failure to dispose of objections violated the mandatory procedural safeguard, rendering the reassessment without jurisdiction.

Treatment of Competing Arguments: The Revenue did not dispute the non-disposal but relied on other group cases where objections were disposed of. The Tribunal distinguished those cases on this ground.

Conclusion: Non-disposal of objections vitiated the reassessment proceedings.

5. Existence of Permanent Establishment and Business Connection

Legal Framework and Precedents: The determination of PE and business connection under the Income Tax Act and relevant tax treaties is fact-specific and requires concrete evidence. Mere group association or common office does not establish PE for a particular entity.

Court's Interpretation and Reasoning: The AO's reasons recorded referred to the presence of expatriate employees, fixed place of business, and dependent agent PE for various GE group entities. However, no specific evidence was linked to the assessee for AY 2001-02. The Tribunal noted that the reasons were vague, general, and did not mention the assessee by name.

Key Evidence and Findings: The survey statements and documents pertained to multiple GE entities. The AO's attribution of income to PE was based on group-wide activities rather than specific to the assessee.

Application of Law to Facts: The Tribunal held that the assumption of PE and business connection without specific material relating to the assessee and AY was unjustified.

Treatment of Competing Arguments: The Revenue relied on the group's common office and activities to argue existence of PE. The Tribunal rejected this as insufficient to establish PE for the assessee.

Conclusion: The AO's assumption of PE and business connection was not supported by specific material and was therefore incorrect.

Significant Holdings

"The reopening is made in the instant case by incorrect assumption of fact that the assessee had not filed the Return of Income. Consequentially the formation of belief based on incorrect assumption of fact also fails."

"The proviso to section 147 mandates the learned Assessing Officer to clearly mention in the reasons recorded itself as to whether there was any failure on the part of the assessee to disclose true and full material facts that are relevant and material for the purpose of assessment. This aspect of assessee's failure to disclose true and full material facts is conspicuously absent in the reasons recorded."

"The reasons recorded by the Assessing Officer must disclose his mind and should be clear and unambiguous. No additions or substitutions to the reasons are permissible."

"The learned Assessing Officer had not disposed of the objections filed by the assessee for the reasons recorded by way of a separate speaking order. Such assumption of jurisdiction by the Assessing Officer was ultra vires Section 147 of the Act."

"Reopening on the basis of general or unrelated material amounts to conducting fishing enquiries, which is bad in law."

"The assumption of existence of PE and business connection for the assessee based on material relating to other group entities and subsequent years is not justified."

"The reassessment proceedings are quashed for want of jurisdiction and non-compliance with mandatory procedural safeguards."

In conclusion, the Tribunal allowed the assessee's appeal challenging the reopening of assessment under section 147/148 for AY 2001-02, quashed the reassessment proceedings, and dismissed the revenue's appeal. The Tribunal did not express any opinion on the merits of other grounds raised by the assessee, leaving them open for future consideration if necessary.