TMI Blog2015 (8) TMI 275X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, when it is clear that the reassessment resorted to by the second respondent is within the period of four years Of-course, it is true that no fresh material was available with the second respondent to proceed with the reassessment proceedings. However, it is to be noted that the second respondent had categorically mentioned the reasons as stated supra, by which, he had a reason to believe that the income chargeable to tax has escaped assessment inasmuch as the specific case of the Revenue is that the petitioner has not disclosed fully, truly all necessary material to enable the department to assess the income correctly regarding the particulars, viz., the petitioner company is not a domestic company, tax rate applicability on dividend distributor, expenses incurred out of EEFC Fund and Board of approval to claim deduction under Section 10B. Therefore, there is a failure on the part of the petitioner to disclose the above material facts and in such circumstances, the Assessing Officer has rightly initiated the reassessment proceedings on the basis of available material on record, which was specific, relevant and considerable, and after recording the reasons for his own b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rial Policy and Promotion (DIPP) dated 17 May 1999 and Green Card No. DOE/STPI-C/99/1242 dated 06 July 1999 and registered with Software Technology Park of India ( STPI ). Subsequently, the Petitioner renewed its registration as a 100% EOU for a further period of five years from 06 July 2004 to 05 July 2009 vide letter dated 20 July 2004 from the Director, STPI. The Petitioner has accepted the terms and conditions of the renewal vide letter dated 22.07.2004. 3. The brief case of the petitioner is that they filed its return of income for the Assessment Year ( AY ) 2007-08 on 19 October 2007 declaring a total income of ₹ 29,242/- after claiming an amount of ₹ 4,02,37,947 as deduction under Section 10B of Act and it was selected for scrutiny and a notice dated 22 July 2008 under Section 143(2) of the Act was issued. During the course of scrutiny proceedings, the 1st Respondent called for various details from time to time. The 1st Respondent vide notice dated 27 April 2009 had specifically called for the following details: a. Annual accounts including directors and auditors report; and b. Form 56G for claim of deduction under section 10B. 3.1. In response to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2-A) of the Act regarding the domestic company. Out of share capital 2,80,000 equity shares of ₹ 10/- each, 2,79,999 were held by holding company Sword Global Ltd., UK and remaining 1 share was held by the ultimate holding company Sword Group, France. The declaration and payment of dividend was approved by the Board in France and hence, it cannot be considered as a domestic company. The petitioner company being a foreign company, the dividend distribution tax is to be paid under Section 115A(1)(a)(i) and not under Section 115-O of the Act, which relates to tax on distributed profits of domestic company. It is also stated that the petitioner company had incurred expenditure in foreign currency to the extent of ₹ 5,77,40,000 by way of travelling and management fees, however, it has been wrongly included in export turnover, which has to be excluded. Therefore, it is evident that there had been omission and failure on the part of the petitioner to disclose fully and truly all the materials facts stated above. The petitioner was assessed under lower rate and excess relief was granted as per Explanation 2 to Section 147, the same shall be deemed to be cases wherein income cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... writ petition. 6. Heard the learned senior counsel appearing for the petitioner and the learned standing counsel for the Income Tax and perused the entire materials. 7. Mr.Arvind P.Datar, learned senior counsel appearing for the petitioner would contend that after four years of the assessment year 2007-08, the second respondent issued notice dated 26.03.2014 under Section 148 of the Act, seeking to reopen the assessment, without any tangible materials and without assigning reasons that income chargeable to tax has escaped assessment by reason of failure on the part of the petitioner to disclose fully and truly all material facts necessary for the assessment which is a precondition for reopening the assessment, which is untenable and that the notice merely stated that the Assessing Officer has reason to believe that the income chargeable to tax for the assessment year 2007-08 has escaped assessment and such ground is available only if the notice is within four years of the assessment year. 8. The learned senior counsel submitted that the expression used in section 147 of the Act reason to believe is the power of the Assessing Officer to reopen the assessment, though wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to initiate any proceeding under Section 147 of the Act after the expiry of four years from the end of the assessment year. Thus, in cases where the initiation of the proceedings is beyond the period of four years from the end of the assessment year, the Assessing Officer must necessarily record not only his reasonable belief that income has escaped assessment but also the default or failure committed by the assessee. Failure to do so would vitiate the notice and the entire proceedings. If the Assessing Officer chooses to entertain the belief that the assessment has been made in the background of the assessee's failure to disclose truly and fully all material facts, it is necessary for him to record that fact, and in the absence of a record to that effect, it cannot be held that a notice issued without recording such a fact is capable of being regarded as a valid notice. ii) Dynacraft Air Controls v Sneha Joshi 355 ITR 102 (Bom) Under section 147, for the Assessing Officer to reopen an assessment, he must have reason to believe that income chargeable to tax has escaped assessment for any assessment year. Under the proviso to section 147, where an assessment has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was mandatory in terms of proviso to sub-section (1) of section 151 of the Act as the action under section 147 was being initiated after the expiry of four years from the end of the relevant assessment year. As highlighted above, the legislature has provided certain safeguards to prevent arbitrary exercise of powers by an assessing officer, particularly after a lapse of substantial time from completion oil assessment. The power vested in the Commissioner to grant or not to grant approval is coupled with a duty. The Commissioner is required to apply his mind to the proposal put up to him for approval in the light of the material relied upon by the assessing officer. The said power cannot be exercised casually and in a routine manner, we are constrained to observe that in the present case, there has been no application of mind by the Additional Commissioner before granting the approval. 11. On other hand, Mr.Pramod Kumar Chopda, learned counsel appearing for the respondents, while reiterating the averments of the counter affidavit, would submit that actually, after obtaining necessary sanction from the designated authority under Section 151, the second respondent has issued notic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... planation 2(iii) to Section 10B the expenses incurred if any in foreign exchanges in providing technical services outside India shall not be included in export turnover. As per the details furnished in Annexure to Form 56G, an amount of $20,44,100.41 has been shown foreign exchange realized in EEFC as detailed below: HSBC A/c UK $ 6,55,000 ABN AMRO Chennai $13,89,100.41 However, if expenses incurred out of EEFC account has to be excluded from export turnover. iv) As per Circular issued by the Board in March 2009/June 2009 undertakings claiming deduction under section 10B should get the approval ratified by the Board provided under explanation 2(iv) under section 10B of the Act. As per the particulars furnished under Form 56G, the assessee got approval as 100% EOU in May 1999. Under Foreign Trade Policy issued under foreign Trade Development Regulations Act, the license has to be renewed at the end of each of the five years. Since ratification from Board of Approval is not available, the deduction claimed under section 10B to the extent of ₹ 4,02,37,947/- needs to be disallowed. 13. It is not in dispute that the above said reasons have been du ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment, namely: (a) where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to incometax; (b) where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return; (c) where an assessment has been made, but20 (i) income chargeable to tax has been underassessed; or (ii) such income has been assessed at too low a rate; or (iii) such income has been made the subject of excessive relief under this Act; or (iv) excessive loss or depreciation allowance or any other allowance under this Act has been computed. 148. Issue of notice where income has escaped assessment.--(1) Before making the assessment, reassessment or recomputation under Section 147, the Assessing Officer shall serve on the assessee a notice requiring him to furnish within such period, as may be specified in the notice, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on itself. The proviso prescribes restrictions on the power of reopening the assessment by limiting the time period to four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment by reason of failure on the part of the assessee (i) to submit a return under Section 139, or (ii) to respond to the notices issued under Section 142(1), or (iii) to respond to the notices issued under Section 148, or (iv) to disclose fully and truly all material facts necessary for the assessment of the income for that assessment year. Explanation 1 to Section 147 lays down that mere production of the books of account or other evidence from which the Assessing Officer could, with due diligence, have discovered certain facts would not amount to disclosure within the meaning of the provision. Explanation 2 to Section 147 enumerates cases where it would presume that income chargeable to tax has escaped assessment. If the assessment is to be reopened after the expiry of four years from the end of the relevant assessment year, under the proviso to Section 147 of the Act, following conditions must exist, viz., (i) The Assessing Officer must have a reaso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Section 147. Section 149 prescribes the time limit for issuance of a notice under Section 148. Therefore, the conditions laid down under Section 147 of the Act for the purposes of reopening the assessment must be satisfied before the notice can be issued. The conditions laid down in Section 147 are the jurisdictional facts necessary for the purpose of exercise of the power under Section 147. The jurisdictional facts prescribed under Section 147 must exist before a notice under Section 148 can be issued. The time limit prescribed under Section 149 of the Act for issuance of a notice under Section 148 is in addition to and not in derogation with the necessary conditions required to be satisfied under Section 147 of the Act. In other words, if the basic jurisdictional facts required for reopening of an assessment under Section 147 of the Act do not exist it would not be competent for the Assessing Officer to issue a notice under Section 148. Even where the jurisdictional facts prescribed under Section 147 exist and all conditions laid down under Section 147 and the proviso thereto are satisfied, the notice under Section 148 can be issued only after the Assessing Officer has recorded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 014 by the second respondent proposing to reassess the income for the assessment year 2007-08 since he had reason to believe that the income chargeable to tax for the said assessment year has escaped assessment within the meaning of Section 147 of the Act. Therefore, when it is clear that the reassessment resorted to by the second respondent is within the period of four years, now this Court is required to examine whether there any tangible material is exist on record for the assessing officer to form the requisite belief that that the income chargeable to tax, has escaped assessment. 20. According to the third respondent, the petitioner/assessee had not furnished the true information regarding its status and the details regarding payment of dividend and not disclosed full and true material facts on the claim of deduction under Section 10B of the Act. It is the case of the Revenue that the petitioner company is not a domestic company, but it worked out the tax on its distributed profit as per provisions of Section 115-O of the Act, which, in fact, applicable only to a domestic company and that it has made expenses in foreign country to the extent of ₹ 5,77,41,000, which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the reasons as stated supra, by which, he had a reason to believe that the income chargeable to tax has escaped assessment inasmuch as the specific case of the Revenue is that the petitioner has not disclosed fully, truly all necessary material to enable the department to assess the income correctly regarding the particulars, viz., the petitioner company is not a domestic company, tax rate applicability on dividend distributor, expenses incurred out of EEFC Fund and Board of approval to claim deduction under Section 10B. Therefore, there is a failure on the part of the petitioner to disclose the above material facts and in such circumstances, the Assessing Officer has rightly initiated the reassessment proceedings on the basis of available material on record, which was specific, relevant and considerable, and after recording the reasons for his own belief that in the original assessment proceedings, the petitioner/assessee had not disclosed the material facts truly and fully and therefore income chargeable to tax had escaped assessment. In my opinion, he, therefore, correctly invoked the provisions of Sections 147 and 148 of the Act. In this regard it is worthwhile to refer the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment. If either of these conditions is not fulfilled, the notice issued by the Income Tax Officer would be without jurisdiction. The important words under section 147 (a) are has reason to believe and these words are stronger than the words is satisfied . The belief entertained by the Income Tax Officer must not be arbitrary or irrational. It must be reasonable or in other words it must be based on reasons which are relevant and material. The Court, of course, cannot investigate into the adequacy or sufficiency of the reasons whichhave weighed with the Income Tax Officer in coming to the belief, but the Court can certainly examine whether the reasons are relevant and have a bearing on the matters in regard to which he is required to entertain the belief before he can issue notice under section 147 (a). It there is no rational and intelligible nexus between the reasons and the belief, so that, on such reasons, no one properly instructed on facts and law could reasonably entertain the belief, the conclusion would be inescapable that the Income Tax Officer could not ..... 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