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2015 (9) TMI 960 - ITAT PUNE

2015 (9) TMI 960 - ITAT PUNE - TMI - Validity of Re-opening the assessment - income has escaped assessment is the adjustment worked out by the TPO under section 92CA of the Act, as per which adjustment was to be made to the total income and consequently income chargeable to tax had escaped assessment - Held that:- As relying on Maximize Learning (P.) Ltd. vs. ACIT [2015 (2) TMI 662 - ITAT PUNE] when no assessment proceedings were pending in relation to the relevant assessment year, the Assessing .....

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terial for the Assessing Officer to entertain a belief that certain income chargeable to tax had escaped assessment within the meaning of section 147 of the Act. Consequently, we hold that the reasons recorded for reopening the assessment under section 147 of the Act do not meet the requirements of the section and hence the Assessing Officer had no jurisdiction to issue notice under section 148 of the Act. Consequently, the subsequent order passed by the Assessing Officer under section 143(3) r. .....

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3) r.w.s. 147 & 144C of the Income-tax Act, 1961. 2. The assessee has raised the following grounds of appeal:- The Appellant objects to the order dated September 28, 2012 passed by the learned Assistant Commissioner of Income Tax, Circle 11(1), Pune ["ACIT"] under section 143(3) r.w.s. 147 and 144C of the Income-tax Act, 1961 ["the Act'] in pursuance of the directions of the learned Dispute Resolution Panel, Pune ["DRP"] dated August 22, 2012 for the assessment y .....

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its Associated Enterprise in respect of import of Compressors, Motors Oil, Spares etc. for trading activity. 3. The learned ACIT pursuant to the directions of the learned DRP erred in rejecting Transactional Net Margin Method ("TNMM") as the most appropriate method as selected by the Appellant and adopting the Resale Price Method ("RPM") as the most appropriate method for benchmarking the international transaction pertaining to trading activity. 4. The learned ACIT pursuant .....

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s of learned DRP has erred in law and on the facts and in circumstances of the case in non-granting adjustment for functional and other differences. 7. The learned ACIT pursuant to the directions of learned DRP has erred in law and on the facts and in circumstances of the case in ignoring the fresh search process submitted by the Appellant to the learned DRP during the proceedings before the learned DRP. 8. The learned ACIT pursuant to the directions of learned DRP has erred in law and on the fa .....

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2 The Appellant pleads that the shortfall in advance tax has resulted in view of the adjustments which have been objected in the grounds above and accordingly is consequential in nature. 11. Each one of the above grounds of appeal is without prejudice to the other. 12. The Appellant reserves the right to amend, alter or add to the grounds of appeal. 3. Though the assessee has raised various grounds of appeal but the Ld. Authorized Representative for the assessee referred to the ground of appeal .....

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urther pointed out that there were two issues arising in the present appeal i.e. reference to the TPO being invalid and consequent reopening of assessment under section 148 of the Act also being invalid. 5. The Ld. Departmental Representative for the Revenue, on the other hand, placed reliance on the order of the DRP, especially reference to pages 7 - 8 of the said order. 6. Briefly, the facts of the case are that assessee had furnished return of income on 18.10.2007 pursuant to which the return .....

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nt. Thereafter, on 26.10.2009 reference was made by the Assessing Officer to the TPO for determining the arm's length price of the international transaction entered into by the assessee. On 22.10.2010, order was passed by the TPO under section 92CA(3) of the Act proposing an adjustment of ₹ 1,25,17,115/-. Thereafter, notice under section 148 of the Act was issued to the assessee on 14.01.2011. The last date for completing the assessment under section 143(3) of the Act, in line with the .....

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before the Dispute Resolution Panel (DRP), Pune which, in turn, disposed of the objection vide order dated 22.08.2012. On the basis of which, the said addition on account of adjustment to the arm's length price of the international transaction of ₹ 1,39,93,968/- was made to the returned income. 7. The assessee is in appeal before us both on account of reassessment of the proceedings initiated under section 148 of the Act and also against the merits of the addition. 8. In the first inst .....

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total income, income chargeable to tax has escaped assessment within the meaning of section 147(C)(i) of the Income-tax Act, 1961. I have therefore reasons to believe that income of ₹ 1,25,17,115/- has escaped assessment for A.Y. 2007-08, on account of adjustment to International transactions carried out by the assessee. The case satisfies conditions laid down in sections 149(1)(a) and 151(2) of the Income-tax Act, 1961. 9. The perusal of the reasons recorded for reopening the assessment r .....

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n to believe that income to that extent had escaped assessment for the impugned assessment order on account of adjustment to the international transaction carried out by the assessee. Pursuance to which notice under section 148 of the Act was issued to the assessee. The assessee has challenged the validity of the proceedings initiated under section 148 of the Act by way of ground of appeal No.1. 10. The plea of the assessee before us was that the said notice issued under section 148 of the Act t .....

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said error by way of reopening the assessment. The second contention raised by the assessee before us was that the basis for reopening the assessment under section 147 of the Act was on an incorrect reference made to the TPO under section 92CA of the Act and consequently further proceedings carried out in the case are to be treated as illegal. The Assessing Officer had made the reference to the TPO for determination of arm's length price of the international transaction entered into by the .....

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he Act. Another issue raised before us was that reason to believe that certain income had escaped assessment under the provisions of section 147 of the Act, has to be that of the Assessing Officer himself and not that of any other authority. By making reference to the reasons recorded for reopening of the assessment, the Ld. Authorized Representative for the assessee pointed out that the basis for holding that the income has escaped assessment is the adjustment worked out by the TPO under sectio .....

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the Act, it is the belief of the Assessing Officer which can form the basis for reopening the assessment and notice issued/served under section 148 of the Act. Another point raised by the Ld. Authorized Representative for the assessee was that the reference to the provisions of section 147(C)(i) of the Act by the Assessing Officer was without application of mind and on this account also the reopening of the assessment has to fail. 11. The Ld. Authorized Representative for the assessee further p .....

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of income by Maximize Learning (P.) Ltd. was filed on 05.11.2007. It was further pointed out that in both the cases no intimation under section 143(1) of the Act was served upon the assessee. Further, as in the case of the assessee the last date for issue of notice under section 143(2) of the Act in the case of Maximize Learning (P.) Ltd. vs. ACIT (supra) was on 30.09.2008 and in both the cases for such non-issue of notice under section 143(2) of the Act within the prescribed period, the assessm .....

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length price of the international transaction in the case of the assessee on 22.10.2010 and in the case of Maximize Learning (P.) Ltd. vs. ACIT (supra) on 29.10.2010. Thereafter, notice under section 148 of the Act was issued by the Assessing Officer in the case of the assessee. 12. We have heard the rival contentions and perused the record. After going through the factual and legal aspects of the case, the Tribunal vide order dated 02.02.2015 (supra) had firstly held that the Assessing Officer .....

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ss or re-assess such income which has escaped assessment. Section 147 of the Act postulates that if the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may subject to the provisions of sections 148 to 153 of the Act, assess or re-assess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of proceedings under this section. A signifi .....

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ined the belief for escapement of income based on an order of the TPO dated 29.10.2010 u/s 92CA(3) of the Act which is nonest and void ab initio. The fundamental point canvassed by the appellant is that the reference u/s 92CA made by the Assessing Officer to the TPO for computing the arm's length price was invalid because when the reference was made on 14.09.2009, no assessment proceedings were pending in relation to the instant assessment year. 12. At this stage, it would be appropriate to .....

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sessment year 2002-03. Section 92(1) of the Act provides that any income arising from an international transaction between associated enterprises shall be computed having regard to the arm s length price. Sections 92A and 92B of the Act contain provisions relating to the meaning of the expressions associated enterprise and international transaction respectively. Section 92C of the Act contains the powers of the Assessing Officer and the manner of determination of arm's length price in relati .....

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hat the person entering into international transaction shall furnish a report from a chartered accountant in Form No.3CEB. Section 92F of the Act contains definitions of certain terms which are relevant to compute arm's length price, etc. in terms of sections 92 to 92F of the Act. 13. Notably, the entire scheme and mechanism to compute any income arising from an international transaction entered between associated enterprises is contained in sections 92 to 92F of the Act. Now, we may deal in .....

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arm's length price in relation to an international transaction in accordance with the methods prescribed in sub-section (1), on the basis of material or information or documents available with him, after allowing the assessee an opportunity in this regard; and, sub-section (4) of section 92C provides that where the Assessing Officer so determines the arm's length price, he may compute the total income of the assessee having regard to the arm's length price so determined. However, sec .....

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t requires the Assessing Officer to compute the total income of the assessee in conformity with the arm's length price so determined by the TPO. In other words, the determination of the arm's length price, wherever a reference is made to him, is done by the TPO under sub-section (3) of section 92CA but the computation of total income having regard to the arm's length price so determined by the TPO is required to be done by the Assessing Officer under sub-section (4) of section 92C, r .....

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ce of the international transaction so determined, either in terms of sub-section (4) of section 92C or sub-section (4) of section 92CA. Notably, sub-section (4) of section 92C comes into play where an arm's length price in relation to the international transaction is determined by the Assessing Officer and sub-section (4) of section 92CA comes into play where the arm's length price in relation to an international transaction is determined by the TPO, on a reference by the Assessing Offi .....

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he arm's length price or under sub-sections (1) to (3) of section 92CA, where the Assessing Officer refers the determination of arm's length price to the TPO. We may also refer to the provisions of section 143(3) of the Act dealing with assessment of income. In terms of clause (ii) of sub-section (3) of section 143, it is prescribed that the Assessing Officer shall, by an order in writing, make an assessment of the total income or loss of the assessee, and determine the sum payable by hi .....

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tal income before the Assessing Officer, which culminates in an order under section 143(3) or section 144 of the Act, as the case may be ? 16. In-fact, the occasion which requires the Assessing Officer to compute income from an international transaction arises only during the assessment proceedings, wherein he is determining the total income of the assessee. The appellant has canvassed the aforesaid position before us and in this context reference has also been made to the CBDT Instruction No.3 .....

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7; 5 crores, the transactions should be referred to the TPO. Before making reference to the TPO, the Assessing Officer has to seek approval of the Commissioner/Director as contemplated under the Act. Under the provisions of section 92CA reference is in relation to the international transaction. Hence all transactions have to be explicitly mentioned in the letter of reference. Since the case will be selected for scrutiny before making reference to the TPO, the Assessing Officer may proceed to exa .....

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o the TPO u/s 92CA of the Act. Therefore, we are inclined to uphold the position sought to be canvassed by the assessee that an Assessing Officer can make reference to the TPO u/s 92CA of the Act only after selecting the case for scrutiny assessment. In-fact, the aforesaid underlined observations of the CBDT Instruction (supra) is a pointer to the legislative import that the reference to the TPO for determining the arm's length price in relation to an international transaction is envisaged o .....

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controversy, we may refer to the arguments raised by the Ld. CIT-DR whereby it is contended that it was open for the Assessing Officer to make a reference to the TPO for determination of arm's length price without issuing notice u/s 143(2) of the Act; in other words, as per the Revenue, reference to the TPO u/s 92CA of the Act can be made even if no assessment proceeding is pending before the Assessing Officer. In this context, it is submitted that the annual norms for selection of cases fo .....

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ry scrutiny norm, can also be selected for scrutiny if the Assessing Officer records a satisfaction and seeks the approval of the CCIT/DGIT (International Taxation)/DGIT (Exemption). The aforesaid norm has been pointed out to say that in order to pick-up a case for scrutiny, some satisfaction is required to be recorded before the notice u/s 143(2) of the Act is to be issued. This exercise, according to the Ld. CIT-DR, could very well be the reference of the matter of the TPO, therefore, the stip .....

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to 92F. The entire purpose of computation of arm's length price in relation to an international transaction is found in sub-section (1) of section 92 of the Act. Section 92(1) mandates that any income arising from an international transaction shall be computed having regard to the arm's length price. Therefore, the sole aim of computing the arm's length price in relation to any international transaction is to compute the income arising therefrom. Thus, the computation of income and .....

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erence to the TPO to determine arm's length price can be initiated in the absence of any proceeding for computing total income of the assessee. 20. Further, in our view, the Ld. CIT-DR has relied on one of the norms prescribed for picking a return for scrutiny assessment to say that certain exercise is required to be done on the part of the Assessing Officer to record his satisfaction before the matter is put-up to the CCIT/DGIT who shall approve the selection of case for scrutiny. According .....

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tion to international transaction arises only and only when the income from such international transaction is being assessed. Certainly, the reference to the TPO for the computation of arm's length price cannot precede the initiation of the assessment proceedings by the Assessing Officer by issuance of notice u/s 143(2) of the Act. 21. As per the Ld. CIT-DR, section 92C(3) or 92CA of the Act do not enjoin the Assessing Officer to have any assessment proceedings pending before a reference to .....

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y refer the matter to the TPO under approval of the Commissioner. If both the conditions are satisfied there is no bar or requirement of any assessment proceedings being pending, before the reference is made to the TPO. 22. The aforesaid plea of the Ld. CIT-DR also, in our view, fails to take into consideration the entire scheme envisaged for the transfer pricing assessment in sections 92 to 92F of the Act. The provisions of sections 92 to 92F of the relate to computation of income from the inte .....

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es but the same operate with a singular purpose of computing income arising from an international transaction. The process of computation of income is necessarily a part and parcel of the assessment proceedings envisaged under the Act. Section 92CA of the Act is not an independent provision, but it is triggered only when the occasion arises for application of section 92(1) of the Act, whereby income from an international transaction is to be computed having regard to its arm's length price; .....

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he international transaction when no assessment proceedings are pending in relation to the relevant assessment year. 13. The Tribunal further held that when reference was made to the TPO by the Assessing Officer for determination of arm's length price in relation to the international transaction, no assessment proceedings were pending and hence it was an invalid reference. Consequently, the subsequent order passed by the TPO determining the adjustment to the international transaction was a n .....

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ssessee opportunity of being heard and after taking into account the material available with him, passed an order dated 29.10.2010 determining the arm's length price in accordance with sub-section (3) of section 92CA of the Act. 25. In the background of the above facts, it needs to be established as to whether on 14.09.2009 when the Assessing Officer made a reference to the TPO u/s 92CA(1) of the Act, was there an assessment proceedings u/s 143 of the Act pending for the year under considera .....

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ed within the above stipulated period. A consequence of the aforesaid situation is that the return of income filed by the assessee on 05.11.2007 became final as no scrutiny proceedings were started within the period stipulated in law. The aforesaid position is also reinforced by the CBDT Circular No.549 dated 31.10.1989. As per the CBDT, if, after furnishing return of income, an assessee does not receive a notice u/s 143(2) of the Act from the Department within period stipulated in the proviso t .....

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IT and Others, 255 ITR 220 (P&H) is also to the same effect. In-fact, as per the Hon ble Punjab & Haryana High Court, in case where a return is filed and is processed and no notice under sub-section (2) of section 143 thereafter is served on the assessee within the stipulated period, the assessment proceedings u/s 143 come to an end and matter becomes final. As per the Hon ble High Court, although technically no assessment is framed in such a case, yet the proceedings for assessment stan .....

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TPO for determination of arm's length price of the international transactions in terms of section 92CA of the Act. We have already inferred in the earlier paras that under the provisions of section 92CA of the Act, a reference to the TPO for computation of arm's length price in relation to international transactions is permissible only in the course of the assessment proceedings. 27. In view of the aforesaid discussion, it has to be inferred that when the Assessing Officer made referenc .....

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f the TPO could be valid material for the Assessing Officer to entertain a belief that certain income chargeable to tax has escaped assessment within the meaning of section 147 of the Act. It was held by the Tribunal that the reasons recorded by the Assessing Officer in the present case do not meet the requirement of section 147 of the Act and therefore the Assessing Officer had no jurisdiction to issue notice under section 148 of the Act dated 14.01.2011 and as a consequence, the subsequent ass .....

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context, the Ld. CID-DR has vehemently pointed out that the return of income filed by the assessee included international transactions entered with the associated enterprise and such return of income was required to be taken-up for compulsory scrutiny, as per the norms of the CBDT relating to assessment year 2007-08. Therefore, when such a return of income was not picked up for a scrutiny assessment within the stipulated period, the only course for the Revenue was to issue notice u/s 148 of the .....

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es. For this reason, the case of the assessee had escaped from compulsory selection for scrutiny. On this basis, it is sought to be pointed out that the re-opening of assessment by issuance of notice u/s 147/148 of the Act is justified. 30. Apart from the aforesaid, it was also vehemently argued that any illegality or irregularity in making of a reference to the TPO u/s 92CA of the Act cannot render the subsequent order passed by the TPO u/s 92CA(3) of the Act as a nullity qua the belief enterta .....

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ar analogy to the facts of the present case, it is contended that an illegal or incorrect reference to the TPO would not invalidate the arm's length price determined by him u/s 92CA(3) of the Act, which showed that an adjustment of ₹ 2,49,43,811/- was required to be made to the stated values of the international transaction. Therefore, the aforesaid material provided a good ground for the Assessing officer to formulate a belief that certain income chargeable to tax had escaped assessme .....

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ng Officer, are reasons which are not finding a place in the reasons recorded by the Assessing Officer for re-assessment. The reasons recorded by the Assessing Officer for re-assessment, have already been reproduced by us in the earlier part of this order. It s a trite law that the reasons recorded by the Assessing Officer are alone to be examined so as to test their validity. In this context, a reference can be made to the judgement of the Hon ble Delhi High Court in the case of Northern Exim ( .....

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5) 98 ITR 486 (Pat.); (iv) Asa John Devinathan vs. Addl. CIT, (1980) 126 ITR 270 (Mad.); (v) East Coast Commercial Co. Ltd. vs. ITO, (1981) 128 ITR 326 (Cal.); (vi) Equitable Investment Co. (P.) Ltd. vs. ITO, (1988) 174 ITR 714 (Cal.); and, (vii) S. Sreeramachandra Murthy vs. DCIT, (2000) 243 ITR 427 (AP). held as under :- The ratio laid down in all these cases is that, having regard to the entire scheme and purpose of the Act, the validity of the assumption of jurisdiction under Section 147 can .....

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s the judgement of the Hon ble Bombay High Court in the case of 31 Infotech Ltd. vs. ACIT, (2010) 329 ITR 257 (Bom.) wherein it has been held that the validity of the reopening of assessment has to be determined with reference to the reasons which had weighed with the Assessing Officer and those cannot be added to or supported on a basis which was not present to the mind of the Assessing Officer when he issued the notice to reopen the assessment. As a consequence of our aforesaid discussion, we .....

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dence would not preclude the Revenue authorities from utilizing the same in assessment of income unless the genuineness and correctness of the material or evidence is in doubt. So however, in the present case, we are not dealing with the power of the Assessing Officer to compute income of the assessee arising from an international transaction based on the arm's length price determined by the TPO. Indeed, as we had seen earlier the computation of total income from an international transaction .....

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le to tax has escaped assessment within the meaning of section 147 of the Act. The controversy in the present case has to be adjudicated in the light of the parameters of section 147/148 of the Act. In a somewhat similar situation, the Hon ble Rajasthan High Court in the case of Brig B. Lal vs. WTO, 127 ITR 308 (Raj.) was dealing with a situation where the reopening of assessment was based on a report submitted by the Valuation Officer in an invalid reference. As per the Hon ble High Court, a re .....

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e. Therefore, having regard to the peculiar facts of the present case, the proposition sought to be canvassed by the Ld. CIT-DR based on the decision in the case of Pooran Mal (supra) does not validate the issuance of notice u/s 148 of the Act to reopen the assessment in the present case. 34. The Ld. CIT-DR also relied upon the judgement of the Punjab & Haryana High Court in the case of M/s Coca Cola India Inc vs. ACIT, (2009) 177 taxmann.com 103 to say that an order passed by the TPO can be .....

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eriod prior to the assessment year 2002-03. The Revenue contended the suppression of profits on the ground of an order passed by the TPO under Chapter X after 01.04.2002 in relation to an assessment year after 01.04.2002. Such order of the TPO formed the basis for the Assessing Officer to formulate a belief that there was an escapement of income within the meaning of section 147 of the Act for the period prior to assessment year 2002-03. Pertinently, in the period prior to assessment year 2002-0 .....

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ct of a subsequent assessment year could not be a ground to reopen the assessment of a year which was prior to the amendment of section 92 of the Act with effect from 01.04.2002. The Hon ble High Court disagreed with the assessee s defense and upheld the action of the Assessing Officer in taking into account the subsequent order of the TPO for forming a belief that certain income liable to tax had escaped assessment even in relation to an assessment year prior to the insertion of 92CA of the Act .....

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ction of the amended Chapter X with effect from 01.04.2002. Clearly, the dispute in the case of M/s Coca Cola India Inc (supra) stood on a different footing than the dispute before us. In the case of M/s Coca Cola India Inc (supra), it was nobody s case that there was any illegality in the reference made to the TPO or that the order of the TPO was void ab initio with respect to the assessment year for which the TPO passed the order u/s 92CA(3) of the Act. The only point was whether order of the .....

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e, we conclude by holding that the reasons recorded by the Assessing Officer in the present case do not meet with the requirements of section 147 of the Act and therefore the Assessing Officer had no jurisdiction to issue notice u/s 148 of the Act dated 14.01.2011. As a consequence, the subsequent assessment order passed u/s 143(3) r.w.s. 147 and 144C(13) of the Act is liable to be quashed. We hold so. 15. As referred to by us in the paras hereinabove the factual aspects of the present case befo .....

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