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2016 (3) TMI 1025 - DELHI HIGH COURT

2016 (3) TMI 1025 - DELHI HIGH COURT - [2016] 383 ITR 197 - Reopening of assessment - reasons recorded - Held that:- In case of absence of records, the AO can assess the income of an assessee on the basis of a reasonable estimation. In such cases, it would not be open for the AO to subsequently hold that the Assessee had failed or omitted to truly and fully disclose all material facts and reopen the assessment on the basis that he should have estimated the income by adopting a different method. .....

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e assessment or to allege that the Assessee had failed to truly and fully disclose material facts for the purposes of its assessment. - Decided in favour of assessee - W. P. (C) 8221/2010 - Dated:- 21-3-2016 - S. Muralidhar And Vibhu Bakhru, JJ. For the Petitioner : Mr M. S. Syali, Senior Advocate with Ms Husnal Syali, Mr Mayank Nagi and Mr Aditya Raj Singh, Advocates For the Respondent : Mr Raghvendra Singh, Junior Standing Counsel for Mr Rahul Chaudhary, Senior Standing Counsel ORDER Vibhu Bak .....

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axation Avoidance Agreement between India and UK (hereafter 'the DTAA'). During the Previous Year relevant to AY 2002-03, the Assessee (through BBC World Division) operated the 'BBC World International News and Information Channel' (hereafter 'the BBC World Channel'). The Assessee earned revenues, inter alia, from the selling of airtime to Indian advertisers and from subscriptions for the BBC World Channel - which was otherwise a free to air channel (i.e., provided free o .....

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/-. The said income comprised of ₹ 1,30,00,000/- received as a lump-sum consideration from Prasar Bharti (Door Darshan) for a feasibility study to analyse the introduction of Digital Terrestrial Transmission in India; ₹ 10,66,481/- received as royalty from Penguin Books India Private Limited on sale of books; and ₹ 30,02,969/- as interest from loans advanced to BIPL. 5. In the notes to the return of income, the Assessee stated that it neither had a Permanent Establishment (here .....

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Notices under Section 143(2) were issued on 2nd September, 2003, 28th July, 2004 and 9th September, 2004, whereby the Assessing Officer (hereafter 'the AO') called upon the Assessee to answer specific queries regarding its business in India and provide information as required for assessing the income. 7. In the meantime, the Assessee filed a revised return on 31st March, 2004; the income declared was not revised but the Assessee claimed a higher credit on account of Tax Deducted at Sour .....

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,45,87,800/-. 9. The AO issued a notice under Section 148 of the Act on 30th March, 2009; that is, after a lapse of four years from the end of the relevant AY. In compliance with the aforesaid notice, the Assessee sent a letter on 4th May, 2009 stating that its revised return be treated as a return filed in response to the notice under Section 148 of the Act. The Assessee also sought reasons for reopening of the assessment. Subsequently, the AO issued notices under Section 143(2) of the Act and .....

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d that the AO had examined all relevant material and, thereafter, accepted that the Assessee had incurred a loss; a part of which was attributable to India. He contended that the AO had reopened the assessment on the basis of assessment for other AYs, including assessment for subsequent AYs made in respect of the entities, which had succeeded to the Assessee's business in question. He contended that the AO was seeking to review the assessment made on the said basis, which is impermissible as .....

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s in India. He also referred to the submissions filed by the Assessee on 18th February, 2005 in response to the queries raised by the AO. He pointed out that the said submissions also included details of revenues from sale of airtime as well as subscriptions from hotels. He contended that the AO had examined all the relevant materials and, the reasons provided for reopening the assessment clearly indicated that the assessments were being reopened merely on account of change of opinion and for re .....

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of assessment for AY 2003-04 in the case of the petitioner therein. In particular, he referred to paragraph 14 of the said judgment wherein this Court had referred to the assessment order dated 16th March, 2005 in the case of the Assessee for AY 2002-03 - the reopening of which is impugned in this petition - and had concluded that the AO had examined the India specific income and expenditure of the Assessee relating to channel activities in that year. The Court had, inter alia, on the aforesaid .....

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esent case as, according to him, the Assessee had failed to provide the necessary records as mandated under Section 44AB of the Act. He submitted that in absence of the Assessee not discharging its onus to produce all primary materials, the question of a change of opinion would not arise as the AO would have no occasion to form an opinion. He argued that the assessment order was passed on the statement produced by the Assessee which indicated that the Assessee had incurred a loss in relation to .....

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Insofar as the decision of this Court in BBC World News Limited (supra) is concerned, he submitted that the said decision would not be applicable; first of all for the reason that the said decision did not pertain to the Assessee. Secondly, he submitted that in any event, the said decision could not be relied upon as it had proceeded on the basis of discussion and finding recorded in assessment order which was now being reopened and, therefore, the observations made by this Court in respect of .....

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ee also earned revenues from hotels as subscription to the said channel. The controversy in the present petition relates to assessing the Assessee s income from the aforesaid revenue streams, that is, (a) sale of advertisement airtime; and (b) income from distribution - subscription to the BBC World Channel by various hotels. 19. In order to consider the issues involved, it is relevant to refer to the proceedings relating to the Assessee for AYs 2000-01, 2001-2002 and 2003- 04; these indicate th .....

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operations. These indicated that the Assessee had incurred a loss during the relevant period. The AO rejected such computation on the ground that the accounts were not audited and could not be relied upon. The AO then proceeded to estimate the taxable income attributable to Assessee s activities in India at 20% of the total revenue of ₹ 13,89,09,000/-. Accordingly, the Assessee s taxable profits were determined at ₹ 2,77,81,800/-. 21. The Assessee appealed against the said order bef .....

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the Assessee filed a further appeal before the Income Tax Appellate Tribunal ( ITAT ). 22. The ITAT accepted the Assessee s contention that in view of the decisions of the Supreme Court in DIT v. Morgan Stanley and Company Inc: 292 ITR 416 (SC) and the Bombay High Court in SET Satellite (Singapore) Private Limited v. DDIT: 307 ITR 205 (Bom), the Assessee s revenues from sale of airtime could not be taxed. This was so because BIPL was assessed in respect of revenues from Indian activities which w .....

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e marketing commission payable to BIPL from the revenues and estimated the taxable profit as 10% of the net revenue. 24. For the AY 2003-04, the AO accepted the Assessee's statement of its worldwide turnover and profits. The AO noted that the Assessee's sales revenue generated from India was 4.76% of its total sales revenue and applying the same proportion to the Assessee's global profits, computed the Assessee's profits from India at ₹ 26,55,183/-. The Assessee further hel .....

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he gross receipts without allowing any deduction. 26. Aggrieved by the order dated 24th March, 2008 passed by the CIT(A), the Assessee preferred appeals before the ITAT being ITA No. 2458 (Del)/2008 and 2459 (Del)/2008 for AYs 2001-02 and 2003-04 respectively. The said appeals were also heard together. The Assessee contended that no income could be attributable to its Indian activities since BIPL - which was held to be the Assessee's PE in India - was taxed on its income. The Assessee relied .....

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(being ITA No.1341/2010, ITA No. 703/2011 and ITA 705/2011) were heard together and disposed of by a common order dated 30th September, 2011 whereby this Court concurred with the ITAT's view and held that no question of law arose in those appeals. 28. In the aforesaid backdrop, we now proceed to examine the reasons recorded by the AO for forming a belief that income of the Assessee for AY 2002-03 has escaped assessment. 29. The reasons recorded by the AO are lengthy and runs into 11 pages. H .....

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e was earning profits from activities relating to telecast of the channel and since, the business had remained the same in the previous year, the AO reasoned that the Assessee had earned income in AY 2002-03 also, which income had escaped assessment. (B) The Assessee had not furnished the documentary evidence in support of its claim for loss but had merely furnished summary figures. (C) BBC World Ltd., the successor of the Assessee in respect of the business in question, was assessed for AYs 200 .....

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oticed that in assessment relating to 2003-04 onwards, the Assessee's claim for loss had been rejected for various reasons. (E) That the Assessee's income from distribution (i.e. subscription from hotels) was liable to be taxed as royalty as was held in the assessment - for the AY 2006-07 pertaining to BBC World Distribution - Assessee's successor for its distribution business. The AO also recorded that "the Assessee did not furnish the material true facts during the proceedings .....

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advertisement time. Further, the AO also called for information under Section 133(6) of the Act from some of the major advertisement agencies, which were clients of the Assessee. In response to the information sought, one of the large advertisement agency, M/s R.K. Swamy BBDO Advertising Private Limited, responded by, inter alia, stating that they did not deal with the overseas offices of the Assessee but interacted and negotiated only with the representatives from the local office and had presu .....

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therefore, no tax was payable. In support of its contention, the Assessee submitted the audited statement indicating worldwide loss of BBC World Division (the Assessee s division that operated the BBC World Channel). The Assessee also provided a statement indicating that BBC World Division had incurred a loss of UK Pounds 1,34,27,000 out of which losses that could be attributed to the Indian operations, were estimated at UK Pounds 4,335,000 (i.e, ₹ 29,77,31,000/-). The Assessee emphasized .....

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el was beamed. The Assessee also furnished a report of KPMG London in support of its computation. 33. The Assessee, without prejudice to its other contentions, further contended that even if BIPL was held to be the Assessee's PE in India or a business connection under Section 9 of the Act, the commission paid to BIPL constituted adequate compensation for the activities conducted in India. The same was also held to be at Arm's Length and following Morgan Stanley (supra) and SET Satellite .....

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tax at the rate of 15% of the gross fee. The royalty of ₹ 10,66,481/- received from the sale of books was also offered to tax at the rate of 15% in terms of Article 13 of the DTAA. The interest of ₹ 30,02,969/- received by the Assessee from loans extended to BIPL was offered to tax at the rate of 15% of the gross amount under Article 12 of the DTAA. 35. The AO examined the report of KPMG, London and noticed that certain expenses, which were stated as pertaining to the India footprin .....

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cial Year 2001-02 Particulars Amount in UKP Amount in Rupees Revenue from advertisement/ sponsorship earned in India In USD 250,000 17,278,000 * In Rs. 677,000 48,628,000 * Hotel Distribution Revenues 41,000 2,823,000 Total 968,000 68,729,000 Less: Specific costs relating to India footprint/Activities Digitisation and other distribution costs 191,000 13,204,000 India-opt out programming 946,000 65,372,000 Research costs 108,000 7,458,000 Distribution Staff and Admin costs 408,000 28,227,000 Mark .....

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with the furnished vouchers were examined in detail and the same was found satisfactory". Accordingly, the AO accepted the loss attributable to the Indian operations of the BBC World Channel at ₹ 7,29,39,000/-. He further attributed 20% of that loss to the activities in India; thus, restricting the loss attributable to the Assessee s Indian PE (i.e, BIPL) at ₹ 1,45,87,800/-. 37. The above narration clearly indicates that the AO had conducted a detailed examination and thereafter .....

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amination of the assessment order clearly indicates that the AO had also rejected the statement of allocation of revenues (supported by a report from KPMG London) and proceeded to assess the income by allowing deduction of only those expenses that pertained to the activities in India. The AO had examined the statement of computation of loss provided by the Assessee (as reproduced above) and also examined the relevant vouchers which the AO found to be 'satisfactory'. Concededly, there is .....

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income of the Assessee has escaped assessment; and, admittedly, a change of opinion provides no such reason. The Supreme Court in its decision in CIT v. Kelvinator of India Limited: (2010) 2 SCC 723 has authoritatively held that reopening of assessment on a mere change of opinion is not permissible and the said reason is excluded from the purview of Section 147 of the Act. 40. The reliance placed by Mr Singh on the decision of this Court in Dalmia (supra) is also misplaced. In that case, the AO .....

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The facts of that case are materially different from the facts of the present case. In the present case, the AO had examined the statement of computation furnished by the Assessee. The AO had also examined in detail the vouchers and had found the same to be satisfactory. Thus, the present case squarely falls in the category of a change of opinion and not where the AO had not formed an opinion. 41. In the aforesaid context, it may be mentioned that the Supreme Court in Indian and Eastern Newspape .....

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o a change of opinion on material already considered] by him. The Revenue contends that it is open to him to do so, and on that basis to reopen the assessment under Section 147(b). Reliance is placed on Kalyanji Mavji and Co. v. Commissioner of Income Tax : [1976] 102 ITR 287 (SC), where a Bench of two learned Judges of this Court observed that a case where income had escaped assessment due to the "oversight, inadvertence or mistake" of the Income Tax Officer must fall within Section 3 .....

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sideration of the same material (and no more) does not give him that power. That was the view taken by this Court in Maharaj Kamal Singh v. Commissioner of Income Tax (supra), Commissioner of Income Tax v. Raman and Company (supra) and Bankipur Club Ltd. v. Commissioner of Income Tax : [1971]82ITR831(SC), and we do not believe that the law has since taken a different course. Any observations in Kalyanji Mavji and Co. v. Commissioner of Income Tax (supra) suggesting the contrary do not, we say wi .....

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ct is available and should be resorted to. But initiation of reassessment proceedings will be invalid on the ground of change of opinion" 43. Thus, even in cases where AO has made a mistake or has made an error in assessing the income of an Assessee, a recourse to Section 147 of the Act is not available and the appropriate course would be for the Commissioner to pass an order under Section 263 of the Act, if he finds that the assessment order is erroneous inasmuch as its prejudicial to the .....

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t under sub-section (3) of Section 143 of the Act has been made for the relevant AY, no action under Section 147 of the Act can be taken after expiry of four years from the end of the relevant AY unless any income chargeable to tax has escaped assessment for such AY by reason of failure on the part of the assessee: (i) to make a return under Section 139 or in response to a notice issued under sub-section (1) of Section 142 or Section 148; or (ii) to disclose fully and truly all material facts ne .....

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re also unable to accept the contention that the Assessee had not maintained books of accounts as required under Section 44AB of the Act and, therefore, had failed to produce the primary facts necessary for his assessment. 47. The Supreme Court in Calcutta Discount Company v. Income Tax Officer: (1961) 41 ITR 191 (SC) had held that: "The words used are" omission or failure to disclose fully and truly all material facts necessary for his assessment for that year". It postulates a d .....

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ific books of accounts for BBC World Channel as its operations were not limited to India alone and further, according to the Assessee, its business income was not chargeable to tax in India. Nonetheless, the Assessee had produced a statement of its global accounts and also produced details of India specific expenditure, which was examined and verified by the AO. 49. It is necessary to observe that the issue in the present case is not that the Assessee has not correctly recorded its affairs in it .....

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dia operations. The AO rejected the same and decided to estimate the income attributable to Indian activities by taking the gross revenue from sale of airtime in India and subscription received from hotels and reducing the same by India specific expenses; the necessary data for the same was provided for by the Assessee and verified by the AO. There is no material to even remotely suggest that such accounts were not accurate. Concededly, the Assessee provided all material that was desired by the .....

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ich are relevant for the purpose of his assessment. Thus, even in cases, where an assessee has not maintained the necessary records or accounts as required in law, he is bound to disclose all facts in his knowledge which are relevant for the purposes of his assessment including making a candid disclosure that the requisite records have not been maintained by him. The Assessee must not conceal any material fact that he knows, or should have reasonably known, would have a bearing on his assessment .....

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uently hold that the Assessee had failed or omitted to truly and fully disclose all material facts and reopen the assessment on the basis that he should have estimated the income by adopting a different method. In the present case, there is no material to hold that the Assessee had withheld or concealed any material information; on the contrary, the Assessee had specifically pointed out that it had not maintained India specific books of accounts. The Assessee had furnished the records that it ma .....

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said decision was rendered in the case of BBC World News Ltd. (formerly known as BBC World Ltd.), the Court had noticed that the same AO who had passed the assessment order in that case had also examined the questions involved in detail in the case of the Assessee for AY 2002-03. It is relevant to note that the BBC World Division (the Assessee s Division which operated the BBC Channel) was transferred to a newly incorporated company - BBC World Ltd. (subsequently known as BBC World News Ltd.) wi .....

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2003. Both the Assessee and BBC World News Ltd. claimed that the said revenues were not taxable as they had no business connection/PE in India. Thus, for the AY 2003-04, the issue concerning taxability of income from sale of airtime of BBC World Channel was common to both BBC World News Ltd and the Assessee. Whilst, the AO sought to reopen the assessment of BBC Worldwide News Ltd. for AY 2003-04, we are informed by Mr Syali that no such proceedings were initiated in the case of the Assessee for .....

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ee. Accordingly, BBC Worldwide (India) Private Limited (BWIPL) acts as an agent in India for the assessee for soliciting advertisement for the sale of airtime on the channel and for providing marketing support to the channel in India. The assessee has claimed in the notes to the return of income that it does not have any business connection or permanent establishment in India as envisaged under Sec.9(1)(i) of the I.T.Act, 1961 and Article 5 of the DTAA between India and U.K. respectively. Theref .....

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essment proceedings the actual expenditure incurred on the activities related to the Indian operations were not submitted by the assessee. In the orders for A.Ys. 2004-05 to 2006-07, in the case of the assessee, it has been held that that the global loss, if any, is not on account of activities of the assessee in India and such loss cannot be attributed to the PE of the assessee in India. It is therefore held that the statements furnished by the assessee showing loss from Indian activities do no .....

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hargeable to tax has escaped assessment, 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 income-tax; (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 understand the .....

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