2007 (2) TMI 193 - HC - Income Tax

Reopening of assessment u/s 147 - Income escaping assessment - Validity Of notice issued u/s 148 - assessment for the assessment year 2001-02 is sought to be reopened - HELD THAT - It is evident that the reasons to believe that the income has escaped assessment are based on the findings recorded in the assessment order for the assessment year 2002-03. In the assessment order for the assessment year 2002-03, the research and development expenses incurred by the petitioner in the assessment year 2002-03 have been disallowed partially on the basis of the findings recorded by the Transfer Pricing Officer to the. effect that the transactions were not at arm's length as contemplated under the Transfer Pricing Regulations. As rightly contended by Mr. Pardiwala, the Transfer Pricing Regulations came into force with effect from April 1, 2002, and, thus, the said Regulations were not applicable to the assessment year 2001-02. Therefore, reopening of the assessment for the assessment year 2001-02 based on the provisions which were not applicable for the assessment year 2001-02 cannot be sustained. The contention of the Revenue that the Assessing Officer has only relied upon the material available from the assessment order for the assessment year 2002-03 cannot be accepted, because what is held in the assessment order for the assessment year 2002-03 is that the transactions were not at arm's length as per the provisions which are applicable to the assessment year 2002-03. It is not the case of the Assessing Officer that the deduction allowed in the assessment order passed u/s 143(3) of the Act is contrary to any provisions applicable to the assessment year 2001-02. Thus, in the facts of the present case, apart from the assessment order for the assessment year 2002-03, there are no other reasons for reopening the assessment. Admittedly, the expenses in question have been incurred after obtaining FIPB approval and approval from the R.B.I. Therefore, reopening of the assessment for the assessment year 2001-02 on the ground that the transactions are not at arm's length is without any merit. The law in the subsequent year being different, reopening of the assessment based on the subsequent assessment order cannot be sustained. Thus, the reopening of the assessment for the assessment year 2001-02 on the ground that the transactions were not at arm's length as held in the assessment order for the assessment year 2002-03 cannot be sustained. Accordingly, the petition succeeds. The impugned notice is quashed and set aside.

Summary

Issues:
Challenging notice under section 148 of the Income-tax Act, 1961 for reopening assessment year 2001-02 and order rejecting objections based on assessment year 2002-03.

Analysis:
1. The petitioner challenged a notice dated May 25, 2005, under section 148 of the Income-tax Act, 1961, seeking to reopen the assessment for the year 2001-02. The petitioner also contested the order dated November 21, 2006, rejecting objections filed for reopening the assessment.

2. The petitioner, engaged in providing verification and certification services in India, initially declared taxable income of Rs. 8,42,67,317 for the assessment year 2001-02, later revised to Rs. 8,19,03,180 due to a change in depreciation claim.

3. The assessment order passed under section 143(3) of the Act disallowed part of the technical know-how team expenses but allowed the deduction of research and development fees claimed by the petitioner.

4. The notice for reopening the assessment was based on an order for the assessment year 2002-03, where research and development expenses were disallowed due to non-compliance with arm's length pricing regulations.

5. The petitioner objected to the reopening, arguing that the law for the assessment year 2002-03 was different and should not be the basis for reassessment of the year 2001-02.

6. The petitioner contended that the reopening lacked justification as there was full disclosure and allowance of research and development expenses after a detailed enquiry by the Assessing Officer.

7. The court considered the arguments and precedent cases, emphasizing that mere change of opinion cannot justify reopening a completed assessment, as established in various court decisions.

8. The court ruled in favor of the petitioner, stating that the reopening of the assessment for the year 2001-02 based on the assessment order for 2002-03, which applied different regulations, was unjustified.

9. Consequently, the court quashed and set aside the notice dated May 25, 2005, ruling in favor of the petitioner with no order as to costs.