2013 (8) TMI 958 - HC - Income Tax

Reopening of assessment - Held that - Reason to believe does not mean that the assessing officer should have finally ascertained the fact by legal evidence. It only means, the examination that is required to be made on the basis of information that the assessing officer has received and if he discovers or finds as satisfied that the taxable income has escaped assessment, suffice it to state that he had reason to believe that such income had escaped assessment. Job work done by FFIPL for the petitioner, by itself and nothing more, cannot deprive the petitioner from claiming deduction under Sec.10B of the Act, is a pure question of fact that has to be decided based upon an enquiry. It is well settled law that it is for the authorities to lift the veil and ascertain the true nature of transaction that has taken place as between FFIPL and the petitioner., who claim to be sister-organizations, carrying on identical business. It is useful to notice that FFIPL could not make any further claims for deduction under Sec.10B of the Income Tax Act after the period, specified therein, whence the petitioner-company was incorporated and two years thereafter purchased the machinery of FFIPL disclosing the value of the old machinery was less than 20%. It is elsewhere said that tax planning may be legitimate provided it is within the framework of law. However colorable devices cannot be part of tax planning. The reasons assigned by the Deputy Commissioner to reject the objections of the petitioner in the exercise of jurisdiction under Sec. 147/148 of the Income Tax Act for the assessment year 2006-07 cannot be said to be either arbitrary or irrational calling for interference in exercise of extraordinary writ jurisdiction under Art.226 of the Constitution of India

Summary

Issues:
1. Validity of notice issued under Sec. 148 of the Income Tax Act, 1961
2. Application of principles of law in re-assessment proceedings for the assessment year 2006-07
3. Consideration of objections filed by the petitioner to the re-assessment proceedings
4. Justifiability of invoking jurisdiction under Sec. 147/148 of the Income Tax Act
5. Claiming deduction under Sec. 10B of the Income Tax Act
6. Relevance of job work done by another entity in claiming deductions
7. Legitimacy of tax planning within the framework of the law

Analysis:
1. The High Court reviewed a petition challenging a notice issued under Sec. 148 of the Income Tax Act, 1961. The court emphasized the importance of recording reasons and findings in such orders to ensure fairness and objectivity. It highlighted the need for the assessing officer to consider objections raised by the petitioner and provide detailed reasons for their decision.

2. The Deputy Commissioner of Income Tax considered objections to the re-assessment proceedings for the assessment year 2006-07. The court examined the legality of re-opening the assessment under Sec. 147/148, focusing on the transfer of assets between entities and the eligibility for deductions under Sec. 10B. The court emphasized the necessity of reasonable grounds and evidence for re-assessment.

3. The court addressed the petitioner's argument regarding the relevance of certain statements and the lack of sufficient reasons to believe income had escaped assessment. It clarified that the assessing officer does not need final legal evidence to initiate re-assessment, but must have a valid reason to believe income was not assessed correctly.

4. The issue of job work done by another entity and its impact on claiming deductions under Sec. 10B was discussed. The court highlighted the importance of investigating the true nature of transactions between related organizations to prevent misuse of tax laws.

5. The judgment emphasized the distinction between legitimate tax planning within legal boundaries and using colorable devices to evade taxes. It upheld the Deputy Commissioner's reasons for rejecting the petitioner's objections and concluded that the re-assessment proceedings were justified under the law.

6. Ultimately, the court dismissed the petition, stating it lacked merit. The judgment reaffirmed the legality of the Deputy Commissioner's actions and the validity of the re-assessment proceedings for the assessment year 2006-07.