2014 (6) TMI 996 - HC - Income Tax

Initiating of proceedings u/s 147 - international transaction as identified as sham - assessment beyond ordinary period - Held that - In case of assessment in relation to the present assessment year 2003-2004, it should be by the end of financial year 2008, while for the year 2004-2005, it should be by the end of financial year 2009. Before us, copies of such notices have not been produced. However, the learned Tribunal on fact found that the notice was issued beyond four years, but there has been no factual basis as required under the aforesaid provision to reopen the assessment beyond four years and within six years, meaning thereby pre-conditions for issuance of notice after four years and within six years, namely, the allegation of escapement of assessment on account of failure on the part of the assessee to make a return under Section 139 or in response to notice issued under sub-section (1) of Section 147 or Section 148 or to disclose fully and truly all material facts necessary for its assessment for that assessment year have not been fulfilled. When pre-conditions are not found in the notices, initiation of proceedings is bad. We cannot re-appreciate this finding in the absence of the allegation of perversity. - Decided in favour of assessee.

Summary

Issues:
1. Validity of quashing the assessment order by the Tribunal without considering facts and merits.
2. Justification of initiating proceedings under Section 147 based on identified sham international transaction.

Analysis:
1. The appeal was filed against the Tribunal's judgment for assessment years 2003-2004 and 2004-2005. The appellant questioned the correctness of the Tribunal's decision in allowing the respondent-assessee's appeal and quashing the assessment order. The primary contention was that the Tribunal did not consider the facts and merits of the assessment order, which had been upheld by the Commissioner of Income Tax (Appeals) solely because the Transfer Pricing Officer (TPO) lacked the authority to declare the international transactions as sham. The High Court noted that the Assessing Officer sought to reopen the assessment beyond the ordinary four-year period prescribed by law. The Tribunal found that the notice for reopening the assessment was issued beyond four years without fulfilling the necessary pre-conditions for such action. As the pre-conditions for reopening the assessment within six years were not met, the initiation of proceedings was deemed improper. The High Court upheld the Tribunal's decision, emphasizing the absence of legal grounds to intervene.

2. The second issue raised in the appeal was the justification for initiating proceedings under Section 147 of the Income Tax Act based on the identification of a sham international transaction. The appellant argued that the Assessing Officer was not justified in reopening the assessment under Section 147, contending that the information regarding the sham transaction was available from the TPO's order. The High Court highlighted that the initiation of proceedings under Section 147 beyond the four-year period required specific conditions to be met, such as the allegation of escapement of assessment due to the assessee's failure to disclose material facts. Since the necessary pre-conditions for reopening the assessment were not satisfied, the High Court concluded that the proceedings were not valid. Consequently, the appeal was dismissed, and no costs were awarded. Any pending petitions related to the appeal were also dismissed accordingly.

In conclusion, the High Court dismissed the appeal, emphasizing the importance of fulfilling the legal pre-conditions for reopening assessments beyond the prescribed time limits. The judgment underscored the necessity of meeting specific criteria, such as the allegation of escapement of assessment, to justify initiating proceedings under Section 147 of the Income Tax Act.