2011 (6) TMI 329 - AT - Income Tax

Reopening of assessment - as per AO assessee company was conducting its business operations in India through TPIL and it had a permanent establishment (PE) in India - Held that - In the present case there was no basis for the Assessing Officer to have reason to believe that income of the assessee for the year under consideration had escaped assessment and as established by the assessee the only document which was relied upon by the AO specifically at assessment stage also could not have been the basis for the Assessing Officer to have reason to believe that any income of the assessee for the previous year relevant to assessment year 2001-02 had escaped assessment - As a matter of fact there being no business carried on by the assessee company in that year there was no question of earning of income which could be said to have escaped assessment - Therefore cancel the assessment made by the Assessing Officer under section 143(3) read with section 147 in pursuance of such invalid reopening holding the same to be bad in law and allow the appeal of the assessee on this preliminary issue.

Summary

Issues Involved:
1. Validity of reassessment proceedings under section 143(3) read with section 147.
2. Existence of a Permanent Establishment (PE) in India.
3. Quantification of income attributable to the PE in India.

Issue-wise Detailed Analysis:

1. Validity of Reassessment Proceedings:
The primary issue was whether the reassessment proceedings initiated by the Assessing Officer (AO) under section 143(3) read with section 147 were valid. The assessee argued that no business was conducted in the relevant year, thus no income was earned, and consequently, there was no escapement of income to warrant reopening of the assessment. The AO initiated reassessment based on materials seized during a search, believing the assessee had a PE in India and had not filed returns. The CIT(A) upheld the AO's decision, stating that the AO had sufficient reason to believe that income chargeable to tax had escaped assessment. However, the Tribunal found that the AO's reasons were vague and lacked specific references to documents indicating escapement of income. The Tribunal concluded that there was no basis for the AO to believe that income had escaped assessment, rendering the reassessment proceedings invalid.

2. Existence of a Permanent Establishment (PE) in India:
The AO and CIT(A) held that the assessee had a PE in India through TPIL, making income arising from its operations in India taxable. The assessee contended that it did not commence business until September 2001, thus no income was earned in the relevant year. The Tribunal noted that the revenue figure for the calendar year 2001 included income from both TPIL's Singapore branch and the assessee company, with no revenue attributable to the period before 31-3-2001. The Tribunal found no evidence of business activity by the assessee in the relevant year, thus no income could have been earned or escaped assessment.

3. Quantification of Income Attributable to the PE in India:
The AO determined the income attributable to the PE in India based on seized documents, converting revenue figures to Indian Rupees and applying a pro-rata calculation. The assessee challenged this quantification, arguing that the figures used were for subsequent years and not the relevant year. The Tribunal agreed, noting that the revenue figure for 2001 was a combined figure and did not include any income for the period ending 31-3-2001. The Tribunal concluded that there was no basis for the AO's quantification of income for the relevant year.

Conclusion:
The Tribunal held that the reassessment proceedings were invalid due to the lack of a basis for the AO's belief that income had escaped assessment. Consequently, the assessment made under section 143(3) read with section 147 was cancelled. The other grounds raised by the assessee, challenging the addition on merits, became academic and were not adjudicated. The appeal of the assessee was allowed.