2012 (12) TMI 895 - HC - Income Tax

Validity of notice u/s 148 Reason to believe - Deduction on account of royalty - Adverse comment in the Audit report in relation to the royalty amount for the assessment year - Held that - As the reasons to believe are a mere recital of events, including the previous order of assessment, which permitted the deduction, the order of the TPO, the assessment order of the subsequent year which made disallowance for royalty. The notice does not anywhere indicate what was the new material which came to light, that threw into focus the fact that the assesse s behavior in not disclosing material particulars, attracted the provision u/s 148. Following the decision in case of Eastern Newspaper Society (1979 (8) TMI 1 - SUPREME COURT) that the opinion rendered by the audit party in regard to the law cannot for the purpose of such belief, add to or colour the significance of such law. In short, the true evaluation of the law in its bearing on the assessment must be made directly and solely by the Income Tax officer Assessing Officer can re-open an assessment under Section 147 of the Act, only if there is tangible material to show that income has escaped assessment. The Assessing Officer shall not be allowed to arbitrarily re-open assessment. The mere fact that a transfer pricing order had led to a partially adverse order, or that in the subsequent year, the amount claimed was disallowed, does not constitute a valid basis for issuance of the notice. On the contrary, the materials on record disclose a detailed inquiry into the nature and character of the royalty, which had been dealt with by the AO in the first instance. Therefore, that the impugned notice, to the extent it was based on the report and opinion of the audit report, is indefensible. In favour of assessee

Issues Involved:
1. Validity of jurisdiction assumed under Section 147 read with Section 148 of the Income Tax Act.
2. Compliance with the principles of natural justice.
3. Validity of reassessment proceedings initiated after the expiry of four years.
4. Basis of reassessment on the grounds of change of opinion.
5. Reliance on audit report for issuing notice under Section 148.

Issue-wise Detailed Analysis:

1. Validity of jurisdiction assumed under Section 147 read with Section 148 of the Income Tax Act:
The primary contention of the Petitioner was that the Respondent dismissed the objections regarding the assumption of jurisdiction without giving an opportunity to be heard, contrary to the principles of natural justice. The Supreme Court in G.K.N. Driveshafts (India) Ltd v. ITO & Ors. held that tax authorities must provide the assessee an opportunity to be heard regarding notices under Section 148, and any order in contravention should be set aside. The Petitioner also cited Kamlesh Sharma v. B.L. Meena, ITO, where reassessment completed without a speaking order was deemed improper.

2. Compliance with the principles of natural justice:
The Petitioner argued that the Respondent dismissed the objections without disposing of them and without providing an opportunity to be heard. The Court reiterated that the Assessing Officer must reject objections before passing the final order and not simultaneously, as held in Sita World Travels (India) Ltd. v. CIT and Anr.

3. Validity of reassessment proceedings initiated after the expiry of four years:
The Petitioner contended that the reassessment proceedings were initiated after four years from the end of the relevant assessment year without any failure on their part to disclose material facts necessary for assessment. The bar in the proviso to Section 147 of the Act would apply. The Court noted that mere escape of income is insufficient to justify action after four years; such escapement must be due to the assessee's failure to disclose material facts truly and fully. The Petitioner relied on judgments such as Kaira District Cooperative Milk Producers Union Ltd. v. ACIT and Fenner India Ltd. v. DCIT, which emphasized that the Assessing Officer must record the belief that income escaped due to the assessee's failure to disclose material facts.

4. Basis of reassessment on the grounds of change of opinion:
The Petitioner argued that the reassessment was initiated merely on the basis of a change of opinion without any new material coming before the Assessing Officer. The Court held that reassessment based solely on a change of opinion is not justified. The Petitioner cited CIT v. Purolator India, where it was held that reassessment cannot be based on the Assessing Officer's failure to draw correct legal inferences from primary facts disclosed during the original assessment.

5. Reliance on audit report for issuing notice under Section 148:
The Court noted that the jurisdictional precondition to invoke the power under the proviso to Section 148 is that the AO must have reasons to believe, based on materials not existing on record, that income has escaped assessment. The notice in this case was based on an audit report, which the Court found insufficient as a basis for reassessment. The Supreme Court in Indian and Eastern Newspaper Society v. Commissioner of Income Tax held that an audit report cannot constitute material or information for income escaping assessment. The Court also referenced CIT v. Kelvinator of India Ltd., which held that the AO can re-open an assessment only if there is 'tangible material' to show that income has escaped assessment.

Conclusion:
The Court concluded that the reassessment notice and consequent orders were without jurisdiction and quashed them. The writ petition was allowed, but no order as to costs was made.

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