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2013 (6) TMI 624 - AT - Income TaxReopening of assessment - additions on account of transfer pricing adjustments and determined the total income - Held that - The assessment was reopened for assessing the escaped income on account of increase in work in progress which according to the AO was due to advances received from the customers. However, reading of the assessment order passed u/s 143(3) r.w.s. 147 reveals the fact that the issue was completely given a go bye in the reassessment order. The Assessing Officer not even has made a whisper about the income which he believed to have escaped assessment as per the reasons recorded by him. In fact, as it appears during the reassessment proceeding the AO had made a reference to the TPO for determining the arm's length price and has made additions as per the order passed by the TPO u/s 92CA(5) making transfer pricing adjustment. Thus, it is very much clear that the reassessment has been made for assessment of income other than the income escaping assessment as per the reasons recorded for formation of belief while initiating proceeding u/s 147 of the Act. The reasons recorded for reopening the assessment has no nexus with the income ultimately assessed u/s 147. In favour of assessee.
Issues Involved:
1. Validity of proceedings initiated under Section 147 of the Income Tax Act. 2. Non-communication of reasons for reopening the assessment. 3. Nexus between the reasons recorded for reopening and the assessment made. Issue-wise Detailed Analysis: 1. Validity of Proceedings Initiated under Section 147 of the Income Tax Act: The assessee challenged the validity of the proceedings initiated under Section 147, arguing that the reopening of the assessment was invalid due to the lack of tangible material before the Assessing Officer (AO) to conclude that income had escaped assessment. The Dispute Resolution Panel (DRP) rejected this contention, relying on the Supreme Court decision in ACIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd. (291 ITR 500) and the Kerala High Court decision in CIT vs. Bestwood Industries & Sawmills (331 ITR 64). The DRP held that the proceedings under Section 147 were validly initiated. 2. Non-communication of Reasons for Reopening the Assessment: The assessee contended that the AO did not communicate the reasons for reopening the assessment, rendering the proceedings invalid. The DRP noted that the assessee did not request the reasons for reopening after responding to the notice under Section 148. The Tribunal referenced the Supreme Court decision in GKN Driveshafts (India) Ltd. vs. ITO, which mandates that the AO must communicate the reasons for reopening if requested by the assessee. Since the assessee did not request these reasons, the Tribunal found no procedural violation by the AO. 3. Nexus Between the Reasons Recorded for Reopening and the Assessment Made: The Tribunal scrutinized whether there was a nexus between the reasons recorded for reopening the assessment and the income ultimately assessed. The AO had reopened the assessment on the grounds that the assessee received advances from customers, leading to an increase in work-in-progress, which was not offered to tax. However, the reassessment order did not address this issue but instead made additions based on transfer pricing adjustments determined by the Transfer Pricing Officer (TPO). The Tribunal cited several judicial precedents, including CIT vs. Jet Airways (I) Ltd. (331 ITR 236), Ranbaxy Laboratories Ltd. vs. CIT (336 ITR 136), and ACIT vs. Major Deepak Mehta (344 ITR 641), to emphasize that the AO must assess the income that formed the basis for the belief of escapement. If the AO does not assess the income that led to the reopening, the reassessment is invalid. The Tribunal concluded that the AO's failure to assess the income related to the work-in-progress advances, which was the basis for reopening, rendered the reassessment order invalid. Conclusion: The Tribunal annulled the assessment order dated 5-10-2012, passed under Section 143(3) read with Section 147, on the grounds that the AO did not assess the income that formed the basis for reopening the assessment. Consequently, the grounds raised on the merits of the additions became academic and were not adjudicated. The Tribunal also noted that the major addition of Rs. 15.24 crores on account of transfer pricing adjustments could not survive, referencing the coordinate bench's order in the assessee's own case for the assessment year 2007-08. Final Decision: The appeal filed by the assessee was allowed, and the assessment order was annulled. The order was pronounced in the open Court on 21-06-2013.
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