2014 (12) TMI 2 - AT - Income Tax

Validity of reopening of assessment - Non issuance of notice u/s 143(2) - Whether report of DVO constitute fresh information for reopening of the case - Reference made to the DVO found as illegal - Held that - The assessee filed the return of income of 29th October 2007, and that the time limit for issuance of notice, u/s 143(2), selecting the case for scrutiny assessment expired on 30th September 2008 - it was only on 24th December 2009 that the AO made a reference, u/s 92CA(3), to the Transfer Pricing Officer for determination of arm s length price of the international transactions entered into by the assessee with its associated enterprises - as there were no proceedings pending before the AO, nor was, for that purpose, the case of the assessee was even picked up for scrutiny assessment u/s 143(3), the AO proceeded to reopen the assessment, which had by then achieved finality, by reopening the assessment - the reference to TPO was invalid but it does invalidate the findings of the TPO which are based on the facts of the case - The assessee itself appeared before the TPO from time to time and did not contest or, the notice issued by the TPO to compute the arm s length price - Thus the directions of the TPO even on an irregular reference, form a valid ground to reopen the proceedings for reassessment - the notice u/s. 148 was not sent to substitute notice u/s. 143(2) - notice u/s. 143(2) was never issued, therefore, it is wrong to presume that reassessment proceedings u/s. 148 were to substitute the proceedings as stated by the assessee. Reassessment to be based on fresh material/information Held that - As decided in Commissioner of Income Tax, Delhi Versus M/s. Kelvinator of India Limited 2010 (1) TMI 11 - SUPREME COURT OF INDIA - as to what is the relevance of an order passed by the Transfer Pricing Officer s order, in a situation in which the reference itself is unsustainable in law - such a reference could not have been made under the scheme of the Act because the assessment proceedings had come to an end before the point of time when such a reference was made, and as such the reference itself was legally invalid - The stand of the revenue was that even if reference to the DVO is to be held to be invalid, the DVO s report constituted information and as such it could be a good basis for coming to the conclusion that wealth has escaped assessment - when reference itself is invalid, the report received as a result of the reference cannot constitute material for forming the belief that an income or wealth tax escaped assessment - the initiation of reassessment proceedings are not sustainable in law the reassessment order is set aside Decided in favour of assessee.

Issues Involved:
1. Validity of reopening of assessment.
2. Barred by limitation under section 153(2) of the Act.
3. Upward adjustment with respect to transfer pricing matters.
4. Jurisdictional errors in issuing notice under section 148.
5. Invalid reference to Transfer Pricing Officer (TPO).

Issue-wise Detailed Analysis:

1. Validity of reopening of assessment:
The assessee challenged the validity of the reopening of the assessment. The reassessment proceedings were initiated based on the Transfer Pricing Officer's (TPO) report, which itself was considered bad in law. The reference to the TPO was made after the time limit for issuing a notice under section 143(2) had expired and before the reassessment proceedings had commenced. No proceedings were pending before the Assessing Officer at the time of the reference to the TPO. The Tribunal held that the reassessment proceedings were not sustainable in law, as the reference to the TPO, in the absence of any pending proceedings, was invalid. This was supported by the judgments in the cases of CIT Vs SAP Labs Pvt Ltd and CWT Vs Sona Properties Pvt. Ltd., where it was held that references made after the end of assessment proceedings are legally invalid.

2. Barred by limitation under section 153(2) of the Act:
The assessee contended that the reassessment was barred by limitation as per the provisions of section 153(2) of the Act. The Tribunal noted that the assessment order was passed on 31st October 2012, while the reassessment proceedings should have been completed by 31st March 2012. Since the draft assessment order under section 144C was issued based on an invalid reference to the TPO, the reassessment proceedings were time-barred.

3. Upward adjustment with respect to transfer pricing matters:
The Assessing Officer made an upward adjustment of Rs. 22,372,524 with respect to transfer pricing matters, computing the total income at Rs. 27,806,100 against the returned income of Rs. 5,433,580. The Tribunal did not delve into the merits of the transfer pricing adjustments, as the reassessment proceedings themselves were held to be invalid.

4. Jurisdictional errors in issuing notice under section 148:
The assessee argued that the Assessing Officer erred in assuming jurisdiction while issuing a notice under section 148 without any material to form a belief that certain income had escaped assessment. The Tribunal observed that the reasons recorded for reopening the assessment were based on the TPO's report, which was obtained from an invalid reference. Therefore, the jurisdictional assumption for issuing the notice under section 148 was flawed.

5. Invalid reference to Transfer Pricing Officer (TPO):
The reference to the TPO was made without any pending proceedings before the Assessing Officer, which is a sine qua non for such a reference. The Tribunal held that the reference to the TPO was unsustainable in law, as supported by the judgments in the cases of SAP Labs Pvt Ltd and Sona Properties Pvt. Ltd. The Tribunal emphasized that a report called by an authority having no jurisdiction would be a nullity at law, and consequently, proceedings based on such a report would be illegal.

Conclusion:
The Tribunal quashed the reassessment proceedings and the reassessment order, holding them to be legally unsustainable. All other grounds of appeal, dealing with the merits of the additions made during the reassessment proceedings, were rendered infructuous. The appeal was allowed in favor of the assessee.

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