2016 (6) TMI 105 - AT - Income Tax

Reopening of assessment - disallowance under section 40(a)(ia) - Held that - Tax audit report not only contains all necessary information but gives an insight into the business and financial affairs of the assessee for the relevant financial year. Therefore, tax audit report is not only the primary and most important document but is the foundation on which assessment proceeds. That being the case, it is totally unacceptable that the Assessing Officer at the time of completing original assessment has not examined the tax audit report. On the contrary, presumption should be, at the time of completing original assessment, the Assessing Officer must have examined the tax audit report. Even otherwise also, if the Assessing Officer at the time of original assessment failed to examine the information contained in a document having statutory forces, the assessee cannot be penalized for such lapse on the part of the Department with re opening of assessment. Thus, in absence of fresh tangible material there cannot be formation of belief in vacuum for re opening the assessment under section 147 of the Act. Therefore, re opening on mere reappraisal / review of material already considered at the time of original assessment tantamount to change of opinion and review of the order passed earlier. For this reason alone, impugned assessment order deserves to be quashed. As far as merits of the issue are concerned could be seen it is clearly evident that the payment of ₹ 8,79,32,213 by the assessee to RPPL is towards reimbursement of expenditure incurred on behalf of the assessee and not towards fee for managerial services. What RPPL received from the assessee towards services rendered is service charges of ₹ 8,79,322 being 1% of the actual expenditure. It is seen from the material placed on record that RPPL has raised two separate debit notes i.e., one for ₹ 8,79,32,213 towards advertisement expenses incurred on behalf of the assessee and another of ₹ 8,79,322 towards service charges. It is also evident, on the service charges of ₹ 8,79,322 paid to RPPL assessee has not only deducted tax at source but RPPL has declared such amount as its income. Therefore, in the aforesaid facts and circumstances of the case, when it is evident that the payment made by the assessee to RPPL is towards reimbursement of cost of expenditure incurred on behalf of the assessee such payment cannot be subject to deduction of tax. Consequently, no disallowance under section 40(a)(ia) can be made. - Decided in favour of assessee

Summary

Issues involved:
Validity of re-opening of assessment under section 147 of the Income Tax Act, 1961 and Merit of the disallowance under section 40(a)(ia) of the Act.

Validity of re-opening of assessment:
The appeal and cross objection were against the order dated 7th February 2014 for the assessment year 2007-08. The Department appealed against the deletion of an addition made under section 40(a)(ia), while the assessee raised the issue of the validity of proceedings under section 147. The Assessing Officer re-opened the assessment based on the belief that income had escaped assessment due to the assessee's failure to deduct tax at source on payments to a group company. The Commissioner (Appeals) held that the re-opening was valid as the original assessment did not address this issue, and there was no change of opinion. However, the Tribunal disagreed, stating that the re-opening lacked fresh tangible material and amounted to a change of opinion, thus quashing the assessment order.

Merit of the disallowance under section 40(a)(ia):
Regarding the disallowance under section 40(a)(ia), the Commissioner (Appeals) found that the payments made by the assessee to the group company were reimbursement of costs incurred on behalf of the assessee, not subject to deduction of tax. The Tribunal concurred, noting that the payment comprised advertisement expenses and service charges, with clear evidence that the group company had deducted tax at source on the advertisement expenses. As the payment was reimbursement and not for managerial services, no disallowance under section 40(a)(ia) could be made. The Tribunal upheld the Commissioner's decision, dismissing the Department's appeal and allowing the assessee's cross objection.

This detailed analysis of the judgment highlights the key issues of the validity of re-opening the assessment under section 147 and the merit of the disallowance under section 40(a)(ia) of the Income Tax Act, 1961, providing a comprehensive understanding of the legal proceedings and decisions involved in the case.