2016 (10) TMI 630 - HC - Income Tax

Reopening of assessment - reasons to believe - Held that - A notice of reopening, the Assessing Officer does not have to establish that any income has escaped assessment. He must simply be shown to have formed an opinion, which, in turn, is supported by reasons. The reasons themselves must be based on some material. A minimum requirement one would expect in the face of this scheme of things is that the material used by the Assessing Officer for forming his opinion must have some bearing or nexus with escapement of income. If not, the reopening notice would be clearly without jurisdiction. In the present case, the material used by the Assessing Officer for purportedly forming this opinion is the description of the assessee of itself as a supplier of the equipment in an EPC contract, which inter alia required it to take offshore delivery of the equipment from a foreign vendor and supply and install the same onshore. Mere description as a supplier in a suit by the assessee against the insurance company claiming an insurance claim for loss of equipment, when the assessee insured the equipment jointly with the purchaser, can possibly have no connection with the escapement of any income arising out of sale of the equipment. Since that was the only material used by the Assessing Officer for issuance of the reopening notice, the notice is without any legal basis or justification. The authorities below were clearly, therefore, right in setting aside the notice. One more fact to be noted is that for the Assessment Year 1999-2000 and 2002-03, a coordinate bench of the Tribunal had taken a view that the Respondent Assessee has not sold any equipment. In these circumstances, the order of the coordinate bench for Assessment Years 1999-2000 and 2002-2003 also supports the Respondent s contention that they were not suppliers of the equipment and no income assessable to tax has escaped assessment. It s obligation was to insure the goods/equipment during transit done by it either on its own or through a subcontractor.

Summary

Issues:
Challenge to order of Income Tax Appellate Tribunal under Section 260A of Income Tax Act for Assessment year 2000-01. Question of law: Validity of notice issued under Section 148.

Analysis:
The case involved a Project Contractor who was awarded a contract by KPCL for setting up a power plant and had taken delivery of equipment valued at US$ 103 million from Hanjung on behalf of KPCL, which was lost during transit. The Assessing Officer issued a reopening notice in 2004, alleging that income of USD 51.5 million had escaped assessment for A.Y. 2000-01. The RespondentAssessee challenged the jurisdiction of the notice, contending it should be quashed. The Assessing Officer relied on the suit filed by the RespondentAssessee against the Insurance Company, claiming to have supplied equipment valued at US$ 103 million, to justify the notice.

The CIT(A) examined the facts, including the contract terms and scope of work, and concluded that the RespondentAssessee was not the owner of the goods but an EPC contractor for KPCL. The CIT(A) held that the word "supply" in the suit referred to responsibilities under the onshore contract, not ownership of equipment. The Tribunal upheld this finding, confirming that the RespondentAssessee was not the supplier of the equipment, based on the contract terms and transit insurance provisions.

The Court noted that the Assessing Officer must have a valid reason, supported by material, to issue a reopening notice. In this case, the description of the RespondentAssessee as a "supplier" in the suit against the insurance company did not establish any connection to income escapement. The Court found the notice lacked legal basis and upheld the decision to set it aside. Additionally, previous Tribunal decisions for other assessment years supported the Respondent's position that they were not equipment suppliers.

Considering the findings of fact by the CIT(A) and Tribunal, the Court concluded that the question of law raised did not present any substantial issue. Therefore, the appeal was dismissed, with no order as to costs.