2017 (9) TMI 1223 - AT - Income Tax

Reopening of assessment - validity of reasons to believe - independent application of mind by AO and no borrowed reasons - Held that - As reason to believe says that income chargeable to tax has escaped assessment should be of Assessing Officer. It is Assessing Officer s reason to believe that taxable income has escaped assessment that forms bedrock for reopening assessment u/s. 147 of the Act. Directions from JCIT or CIT to issue notice cannot in any manner be construed as Assessing Officer s reason to believe for initiating reassessment proceedings. The provisions of section 147 in unambiguous terms mandates that the reason to believe for reopening assessment should be of Assessing Officer. In other words the Assessing Officer should carryout independent exercise to examine fresh material in his possession to come to a conclusion that the assessment warrants reopening on account of escapement of income. In the present case, a perusal of reasons for initiating reassessment proceedings clearly show that they are against the sprit of provisions of section 147 of the Act. The Assessing Officer has issued notice u/s. 148 on the directions of JCIT and CIT. Therefore, in our considered opinion the notice issued u/s. 148 is bad in law and thus, the subsequent proceedings arising there from are vitiated. Appeal of assessee is allowed.

Issues Involved:
1. Legality of reopening the assessment under section 147 of the Income Tax Act.
2. Validity of reassessment proceedings and whether they were conducted in accordance with the law.
3. Adequacy of the Commissioner of Income Tax (Appeals)’s decision to dismiss the appeal as infructuous.
4. Validity of the addition of INR 11,22,74,613 on account of international transactions (transfer pricing adjustment).

Detailed Analysis:

1. Legality of Reopening the Assessment under Section 147 of the Income Tax Act:
The assessee challenged the reopening of the assessment under section 147, arguing that the Assessing Officer (AO) initiated reassessment proceedings based on the directions of the Joint Commissioner of Income Tax (JCIT) and the Commissioner of Income Tax (CIT), rather than on his own 'reason to believe' that income had escaped assessment. The tribunal noted that the provisions of section 147 mandate that reassessment proceedings can be initiated only if the AO independently believes that income chargeable to tax has escaped assessment. The tribunal cited the decision of the Hon’ble Delhi High Court in the case of Commissioner of Income Tax Vs. Kelvinator of India Ltd., which emphasized that the ‘reason to believe’ must be that of the AO. Since the AO in this case acted on the directions of superior authorities without forming his own belief, the tribunal concluded that the notice issued under section 148 was bad in law, rendering the subsequent proceedings invalid.

2. Validity of Reassessment Proceedings and Whether They Were Conducted in Accordance with the Law:
The assessee argued that the reassessment proceedings violated the procedure prescribed by the Supreme Court in GKN Driveshafts (India) Ltd. v. Income Tax Officer. Specifically, the AO failed to provide reasons for reopening the assessment before issuing further notices and did not dispose of the assessee’s objections with a speaking order before proceeding with the reassessment. The tribunal agreed with the assessee, noting that the AO issued the notice under section 148 without providing the reasons for reopening and proceeded with the reassessment in a hasty manner, violating the guidelines set by the Supreme Court and the jurisdictional High Court in Asian Paints Ltd. v. Deputy Commissioner of Income Tax. Therefore, the reassessment proceedings were not conducted in accordance with the law.

3. Adequacy of the Commissioner of Income Tax (Appeals)’s Decision to Dismiss the Appeal as Infructuous:
The Commissioner of Income Tax (Appeals) dismissed the assessee’s appeal as infructuous without considering the merits of the case, on the grounds that the assessment order had been set aside by the CIT under section 263. The tribunal found this approach erroneous, stating that the CIT (Appeals) was duty-bound to first decide the validity of the reopening before addressing the merits. The tribunal emphasized that the CIT (Appeals) should have adjudicated on the issue of reopening as it was a critical aspect of the appeal.

4. Validity of the Addition of INR 11,22,74,613 on Account of International Transactions (Transfer Pricing Adjustment):
The assessee contested the addition of INR 11,22,74,613 on account of transfer pricing adjustments. However, since the tribunal held that the initiation of reassessment proceedings was invalid, this ground became academic and did not require further adjudication.

Conclusion:
The tribunal set aside the impugned order and allowed the appeal of the assessee, concluding that the reassessment proceedings were invalid due to the AO’s failure to independently form a ‘reason to believe’ and the procedural violations during the reassessment process. The tribunal did not need to address the merits of the transfer pricing adjustment due to the fundamental invalidity of the reassessment proceedings.

Order Pronounced:
The order was pronounced on Friday, the 15th day of September, 2017.

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