2021 (8) TMI 484 - HC - Income Tax

Revision u/s 263 - CIT against a decision of the AO dropping the reopening proceedings after issuing notice u/s 148 and after receiving the reply/objections of the assessee - whether or not there was change in beneficial interest in terms of Section 10A(9) - whether the twin ingredients which are required to be satisfied cumulatively for the exercise of power under Section 263 of the Act stood satisfied? - HELD THAT - CIT had no jurisdiction to invoke his power u/s 263 to examine the correctness of the decision taken by the Assessing Officer dropping the reopening proceedings after issuance of notice under section 148 of the Act and after considering the objections filed by the assessee. In fact to the said extent, the Tribunal was right in its opinion - we do not agree with the finding of the Tribunal wherein the Tribunal has made an observation that issuance of notice under section 148 of the Act was an administrative decision and dropping of the proceedings after verifying the details was also an administrative decision. This observation is incorrect because the decision to be taken before issuance of notice for reopening should be based upon the cogent reasons and the AO who issues notice should record his satisfaction and this cannot be termed as purely an administrative decision but there is a quasi-judicial application of mind required before issuance of notice under Section 148 - Likewise after receiving the objections from the assessee if the AO seeks to sustain his prima facie view and reject the objections submitted by the assessee, then also he is required to apply his mind and pass an order, the correctness of which can be questioned in a proceedings under Article 226 of the Constitution of India. Therefore, to that extent, we do not agree with the finds of the Tribunal. Assessee had submitted an explanatory note clearly explaining the organization structure and established before the Assessing Officer that during 2000-01, Barry-Wehmiller Company Inc. acquired 100% shares in Marquip International Inc. and this does not change the shareholding pattern of the assessee Company and the parent Company continued to be the Mauritius Company with 100% equity. These facts were taken note of and the Assessing Officer had dropped the reopening proceedings. Thus, it is on an opinion formed by the Assessing Officer and after being satisfied that there is no case made out for reopening and after recording that the ownership or beneficial interest of the Company has not changed and continued to be with Mauritius Company and therefore, Section 10A(9) of the Act is not attracted and accordingly, proceedings under Section 147 of the Act was dropped. Unless and until the twin tests which are required to be satisfied that the assessment should be not only erroneous but prejudicial to interest, the power under section 263 of the Act should not have been invoked apart from the fact that this was not a case where such a power was exercised to revise the original assessment. Therefore, the Tribunal was right in coming to the conclusion that the shares were transferred only to comply with the legal requirements and the beneficial ownership was never transferred. Hence, we find that the order passed by the Tribunal does not call for any interference. - Decided in favour of assessee.

Summary

Issues Involved:
1. Jurisdiction of CIT under Section 263 of the Income Tax Act.
2. Change in beneficial ownership in terms of Section 10A(9) of the Income Tax Act.
3. Satisfaction of twin conditions for exercising power under Section 263 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Jurisdiction of CIT under Section 263 of the Income Tax Act:
The primary issue was whether the Commissioner of Income Tax (CIT) could exercise jurisdiction under Section 263 of the Income Tax Act against the decision of the Assessing Officer (AO) dropping the reopening proceedings initiated under Section 147 of the Act. The Tribunal had quashed the CIT's order, asserting that the AO's noting in the order sheet did not constitute an "order" subject to revision under Section 263. The CIT argued that the AO's decision to drop the proceedings was erroneous and prejudicial to the interest of the revenue. The High Court, however, held that the CIT had no jurisdiction to invoke Section 263 to examine the correctness of the AO's decision to drop the reopening proceedings after issuing notice under Section 148 and considering the assessee's objections. The Court emphasized that the AO's decision to issue a notice for reopening requires a quasi-judicial application of mind, not merely an administrative act.

2. Change in Beneficial Ownership in Terms of Section 10A(9) of the Income Tax Act:
The second issue was whether there was a change in beneficial ownership that would invoke Section 10A(9) of the Act. The CIT contended that the AO failed to appreciate the change in beneficial shareholding due to the acquisition of shares by Marquip International Inc., USA, which indirectly affected the assessee's holding company in Mauritius. The Tribunal, however, held that the transfer of shares was merely to comply with legal requirements, and there was no actual transfer of beneficial ownership. The High Court supported this view, noting that the AO had thoroughly examined the shareholding structure and concluded that the beneficial ownership remained unchanged. The Court found that the AO's decision was based on substantial evidence, including the company's registers and shareholder communications, which confirmed that the beneficial interest continued to be held by the Mauritius Company.

3. Satisfaction of Twin Conditions for Exercising Power Under Section 263 of the Income Tax Act:
The third issue was whether the twin conditions—erroneous assessment and prejudice to the interest of the revenue—were satisfied for the CIT to exercise power under Section 263. The High Court concluded that these conditions were not met. The AO had conducted a detailed examination and was satisfied that there was no change in beneficial ownership, thus dropping the reopening proceedings. The Tribunal's decision to uphold the AO's findings was deemed correct. The High Court emphasized that the power under Section 263 should only be invoked if both conditions are cumulatively satisfied, which was not the case here.

Conclusion:
The High Court dismissed the revenue's appeal, affirming the Tribunal's decision that the CIT could not exercise jurisdiction under Section 263 to revise the AO's decision to drop the reopening proceedings. The Court also agreed with the Tribunal that there was no change in beneficial ownership and that the AO's decision was neither erroneous nor prejudicial to the interest of the revenue. The substantial questions of law were answered against the revenue and in favor of the assessee.