2022 (5) TMI 1284 - HC - Income Tax

Reopening of assessment u/s 147 - Transfer Pricing Reference u/s 92CA - Non disclosure of loan extended to its Associated Enterprise MMG and there is difference in the petitioner's investment in purchasing MMG's shares as per the respective financials of the petitioner and MMG - HELD THAT - The first respondent has initiated proceedings for reopening of the assessment for the Assessment Year 2012-13 insofar as the petitioner's loan transaction with MMG on twin grounds; The first respondent has reasoned that the petitioner has not disclosed advance to the Associated Enterprise (MMG) in the Auditors Certificate in Form No.3CEB and because the advance amount is not specifically mentioned in this certificate, the AO could not refer the petitioner's loan transaction with MMG to the TPO. The first respondent has also opined that if there is a TPO reference and re- adjudication, the disallowance towards interest will have to be reassessed. As undisputed that the petitioner has enclosed Auditor's Certificate in Form No. 3CEB in the prescribed format furnishing the details of the transaction as required i.e., the nature of transaction, the rate of interest, interest computed and the method adopted in determining Arm's Length Price. There is no allegation that the petitioner has omitted or not disclosed any particular detail as required in this Form. As undisputed that the petitioner's loan transaction with MMG was examined in the proceedings under Section 143(2) of the I-T Act. The petitioner with the issuance of the notice under Section 143(2) is called upon to justify the advance to MMG, and after considering the petitioner's justification with reference to the disallowance of notional interest during the previous assessment years, the AO has disallowed interest in the premise that the petitioner has utilized loan bearing advances to lend loan to its associated enterprise, MMG. This circumstance clearly demonstrates that the value of the petitioner's advance to MMG was available with the AO and has received consideration. It cannot be opined that the petitioner had either omitted or failed to disclose the advance/loan transaction with MMG. As such, it must be concluded that the Revenue has failed to establish one of the necessary conditions viz., that the petitioner has either omitted or failed to disclose fully or truly material circumstances. In that event the first respondent could not have assumed jurisdiction for reassessment and issued the impugned notice dated 29.01.2018 (Annexure-E). Revenue does not dispute that both the source of income and the subject investment are mentioned in the books of accounts, and the Revenue also does not contend that the petitioner did not have the necessary resources to make such investment. Importantly, the Revenue does not contend that the payment of premium by the petitioner to MMG's shareholders for purchase of the shares will not be reflected in the MMG's financials. The petitioner's objections in this regard are rejected only on the ground that the explanation could be considered at the time of reassessment. This Court must opine that the question framed for consideration must be answered in favour of the petitioner concluding that the Revenue has failed to establish that the petitioner has either omitted or failed to disclose material circumstances or that there is reason even for a subjective belief that any income has escaped tax - WP allowed.

Summary

Issues Involved:
1. Validity of the reassessment notice under Section 147 of the Income Tax Act, 1961.
2. Justification for the reference to the Transfer Pricing Officer (TPO) under Section 92CA.
3. Applicability of Section 69 regarding unexplained investments.

Detailed Analysis:

1. Validity of the Reassessment Notice under Section 147 of the Income Tax Act, 1961:

The petitioner challenged the notice dated 29.01.2018 issued under Section 147 of the I-T Act for reassessment beyond four years from the relevant date, arguing it was without jurisdiction and barred by limitation. The petitioner contended that all material facts were fully and truly disclosed during the original assessment proceedings, and thus, the conditions for invoking Section 147 were not met. The court found that the petitioner had indeed disclosed all necessary details in the Auditor’s Certificate (Form 3CEB) and that the Assessing Officer (AO) had already scrutinized the loan transaction during the original assessment under Section 143(3). Therefore, the court concluded that the Revenue failed to establish that the petitioner had omitted or failed to disclose material facts, making the reassessment notice invalid.

2. Justification for the Reference to the Transfer Pricing Officer (TPO) under Section 92CA:

The petitioner objected to the reference to the TPO, arguing that the loan transaction with its Associated Enterprise (MMG) was already scrutinized and disallowed under Section 143(3). The court noted that the petitioner had disclosed the interest received from MMG in Form 3CEB, and the AO had considered the transaction during the original assessment. The court emphasized that the AO had the necessary details to form a prima facie belief on whether a reference to the TPO was necessary. Since the AO did not find it necessary to refer the transaction to the TPO during the original assessment, the court held that the subsequent reference was unjustified.

3. Applicability of Section 69 Regarding Unexplained Investments:

The Revenue argued that the difference in the value of the petitioner’s investment in MMG’s shares as recorded in the petitioner’s books and MMG’s books indicated unexplained investment liable to be taxed under Section 69. The petitioner explained that the difference was due to the premium paid for purchasing shares from third parties, which would not be reflected in MMG’s financials. The court found that the Revenue did not dispute the petitioner’s explanation or the source of the investment. The court held that for Section 69 to apply, the Revenue must establish that the investment was made from an unrecorded source of income and that the petitioner failed to offer a satisfactory explanation. Since the petitioner had disclosed the investment and its source, the court concluded that Section 69 was not applicable.

Conclusion:

The court quashed the reassessment notice and the orders for reference to the TPO, holding that the reassessment proceedings were without jurisdiction as the petitioner had fully and truly disclosed all material facts necessary for the assessment. The court emphasized that the Revenue failed to establish the necessary conditions for invoking Section 147 and that the reference to the TPO and the application of Section 69 were unjustified.