2022 (8) TMI 1224 - AT - Income Tax

Validity of Reopening of assessment - validity of jurisdiction u/s.147 - AO had alleged escapement of income in the hands of the assessee for the A.Y.2012-13 in respect of import of pulses from Aster DMCC, Dubai which had allegedly resulted in over invoice of import of pulses thereby reducing the profits of the assessee in India - HELD THAT - The only disallowance made in the re-assessment proceedings was on account of loss of trading in gold jewellery - It is not in dispute that the issue of disallowance of loss of trading in gold jewellery was not subject matter of reasons recorded. Hence, it could be safely concluded that the reasons for which the assessment was reopened, no addition was ultimately made by the ld. AO in respect of such issue. Once, no addition has been made for an issue contemplated in the reasons recorded by the ld. AO, then the entire satisfaction of the ld. AO of reason to believe and formation of belief , within the meaning of section 147 of the Act, fails. Hence, the re-assessment proceedings deserve to be quashed on this count itself. It is trite law that jurisdiction of Section 147 of the Act for the ld. AO is to be tested based on reasons recorded by the ld. AO. It is also pertinent to note that the TPO did not make any disallowance / addition for A.Y.2012-13 in respect of fresh reference made during re-assessment proceedings with regard to over pricing of import of pulses from the associated enterprises. This fact is evident from the order passed by the ld. TPO u/s. 92CA(3). Though it is a fact on record that for A.Y.2014-15, TPO had made certain addition on the said transaction vide his order dated 31/10/2017, still he chose not to make any addition in respect of the very same transaction of import of pulses from Aster DMCC, Dubai for A.Y.2012-13 while passing his order on 31/01/2020. These facts collectively go to prove that the entire reasons recorded by the ld. AO for A.Y.2012-13 is without any basis and is merely decided on suspicion, surmise and conjecture not supported by any tangible material. In any case, as stated earlier, no addition has been made by the ld. AO in the re-assessment proceedings with regard to the issue for assessment has been reopened. Hence, as stated earlier, the very basic premise of the ld. AO that he had reason to believe regarding escapement of income in the hands of the assessee, miserably fails. Thus the re-assessment is hereby quashed. - Decided in favour of assessee. Effect of rectification of mistake u/s.154 - We hold that the order passed u/s.154 is only to rectify an error that is already prevailing in the previous order. Hence, the rectified order will take effect from the date of original order i.e. in this case, the re-assessment order dated 19/03/2020. Accordingly, it could be safely concluded that in the re-assessment order dated 19/03/2020, AO could not have made any transfer pricing adjustment and actually not made any transfer pricing adjustment with regard to purchase transactions from Aster DMCC Dubai. Reliance in this regard is placed on the decision in the case of S. Arthanari 1971 (3) TMI 14 - MADRAS HIGH COURT wherein the Hon‟ble High Court by placing reliance on yet another decision of the Hon‟ble Madras High Court in the case of Vedantham Raghaviah 1963 (3) TMI 64 - MADRAS HIGH COURT had held once an order of rectification is passed, the assessment itself is modified and what remains is not the order of rectification, but only the assessment as rectified. No addition for an issue for which assessment has been reopened has been ultimately made by the ld. AO in the re-assessment proceedings dated 19/03/2020. Hence, the basic formation of belief for the AO that income of the assessee has escaped assessment, fails. For the elaborate reasoning given by us for A.Y.2012-13 hereinabove by placing reliance on various judgments, we quash the re-assessment proceedings framed for the A.Y.2015-16 also. Since the entire re-assessment proceeding is quashed, the other grounds raised by the assessee on merits, need not be adjudicated and they are left open. Appeal of the assessee for A.Y.2015-16 is allowed.

Summary

Issues Involved:
1. Validity of jurisdiction under Section 147 of the Income Tax Act for reopening the assessment.
2. Disallowance of loss on trading of gold jewellery.
3. Transfer pricing adjustment in respect of import of goods from Aster DMCC, Dubai.

Detailed Analysis:

Issue 1: Validity of Jurisdiction under Section 147 of the Income Tax Act for Reopening the Assessment
Assessment Year 2012-13:
The assessee challenged the validity of the jurisdiction under Section 147 for reopening the assessment. The original return of income declared a total income of Rs.35,43,40,796, later revised to Rs.32,38,18,010, and the assessment was completed under Section 143(3) determining total income at Rs.55,73,37,763. The case was reopened based on findings from a survey under Section 133A, which alleged that the assessee was involved in over-invoicing imports of pulses from Aster DMCC, Dubai, thereby reducing profits in India.

However, the final assessment order did not make any disallowance or addition on account of overpricing of import of pulses. The only disallowance made was related to the loss on trading in gold jewellery. The Tribunal concluded that since no addition was made for the issue for which the assessment was reopened, the entire satisfaction of the AO for "reason to believe" and "formation of belief" fails. This conclusion was supported by the jurisdictional High Court's decision in CIT vs. Jet Airways (I) Ltd. and other precedents. Consequently, the reassessment proceedings were quashed.

Assessment Year 2015-16:
Similar to A.Y. 2012-13, the validity of the jurisdiction under Section 147 was challenged. The original return declared a total income of Rs.110,09,98,710, later revised to Rs.114,60,11,490. The case was reopened based on similar reasons as A.Y. 2012-13. The TPO initially made a transfer pricing adjustment of Rs.33,46,92,911, which was later rectified to Rs.18,89,29,419 and eventually brought to nil after considering the tolerance band.

The Tribunal held that since the primary basis of escapement of income (overpricing of imports from Aster DMCC) was ultimately not added by the AO, the reopening of the assessment was invalid. The Tribunal relied on the principle that rectified orders take effect from the date of the original order, as supported by the Madras High Court in S. Arthanari vs. ITO and the Calcutta High Court in Jeewanlal (1929) Ltd. vs. Additional Commissioner of Income Tax. Consequently, the reassessment proceedings for A.Y. 2015-16 were also quashed.

Issue 2: Disallowance of Loss on Trading of Gold Jewellery
Assessment Year 2012-13:
The reassessment proceedings included a disallowance of Rs.30,30,72,108 on account of loss on trading in gold jewellery. However, since the reassessment proceedings were quashed on jurisdictional grounds, the Tribunal did not adjudicate on the merits of this disallowance and left it open.

Issue 3: Transfer Pricing Adjustment in Respect of Import of Goods from Aster DMCC, Dubai
Assessment Year 2015-16:
The TPO initially made a transfer pricing adjustment of Rs.33,46,92,911, which was later rectified to Rs.18,89,29,419, and eventually brought to nil after considering the tolerance band. The Tribunal concluded that since the primary issue for reopening the assessment was not sustained, the reassessment proceedings were invalid. Therefore, the transfer pricing adjustment was not upheld.

Conclusion:
The Tribunal quashed the reassessment proceedings for both A.Y. 2012-13 and A.Y. 2015-16 on the grounds of invalid jurisdiction under Section 147, as the issues for which the assessments were reopened were not sustained in the final orders. The disallowance of loss on trading of gold jewellery for A.Y. 2012-13 was not adjudicated on merits due to the quashing of the reassessment proceedings. The transfer pricing adjustment for A.Y. 2015-16 was also not upheld as the reassessment proceedings were invalidated.