2024 (8) TMI 759 - HC - Income Tax

Reopening of assessment u/s 148A - reassessment on an order u/s 263 - interest income derived from Non-convertible Debentures NCDs floated by Genpact India Private Limited GIPL had not been appropriately offered to tax due to mischaracterization of income - HELD THAT - As is evident from a reading of the initial notice u/s 148A(b), the respondents had taken the stand that the interest income derived from the NCDs floated by GIPL had not been appropriately offered to tax on account of mischaracterization of income. By the time the Section 148A (d) order came to be passed, the respondents sought to buttress their case of proposed reassessment on an order u/s 263 of the Act passed by the CIT (IT) in the case of Headstrong Consulting Singapore Pte. Ltd. The principal allegation now laid was that although the funds were taken out in the form of interest payments, they were in fact liable to be declared as dividend and subjected to DDT. It is in the aforesaid backdrop that Mr. Jolly had contended that there is an evident and manifest variation between the reasons which had been originally recorded in the notice dated 11 March 2022 and the final order passed by the respondents disposing of the objections of the petitioner on 29 March 2022. The ineffaceable connect which must exist between the reasons initially disclosed proposing reassessment and which constitute the basis for formation of opinion with respect to escapement of income and the final decision to commence reassessment, was an aspect which was duly highlighted by us in our judgment in ATS Infrastructure Limited 2024 (7) TMI 1441 - DELHI HIGH COURT Quite apart from the above, the impugned proceedings are liable to be quashed on a more fundamental ground. Undisputedly, the petitioner had offered the interest income to tax in terms of the provisions contained in Section 194LD of the Act. The ultimate order u/s 148A (d), however, alleges that the remittance in fact, constituted dividend and which was liable to be taxed in terms of Section 115-O of the Act. As is plainly evident from a reading of that provision, DDT is liable to be paid by the company which declares, distributes or pays the same. The petitioner herein was merely the recipient of the interest income and it was thus, clearly not the entity which had either declared or paid the dividend. Viewed in that context, even if the payment were to be assumed to be dividend, the liability to pay tax thereon could have only been foisted upon the company which had declared, distributed or paid the same. That in the facts of the present case and even if the allegation laid by the respondents were to be accepted would have been GIPL. We also note that the issues emanating from the order of the CIT (IT) under Section 263 of the Act presently forms subject matter of challenge in Genpact Consulting Singapore Pte Ltd. While issues relating to the merits and the validity of the view taken by the CIT (IT) would have to be examined in that pending appeal, the same would clearly not sustain the action for reassessment which is impugned herein. Writ petition and quash the impugned notice u/s 148A (b) impugned order u/s 148A (d) and the consequential notice issued u/s 148.

Issues Involved:
1. Validity of the initiation of reassessment proceedings under Section 148A of the Income Tax Act, 1961.
2. Mischaracterization of interest income derived from Non-convertible Debentures (NCDs) and its recharacterization as dividend income.
3. Applicability of the principle of Res Judicata in tax proceedings.
4. Liability to pay Dividend Distribution Tax (DDT) under Section 115-O of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Validity of the initiation of reassessment proceedings under Section 148A of the Income Tax Act, 1961:
The petitioner challenged the initiation of reassessment proceedings for AY 2018-19, which commenced under the impugned order dated 29 March 2022 under Section 148A(d) of the Income Tax Act, 1961, along with the consequential notice dated 30 March 2022 under Section 148. The initial notice under Section 148A(b) dated 11 March 2022 indicated that the interest income from NCDs floated by Genpact India Private Limited (GIPL) had not been appropriately offered to tax due to mischaracterization of income. The petitioner was called upon to show cause why an amount of INR 5,06,00,00,000/- should not be treated as income escaping assessment.

The court observed that the validity of reassessment proceedings must be adjudged based on the reasons initially disclosed in the notice. The court emphasized that the reasons forming the basis for the formation of opinion regarding the escapement of income must be consistent and cannot be supplemented or improved upon subsequently. The court cited the judgment in ATS Infrastructure Limited Vs. Assistant Commissioner of Income Tax Circle 1(1) and Others, which reiterated that the reasons for reassessment must have a live link with the formation of the belief and cannot be based on a mere change of opinion.

2. Mischaracterization of interest income derived from Non-convertible Debentures (NCDs) and its recharacterization as dividend income:
The respondents initially alleged that the interest income derived from NCDs floated by GIPL had not been appropriately offered to tax due to mischaracterization of income. However, by the time the Section 148A(d) order was passed, the respondents relied on an order under Section 263 of the Act passed by the Commissioner of Income Tax (International Taxation)-2, New Delhi (CIT (IT)) in the case of Headstrong Consulting Singapore Pte. Ltd. The principal allegation was that the funds taken out in the form of interest payments were, in fact, liable to be declared as dividend and subjected to DDT.

The court noted the evident and manifest variation between the reasons initially recorded in the notice dated 11 March 2022 and the final order passed on 29 March 2022. The court held that the reasons for reassessment must be consistent and cannot be changed or supplemented subsequently.

3. Applicability of the principle of Res Judicata in tax proceedings:
The petitioner contended that the principle of Res Judicata was inapplicable considering the principle of consistency. The court observed that in taxation proceedings, each Assessment Year (AY) is a separate cause of action, and the concept of Estoppel or Res Judicata does not apply. The court cited the Supreme Court judgment in Joshi Technologies International Inc. v. UOI, which held that even if an erroneous decision was taken in prior years, the Assessing Officer is not precluded from examining the matter afresh in subsequent AYs and taking a correct decision.

4. Liability to pay Dividend Distribution Tax (DDT) under Section 115-O of the Income Tax Act, 1961:
The ultimate order under Section 148A(d) alleged that the remittance constituted a dividend, which was liable to be taxed under Section 115-O of the Act. The court noted that Section 115-O imposes DDT on the company that declares, distributes, or pays the dividend. In this case, the petitioner was merely the recipient of the interest income and was not the entity that declared or paid the dividend. Therefore, the liability to pay tax could only be imposed on GIPL, the company that declared or paid the dividend.

The court also noted that the issues arising from the order of the CIT (IT) under Section 263 of the Act were subject to challenge in a pending appeal (Commissioner of Income Tax (International Taxation)-2 Vs. Genpact Consulting Singapore Pte Ltd.). The court held that the pending appeal did not sustain the action for reassessment impugned in the present case.

Conclusion:
The court allowed the writ petition and quashed the impugned notice under Section 148A(b) dated 11 March 2022, the impugned order under Section 148A(d) dated 29 March 2022, and the consequential notice issued under Section 148 dated 30 March 2022. The court left it open to the respondents to adopt other measures permissible in law.

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