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2012 (3) TMI 244 - HC - Income TaxValidity of notice issued u/s 148 for re-opening of assessment when jurisdiction was founded merely on the possibility of escapement asseseee being Singapore Company had business of investment in Indian securities electronically annexure less return of NIL income filed in accordance with provisions of DTAA between India and Singapore several notes annexed to the return of Income making relevant disclosures A.O. sought to reopen assessment on ground that petitioner is FII and section 115AD would be attracted and short term capital gains may have arose A.Y. 2006-07 - Held that - It is settled principle of law that when the A.O. issues a notice u/s 148, at that stage the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief and validity of the notice u/s 148 has to be determined on the basis of the reasons which are disclosed to the assessee. Those reasons constitute the foundation of the action initiated by the A.O. of reopening the assessment. Those reasons cannot be supplemented or improved upon subsequently. In present case, attention of A.O. was drawn to the fact that assessee is not FII and it would be evident that the A.O. has not acted within his jurisdiction in purporting to reopen the assessment. Also A.O. was not entitled, when he disposed of the objections to travel beyond the ambit of the reasons which were disclosed to the assessee. See CIT v. Kelvinator of India Ltd (2010 - TMI - 35201 - Supreme Court Of India) Decided in favor of assessee.
Issues Involved:
1. Legality of reopening the assessment under Section 148 of the Income Tax Act, 1961. 2. Validity of the reasons provided for reopening the assessment. 3. Application of Section 115AD concerning Foreign Institutional Investors (FIIs). 4. Compliance with the Double Taxation Avoidance Agreement (DTAA) between India and Singapore. 5. Adequacy of disclosure by the assessee in the return of income. Detailed Analysis: 1. Legality of Reopening the Assessment under Section 148: The Assessing Officer issued a notice on 16 March 2011 to reopen the assessment for the Assessment Year 2006-07 under Section 148 of the Income Tax Act, 1961. The assessee challenged this notice and the subsequent order disposing of their objections, arguing that there was no tangible material to justify the reopening. The court emphasized that the reopening of an assessment must be based on "reason to believe" and not on mere suspicion. It was found that the Assessing Officer's action was based on the possibility of income escapement without concrete evidence, thus failing the test of tangible material required for reopening. 2. Validity of the Reasons Provided for Reopening the Assessment: The reasons for reopening the assessment were primarily two-fold: - The assumption that the assessee was a Foreign Institutional Investor (FII) or a sub-account of an FII, which would subject it to taxation under Section 115AD. - The possibility that the assessee had realized short-term capital gains. The assessee clarified that it was neither an FII nor a sub-account of an FII, and that all investments were held for more than twelve months, thereby not resulting in short-term capital gains. The court found that the Assessing Officer did not dispute these clarifications and yet proceeded with the reopening, which indicated a lack of valid grounds. 3. Application of Section 115AD Concerning FIIs: The court examined whether the provisions of Section 115AD, which apply to FIIs, were relevant to the assessee. It was established that the assessee was not an FII or a sub-account of an FII, and hence, Section 115AD was not applicable. The Assessing Officer's reliance on this section to justify the reopening was found to be misplaced. 4. Compliance with the Double Taxation Avoidance Agreement (DTAA) Between India and Singapore: The assessee, being a tax resident of Singapore, claimed relief under the DTAA between India and Singapore. According to Article 7 of the DTAA, business profits are taxable only in Singapore unless the business is conducted through a permanent establishment in India. The assessee had no permanent establishment in India, and thus, its profits from Indian securities were not taxable in India. The court upheld this position, noting that the assessee had made full disclosure in its return of income. 5. Adequacy of Disclosure by the Assessee in the Return of Income: The court reviewed the disclosures made by the assessee in its return of income, which included detailed notes explaining its tax position under the DTAA. Despite the Assessing Officer's claim of inadequate disclosure, the court found that the assessee had complied with the requirements, especially given the electronic filing system's limitations at the time, which did not allow for attachments. The court concluded that the Assessing Officer's rejection of the objections based on alleged sketchy details was unjustified. Conclusion: The court quashed the notice dated 16 March 2011 and the order dated 20 December 2011, finding that the reopening of the assessment lacked tangible material and was based on incorrect assumptions. The exercise of jurisdiction under Section 147 and Section 148 was deemed invalid, and the rule was made absolute in favor of the assessee. No order as to costs was made.
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