2012 (4) TMI 236 - HC - Income Tax

Present petition challenging re-assessment proceedings u/s 147 and 148 of the Income Tax Act - reasons to belief recorded by the Assessing Officer that on perusal of P&L A/C payment towards software consultation was shown and was remitted to foreign company without deducting tax at source - such charges shall be disallowed and added back in the taxable income assessee contented that payment made for Consultancy Services outside India are not chargeable under this Act as per Section 9(1)(vii) Held that - the AO during the course of the original assessment proceedings had gone into the question whether or not Section 9(1)(vii) of the Act was applicable to payment made by the petitioner and was satisfied with the reply furnished - the assessing officer has power to reopen, provided there is tangible material to come to the conclusion that there is escapement of income from assessment - the present case is of change of opinion as AO in the original assessment proceedings had gone into and examined the said question but accepted the stand of the petitioner- A wrong/incorrect opinion cannot be corrected in 147/148 proceedings but if the decision is erroneous and prejudicial to the interest of the Revenue, it can be corrected in proceedings under Section 263 of the Act - writ petition is allowed and the re-assessment notice is quashed.

Summary

Issues Involved:
1. Validity of reassessment proceedings under Sections 147 and 148 of the Income Tax Act.
2. Applicability of Section 9(1)(vii) concerning payments made to a foreign company.
3. Concept of "reason to believe" and "change of opinion" in reopening assessments.
4. Misinterpretation of audit report and factual inaccuracies in the reassessment notice.

Detailed Analysis:

1. Validity of reassessment proceedings under Sections 147 and 148 of the Income Tax Act:
Artech Infosystems (P) Ltd. challenged the reassessment proceedings initiated for the Assessment Year 2003-04 via notice dated 22.03.2010. The petitioner also contested the order dated 18.11.2010, which dismissed their objections to the reassessment proceedings, referencing the Supreme Court's order in GKN Driveshafts (India) Ltd. Vs. CIT (2003) 259 ITR 19 (SC).

2. Applicability of Section 9(1)(vii) concerning payments made to a foreign company:
The Assessing Officer (AO) recorded that the petitioner had remitted Rs. 2,12,31,472/- to Artex Information System LLC without deducting tax at source, stating that the payments were for consultancy services outside India and not chargeable under the Act. However, the AO asserted that as per Section 9(1)(vii), the consultancy charges should be disallowed and added back to the taxable income since the services were utilized in India.

3. Concept of "reason to believe" and "change of opinion" in reopening assessments:
The AO's "reasons to believe" dated 19.03.2010 indicated that the issue had been examined during the original assessment proceedings, where the AO accepted the petitioner's stand. The Court cited CIT vs. Kelvinator of India Ltd. (2002) 256 ITR 1 (Del) and the Supreme Court's affirmation in Commissioner of Income Tax, Delhi v. Kelvinator of India Limited, (2010) 320 ITR 723(SC), emphasizing that reopening assessments based on a mere change of opinion is not permissible. The Court highlighted that the AO has no power to review but only to reassess, which must be based on tangible material indicating income escapement.

4. Misinterpretation of audit report and factual inaccuracies in the reassessment notice:
The AO's reliance on Form No. 3CD, Sl.No.28(a) was factually incorrect. The audit report related to software purchased from Micrografx, not payments to Artech Information Systems LLC. The Court noted that the AO's reasons for reopening were based on this erroneous interpretation, rendering the reassessment notice invalid.

Conclusion:
The Court concluded that the reassessment proceedings were initiated on a change of opinion and factual inaccuracies. The AO had examined the relevant issues during the original assessment and accepted the petitioner's explanations. Therefore, the reassessment notice dated 22.03.2010 and the impugned order dated 18.11.2010 were quashed, and the writ petition was allowed. No costs were imposed.