2020 (6) TMI 314 - AT - Income Tax

Reassessment proceedings u/s. 147 - proceeding initiated on the basis of an audit objection - HELD THAT - We have found cogent reasons for not appreciating such reopening as an abundant caution by the Revenue only on the basis of an internal audit objection particularly when the same officer himself has objected such reopening on merit; consideration whereof has already been done by him in the original proceeding. As enlightened by the ratio laid down by SHUBHLAXMI PETROHEMICALS 2016 (9) TMI 1571 - ITAT AHMEDABAD in the same set of facts and relying upon the same we find no justification for approving the reassessment proceeding initiated by the Revenue. Hence, the same is found to be devoid of any merit and thus quashed. - Decided in favour of assessee. Order being pronounced after ninety (90) days of hearing - COVID-19 pandemic and lockdown - HELD THAT - Taking note of the extraordinary situation in the light of the COVID-19 pandemic and lockdown, the period of lockdown days need to be excluded. See case of DCIT vs. JSW Limited 2020 (5) TMI 359 - ITAT MUMBAI .

Summary

Issues Involved:

1. Legality of reassessment proceedings under Section 147 of the Income Tax Act, 1961.
2. Disallowance under Section 40(a)(ia) of the Act.
3. Denial of deduction under Section 10A of the Act on the disallowance made under Section 40(a)(ia).

Detailed Analysis:

1. Legality of Reassessment Proceedings under Section 147 of the Income Tax Act, 1961:

The primary issue revolves around the validity of the reassessment proceedings initiated under Section 147 of the Income Tax Act, 1961. The assessee argued that the reassessment proceedings were invalid as they were initiated based on an internal audit objection and beyond the four-year limitation period stipulated by the Act. The reassessment was initiated on 18.03.2015, well after the four-year period from the end of the relevant assessment year (2008-09). The Tribunal noted that the reassessment was based on an internal audit objection dated 04.03.2015, which pointed out that disallowance under Section 40(a)(ia) was not made due to non-deduction of tax at source on payments made to foreign companies. However, the Tribunal found that the reasons for reopening did not indicate any failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. The Tribunal relied on the Delhi High Court judgment in Best Cybercity India Ltd. vs. ITO [2019] 414 ITR 385 (Del), which emphasized that for reopening beyond four years, the reasons must show that the escapement of income was due to the assessee's failure to disclose fully and truly all material facts. The Tribunal concluded that the reassessment proceedings were invalid as they were based on an internal audit objection and not on any fresh material or information suggesting income had escaped assessment.

2. Disallowance under Section 40(a)(ia) of the Act:

The second issue involved the disallowance under Section 40(a)(ia) of the Act. The reassessment included a disallowance of ?20,38,13,871/- under this section due to non-deduction of tax at source on payments made to foreign companies. The assessee contended that these payments were merely reimbursements of expenses and not in the nature of interest, royalty, or fee for technical services, and hence, no TDS was required. The Tribunal noted that the DCIT had also clarified in a letter dated 04.03.2015 that the payments were reimbursements and not subject to TDS. The Tribunal found that the reassessment proceedings were initiated primarily to safeguard the interest of the Revenue based on the internal audit objection, despite the DCIT's clarification. The Tribunal concluded that the disallowance under Section 40(a)(ia) was not justified as the payments were merely reimbursements and not subject to TDS.

3. Denial of Deduction under Section 10A of the Act:

The third issue pertained to the denial of deduction under Section 10A of the Act on the disallowance made under Section 40(a)(ia). The assessee argued that the disallowance under Section 40(a)(ia) should not affect the deduction under Section 10A. The Tribunal did not specifically address this issue in detail, as it had already concluded that the reassessment proceedings and the disallowance under Section 40(a)(ia) were invalid. Consequently, the denial of deduction under Section 10A was also rendered invalid.

Conclusion:

The Tribunal allowed the appeal, quashing the reassessment proceedings and the disallowance under Section 40(a)(ia) of the Act. The Tribunal emphasized that the reassessment proceedings were invalid as they were based on an internal audit objection and initiated beyond the four-year limitation period without any fresh material or information. The Tribunal also concluded that the disallowance under Section 40(a)(ia) was not justified as the payments were merely reimbursements and not subject to TDS. Consequently, the denial of deduction under Section 10A was also rendered invalid. The Tribunal's order was pronounced on 27.05.2020, considering the exceptional circumstances due to the Covid-19 pandemic and the nationwide lockdown.