2021 (10) TMI 361 - HC - Income Tax

Reopening of assessment u/s 147 - whether the revenue is justified in reopening the assessment for the year under consideration? - determining the Arm s Length Price of the international transactions entered into by the assessee with its associated enterprises - HELD THAT - The assessee Company had entered into various international transactions with its associated enterprises. Any income arising from international transaction shall be computed having regard to the Arm s Length Price. The original Form No.3CEB under Section 92E of the Act determining the Arm s Length Price of the international transactions entered into by the assessee with its associated enterprises had been submitted physically as well as online with the respondent within the time prescribed by the Act and thereafter, return of income for the year A.Y. 2013-14 was filed and the same was processed under Section 143(1) of the Act and the case was selected for scrutiny assessment under Section 143(2) - also not in dispute that, during the course of proceedings, the AO had called for necessary information by issuing notice under Section 92C read with Section 142(1) of the Act dated 05.02.2016 for the A.Y. 2013-14 and the same was complied with by the assessee vide its letter dated 19.02.2016, whereby, the assessee had furnished a copy of the audit report in Form No.3CEB containing the complete details of international transactions and also submitted Transfer pricing Study report and thereafter, on 18.03.2016, the revised Transfer Pricing Study report and Accountant s report were submitted and finally, the AO has framed the assessment vide its order dated 18.03.2016. Before completion of the scrutiny assessment, the original Accountant s report in Form No.3CEB, Transfer Pricing Study report and revised reports thereof were available on record and it is evident that, the assessee had submitted it in a prescribed time limit. Thus, all the information with regard to international transactions entered into by the assessee with its associated enterprises were placed on record at the time of scrutiny assessment proceedings. On perusal of the reasons recorded, it appears that the AO has recorded to the effect that he could not refer the matter to the Transfer Pricing Officer nor could he examine the issue because of delayed submission of the revised reports - observations recorded by the AO are factually incorrect and contrary to the material evidence on record - while framing the assessment order, it would not reflect that due to non-submission of revised Accountant s report or Form No.3CEB, AO could not determine the Arm s Length Price or refer the issue to the Transfer Pricing Officer. Thus, we find substance in the contention raised by the learned counsel for the writ applicant that, the reasons recorded are factually incorrect and without any basis - Decided in favour of assessee.

Summary

Issues Involved:
1. Legality and jurisdiction of the notice issued under Section 148 of the Income Tax Act, 1961.
2. Validity of the reasons recorded for reopening the assessment.
3. Allegation of income escaping assessment due to international transactions.
4. Application of the principle of "change of opinion" in reassessment proceedings.

Issue-wise Detailed Analysis:

1. Legality and Jurisdiction of the Notice Issued Under Section 148 of the Income Tax Act, 1961:
The writ applicant challenged the notice dated 31.03.2018 issued by the respondent under Section 148 of the Income Tax Act, 1961, seeking to reopen the income tax assessment for the A.Y. 2013-14. The petitioner argued that the notice was "bad in law and without jurisdiction" as the conditions precedent for initiating reassessment proceedings were not complied with. The court examined whether the revenue was justified in reopening the assessment and referred to the provisions of Section 147 of the Act, which require the Assessing Officer (AO) to have "reason to believe" that any income chargeable to tax has escaped assessment.

2. Validity of the Reasons Recorded for Reopening the Assessment:
The reasons recorded by the AO for reopening the assessment stated that the assessee had exported goods to its Associated Enterprises (AEs) at a lower price than to unrelated parties. The AO noted that the Transfer Pricing (TP) study report was submitted late, preventing the AO from referring the matter to the Transfer Pricing Officer (TPO) or examining the issue. The petitioner contended that the reasons were factually incorrect, as the necessary reports were submitted within the prescribed time, and the AO consciously chose not to refer the issue to the TPO based on Circular No. 3/2016. The court found that the AO's observations were "factually incorrect and contrary to the material evidence on record."

3. Allegation of Income Escaping Assessment Due to International Transactions:
The AO alleged that income had escaped assessment because the average rate of sales to AEs was much lower than the rate to unrelated parties. The court noted that during the original assessment proceedings, all necessary information, including Form No. 3CEB and the TP study report, was submitted. The AO, relying on Circular No. 3/2016, chose not to refer the issue to the TPO. The court found that the AO's decision not to examine the issue was a conscious one and that the reasons recorded for reopening the assessment were "without any basis."

4. Application of the Principle of "Change of Opinion" in Reassessment Proceedings:
The petitioner argued that the reassessment proceedings were based on a mere change of opinion, which is not permissible. The court referred to the Supreme Court's decision in CIT Vs. Kelvinator of India Ltd., which held that the AO must have "tangible material" to justify reopening an assessment and that a mere change of opinion does not confer jurisdiction to initiate reassessment proceedings. The court found that the AO had not discovered any new tangible material after the original assessment and that the reassessment was based on the same set of facts, amounting to a change of opinion.

Conclusion:
The court concluded that the reasons recorded for reassessment did not justify the formation of a belief that income had escaped assessment. The notice dated 31.03.2018 was deemed unsustainable and was quashed. The writ application was allowed, and the impugned notice was set aside.