2022 (5) TMI 326 - AT - Income Tax

Reopening of assessment u/s 147 - AO was of the opinion that the assessee was having business connection as well as Permanent Establishment PE in India and the PE was engaged in activities which cannot be termed as auxiliary and preparatory - HELD THAT - We find that in the appeals under challenge before us, the assessee had raised specific objections to the notice issued u/s 148 of the Act qua the reasons recorded therein. Therefore, the findings of the Tribunal given on specific facts of those Assessment Years are totally distinguishable on the facts of the years under consideration. As mentioned elsewhere, in the reasons recorded for reopening the assessment, we do not find any mention of any expat employee present during the relevant year nor there is any mention of such employees in the assessment order. In our considered opinion, there needs to be close nexus between the material before the Assessing Officer and the belief which he has formed. The Hon'ble Supreme Court in the case of Ganga Saran Sons 1981 (4) TMI 5 - SUPREME COURT has remarked The words has reason to believe are stronger than the words is satisfied. . The belief entertained by the Income Tax Officer must not be arbitrary or irrational. It must be reasonable or, in other words, it must be based on reasons which are relevant and material. We are of the view that the belief of the Assessing Officer is a condition precedent for assuming jurisdiction and without such belief, the Assessing Officer would not have jurisdiction to initiate proceedings u/s 147 of the Act. We are of the view that the fulfillment of this condition is not a mere formality but it is mandatory and failure to fulfill that condition would vitiate the entire proceedings. We find that there is no rationale connection between the information in the possession with the Assessing Officer and formation of belief that there has been escapement of income for Assessment Years 2008-09 to 2011-12. On a perusal of the assessment order/DRP order, we find that strong reliance has been placed on various documents found during the course of survey which was carried out at the premises of General Electric International Operations India Liaison Office on 02.03.2007 whereas the assessment orders under challenge pertain to Assessment Years 2008-09 to 2011-12. Therefore, evidence being sought to be used for initiating fresh enquiry against the assessee does not even pertain to the Assessment Year under consideration. In our considered opinion, whether a PE exists or not is a fact specific issue and is to be decided on year on year basis. We are of the considerAssessment Years under challenge, no new tangible material has been brought by the Assessing Officer to justify the reopening and as mentioned elsewhere, the reason why reopening was upheld by this Tribunal in Assessment Year 2001-02 which was followed by it in subsequent years i.e. 2002-03 to 2006-07 are totally distinguishable, in as much as, in those years in the reasons itself, as mentioned elsewhere, the Assessing Officer had given specific findings in respect of expat employees present in India, which fact finding is absent in the Assessment Years under consideration. Reasons for reopening the assessment cannot be improved in the body of the assessment order. Appeal of assessee allowed.

Issues Involved:
1. Validity of initiation of proceedings under Sections 147/148 of the Income Tax Act.
2. Existence of a Permanent Establishment (PE) in India.
3. Attribution of income to the PE.
4. Chargeability of interest under Section 234B of the Act.

Issue-wise Detailed Analysis:

1. Validity of initiation of proceedings under Sections 147/148 of the Income Tax Act:
The primary issue in these appeals was whether the Dispute Resolution Panel (DRP) erred in upholding the action of the Assessing Officer (AO) in initiating proceedings under Sections 147/148 without any material to form a belief that income had escaped assessment. The Tribunal noted that the AO’s reasons for reopening the assessment were heavily influenced by previous assessment orders for the years 2006-07 and 2002-03 to 2005-06. The AO relied on the fact that the assessee had a business connection and a Permanent Establishment (PE) in India, and that the PE was engaged in non-auxiliary and non-preparatory activities. The Tribunal found that the AO did not provide specific facts or tangible material evidence pertaining to the assessment years under challenge (2008-09 to 2011-12). The Tribunal emphasized that there must be a direct nexus or live link between the material before the AO and the belief that income had escaped assessment. Citing the Supreme Court's decision in Ganga Saran & Sons, the Tribunal held that the belief must be reasonable and based on relevant material. The Tribunal concluded that the AO’s belief was arbitrary and without new tangible material, thus vitiating the entire proceedings.

2. Existence of a Permanent Establishment (PE) in India:
The AO's conclusion that the assessee had a PE in India was based on the presence of expatriate employees and the involvement of GE India Industrial Pvt. Ltd. (GEIIPL) in local marketing support. However, the Tribunal found that there was no mention of any expatriate employees during the relevant assessment years in the reasons recorded for reopening the assessment. The Tribunal emphasized that the existence of a PE is a fact-specific issue that must be decided on a year-by-year basis. The Tribunal noted that the AO’s reliance on the presence of expatriate employees in earlier years was not sufficient to establish a PE for the assessment years under consideration.

3. Attribution of income to the PE:
The AO attributed 2.625% of the total sales in India to the PE based on previous assessments. However, the Tribunal found that there was no new tangible material to justify this attribution for the assessment years under consideration. The Tribunal highlighted that each assessment year is separate, and the findings from one year cannot be automatically applied to subsequent years without specific evidence. The Tribunal concluded that the AO failed to provide a rationale connection between the information in his possession and the formation of belief that income had escaped assessment for the relevant years.

4. Chargeability of interest under Section 234B of the Act:
The Tribunal did not find it necessary to dwell into the merits of the case regarding the chargeability of interest under Section 234B, as it had already quashed the assessment order. The Tribunal noted that the reopening of the assessment was not justified, and therefore, the subsequent orders were also invalid.

Conclusion:
The Tribunal quashed the notice issued under Section 148 and the orders consequent to such notice, as the AO failed to provide new tangible material to justify the reopening of the assessment. The Tribunal allowed all four appeals of the assessee, emphasizing the need for a direct nexus between the material before the AO and the belief that income had escaped assessment. The Tribunal also highlighted that each assessment year is separate and must be decided based on specific evidence for that year.

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