2023 (3) TMI 484 - HC - Income Tax

Reopening of assessment u/s 148 - review and change of opinion - disallowance with respect to interest expense on the ground that the petitioner had given interest free loan and advances to subsidiaries and other companies - HELD THAT - The pre-requisite conditions of assuming jurisdiction u/s 148 are not satisfied in as much as the AO has failed to specify the material facts that were not truly and fully disclosed by the petitioner that was necessary for the assessment. Upon perusal of all the documents attached with the petition, it is clear that all documentary evidence including books of account as well as statements were submitted by the petitioner and therefore it is nothing but change of opinion which is not permissible under the Act. In regard to what is true and full disclosure by the assessee the following passage from the decision in the case of Income-tax Officer vs. Lakhmani Mewal Das 1976 (3) TMI 1 - SUPREME COURT - there was no failure to disclose any material fact necessary for the assessment by the petitioners. Based upon the reasons recorded, one needs to scrutinize whether there was any tangible material with the AO justifying reopening of the assessment or can it be said to be a case of review and change of opinion by the said officer. On the perusal of the papers and the reasons mentioned in the notice for reopening we find that AO has not mentioned what was the new tangible material to justify the reopening and what was the material fact which was not truly and fully disclosed. The respondent has failed to show why the presumption should not be applied in the present case. It can also be seen from the reasons recorded that there was no new material which had come to the notice of the AO and the entire reference in the reasons recorded is only to the material on record. The respondent no.1 wrongly rejected the aforestated objection of the petitioner by the impugned order dated 25th January 2022. The statement of an employee, during the course of survey of Jet Airways cannot in our view form the basis of assessment. It would clearly amount to a change of opinion. There is no failure on the part of the petitioner to disclose any material facts and consequently the reopening is invalid in view of the proviso of Section 147 of the IT Act. The petitioner was right in charging lower commission rates to its sister concern / related party jet airways India Limited on account of it being a sole selling agent as well as client giving more than 98% of its total turnover. It is business call / decision for a party and is certainly not colourable device / mechanism as contended by the respondents. In fact, if the sister concern / related party namely Jet Airways India Limited which is loss making company were to pay the same rates as paid by other clients of the assessee then such transaction in normal business parlance would have been colourable device or mechanism to increase the expenses of the sister concern, the fact that Jet India Private Limited is a loss making company is not a valid criteria to determine escapement of income. Since this transaction is neither an international transaction nor a specified domestic transaction, the transfer provisions do not apply. We have no hesitation in holding that the reassessment proceedings were nothing but a case of change of opinion , which does not comply with the jurisdictional foundation u/s. 147 of the Act.

Issues Involved:
1. Validity of the notice issued under Section 148 of the Income Tax Act, 1961 for reopening the assessment.
2. Alleged failure to disclose material facts by the petitioner.
3. Whether the reassessment proceedings were based on new tangible material or merely a change of opinion.
4. Applicability of transfer pricing provisions and arm's length principles.
5. Validity of the approval obtained under Section 151 of the Act.

Detailed Analysis:

1. Validity of the Notice Issued Under Section 148:
The petitioner challenged the notice dated 11th March 2021 issued under Section 148 of the Income Tax Act, 1961, seeking to reopen the assessment for AY 2013-14, claiming it was based on the belief that income chargeable to tax had escaped assessment. The petitioner argued that the reassessment proceedings were invalid as the actual reasons recorded for issuing the notice were not provided and that the approval obtained for issuing the notice was not given to the petitioner.

2. Alleged Failure to Disclose Material Facts:
The petitioner contended that all material facts necessary for the assessment were disclosed during the original assessment proceedings, including documentary evidence, books of account, and statements. The court found merit in this contention, stating that the Assessing Officer (AO) failed to specify the material facts that were not disclosed by the petitioner. The court referenced the decision in Income-tax Officer vs. Lakhmani Mewal Das, emphasizing that the duty of the assessee does not extend beyond making a true and full disclosure of primary facts.

3. New Tangible Material vs. Change of Opinion:
The court scrutinized whether there was any new tangible material justifying the reopening of the assessment or if it was merely a change of opinion by the AO. The court noted that the AO did not mention any new tangible material and that the reasons recorded referred only to the material on record. The court referenced the decision in Kelvinator of India Limited, which held that a presumption can be raised that an order of assessment under Section 143(3) is passed on the application of mind. The court concluded that the reassessment proceedings were based on a change of opinion, which is not permissible under the Act.

4. Applicability of Transfer Pricing Provisions and Arm's Length Principles:
The court addressed the respondent's argument that the lower commission rates charged by the petitioner to Jet Airways (a related party) were indicative of a mechanism to lower the tax liability. The court found that the petitioner was justified in charging lower commission rates due to the substantial turnover provided by Jet Airways. The court also noted that the transaction was neither an international transaction nor a specified domestic transaction, and therefore, the transfer pricing provisions did not apply.

5. Validity of the Approval Obtained Under Section 151:
The petitioner argued that no approval was provided, suggesting that no approval was obtained from the appropriate authority. The court found that the AO had not shown why the presumption of proper application of mind should not apply. The court referenced the decision in Ananta Landmark (P.) Ltd. vs. Deputy Commissioner of Income-tax, which stated that the AO must disclose the material fact not truly and fully disclosed by the assessee. The court concluded that the approval obtained for issuing the notice was not valid.

Conclusion:
The court found that the reassessment proceedings were based on a change of opinion and not on any new tangible material. The court set aside the impugned notice dated 11th March 2021 and the impugned order dated 25th January 2022, staying all proceedings in furtherance thereto. The petitions were disposed of with no order as to costs.

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