2023 (12) TMI 1135 - HC - Income Tax

Validity of reopening of assessment u/s 147 - reasons to believe - change in opinion - Whether the petitioner assessee has failed to disclose fully and truly all material facts necessary for assessment ? - admissibility of deduction under Section 10A - Whether the petitioner assessee has failed to disclose fully and truly all material facts necessary for assessment? - HELD THAT - There has been declaration including of expenditure relating to providing technical services. Once such primary facts have been declared and the assessee had made the declaration and claimed deduction under Section 10A of the I.T. Act, there was no further obligation on the assessee. If the Assessing Officer was of the view that details furnished would fall within Section 80HHE and not under Section 10A of the I.T. Act and accordingly, assessee was not entitled to claim such expenditure under Section 10A of the I.T. Act, the non-drawing of such legal inference by the assessing officer at the relevant point of time cannot result in holding that there is no true and full disclosure of primary facts. Whether the re-assessment notice u/s 147 r/w Section 148 of the I.T. Act is merely a product of change in opinion and accordingly is impermissible in law? - A perusal of Section 148 of I.T. Act, the notice along with the reasons for reopening make it clear that the tangible material relied upon are the MSA s, Works contracts/SCW s, Invoices and other details relating to the deduction claimed under Section 10A of the I.T. Act. All of which is stated to have come to the notice of the Department relating to the Assessment Year 2008-2009. However, even on a perusal of para-2.10 of the Assessment Order relating to the Assessment Year 2008- 2009, the assessee as has been asked on innumerable occasions to submit MSAs and SOWs that it had with its clients the assessee has only been able to provide some of the sample MSAs and SOWs . Similar observation is made at para-2.12, which reads as follows, the assessee has not been able to submit all the SOWs and MSAs entered for software contract services . The finding by the Assessing Authority is by placing the burden on the assessee regarding correlation between the MSA, SOW/ work order vis-a-vis work carried out by STP/SCZ unit. Thus the tangible material sought to be relied upon itself not being complete, it cannot be held that the MSAs and SCWs would demonstrate that the declaration made by the assessee leads to a conclusion that there has been escapement of income. It is also a settled position that reassessment proceedings cannot be in the nature of review and accordingly, the material as has come to light in the assessment proceedings for the Assessment Year 2008- 2009 cannot be a sufficient ground to resort to reassessment proceedings. Whether the re-assessment notice u/s 147 r/w Section 148 amounts to borrowed satisfaction as it places reliance on findings recorded in the assessment proceedings recorded in the Assessment Year 2008-2009? - The jurisdictional requirement under Section 147 of the I.T. Act for re-assessment requires the assessing officer to entertain reasons to believe that income chargeable to tax has escaped assessment . It is clear that the reason to believe has to be entertained by the Assessing Officer by forming an opinion himself. Clearly, reasons for reopening rests on the satisfaction of the Assessing Officer who has passed an Assessment Order for the Assessment Year 2008-09 which would amount to substitution of the assessment orders of reasons to believe by borrowed satisfaction of the Assessing Officer who has passed an order for the year 2008-09 which is impermissible in law. Whether the bar under third Proviso to Section 147 of the I.T. Act is a legal impediment insofar as the present re-assessment notice is concerned? - In the above context and looking into the bar under the third proviso to Section 147, the object being to prohibit proceedings u/s 148, when appeal/revision/reference is pending, in the present case, taking note of the details in the Table above, more particularly, noticing pendency of appeals in Column No.(4) as on the date of Section 148 notice, clearly, notice under Section 148 was hit by the bar under third proviso to Section 147 of I.T. Act. Computation of deduction u/s 10A - Assessment Year 2006-2007 - HELD THAT - The nexus between the technical services rendered and the STP which is necessary for an allowable deduction u/s 10A is a legal requirement and existence of such nexus is a conclusion to be arrived at by the AO. Once the primary facts regarding providing of technical services outside India is made out, there would end the duty of the assessee and the question of nexus is a matter that the Assessing Officer ought to have clarified by further investigation. The reliance on documents that has come out as regards the proceedings for the Assessment Year 2008-2009 by way of MSAs, Work Contracts, SCWs and Invoices cannot be sufficient by itself to initiate proceedings for deduction under Section 10A of the I.T. Act in light of absence of nexus. If that were to be so, as the reliance on such documents for the purpose of reducing Section 10A of I.T. Act, the deduction for Assessment Year 2008-2009, itself has not attained finality and is subject to appeal as averred by the petitioner in the pleadings which remains uncontroverted. If that were to be so, the material relied upon in assessment proceedings for the Assessment Year 2008-2009 not having been finally adjudicated so as to indicate requirement to reduce Section 10A deduction, the same cannot be made use of for reassessment proceedings. The requirement that there must be true and full disclosure cannot be stated to have been breached by taking recourse to the material produced during the Assessment Year 2008-2009 as such conclusion for the Assessment Year 2008-2009 leading to reduction in Section 10A deduction itself is a subject matter of further adjudication. Implication of Circular No. 1/2013 F.No.178/84/2012 - ITA.I - Government of India, Ministry of Finance, Department of Revenue, CBDT dated 17.01.2013. - It is clear that the clarification stipulates that the benefits under Section 10A deductions can be availed of, if there exists a direct and intimate nexus or connection between the development of software abroad with the eligible units setup in India. Though the clarification is issued on 17.01.2013, whereas the said circular is only clarificatory and does not confer any new benefit and hence can be made use of to interpret the scope of deduction under Section 10A of the I.T. The conclusion arrived at by the Assessing Officer for the Assessment Years 2005-2006, 2006-2007 and 2007-2008, when examined from the point of view of the Circular would strengthen the case of upholding deduction under Section 10A of the I.T. Act and would indicate that the resort to a review by recourse to Section 148 of the I.T. Act in the guise of reassessment would be a futile exercise.

Summary

Issues Involved:

1. Whether the petitioner assessee failed to "disclose fully and truly all material facts necessary for assessment"?
2. Whether the re-assessment notice under Section 147 r/w Section 148 of the I.T. Act is merely a product of change in opinion and accordingly is impermissible in law?
3. Whether the re-assessment notice under Section 147 r/w Section 148 amounts to borrowed satisfaction as it places reliance on findings recorded in the assessment proceedings recorded in the Assessment Year 2008-2009?
4. Whether the bar under third Proviso to Section 147 of the I.T. Act is a legal impediment insofar as the present re-assessment notice is concerned?

Summary:

Issue 1: Failure to Disclose Fully and Truly All Material Facts Necessary for Assessment
The court examined whether the petitioner had failed to disclose all material facts necessary for assessment. The petitioner's regular assessment for the relevant years was concluded under Section 143(3) of the I.T. Act, and the petitioner's claim for deduction under Section 10A was allowed. However, the Commissioner of Income Tax initiated proceedings under Section 263, directing the Assessing Officer to re-examine the claim for deduction under Section 10A/80HHE. The Assessing Officer made further disallowances after examining the matter afresh. The petitioner contended that all primary facts were disclosed, and it was the duty of the Assessing Officer to draw inferences from those facts. The court agreed with the petitioner, citing the Supreme Court's ruling in Calcutta Discount Company Ltd. v. Income Tax Officer, which stated that the duty of the assessee is to disclose fully and truly all primary relevant facts, but not to disclose inferences.

Issue 2: Change in Opinion
The court examined whether the re-assessment notice was based on a mere change of opinion. The petitioner argued that the very aspect of profits from rendering technical services in the context of the export of computer software had been examined and decided upon in the original assessment. The court referred to the Supreme Court's ruling in Commissioner of Income Tax, Delhi v. Kelvinator of India Ltd., which reiterated that mere change of opinion cannot be a ground for reopening concluded assessments. The court found that the reassessment was indeed based on a change of opinion, as the Assessing Officer had already considered the expenditure incurred in providing technical services outside India in the original assessment.

Issue 3: Borrowed Satisfaction
The court examined whether the re-assessment notice amounted to borrowed satisfaction, relying on findings from the assessment proceedings for the Assessment Year 2008-2009. The court found that the reasons for reopening were based on the satisfaction of the Assessing Officer who passed the Assessment Order for the Assessment Year 2008-09, which amounted to borrowed satisfaction. The court held that this was impermissible in law, as the jurisdictional requirement under Section 147 requires the Assessing Officer to entertain reasons to believe that income chargeable to tax has escaped assessment.

Issue 4: Bar under Third Proviso to Section 147
The court examined whether the bar under the third proviso to Section 147 was a legal impediment to the re-assessment notice. The third proviso prohibits proceedings under Section 148 when an appeal, revision, or reference is pending. The court found that as on the date of the Section 148 notice, appeals were pending for the relevant assessment years. Therefore, the re-assessment notices were hit by the bar under the third proviso to Section 147.

Implication of Circular No. 1/2013
The court also considered Circular No. 1/2013, which clarified issues relating to the export of computer software. The circular stated that tax benefits under Sections 10A, 10AA, and 10B would not be denied merely on the ground that a separate and specific Master Service Agreement (MSA) does not exist for each Statement of Work (SOW). The court found that the circular further clarified the scope of allowable deductions under Section 10A and supported the petitioner's case.

Conclusion:
The court set aside the re-assessment notices and the orders rejecting the petitioner's objections for the Assessment Years 2005-2006, 2006-2007, and 2007-2008.