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TMI Blog2021 (7) TMI 348X X X X Extracts X X X X X X X X Extracts X X X X ..... the material that was always available on record, and by this route conclude that the assessee s income chargeable to tax has escaped assessment. [See Commissioner of Income-tax, Delhi vs. Kelvinator of India Ltd. , [ 2010 (1) TMI 11 - SUPREME COURT] Grant of approval under Section 151 for issuance of notice under Section 148 - Given this backdrop, the ACIT while giving approval under Section 148 of the Act, ought to have applied his mind, to the crucial question as to whether any new or fresh facts had come to the notice of the AO for triggering the provisions of Section 147/148 of the Act. The ACIT, on the other hand, mechanically replicated the language of the provision [i.e., Section 151 of the Act] by making the aforesaid endorsement in both cases - Given this backdrop, the ACIT while giving approval under Section 148 of the Act, ought to have applied his mind, to the crucial question as to whether any new or fresh facts had come to the notice of the AO for triggering the provisions of Section 147/148 of the Act. The ACIT, on the other hand, mechanically replicated the language of the provision [i.e., Section 151 of the Act] by making the aforesaid endorsement in both cases - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii. orders dated 24.09.2018, whereby the objections filed by the petitioners to the impugned reasons were disposed of by the AO. 3. Since the facts in both cases are similar, the above-captioned writ petitions are being disposed of via a common judgement. 3.1. The aforementioned orders concern the assessment year [in short "A.Y."] 2013-2014. 3.2. Before we set forth the core issues, which arise for consideration, in the above-captioned writ petitions, which are similar, it would be convenient, to outline, in detail, the facts and circumstances obtaining in one of the writ petitions, i.e., W.P. (C) 10939/2018 instituted by ESSA. We may note that counsel for the parties were agreed that the decision in W.P. (C) 10939/2018 would apply mutatis mutandis to the other writ petition as well, i.e., W.P. (C) 10940/2018. Background facts pertaining to W.P. (C) 10939/2018: 4. ESSA is a partnership firm established under the laws of Mauritius. The two partners in ESSA are ESPN Mauritius Ltd. [now known as Worldwide Wickets, Mauritius]; an entity incorporated in Mauritius and having 99.9% share in the profits of ESSA. While the other partner, i.e., ESPN Network Pte Ltd.; incorporated in Sin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated 05.09.2016, inter alia, informed the AO the following. "3. During the year, the assessee has reported the following International transactions in the Form 3CEB: International Transaction Amount Receipt for [the] acquisition of Advertisement airtime inventory 2,586,079,609 4. The transfer pricing documentation which contains the functional and economic analysis along with other details has been examined and placed on record. This is a flipside case and the Indian company i.e. M/s Star Sports India Pvt. Ltd. (Formerly Known as ESPN Software India Pvt. Ltd.) is subject to TP Audit. The TP issues that arise in the international transaction between the assessee and its AE are being examined in the case of the AE. Accordingly, necessary action, if any, is being taken in the case of AE." 5.3. Unknown to the TPO who passed the order dated 05.09.2016, concerning ESSA, the TPO dealing with the Associated Enterprise [in short "AE"] referred to in the order dated 05.09.2016, i.e., SSIPL had the international transactions examined to determine the ALP. After examination of the transfer pricing documentation submitted by SSIPL, containing functional and economic analysis as presc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eing aggrieved, ESSA filed objections with the Dispute Resolution Panel [in short "DRP"], on 01.02.2017. A copy of the said objections was filed with the AO on the succeeding day, i.e., 02.02.2017. The DRP disposed of the objections vide order dated 11.09.2017, wherein it concluded that it did not have jurisdiction in the matter as ESSA was not an "eligible assessee" within the meaning of Section 144C(15)(b) of the Act [as it stood on that date], as neither the TPO had proposed any variation in its income and nor was ESSA a foreign company. Consequently, the DRP declined to issue any directions in the matter and dismissed the proceedings without considering other grounds of objections taken by ESSA. 6. Faced with this situation, the AO, employed a different approach and as it appears took steps for initiating proceedings against ESSA under Section 147 of the Act. As per the respondent, a note was generated on 20.03.2018 for recording reasons for initiating proceedings under Section 147 of the Act. Pertinently, this note proffers the following reasons for initiating reassessment proceedings. "During the year under consideration, the Assessee received gross advertising r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3,883/- qua AY 2013-2014 had escaped assessment. Thus, according to the said notice, the AO proposed to assess/reassess the ESSA's income/loss for the said AY, and therefore, required it to deliver a return within 30 days in the prescribed form. 7.1. ESSA responded to the aforesaid notice vide reply dated 25.04.2018. Via the said reply, ESSA indicated, in no uncertain terms, that the AO should treat the return originally filed by it as a return filed in response to the notice issued under Section 148 of the Act. Besides this, ESSA also sought reasons for initiating proceedings under Section 147 of the Act in line with the judgement of the Supreme Court rendered in GKN Driveshafts (India) Ltd. vs. ITO, [2003] 259 ITR 19 (SC). 7.2. The AO complied with the request. The reasons which were said to have been recorded by the AO, as noted above, on 20.03.2018, were received by ESSA on 29.06.2018, via e-mail. On 02.08.2018, ESSA filed its objections with the AO. The objections were disposed of by the AO, as noted above, vide order dated 24.09.2018; this order was received by ESSA via email dated 25.09.2018. 7.3. On the same day, i.e., 25.09.2018, ESSA received a notice under Section 143 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thereto, submissions were filed by ESSD on 29.09.2016. The AO, once again, served a questionnaire on ESSD which was received by it on 08.12.2016 seeking additional information, which, according to ESSD, was furnished by it via communication dated 19.12.2016. 9.6. On 23.12.2016, the AO passed a draft assessment order under Section 144C(1)/143(3) of the Act qua ESSD. The proposed addition to the returned income on account of the subscription fee received by ESSD, which, according to the AO, took the character of royalty was ₹ 4,90,07,43,680/-. A perusal of the draft assessment order would show that the AO has also held that the subscription income received by ESSD was its business income attributable to the PE in India. The AO, however, proposed the alternate route of treating the subscription income as royalty as the net tax effect was higher and therefore beneficial to the revenue. 9.7. Being aggrieved, ESSD filed its objections with the DRP on 01.02.2017. A copy of the same was filed with the AO on 02.02.2017. The DRP, in ESSD's case as well, declined to issue any direction, via its order dated 11.09.2017, as it concluded that ESSD was not an "eligible assessee" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2015 AY 2011-2012 Final assessment order passed under Section 143(3) of the Act and not a draft assessment order as petitioners were not eligible assessees, 10.03.2016 AY 2012-13 Final assessment order passed under Section 143(3) of the Act and not a draft assessment order as petitioners were not found to be eligible assessees, 23.03.2016 AY 2010-2011 This Court quashed the draft and final assessment order as petitioners were not found to be eligible assessees. ii. Secondly, the respondent sought to initiate (re)assessment proceedings, although, such an attempt had been repelled by this Court vide judgment dated 31.10.2017, passed in W.P 11968/2016 and W.P. (C) 11971/2016 [concerning AY 2010-2011] and in W.P. (C) 12031/2016 and W.P. (C) 11972/2016 [concerning AY 2008-2009]. iii. Thirdly, the respondent has chosen repeatedly to raise the issue that ESSA has a PE in India; a reference to which has been made by this Court in its aforementioned judgment dated 31.10.2017. iv. Fourthly, the Income Tax Appellate Tribunal [in short "Tribunal"] has, in at least four AYs, held that the transaction entered into between ESSA and SSIPL is at Arms' Length, and therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me, what was, to begin with, illegal action of the respondent. d) The respondent, after considering the entire material on record, adjudicated, inter alia, on the issue concerning PE (in the case of petitioners) and royalty (in the case of ESSD) in the draft assessment order(s) which was passed under Section 143(3) read with Section 144C of the Act. Once such an order was passed, the concerned officer had completed his part of the assessment proceedings, albeit, as required under Section 144C of the Act in a draft form. e) A draft assessment order is final, once passed, insofar as the AO is concerned, pending the directions that DRP may issue while disposing of the objections filed by the assessee. The AO is bound by the decision that the DRP may take on the objections filed by the assessee. Given the failure of the respondent to act as per the scheme of the statute (and, in not adhering to the decisions of this Court as also the DRP), the respondent could not have formed reasons to believe that the petitioners' income chargeable to tax had escaped assessment. [See Principal Commissioner of Income-tax-6 vs. Moser Baer India Ltd., (2020) 114 taxmann.com 549 (SC), and Coperion Id ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amal Rajpal vs. S.P. Chaliha, (1971) 79 ITR 603 (SC), PCIT vs. NC Cables Ltd., (2017) 391 ITR 11 (Del) and United Electrical CO (P.) Ltd. vs. Commissioner of Income-Tax, (2002) 258 ITR 317 (Del)] Submissions advanced on behalf of the respondent: 12. On behalf of the respondent, arguments were advanced by Ms. Vibhooti Malhotra. Ms. Malhotra argued, broadly, on the following lines. i. An alternate statutory remedy that was equally efficacious was available to the petitioners, and therefore, the instant writ petition should not be entertained. [See: CIT vs. Chhabil Dass Agarwal, (2014) 1 SCC 603] ii. The petitioners have wrongly sought to place reliance on this Court's order dated 23.03.2016 [passed in W.P. (C) Nos. 2384/2015 and 2397/2015 concerning AY 2010-2011]. This Court, via the said order, quashed final assessment orders and reiterated the principle that assessment orders passed contrary to the requirement of Section 144C of the Act are, entirely without jurisdiction. This observation was made by this Court, in the said order, as it took exception to the AO attempting to finalize the assessment; conduct which was found contrary to the principles laid down in the judgement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 147 of the Act. Furthermore, it requires to be emphasized that a draft assessment order is final qua the AO only when assessment jurisdiction is exercised under Section 144C of the Act. vi. Since no final assessment orders were passed, (re)assessment proceedings could have been initiated against the petitioners. [See Deputy Commissioner of Income-tax vs. Zuari Estate Development & Investment Co. Ltd., [2015] 373 ITR 661. vii. The petitioners had raised objections on merits against the draft assessment orders before the DRP; the main issue being, as to whether the advertising revenue (in case of ESSA) and subscription fee received from SSIPL (in case of ESSD) was taxable in the AY in issue, i.e., AY 2013-2014. The DRP has not expressed any view on this aspect. viii. This apart, since no original assessment has been carried out, it was not necessary for the AO to come up with fresh tangible material to form "reasons to believe" that the taxable income of the petitioners had escaped assessment. [See Indu Lata Rangwala vs. Deputy Commissioner of Income-tax, [2016] 384 ITR 337 (Delhi] ix. Since the draft assessment orders did not attain finality, there could be no im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DRP, via its orders dated 11.09.2017, ruled once again, that the petitioners were not eligible assessees within the meaning of Section 144C(15)(b) of the Act, as neither the TPO had proposed a variation in their returned income and nor were they a foreign company, did the AO take recourse to the impugned proceedings. It is pertinent to note, as noticed above, that the DRP had concluded that it did not have jurisdiction in the matter, and therefore, was not inclined to issue any directions in the case. The proceedings qua the petitioners were, accordingly, dismissed. 13.6. What is important, though, is that the draft assessment orders concerning the petitioners, [which were passed vis-à-vis the AY in issue, i.e., AY 20132014] - have been passed under Section 144C(1)/143(3) of the Act. More importantly, in both the draft assessment orders, which are dated 23.12.2016, there is a detailed discussion made as to why the income of the petitioners is attributable to PE in India and in particular, vis-à-vis ESSD, as to why the income received from subscriptions took the character of royalty. Furthermore, the variation in the taxable income proposed, both in the case of ESSA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The question, therefore, which arises for consideration is: whether the respondent can continue with the impugned proceedings based on the same material which was examined and qua which opinion was rendered by the AO while passing the draft assessment orders? 14.3. There can be no dispute that the material that has been used for triggering the impugned proceedings is the same material that was available to the AO while passing the draft assessment orders. The notes which contained reasons for initiating the impugned proceedings make no bones about the fact that the same material has been used. The only argument advanced is that the exercise did not culminate in the passing of the orders under Section 143(3) of the Act. Clearly, the respondent took recourse to Section 147/148 of the Act as she found that she did not have any room to vary the taxable income declared by the petitioners, as proposed, under the provisions of Section 143(3) of the Act. 15. Thus, the moot question, which arises for consideration, is: should the respondent be permitted to assess the petitioners' income chargeable to tax, which, according to the respondent, had escaped assessment in the facts and circums ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or an assessment being conducted and concluded thereon by the Assessing Officer. The provisions of section 147 would have no role to play at this stage of the proceedings. Once a return of income attracts the attention and scrutiny of the Assessing Officer, it is his bounden duty to delve into every aspect thereof. The Assessing Officer is sufficiently empowered to ask for all information necessary for framing the assessment. The only fetter on the amplitude of his discretion is that the assessment must be framed within the time limit set-down by section 153 which, in substance, is two years from the end of the assessment year in which the income was first assessable or one year from the end of the financial year. A perusal of its second sub-section makes it clear that proceedings under section 147 are altogether different to those under section 143. This distinction appears to have escaped the attention of the revenue. Sub-section (2) stipulates that no order under section 147 shall be made after the expiry of one year from the end of the financial year in which notice under section 148 was served. 8. Section 147 of the Income-tax Act deals with the powers of the Assessing Offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own in section 153, this situation can be remedied by the Assessing Officer by invoking section 147. … 9. … However, in the present case since inquiries had been initiated under section 143(2), it became mandatory that they should have culminated in an order under section 143(3). 10. In Trustees of H. E. H. the Nizam's Supplemental Family Trust v. CIT [2000] 242 ITR 381 the Apex Court has observed that it is "settled law that unless the return of income already filed is disposed of, notice for reassessment under section 148 of the Income-tax Act, 1961, cannot be issued, i. e. , no reassessment proceedings can be initiated so long as assessment proceedings pending on the basis of the return already filed are not terminated. … 11. We would arrive at this very destination even if we were to traverse along a different dialectic, namely, if we were to analyse the circumstances in which section 147 of the Income-tax Act could be invoked. There is plenitude of precedents on this aspect of the law; hence only some of them shall be discussed. The question that had arisen before the Bombay High Court in Western Outdoor Interactive (P.) Ltd. v. A. K. Phute, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or discovered by him on the basis of the facts disclosed, or otherwise, the assesssing authority has to draw inferences as to certain other facts. But on the primary facts, it is for the taxing authority to draw inferences. It is not necessary for the assessee to draw inferences for him. See, in this connection, the observations in Calcutta Discount Ltd. 's case (supra). " (p. 967) 12. The Full Bench of this Court in CIT v. Kelvinator of India Ltd. [2002] 256 ITR 1 had opined that the amendments introduced into section 147 with effect from 1-4-1989 have not altered the position that a mere change of opinion of the Assessing Officer was not sufficient ground for embarking on a reassessment. Calcutta Discount was duly considered and applied by the Full Bench. The Full Bench further observed that an order of assessment must be presumed to have been passed by the Assessing Officer concerned after due and proper application of mind. xxx xxx xxx 15. Applying this line of decisions to the facts of the present case, the inescapable conclusion that would have to be reached is that while assessment proceedings remain inchoate, no 'fresh evidence or material' could pos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me. Consequently, the DRP had dismissed the proceedings filed before it. iii. Third, the only reason approval for initiating proceedings under Section 147/148 of the Act was sought to be taken was on account of the draft assessment orders not reaching a logical conclusion. 15.7. Given this backdrop, the ACIT while giving approval under Section 148 of the Act, ought to have applied his mind, to the crucial question as to whether any new or fresh facts had come to the notice of the AO for triggering the provisions of Section 147/148 of the Act. The ACIT, on the other hand, mechanically replicated the language of the provision [i.e., Section 151 of the Act] by making the aforesaid endorsement in both cases. 15.8. What the ACIT forgot was that this endorsement was really his conclusion and the reasons which were to form a link between the material that was placed before him and was required to be appraised by him, were missing. The approval, thus, given by ACIT, in our view, is flawed in law and cannot pass muster. The observations made in Synfonia Tradelinks (P.) Ltd. vs. Income-tax Officer, [2021] 127 taxmann.com 153 (Delhi) being apposite are extracted hereafter. "10. In our v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es much to be desired. It is a case where literally a mere stamp is affixed. It is signed by a Under Secretary underneath a stamped 'Yes' against the column which queried as to whether the approval of the Board had been taken. Rubber stamping of underlying material is hardly a process which can get the imprimatur of this Court as it suggests that the decision has been taken in a mechanical manner. Even if the reasoning set out by the ITO was to be agreed upon, the least, which is expected, is that an appropriate endorsement is made in this behalf setting out brief reasons. Reasons are the link between the material placed on record and the conclusion reached by an authority in respect of an issue, since they help in discerning the manner in which conclusion is reached by the concerned authority. Our opinion is fortified by the decision of the Apex Court in Union of India v. M.L. Capoor and Ors. MANU/SC/0405/1973 : AIR 1974 SC 87 wherein it was observed as under: 27. ... We find considerable force in the submission made on behalf of the Respondents that the "rubber-stamp" reason given mechanically for the supersession of each officer does not amount to "reaso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eeding cannot become the ruse for initiating the proceedings under Section 147/148 of the Act in the absence of new material emerging before the AO which gives the AO reason to believe that assessee's income chargeable to tax had escaped assessment. Conclusion: 19. Thus, for the foregoing reasons, we are of the view that the above-captioned writ petitions would have to be allowed, and consequently, the notices issued under Section 148 of the Act dated 29.03.2018, the underlying reasons contained in the notes dated 20.03.2018, and the orders disposing of the objections dated 24.09.2018 would have to be quashed. It is ordered accordingly. Resultantly, pending applications shall stand closed. 20. There shall, however, be no order as to costs. ----------------- Notes: 1. Section 147 Income escaping assessment. Explanation 2.-For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely:- (a) where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year e ..... X X X X Extracts X X X X X X X X Extracts X X X X
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