S.S. Godara, Judicial Member - The Revenue and assessee have filed these two cross appeals each relating to A.Ys. 2004-05 and 2005-06 arising from two separate orders of the CIT (A)-III, Baroda dated 27th and 29th Ferbuary,2012,in case Nos.CAB/III-170/09-10, and No. CAB/III-171/09-10 respectively, in proceedings u/s. 143(3) r.w.s. 147 of the Income Tax Act, 1961 for short the Act.
2. We find in A.Y. 2004-05 that in its ITA 1038/Ahd/2012 challenge the lower appellate order interalia excluding an entity M/s. Celestial Labs from the array of comparable in ascertaining arms length price, in short 'ALP', of the assessee's international transactions with its associate enterprise. Its second grievance assails correctness of the lower appellate findings allegedly granting + 5 % variation in 'alp' as standard deduction. The assessee's cross appeal ITA 1065/Ahd/2012 raises three substantive grounds interalia challenging validity of reopening on various aspects to be elaborated hereunder, treatment of a sum of Rs.17,31,114/- spent on purchase of library books as capital expenditure and transfer pricing adjustment of Rs.2,08,61,862/-. The transfer pricing officer "the TPO" computed the last adjustment which has been confirmed right upto the CIT (A).
3. We come to assessment year 2005-06. The Revenue's appeal ITA 1039/Ahd/2012 involves identical pleadings as in the preceding assessment year hereinabove. The assessee's grounds in its appeal ITA no.1066/Ahd/2012 raise issues of reopening identical to as in the preceding assessment year and challenge action of the CIT (A) in treating software and library books purchase of Rs.22,03,538/- and Rs.8,93,931/- respectively; as capital expenditure. The last grievance is of transfer pricing adjustment to the tune of Rs.1,95,08,213/-.
It is clear that the assessee's both appeals raise a purely legal ground challenging of validity of reopening in the two assessment years. We proceed to decide the same as it goes to root of the matter. The assessee's appeal ITA no.1065/Ahd/2012 for A.Y,.2004-05 is treated as the lead case.
4. The assessee-company is in petrochemicals research business. It filed its return on 14-10-2004 admitting loss of Rs.2,36,14,400/-. The same was processed u/s. 143(1) on 27-3-2006. Thereafter, the Assessing Officer formed reasons to believe that assessee's income liable to be assessed had escaped assessment. He issued a section 148 notice 17-4- 2007. The assessee sought for reasons thereof. The Assessing Officer furnished the same as under:—
"Reg Sabic Research & Technology P.Ltd. A.Y. 2004-05
Nos. 5 & 6, Savli
GIDC Estate Manjusar - 391 175.
Asst. Year : 2004-2005
PAN AABCS 7650L
REASONS FOR REOPENING THE ASSESSMENT U/S. 147.
[1] In this case, the return of income was filed on 14- 10-2006 showing total loss of Rs.2,36,14,400. The tax payable under MAT was also shown at Rs. Nil.
[2] The return of income was accompanied by audited accounts. In the profit and loss account, the assessee has shown the following incomes:—
|
Research Fees |
Rs. 5,42,35,259 |
|
Exchange Fluctuation-Gain |
Rs. 54,03,639 |
|
Miscellaneous income Total |
Rs. 6,30,344 |
|
Total |
Rs. 6,02,69,242 |
[3] But in the computation of total income, the assessee has excluded the exchange fluctuation gain from the total income as well as from the book profit u/s.115JB. Any gain on account of exchange fluctuation is treated as profit and any loss out of exchange fluctuation is treated as a loss. In this case, the assesses has earned a gain of Rs.54,03,639 on account exchange fluctuation. Therefore this gain should be considered as the assessee's income from the relevant year and should be considered for computing the total income under the normal provisions as well as under MAT.
[4] In view of above, I am satisfied that the income chargeable to tax has escaped assessment within the meaning of section 147 of the Income Tax Act.
[5] 'Issue notice u/s.148 of the Income-tax Act, 1961."
5. The assessee filed a letter dated 19-6-2007 seeking to treat its original return as the one in response to the reopening notice. There is lot of quarrel on this issue as well. The CIT (A) holds the assessee to have filed this letter before the ITO, Ward 4(1), Baroda instead of its Assessing Officer i.e. the DCIT Circle-4 (1), Baroda. Paper book page 49 contains a photo copy of this letter to have been addressed to the DCIT /appropriate Assessing Officer; but containing stamp of the ITO -4 (1). The parties have not raised any argument qua this issue. We do not need to comment much in these circumstances.
6. We proceed further and find that the Assessing Officer framed re-assessment in order dated 21-1-2010 inter alia adding aforesaid foreign exchange gains of Rs.54,03,649/- as income under normal provisions as well as book profits, treated a sum of Rs.19,82,512/- spent on purchase of library books as capital expenditure alongwith an upward "ALP" adjustment of Rs.2,08,61,862/- (supra).
7. The assessee preferred appeal inter alia challenging validity of the reopening as well as the impugned additions on merits. We are dealing with the reopening plea only at present. The CIT (A) has rejected its legal ground as under:—
5. Vide the second ground of appeal, the appellant as stated that the A.O. has erred by carrying out regular assessment under the garb of reassessment. The appellant submitted that the time limit for initiating regular assessment expired on 30-09-2005 and no regular assessment was initiated. Intimation u/s. 143(1) does not amount to an assessment which can be subjected to reassessment. By invoking provisions of Sec.147, A.O. has resorted to make regular assessment and therefore, reassessment is had in law. The third ground of appeal on technical grounds is that the learned Assessing Officer has erred in making reassessment on the issues not indicated in the reasons submitted to the appellant prior to commencement of reassessment. Ld. A.O. has also erred in law by referring the Transfer Pricing Assessment to the T.P.O. in absence of the enabling provisions which in fact came in to force only from 01-04-89 as per the Finance Act 2009. The appellant submitted that the learned Assessing Officer is not permitted to make general inquiries on matters totally unconnected with the issue on which proceedings under section 147 were originally initiated.
5.1 Since these grounds are inter-related, hence, they are adjudicated together.
5.2 Once the assessment is reopened u/s. 147, the entire assessment becomes open and A.O. is free to inquire into all matters related to the assessment. The section 147 has been amended by Finance Act No.2, 2009 with retrospective effect from 01 .04.1989 by which explanation 3 has been inserted which states that for the purpose of assessment or reassessment under this section, the A.O. may assess or reassess the Income in respect of any issue, which has escaped assessment, and such issue comes to his notice subsequently in the course of the proceedings under this section, notwithstanding that the reasons recorded under sub-section(2) of secton148. Thus, the ground nos.2 and 3 of appellant are not correct and are accordingly dismissed.
6. The fourth ground of appeal on technical grounds is that the Learned Assessing Officer has erred by initiating on the issues covered, in reasons for reopening the assessment which were adequately disclosed in return of income as well as notes on accounts appended to Balance sheet filed along with return of income. The appellant submitted that there was no misstatement or non- disclosure on part of appellant on the issues for which re-assessment u/s.147 was initiated.
6.1 In this cast, the assessment has been reopened by issuing the notice u/s 148 on 17.04.2007 which is within a period of 4 years from the end of the A.Y. Moreover, the original return was only processed u/s 143(1) and hence, no opinion had been formed by the A.O. regarding this original return. Therefore, there is no question of change of opinion in this case. Moreover, since the original return was processed u/s. 143(1)(a) only and no order u/s. 143(3) had been passed, hence, he first proviso to section 147 is not applicable in the present case. For this purpose reliance is placed on the decision of the apex court in [2007] 161 TAXMAN 316 (SC), Assistant Commissioner of Income Tax v/s. Rajesh Jhaveri Stock Brokers (P) Ltd. Since the assessment has been reopened by recording reasons for the same by the A.O., hence, it is held that the notice u/s. 148 has been validly issued. Accordingly, this ground of appeal is dismissed."
8. The assessee's first argument is that the impugned reopening amounts to review and not based on any fresh tangible material apart from its Profit and loss account and income computation which were already there on record at the time of section 143(1) processing. Its second argument assails Assessing Officer's forming reasons to believe of escapement of income from being assessed on the ground of impugned foreign exchange gains added as income in re- assessment and deleted in the lower appellate order. The assessee submits that its case is already that of losses being claimed (supra). Thus, there is no question of any such escapement of assessable income. Its third argument refers to some of the relevant facts and particulars i.e. the Assessing Officer recorded reopening reasons on 11-10-2006, issued section 148 notice on 17-4-2007 and made reference to the "TPO" on 26-12-2008. It refers to section 147 Explanation 3 inserted by the Finance Act, 2009 w.e.f. 1-4- 2009. It states that no issue other than the one stated in the reopening reasons ought to have been taken up in the re- assessment proceedings since the above stated explanation does not apply with retrospective effect. More particularly, in view of the fact that the "TPO" reference is prior in point of time than insertion of the new explanation. A catena of case- law is quoted in support. The same would be discussed in succeeding paragraphs. The assessee accordingly prays for quashing of re-opening in its appeal.
9. The Revenue strongly justifies action of the lower authorities on all counts as stated in the CIT (A)'s order. It submits that this reopening is well within 4 years from the end of the impugned assessment year. And the Assessing Officer is accordingly justifies in making all additions indicated hereinabove wherever he found escapement of assessable incomes. The Revenue seeks to draw a distinction between processing of a return u/s. 143(1) and a regular assessment framed u/s. 143(3). It contends that the impugned re- opening is very well in order.
10. We have heard both the parties and gone through the case file. We come to the assessee's first argument. The case file reveals in pages 4 and 13 that it had explained in its computation of income and notes on accounts the reasons for non inclusion of the impugned foreign exchange gains to the fact that the same represented gains on capital account pertaining to its fixed assets. The same was processed u/s. 143(1). The Assessing Officer records reasons of reopening without stating any tangible material in support thereof. Nor it is the Revenue's case of having been discovered any such material. The hon'ble jurisdictional high court in Rasna (P.) Ltd. v. ACIT [SCA 375, dated 9-7-2012] deals with a case of reopening arising from sec. 143(1). It considers landmark judgment ofAsstt. CIT v. Rajesh Jhaveri [2007] 291 ITR 500/161 Taxman 316 (SC), and holds that an Assessing Officer u/s.148 can assume jurisdiction only if he has to reason to believe that any income liable to be assessed has escaped assessment on the basis of tangible material for reopening an assessment, or for that, even section 143(1) processing. The hon'ble Delhi CIT v. Orient Craft Ltd. [2013] 354 ITR 536/215 Taxman 28/29 taxmann.com 392holds in an instance of reopening based in the Assessing Officer's belief of escapement of assessable income processed u/s. 143(1) to be that of review of the earlier proceedings as under:—
"Having regard to the judicial interpretation placed upon the expression "reason to believe", and he continued use of that expression right from 1948 till date, we have to understand the meaning of the expression in exactly the same manner in which it has been understood by the courts. The assumption of the Revenue that somehow the words "reason to believe" have to be understood in a liberal manner where the finality of an intimation under Sec. 143(1) is sought to be disturbed is erroneous and misconceived. As pointed out earlier, there is no warrant for such an assumption because of the language employed in Sec. 147; it makes no distinction between an order passed under sec. 143(3). Therefore, it is not permissible to adopt different standards while interpreting the words "reason to believe" vis-à-vis Sec. 143(1) and sec. 143(3). We are unable to appreciate what permits the Revenue to assume that somehow the same rigorous standards which are applicable in the interpretation of the expression when it is applied to the reopening of an assessment earlier made u/s. 143(3) cannot apply where only intimation was issued earlier u/s. 143(1). It would in effect place an assessee in whose case the return processed u/s. 143(1) in a more vulnerable position that an assessee in whose case there was a full- fledged scrutiny assessment made u/s. 143(3). Whether the return is put to scrutiny or is accepted without demur is not a matter which is within the control of assessee; he has no choice in the matter. The other consequence, which is somewhat graver, would be that the entire rigorous procedure involved in reopening an assessment and the burden of proving valid reasons to believe could be circumvented by first accepting the return u/s. 143(1) and thereafter issue notices to reopen the assessment. An interpretation which makes a distinction between the meaning and content of the expression "reason to believe" in cases where assessments were framed earlier u/s. 143(3) and cases where mere intimations were issued earlier u/s.143(1) may well lead to such an unintended mischief. It would be discriminatory too. An interpretation that leads to absurd results or mischief is to be eschewed.
Certain observations made in the decision of Rajesh Jhaveri Stock Brokers (P.) Ltd. (supra) are sought to be relied upon by the revenue to point out the difference between an "assessment" and an"intimation". The context in which those observations were made has to be kept in mind. They were made to point out that where an "intimation" is issued u/s. 143 (1) there is no opportunity to the assessing authority to form an opinion and therefore when its finality is sought to be disturbed by issuing a notice u/s. 148, the proceedings cannot be challenged on the ground of "change of opinion". It was opined by the Supreme Court that the strict requirements of section 147 can be compromised. On the contrary, from the observations (quoted by us earlier) it would appear clear that the court reiterated that "so long as the ingredients of sec. 147 are fulfilled" an intimation issued u/s. 143(1) can be subjected to proceedings for reopening. The court also emphasized that the only requirement for disturbing the finality of intimation is that the Assessing Officer should have "reason to believe" that income chargeable to tax has escaped assessment. In our opinion the said expression should apply to intimation in the same manner and subject to the same interpretation as it would have applied to an assessment made u/s. 143(3). The argument of the revenue that an intimation cannot be equated to an assessment, relying upon certain observations of the Supreme Court in Rajesh Jhaveri Stock Broker (P.) Ltd. (supra) would also appear to be self-defeating, because if an "intimation" is not an "assessment" then it can never be subjected to sec. 147 proceedings, for, that section covers only an "assessment" and we wonder if the revenue would be prepared to concede that position. It is nobody's case that an "intimation" cannot be subjected to Sec. 147 proceedings; all that that is contended by the assessee, and quite rightly, is that if the revenue wants to invoke sec. 147 it should play by the rules of that section and cannot bog down. In other words, the expression "reason to believe" cannot have two different standards or sets of meaning, one applicable where the assessment was earlier made u/s. 143(3) and another applicable where an intimation was earlier issued u/s.143(1). It follows that it is open to the assessee to contend that notwithstanding that the argument of "change of opinion" is not available to him, it would still open to him to contest the reopening on the ground that there was either no reason to believe or that the alleged reason to believe is not relevant for the formation of the belief that income chargeable to tax has escaped assessment. In doing so, it is further open to the assessee to challenge the reasons recorded under sec. 148(2) on the ground that they do not meet the standards set in the various judicial pronouncements.
In the present case the reasons disclose that the Assessing Officer reached the belief that there was escapement of income "on going through the return of income" filed by the assessee after he accepted the return under section 143(1) without scrutiny, and nothing more. This is nothing but a review f the earlier proceedings and an abuse of power by the Assessing Officer, both strongly deprecated by the Supreme Court in Kelvinator of India Ltd. (supra). The reasons recorded by the Assessing Officer in the present case do confirm our apprehension about the harm that a less strict interpretation of the words "reason to believe" vis-à-vis intimation issued under Sec. 143(1) can cause to the tax regime. There is no whisper in the reasons recorded, of any tangible material which came to the possession of the assessing officer subsequent to the issue of the intimation. It reflects an arbitrary exercise of the power conferred under section 147.
For the above reasons, we answer the substantial question of law framed by us in the affirmative, in favour of the assessee and against the Revenue. The appeal of the Revenue is accordingly dismissed."
11. We put a specific query to both parties as to whether the hon'ble jurisdictional high court has rendered any such decision treating an assessment u/s. 143(1) at par with a regular assessment u/s.143(3) for adjudicating validity of a reopening. Both of them reply in negative. We reiterate that the Assessing Officer's reasons extracted hereinabove refer to assessee's return and computation already on record at the time of sec. 143(3) assessment as per hon'ble Delhi high court. No other material much less a tangible one is even whispered therein. Therefore, we follow hon'ble Delhi high court and accept the assessee's arguments to hold that this reopening action amounts to review exercise without any basis not sustainable in the eyes of law.
12. We take up assessee's second and third arguments together. There is no dispute that this is a case of book loss originally declared of Rs.2,36,14,400/-.The sole reasons of reopening is that of treating foreign exchange gains of Rs.54,03,639/- as income. This addition stands deleted (supra). Coming to the other additions of capital expenditure and ALP, it is an admitted fact that the same did not form part of section 148 notice. The A.O. made reference to the "TPO" on 26-12-2008 i.e. much before insertion of Sec. 147 Explanation 3 w.e.f. 1-4-2009 reading as under:—
"[Explanation 3: For the purpose of assessment or reassessment under this section, the Assessing Officer may assess or reassess the income in respect of any issue, which has escaped assessment, and such issue comes to his notice subsequently in the course of the proceedings under this section, notwithstanding that the reasons for such issue have not been included in the reasons recorded under sub-section (2) of section 148.]"
13. The Assessing Officer issued reopening notice and made transfer pricing reference much prior to coming into effect of this explanation. We deem it proper to observe with this explanation in a Tax statute having prospective effect only is sought to be applied with retrospective effect at the Revenue's behest. The case law of Rallis India Ltd. v. Asstt. CIT [2010] 323 ITR 54/190 Taxman 1 (Bom.) holds that validity of a reopening notice has to be adjudicated on the basis of reasons recorded at the time of reasons recorded and not by subsequent amendments. The hon'ble Delhi high court in CIT v. Cheil Communications India (P.) Ltd. [2013] 354 ITR 549/217 Taxman 275/33 taxmann.com 170, has decided validity of a reopening notice issued on 11-9-2008 followed by a re-assessment framed on 17-10-2011 resulting in additions on issues not forming part of sec. 148 reassessment. The relevant assessment year there is 2006- 07. There was no addition in response to the reasons stated in reopening notice. Their lordships have upheld the tribunal's order holding the said reopening to be invali0d in section 143(1) case. Section 147 explanation 3 has also been reproduced and considered. We observe accordingly that this is a case of neither escapement of any assessable income nor is there any authority vested with the Assessing Officer any jurisdiction vested with the Assessing Officer to advert to other issue of capital expenditure and "ALP" adjustment hereinabove by taking shelter u/s. 147 explanation 3 since the same applies only w.e.f. 1-4-2009 much after the reopening notice and the TPO reference. The assessee's latter two arguments are accepted. So far as the Revenue's plea (supra) are concerned, we do not find the same to be justifiable in view of the fact that the abovestated conditions of existence of tangible material for reopening of an assessment and not making out the case of review from a section 143(3) apply even if reopened within four years from the end of the impugned assessment year.
14. Our detailed discussion hereinabove lead us to conclude that the impugned reopening is without any tangible material, amounts to review of section 143(1) assessment, it is not a case of any escapement of income from being assessed and the Assessing Officer ought not to have reverted to the issue other than the one in the reopening reasons. The assessee's legal ground challenging the impugned reopening as per the arguments hereinabove is accepted. The same is quashed. This renders the other grounds on merits in its appeal as well as the Revenue's appeal (supra) to have become infructuous. Assessee's appeal ITA No.1065/Ahd/2012 is allowed. The Revenue's appeal ITANO.1038/Ahd/12 is dismissed.
15. Same order to follow in the Revenue's appeal ITA No.1039/Ahd/12 and the assessee's cross appeal ITA No.1066/Ahd/12 for assessment year 2005-06.
To sum up, the Revenue's appeals ITA 1038 and 1039/Ahd/12 are dismissed and the assessee's cross appeals ITA 1065 & 1066/Ahd/12 are allowed.