Approval by CIT even before recording reasons by AO for reopening u/s 147 may reflect premature approval but need not render initiation of proceedings as non-est or void -High Court
Section 147 of the Income Tax Act, 1961 contains enabling provisions for re-assessment of income escaping assessment. The section provides that if the Assessing Officer has reasons to believe that any income has escaped assessment for any assessment year, he may assess/reassess such income.
Further, under section 148 the AO before making re-assessment is required to serve the assessee with a notice requiring him to furnish return of income for the relevant assessment year. Under sub section (2) of section 148, the AO, before issue of the notice is required to record his reasons for initiation of reassessment proceedings.
Also, section 151 provides for the before issue of notice u/s 148, the AO is required to obtain approval of the competent officials (Commissioners) who should be satisfied on the reasons recorded by the AO u/s 148(2) that it is a fit case for issue of the notice.
The petition under question raised an objection to the legality of notice issued u/s 148 where the approval by the concerned Additional Commissioner of Income Tax was obtained on a date even before the date of recording reasons by AO u/s 148(2).
Approval by CIT even before recording reasons by AO for reopening u/s 147
ABCAUS Case Law Citation:
ABCAUS 2155 (2017) (12) HC
The petitioner company had filed the writ petition under discussion before the Hon’ble High Court challenging the initiation of reassessment proceedings under Section 147 of the Income Tax Act, 1961 (the Act) with a request to quash the same.
Important Case Laws Cited/relied upon by the parties:
M/s. Standard Chartered Finance Ltd. v. Commissioner of Income Tax & ANR
Brief Facts of the Case:
The petitioner company was one of the Associated Enterprises (AEs) of a Limited company (Parent company) engaged in the business of providing information technology solutions and services tailored to meet the requirements of the clients. The parent company, for the onsite portion of software development work, had entered into contracts for software development work with customers outside India and engaged services of its overseas group companies (AEs) including the petitioner company.
The AO noticed that the parent company had made payments, both for onsite services and marketing services to the petitioner company without deduction of tax at source. Further the AE had also not filed any application before the Income Tax Department (ITD) for lower or NIL rate of deduction of tax at source (TDS). No application was also filed by the AE nor parent company before the Authority for Advance Ruling (AAR) seeking a ruling on the issue of TDS on the payments made to the AE for on-site services and selling commission.
The AO was of the view that the payments received by the petitioner company by the parent company for onsite services and marketing services/selling Commission were covered by the definition of Fees for technical services (“FTS”) as defined in Explanation 2 to Section 9(1)(vii) of the Act. The sums received by the petitioner company were therefore chargeable to tax under the Act.
Thus the AO, opined that the petitioner company who had received FTS during the relevant previous year was under obligation to file return and pay taxes as the income accrued or arised in India the same had not been done.
Therefore on this reason the AO recorded his satisfaction that due to omission or failure on the part of the assessee there was an escapement of income and the case was fit to invoke the provisions of sec.147 for initiation of reassessment proceedings and accordingly he issued notice u/s.148.
Contention made on behalf of the Petitioner Assessee:
It was submitted that the approval obtained by the AO from his higher Authority, i.e. Additional Commissioner was even prior to the recording of the reasons itself for re-opening the assessment. The approval was taken three days prior to the date when the satisfaction/reasons were recorded by the AO.
Therefore, there was a violation of Section 151(2) of the Act, which provides that in a case other than a case falling under Section 151(1) of the Act, no notice under Section 148 of the Act shall be issued by the Authority, who are below the rank of a ‘Joint Commissioner’, unless the ‘Commissioner’ is satisfied, on the reasons recorded by such Assessing Officer, that it is a fit case for the issue of such notice. It was contended that the approval obtained by the AO even before recording the reasons was therefore fatal to these proceedings and the same deserves to be quashed;
It was also contended that the formal notice issued under Section 148 of the Act, the words ‘assessment/reassessment’ both have been employed by the AO and therefore, the said notice was bad in law and deserved to be quashed.
It was also argued that the AO had no jurisdiction to issue the impugned notice, as the petitioner did not have any Permanent Establishment (P.E.) in India and therefore, the impugned notice was without jurisdiction.
Observations made by the High Court:
The Hon’ble High Court opined that it was premature to interfere at the current stage as the reassessment proceedings were still pending before the AO, who was yet to decide all the objections raised by the assessee by passing an appropriate order, but also because the nature of objections raised did not render the proceedings as patently without jurisdiction.
Regarding the approval by Addl. CIT even before recording of reasons by the AO, the Hon’ble High Court opined that the question of approval by higher authority is an administrative job. Even if there is difference of dates in such approval, prima facie, it may reflect premature approval on the part of the Addl. CIT but it need not render the very initiation of proceedings as non-est or void. These proceedings cannot be quashed merely on this ground, as no prejudice was caused to the petitioner by such an administrative approval.
The Hon’ble High Court observed that the reasons recorded for initiation of the proceedings prima facie, indicated that the AO had sufficient and reasonable reasons to initiate such proceedings, as certain payments were made to the Associate Enterprises (A.Es.) of the parent Company of U.S.A. without making suitable Tax Deduction at Source (TDS) rendering such expenses as non-admissible in the hands of the assessee.
The Hon’ble High Court opined that the said reasons could not be said to be irrelevant or non-germane for the formation of a reasonable belief about escapement of income as required under Section 147/148 of the Act or initiation of such proceedings for bringing to the tax the income which has escaped assessment.
The Hon’ble High Court opined that since the proceedings were pending, it cannot pre-judge as to how the other objections raised by the assessee will be met by the AO and pronouncement with regard to merit of such objections can not be made at this stage.
The Hon’ble High Court stated that the question whether the petitioner had a Permanent Establishment in India or not was certainly a mixed question of fact and law and that would depend upon several facts to be established by the assessee before the AO.
The Hon’ble High Court expressed that it is always safer and better to leave the determination of questions of facts at the hands of the Authorities created under the Act upto the Appellate Forums, i.e. Income Tax Appellate Tribunal, which is the final fact-finding body under the provisions of the Act. Cutting short of that procedure and process of assessment would amount to unnecessary interference with such proceedings, which prima facie, appear to have been validly initiated.
The Petition was dismissed as premature keeping it open for the petitioner to press the objections before the AO and Appellate Authorities under the Act to decide these objections and adjudicate these questions of the assessee at their own level.