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Novo Nordisk India Private Limited Vs DCIT (Karnataka High Court)
Karnataka High Court held that assumption of jurisdiction under section 147 of the Income Tax Act untenable since mandatory requirement of section 149(1)(b) of the Income Tax Act not complied. Accordingly, writ petition allowed and notice u/s. 148 quashed.
Facts- The petitioner is a company incorporated under the laws of India and is a resident for the purposes of the Act. The case of the petitioner was selected for detailed scrutiny and notice u/s. 143(2) was issued on 23.10.2007, to which the petitioner filed requisite reply. Reference was made to TPO for determination of arm’s length price in respect of international transactions reported by the petitioner during the subject Assessment year. TPO passed a detailed order u/s. 92CA(3) of the Act accepting the arm’s length price reported by the petitioner in respect of its international transactions and concluded that no adjustment was required in respect of the same. Pursuant to which respondent No.1 passed order u/s 143(3) of the Act inter alia accepting the conclusions of the TPO.
It appears after lapse of close to six years from the end of relevant Assessment Year, by the impugned notice dated 28.3.2013 issued u/s. 148 of the Act respondent No.1 initiated re-assessment proceedings for the subject Assessment Year on the ground that the income of the petitioner for the relevant year had escaped assessment u/s. 147 of the Act. Being aggrieved, the present appeal is filed.
Conclusion- The material aspect for invoking the extended period of limitation under Section 149 (1)(b) not being forthcoming, further proceedings in pursuance to the said notice cannot be sustained. The notice issued being not in conformity with the provisions of the Act, it being the base or the foundation, edifice built upon it, has to fall.
Held that the mandatory requirement of Section 149(1)(b) of the Act is not complied with. Hence, the assumption of jurisdiction by respondent No.1 under Section 147 of the Act is untenable.
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
The petitioner has called in question the notice dated 28.3.2013 issued by respondent No.1 under Section 148 of the Income Tax Act, 1961 [‘Act’ for short] as well as the order dated 12.03.2014 passed by the Deputy Commissioner of Income-tax under Section 152 of the Act and the consequential notice dated 6.2.2014 issued by respondent No.1 under Section 143(2) of the Act.
2. The petitioner is a company incorporated under the laws of India and is a resident for the purposes of the Act. Petitioner is a subsidiary of Novo Investments Pvt. Ltd., a company incorporated under the laws of Singapore, which in turn is held by Novo Nordisk A/s (Novo Denmark) and Novo Nordisk Region International Operations A/S, which are companies incorporated under the laws of Denmark. Petitioner is engaged in the business of distribution of market products in relation to diabetes care, growth disorders and homeostasis and providing administrative and co-ordination services to its group companies.
3. For the Assessment Year 2006-07, the petitioner filed returns of tax on 29.11.2006 which was processed under Section 143(1) of the Act on 11.9.2007. The case of the petitioner was selected for detailed scrutiny and notice under Section 143(2) was issued on 23.10.2007, to which the petitioner filed requisite reply. Reference was also made with the prior approval of respondent No.2 to the Transfer Pricing Officer under Section 92CA(1) of the Act for determination of arm’s length price in respect of international transactions reported by the petitioner during the subject Assessment year. TPO passed a detailed order under Section 92CA(3) of the Act accepting the arm’s length price reported by the petitioner in respect of its international transactions and concluded that no adjustment was required in respect of the same. Pursuant to which respondent No.1 passed order u/s 143(3) of the Act inter alia accepting the conclusions of the TPO. It appears after lapse of close to six years from the end of relevant Assessment Year, by the impugned notice dated 28.3.2013 issued under Section 148 of the Act respondent No.1 initiated re-assessment proceedings for the subject Assessment Year on the ground that the income of the petitioner for the relevant year had escaped assessment under Section 147 of the Act. In reply to the said notice, the petitioner requested respondent No.1 to furnish a copy of the reasons recorded for initiating reassessment proceedings under Section 147 of the Act and the same was furnished.
4. It is the grievance of the petitioner that respondent No.1 has alleged that the transaction undertaken by the petitioner during the subject assessment year shall qualify as a deemed international transaction under Section 92B(2) of the Act and thus, should have been reported in the form filed by the petitioner for the relevant assessment year which is exfacie illegal and contrary to factual aspects as well as law relating to said subject. The notice issued under Section 148 as well as the order passed under Section 152 and the consequential notice under Section 143(2) issued by the respondent-authorities are challenged mainly on the ground that the proceedings initiated are contrary to the statutory requirements as envisaged under clause (b) of Subsection (1) of Section 149 of the Act.
5. Arun Sri Kumar, learned counsel for the petitioner submitted that Section 147 deals with income escaping the assessment. The Assessing Officer is empowered to invoke Section 147, when he has the reason to believe that any income chargeable to tax has escaped assessment for any assessment year, subject to the provisions of Section 148-153. Section 149 provides for the time limit for notice. In terms of Section 149(1)(b), no notice under Section 148 shall be issued for the relevant Assessment year, if four years, but not more than six years, have elapsed from the end of the relevant year unless the income chargeable to tax which has escaped tax amounts to or is likely to amount to one lakh for that year or more. The reasons recorded by respondent No.1 to initiate proceedings under Section 147 does not disclose that the amount of tax which has escaped assessment is Rs. One Lakh or more.
6. Nextly, it was contended that by Finance Bill 2012, deemed escapement of income is brought in, in relation to the international transactions to be computed in accordance with the Arms Length price. It is made clear that if an international transaction is not reported by the assessee, such transaction never gets benchmarked against Arms Length price. In such cases, non reporting of international transactions has to be based upon presumption of escapement of income, non filing of report or otherwise by not including such transaction in the report mentioned in Section 92E would be considered as a case of deemed escapement of income and can be re-opened under Section 147 of the Act with effect from 1.7.2012 which is not applicable to the present facts of the case which relates to the AY 2006-07 concluded on 15.12.2009.
7. It is further submitted that the allegation made by the Authorities are without any valid basis. The report required under Section 92E was furnished with the details of ledger extract for purchases from the companies attracting international transaction and the copies of which are made available before this Court as annexures to the writ petition. Thus, it is submitted that even on the merit as well as for want of statutory requirements, the impugned notices and order are liable to be quashed.
8. Learned counsel for the petitioner in support of his submissions has placed reliance on the following Judgments:
i) Mahesh Kumar Gupta and Others –v-Commissioner of Income-tax and Another (2014) 363 ITR 300 (AII);
ii) Bakulbhai Ramanlal Patel –v- Income Tax Officer (Special Civil Application No. 12853 of 2010 (Guj))
9. Learned counsel Sri.Aravind.K.V, for the revenue supporting the impugned notices and the order submitted that the Finance Bill of 2012 amending Section 147 of the Act providing for deemed escapement of income for violating Section 92E though has come into effect from 1.7.2012 do not specify the period of assessment whereas amendments relating to the power of DRT brought w.e.f. 1.4.2009 has been made applicable to AY 2009-10 and subsequent Assessment years and accordingly similar amendments with respect to General anti avoidance Rule has come into effect from 1.4.2003 applicable in relation to the AY 2013-14 and subsequent years. Hence, it cannot be held that the amendment to Section 147 indicated by Finance bill 2012 is not applicable to the proceedings concluded for the AY 2006-07. Nextly, it was submitted that the reasons recorded by the Assessing Officer is suffice to invoke the proceedings under Section 147 of the Act and there is no lacuna of whatsoever manner in issuing notice under Section 148.
10. I have given my thoughtful consideration to the arguments advanced by the learned counsel for the parties and perused the material on record. The proceeding concluded on 15.12.2009 for the AY 2006-07 in terms of the order passed by respondent No.1 pursuant to the order passed by the TPO under Section 92CA(3) of the Act on 27.10.2009 concluding that ‘no adjustment’ was required to the Arms Length price determined by the tax payer in respect of international transactions entered into by the petitioner with his associated enterprises is not in dispute. Now the question would be whether initiation of proceedings under Section 147 of the Act is sustainable?
11. To answer this question it is apt to refer to the relevant provisions of the Act and the same are extracted for ready reference:
“S. 92E. Report from an accountant to be furnished by persons entering into international transaction [or specified domestic transaction]
Every person who has entered into an international transaction [or specified domestic transaction] during a previous year shall obtain a report from an accountant and furnish such report on or before the specified date in the prescribed form duly signed and verified in the prescribed manner by such accountant and setting forth such particulars as may be prescribed.
S. 147. Income escaping assessment.
If the Assessing Officer [has reason to believe] that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year):
S. 148. Issue of notice where income has escaped assessment.
(1) Before making the assessment, reassessment or recomputation under section 147, the Assessing Officer shall serve on the assessee a notice requiring him to furnish within such period, as may be specified in the notice, a return of his income or the income of any other person in respect of which he is assessable under this Act during the previous year corresponding to the relevant assessment year, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed; and the provisions of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under section 139:
S. 149 Time limit for notice
(1) No notice under section 148 shall be issued for the relevant assessment year,-
(a) if four years have elapsed from the end of the relevant assessment year, unless the case falls under sub- clause (b) or sub-clause (c);
(b) if four years, but not more than seven years, have elapsed from the end of the relevant assessment year unless the income chargeable to tax which has escaped assessment amounts to or likely to amount to one lakh rupees ormore for that year;
(c) if four years, but not more than sixteen years, have elapsed from the end of the relevant assessment year, unless the income in relation to any asset including financial interest in any entity] located outside India, chargable to tax, has escaped assessment.]
(2) The provisions of sub- section (1) as to the issue of notice shall be subject to the provisions of section 151
(3) If the person on whom a notice under section 148 is to be served is a person treated as the agent of a non- resident under section 163 and the assessment, reassessment or recomputation to be made in pursuance of the notice is to be made on him as the agent of such non- resident, the notice shall not be issued after the expiry of a period of two years from the end of the relevant assessmen year.
S. 151 Sanction for issue of notice.
(1) No notice shall be issued under section 148 by an Assessing Officer, after the expiry of a period of four years from the end of the relevant assessment year, unless the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner is satisfied, on the reasons recorded by the Assessing Officer, that it is a fit case for the issue of such notice.
(2) In a case other than a case falling under sub-section (1), no notice shall be issued under section 148 by an Assessing Officer, who is below the rank of Joint Commissioner, unless the Joint Commissioner is satisfied, on the reasons recorded by such Assessing Officer, that it is a fit case for the issue of such notice.
(3) For the purposes of sub-section (1) and sub-section (2), the Principal Chief Commissioner or the Chief Commissioner or the Principal Commissioner or the Commissioner or the Joint Commissioner, as the case may be, being satisfied on the reasons recorded by the Assessing Officer about fitness of a case for the issue of notice under section 148, need not issue such notice himself.”
12. On perusal of these provisions, it is significant to analyze the reasons for invoking the provisions of Section 147 which would go to the root of the matter. It is the statutory requirement to bring forth the case of the escaped assessment particularly with reference to Section 149(1)(b) which contemplates about the escaped assessment amounts to or is likely to amount to One Lakh Rupees or more if the time limit has elapsed 4 years but not more than 6 years. It is not in dispute that the present case falls under the said provision. It is also not in dispute that the reasons assigned by the respondent No.1 for invoking Section 147 of the Act do not specify that the escaped assessment amounts to or is likely to amount to Rs.1,00,000/- or more for the relevant assessment year as evinced from the reasons placed on record by the petitioner before the Court. Section 151(1) of the Act provides that no notice shall be issued under Section 148 of the Act by an Assessing Officer, after the expiry of a period of four years from the end of the relevant assessment year, unless the Principal Chief Commissioner of Chief Commissioner or Principal Commissioner or Commissioner is satisfied, on the reasons recorded by the Assessing Officer, that it is a fit case for the issue of such notice. It is mandatory for the Assessing Officer in his reasons recorded, to state that the escaped assessment amounts to, or is likely to be Rs.1,00,000/- or more, to bring it within the ambit of Section 149(1)(b) of the Act. It is based on the reasons assigned by the Assessing Officer, the Commissioner/Sanctioning Authority on application of mind can take a decision whether it is a fit case for issuance of notice under Section 148. The material aspect for invoking the extended period of limitation under Section 149 (1)(b) not being forthcoming, further proceedings in pursuance to the said notice cannot be sustained. The notice issued being not in conformity with the provisions of the Act, it being the base or the foundation, edifice built upon it, has to fall.
13. In the case of Sheo Nath Singh V/s. Appellate Assistant Commissioner of Income Tax, reported in [1971] 82 ITR 147, the Hon’ble Supreme Court while considering the Section 147 of the Act, observed thus:
“The words “reason to believe” suggest that the belief must be that of an honest and reasonable person based upon reasonable grounds and that the Income-tax Officer may act on direct or circumstantial evidence but not on mere suspicion, gossip or rumour. The Income-tax Officer would be acting without jurisdiction if the reason for his belief that the conditions are satisfied does not exist or is not material or relevant to the belief required by the section. The court can always examine this aspect though the declaration or sufficiency of the reasons for the belief cannot be investigated by the court.”
14. The phrase “reasons to believe” categorically emphasizes that the Assessing Officer should be of the firm opinion that there is escapement of income based on the materials available and the same should be reflected in assigning the reasons to re-open the assessment and the same should adhere to the provisions of Sections 148 to 153 of the Act.
15. As discussed above, the mandatory requirement of Section 149(1)(b) of the Act is not complied with. Hence, the assumption of jurisdiction by respondent No.1 under Section 147 of the Act is untenable. This view is also fortified by the judgment of the Allahabad High Court in the case of Mahesh Kumar Gupta (supra) as well as the judgment of the Gujarat High Court in the case of Bakulbhai Ramanlal Patel (Supra). On this ground alone, the petition succeeds.
16. Under these circumstances, this Court is of the considered opinion that the arguments advanced by the learned counsel for the petitioner on other grounds do not call for any adjudication as the main ground of assuming jurisdiction under Section 147 of the Act is held to be invalid. Hence, without adverting to the other aspects of the matter urged, the issuance of notice under Section 148 deserves to be set aside and is accordingly quashed. Consequentially, the order passed under Section 152 as well as the notice issued under Section 143(2) of the Act are to be quashed.
17. Hence, the following:
ORDER
1. Writ petition is allowed
2. Notice dated 28.03.2013 issued under Section 148 of the Act at Annexure-A as well as the order dated 12.03.2014 at Annexure-B and notice dated 06.02.2014
3. No Order as to Costs.
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