2009 (10) TMI 644 - AT - Income Tax

Tribunal Invalidates Assessment Reopening for Change of Opinion, Upholds Validity for Lower Tax Rate

Assistant Commissioner of Income-tax, Range I, Dehradun Versus Hyundai Heavy Industries Co. Ltd.

Assistant Commissioner of Income-tax, Range I, Dehradun Versus Hyundai Heavy Industries Co. Ltd. - [2010] 35 SOT 316 (DELHI) Issues Involved:1. Validity of reopening assessments under Section 147/148 of the Income-tax Act.2. Application of tax rates applicable to foreign companies versus domestic companies.Issue-wise Detailed Analysis:1. Validity of Reopening Assessments under Section 147/148:The revenue contended that the Commissioner of Income-tax (Appeals) erred in holding that the Assessing Officer was not justified in initiating action under Section 147, read with Section 148, merely based on a change of opinion. The Assessing Officer had reason to believe that income chargeable to tax had escaped assessment because it was taxed at a lower rate than applicable.The Tribunal noted that the Assessing Officer must have 'reason to believe' that income had escaped assessment, which is a stronger requirement than merely suspecting or doubting. The power to reopen assessments is wider post-1989, but it does not permit reopening based on a mere change of opinion. The original assessments were made applying the domestic tax rate based on a mutual agreement procedure under the DTAA between India and Korea, which was later challenged based on the decision of the Authority for Advance Ruling (AAR) in the French Bank case.The Tribunal concluded that the reopening of assessments for the years 1995-96 and 1996-97 was invalid as the application of a higher tax rate was not the reason recorded for reopening under Section 148. The reopening was based on the interest income not being fully disclosed, not on the tax rate applied. Thus, the reopening was deemed a mere change of opinion, which is not permissible under the amended provisions of Section 147.For the assessment year 1997-98, the Tribunal found that the reopening was valid as the notice under Section 148 was issued after the insertion of the Explanation to Section 90(2) by the Finance Act, 2001, with retrospective effect. The Assessing Officer had reason to believe that the assessee had been taxed at a lower rate, fulfilling the conditions for reopening under Section 147.2. Application of Tax Rates Applicable to Foreign Companies versus Domestic Companies:The Tribunal considered whether the Assessing Officer was justified in applying a higher tax rate applicable to foreign companies while framing the reassessment under Section 147/148. The Tribunal noted that the DTAA between India and Korea provided that the taxation on a permanent establishment should not be less favorable than that levied on domestic enterprises. The original assessments applied the domestic tax rate based on a mutual agreement procedure under the DTAA.However, the Tribunal also considered the Explanation to Section 90(2), introduced by the Finance Act, 2001, which clarified that charging a foreign company at a higher rate than a domestic company is not considered less favorable. The Tribunal referred to its earlier decision in the case of the same assessee for subsequent years, where it upheld the application of the higher tax rate for foreign companies.The Tribunal concluded that for the assessment years 1995-96 and 1996-97, the application of the higher tax rate was not justified as the reopening was invalid. However, for the assessment year 1997-98, the application of the higher tax rate was justified as the reopening was valid, and the Explanation to Section 90(2) applied.Conclusion:- For assessment years 1995-96 and 1996-97, the reopening of assessments was invalid, and the application of the higher tax rate was not justified.- For assessment year 1997-98, the reopening was valid, and the application of the higher tax rate was justified.The appeals of the revenue for the assessment years 1995-96 and 1996-97 were partly allowed, and the appeal for the assessment year 1997-98 was allowed.