2013 (11) TMI 215 - AT - Income Tax

Invalidation of Assessment Order for AY 2002-03 Due to Procedural Lapses

The Tribunal allowed the assessee's appeal, holding the assessment order for AY 2002-03 invalid and unsustainable due to procedural lapses. The notice ... Validity of notice u/s 148 - Notice issued to agent of the assessee - Notice issued without passing an order u/s.163(2) - Held that:- As per the provisions of section 163(2) of the Act, before treating a person as an agent, an opportunity of being heard has to be given to such person for it to file objections it may have in that regard - no proper opportunity was afforded to the assessee company of being heard in the matter and that the proper procedure for issue of notice u/s.148 of the Act to the Indian Company i.e. TESA for treating it as an agent of the assessee company was not adhered to. It is also relevant to mention here that before treating any person as an agent of a foreign company or person, an order has to be passed in accordance with the provisions of section 163 of the Act and that order requires to be communicated to the parties concerned - it is seen that no there is no order passed by the Assessing Officer u/s.163 of the Act treating TESA as an agent of the assessee company for A.Y. 2002-03. Consequently, the notice u/s.148 of the Act dt.31.3.2005 issued by the Assessing Officer to TESA on behalf of the assessee company is bad in law and all subsequent proceedings culminating in the passing of the order of assessment would not the test of judicial scrutiny. In this view of the matter, the order of assessment passed u/s.143 r.w.s. 147 of the Act on 31.3.2006 for Asst. Year 2002-03, based on the invalid notice issued u/s.148 of the Act on 31.3.2005 is cancelled - Following decision of Commissioner Of Income-Tax, Bombay City III Versus Belapur Sugar And Allied Industries Limited [1981 (9) TMI 19 - BOMBAY High Court] - Decided in favour of assessee. It is undisputed that the notice under section 148 of the Act dt.31.3.2005 for Assessment Year 2002-03 is issued in the name of TESA, as an agent of the assessee company, whereas the order of assessment for the said period was passed in the name of the assessee company instead of being concluded in the hands of the Indian company i.e. TESA as an agent of the assessee company. In our view, this action on the part of the Assessing Officer is not curable. It is a well settled position of law that the notice cannot be regarded as a mere procedural requirement. Rather, it is a condition precedent to the initiation of assessment proceedings - if a notice is issued on one person in a particular company and the order of assessment is passed on another person who has not been served the said notice, then such order is bad in law and ab-initio, null and void. Records of assessment admittedly reveal that the reasons recorded by the Assessing Officer for initiating proceedings under section 147 / 148 of the Act were not communicated / made available to the assessee by the Assessing Officer before the completion of assessment proceedings - it is amply clear that the reasons as recorded by the Assessing Officer for initiating reassessment proceedings for Assessment Year 2002-03 in the case on hand were not provided, communicated or made available to the assessee by the Assessing Officer during the pendency of assessment proceedings, but the same were provided to the assessee at the stage of appellate proceedings by the learned CIT(Appeals). The letter dt.24.6.2005 relied on by the learned Departmental Representative cannot be construed as the communication of reasons recorded to the assessee - The failure of the Assessing Officer in providing the assessee with the reasons recorded for initiation of proceedings under section 148 of the Act, within a reasonable period of time so that the assessee could efficiently represent / file objections to the same is, in our opinion, amply evident beyond any doubt from the facts on record and our observations thereon. The fact of non-provision of the reasons recorded for initiation of proceedings under section 147 / 148 of the Act before the completion of assessment proceedings for the relevant period and the furnishing of the said reasons recorded at the appellate stage by the learned CIT(Appeals) will render the order of assessment dt.31.3.2006 for Assessment Year 2002-03 invalid and unsustainable in law. Issues Involved:1. Validity of the notice issued under section 148 of the Income Tax Act.2. Requirement of an order under section 163(2) before issuing notice under section 148.3. Communication of reasons for initiating proceedings under section 147.4. Barred by limitation for the assessment year.5. Whether reasons for reopening constitute 'reason to believe' or 'reason to suspect'.6. Taxability of income as fees for technical services under section 9 and Article 12 of DTAA.7. Levy of interest under section 234B.Detailed Analysis:1. Validity of the notice issued under section 148 of the Income Tax Act:The assessee contended that the notice issued under section 148 to TESA as an agent of the assessee without passing an order under section 163(2) renders the proceedings void-ab-initio. The Tribunal found merit in this argument, noting that the proper procedure under section 163(2) was not followed. The show cause notice was issued on 30.3.2005, and TESA was given time until 31.3.2005 to respond. However, the notice under section 148 was issued immediately without passing an order under section 163(2), violating the principles of natural justice. Consequently, the Tribunal held that the notice under section 148 was invalid, and the subsequent assessment proceedings were void.2. Requirement of an order under section 163(2) before issuing notice under section 148:The Tribunal emphasized that treating a person as an agent under section 163 requires passing an order after giving the person an opportunity to be heard. Since no such order was passed in this case, the notice issued under section 148 was deemed invalid. The Tribunal relied on judicial precedents, including CIT v. Kanhaya Lal Gurmukh Singh and CIT v. Express Newspapers (P.) Ltd., to support this view.3. Communication of reasons for initiating proceedings under section 147:The assessee argued that the reasons recorded for initiating proceedings under section 147 were not communicated during the assessment proceedings, despite requests. The Tribunal found that the reasons were only provided during the appellate stage, which was insufficient. The Tribunal referred to the decision in GKN Driveshafts (India) Ltd. v. ITO, which mandates that reasons must be communicated to the assessee within a reasonable time to allow for objections. The failure to do so rendered the assessment invalid.4. Barred by limitation for the assessment year:The assessee contended that the assessment was barred by limitation as the order did not leave the control of the officer before 31.3.2006. The Tribunal did not explicitly address this issue, as the assessment was already held invalid on other grounds.5. Whether reasons for reopening constitute 'reason to believe' or 'reason to suspect':The Tribunal did not specifically address this issue, as the assessment was already invalidated due to procedural lapses.6. Taxability of income as fees for technical services under section 9 and Article 12 of DTAA:The Tribunal did not delve into the merits of the taxability of income as fees for technical services under section 9 of the Act and Article 12 of the DTAA, as the assessment was invalidated on procedural grounds.7. Levy of interest under section 234B:The Tribunal did not address the issue of levy of interest under section 234B, as the assessment was invalidated on procedural grounds.Conclusion:The Tribunal allowed the assessee's appeal, holding that the assessment order for AY 2002-03 was invalid and unsustainable in law due to:1. The failure to pass an order under section 163(2) before issuing notice under section 148.2. Issuing notice under section 148 to TESA and completing the assessment on the assessee company.3. Non-communication of reasons recorded for initiating proceedings under section 147 before completing the assessment.The Tribunal did not address the merits of the additions/disallowances made in the assessment due to the procedural invalidity of the assessment order.