2014 (7) TMI 720 - AT - Income Tax

Reassessment proceedings quashed for invalid initiation; appeal allowed

The Tribunal held that the initiation of reassessment proceedings was not valid as the factors relied upon by the Assessing Officer were deemed ... Validity of reassessment - Reassessment on The Basis of Judgment in ONGC - Taxability of receipts u/s 44B – Held that:- A reassessment can be undertaken when there is escapement of income by all - where the original assessment was completed u/s 143(3) and a period of four years has expired from the end of the relevant assessment year, the recourse to the provisions of section 147 can be taken only if the case falls under the first situation, namely, where the income escaped assessment because of the assessee not properly disclosing the particulars of his income - No reassessment in such an event is permissible where the assessee properly disclosed the particulars of his income, but the income escaped assessment with or without the failure on the part of the AO to examine the issue properly or some post assessment event. Where a period of four years has not expired from the end of the relevant assessment year and the reassessment is taken up after the original assessment u/s 143(3), the provisions of section 147 can be activated in the first two situations, the second circumstance of the third situation and the fourth situation - The embargo on reassessment in such an event is only in the first circumstance of the third situation, being the change of opinion simplicitor without reference to any unconsidered tangible material coming to the notice of the AO indicating escapement of income – Relying upon COMMISSIONER OF INCOME-TAX AND ANOTHER Versus ONGC [2005 (12) TMI 46 - UTTARANCHAL HIGH COURT] - the revenue from services which are technical in nature in a business to which section 44BB applies, does not fall within the ambit of section 44BB(1) of the Act but is taxable under the provisions of either section 44D or section 115A. The AO did not venture to re-examine the assessment afresh de hors any fresh material, which would otherwise have made it a case of change of opinion ousting the jurisdiction of the AO to initiate proceedings u/s 147 - section 44BB applied by the assessee in the case of ONGC as agent of Foramer France, has been statutorily designated as a special provision for computing profits and gains in connection with the business of exploration, etc., of mineral oils - both sections 44BB and 44D have been categorized by the legislature as special provisions - income by way of royalty or fees for technical services earned by a foreign company in pursuance of an agreement made before 1.4.2003 is chargeable u/s 44D of the Act, now it needs to be considered as to whether the same thing would be applicable in the context of section 44DA also - the AO was not justified in initiating reassessment by relying on the judgment in the case of ONGC. It is prima facie applicable but not applicable on proper appreciation - the initiation of the present reassessment on the basis of the judgment in ONGC is not valid in law - the amendment to sections 44DA and 44BB by the Finance Act, 2010 w.e.f. 01.04.2011 are prospective, there can be no question of arguing or holding otherwise - the insertion of second proviso to section 44DA by the Finance Act, 2010 is applicable only from AY 2011-12 and not prior to that - the reasons recorded by the AO for initiating the re- assessment by taking cognizance of the amendment proposed by the Finance Bill, 2010 and holding it to be retrospective, do not stand. Neither the AO can later on improve his reasons or make out a different case from the one on which basis he initiated reassessment, nor is it permissible to argue that the reassessment be sustained on the ground other than that of the AO as mentioned in the reasons - applicability of the judgment in the case of ONGC and the retrospective application of the amendments brought out by the Finance Act, 2010 to section 44DA and section 44BB, are not relevant and hence do not support the initiation of reassessment – thus, the initiation of re-assessment and the proceedings flowing there from is set aside – Decided in favour of Assessee. Issues Involved:1. Initiation of reassessment proceedings.2. Applicability of judgment in ONGC as agent of Foramer France case.3. Reassessment based on amendments to Section 44DA.4. Relevance of Tribunal order for AY 2007-08.Issue-wise Detailed Analysis:1. Initiation of Reassessment Proceedings:The primary issue was whether the reassessment proceedings initiated by the Assessing Officer (AO) were valid. The AO issued notice under Section 148 on the grounds that the income of the assessee was to be assessed as 'fees for technical services' instead of under Section 44BB. The assessee contended that this amounted to a change of opinion, which is not permissible as per the Supreme Court's judgment in CIT Vs. Kelvinator of India Ltd. The Tribunal held that the AO's initiation of reassessment was based on the judgment of the jurisdictional High Court and an amendment to Section 44DA, which provided tangible material for the belief of income escapement, thus not constituting a mere change of opinion.2. Applicability of Judgment in ONGC as Agent of Foramer France Case:The AO relied on the judgment in ONGC as agent of Foramer France, which held that technical services are not covered under Section 44BB but under Section 44D. The Tribunal examined whether this judgment was applicable to the assessee's case. It was determined that the judgment in ONGC as agent of Foramer France was not directly applicable because the assessee's income was derived from planning and executing seismic data acquisition, which is different from the services discussed in the ONGC case. The Tribunal concluded that the AO's reliance on this judgment to initiate reassessment was not justified.3. Reassessment Based on Amendments to Section 44DA:The AO also based the reassessment on the explanatory note to the Finance Bill, 2010, which clarified that Section 44BB applies only to services not in the nature of technical services. The Tribunal noted that the amendments to Section 44DA were prospective and applicable from 01.04.2011, as held by the jurisdictional High Court in B.J. Services Company Middle East Ltd. vs. Dy. Director of IT. Since the assessment year in question was 2005-06, the Tribunal held that the AO could not rely on these amendments to initiate reassessment.4. Relevance of Tribunal Order for AY 2007-08:The Department argued that the Tribunal's order for AY 2007-08, which held that the income from ONGC was not covered under Section 44BB, should be applied. The Tribunal distinguished the facts of the two years, noting that for AY 2005-06, the AO had accepted the existence of a Permanent Establishment (PE) and applied Section 44DA. The Tribunal concluded that the order for AY 2007-08, which dealt with Section 115A due to the absence of a PE, was not applicable to the current assessment year.Conclusion:The Tribunal held that the initiation of reassessment proceedings was not valid as both the factors relied upon by the AO (the judgment in ONGC as agent of Foramer France and the amendments to Section 44DA) were not applicable. Consequently, the reassessment proceedings were quashed, and the appeal was allowed. The Tribunal did not address the grounds on merits due to the decision on the initiation of reassessment. The order was pronounced on 17.07.2014.