2019 (11) TMI 1854 - HC - Income Tax

Tax authority must first decide taxpayer's jurisdictional objections; s.147 reasons tied to s.14A, s.92CA notice quashed

Karnataka HC held that the tax authority (respondent No.1) must first adjudicate the petitioner's jurisdictional objections before initiating further ... Reopening of assessment - TP Adjustment - Authorities submitted that the respondent No. 1 indeed has jurisdiction to re-open the assessment u/s 147 and refer the matter to the TPO - HELD THAT:- It is well settled that the respondent No. 1 is required to adjudicate upon the preliminary objections raised by the petitioner inasmuch as the jurisdiction aspect is concerned, without disposing of the objections raised by the petitioner, no further proceedings can be initiated by the respondent No. 1. It is pertinent to note that the action of the respondent No. 1 in referring the matter to the respondent No. 2 appears to be without application of mind and is premature at this stage. The reasons recorded for re-opening of the assessment under Section 147 of the Act do not indicate any escapement of income due to the wrong TP adjustment/arm’s length price. On the other hand, it is confined to the disallowance under Section 14A of the Act. The action of the respondent No. 1 in referring the matter to the respondent No. 2 for TP adjustment cannot be countenanced at this stage. Hence, the notice impugned issued by the second respondent under Section 92CA of the Act are quashed. The respondent No. 1 shall consider the objections submitted by the petitioner dated 15.10.2018 and dispose of the same in accordance with law in an expedite manner. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether the assessing officer validly exercised jurisdiction to re-open an assessment under Section 147 read with Section 148 of the Income Tax Act where the assessee had raised preliminary objections to jurisdiction. 2. Whether an assessing officer may, prior to adjudicating the assessee's preliminary objections to the reopening, make a reference under Section 92CA to the Transfer Pricing Officer (TPO) for determination of transfer pricing adjustments. 3. Whether the reasons recorded for reopening under Section 147 justified a reference to the TPO under Section 92CA on the ground of alleged escapement of income by way of incorrect arm's-length / transfer pricing, where the reasons on record refer only to disallowance under Section 14A. 4. Whether any order passed by the TPO pursuant to a premature reference can be given effect to before the assessing officer disposes of the assessee's jurisdictional objections and takes a decision in accordance with law. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Jurisdiction to Re-open Assessment where Preliminary Objections are Raised Legal framework: The assessing officer's power to reopen an assessment is governed by Sections 147 and 148; the officer must have jurisdiction and the reasons recorded must disclose escapement of income. The assessee is entitled to raise preliminary objections as to jurisdiction which require adjudication. Precedent treatment: The Court applied established principles that an assessing officer must first consider and decide jurisdictional objections before undertaking further action in the reopened proceedings. Interpretation and reasoning: The Court held that when preliminary objections contesting jurisdiction are raised, the assessing officer is obliged to adjudicate those objections; absent such adjudication further steps taken in the reopened proceedings amount to acting without application of mind. The phrase 'without disposing of the objections ... no further proceedings can be initiated' was adopted as a controlling principle. Ratio vs. Obiter: Ratio - Assessing officer must decide preliminary jurisdictional objections before initiating further proceedings after reopening; actions taken before such adjudication are procedurally impermissible. Conclusions: The reopening cannot proceed to further steps (including references) until the assessing officer adjudicates the preliminary objections about jurisdiction. The reference made prior to such adjudication was premature. Issue 2 - Validity of Reference to Transfer Pricing Officer prior to Adjudication of Jurisdictional Objections Legal framework: Section 92CA authorizes reference to the Transfer Pricing Officer for determination of arm's-length price in international/related party transactions; such reference ordinarily follows a finding that transfer pricing issues arise within a validly reopened assessment. Precedent treatment: The Court followed the principle that administrative steps which presuppose the validity of reopening cannot be taken when the jurisdictional basis for reopening is contested and undecided. Interpretation and reasoning: The Court found the reference to the TPO was effected without application of mind and prematurely since the assessing officer had not adjudicated the assessee's objections challenging the jurisdiction to reopen. A reference under Section 92CA presupposes that the reopening is valid and that the reasons recorded justify a transfer pricing enquiry; absent such foundational determination the reference cannot be countenanced. Ratio vs. Obiter: Ratio - Reference to TPO under Section 92CA before the assessing officer disposes of jurisdictional objections raised in response to the Section 148 notice is illegal and premature. Conclusions: The reference to the TPO made prior to disposal of the objections was invalid; consequent TPO proceedings based on that reference cannot stand at that stage. Issue 3 - Sufficiency of Reasons Recorded for Reopening to Justify Transfer Pricing Reference (Section 14A v. Transfer Pricing) Legal framework: Reasons recorded for reopening must disclose escapement of income and specify the basis for reopening; where the recorded reasons relate to a particular legal provision or defect, any further proceedings must be confined to that scope unless reasons legitimately raise other issues. Precedent treatment: The Court adhered to the requirement that the reasons recorded must indicate the true basis for reopening and cannot be treated as a carte blanche to expand the scope of enquiry beyond what was recorded. Interpretation and reasoning: The Court examined the reasons recorded and concluded they concerned alleged exempt income and disallowance under Section 14A; the reasons did not indicate any escape of income attributable to incorrect transfer pricing or arm's-length pricing. Therefore, the reference to the TPO for transfer pricing adjustment lacked a foundation in the reasons recorded for reopening. Ratio vs. Obiter: Ratio - A transfer pricing reference under Section 92CA is not justified where the reasons for reopening do not disclose escapement of income on account of transfer pricing or arm's-length price discrepancies and instead pertain to other specific disallowances (e.g., Section 14A). Conclusions: The reasons recorded did not justify a TP adjustment; the assessing officer could not validly refer the matter to the TPO on the basis of the recorded reasons which were confined to Section 14A disallowance. Issue 4 - Effect of TPO Orders Made Pursuant to a Premature Reference Legal framework: Orders by statutory authorities derive validity from the jurisdictional steps preceding the reference; administrative or quasi-judicial action taken pursuant to a reference invalid for want of jurisdiction should not be given operative effect until jurisdictional defects are cured. Precedent treatment: The Court applied the principle that subsidiary authorities' orders cannot be acted upon if the reference was invalid; however such orders may be kept in abeyance pending proper decision by the primary authority. Interpretation and reasoning: The Court held that any order passed by the TPO subsequent to the premature reference shall not be given effect to until the assessing officer disposes of the assessee's objections and reaches a lawful decision. This preserves the status quo and prevents prejudice arising from actions taken on an invalid reference, while allowing the assessing officer to re-examine and, if appropriate, make a valid reference thereafter. Ratio vs. Obiter: Ratio - TPO orders arising from a reference made before disposal of jurisdictional objections are not to be given effect to until the assessing officer validly decides the objections and acts in accordance with law. Conclusions: The TPO's notices and consequent orders issued pursuant to the premature reference are quashed (to the extent challenged); such orders shall not be acted upon until the assessing officer disposes of the objections in accordance with law and only subject to that decision. Overall Disposition and Direction The Court directed that the assessing officer shall consider and dispose of the assessee's objections (dated 15.10.2018) in accordance with law expeditiously. Notices/orders issued by the TPO pursuant to the premature reference were quashed and shall not be given effect to until the assessing officer's lawful decision. The principles stated above constitute the operative ratio of the Court's order.