2025 (6) TMI 80 - HC - Income Tax

Reassessment proceedings for finance and sales charges invalid due to change of opinion under Section 148

Springer Healthcare Limited Versus Assistant Commissioner Of Income Tax & Anr.

The HC held that reassessment proceedings regarding finance, sales and corporate services charges were invalid. The court found that the AO had examined ... Reassessment proceedings - receipt of finance, sales and corporate services charges were taxable under the Act or the India-UK DTAA - HELD THAT:- As petitioner had received during the previous year relevant to AY 2017-18, which was not surrendered to tax, was not only within the AO’s knowledge, but was subject matter of examination as to whether the said amount was now held to be chargeable to tax under the Act. Concededly, all relevant facts regarding the aspect of taxability of the aforesaid amount were examined by the AO. There is no additional material that has been discovered subsequently, which was not within the knowledge of the AO at the material time. Undeniably, this would be a case of change of opinion, if the said amount is now held as chargeable to tax under the Act. We must, note that there is no cavil that the exercise initiated pursuant to the impugned notice is for all intents and purpose an attempt to review the decision the AO in the assessment proceedings. However, it is contended by the Revenue that the same is permissible as the initiation was triggered by audit observations and the same constitutes information that can trigger the reassessment proceedings. We find no merit in the said contention. The fact that audit observation may be deemed to be information suggestive of the assessee’s income escaping assessment does not enhance or expand the power available with the AO to assess/ reassess the assessee’s income that has escaped assessment. It does not alter the very nature of power to assess/ reassess under Section 147 of the Act, to a power to review a concluded assessment. The term “information” is used in the first proviso to Section 148 of the Act. The said proviso proscribes issuance of notice under Section 148 of the Act unless there is “information” with the AO, which suggests that an assessee’s income chargeable to tax has escaped the assessment for the relevant AY. Thus, if the AO is in receipt of an audit objection, the same is required to be construed as information that suggests that the income of the assessee has escaped assessment. The proviso to Section 148 of the Act is couched in the negative. Whilst, the AO is proscribed from issuance of the notice under Section 148 of the Act, unless it has the “information” that suggests that the assessee’s income has escaped assessment, it is not mandatory for the AO to issue such a notice, or to review the assessment order merely because issues were flagged in an audit objection. The AO is required to apply its mind to the audit objection and form an independent, informed view. The provisions of Section 148A of the Act are also required to be construed by imputing the meaning of the term “information” as provided under Explanation I to Section 148 of the Act. Section 148A of the Act prescribes the procedure to be followed prior to issuance of notice under Section 148 of the Act. The expression “escaped assessment” by its very nature, means that the income has not been subjected to an assessment. The expression would not include a case where the AO made an informed assessment of the assessee’s income. Clause (c) of the proviso to Section 148A of the Act excludes the procedure under Section 148A of the Act where the information available with the AO is contained in the books of accounts, documents or material seized in a search conducted under Section 132 of the Act or requisitioned under Section 132A of the Act on or after 01.04.2021. This clause is not applicable to the facts of the present case. Whether the impugned notice has been issued beyond the period of limitation as stipulated under Section 149(1)? - The first proviso to Section 149(1) of the Act proscribes the issuance of any notice under Section 148 of the Act for a period prior to 31.03.2021, which could not be issued at that time. This requires us to examine whether the impugned notice could be issued under Section 148 of the Act as it was in force prior to 31.03.2021. There is no allegation that there was a failure on the part of the petitioner to redisclose any material fact in its return. Thus, the extended period of limitation of six years for reopening assessment would not be available under Section 147 of the Act as it was in force prior to 31.03.2021. The period of limitation is, thus, extended to ten years from the end of the relevant AY 2017–18, and concededly, the impugned notices have been issued beyond this period. Thus, by virtue of the first proviso of Section 149 of the Act, no notice could have been issued under Section 148 of the Act as no such notice could have been issued on the basis provisions for reassessment that were in force prior to 31.03.2021. This issue is covered in favour of the petitioner by a recent decision of this Court in Ratnagiri Gas and Power Private Limited [2025 (5) TMI 449 - DELHI HIGH COURT] 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Court are:Whether reassessment proceedings under Section 148 of the Income Tax Act, 1961 (the Act) can be initiated on the basis of audit objections when the issue raised has already been examined and concluded in the original assessment order.Whether the initiation of reassessment proceedings in this case amounts to impermissible review or change of opinion by the Assessing Officer (AO).The scope and interpretation of the term 'information' under Explanation 1 to Section 148 of the Act, particularly whether audit objections necessarily constitute sufficient 'information' to trigger reassessment.Whether the procedure prescribed under Section 148A of the Act, including providing an opportunity to the assessee before issuance of notice under Section 148, was complied with.Whether the notice under Section 148 was issued beyond the period of limitation prescribed under Section 149(1) of the Act.Whether the receipts of finance, sales and corporate service charges amounting to Rs. 1,44,34,773/- received by the petitioner from its associated enterprise in India qualify as taxable 'fees for technical services' (FTS) under the Act and the India-UK Double Tax Avoidance Agreement (DTAA).2. ISSUE-WISE DETAILED ANALYSISIssue 1: Permissibility of Reassessment Proceedings on the Basis of Audit Objections When the Issue Has Been Examined in Original AssessmentThe legal framework governing reassessment is primarily found in Sections 147, 148, 148A, and 149 of the Act. Section 147 empowers the AO to reassess income that has escaped assessment, subject to the conditions and procedure prescribed. Explanation 1 to Section 148 clarifies that 'information' suggesting escaped income includes audit objections.Precedents such as Commissioner of Income Tax, Delhi v. Kelvinator of India Limited and Commissioner of Income Tax v. Techspan India (P) Ltd. have established that reassessment cannot be used as a tool for review or change of opinion. The Supreme Court emphasized that reassessment must be based on tangible material indicating escapement of income and not merely on a change of opinion by the AO.In the present case, the AO initiated reassessment proceedings based on audit objections alleging that the petitioner's receipts should be treated as FTS and thus taxable. However, the Court found that the identical issue had been examined in detail during the original assessment proceedings, including issuance of notices under Section 142(1) and show cause notices under Section 143(2). The petitioner had responded comprehensively, explaining why the receipts did not constitute FTS under the Act or DTAA.The Court held that reopening the assessment on the same issue, without any new tangible material, amounted to a change of opinion, which is impermissible. The audit objection, while constituting 'information,' does not automatically mandate issuance of reassessment notice if the AO's earlier assessment was informed and conclusive.The Revenue's contention that audit objections justify reassessment was rejected. The Court clarified that audit observations do not expand or alter the AO's power to reassess beyond the statutory limits and safeguards.Issue 2: Interpretation of 'Information' under Explanation 1 to Section 148 and the Procedure under Section 148AExplanation 1 to Section 148 defines 'information' as including audit objections indicating that the assessment was not made in accordance with law. Section 148A prescribes a mandatory procedure before issuing a notice under Section 148, including conducting enquiry (if required), issuing a show cause notice to the assessee, considering the assessee's reply, and passing a reasoned order with prior approval.The Court observed that the AO must apply independent mind to the audit objection and not treat it as a mandatory command to issue a notice. The AO is obliged to provide the assessee with the basis of the information and an opportunity to respond, which must be duly considered before deciding to issue a notice under Section 148.In the case at hand, the petitioner's response to the notice under Section 148A(b) was not considered earlier, leading to the setting aside of the initial reassessment notice on grounds of violation of natural justice. Upon re-issuance of the notice under Section 148A(b), the petitioner again furnished detailed explanations, which were rejected by the AO without adequate consideration.The Court emphasized that the AO's decision to issue notice under Section 148 must be based on material including the assessee's reply, and not merely on audit objections. The purpose of the procedure under Section 148A is to prevent arbitrary reopening and ensure fairness.Issue 3: Limitation Period for Issuance of Notice under Section 148Section 149(1) prescribes limitation periods for issuance of notice under Section 148. The extended six-year period applies only where there is failure to disclose material facts. Otherwise, the limitation is four years from the end of the relevant assessment year.In this matter, there was no allegation of concealment or failure to disclose material facts by the petitioner. Therefore, the limitation period was four years. The impugned notices were issued beyond this period, making them time-barred.The Court relied on a recent decision of the same High Court which held similarly, reinforcing that notices issued beyond the prescribed limitation period without valid grounds are invalid.Issue 4: Taxability of Finance, Sales and Corporate Service Charges as Fees for Technical Services (FTS) under the Act and the India-UK DTAAThe petitioner contended that the receipts of Rs. 1,44,34,773/- from its Indian associated enterprise were not taxable as FTS because:The petitioner did not have a permanent establishment in India.The services did not transfer any technology, skill, or knowledge, and hence did not satisfy the 'make available' criterion under Article 13(4) of the India-UK DTAA defining FTS.The services were general management, controlling, IT and business support services, which do not qualify as technical or consultancy services under the Act or DTAA.Precedents such as M/s Continental Construction Ltd. v. CIT and Skycell Communications Ltd. v. DCIT were cited to support the interpretation that only services making available technical knowledge, skill or know-how constitute FTS.The AO had examined these contentions during original assessment and had accepted the petitioner's return without taxing the receipts as FTS. The reassessment attempt to revisit this issue was held to be a change of opinion, impermissible in law.3. SIGNIFICANT HOLDINGS'The power under Section 147 of the Act is to reassess the income that has escaped assessment and cannot be misunderstood as a power of review.''Reassessment must be based on tangible material indicating escapement of income and not merely on a change of opinion by the Assessing Officer.''An audit objection may be 'information' for the purposes of Section 148 but does not mandate issuance of notice under Section 148 if the issue has been examined and concluded in the original assessment.''The procedure under Section 148A requires the Assessing Officer to consider the assessee's response before issuing a notice under Section 148 and to form an independent opinion based on material on record.''Issuance of notice under Section 148 beyond the prescribed limitation period without valid grounds is invalid.''The term 'fees for technical services' under the India-UK DTAA requires that the services must make available technical knowledge, experience, skill, know-how or processes; mere provision of general management or corporate services does not qualify.'The Court concluded that the reassessment proceedings initiated were invalid as they were based on a mere change of opinion, triggered solely by audit objections already examined in original assessment, and were time-barred. Consequently, the impugned notice and consequential proceedings were set aside.