Income Tax, Issue Update

Issue examined under original assessment proceeding: Whether re-opening in such case is justified


Outcome: Assessee


  • The return of income for the year under consideration was filed in the capacity of the representative Assessee on 16.02.2006 and assessment was completed under section 143(3) of the Act. Subsequently, the Assessing Officer noticed that there was an agreement under which the Assessee company would develop and maintain applications and would also allow the use of systems software and such applications including use of incidental software to American Express (India) Pvt. Ltd. As per the said agreement, a consideration was paid by American Express (India) Pvt. Ltd. to the Assessee company.
  • The Assessing Officer was of the opinion that the consideration received as compensation for the use of or the right to use of the systems software and applications software by American Express (India) Pvt. Ltd. was covered by the definition of ‘Royalty’ both as per the provisions of the Act as well as Article-12 of the Double Taxation Avoidance Agreement between Indian and the US. The Assessing Officer was further of the opinion that this royalty was taxable in India at the rate of 15% of gross amount of India but since this royalty income had not been offered to tax in India by the Assessee company, reassessment proceedings were initiated by the Assessing Officer. As per records, the statutory notice under section 148 of the Act was issued on 27.03.2008.

Key Points

  • Reassessment proceedings in this case were initiated without there being any fresh material in possession of the Assessing Officer. Thus, there was no tangible material with the Assessing Officer which could justify the initiation of reassessment proceedings. The aspects recorded by the Assessing Officer in the reasons to believe were known to the Assessing Officer at the time of original assessment also and apparently the explanations offered by the Assessee appeared to have been taken into account. The Assessing Officer cannot be permitted to review his earlier assessment order in the garb of reassessment. Also the reassessment jurisdiction cannot be invoked by a mere change of opinion. Reliance was placed on the decision of the Hon’ble Supreme Court in the case of CIT vs. Kelvinator of India Ltd., wherein it was concluded that ‘reasons to believe’ cannot comprehend a mere change of opinion which would only amount to an impermissible review. Therefore, post 01.04.1989, power to re-open was much wider. However, one needs to give a schematic interpretation to the words ‘reason to believe’ failing which, section 147 would give arbitrary powers to the Assessing Officer to re-open assessments on the basis of ‘mere change of opinion’ which cannot be per se reason to re-open. It was also important to keep in mind the conceptual difference between power to review and power to re-assess. The Assessing Officer has no power to review; he has the power to re-assess. But re-assessment has to be based on fulfilment of certain pre-condition and if the concept of ‘change of opinion’ is removed, as contended on behalf of the Department, then in the garb of re-opening the assessment, review would take place.
  • Reliance was also placed on the decision of the Hon’ble Delhi High Court in the case of Le Passage To India Ltd., wherein it was concluded that where the reasons to believe do not reveal as to what tangible material the Assessing Officer came to obtain to justify the reassessment notice and where an aspect which was known to the Assessing Officer at the time of the original assessment and the explanations of the Assessee appeared to have been taken into account, the assessment cannot be reopened.
  • Hence, it was inferred that the reasons recorded nowhere revealed as to what tangible material, the Assessing Officer obtained to justify the reassessment notice and, therefore, the reassessment proceedings had been wrongly initiated and were liable to be quashed.

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