Sysarris Software (P) Ltd. vs Deputy Commissioner of Income Tax and Others

Ajit J. Gunjal, J.—The petitioner is questioning the initiation of proceedings under s. 148 of the IT Act, 1961 pursuant to Annex. A. The matter arises in the following manner:

The petitioner claims to be a private limited company incorporated under the provisions of the Companies Act, 1956. It is affiliated to Forma Apps, a company incorporated in United States of America engaged in the business of development and export of computer software to its affiliate enterprises. The petitioner filed its return of income for the asst. yr. 2006-07 declaring loss of Rs. 60,89,533. The said return was filed on 26th Oct., 2006. The respondent No. 1 passed an assessment order under s. 143(3) of the Act on 29th Aug., 2008 and issued a demand notice under s. 156 of the Act raising ''nil'' demand for the asst. yr. 2006-07. According to the petitioners respondent No. 1 issued a notice under s. 148 of the Act on 6th Jan., 2010 for the asst. yr. 2006-07. Indeed, pursuant to the said notice issued under s. 148 of the Act, the petitioner sent a communication to respondent No. 1 enclosing the acknowledged copy of the IT returns filed on 26th Oct., 2006 and also the order passed under s. 143(2) of the Act for the asst. yr. 2006-07. The respondent No. 1 however, issued a notice under s. 143 of the Act for the asst. yr. 2006-07. The respondent No. 2 also issued a notice on 5th Jan., 2011 calling upon the petitioner to furnish the required documents in respect of the proceedings under s. 92CA of the Act for the asst. yr. 2006-07.

Suffice it to note that the provisions of the Act would contemplate inviting of objections for second notice, which is issued. Accordingly, the petitioners filed their reply, a copy of which is produced at Annex. P. The respondent No. 1 pursuant to Annex. L gave his reasons why he proposed to reopen the returns filed by the petitioner. The objections were filed by the petitioner to the said reasons and that objections were overruled pursuant to Annex. C, dt. 17th Oct., 2011. According to the petitioners, the very reopening of the assessment for the year 2006-07 is one without jurisdiction, having regard to the fact that it is not forthcoming in the reasons stated that he had a reason to believe that the income chargeable in respect of the asst. yr. 2006-07 had escaped his attention within the meaning of s. 147 of the Act.

I have heard Mr. Chyttanya K.K., the learned counsel appearing for the petitioner as well as Mr. M.V. Seshachala, the learned counsel appearing for the Revenue.

Mr. Chyttanya K.K., learned counsel appearing for the petitioner in support of the writ petition vehemently contends that a perusal of Annex. L does not disclose that respondent No. 1 has applied his mind and has recorded the reasons for him to believe that the proceedings are required to be initiated under s. 148 of the Act on the premise that certain transactions have escaped his attention notwithstanding the fact they are reflected in the returns filed by the petitioner. He submits that this cannot be termed as reason to believe to reopen the assessment, which has attained finality pursuant to initiation of proceedings under s. 148 of the Act. In support of his contention he would press into service decisions of the apex Court.

Mr. M.V. Seshachala, the learned counsel appearing for Revenue submits that the concept of reason to believe has been rephrased. ''Reason to believe'' has been dealt by the apex Court and the apex Court has opined that what is required to be looked into is not the order passed on the ''reason to believe'' but the reasons given by the authorities in coming to such a conclusion.

In sum and substance his case would be that the Court is required to consider the decision making process and not the decision itself.

Before considering the rival submissions it is required to note a few of the proceedings, which have taken place during the pendency of the writ petition.

Apparently on the basis of the order at Annex. C, the matter is referred to respondent No. 2, the TPO, who has passed an order, which is the subject-matter before the DRP.

It is submitted by the learned counsel appearing for the petitioner the question of jurisdiction certainly cannot be urged before the Redressal Panel but certainly can be a subject-matter of an appeal before the Tribunal if the explanation offered by the petitioner is not accepted. But for the present the Court is required to examine as to whether respondent No. 1 has "reason to believe" to reopen the assessment for the year 2006-07. It Is not in dispute that for the asst. yr. 2005-06, the identical transaction, which was reflected in the returns filed by the petitioner was referred to respondent No. 2 TPO, and on the basis of the material placed, the TPO, passed an order for the asst. yr. 2005-06, which is once again the subject-matter before the DRP.

The grievance of the petitioner appears to be that there is no independent application of mind for reopening the assessment for the year 2006-07 in as much as the respondent No. 1 has imported the pricing order passed by respondent No. 2 for the asst. yr. 2005-06 in reopening the assessment for the year 2006-07.

In fact, escaping the assessment is referable to s. 147 of the Act. Sec. 147 of the Act would speak about the fact that the AO has a reason to believe that any income chargeable to the tax has escaped assessment for any assessment year such a reopening is subject to the provisions of ss. 148 to 153 of the Act. Indeed, s. 148 of the Act is referable to an income, which is chargeable to the income tax and which has escaped the assessment i.e., assessment/notice and which comes to his notice subsequent in the course of proceedings under the statute. It is open for the AO to reopen the assessment. But however, there is a cap on such reopening of the assessment inasmuch as it is required to be done within a period of four years from the end of the relevant assessment year. In the case on hand it is not the case of the petitioner that reopening of the assessment is barred by statute. The only grievance is that there is no reason to believe to reopen the assessment, which has attained finality.

In the case on hand it is to be noticed that s. 147 of the Act is referable to income escaping assessment. Undoubtedly, the petitioner has reflected the present transactions in the returns filed by it. But however, that had escaped the notice of the assessing authority. Hence, I am of the view that the proceedings would squarely fall under s. 147 of the Act. Indeed, the question ''reason to believe'' fell for consideration before the apex Court. In the first instance in the case of Johri Lal (H.U.F.), Agra Vs. The Commissioner of Income Tax, the apex Court has observed thus:

... The formation of the required opinion by the ITO is a condition precedent. Without formation of such an opinion he will not have jurisdiction to initiate proceedings under s. 34(1)(a) of the Act. The fulfilment of this condition is not a mere formality but it is mandatory. It is one of the essential preconditions before proceedings are initiated under s. 147 of the Act.

The apex Court while considering as to the concept of ''reason to believe'' has observed thus:

There can be no manner of doubt with the words ''reason to believe'' suggest that the belief must be that of an honest and reasonable person based upon reasonable grounds and that the ITO may act on direct or circumstantial evidence but not on mere suspicion, gossip or rumour. The ITO would be acting without jurisdiction if the reason for his belief that the conditions are satisfied does not exist or is not material or relevant to the belief required by the section.

The apex Court in the case of Calcutta Discount Company Limited Vs. Income Tax Officer, Companies District, I and Another, has observed thus:

...The expression ''reason to believe'' postulates belief and the existence of reasons for that belief. The belief must be held in good faith: it cannot be merely a pretence. The expression does not mean a purely subjective satisfaction of the ITO, the forum of decision as to the existence of reasons and the belief is not in the mind of the ITO.

The existence of the belief and the reasons for the belief but not the sufficiency of the reasons, will be justiciable. The expression therefore predicates that the ITO holds the belief induced by the existence of reasons for holding such belief.

In the case on hand it is to be noticed that it is a case of income escaping the assessment. It may not be a tax of avoidance but it would be a case of a return, which is filed with all the material escaping the attention of the assessing authority. It may be that respondent No. 1 might have derived assistance that his opinion to ''reason to believe'' on an earlier order passed by the TPO for the asst. yr. 2005-06. It is useful to extract the observations made by the respondent No. 1 in support of his ''reason to believe'' to reopen the assessment for the year 2006-07:

A perusal of Form No. 3CEB report reveals that for asst. yr. 2005-06, the assessee had arm''s length transactions with companies like Pharma Systems Inc., Pharmapps LLC and Aris Global LLC to the extent of Rs. 9.77 crores and adjustment suggested to ALP is Rs. 5.13 crores which is 52 per cent of the such turnover. For asst. yr. 2006-07 also, the assessee company had transactions with the same companies to the extent of Rs. 6.99 crores. The adjustment to ALP for asst. yr. 2005-06, clearly indicates, that the parties with whom the transactions are made, remaining same, there shall be adjustment to the ALP in similar proportion in asst. yr. 2006-07 also.

Indeed, as observed by the apex Court this Court cannot go into the sufficiency of the reasons provided as long as the reasons are forthcoming. As observed the petitioner is already before the DRP. Undoubtedly, if the proceedings go against him before the DRP, it is always open for him to file an appeal before the Tribunal wherein all contentions available to him can be raised. But for the present, I am of the view that the reasons given by respondent No. 1 making him to believe to initiate or reopen the assessment for the year 2006-07 cannot be substituted by this Court by giving its own reasons as to why the reasons given by him are incorrect. Having said so, I am of the view that the question of interference does not arise. Petition stands disposed of accordingly.