Madras High Court
Cognizant Technology Solutions ... vs Assistant Commissioner Of Income ... on 2 August, 2021
W.P.No.10051 of 2015
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED :02.08.2021
CORAM
THE HONOURABLE MR.JUSTICE S.M.SUBRAMANIAM
W.P.No.10051 of 2015
and
M.P.No.1 of 2015
Cognizant Technology Solutions India Private Limited,
Menon Eternity Building,
6th Floor, New No.165,
Old No.110, St.Mary's Road,
Chennai – 600 018. ...Petitioner
Vs
1.Assistant Commissioner of Income Tax,
Large Tax Payer Unit-I,
1775, Jawaharwal Nehru Inner Ring Road,
Anna Nagar Western Extension,
Chennai – 600 101.
2.Commissioner of Income Tax,
Large Tax Payer Unit-I
1775, Jawaharwal Nehru Inner Ring Road,
Anna Nagar Western Extension,
Chennai – 600 101. ... Respondents
Prayer : Writ Petition filed Under Article 226 of the Constitution of India
to issue of Writ of Certiorari, calling for the records and proceedings of the
case and after examining the legality, validity and propriety thereof be
pleased to quash the Impugned Notice dated 28 March 2014 issued under
1/40
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Section 148 of the Income Tax Act, 1961 for Assessment Year 2007-08 by
the respondent No.1 and the Impugned Order(s), disposing of Objections
dated 5 June 2014 and 29 December 2014 passed by the respondent No.1, as
being wholly without jurisdiction and legally invalid.
For Petitioner : Mr.Tushar Jarwal
For Mr.A.K.Raghavulu
and
Mr.Rahul Sateeja
For Respondents : Mr.A.P.Srinivas
Senior Standing counsel
[For R1 & R2]
ORDER
The writ on hand filed, challenging the validity of the notice dated
28.03.2014 issued under Section 148 of the Income Tax Act, 1961
[hereinafter referred to as the 'Act'] for the Assessment Year 2007-08 and
the order, disposing of the objection passed by the Assessing authority on
05.06.2014 and 29.12.2014.
2. The learned counsel for the petitioner commenced his arguments
by stating that the writ petition is filed, challenging the legality and the
jurisdiction of the authority under Section 147/148 of the Act to reassess the
alleged escaped income for the Assessment Year 2007-08.
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3. The petitioner is a Private Limited company engaged inter alia in
the business of providing software development, maintenance and
information technology services to its overseas entities business.
Admittedly, the return of income for the Assessment Year 2007-08 along
with Form 3CEB was filed. The petitioner has submitted all the Books of
Accounts, materials relevant for the purpose of assessment and further,
clarified the doubts raised by the Assessing authority. The final assessment
order was passed by the first respondent on 24.10.2011 and deduction under
Section 10A of the Act was examined in detail with reference to the
materials submitted by the assessee and held against the assessee.
4. The learned counsel for the petitioner reiterated that in the
succeeding Assessment Year 2008-09, also the Assessing authority
disallowed 10-A deduction on software maintenance on 30.12.2011. An
appeal was filed and the Commissioner, Income Tax (Appeals), [hereinafter
referred to as 'CIT(A)'] reversed the orders of the Assessing Officer and
allowed the deduction under Section 10A on Software maintenance. The
Income Tax Appellate Tribunal [hereinafter referred to as 'ITAT'] upheld
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the orders passed by the CIT (A) and the said decision of the ITAT became
final. The ITAT in its order dated 11.03.2014, ruled that the petitioner is
entitled for the benefit and allowed deduction under Section 10A on
Software maintenance. Thus, the issue reached finality as far as the
Assessing Authority is concerned, since the order passed by the CIT (A) as
well as the ITAT is to be followed scrupulously.
5. The learned counsel for the petitioner relying on the order passed
by the CIT (A) and ITAT, made a submission that when the similar issue
was decided in favour of the assessee by the higher forums, there is no
reason whatsoever to issue a notice under Section 148 of the Act. Thus, the
'reason to believe as well as the reasons furnished by the Assessing
authority is directly in violation of the decision already, which reached
finality through the order passed by the CIT (A) and ITAT. In view of the
fact that the Assessing authority has issued notice under Section 148 of the
Act without looking into the orders of the higher authorities including the
ITAT, the Assessing authority lacks his jurisdiction and therefore, the very
initiation of reopening proceedings itself in violation of the provisions of
the Act and thus, liable to be set aside. As far as the disposal of objections
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are concerned, the assessee in detail raised all these objections by
elaborately explaining the orders as well as the issues decided by the
CIT(A) as well as ITAT with reference to Section 10A and 10AA of the
Act. However, none of these objections raised by the assessee was
considered by the Assessing authority and an order, disposing of the
objections was passed in a mechanical manner and thus, the order lacks
application of mind and on this ground also, the writ petition is to be
considered.
6. The learned counsel for the petitioner drawn the attention of this
Court with reference to the reasons furnished for reopening of assessment. It
is contended that the reasons for initiation of reassessment proceedings
under Section 147/148 is regarding Software maintenance, which is not
eligible for Section 10A deduction. When the very same issue was decided
already by the higher forums, the said reason cannot be a reason for the
purpose of reopening of assessment as it is nothing but duplication and the
Assessing authority had failed to consider these aspects and thus, the writ is
to be considered on the ground of jurisdiction.
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7. To substantiate the said grounds raised, the learned counsel for the
petitioner relied on the assessment order passed by the authority competent
for the Assessment Year 2008-09 on 30.12.2011, wherein the very same
issue, which has been cited as reasons for reopening of assessment was dealt
with by the Assessment officer and a finding was given that “While the
export income derived by the assessee from export of computer software
and provision of information technology enabled services are eligible for
claim of deduction u/s.10A and 10AA, the other component of export
income relating to software maintenance is not an eligible item of income to
be considered for deduction under the said sections. The section no where
contemplates allowability of deduction on such maintenance income, more
so when the application maintenance is carried out on-site at the assessee's
client's premises”. The order passed by the ITAT, which is referred, would
reveal that the said issue was adjudicated and the finding was given in
paragraphs 9, 11 & 13, which were relied upon by the petitioners and the
same are extracted hereunder:
“9. The first substantive ground raised by the Revenue
challenges the action of the CIT(A) in holding the assessee
eligible for deduction u/s 10A in respect of income amounting
to Rs.20.43 crores derived from on-site and off-shore software
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application maintenance in relevant previous year. It argues
that as per Board's circular No.1/12013 dated 17.01.2013, the
assessee did not qualify the essential conditions of having a
direct and intimate nexus or connection of development of
software done abroad with the eligible units set up in India; it
had not signed any contractual agreement with its clients and
merely relied upon a MoU entered with US holding company.
The last submission is that the software in question allegedly
produced had not been deployed at US holding company but at
a different third party premises in the absence of any
subsisting contract between them.
11. Relevant facts pertaining to this issue are that the
assessee, a subsidiary of its USA based holding company had
provided on-site and off-shore software application
maintenance services to its associate companies abroad in the
relevant previous year and derived income therefrom. There is
no dispute between the parties that the rates charged by the
assessee have already been found at arm's length in the course
of assessment. In the course of 'scrutiny', the Assessing Officer
was of the view that this application maintenance at its client's
premises did not come within the purview of Section 10A of the
Act. In assessment order, the Assessing Officer denied the
claim of deduction qua this income inter alia, on three grounds
i.e no conclusive proof had come demonstrating major part of
the application maintenance to be from the concerned
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software technology park or the special economic zone unit,
no separate billing or invoicing had been done qua on-site or
off-shore work coupled with the fact that bifurcation had been
arbitrarily shown. The third and last reason was presence of
assessee's technical manpower from India at client's site was
must whereas the maintenance activity in question had been
supported by deputing its manpower from India after
recruiting them here to the holding and other overseas
associate companies. In this manner, the Assessing Officer
excluded these receipts of Rs.20.43 crores from the purview of
Section 10A of the Act.
13. We have heard both parties and gone through the
case file as well as paper books placed on record. There is no
dispute qua factual position narrated hereinabove. The
assessee derives income from application and maintenance of
software by deputing its staff for on-site and off-shore
operations from India and the clients are its holding and
associate companies in various locations like USA, Japan,
Canada, etc. One of such agreement dated 08.06.2005 is at
Pages 265 to 277 of the paper book, wherein its has
undertaken on-site and off-shore services to M/s.Cognizant
Technology Solutions U.S.Corporation. The assessee claims to
have executed such agreements with each of the entities to
whom it has rendered the services in question. On being
pointed out, the Revenue has not drawn our attention to any
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material contrary to the same.
Coming to the first plea of the Revenue that there must
exist a direct and intimate nexus or connection of development
of software done abroad with the eligible units set up in India,
we find that the same goes contrary to Explanation 3 to
Section 10A read with Circular reproduced stipulating that
profits and gains derived from on-site development of
computer software outside India by deputing technical
manpower are deemed as export profits.
The second argument of the Revenue is that there should
be a contract for development of software between the client
and the eligible unit. Needless to say, we have already
observed about such agreements between assessee and its
clients which is nowhere rebutted by the Revenue. So, this plea
also fails.
The next argument of the Revenue is that the assessee
had not signed any contractual argument with the clients and
only placed on record a MoU between itself and the holding
company. As discussed hereinabove, the assessee has signed
agreements with all its clients (supra) and so far as the present
MoU at pages 265 to 277 of the paper book is concerned, the
same is, in fact, a Master Services Agreement which rejects the
Revenue's arguments. Its last plea is that the software
produced by the assessee had not been deployed at its US
holding company but at a different third party premises in
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USA without any subsisting contract. There is no material to
substantiate this plea. In our view, Section 10A is a deduction
provision, which has to be liberally construed. In the course of
arguments, the assessee has highlighted the fact that in
preceding assessment years, it has been getting benefit of
deduction qua the same on-site application maintenance
operations. Apart from this, the Revenue's argument only turns
out to be a hyper technical approach since in the circular
dated 17.01.2013, whose contents have already been
reproduced hereinabove, it is nowhere necessary that the
software in question has to be mandatorily deployed at the
holding company or the agreement should be between the
ultimate client and assessee. The latter argument of the
Revenue that there was no subsisting contract already stand
repelled in our findings hereinabove that indeed there existed
agreements between the assessee and its clients/associated
entities. In these circumstances, we find no merit in the ground
raised by the Revenue that assessee's income of Rs.20.43
crores is not eligible for deduction u/s10A of the Act since it
had arisen from on-site and off-shore software application
maintenance activity.”
8. It is contended that even the subsequent assessment order passed
for the Assessment Year 2009-10, also the very same issue was considered.
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The assessment order was passed on 20.03.2014 by the Commissioner of
Income Tax (Appeals) and with reference to the Assessment Year 2009-10,
the said issue was elaborately considered and a finding was given, stating
that 'since the facts are same for this year also, respectfully following the
above decision, the ground is allowed'. When the commissioner of Income
Tax (Appeals) as well as the ITAT categorically held that the issue is in
favour of the assessee, the said benefit is to be extended. However, it is
contended that the Assessing authority filed an appeal before the ITAT in
respect of the Appellate order passed for the Assessment Year 2009-10 and
the said appeal is now pending.
9. The learned counsel for the petitioner made a submission that the
said appeal was filed by the same Assessing Officer, who issued the notice
under Section 148 of the Income Tax Act in the present case. This apart, the
issue relating to the maintenance was not raised in the said grounds of
appeal. Therefore, the learned counsel for the petitioner is of an opinion that
the said issue relating to Section 10A and 10-AA reached finality as far as
the writ petitioner is concerned and it is binding on the Assessing authority.
Thus, the very initiation of proceedings under Section 147 is untenable and
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without jurisdiction.
10. The learned counsel for the petitioner drawn the attention of this
Court with reference to the reasons furnished, which is the same and was
already adjudicated elaborately by the Assessing officer and an order of
assessment was passed and the appeal preferred also held in favour of the
assessee. The disposal of the objections, which is impugned also shows that
the objections raised by the petitioner are not considered with reference to
the decision of the CIT (A) as well as the ITAT. For all these reasons, the
initiation perse is without jurisdiction and in violation of the essential
ingredients contemplated under the provisions of Section 147 of the Act.
11. In support of the said contentions, the learned counsel for the
petitioner relied on the judgments of the Hon'ble Supreme Court of India:
(a) In the case of Raza Textiles Limited Vs. Income Tax Officer,
Rampur, reported in (1973) 1 SCC 633, wherein, the Hon'ble Supreme
Court held as follows:
“3...................No authority, much less a quasi-judicial
authority, can confer jurisdiction on itself by deciding a
jurisdictional fact wrongly. The question whether the
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Jurisdictional fact has been rightly decided or not is a question
that is open for examination by the High Court in an application
for a writ of certiorari. If the High Court comes to the
conclusion, as the learned Single Judge has done in this case,
that the Income Tax Officer had clutched at the Jurisdiction by
deciding a jurisdictional fact erroneously, then the assessee was
entitled for the writ of certiorari prayed for by him. It is
incomprehensible to think that a quasi-judicial authority like the
Income Tax Officer can erroneously decide a jurisdictional fact
and thereafter proceed to impose a levy on a citizen.”
(b) The petitioner relied on the case of Jeans Knit Private Limited
Vs. Deputy Commissioner of Income Tax and others, reported in (2017)
390 ITR 10 (SC), and said that the Hon'ble Supreme Court set aside the
orders passed by the High Court and remanded the matter back relying on
the judgment by the Constitution Bench in the case of Calcutta Discount
Co., Limited Vs. ITO, [1961] 41 ITR 191 (SC). In paragraph 4 of the Jeans
Knit (cited supra), the Apex Court made an observation that “We are
conscious of the fact that the High Court has referred to the judgment of
this Court in CIT Vs. Chhabil Dass Agarwal [2013] 357 ITR 357 (SC). We
find that the principle laid down in the said case does not apply to these
cases.”
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(C) In the case of Radhasoami Satsang Vs. Commissioner of
Income Tax, reported in [1992] 193 ITR 321 (SC), the Apex Court held as
follows:
“13. One of the contentions which the learned senior
counsel for the assessee-appellant raised at the hearing was
that in the absence of any change in the circumstances, the
Revenue should have felt bound by the previous decisions and
no attempt should have been made to reopen the question. He
relied upon some authorities in support of his stand. A Full
Bench of the Madras High Court considered this question
in T.M.M. Sankaralinga Nadar & Bros. v. CIT [4 ITC 226
(Mad) (FB)] . After dealing with the contention the Full Bench
expressed the following opinion:”
15..............“At the same time, we have to bear in mind
that the policy of law is that there must be a point of finality in
all legal proceedings, that stale issues should not be reactivated
beyond a particular stage and that lapse of time must induce
repose in and set at rest judicial and quasi-judicial
controversies as it must in other spheres of human activity.”
16. We are aware of the fact that strictly speaking res
judicata does not apply to income tax proceedings. Again, each
assessment year being a unit, what is decided in one year may
not apply in the following year but where a fundamental aspect
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permeating through the different assessment years has been
found as a fact one way or the other and parties have allowed
that position to be sustained by not challenging the order, it
would not be at all appropriate to allow the position to be
changed in a subsequent year.”
12. Relying on the said judgments, it is contended that the reasons
furnished for reopening of assessment for the Assessment Year 2007-08 is
not in consonance with the provisions of the Act. The issues already decided
by the CIT (A) as well as ITAT was taken as a reason for reopening of
assessment and therefore, the authority lacks his jurisdiction and thus, the
writ petition is to be allowed.
13. It is further contended that the scope of reopening within four
years may be wider. However, in the present case, the reopening is made
beyond the period of four years and within 6 years. Thus, the assessing
authority is bound to follow the proviso clause, which contemplates that
there is a failure on the part of the assessee to disclose fully and truly all
material facts necessary for the assessment for his assessment for that
Assessment Year. In the present case, the assessee has fully furnished the
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details, account books etc., at the time of original assessment and there was
a specific question raised by the Assessing authority and that was clarified
by the assessee during the relevant point of time. Thus, the said ground
cannot be a reason for the purpose of reopening of assessment as
requirement contemplated under the Proviso clause to Section 147 of the
Act has not been complied with.
14. In the case of Kone Elevators (India) Pvt.Ltd., Vs. Assistant
Commissioner of Income Tax in W.P.No.43662 of 2016 dated 16.06.2021,
this Court held as follows:
“14.The language employed in the Provision is to be
interpreted constructively and pragmatically so as to
understand the purpose and object. Plain meaning would not
serve the purpose to meet out the object of the provision. Thus,
this Court is of an opinion that the language employed under
the Proviso to Section 147 i.e., “to disclose fully and truly all
material facts” denotes that there must be an intention or
motive on the part of the assessee to suppress certain facts at
the time of passing an assessment order by the original
authority.
15.Question may arise, if certain non-disclosure can be
a ground for reopening. In this regard, absolutely there is no
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bar for reopening of assessment within a period of four years
under Section 147 of the Act and if the reopening of assessment
is to be made beyond four years, then it must be established
that the assessee has not disclosed fully and truly all material
evidence with an intention to escape from the payment of tax.
Mere nondisclosure is insufficient in view of the fact that the
assessee may have certain opinions in the matter of furnishing
certain details to the Assessing Officer. Therefore, the motive
or intention on the part of the assessee for such non-disclosure
is also a material ground to be considered by the Courts as
well as by the authority at the time of reopening of assessment
beyond the period of four years.”
15. The contentions raised on behalf of the petitioners are rebutted by
the learned Senior Standing counsel appearing on behalf of the respondents/
Income Tax Department.
16. The learned Senior Standing counsel contended that when the
Assessing authority has 'reason to believe' that the income chargeable to tax
escaped assessment, then he is empowered to reopen the reassessment. The
writ petition is filed, challenging the very notice as well as the disposal of
objections. Thus, the contentions raised on merits are to be adjudicated by
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the Assessing authority and the writ petitioner has to submit all the
materials for the purpose of consideration. Instead, this Court cannot
considered merits and demerits involved in respect of the grounds for
reopening of assessment.
17. The learned Senior Standing counsel drawn the attention of this
Court with reference to the reasons furnished for reopening the assessment.
The reasons furnished would reveal that the deduction under Section 10A,
10AA regarding the maintenance amount in the customers place are not
eligible and the said amount is no way connected with the export income
and thus, the said aspects are to be considered by the Assessing authority,
while adjudicating the issues in the reassessment proceedings. The reasons
furnished would show that the assessee company is engaged in the company
of software development and related services / solutions including software/
application maintenance services. The Assessing authority observed that out
of the profits earned from business more than 50% of the earnings from
STPI unit was attributed to the software application maintenance activity in
the relevant year. This specific activity is distinguishable to the computer
software development as specified in the Income Tax Act 1961. Further, the
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said software maintenance services work carried out by the assessee
company with the support of the technical manpower abroad. Since the
software application maintenance activity was not carried out from the STPI
unit, the proceeds from such software maintenance activity is not eligible
for deduction under Section 10-A / 10-AA of the Act. This specific
proceeds amounts to Rs.377,37,48,058/- for the instant year.
18. Relying on the reasonings, the learned Senior Standing counsel
reiterated that the jurisdiction point raised by the assessee was considered
by the authority competent, while disposing of the objections. Therefore, the
assessee has to participate in the process of reassessment by submitting their
grounds, materials, etc., enabling the authority to consider and pass
assessment/ reassessment orders.
19. The learned Senior Standing counsel elaborated the scope of
reopening of assessment under Section 147 of the Act. Explanation 1 & 2
would clarify that where an assessment has been made, but - (i) income
chargeable to tax has been under assessed is also a ground for reopening of
assessment. There are various several other grounds, which all are
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contemplated and it will be premature to decide all these aspects. It is
contended that Section 147 perse would reveal that any income chargeable
to tax has escaped assessment, the authority may subject to provisions of
Sections 148, 153, assess or reassess such income and also any other income
chargeable tax, which has escaped assessment and which comes to his
notice subsequently in the course of proceedings. Therefore, even in case,
where such income escaped assessment is noticed during the course of
proceedings, then also, the assessee is empowered to deal with such income
escaped assessment for the purpose of reopening. The wider scope
contemplated under Section 147 would reveal that disposal of objections
submitted by the assessee is one aspect of the matter and beyond the
objections submitted by the assessee, there is a possibility of culling out
certain other truth regarding the transactions and therefore, the very
initiation need not be interfered with as the assessee would get further
opportunity to participate in the proceedings in order to defend his case.
20. In support of the said contentions, the learned Senior Standing
counsel relied on the judgment of the Hon'ble Supreme Court of India in the
case of Phool Chand Bajrang Lal Vs. Income Tax Officer, reported in
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[1993] 69 Taxman 627(SC), and the relevant paragraphs are extracted
hereunder:
“21. We are not persuaded to accept the argument of Mr
Sharma that the question regarding truthfulness or falsehood of
the transactions reflected in the return can only be examined
during the original assessment proceedings and not at any
stage subsequent thereto. The argument is too broad and
general in nature and does violence to the plain phraseology
Sections 147(a) and 148 of the Act and is against the settled
law by this Court. We have to look to the purpose and intent of
the provisions. One of the purposes of Section 147, appears to
us to be, to ensure that a party cannot get away by wilfully
making a false or untrue statement at the time of original
assessment and when that falsity comes to notice, to turn
around and say “you accepted my lie, now your hands are tied
and you can do nothing”. It would be travesty of justice to
allow the assessee that latitude.”
(b) In the case of Sri Krishna (P) Ltd., Vs. Income-tax Officer,
reported in [1996] 221 ITR 538 (SC), wherein the Hon'ble Supreme Court
of India held as follows:
“10. A recent decision of this Court in Phool
chand Bajranglal v. Income Tax officer [(1993) 203 I.T.R.456],
we are gratified to note, adopts an identical view of law and we
are in respectful agreement with it. The decision rightly
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emphasises the obligation of the assessee to disclose all
material facts necessary for making his assessment fully and
truly. A false disclosure, it is held, dose not satisfy the said
requirement. We are also in respectful agreement with the
following holding in the said decision:
"Since the belief is that of the Income tax Officer,
the Sufficiency of reasons for forming the belief is
not for the court of judge but it is not for the court
of judge but it is open to an assessee to establish
that there in fact not at all a bona fide one or was
based on vague, irrelevant and non-specific
information. To that limited extent, the court may
look into the conclusion arrived at by the Income-
tax Officer and examine whether there was any
meterial available on the record from which the
requisite belief could be formed by the Income-tax
Officer and further whether that material had any
rational connection or a live link for the formation
of the requisite belief."
11. The learned counsel for the assessee, Sri Gupta placed
strong reliance upon the decisions of this Court in Chhugamal
Rajpal v. S.P. Chaliha & Ors [(1971) 79 I.T.R.603], Income Tax
Officer, I Word, Dist. VI, Calcutta v. Lakhmani Mewal
Das [(1976) 103 I.T.R.437] and Commissioner of Income Tax,
Calcutta v. Burlop Dealers Limited [(1971) 79 I.T.R.609] as
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laying down propositions contrary to those laid down in Phool
Chand Bajranglal. We cannot agree. The principle is well-
settled by Calcutta Discount and it is not reasonable to suggest
that any different proposition was sought to be enunciated in the
said decisions. Calcutta Discount emphasises repeatedly the
assessee's obligation to disclose all material facts necessary for
his assessment fully and truly in the context of the two
requirements - called conditions precedent which must be
satisfied before the Income Tax Officer gets the jurisdiction to
re-open the assessment under Section 147/148. This obligation
can neither be ignored nor watered down. Nor can anyone
suggest that a false disclosure satisfies the requirement of full
and true disclosure. All the requirement stipulated by Section
147 must be given due and equal weight. Finality of proceedings
is certainly a consideration but that avails one who has fully
and truly disclosed all material facts necessary for his
assessment for that year - and not to others. All the decisions
relied upon by Sri Gupta have been elaborately discussed and
distinguished in Phool Chand Bajranglal and we fully agree
with the same. We think it unnecessary to repeat those reasons.
In particular, we agree with the reasons given in Phool Chand
Bajranglal for holding that the decision of this Court in Burlop
delears must be confined to the particular fact-situation of that
case and that it cannot be construed to be of universal
application irrespective of the facts and circumstances of the
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case before the Court.”
(c) The Apex Court in the case of Raymond Woollen Mills Limited
Vs. Income Tax Officer, reported in [1999] 236 ITR 34 (SC), held as
follows:
“In this case, we do not have to give a final decision as to
whether there is suppression of material facts by the assessee
or not. We have only to see whether there was prima facie some
material on the basis of which the Department could reopen the
case. The sufficiency or correctness of the material is not a
thing to be considered at this stage. We are of the view that the
court cannot strike down the reopening of the case in the facts
of this case. It will be open to the assessee to prove that the
assumption of facts made in the notice was erroneous. The
assessee may also prove that no new facts came to the
knowledge of the Income-tax Officer after completion of the
assessment proceeding. We are not expressing any opinion on
the merits of the case. The questions of fact and law are left
open to be investigated and decided by the assessing authority.
The appellant will be entitled to take all the points before the
assessing authority. The appeals are dismissed. There will be
no order as to costs.”
(d) The High Court of Madras in the case of Jayaram Paper Mills
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Limited Vs. Commissioner of Income Tax, Chennai, reported in [2010]
191 Taxman 38 (Madras), held as follows:
“25. Thus it is clear that the scope of the deeming
fiction which was found in Explanation 1 under section 147,
before its amendment, was enlarged in the form
of Explanation 2, by the amendment under Act No. 4 of 1988.
The effect of this deeming fiction did not fall for consideration
in any of the decisions that arose even up to Sri Krishna
Private Ltd.. Therefore, even while keeping in mind the
elementary principles laid down in the aforesaid decisions, we
may have to apply them to the extent that they are now
permissible in view of Explanation 2.”
21. Relying on the said judgments, the learned Senior Standing
counsel made a submission that the assessee has to participate in the process
of re-assessment proceedings and he may raise all these grounds for the
purpose of effective adjudication of the issues and an assessment order is to
be passed by the authority competent. Therefore, the writ petition is to be
rejected.
22. The question arises, whether the grounds raised in the present writ
petition regarding the jurisdiction to reopen the assessment, is established.
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23. Let us now consider the scope of reopening of proceedings under
Section 147 of the Act. It is unambiguously enumerated that if the
Assessing Officer has 'reason to believe' that any income chargeable to tax
has escaped assessment for any assessment year, he may, subject to the
provisions of Sections 148 to 153, assess or reassess such income and also
any other income chargeable to tax which has escaped assessment and
which comes to his notice subsequently in the course of the proceedings
under this section, or recompute the loss or the depreciation allowance or
any other allowance, as the case may be, for the assessment year concerned.
24. Proviso clause deals with two circumstances, when a reopening of
assessment is made within the period of four years, no embargo is
contemplated. If the reopening is made beyond four years, but within six
years, then certain conditions are to be complied with. The conditions are
three fold, (i) any income chargeable to tax has escaped assessment for such
assessment year by reason of the failure on the part of the assessee to make
a return under Section 139; (ii) in response to a notice issued under Sub-
Section (1) of Section 142 or Section 148; or (iii) to disclose fully and truly
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all material facts necessary for his assessment, for that assessment year.
25. If reopening of assessment is made by the authority competent
beyond the period of four years and within 6 years, then any one of these
conditions are to be satisfied.
26. Explanation 1 to Section 147 of the Act provides that Production
before the Assessing Officer of account books or other evidence from which
material evidence could with due diligence have been discovered by the
Assessing Officer will not necessarily amount to disclosure within the
meaning of the foregoing proviso. Therefore, mere production of account
books or other evidences by the assessee is insufficient to form an opinion
that the materials were already dealt with by the Assessing authority.
Therefore, there is no scope for reopening of assessment. Firstly, the
Assessing authority if has 'reason to believe' for reopening, he is empowered
to do so. Explanation 2(c) also stipulates several circumstances under
which, reopening of assessment can be made. For instance, income
chargeable to tax has been under-assessed or such income has been assessed
on too low a rate or such income has been made the subject of excessive
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relief under the Income Tax Act or excessive loss or depreciation allowance
or any other allowance under this Act has been computed.
27. Therefore, the circumstances, which enumerates and if the
Assessing Officer has 'reason to believe' that there are materials on record to
reopen the assessment, which would be sufficient for invoking Section
147/148and if at all the assessee is having contra opinion, it is for them to
submit the materials to rebut the reasonings and therefore, quashing of the
notice on initiation stage cannot be done in a routine manner.
28. The procedures contemplated for furnishing reasons, submitting
objections and disposal of the objections are based on the Directives of the
Hon'ble Supreme Court of India in the case of GKN Driveshafts (India)
Ltd., vs. Income Tax Officer [(2002) 125 Taxman 963(SC)]. Such
directives are issued, in order to own the compliance of the Principles of
Natural Justice and therefore, the assessee cannot make a complaint that the
objections in entirety on merits are adjudicated and discussed in the order of
disposal of objections. Disposal of objections cannot be construed as a final
order passed in the reassessment proceedings. Disposal of objections with
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reference to the jurisdiction in the present case has been considered. As far
as the merits are concerned, it is inappropriate to form an opinion that the
competent authority shall adjudicate the merits, while disposing of the
objections filed by the assessee on reopening of assessment under Section
147/148 of the Act.
29. Therefore, two circumstances, are to be considered. Firstly, the
grounds raised on merits and grounds raised on jurisdiction. In order to
overcome the liability or to escape from the liability, the aggrieved person
may raise the point of jurisdiction etc., However, the point of jurisdiction, if
to be adjudicated along with the facts, that is to be adjudicated by the
competent authority and not by the High Court in a writ proceedings. The
jurisdiction point directly hitting the provisions of the Income Tax Act, then
the High Court may entertain a writ petition and set aside on the ground that
the authority, who issued an order, has no jurisdiction to issue such an order
and remand the matter back for fresh consideration. At the outset, if any
notice or order is issued by an authority incompetent having no jurisdiction,
then the writ is entertainable and if the jurisdiction point is raised along with
the factual aspects, which require an elaborate adjudication, then the High
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Court would not venture into such an adjudication in a writ proceedings.
More over, such adjudication requires examination of original records and
evidences. However, the writ petitions are mostly filed by raising a ground
of jurisdiction. The ground of jurisdiction are raised, linked with the factual
aspects and such factual aspects requires some adjudication and in those
circumstances, the authorities must be allowed to proceed with the
reassessment proceedings by affording opportunity to the assessee and
therefore, this Court is of an opinion that merely raising a point of
jurisdiction is insufficient and the jurisdiction raised directly hitting the
provisions of the Income Tax Act alone is entertainable and not otherwise.
30. Regarding the scope of reopening of the assessment, Section 147
contemplates wider scope and enumerates circumstances. The Assessing
authority must have 'reason to believe' means that the 'reasons to believe'
must have nexus with the materials available on record. However, the
sufficiency of the reasons cannot be gone into by the High Court in a writ
proceedings. The in-between procedures contemplated in GKN Driveshafts
(cited supra) case is to comply with the Principles of Natural Justice and not
to complete the entire adjudication for the purpose of passing the
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reassessment orders. To make it clear, once reopening of proceedings are
initiated under Section 147 and a notice was issued under Section 148, the
assessee seeking reasons, the Assessing Officer, furnishing reasons, the
assessee submitting objections and authority disposing of the objections are
to make the assessee to understand the reasons, for which, the reopening of
assessment is made and not beyond that. Rest of the grounds are to be
adjudicated only after disposal of the objections. In most of the cases, the
assessees are making an attempt to adjudicate the entire issues on merits at
the stage of filing objections and while disposing of the objections by the
competent authority. It is to be borne in mind that even at the time of
disposing of the objections, the Assessing Officer himself may not be
knowing about certain factual details, there is a possibility. That is the
reason why Section 147 contemplates that “any other income chargeable to
tax, which has escaped assessment and which comes to his notice
subsequently in the course of the proceedings”. When the Assessing
authority is empowered to adjudicate the other income chargeable to tax,
which has escaped assessment, and which comes to his notice subsequently
in the course of the proceedings, High Court is expected to give scope for
such adjudication for the Assessing authority, then only, the said provision
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can be complied with.
31. For instance, if a writ petition is decided based on the objections
raised and the disposal of the objections by the Assessing Officer, this Court
is of an opinion that the Revenue is deprived of an opportunity to cull out
the truth at the time of adjudication of the issues. During the proceedings, if
the Revenue found that the income chargeable to tax, which has escaped
assessment and which comes to his notice subsequently in the case of the
proceedings, is also subject matter for reassessment. The wider scope of the
Section cannot be crippled down by quashing the reopening proceedings at
the budding stage and in all circumstances, the Assessing authority shall be
allowed to proceed with the reassessment proceedings, except in
extraordinary circumstances, where the initiation itself is found without
jurisdiction and directly hitting the provisions of the Income Tax Act.
32. Even, where the income chargeable to tax has been under
assessed, and such income has been assessed at too low a rate, or such
income has been made the subject of excessive relief under the Act or
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excessive loss or depreciation allowance or any other allowance under this
Act also grounds for reopening of assessment. Under these circumstances,
the reasons furnished by the authority for reopening of assessment is one
aspect of the matter. There is a possibility of identifying other income
chargeable to tax during the course of tax are the other aspect of the matter.
Thirdly, there are certain intricacies and accounting technicalities, which are
to be gone into by the competent authority, who has possessing expertise in
the matter of scrutinizing the materials for the purpose of assessment or
reassessment. Undoubtedly, High Court cannot adjudicate the intricacies of
accounting on merits. Admittedly, the Income tax officials are trained to
deal with such issues. Thus, they need not be restrained at the budding stage
and no prejudice would be caused even if the Assessing Officer is allowed
to complete the proceedings, after affording opportunity to the writ
petitioner. The assessee would get opportunity to explain and their ground
and to submit the materials before the authority for effective adjudication.
Contrarily, in a writ proceedings, High Court cannot gone into and
scrutinize such materials with reference to the records.
33. In the present case, the following reasons were furnished in
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proceedings dated 18.09.2014:
“The assessee Cognizant Technology Solutions India
Private Limited (CTS) claimed deduction U/s 10A/10AA of the
IT Act to the tune of Rs747,88,97,793 for the assessment year
2007-08. The assessee company is engaged in the business of
software development and related services / solutions
including software/application maintenance services. It is
observed that out of the profits earned from business more
than 50% of the earnings from STPI unit was attributed to the
software application maintenance activity in the relevant year.
This specific activity is distinguishable to the computer
software development as specified in the Income Tax Act, 1961
Further, the said software maintenance services work earned
out by the assessee company with the support of the technical
manpower abroad. Since this software application
maintenance activity was not carried out from the STPI unit,
the proceeds from such software maintenance activity is not
eligible for deduction U/S.10A/10AA of the IT Act This specific
proceeds amounts to Rs.377,37,48,058 for the instant_year.-
While the export income derived by the assessee from
export of computer software and provision of information
technology enabled services are eligible for claim of deduction
U/s 10A and 10AA of the Income Tax Act the other component
of export income relating to software maintenance is not an
eligible item of income to be considered for deduction under
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the said sections. The relevant provisions of section 10A or
10AA nowhere contemplates allowability of deduction on such
maintenance income, more so when the application
maintenance is carried out on-site at the assessee client's
premises.
In view of these reasons, it is held that the export
earnings of the assessee company from application
maintenance is not eligible for deduction U/s.10A & 10AA.
Moreover, it is seen that the assessee gets its entire project
work order/project work from its holding company and
overseas subsidiary companies namely CTS USA, CTS France,
CTS Germany etc. The assessee is deputing manpower from
India after recruiting them in India to its holding company and
other overseas assoiate companies. Though these technical
persons are on the pay rolls of its holding company and other
overseas associate companies, apparently the maintenance
activity carried out by the assessee company are supported by
these very technical manpower from abroad.
In light of these facts, I have reason to believe that
income chargeable has escaped assessment and accordingly
need to be brought to taxation. Hence, the assessment was
reopened as per the provisions of section 147 of the Income
Tax Act; and Notice U/s 148 dated 28.03.2014 was issued.”
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34. No doubt, the petitioner has raised a ground that the said issue has
been already considered in favour of the assessee by the CIT (A) as well as
the ITAT with reference to other assessment years. However, those details
are to be gone into elaborately for the purpose of appreciation of the
grounds raised by the assessee. This Court blanketly comparing the grounds
raised by the assessee as well as the findings of the Commissioner of
Income Tax (Appeals) and form an opinion that the very initiation of
reassessment proceedings is not in accordance with the provisions of the
Act. If such a conclusion is arrived, undoubtedly, the parties would not be
getting an opportunity for an effective adjudication of issues. Therefore, the
grounds raised by the petitioner with reference to the orders passed by the
CIT (A) and the ITAT are required to be gone into in detail with reference
to the reasons furnished for the purpose of reopening of assessment. Such an
exercise cannot be done in a writ proceedings by the High Court under
Article 226 of the Constitution of India. In the event of any finding on
merits, the same would affect either of the parties to the lis and such an
adjudication must be done by the competent authority by scrutinizing the
original documents and evidences.
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35. This being the principles to be followed, the petitioner may of an
opinion that the grounds raised are stronger enough to repudiate the
reopening proceedings, this Court cannot offer any finding on that and it is
for the petitioner to raise all these grounds by submitting supporting
material, evidences in order to complete the reassessment proceedings.
However, the reasons furnished by the authorities in proceedings dated
18.09.2014 are enough for the purpose of reopening of assessment.
However, the sufficiency of the reasons are to be considered only during the
course of proceedings and not by this Court in the present writ proceedings.
36. The High Courts are expected to slow in interfering during the
intermittent period when a reassessment proceedings are undertaken. The
original assessment orders are passed, merely based on the return of income
as well as the materials furnished by the assessee. It is a first stage, where
the Income Tax Department is able to get some materials or informations for
the purpose of reopening of assessment. Therefore, in all circumstances, the
original assessment orders are passed only based on the return of income
and the informations provided by the assessee. When the Assessing
authority would able to cull out certain informations or materials after
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passing an assessment order, then the power of reopening is confirmed. This
being the very scope and purpose of the Act, this Court is of an opinion that
an adjudication in the reopening of assessment proceedings are of
paramount importance in order to find out, whether any income chargeable
to tax has escaped assessment or not. This is a first stage, where the
Revenue gets an opportunity to investigate the matter elaborately.
Therefore, such an investigation need not be crippled down for the purpose
of completion of the proceedings.
37. This being the principles to be followed, the petitioner has to
participate in the reassessment proceedings by availing the opportunities to
be provided by the Assessing authority. As far as the other grounds raised in
the writ petition are concerned, the petitioner is at liberty to raise all those
grounds before the Assessing authority for the completion of reassessment
proceedings.
38. With these observations, the writ petition stands dismissed. No
costs. Consequently, connected miscellaneous petition is closed.
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W.P.No.10051 of 2015
02.08.2021
Speaking order/Non-speaking order
Index : Yes/No
Kak
To
1.Assistant Commissioner of Income Tax,
Large Tax Payer Unit-I,
1775, Jawaharwal Nehru Inner Ring Road,
Anna Nagar Western Extension,
Chennai – 600 101.
2.Commissioner of Income Tax,
Large Tax Payer Unit-I
1775, Jawaharwal Nehru Inner Ring Road,
Anna Nagar Western Extension,
Chennai – 600 101.
S.M.SUBRAMANIAM, J.
Kak
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W.P.No.10051 of 2015
02.08.2021
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