HIGH COURT OF BOMBAY
Rabo India Finance Ltd.
v.
Deputy Commissioner of Income-tax*
DR. D. Y. CHANDRACHUD AND A. A. SAYED, JJ. 
Writ Petition (Lodg.) No. 592 of 2013
MAY  3, 2013 
Section 147, read with section 37(1), of the Income-tax Act, 1961 - Income escaping assessment - Non-disclosure of primary facts [To disallow business expenditure under section 37(1)] - Assessment year 2006-07 - Whether an Assessing Officer acts within jurisdiction in reopening an assessment on basis of information which comes to him after original assessment and during course of assessment proceedings for a subsequent assessment year - Assessee-company claimed deduction on account of business support charges, guarantee fees and other service charges paid to its holding company and it was allowed deduction accordingly - However, Assessing Officer noticed that in assessment proceedings for assessment year 2007-08, business support charges and guarantee fees paid to holding company were disallowed being not for business expediency - On basis of said order, Assessing Officer reopened assessment for assessment year 2006-07 - Records revealed that Assessing Officer for assessment year 2006-07 did not evaluate or consider said issues - Moreover, assessment order for assessment year 2007-08 could be said to be tangible material to form belief that income had escaped assessment - Whether re-opening was justified - Held, yes [Para 9] [In favour of revenue] 
FACTS
 
■ 	 	The assessee-company was a wholly owned subsidiary of a foreign company. It was paying business support charges, guarantee fees and other service charges to its holding company.	
■ 	 	The Assessing Officer in assessment proceedings for year 2007-08 held that no substantial or specific services had been rendered by the holding company and, hence, the business support charges and guarantee fees paid to the holding company were not for business expediency and since this issue was apparently not verified in the transfer pricing proceedings by the TPO, these were to be disallowed. 	
■ 	 	On basis of said order, the Assessing Officer, facts being similar initiated re-assessment proceedings for assessment year 2006-07.	
■ 	 	The assessee filed writ petition and submitted that the Transfer Pricing Officer as well as the Assessing Officer applied their minds in the first instance even though there was no specific finding and the reopening of the assessment was based on a mere change of opinion and that the reopening of the assessments of the assessee for assessment years 2004-05 and 2005-06 under section 148 was questioned in writ proceedings before the High Court but the notices issued for were quashed and set aside. 	
HELD
 
■ 	 	In the present case, the assessment is sought to be reopened within a period of four years of the end of the relevant assessment year. Where an assessment is sought to be reopened beyond a period of four years, the proviso to section 147 stipulates as a jurisdictional requirement that there must be a failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that assessment year. Such a requirement, which the proviso to section 147 stipulates in respect of a reopening beyond a period of four years is evidently not extrapolated to a situation as in the present case the reopening is within a period of four years. Where reopening of an assessment under section 148 takes place within a period of four years, the test that has been laid down by the Supreme Court is whether the Assessing Officer had tangible material to come to the conclusion that there is an escapement of income from assessment. [Para 4] 	
■ 	 	The judgments of the Supreme Court on the subject contain a clear elaboration of principle in which it has been held that an Assessing Officer acts within jurisdiction in reopening an assessment on the basis of information which comes to him after the original assessment and during the course of the assessment proceedings for a subsequent assessment year.[Para 5]	
■ 	 	The order of the Assessing Officer for assessment year 2006-07 contained absolutely no evaluation or consideration whatsoever in respect of the issues on the basis of which the assessment had been sought to be reopened. During the course of the assessment proceedings for assessment year 2007-08, an order of assessment came to be passed on 24-11-2010. During the course of the order of the assessment, the Assessing Officer on the basis of material in his possession came to the conclusion that the assessee had failed to demonstrate the nature of the services or support received, the necessity of the said services, and that the payments were made for commercial reasons of business exigency, as a result of which the expenses were inadmissible under section 37(1). Having regard to the law as expounded by the Supreme Court, one can come to the assessment for assessment year 2006-07 could legitimately be reopened on the basis of the material which came before the Assessing Officer during the course of the assessment proceedings for assessment year 2007-08. [Para 9]	
■ 	 	The earlier judgment of a Division Bench of High Court in the proceedings initiated by the assessee related to the reopening for assessment years 2004-05 and 2005-06 which was admittedly beyond a period of four years. Where the reopening of an assessment takes place beyond a period of four years of the end of the relevant assessment year, the jurisdictional condition before an assessment can be validly reopened is that there must be a failure on the part of the assessee to fully and truly disclose all material facts necessary for the assessment for that assessment year. The test which the Division Bench was therefore called upon to apply in relation to the reopening of assessments for assessment years 2004-05 and 2005-06 beyond a period of four years would therefore be distinct from the situation in the present proceeding where the reopening has taken place within a period of four years. The Division Bench in fact observed that the reopening for those years was admittedly not on the basis of any new material or the existence or even the realization of any provision of law or judgment which had not been noticed earlier. The situation in the present case is clearly distinguishable where the reopening of the assessment is within a period of four years. [Para 10]	
■ 	 	The Assessing Officer was acting within jurisdiction in reopening the assessment for assessment year 2006-07 on the basis of the assessment proceedings for assessment year 2007-08. The mere fact that the income has been assessed in the hands of the parent company of the assessee could not be demonstrative of the allowability of the expenditure under section 37(1). Similarly, the considerations which weigh in the passing of an order under section 195(2) would clearly not be dispositive of the jurisdiction of the Assessing Officer to reopen an assessment under section 148. For these reasons, no reason or justification is found to interdict the exercise of the jurisdiction of the Assessing Officer to reopen an assessment under section 148. The reopening within a period of four years in the present case is based on tangible material. [Para 10]	
CASE REVIEW
 
CIT v. Kelvinator of India Ltd. [2010] 320 ITR 561/187 Taxman 312 (SC) (para 4), Kalyanji Mavji & Co. v. CIT [1976] 102 ITR 287 (SC) (para 5), Claggett Brachi Co. Ltd v. CIT [1989] 177 ITR 409/44 Taxman 86 (SC) (para 5), Raymond Woollen Mills Ltd. v. ITO [1999] 236 ITR 34(SC) (para 6), Asstt. CIT v. Rajesh Jhaveri Stock Brokers (P.) Ltd. [2007] 291 ITR 500/161 Taxman 316 (SC) (para 8) followed.
CASES REFERRED TO
 
CIT v. Kelvinator of India Ltd. [2010] 320 ITR 561/187 Taxman 312 (SC) (para 4), Hindustan Lever Ltd. v. R.B. wadkar, Asstt. CIT [2004] 268 ITR 332/137 Taxman 479 (Bom.) (para 4), Kalyanji Mavji & Co. v. CIT [1976] 102 ITR 287 (SC) (para 5), Claggett Brachi Co. Ltd v. CIT [1989] 177 ITR 409/44 Taxman 86 (SC) (para 5), Raymond Woollen Mills Ltd. v. ITO [1999] 236 ITR 34(SC) (para 6), Virudhunagar Co. Operative Milk Supply Society Ltd. v. CIT [1990] 183 ITR 545/[1989] 46 Taxman 13 (Mad.) (para 7), Ropar District Co. Operative Milk Producers Union Ltd. v. CIT [2009] 311 ITR 42/[2007] 165 Taxman 477 (Punj. & Har.) (para 7), Diwakar Engineers Ltd. v. ITO [2010] 329 ITR 28/187 Taxman 327 (Delhi) (para 7) and Asstt. CIT v. Rajesh Jhaveri Stock Brokers (P.) Ltd. [2007] 291 ITR 500/161 Taxman 316 (SC) (para 8).
Jehangir D. Mistri and Atul K. Jasani for the Petitioner. P.C. Chhotaray for the Respondent.
JUDGMENT
 
Dr. D.Y. Chandrachud, J. - In these proceedings under Article 226 of the Constitution the Petitioner seeks to challenge the reopening of an assessment for Assessment Year 2006-07, under Section 148 of the Income Tax Act, 1961 by a notice dated 28 March 2011. The reopening in the present case is admittedly within a period of four years of the end of the relevant Assessment Year. The reasons on the basis of which the assessment is sought to be reopened are as follows:
"The assessee company is a wholly owned subsidiary of a Scottish bank. It is paying business support charges, guarantee fees and other service charges to its holding company. During the assessment year 2007-08, the AR was asked to produce the details of business support charges etc. received from the holding company. The details furnished by the AR shows that no substantial or specific services have been rendered by the holding company. Hence, the business support charges, guarantee fees paid to the holding company are not for business expediency. These payments are also subject matter of TP and this issue was apparently not verified in the transfer pricing proceedings by the TPO. The facts being the same for the AY 2006-07, the above expenses need to be disallowed.
I have therefore reasons to believe that the income of Rs.18,62,02,246/- has escaped assessment under the provisions of Income Tax Act, 1961 for the AY 2006-07 and remedial action by issuance of notice u/s 148 will be appropriate in the case because all the conditions for issue of such notice are fulfilled in this case. Hence the assessment for A.Y. 2006-07 is hereby re-opened."
2. On behalf of the Petitioner, it has been urged that -
(i)	 	Before the order of assessment was passed in the present case, requisitions were issued by the Transfer Pricing Officer and thereafter even by the Assessing Officer during the course of which explanatory statements were furnished by the assessee in regard to the interest on external commercial borrowings, guarantee commission and payments made for head office and regional charges. The Transfer Pricing Officer as well as the Assessing Officer had therefore applied their minds in the first instance even though there was no specific finding and the reopening of the assessment is consequently based on a mere change of opinion;	
(ii)	 	The reopening of the assessments of the Petitioner for Assessment Years 2004-05 and 2005-06 under Section 148 was questioned in writ proceedings before this Court. By a judgment and order of a Division Bench dated 9 July 2012, the notices issued for those years for reopening the assessments were quashed and set aside. Though the reopening in that case was beyond a period of four years of the end of the relevant Assessment Year, the observations of the Division bench would indicate that the reopening was on the basis of a mere change of opinion and was therefore impermissible;	
(iii)	 	The parent company of the Petitioner has been assessed in respect of the very same income; and	
(iv)	 	Tax was deducted at source on the basis of an order that was passed under Section 195(2) of the Income Tax Act 1961.	
3. On the other hand, it has been urged on behalf of the Revenue that -
(i)	 	The reopening of the assessment in the present case is on the basis of the assessment proceedings for Assessment Year 2007-08 since in the course of those proceedings it had emerged that no substantial or specific services were rendered by the holding company;	
(ii)	 	In view of a line of precedent of the Supreme Court, it is a settled principle of law that the reopening of an assessment on the basis of information which is disclosed in the course of assessment proceedings for a subsequent assessment year is permissible. In the present case the reopening of the assessment is within a period of four years and the test to be applied is whether there was tangible material before the Assessing Officer on the basis of which the assessment could be reopened. Ex-facie, the order of assessment for Assessment Year 2007-08 would constitute tangible material on the basis of which the assessment for Assessment Year 2006-07 could be reopened;	
(iii)	 	The earlier judgment of the Division Bench of this Court dated 9 July 2012 related to the reopening of the assessments for Assessment Years 2004-05 and 2005-06 which took place beyond a period of four years of the end of the relevant Assessment Year. In such a case the jurisdictional requirement is that there must be a failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment for that Assessment Year. On the other hand, where the assessment has been reopened within a period of four years, as in the present case, the test is as to whether there is tangible material before the Assessing Officer for reopening an assessment. Once there is tangible material, the reopening would have to be sustained;	
(iv)	 	The mere fact that the parent company has been assessed on the basis of the same income would not be conclusive of the allow-ability of the expenditure under Section 37(1) of the Income Tax Act 1961; and	
(v)	 	Similarly, the order under Section 195(2) was only concerned with the deduction of tax on payments which have been made to a non-resident and would not be conclusive of whether the assessment could be legitimately reopened under Section 148 of the Income Tax Act 1961.	
4. In the present case, the assessment is sought to be reopened within a period of four years of the end of the relevant Assessment Year. Where an assessment is sought to be reopened beyond a period of four years, the proviso to Section 147 stipulates as a jurisdictional requirement that there must be a failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that Assessment Year. Such a requirement which the proviso to Section 147 stipulates in respect of a reopening beyond a period of four years is evidently not extrapolated to a situation where as in the present case the reopening is within a period of four years. Where a reopening of an assessment under Section 148 takes place within a period of four years, the test that has been laid down by the Supreme Court in the CIT v. Kelvinator of India Ltd. [2010] 320 ITR 561/187 Taxman 312 is whether the Assessing Officer had tangible material to come to the conclusion that there is an escapement of income from assessment. The Supreme Court has held that the "reason to believe" that any income chargeable to tax has escaped assessment cannot be founded on a mere change of opinion. The power to reassess is not in the nature of a power to review. Hence, the true test to be applied, where a reopening takes place within a period of four years, as in the present case, is whether there exists tangible material on the basis of which the Assessing Officer has proceeded to reopen the assessment. That determination has to be made on the basis of the reasons which are disclosed to the assessee. For it is those reasons which form the foundation of the action of the Assessing Officer and form the basis on which the belief that income has escaped assessment is formed. Hindustan Lever Ltd v. R.B. Wadkar, Asstt. CIT [2004] 268 ITR 332/137 Taxman 479 (Bom.).
5. The judgments of the Supreme Court on the subject contain a clear elaboration of principle in which it has been held that an Assessing Officer acts within jurisdiction in reopening an assessment on the basis of information which comes to him after the original assessment and during the course of the assessment proceedings for a subsequent assessment year. This principle was laid down in a judgment of the Supreme Court in Kalyanji Mavji & Co. v. CIT [1976] 102 ITR 287 while construing the expression "information" in Section 34(1)(b) of the Income Tax Act 1961. A similar principle of law was enunciated in a subsequent decision of the Supreme Court in Claggett Brachi Co. Ltd. v. CIT [1989] 177 ITR 409/44 Taxman 86 where the Income tax Officer came to realise that income had escaped assessment for two assessment years when he was in the process of making an assessment for a subsequent assessment year. While making that assessment, he came to know from the documents pertaining to that assessment that the overhead expenses related to the entire business including the business as commission agents and were not confined to the business of purchase and sale. The Supreme Court held that it is true that this information could have been acquired by the Income-tax Officer if he had exercised due diligence at the time of the original assessment itself. The reopening of the assessment was upheld, on the basis of information which came into the possession of the Assessing Officer when taking assessment proceedings for the subsequent year.
6. In Raymond Woollen Mills Ltd. v. ITO [1999] 236 ITR 34 (SC) an assessment was sought to be reopened and the reasons recorded for reopening under Section 147(a) of the Income Tax Act 1961 showed that according to the Revenue the assessee was charging to its Profit and Loss Account, fiscal duties paid during the year as well as labour charges, power, fuel, wages, chemicals etc. However, while valuing its closing stock, the elements of fiscal duty and other direct manufacturing costs were not included, as a result of which there was an undervaluation of inventories and understatement of profits. This information was obtained by the Revenue in an assessment proceeding of a subsequent assessment year. While upholding the reopening, the Supreme Court observed 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."
7. A similar principle of law has been laid down in a judgment of a Division Bench of the Madras High Court in Virudhunagar Co-operative Milk Supply Society Ltd v. CIT [1990] 183 ITR 545/[1989] 46 Taxman 13 and in a judgment of a Division Bench of the Punjab and Haryana High Court in Ropar District Co-operative Milk Producers Union Ltd. v. CIT [2009] 311 ITR 42/[2007] 165 Taxman 477 (Punj & Har.) In a more recent judgment, a Division Bench of the Delhi High Court in Diwakar Engineers Ltd. v. ITO [2010] 329 ITR 28/187 Taxman 327 held that where materials had come to light during the assessment of a subsequent Assessment Year, that would not constitute a mere change of opinion, but could sustain a notice of reopening.
8. In Asstt. CIT v. Rajesh Jhaveri Stock Brokers (P.) Ltd. [2007] 291 ITR 500/161 Taxman 316 (SC) the Supreme Court has held that the expression "reason" in the phrase "reason to believe" would mean a cause or justification and if the Assessing Officer has cause or a justification to know or suppose that income had escaped assessment, he can be said to have reason to believe that income had escaped assessment. That expression, the Supreme Court held cannot be read to mean that the Assessing Officer should have finally ascertained the fact by legal evidence on conclusion. At the stage of a notice under Section 148, the final outcome of the proceedings is not relevant and at the stage of initiation what is required is a reason to believe, but not an established fact of the escapement of income. At the stage of the issuance of a notice, the only question is whether there was relevant material on the basis of which a reasonable person could have formed a requisite belief and whether the materials could conclusively prove the escapement of income is not a concern at that stage. The Supreme Court has also cautioned that at the stage of the issuance of a notice under Section 148, it is not necessary that the material must be extensive and detailed, since there is a difference in the material for the purpose of initiation and that required for successfully completing a reassessment.
9. In the present case, the order of the Transfer Pricing Officer dated 14 February 2008 under Section 92 CA(3) contained only the following reasoning: 
"Considering the facts and circumstances of the case, and the assessee's submissions and documents furnished, the value of the international transactions with the associated enterprises, with regards to the Arm's length price is not being disturbed."
Similarly, the order of the Assessing Officer under Section 143(3) for Assessment Year 2006-07 contains absolutely no evaluation or consideration whatsoever in respect of the issues on the basis of which the assessment has been sought to be reopened. During the course of the assessment proceedings for Assessment Year 2007-08, an order of assessment came to be passed on 24 November 2010. During the course of the order of assessment, the Assessing Officer on the basis of material in his possession came to the conclusion that the assessee had failed to demonstrate the nature of the services or support received, the necessity of the said services, that the payments were made for commercial reasons of business exigency, as a result of which the expenses were inadmissible under Section 37(1). At this stage, the Court is not concerned with the correctness of that determination, since the only issue is as to whether the material which emerged during the course of the assessment proceedings for Assessment Year 2007-08 and the order of assessment could furnish tangible material on the basis of which the assessment for Assessment Year 2006-07 could be reopened. Having regard to the law as expounded by the Supreme Court in the several judgments which we have noted earlier, we have come to the conclusion that the assessment for Assessment Year 2006-07 could legitimately be reopened on the basis of the material which came before the Assessing Officer during the course of the assessment proceedings for Assessment Year 2007-08.
10. The earlier judgment of a Division Bench of this Court in the proceedings initiated by the assessee related to the reopening for Assessment Years 2004-05 and 2005-06 which was admittedly beyond a period of four years. Where the reopening of an assessment takes place beyond a period of four years of the end of the relevant Assessment Year, the jurisdictional condition before an assessment can be validly reopened is that there must be a failure on the part of the assessee to fully and truly disclose all material facts necessary for the assessment for that Assessment Year. The test which the Division Bench was therefore called upon to apply in relation to the reopening of assessments for Assessment Years 2004-05 and 2005-06 beyond a period of four years would therefore be distinct from the situation in the present proceeding where the reopening has taken place within a period of four years. The Division Bench in fact observed that the reopening for those years was admittedly not on the basis of any new material or the existence or even the realization of any provision of law or judgment which had not been noticed earlier. The situation in the present case is clearly distinguishable where the reopening of the assessment is within a period of four years. In view of the position in law as laid down by the Supreme Court, we have no hesitation in coming to the conclusion that the Assessing Officer was acting within jurisdiction in reopening the assessment for A.Y. 2006-07 on the basis of the assessment proceedings for A.Y. 2007-08. The mere fact that the income has been assessed in the hands of the parent company of the assessee would not be demonstrative of the allowability of the expenditure under Section 37(1). Similarly, the considerations which weigh in the passing of an order under Section 195(2) would clearly not be dispositive of the jurisdiction of the Assessing Officer to reopen an assessment under Section 148. For these reasons, we do not find any reason or justification to interdict the exercise of the jurisdiction of the Assessing Officer to reopen an assessment under Section 148. The reopening within a period of four years in the present case is based on tangible material. We accordingly dismiss the Petition.
There shall be no order as to costs.
Pooja 

*In favour of revenue.