Section 195:A.O Can’t Reopen Assessment Without Valid Reason?

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Monitor Group Holdings Netherlands B.V.,is a subsidiary of a Dutch Company which in turn is a wholly owned subsidiary of Monitor Company Group L.P. United States. During the course of Assessment Year 2004-05, the Petitioner made a payment of Rs. 1.56 crores to its U.S. based principal.This, according to the assessee , was a reimbursement for costs incurred for providing Group Management, Finance and Benefits, Training and Professional Development, Information Resources and allocations of human resources services to the Petitioner.

The assessee filed an application under Section 195(2) and sought a no objection certificate authorising the assessee to remit the amount to its U.S. principal without deduction of tax at source. Later it filed a return of income a total income wherein the amount on which tax was not deducted was not reduced while computing total income.

However, assessee appended Note 4 to the return of income by which it was made clear that there was no income tax liability arising on such corporate allocations and the company is hopeful of a nil order of withholding. But pending the order from the Revenue authorities this amount has been disallowed. The assessee reserves the right to revise the return after receipt of favourable order.

Subsequently assessee received order of A.O by which the assessee was authorised to remit a total sum of Rs. 1.74 crores to the U.S. Company without deducting withholding tax on the amount which represented reimbursement of expenditure incurred by the Payee for providing support services to the Petitioner.

The assessee filed a revised return of income by claiming deduction of of Rs. 1.56 crores which was added back in in the original return of income . A covering letter was filed with the revised return dated 23 March 2005 stating that in the original return of income, the amount of Rs.1.56 crores was recorded as disallowance for reasons explained in Note-4. Following the receipt of an order under Section 195, the amounts which had been disallowed earlier were claimed as allowable expenditure against the taxable income computed.
Subsequently, a notice had been issued to the assessee under section 148 on 22-3-2011 for re-opening the assessment on the ground that the certificate is valid only after the date it is issued , however, the assessee had already credited the sum to non resident principal and the amount credited/paid by the assessee for the period under consideration for which the certificate had been issued also does not tally.

The assessee challenged the re-assessment proceedings in the writ petition .

The issue before , Bombay High Court in Monitor India (P.) Ltd vs Union of India 343 ITR 236 (BOM.)/[2012] was

Whether since the Assessing Officer had in reasons for reopening u/s 148 made no reference at all to whether payment which was effected to foreign principal represented income chargeable under provisions of Act and, moreover, assessee in original proceedings had disclosed fully and truly facts that payment made to foreign principal represented a reimbursement for costs incurred by foreign principal on behalf of assessee and allocation of expenses was carried out in accordance with methodology which was placed on record, re-opening of assessment was not justified ?

The Bombay High Court held vide its order 1/24/2012 as under :

Now, reading the reasons as they stand, it is evident that there is not even an allegation to the effect that there was a failure on the part of the Petitioner to fully and truly disclose all material facts necessary for the assessment. But for the purposes of the present discussion, it is not necessary to rest the view which we are inclined to take, merely on the absence of any averment that there was a failure to disclose on the part of the Petitioner. The record before the Court indicates that even when the original return was filed, the Petitioner had in the note (Note-4) annexed to the return of income, expressly clarified that the Petitioner had filed an application under Section 195 in respect of the corporate allocation payable to its principal. The Note indicated that the principal provided administrative and management support services and the costs which were incurred were allocated at actuals to various subsidiaries globally that benefited from the service provided. The Petitioner stated that the costs which were allocated were reimbursed to the foreign principal at actuals and that there was no mark-up. The Petitioner stated that it believed that there was no income tax liability arising on such corporate allocations and the company was hopeful that a nil order of withholding would be passed. However, pending the order from the Revenue authorities, the amount was treated as being disallowed, but the Petitioner reserved its right to revise the return after receipt of the order from the Revenue. This was also duly elaborated upon in the Profit and Loss Account as well as in the Tax Audit Report. After an order was passed under Section 195(2) on 15 March 2005, a revised return of income was filed on 1 April 2005.

During the course of the assessment proceedings, the Assessing Officer made enquiries specifically in regard to the manner in which the allocation has been made and sought an explanation from the Petitioner both in regard to the basis and quantum of the allocation. During the course of the replies which were supplied by the Petitioner during the course of the assessment proceedings, the Petitioner disclosed the following facts: (i) That a payment was made in the amount of Rs.1.56 crores by the Petitioner to its foreign principal; (ii) The payment which was made represented a reimbursement on the basis of actuals to the foreign principal in respect of costs incurred on behalf of the Petitioner for providing services; (iii) That there was an agreement between the Petitioner and the foreign principal, a copy of which was placed on record; (iv) The allocation of expenses was carried out in accordance with the methodology which was placed on record; (v) An order had been passed under Section 195(2) by the Assessing Officer.

There was, therefore, in these circumstances, a full disclosure of all primary and material facts necessary for the assessment. As we have noted earlier, the Assessing Officer has not even indicated in the reasons that have been recorded that there was any failure to disclose fully and truly all material facts. But quite apart from the facts and as indicated above, we find merit in the contention of the Petitioner that there was a full and true disclosure of all necessary material for assessment for Assessment Year 2004-05. [Para 10 ]

12. In the circumstances, having regard to the fact that the reopening of the assessment has taken place beyond a period of four years of the end of the relevant Assessment Year, we find merit in the case of the assessee that the jurisdictional condition for reopening of the assessment has not been fulfilled. There has been clearly no failure on the part of the Petitioner to disclose fully and truly all material facts necessary for the assessment. Moreover, as we have noted earlier that is not even the case of the Assessing Officer for reopening of the assessment. Accordingly, we allow the Petition by quashing and setting aside the notice dated 22 March 2011. Rule is made absolute in these terms. There shall be no order as to costs.