The Bombay High Court has dismissed an appeal filed by the Principal Commissioner of Income Tax-1, Thane, challenging the Income Tax Appellate Tribunal’s ( ITAT ) order quashing reassessment proceedings against Agfa India Pvt. Ltd., for the Assessment Year 2007–08. The High Court held that the reassessment was initiated without the Assessing Officer (AO) having formed an independent belief that income had escaped assessment, as required under the law.
The appellant, Principal Commissioner of Income Tax-1, Thane, had approached the High Court under Section 260A of the Income Tax Act, 1961, challenging the ITAT’s order dated 15 September 2017. The Revenue contended that reassessment was validly initiated based on information received from the Transfer Pricing Officer (TPO) and subsequent directions from superior officers. The appeal arose from the ITAT’s finding that the reassessment was based on “borrowed satisfaction” and not on the AO’s independent application of mind.
The original assessment for Agfa India Pvt. Ltd. was completed on 22 December 2010 under Section 143(3), accepting the income as returned by the assessee. Later, based on transfer pricing adjustments proposed for the subsequent Assessment Year 2008–09, the TPO communicated to the Joint Commissioner of Income Tax that income had escaped assessment in the previous year. Acting on this, the Joint Commissioner and the Commissioner directed the AO to initiate reassessment for 2007–08, which was done via a notice issued on 19 January 2012 under Section 148.
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The High Court found that the AO had not recorded any independent satisfaction before issuing the reassessment notice. The satisfaction note revealed that the AO merely followed instructions from the superior authorities without forming his own belief based on material facts. The Court held that the AO cannot act solely on the dictates of higher officers and that such action amounted to abdication of statutory discretion.
The bench, comprising Justice M.S. Sonak and Justice Jitendra Jain, rejected the Revenue’s contention that the AO was bound by the TPO’s findings for the subsequent assessment year. It held that the reassessment was legally unsustainable as it was not based on the AO’s own reasoning but merely carried forward from determinations made by others.
The Court relied on precedents including Anirudhsinhji K. Jadeja V. State of Gujarat and rulings of the Bombay High Court such as Sodexo India Services Pvt. Ltd., Balaji Mines and Minerals Pvt. Ltd., and Shodiman Investments Pvt. Ltd., all of which underscored that the “reason to believe” must originate from the AO’s independent assessment and not from external direction.
Dismissing the appeal, the Court held that no substantial question of law arose in the Revenue’s favour. It upheld the ITAT’s order quashing the reassessment proceedings as legally invalid.
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