The Bombay High Court in Pr. Commissioner of Income Tax-1, Thane (W) v/s Agfa India Pvt. Ltd. (Now Merged With Agfa Healthcare India Pvt. Ltd.), Thane (West)., has dismissed an appeal filed by the Income Tax Department, upholding the Income Tax Appellate Tribunal’s (ITAT) order that had quashed reassessment proceedings against an assessee engaged in the distribution of photographic and electronic imaging systems. The High Court concurred with the ITAT's finding that the Assessing Officer (AO) had initiated the reassessment based on the directions and information from superior authorities without an independent application of mind, thus rendering the proceedings invalid.

The case pertains to the Assessment Year 2007-08. The assessee had filed its return of income, which was initially accepted after a Transfer Pricing Officer (TPO) suggested no adjustments to its international transactions. However, based on an adjustment suggested by the TPO for the subsequent Assessment Year 2008-09, the assessee’s case was reopened under Section 147 of the Income Tax Act, 1961 (“IT Act”).

The reassessment order was later set aside by the Principal Commissioner of Income Tax (Pr. CIT) under Section 263 of the IT Act, directing a fresh assessment after referring the matter to the TPO. Consequently, a reassessment order was passed, making a significant addition to the assessee's income.

The assessee challenged these orders, and the Commissioner of Income Tax (Appeals) [CIT(A)] dismissed the appeal. However, the ITAT allowed the assessee’s appeal, leading the Revenue to file an appeal before the Bombay High Court under Section 260A of the IT Act, posing a substantial question of law regarding the validity of the reassessment proceedings.

The Revenue’s counsel argued that the AO was duty-bound to initiate reassessment based on the information received from the Additional CIT, Transfer Pricing, and that the TPO’s determination was binding on the AO. The Revenue contended that there was no illegality in initiating the reassessment and that the ITAT erred in interfering with it.

Conversely, the assessee’s senior counsel argued that the AO had no independent reason to believe that income had escaped assessment and acted solely on the instructions of superior authorities. It was contended that the AO incorrectly assumed that the TPO’s determination for a subsequent assessment year was binding for the year in question, leading to a flawed initiation of reassessment proceedings.

The Bombay High Court, after examining the relevant provisions of Section 147 and 148 of the IT Act and the satisfaction note recorded by the AO, observed that the entire process of initiating reassessment was triggered by a letter from the Additional CIT, Transfer Pricing, to the Joint Commissioner, who then directed the AO to take necessary action. The court noted that the AO’s satisfaction note merely reiterated the information received from the Transfer Pricing Wing and the directions from the Joint Commissioner and the CIT, without indicating any independent application of mind by the AO himself.

The High Court relied on the Supreme Court’s judgment in Anirudhsinhji K Jadeja v. State of Gujarat, which held that a statutory authority must exercise its jurisdiction based on its own discretion and not under the dictates of another authority. The court also cited several of its own precedents, including Sodexo India Services (P) Ltd. v. ACIT and Balaji Mines and Minerals (P) Ltd. v. ACIT, where reassessment notices issued based on borrowed satisfaction or the dictates of other authorities were quashed.

The High Court clarified that while an AO is bound by the TPO’s determination during the assessment for the relevant assessment year, this applies when the AO makes a reference to the TPO under Section 92CA(1) during pending assessment proceedings. In the present case, the AO appeared to have considered the TPO’s determination for a subsequent year as binding, which the court found to be erroneous.

The court concluded that the initiation of reassessment proceedings was vitiated as the AO acted under the dictation of superior authorities and on borrowed satisfaction, without forming an independent belief that income had escaped assessment. The High Court upheld the ITAT’s order, which had correctly analyzed the material on record and concluded that the AO had not independently applied his mind.

In light of the Full Bench decision of the Delhi High Court in Commissioner of Income Tax Vs. Kelvinator of India Ltd., which emphasized that the AO must have a reason to believe that income has escaped assessment as a precondition for reopening, the Bombay High Court found no error in the ITAT’s reasoning. Consequently, the substantial question of law was answered against the Revenue, and the appeal was dismissed.

Section 147, Income Tax Act - 1961  

Income Tax Act, 1961