High Court dismissed writ challenging income-tax reopening notice. Court held merits not for High Court; validity depends on reasons furnished and facts scrutinized during proceedings, not prior appellate findings in other years.
Writ petition filed challenging notice dated 28.03.2014 under Section 148 is dismissed.
This page shows the compact analysis of this judgement. The full analysis — procedural history, issue-by-issue holdings with ratio and obiter, advocates, and paragraph-level evidence for every claim — is being added to the record in batches and will appear here when this judgement has been through it.
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
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 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.
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 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.
“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 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.
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 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 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.”
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.
(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 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.”
(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.”
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.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 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.”
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.
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.
“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 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 nonspecific 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."
for holding that the decision of this Court in Burlop delears must be confined to the particular factsituation of that case and that it cannot be construed to be of universal application irrespective of the facts and circumstances of the 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 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.”
adjudication of the issues and an assessment order is to be passed by the authority competent. Therefore, the writ petition is to be rejected.
been assessed on too low a rate or such income has been made the subject of excessive relief under the Income Tax Act or excessive loss or depreciation allowance or any other allowance under this Act has been computed.
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.
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.
“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 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.”
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.
Sd/-
Assistant Registrar(CS-III)
//True Copy//
Sub Assistant Registrar
Kak
To
Large Tax Payer Unit-I, 1775, Jawaharwal Nehru Inner Ring Road, Anna Nagar Western Extension, Chennai – 600 101.
+1cc to M/s.A.K.Raghavalu, Advocate, S.R.No.37509 +1cc to Mr.A.P.Srinivas, Advocate, S.R.No.37668
W.P.No.10051 of 2015
VSNII(CO)
RGA(26/08/2021)
2 issues framed by the court
Whether the High Court can quash a notice under Section 148 by examining the merits of escaping income found in appeal orders from other assessment years?
Whether the Assessing Officer had jurisdiction to reopen assessment beyond four years regarding software maintenance income already under dispute in final ITAT orders?
Colour shows how this judgement treated each authority
Raza Textiles Limited Vs. Income Tax OfficerReferred¶41
(1973) 1 SCC 633 · Who else cites this
Jeans Knit Private Limited Vs. Deputy Commissioner of Income TaxReferred¶43
(2017) 390 ITR 10 (SC)
Calcutta Discount Co., Limited Vs. ITOExplained¶43
[1961] 41 ITR 191 (SC)
CIT Vs. Chhabil Dass AgarwalDistinguished¶43
[2013] 357 ITR 357 (SC)
Radhasoami Satsang Vs. Commissioner of Income TaxExplained¶44
[1992] 193 ITR 321 (SC)
Phool Chand Bajrang Lal Vs. Income Tax OfficerExplained¶65
[1993] 69 Taxman 627(SC)
Sri Krishna (P) Ltd., Vs. Income-tax OfficerExplained¶67
[1996] 221 ITR 538 (SC)
Raymond Woollen Mills Limited Vs. Income Tax OfficerExplained¶74
[1999] 236 ITR 34 (SC)
GKN Driveshafts (India) Ltd., vs. Income Tax OfficerApplied¶89
[(2002) 125 Taxman 963(SC)]
4 provisions across 2 enactments
Cognizant Technology Solutions India Private Limited
Assistant Commissioner of Income Tax
Commissioner of Income Tax
S.M. Subramaniam
As recorded by the court registry
Judgements on the same questions, provisions and authorities, from every court
