Sodexo India Services Pvt. Ltd. ] v. Sridharan, Senior Advocate A/W Ms. Neha Sharma I/B Mr. Sriram Sridharan For The

Digitallysigned byUDAYUDAY SHIVAJIJAGTAPSHIVAJIDate:JAGTAP2022.04.0710:29:54+0530 IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION WRIT PETITION NO. 694 OF 2021 Sodexo India Services Pvt. Ltd. ]having its office at 1[st] Floor,]Gemstar Commercial Complex, ]Ramchandra Lane Extension Kanchpada,]Formerly known as]Sodexo Food Solutions India Pvt. Ltd.] .. Petitioner Vs.1. Asst. Commissioner of Income Tax,] Circle – 13(2)(1), having his office] at Aayakar Bhavan,] Maharshi Karve Road, Churchgate,] Mumbai – 400 020]2. Asst. Commissioner of Income-tax,] Transfer Pricing – 4(1)(2), having his] office at Mittal Court, 22,] Nariman Point, Mumbai – 400 021.]3. Principal Commissioner of Income] Tax-13, having his office at ] Aaykar Bhavan, Maharshi Karve Road,] Churchgate, Mumbai – 400 020]4. Union of India] through Ministry of Finance,] North Block, New Delhi – 110 001.] .. Respondents ..... Mr. V. Sridharan, Senior Advocate a/w Ms. Neha Sharma i/b Mr. Sriram Sridharan for the petitioner Mr. Akhileshwar Sharma for the respondent – Revenue …. CORAM : K. R. SHRIRAM & N.R. BORKAR, J.J.DATED : 23[rd] MARCH, 2022 ORAL JUDGMENT :- (Per K.R. Shriram, J.) 1.The petitioner has impugned notice dated 30.03.2019 receivedunder Section 148 of the Income Tax Act, 1961 (the Act). Afterpetition was filed, an order dated 30.01.2021 u/s 92-CA(3) of theAct came to be passed. Petition was, therefore, amendedpursuant to the liberty granted by this Court on 20.2.2021 bywhich respondent no.2 re-initiated transfer pricing proceedingswhich were already concluded pursuant to re-opening ofassessment by respondent no.1.under Section 148 of the Income Tax Act, 1961 (the Act). Afterpetition was filed, an order dated 30.01.2021 u/s 92-CA(3) of theAct came to be passed. Petition was, therefore, amendedpursuant to the liberty granted by this Court on 20.2.2021 bywhich respondent no.2 re-initiated transfer pricing proceedingswhich were already concluded pursuant to re-opening ofassessment by respondent no.1. 2.Mr. Sridharan submitted that if the Court is going to set asidenotice issued under Section 148 of the Act then consequencethereof will be to set aside all revised orders passed byrespondent no.2 u/s 92-CA(3). He submitted that there isenough material to set aside notice under Section 148 of the Actand at the same time, if notice u/s 148 goes, there will be acascading effect and all other orders will also go.notice issued under Section 148 of the Act then consequencethereof will be to set aside all revised orders passed byrespondent no.2 u/s 92-CA(3). He submitted that there isenough material to set aside notice under Section 148 of the Actand at the same time, if notice u/s 148 goes, there will be acascading effect and all other orders will also go. 3. Petitioner filed its return of income for the Assessment Year 2012-2013 on 29.11.2012 declaring total income of Rs.9,90,48,280/-.Return was processed u/s 143(1) of the Act on 19.02.2014accepting the return income of Rs.9,90,48,280/-. Petitioner’scase was thereafter taken up for regular assessment andassessment order under Section 143(3) of the Act came to bepassed on 28.3.2016. Total income was assessed atRs.11,11,94,030/-.2013 on 29.11.2012 declaring total income of Rs.9,90,48,280/-.Return was processed u/s 143(1) of the Act on 19.02.2014accepting the return income of Rs.9,90,48,280/-. Petitioner’scase was thereafter taken up for regular assessment andassessment order under Section 143(3) of the Act came to bepassed on 28.3.2016. Total income was assessed atRs.11,11,94,030/-. 4. Petitioner thereafter received impugned notice dated 30.3.2019u/s 148 of the Act in which, respondent no.1 asserted that he hadu/s 148 of the Act in which, respondent no.1 asserted that he had 4. Petitioner thereafter received impugned notice dated 30.3.2019u/s 148 of the Act in which, respondent no.1 asserted that he hadu/s 148 of the Act in which, respondent no.1 asserted that he had reasons to believe that income chargable to tax for AssessmentYear 2012-13 has escaped assessment within the meaning ofSection 147 of the Act. Petitioner was provided reasons forreopening alongwith approval received under Section 151 of theAct. Mr. Sridharan further submitted that the reasons recordedclearly indicate that the Assessing Officer who has issued thenotice has acted merely on the dictates of the Revenue Audit inissuing the notice. Therefore, the notice itself is bad in law. Mr.Sridharan further submitted that it is settled law that the IncomeTax Officer must determine for himself what is the effect andconsequence of the law mentioned in the audit note and opinionrendered by the audit party in regard to law cannot be the basisfor the purpose of such belief. He submitted that evaluation oflaw must be made directly and solely by the Income Tax officer. 5.Mr. Sharmastrongly objected and made valiant effort to justifyissuance of notice. He submitted that Transfer Pricing Officer(TPO) has calculated operating profit / operating revenue at1.55% after considering operating cost as debited to the profitand loss account including depreciation of Rs.2.93 Crores.Whereas, depreciation of Rs. 6.58 Crores, which was debitedshould have been included for computing assessee’s Arm’s LengthPricing (ALP) margin, thus resulting in Rs.3.64 Crores to beconsidered for the purpose of ALP. He submitted that TPO hasgrossly erred in calculating operating profits to operating revenueand, therefore, revenue audit was justified in raising objections. 6.In our view, Mr. Sharma’s objections does not hold water becausethe reason to believe that income has escaped assessment, cannotbe based on borrowed information. The Apex Court in Indian &the reason to believe that income has escaped assessment, cannotbe based on borrowed information. The Apex Court in Indian & Eastern Newspaper Society Vs. Commissioner of Income Tax[1] held that opinion of internal audit of Income Tax Department can not be regarded as information within the meaning of Section 147(d) of the Act. Paragraphs 7, 8, 9, 11 and 20 of the said judgment read as under:- “7.Insofar as the word "information" meansinstruction or knowledge concerning facts orparticulars, there is little difficulty. By its inherentnature, a fact has concrete existence. It influences thedetermination of an issue by the mere circumstance of its relevance. It requires no further authority to make it significant. Its quintessential value lies in its definitive vitality. 8. But when "information" is regarded asmeaning instruction or knowledge as to law, theposition is more complex. The controversy betweenthe parties centres around the point whether theinstruction or knowledge as to law is circumscribedby any limitation. When we speak of "law", weordinarily speak of norms or guiding principles havinglegal effect and legal consequences. To possess legalsignificance for that purpose, it must be enacted ordeclared by competent authority. The legal sanctionvivifying it imparts to it its force and validity and legal effect and legal consequences. To possess legal binding nature. Law may be statutory law or, what ispopularly described as, judge made law. In the formercase, it proceeds from enactment having its source incompetent legislative authority. Judge made law emanates from a declaration or exposition of the content of a legal principle or the interpretation of a statute, and may in particular casesextend to a definition of the status of a party or thelegal relationship between parties, the declaration being rendered by a competent judicial or quasi- judicial authority empowered to decide questions oflaw between contending parties. The declaration orexposition is ordinarily set forth in the judgment of a court or the order of a tribunal. Such declaration or legal effect and legal consequences. To possess legal binding nature. Law may be statutory law or, what ispopularly described as, judge made law. In the formercase, it proceeds from enactment having its source incompetent legislative authority. Judge made law emanates from a declaration or exposition of the content of a legal principle or the interpretation of a statute, and may in particular casesextend to a definition of the status of a party or thelegal relationship between parties, the declaration being rendered by a competent judicial or quasi- judicial authority empowered to decide questions oflaw between contending parties. The declaration orexposition is ordinarily set forth in the judgment of a court or the order of a tribunal. Such declaration or exposition in itself bears the character of law. In every case, therefore, to be law it must be a creation by aformal source, either legislative or judicial authority.A statement by a person or body not competent tocreate or define the law cannot be regarded as law.The suggested interpretation of enacted legislation and the elaboration of legal principles in text booksand journals do not enjoy the status of law. They aremerely opinions and, at best, evidence in regard to the state of the law and in themselves possess no binding effect as law. The forensic submissions of professional lawyers and the seminal activities of legal academics enjoy no higher status. Perhaps the only exception is provided by the writings ofpublicists in international law, for in the law ofnations the distinction between formal and materialsources is difficult to maintain. nations the distinction between formal and material 9.In that view, therefore, when section 147(b)of the Income-Tax Act is read as referring to"information" as to law, what is contemplated isinformation as to the law created by a formal source.It is law, we must remember, which, because it issuesfrom a competent legislature or a competent judicial or quasi-judicial authority, influence the source of the assessment and decides any one or more of those matters which determine the assessee's tax liability. 11.Under that section, the audit by theComptroller and Auditor-General is principallyintended for the purposes of satisfying him withregard to the sufficiency of the rules and proceduresprescribed for the purpose of securing an effectivecheck on the assessment, collection and proper allocation of revenue. He is entitled to examine the accounts in order to ascertain whether the rules and procedures are being duly observed, and he is required, upon such examination, to submit a report. His powers in respect of the audit of income-tax receipts and refunds are outlined in the Board's s Circular No. 14/19/56-II, dated 28-7-1960.[Internal Audit Manual, Vol.II, p.39J. Paragraph 2 of the Circular repeats the provisions of section 16 of the Comptroller and Auditor-General's (Duties, Powersand Conditions of Service) Act, 1971. And paragraph3 warns that "the audit department should not in any s (Duties, Powers way substitute itself for the revenue authorities in the performance of their statutory duties." Paragraph 4 declares: “Audit does not consider it any part of its duty topass in review the judgment exercised or thedecision taken in individual cases by officersentrusted with those duties, but it must berecognised that an examination of such casesmay be an important factor in judging theeffectiveness of assessment procedure………. Itis, however, to forming a general judgmentrather than to the detection of individual errorsof assessment, etc., that the audit enquiriesshould be directed. decision taken in individual cases by officersentrusted with those duties, but it must berecognised that an examination of such casesmay be an important factor in judging theeffectiveness of assessment procedure………. Itis, however, to forming a general judgmentrather than to the detection of individual errorsof assessment, etc., that the audit enquiriesshould be directed. effectiveness of assessment procedure………. It effectiveness of assessment procedure………. It The detection of individual errors is an incident rather than the object of audit." Other provisions stress that the primary function of audit in relation to assessments and refunds is the consideration whether the internal procedures are adequate and sufficient. It is not intended that the purpose of audit should go any further. Our attention has been invited to certain provisions of the Internal Audit Manual more specifically defining the functions of internal audit in the Income-Tax Department. While they speak of the need to check all assessments and refunds in the light of the relevant tax laws, the orders of the CIT and the instructions of the CBDT, nothing contained therein can be construed as conferring on the contents of an internal audit reportthe status of a declaration of law binding on the ITO.Whether it is the internal audit party of the Income- the status of a declaration of law binding on the ITO. Tax Department or an audit party of the Comptroller and Auditor-General, they perform essentially administrative or executive functions, and cannot be attributed the powers of judicial supervision over the quasi-judicial acts of income-tax authorities. The Income-Tax Act does not contemplate such power in any internal audit organisation of the Income-Tax Department; it recognises it in those authorities onlywhich are specifically authorised to exerciseadjudicatory functions. Nor does section 16 of theComptroller and Auditor-General's (Duties, Powersand Conditions of Service) Act, 1971, envisages sucha power for the attainment of the objectives incorporated therein. Neither statute supports the conclusion that an audit party can pronounce on thelaw, and that such pronouncement amounts to"information" within the meaning of section 147(b) of the Income Tax Act, 1961. 20.Therefore, whether considered on the basis that the. nature and scope of the functions of the internal audit organisation of the Income-Tax Department are co-extensive with that of receipt audit or on the basis of the provisions specifically detailing its functions in the Internal Audit Manual Vol.2, we hold that the opinion of an internal audit party of the Income-tax Department on a point of law cannot be regarded as "information" within the meaning ofsection 147(b) of the Income Tax Act, 1961.” 7. The Division Bench of this Court in Ananta Landmark (P) Ltd. Vs. Deputy Commissioner of Income-tax, Central Circle 5(3), 2has also, following Indian & Eastern NewspaperSociety Mumbai2 (Supra), held that true evaluation has to be made directly and 2(2021) 131 taxmann.com 52 (Bombay) solely by Income Tax Officer and the reasons for reopening of thatby the Assessing Officer alone who is receiving the notice and hecan not act merely on the dictates of any other person in issuing notice. 8.In Hamilton Housewares (P) Ltd. Vs. Deputy Commissioner ofIncome Tax3, this Court while quashing the notice issued u/s 148of the Act reiterated settled position of law that the decision toreopen assessment must be on the basis of the belief found by theAssessing Officer. It must be open for the audit party to bringrelevant aspect to the notice of the Assessing Officer. Butthereafter it must be the independent decision of the AssessingOfficer to reopen assessment upon formation of his belief thatincome chargeable to tax had escaped assessment. The Court hadrelied upon another Judgment of this Court in the matter ofCommissioner of Income Tax Vs. Rajan N. Aswani 4. Paragraph11 of the said judgment reads thus; notice. 8.In Hamilton Housewares (P) Ltd. Vs. Deputy Commissioner ofIncome Tax3, this Court while quashing the notice issued u/s 148of the Act reiterated settled position of law that the decision toreopen assessment must be on the basis of the belief found by theAssessing Officer. It must be open for the audit party to bringrelevant aspect to the notice of the Assessing Officer. Butthereafter it must be the independent decision of the AssessingOfficer to reopen assessment upon formation of his belief thatincome chargeable to tax had escaped assessment. The Court hadrelied upon another Judgment of this Court in the matter ofCommissioner of Income Tax Vs. Rajan N. Aswani 4. Paragraph11 of the said judgment reads thus; “11. There is one more ground on which the impugnednotice must be quashed. We may recall, the counsel for thepetitioner had argued that the Assessing Officer was actingat the behest of the audit party. Such a ground was nottaken in the petition. However, we had permitted thepetitioner to raise the same in the rejoinder and providedsufficient time to the revenue to respond. This being a purequestion of examination of contemporaneous documents,we had requested the counsel for the revenue to makeavailable for our perusal the original file of the department, we had requested the counsel for the revenue to makeavailable for our perusal the original file of the department,which he had so done. The perusal of the file would clearlyshow that the audit party had brought to the notice of theAssessing Officer the possibility of invoking Section 2(22) (e) of the Act in relation to the loan transaction in question. 3(2019) 104 taxmann.com 128 (Bombay) 4(2018) 91 taxmann.com 313/403 ITR 30 The Assessing Officer under a detailed reply dated 9th June, 2015 had opposed any such invocation of Section 2(22)(e) of the Act. He had given reasons why in his opinion Section 2(22) (e) of the Act was inapplicable. Despite this, upon further insistence by the audit party, impugned notice came to be issued. It is well settled through series of judgments that the decision to reopen the assessment must be on the basis of the belief found by the Assessing Officer. It may be open for the audit party to bring the relevant aspect to the notice of the Assessing Officer. However, thereafter it must be the independent decision of the Assessing Officer to reopen the assessment upon formation of his belief that income chargeable to tax had escaped assessment. Reference in this respect can be made to a decision of this Court in case of Commissioner of Income-Tax Vs. Ranjan N. Aswani (2018) 91 taxmann.com 313/403 ITR 30.” 8.the Act, can not be sustained. In the circumstances, in our view also notice issued u/s 148 of 9.Petition is allowed in terms of prayer clauses (a) and (aa) whichread as under :- “(a)that this Hon’ble Court may be pleased to issue awrit of certiorari or a writ in the nature of certiorari or anyother appropriate writ, order or direction under Article 226 writ of certiorari or a writ in the nature of certiorari or anyother appropriate writ, order or direction under Article 226of the Constitution of India calling for the records of the case leading to the issue of the notice under section 148 of theAct dated 30[th] March 2019 (Ex.’N’), the notice under section 143(2) of the Act dated 04[th] June, 2019 (Ex.’P’), the notice under Section 92CA(2) read with section 92D(3) of the Act dated 21[st] November 2019 (Ex.’S’) and the order dated 29[th] December 2020 rejecting the objections of the Petitioner (Ex.’W’) and after going through the same and examining the question of legality thereof to quash, cancel and set aside the impugned notice under section 148 of the Act dated 30[th] March 2019 (Ex.’N’), the notice under section 143(2) of the Act dated 04[th] June, 2019 (Ex.’P’), the noticeunder section 92CA(2) read with section 92D(3) of the Actdated 21[st] November 2019 (Ex.’S’) and the order dated 29[th]December 2020 rejecting the objections of the petitioner(Ex.’W’). theAct dated 30[th] March 2019 (Ex.’N’), the notice under section 143(2) of the Act dated 04[th] June, 2019 (Ex.’P’), the notice under Section 92CA(2) read with section 92D(3) of the Act dated 21[st] November 2019 (Ex.’S’) and the order dated 29[th] December 2020 rejecting the objections of the Petitioner (Ex.’W’) and after going through the same and examining the question of legality thereof to quash, cancel and set aside the impugned notice under section 148 of the Act dated 30[th] March 2019 (Ex.’N’), the notice under section 143(2) of the Act dated 04[th] June, 2019 (Ex.’P’), the noticeunder section 92CA(2) read with section 92D(3) of the Actdated 21[st] November 2019 (Ex.’S’) and the order dated 29[th]December 2020 rejecting the objections of the petitioner(Ex.’W’). (aa)that this Hon’ble Court may be pleased to issue awrit of certiorari or a writ in the nature of certiorari or anyother appropriate writ, order or direction under Article 226of the Constitution of India calling for the records of thecase leading to the passing of the order under section92CA(3) of the Act dated 30[th] January 2021 (Ex.’X’) andafter going through the same and examining the question oflegality thereof to quash, cancel and set aside the impugnedorder under section 92CA(3) of the Act dated 30[th] January2021 (Ex.’X’).” 10. Petition disposed with no order as to costs. (N.R. BORKAR, J.) (K.R. SHRIRAM, J.)