Materials that are tangible must pass the reopening test
Fact and issue of the case
The petitioner challenges the notice, dated 31st March, 2021 issued under section 148 of the Income Tax Act, 1961 (“the Act”) whereby the Assessing Officer (A.O.) seeks to reopen the assessment for the assessment year 2013-14 on the ground that income for the said assessment year had escaped assessment within the meaning of section 147 of the Act. The petitioner also challenges the order dated 3rd January, 2022 disposing of the objections to the re-assessment.
Briefly stated the material facts are as under :
The petitioner claims that it is engaged in providing information technology and information technology enabled services, besides India also in countries across the globe. It is 14 WP.1964.2022 OS-J..doc stated that as a part of its business, it provides on-site services to its clients for which employees have to be deputed and in this particular case to the United States of America (“USA”). The employees of the company are sent on deputation and a deputation agreement is executed between the petitioner and the concerned employees, as per which the tax payable in India would be borne by the employee and the tax payable in USA by that employee was to be borne by the employer company i.e. the petitioner.
It is stated that contractual obligations were discharged by the petitioner company by paying taxes in USA on the income of the employees deputed in that country. It is stated that on certain occasions the employees were held entitled to deductions and rebates in regard to the tax returns fled by such employees, which would result in a refund to an employee from out of the tax so deposited by the petitioner as an employer. The said amount of refund in respect of the tax paid in USA on account of deduction/rebate was to be further refunded to the petitioner company in accordance with an undertaking executed by such employees alongwith enabling documents.
It is stated that some of the employees considered this action 14 WP.1964.2022 OS-J..doc of the petitioner to be improper under the California Labour Code. A Class Action Law Suit, therefore, was filed by the employees led by one Mr.Gopi Vedachalam in the United State District Court in the Northern District of California, wherein damages were claimed against the petitioner. The employees had also raised certain other disputes in the said civil suit which had been filed, wherein a settlement was finally arrived at between the parties and an agreement dated 5th February, 2013 came to be executed.
As per the agreement, an amount of Rs.29.75 million USD equivalent to Rs.161.63 crores was to be paid to the concerned employees. The United Sates District Court for the Northern District of California (‘the US Court’), by virtue of its order dated 18th July 2013, allowed the application and granted approval to the service awards.
Return of income was filed by the petitioner for the assessment year 2013-14 on 14th November 2013, declaring an income of Rs.84,04,81,15,610/- and while computing the said income claimed deduction inter-alia of Rs.161.63 crores forming a part of the other expenses in the profit and loss account. The amount aforementioned was debited under the head ‘other 14 WP.1964.2022 OS-J..doc expenses’ in the profit and loss account. The fact relating to the said settlement had also been adequately reflected in Note No.49 in the stand-alone accounts, in Note No.46 of the consolidated account and in the balance-sheet under the head “Other Current Liabilities”. This fact had also been mentioned in the annual report for the financial year 2012-13 as also in the Notes forming part of the substantial statements.
The petitioner claims that its return of income was selected for scrutiny by issuing a notice under section 143(2) of the Act, dated 5th September 2014. During the course of scrutiny assessment, as is reflected from the order-sheet of the Assessing Officer dated 16th November 2016, the petitioner was directed to furnish details in regard to various issues, one of which pertained to “details of claim made under class action suit (Rs.161.63 crores) and its allowability” The queries and the issues on which clarification was sought by the Assessing Officer were answered vide communication dated 28th November 2016 in the following manner :
Note on class action suit :
During the year, the Company entered into an agreement to settle for a sum of Rs.161.63 crores (USD 29.75), a class action suit filed in the United States of America Court relating to payments to employees on deputation. Based on the settlement TCS is relieved from all past and present litigation made by the company. Thus, the amount paid by TCS is towards settlement of employee litigation.
An additional reply was submitted on 16th November 2016, wherein it was yet again reiterated that the payment made under the settlement agreement was a cost incurred by TCS to put an end to the ongoing litigation for purposes of ensuring smooth functioning of the business in USA and further that expenses were neither penal in nature nor in respect of any wrongdoing committed by TCS US Branch but were expenses incurred during the course of carrying out the business. It was, therefore, stated that payments made were deductible expenditure in the hands of TCS for tax purpose under section 37 (1) of the Act. As they were recovered wholly and exclusively for the purposes of business of the company.
An order of assessment then came to be passed on 16th February 2017 under section 143(3) of the Act, without making any disallowances in regard to the claim of Rs.161.63 crores, although there was no specifc discussion in the order of assessment in that regard.
A notice under section 148 dated 31st March 2021 came to be issued by respondent No.1. Return of income was filed pursuant to the receipt of the said notice on 21st April 2021 declaring a total income of Rs.84,54,68,32,080/-. Copy of the reasons recorded for purposes of reopening the assessment were sought along with a copy of the approval obtained under section 151 of the Act. The reasons which were provided to the petitioner stated as under : The assessee had filed return of income on 14.11.2013 declaring its income of Rs 8404,81,15,610/- under normal provisions of the Income Tax Act and book profit of Rs. 15656,52,27,545/- u/s 115JB of the Income Tax Act. The case was selected for scrutiny and the assessment for AY 2013-14 was completed on 16.02.2017 determining income of Rs. 11351,41,97,376/- under normal provisions of the Income Tax Act and Book Profit of Rs. 15956,01,97,867/- u/s 115JB of the Income Tax Act.
In the instant case, information has been received from DDIT (Investigation) Unit-2(4), Mumbai vide email dated 09.06.2020 that Tata Consultancy Services Ltd (hereinafter referred as “TCS”) has paid penalty of Rs161.63 crores (29.75 million USD) in USA. TCS has not shown the penalty paid in USA in the annual report for the FY 2012-13 and FY 2013-14 by their directors and the auditor report. This is clear violation of provisions of Foreign Exchange Violation and Tax Avoidance. The Act said that such adverse loss by violation, has to be in italics or bold letters. Such penalty cannot be shown as operational expenses and evade tax.
The information has been considered and analyzed carefully. Going through the information, it has been observed that an open enquiry was initiated by DDIT (Investigation) Unit-2(4), Mumbai in this case requesting the assessee to provide the details of law suit and payment by assessee of penalty of Rs 161.63 crores (29.75 million USD) and details of treatment of said amount in the books of accounts for AY 2013-14. It was seen from the submission that assessee had claimed the payments made in the USA against the Law suit in their books of accounts as an expense under the head “Other Expenses” for the FY 2012-13. Further Assessee was asked to explain the nature and allowability of the said expenses and was asked to submit the computation of income. However, it is seen that assessee has claimed it as “allowable expense” and has claimed that the said expense is paid by the TCS is towards the settlement against the class action suit and not the penalty. The amount incurred is towards the settlement cost is a cost incurred by the TCS to put an end to the on-going litigation and to ensure smooth functioning of its business in the USA. Thus, the assessee has claimed the said expenditure as deductible expenditure. Under section 37(1) of the Income Tax Act 1961. Further as per information available with the department, Class action Law suit was over the wages dispute and breach of contract and US federal laws. TCS was facing the class Suit action and was made to pay Rs 161.63 crores (29.75 million USD) settlement over its’ practice of forcing its’ employees to sign over their tax refunds cheques when they finished working in the USA. Also, no response for the same has been clearly brought out in the reply fled by the Assessee. The Assessee has also not fled the copy of the legal suit, in support of the Rs.161.63 crores expenses claimed by it in it’s consolidated financial statements for the FY 2012-13.
Observation of the court
We are therefore of the view that the A.O. had no reason to believe that the payment made towards settlement of the class action suit was a payment towards a penalty imposed and on that account we hold that there was no reason for the A.O. to believe that income had escaped assessment. In the light of the above to hold that what was paid by the petitioner was a penalty, in fact, would be without any basis and aimed at reviewing an order passed earlier by the Assessing Officer who had specifically gone into the allowability of the claim. We also have no hesitation in holding that a mere assertion in the absence of any material would not constitute a ‘tangible material’ for purposes of reopening an assessment.
In our opinion, therefore, there would be no basis for the Assessing Offcer for forming his reason to believe and the basis so reflected on the face of it appears to us to be totally perverse.
Be that as it may, we allow this petition.
The impugned notice dated 31st March, 2021 under Section 148 and the impugned order dated 03rd January, 2022 are set aside.
In the result, appeal of the assessee is allowed and ruled in favour of the assessee
Read the full order from hereTata-Consultancy-Services-Ltd.-Vs-DCIT-Bombay-High-Court-2