Bombay High Court Quashes Reassessment Proceedings Against Jetair

The bench of Justices Dhiraj Singh Thakur and Kamal Khata rejected the contentions raised by revenue department that payment of commission to Jetair, who is a sales agent of Jet Airways, at a rate lower than what is charged by it from other unrelated airlines on the domestic and international ticket sales, was a colourable device, with an aim to evade tax.

Since Jet Airways is a loss-making enterprise, the revenue department pleaded that payment of commission at a lower rate lowered the tax liability of the group as a whole, benefitting the whole group.

While holding that it is a business call / decision for a party to charge a lower commission and the same cannot be called a colourable device/ mechanism, the Court remarked that the fact that Jet India Pvt Ltd is a loss-making company is not a valid criteria to determine escapement of income.

Concluding that there was no new material which had come to the notice of the Assessing Officer (AO) which was not submitted by Jetair during the original assessment proceedings, the bench held that there was a mere ‘change of opinion’ of the department, which rendered the reopening of assessment bad in law.

The petitioner, Jetair, was the sole General Sales Agent (GSA) for Jet Airways and also a sales agent for various other airline companies for which it receives commission on domestic and international ticket sales.

Jetair filed a writ petition before the Bombay High Court challenging the notice issued under Section 148 of the Income Tax Act by the Deputy Commissioner of Income Tax (DCIT). The DCIT sought to reopen the assessment for the relevant Assessment Year on the basis that he had ‘reasons to believe’ that income chargeable to tax had escaped assessment.

Jetair pleaded before the High Court that the reassessment proceedings against it were invalid. Since all material facts necessary for the assessment were disclosed during the course of original assessment proceedings, there was no new material before the department to justify reopening of assessment, it pleaded.

It further submitted before the Court that the main reason for the reassessment proceedings against it was that, as per survey findings, the range of Online Registration Commission (ORC) received by it from Jet Airways was 0.2% to 0.99% averaging to about 0.6%, while for other unrelated airlines it averages to around 2.5%.

Jetair argued that merely because it is charging less commission from Jet Airways (related party) than from other airlines, for rendering services as a sales agent, cannot be a basis for a belief that income chargeable to tax has escaped assessment.

To this, the revenue department submitted before the Court that Jet Airways and Jetair are related parties under the Income Tax Act. It added that Jet Airways has considerable weight in fixing the ORC rate to its own benefit. It argued that this arrangement of charging lower rates, which is a deviation from the usual practice of commission payment, has reduced the overall tax liability of Jetair, a group entity of Jet Airways-which is a loss-making enterprise- to the benefit of the whole group. The same has consequently lowered the tax liability of the group as a whole, the department averred.

The revenue department further contended that under the garb of tax planning, the related parties - Jet Airways and Jetair- had managed and arranged to pay lesser rate of commission to suit the finances/revenues of the group companies. This was a colourable device, with an aim to evade tax, it pleaded.

It added that the said issue was not examined at the time of original assessment and therefore it would not amount to a change of opinion which would render the reopening of assessment bad in law.

Referring to the facts of the case, the Court held that the pre-requisite conditions for assuming jurisdiction under Section 148 were not satisfied as the AO had failed to mention what was the new tangible material to justify the reopening of assessment and what was the material fact which was not truly and fully disclosed by Jetair during the original assessment.

Perusing the reasons recorded for reopening assessment in the Section 148 notice, the Court reckoned that there was no new material which had come to the notice of the AO and that the entire reference in the reasons recorded was only to the material on record.

Noting that there is a general presumption that an order of assessment under Section 143(3) has been passed after proper application of mind, the Court concluded that the assessment was sought to be reopened on the ground of change of opinion of the department, which is not permissible under the Income Tax Act.

The bench further noted that during the assessment proceedings, the AO had sought clarification with regard to details of Jetair’s sister concerns and all transactions, details of which were duly submitted by it.

While holding that it is a business call / decision for a party to charge a lower commission and the same is certainly not a colourable device / mechanism, as contended by the revenue department, the Court remarked, “We are of the view that the petitioner was right in charging lower commission rates to its sister concern / related party jet airways India Limited on account of it being a sole selling agent as well as client giving more than 98% of its total turnover.”

Ruling that the fact that Jet India Pvt Ltd is a loss making company is not a valid criteria to determine escapement of income, the Court said, “In fact, if the sister concern / related party namely Jet Airways India Limited which is loss making company were to pay the same rates as paid by other clients of the assessee then such transaction in normal business parlance would have been colourable device or mechanism to increase the expenses of the sister concern, the fact that Jet India Private Limited is a loss making company is not a valid criteria to determine escapement of income.”

“We have no hesitation in holding that the reassessment proceedings were nothing but a case of ‘change of opinion’, which does not comply with the jurisdictional foundation u/s. 147 of the Act,” the Court said, adding that since the said transaction was neither an international transaction nor a specified domestic transaction, the transfer pricing provisions did not apply.

The Court thus allowed the petition, set aside the Section 148 notice and stayed all the reassessment proceedings initiated against the petitioner, Jetair.

Case Title: Jetair Pvt Ltd vs. Deputy Commissioner of Income Tax & Ors.

Citation: 2023 LiveLaw (Bom) 136

Dated: 08.03.3023

Counsel for the Petitioner: Mr. P. J. Pardiwalla, Senior Advocate a/w. Mr. Madhur Agrawal i/by Mr. Atul K. Jasani; Ms. Aasifa Khan

Counsel for the Respondents: Mr. Suresh Kumar

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