High Court Of Uttarakhand
B.J. Services Company Middle East Ltd. vs. Deputy Director Of Income-Tax (International Taxation), Dehradun
Assessment Year : 2003-04
Section : 147, 9, 44BB and 44DA,
Tarun Agarwala, J.
Writ Petition No. 2197 Of 2010 (M/S) And Others
August 20, 2011
JUDGMENT
1. This batch of petitions questions the validity of the notices issued under section 148 of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) as well as the order of the Assessing Officer rejecting the objections of the petitioner. These petitions are further divided into two groups, namely, those petitions where a notice under section 148 of the Act has been issued within four years from the end of relevant assessment year and petitions where a notice has been issued after the expiry of four years. For facility, the facts of Writ Petition No. 2197 of 2010 (M/B) is being taken into consideration.
The petitioner B.J. Services Company Middle East Ltd. is a company incorporated under the laws of the United Kingdom and is engaged in the business of providing services and facilities in connection with the exploration and extraction as well as the production of mineral oils. The petitioner is an assessee under the Act since the financial year 1985-86 and is being assessed to income-tax.
For the assessment year 2003-04, the petitioner filed the return of income on 29-11-2003 declaring a total income of Rs. 10,20,75,480 offering its gross revenue to be taxed under section 45 BB of the Act since the petitioner was being assessed under section 44 BB of the Act in the previous years. The Assessing Officer issued a notice, dated 13th April, 2004 under section 143 (2) of the Act indicating to the petitioner that it has reasons to believe that the return filed by the petitioner was incorrect and inadmissible and directed the petitioner to supply particulars and documents in support of such claim. The petitioner filed his reply, dated 22-11-2005 and 28-11-2005 furnishing the details and the information in response to the queries made by the Assessing Officer. The Assessing Officer, after examining the return of the income and other documents and the replies filed by the petitioner and, after applying its mind, issued an assessment order dated 29-11-2005 under section 143 (3) of the Act.
The matter did not end here. After a lapse of more than four years, the Deputy Director of Income-tax, International Taxation, Dehradun respondent No.1 issued a notice, dated 31st March, 2010 under section 148 of the Act proposing to reassess the income of the petitioner on the ground that income has escaped assessment within the meaning of section 147 of the Act. The petitioner vide letter, dated 23rd April, 2010 filed the same return of income as originally filed for the financial year 2003-04 and, further requested the Assessing Officer, to furnish the reasons recorded for reopening the assessment. The request of the petitioner was acceded to and the Assistant Director of Income-tax International Taxation, respondent No. 2, furnished the reasons recorded for reopening the assessment proceedings under section 147 of the Act vide letter, dated 8-10-2010, namely,
(1) that in view of the decision, dated 15-12-2005 of the High Court of Uttarakhand in Income-tax Appeal No. 239 of 2001 in the case of O.N.G.C. as agent of M/s. Foramer France, Dehradun, the income of the petitioner is required to be assessed as “fees for technical services” and that the income of the petitioner is not covered by the provision of section 44 BB of the Act.
(2) that in view of the explanatory note to the Finance Bill, 2010 indicating that the combined effect of the provision of section 44 BB, 44 DA and 115A of the Act is that if the income of a non-resident is in the nature of a fee for technical services, in that event, it would be taxable under the provision of section 44DA or under section 115A and that section 44BB would only apply in a case where the consideration is for the services and other facilities relating to exploration activity which was not in the nature of technical services.
In the light of the aforesaid, the Assessing Authority was of the opinion that there was a clear cut failure on the part of the assessee to disclose fully and truly all material facts necessary for the completion of its assessment and, consequently, justified its action for issuing a notice under section 148 of the Act and reopening the assessment under section 147 of the Act.
The reasons given by the Assessing officer for reopening the assessment is the same in all the writ petitions.
The procedure to be followed when a notice under section 148 of the Act is issued has been settled by a decision of the Supreme Court in the Case of GKN Driveshafts (India) Ltd. v. ITO [2003] 259 ITR 19 wherein the Supreme Court held :-
“We see no justifiable reason to interfere with the order under challenge. However, we clarify that when a notice under section 148 of the Income-tax Act is issued, the proper course of action for the notice is to file return and if he so desires, to seek reasons for issuing notices. The Assessing Officer is bound to furnish reasons within a reasonable time. On receipt of reasons, the notice is entitled to file objections to issuance of notice and the Assessing Officer is bound to dispose of the same by passing a speaking order. In the instant case, as the reasons have been disclosed in these proceedings, the Assessing Officer has to dispose of the objections, if filed, by passing a speaking order, before proceeding with the assessment in respect of the abovesaid five assessment years.”
Accordingly, on receipt of the reasons recorded by the Assessing Officer, the petitioner filed its objections to the initiation of the re-assessment proceedings submitting therein that the proceedings so initiated were without jurisdiction and illegal contending that there was no new material or opinion which had come into the possession of the Assessing Officer subsequent to the passing of the original assessment order and, therefore, the proposed reassessment proceedings was being initiated on the same material which was already on the record which amounts to a change of opinion and which was not permissible. It was also contended that the notice was issued after the expiry of the period of four years and, in the absence of any failure on the part of the petitioner to disclose fully and truly all material facts necessary for the assessment, the proceedings were barred by limitation in view of the proviso to section 147 of the Act. It was further contended that the decision of the High Court of Uttarakhand was distinguishable on facts and had no application and that the proposed amendment as per the Finance Bill, 2010 was prospective in nature and was not applicable.
In spite of the objections raised by the petitioner, the Assessing Authority, by its order, dated 9-12-2010, rejected the objection of the petitioner contending that in view of the decision of the High Court of Uttarakhand in the case of Foramer (supra) and in view of the Finance Bill, 2010, there was fresh material to show that the payments received by the petitioner were towards “fees for technical services” which could not be assessed under section 44BB of the Act and that the same is to be assessed under section 9(1)(vii ) of the Act. The Assessing Authority held that it was not a mere change of opinion and that there was sufficient material to come to a conclusion that the petitioner had not disclosed fully and truly all material facts necessary for the assessment. The Assessing Authority further held, that even assuming all the facts had been disclosed by the assessee in the original assessment proceedings, the same had escaped the attention of the Assessing Officer since no conscious decision was taken on such set of facts and, consequently, on this ground also, the assessment proceedings could be reopened and that it would not amount to a mere change of opinion.
The petitioner being aggrieved by the said order has filed the present writ petition praying for the quashing of the notice, dated 31st March, 2010 issued under section 148 of the Act and for the quashing of all the proceedings initiated pursuant to the said notice.
Heard Sri M.S. Syali, Senior Advocate assisted by Sri P.R. Mullick, Advocate for the petitioner in WPMS Nos. 2196/2010, 2197/2010, 2228/2010, 2229/2010, 2230/2010, 2242/2010, 2243/2010, 2244/2010, 2245/2010, 2247/2010, 2248/2010, 2249/2010, 2250/2010 and 2251/2010, Sri Salil Kapoor, Advocate with Sri Chetan Joshi, Advocate for the petitioner in WPMS Nos. 2129/2010, 2138/2010, 2139/2010 and 2193/2010, Sri M.S. Syali, Senior Advocate assisted by Sri Chetan Joshi, Advocate for the petitioner in WPMS Nos. 2140/2011, 2141/2010, 2149/2010 and 2150/2010 and Sri Manoj Tiwari, Senior Advocate assisted by Sri Rishabh Maheshwari and Sri K.K. Tiwari, Advocates for the petitioner in WPMS No. 2218/2010 and Sri Arvind Vashisth, Advocate with Mrs. Monika Pant, Advocate for the respondent/Income-tax Department.
The contention of the petitioner is, that the notice issued under section 148 of the Act and the proceedings initiated pursuant to the said notice was without jurisdiction. The petitioner contends that the Assessing Officer having “reasons to believe” that the income of the petitioner had escaped assessment was patently illegal and was not based on any material whatsoever for the formation of its reasons to believe. It was further contended that “reasons to believe” was nothing else but a change of opinion which is not permissible especially when all the relevant and material facts were fully and truly disclosed by the petitioner. It was further contended that no new material or opinion had come in the possession of the Assessing Officer warranting the reopening of the assessment proceedings. The petitioner further contended that the present assessment proceedings was initiated after the expiry of four years from the end of the relevant assessment year which was barred by limitation in view of the proviso to section 147 of the Act since there was no failure on the part of the petitioner to disclose fully and truly all material facts necessary for the assessment.
On the other hand, the contention of the respondents is, that the Assessing Officer has wide powers to reopen the assessment if he has reasons to believe that the income has escaped assessment. The respondents submitted that if the Assessing Officer has some reasonable ground to believe that there has been a non-disclosure of a primary fact which could have a material bearing on the question that the assessment so made was under assessed, in that event, it would be sufficient to initiate proceedings for reassessment. The respondents further submitted that it was not necessary that the reasons should be given in detail in the notice so issued under section 148 of the Act and that the Assessing Officer could justify its action while disposing the objection of the assessee by supplementing the reasons for reopening the assessment.
In rejoinder, it was contended that the petitioner was only required to disclose fully and truly all primary relevant facts and, once all the primary facts was before the Assessing Authority, the assessee was not required to give any further assistance to the Assessing Officer by way of disclosure. It was submitted that all the primary facts were before the Assessing Officer who after applying his mind and drawing the inference of facts passed the assessment order. It was further urged that while deciding the objection, the reason have to be same which was recorded earlier while issuing the notice under section 148 of the Act. It was further contended that where an assessment order was passed under section 143 (3) of the Act, a presumption could be drawn that such an order had been passed on due application of mind.
Before proceedings further, it would be appropriate to peruse sections 147 and 148 of the Act which is extracted hereunder:-
“147. Income escaping assessment.—If the [Assessing] Officer [has reason to believe] that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year) :
Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year:
Provided further that the Assessing Officer may assess or reassess such income, other than the income involving matters which are the subject-matters of any appeal, reference or revision, which is chargeable to tax and has escaped assessment.
Explanation 1 : Production before the Assessing Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the foregoing proviso.
Explanation 2 : For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely :-
(a) Where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax;
(b) Where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return;
(c)Where an assessment has been made, but –
(i)Income chargeable to tax has been underassessed; or
(ii)Such income has been assessed at too low a rate; or
(iii)Such income has been made the subject of excessive relief under this Act; or
(iv)Excessive loss or depreciation allowance or any other allowance under this Act has been computed.”
“148. Issue of notice where income has escaped assessment.—[(1)] Before making the assessment, reassessment or recomputation under section 147, the Assessing Officer shall serve on the assessee a notice requiring him to furnish within such period, as may be specified in the notice, a return of his income or the income of any other person in respect of which he is assessable under this Act during the previous year corresponding to the relevant assessment year, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed; and the provisions of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under section 139.
Provided that in a case—
(a)where a return has been furnished during the period commencing on the 1st day of October, 1991 and ending on the 30th day of September, 2005 in response to a notice served under this section, and
(b)subsequently a notice has been served under sub-section (2) of section 143 after the expiry of twelve months specified in the proviso to sub-section (2) of section 143, as it stood immediately before the amendment of said sub-section by the Finance Act, 2002 (20 of 2002) but before the expiry of the time limit for making the assessment, reassessment or recomputation as specified sub-section (2) of section 153, every such notice referred to in this clause shall be deemed to be a valid notice:
Provided further that in a case –
(a)where a return has been furnished during period commencing on the 1st day of October, 1991 and ending on the 30th day of September, 2005, in response to a notice served under this section, and
(b)subsequently a notice has been served under sub-clause (ii) of sub-section (2) of section 143 after the expiry of twelve months specified in the proviso to clause (ii) of sub-section (2) of section 143, but before the expiry of the time limit for making the assessment, reassessment or recomputation as specified sub-section (2) of section 153, every such notice referred to in this clause shall be deemed to be a valid notice.
Explanation. – For the removal of doubts, it is hereby declared that nothing contained in the first proviso or the second proviso shall apply to any return which has been furnished on or after the 1st day of October, 2005 in response to a notice served under this section.
(2) The Assessing Officer shall, before issuing any notice under this section, record his reasons for doing so.”
A perusal of the aforesaid provisions indicates that the Assessing Officer has wide powers to reopen the assessment if he has reason to believe that the income chargeable to tax has escaped assessment. However, this wide power is circumscribed and does not give jurisdiction to the Assessing Officer to reopen a completed assessment on a mere change of opinion. The reasons to believe is not based nor can it be an outcome of a change of opinion. Further, the proviso indicates that if more than four years have elapsed from the end of the relevant assessment year, in addition to the satisfaction of the Assessing Officer that he has reasons to believe, must also indicate that the assessee had failed to disclose fully and truly all material facts necessary for his assessment for that assessment year.
The words “reasons to believe”, change of opinion, “failure to disclose fully and truly material facts” and “material facts” have been a subject of interpretation by various High Courts and also by the Supreme Court of India.
The proviso to section 147 of the Act stipulates that where the assessment is framed under section 143(3) of the Act and the period of four years from the end of the relevant assessment year has expired, unless and until the income chargeable to tax has escaped the assessment by virtue of a failure to file the return as prescribed or failure to respond to the notice issued under section 142(1) of the Act or section 148 of the Act or to disclose fully and truly all material facts necessary for the assessment of the relevant assessment years, no action could be taken by the Assessing Officer.
According to the petitioner, it is imperative that the Assessing Officer must have a “reason to believe” that income chargeable to tax has escaped assessment. This “reason to believe” must be a genuine belief and must be based on some material that has come to the notice of the Assessing Officer and must not represent a mere change in opinion.
In Ganga Saran & Sons (P.) Ltd. v. Income-tax Officer [1981] 130 ITR 1, the Supreme Court held :
“It is well settled as a result of several decisions of this Court that two distinct conditions must be satisfied before the Income-tax Officer can assume jurisdiction to issue notice under section 147(a). First, he must have reason to believe that the income of the assessee has escaped assessment and secondly, he must have reason to believe that such escapement is by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment. If either of these conditions is not fulfilled, the notice issued by the Income-tax Officer would be without jurisdiction. The important words under section 147(a) are “has reason to believe” and these words are stronger than the words “is satisfied”. The belief entertained by the Income-tax Officer must not be arbitrary or irrational. It must be reasonable or in other words it must be based on reasons which are relevant and material. The Court, of course, cannot investigate into the adequacy or sufficiency of the reasons which have weighed with the Income-tax Officer in coming to the belief, but the Court can certainly examine whether the reasons are relevant and have a bearing on the matters in regard to which he is required to entertain the belief before he can issue notice under section 147(a). It there is no rational and intelligible nexus between the reasons and the belief, so that, on such reasons, no one properly instructed on facts and law could reasonably entertain the belief, the conclusion would be inescapable that the Income-tax Officer could not have reason to believe that any part of the income of the assessee had escaped assessment and such escapement was by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts and the notice issued by him would be liable to he struck down as invalid.”
In Sheo Nath Singh v. Appellate Assistant Commissioner of Income-tax (Central), Calcutta 82 ITR 147 , the Supreme Court held :-
“In our judgment, the law laid down by this court in the above case is fully applicable to the facts of the present case. There can be no manner of doubt that the words “reason to believe” suggest that the belief must be that of an honest and reasonable person based upon reasonable grounds and that the Income-tax Officer may act on direct or circumstantial evidence but not on mere suspicion, gossip or rumour. The Income-tax Officer would be acting without jurisdiction if the reason for his belief that the conditions are satisfied does not exist or is not material or relevant to the belief required by the section. The court can always examine this aspect though the declaration or sufficiency of the reasons for the belief cannot be investigated by the court.”
In Calcutta Discount Co. Ltd. v. Income-tax Officer, Companies District I, Calcutta 41 ITR 191, the Supreme Court held :
“The position, therefore, is that if there were in fact some reasonable grounds for thinking that there had been any non-disclosure as regards any primary fact, which could have a material bearing on the question of “underassessment”, that would be sufficient to give jurisdiction to the Income-tax Officer to issue the notices under section 34. Whether these grounds were adequate or not for arriving at the conclusion that there was a non-disclosure of material facts would not be open for the court’s investigation. In other words, all that is necessary to give this special jurisdiction is that the Income-tax Officer had when he assumed jurisdiction some prima facie grounds for thinking that there had been some non-disclosure of material facts.”
In the light of the aforesaid, where a notice is issued within four years from the end of the relevant assessment year, the jurisdiction on the Assessing Officer is conferred when he has reasons to believe that income chargeable to income tax has escaped assessment. Explanation 2 provides the following shall be deemed to be cases where income chargeable to tax has escaped assessment namely, where no return of income has been furnished by the assessee or where a return of income has been furnished by the assessee, but no document has been made and the Assessing Officer noticed that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return or where an assessment has been made, but income chargeable to tax has been underassessed or such income has been assessed at too low a rate or such income has been made the subject of excessive relief or excessive loss or depreciation allowance or any other allowance has been computed.
Where a notice is issued after four years, the jurisdiction on the Assessing Officer is conferred when he has reasons to believe that income chargeable to tax has escaped assessment and that such under assessment has occurred by reason of omission or failure on the part of assessee to make a return of his income or omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment in that year. Both the conditions are condition precedent to be satisfied before the Income-tax Officer could have jurisdiction to issue a notice for reassessment after the expiry of the period of four years.
The Assessing Officer having reasons to believe that there has been some omission or failure to disclose fully or truly all material facts necessary for the assessment must be based on some material facts which according to the Assessing Officer is based on some reasonable belief and which would have a material bearing on the question of under assessment. If there is no material for the formation of any belief or where the purported belief was nothing but a mere change of opinion, in that case, the Assessing Officer would have no jurisdiction to initiate proceedings under section 147 and 148 of the Act. The Assessing Officer has the power to reopen the assessment where he has reasons to believe that income chargeable to tax has escaped assessment but such re-assessment cannot be initiated on a mere change of opinion to merely re-examine an issue on the basis of information or material which was already available to the Assessing Officer at the time of the completion of the original assessment. It is settled principle of law that “reason to believe” could never be an outcome of a change of opinion. Consequently, before taking any action, the Assessing officer is required to substantiate his satisfaction in the reasons recorded by him. If such reasons recorded discloses a mere change of opinion, in that event, the assessment proceedings could not be initiated.
In CIT v. Saipem SPA [2008] 300 ITR 133 , a Division Bench of this Court held that if there was no fault on the part of the assessee, the delay could not be condoned and that the limitation for initiating the proceedings would come to an end after four years. The High Court held:-
“From the perusal of the facts it is clear that there was no fault of the assessee. Therefore, the Income-tax Appellate Tribunal and the Commissioner of Income-tax (Appeals) were right on the application of Explanation 2(c)(ii ) of section 147 of the Income-tax Act. Even if it is deemed to be the escaped assessment within the meaning of Explanation 2(c)(ii ) of section 147, then in view of the undisputed fact that there was no fault of the assessee, the delay could not be condoned. Limitation comes to an end even under the proviso appended to section 147. Limitation of four years had already been expired. Therefore, the amendment in the original assessment order was time-barred. We agree with the view taken by the Income-tax Appellate Tribunal.”
In Mcdermott International Inc. v. Addl. CIT 259 ITR 138 , a Division Bench of this Court held that the judgment of a higher authority was no ground to reopen the assessment under sections 147 and 148 of the Act, inasmuch as, there was no failure on the part of the assessee. The court held:
“According to learned counsel, the information as envisaged under the Explanation would also be decision of superior authorities and includes true and correct state of law and also information as to judicial decision. He sought to support this proposition by citing various authorities. We need not discuss the case law, even accepting the position of law as an information for reopening of assessment. It could be for invoking the provisions under section 147 of the Act. The proviso to section 147 of the Act as discussed casts exemplary burden for satisfaction that the assessment escaped only due to failure on the part of the assessee for the contingency either of the description. In our view, information relating to the position of law available through the verdict of the higher authority could not be such failure on the part of the assessee which authorities the assessing authority to reopen the assessment.”
In Foramer v. CIT 247 ITR 436 , a Division Bench of the Allahabad High Court held that there was no failure on the part of the assessee to make a return or to disclose fully and truly all material facts necessary for the assessment and, consequently, since notices were issued after a lapse of more than seven years, the proviso to section 147 of the Act was squarely applicable and that the impugned notices were barred by limitation. The said decision was affirmed by the Supreme Court in CIT v. Foramer France, 264 ITR 566 .
In Hindustan Lever Ltd. v. R.B. Wadkar, Assistant Commissioner of Income-tax 268 ITR 332, a Division Bench of the Bombay High Court held that merely mentioning in the notice that there was a failure on the part of the assessee in not disclosing fully or truly all material facts necessary for the assessment was not sufficient. The notice must point out the deficiency and that the Assessing Officer must disclose the reasons as to which fact or material was not disclosed by the assessee fully or truly for assessment of that assessment year so as to establish a vital link between the reasons and the evidence. The Court further held that the reasons recorded by the Assessing Officer could not be supplemented. The Bombay High Court held:
“The reasons recorded by the Assessing Officer nowhere state that there was failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment of that assessment year. It is needless to mention that the reasons are required to be read as they were recorded by the assessing officer. No substitution or deletion is permissible. No additions can be made to those reasons. No inference can be allowed to be drawn based on reasons not recorded. It is for the Assessing Officer to disclose and open his mind through reasons recorded by him. He has to speak through his reasons. It is for the Assessing Officer to reach to the conclusion as to whether there was failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the concerned assessment year. It is for the Assessing Officer to form his opinion. It is for him to put his opinion on record in black and white. The reasons recorded should be clear and unambiguous and should not suffer from any vagueness. The reasons recorded must disclose his mind. Reasons are the manifestation of mind of the assessing officer. The reasons recorded should be self-explanatory and should not keep the assessee guessing for the reasons. Reasons provide link between conclusion and evidence. The reasons recorded must be based on evidence. The Assessing Officer, in the event of challenge to the reasons, must be able to justify the same based on material available on record. He must disclose in the reasons as to which fact or material was not disclosed by the assessee fully and truly necessary for assessment of that assessment year, so as to establish vital link between the reasons and evidence. That vital link is the safeguard against arbitrary reopening of the concluded assessment. The reasons recorded by the Assessing Officer cannot be supplemented by filing affidavit or making oral submission, otherwise, the reasons which were lacking in the material particulars would get supplemented, by the time the matter reaches to the Court, on the strength of affidavit or oral submissions advanced.”
In Austin Engineering Co. Ltd. v. Joint Commissioner of Income-tax [2009] 312 ITR 70, a Division Bench of the Gujarat High Court found that the Supreme Court delivered a decision in the case of CIT v. Sterling Foods [1999] 237 ITR 579 , wherein export incentive benefits was not an income derived from manufacturing and, consequently, not eligible for deduction under sections 80HH and 80-I of the Act. On the basis of this decision of the Supreme Court, the Assessing Officer formed a belief that income chargeable to tax has escaped assessment because excess deduction under sections 80HH and 80-I was allowed. The Gujarat High Court held that there was no failure on the part of the assessee to disclose fully or truly all material facts necessary for the assessment and merely because the Supreme Court has subsequently pronounced a law does not entitle the Assessing Officer to reopen the assessment proceedings and that such reopening of the assessment proceedings amounts to a change of opinion. The Gujarat High Court held :-
“The only question that would then survive would be whether there was any failure on the part of the petitioner-assessee to disclose fully and truly all material facts necessary for the assessment. Though in the reasons recorded, the respondent has stated so, apparently, the said statement does not merit acceptance for the simple reason that if all material facts had not been fully and truly disclosed by the assessee, there was no occasion for the Assessing Officer to frame the assessment under section 143 (3) of the Act by allowing the claim of the assessee. In fact, the law, as it then stood was understood identically both by the assessee and the Assessing Officer. Merely because subsequently the Apex Court pronounced the law to be otherwise, on the date of filing of the return of the income when the assessee made a claim for deduction, the claim could not be termed to be either lacking in material particulars or could not be termed to be untrue. In other words, all the material facts were fully disclosed and no false facts were stated in support of the claim made. The reasons recorded themselves show that the Assessing Officer has changed his opinion only on the basis of subsequent judgment rendered by the apex court.”
Similar view was reiterated by a Division Bench of Delhi High Court in CIT v. SIL Investment Ltd. [Income-tax Appeal Nos. 700 and 701 of 2010, decided on 7th May, 2010].
On the question of relevancy of material facts which is concomitant for the issuance of a notice under sections 147 and 148 of the Act, the Supreme Court in Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191, held that the duty of disclosing the primary facts relevant to the decision of the question before the Assessing Authority lies on the assessee and it is the onerous duty of the assessee to disclose truly and fully all the primary facts. The Supreme Court held that once all the primary facts have been disclosed, the assessee was not required to provide any further assistance by way of disclosure to the Assessing Officer. The Supreme Court held :
“Does the duty, however, extend beyond the full and truthful disclosure of all primary facts ? In our opinion, the answer to this question must be in the negative. Once all the primary facts are before the assessing authority, he requires no further assistance by way of disclosure. It is for him to decide what inferences of facts can be reasonably drawn and what legal inferences have ultimately to be drawn. It is not for somebody else far less the assessee to tell the assessing authority what inferences-whether of facts or law should be drawn. Indeed, when it is remembered that people often differ as regards what inferences should be drawn from given facts, it will be meaningless to demand that the assessee must disclose what inferences-whether of facts or law-he would draw from the primary facts.”
In CIT v. Kelvinator of India Ltd. [2002] 256 ITR 1/ 123 Taxman 433, the Full Bench of the Delhi High Court held that section 147 of the Act did not confer any power upon the Assessing Officer to initiate reassessment proceedings on a mere change of opinion. In the said case, the assessee in his revised return of income had withdrawn the disallowance in respect of expenses on rent and depreciation of the guest house on the ground that since rent and depreciation were allowable under sections 30 and 32 of the Act, the same cannot be disallowed under section 37(4) of the Act. The Assessing Officer accepted the contention of the assessee in the original assessment order and accepted the withdrawal of the disallowance of guest house expenditure as submitted by the assessee in his revised return of income. Subsequently, a notice u/s 148 of the Act was issued on the ground that the tax audit report was not noticed by the Assessing Officer while passing the original assessment order. The Full Bench of the Delhi High Court held :-
“We are unable to agree with the submission of Mr. Jolly to the effect that the impugned order of reassessment cannot be faulted as the same was based on information derived from the tax audit report. The tax audit report had already been submitted by the assessee. It is one thing to say that the assessing officer had received information from an audit report which was not before the Income-tax Officer, but it is another thing to say that such information can be derived by the material which had been supplied by the assessee himself.
We also cannot accept submission of Mr. Jolly to the effect that only because in the assessment order, detailed reasons have not been recorded on analysis of the materials on the record by itself may justify the Assessing Officer to initiate a proceeding under section 147 of the Act. The said submission is fallacious. An order of assessment can be passed either in terms of sub-section (1) of section 143 or sub-section (3) of section 143. When a regular order of assessment is passed in terms of the said sub-section (3) of section 143 a presumption can be raised that such an order has been passed on application of mind. It is well known that a presumption can also be raised to the effect that in terms of clause (e) of section 114 of the Indian Evidence Act the judicial and official acts have been regularly performed. If it be held that an order which has been passed purportedly without application of mind would itself confer jurisdiction upon the Assessing Officer to reopen the proceeding without anything further, the same would amount to giving premium to an authority exercising quasi judicial function to take benefit of its own wrong.”
The aforesaid decision was affirmed by the Supreme Court in CIT v. Kelvinator of India Ltd. [2010] 320 ITR 561 / 187 Taxman 312 wherein the Supreme Court held that the “reason to believe” indicated in the notice u/s 148 was a mere change of opinion and that there was no tangible material to come to a conclusion that there was a escapment of income from the assessment.
In Techspan India (P.) Ltd. v. ITO [2006] 283 ITR 212 (Delhi), a Division Bench found that reason to believe by the Income-tax Officer in initiating proceedings under sections 147 and 148 of the Act was nothing but a mere change of opinion. The Court held that where the Assessing Officer has applied his mind and had taken a conscious decision on a particular matter and issue, the same issue cannot be reopened as it would amount to a change of opinion.
In Consolidated Photo & Finvest Ltd. v. Asstt. CIT [2006] 281 ITR 394 (Delhi), the Court held that a mere change of opinion would be applicable only to a situation when the Assessing Officer has taken a conscious decision on a particular matter in issue and it would have no application where the assessment order does not record the aspect which formed the basis for reopening of the assessment.
In CIT v. Eicher Ltd. [2007] 294 ITR 310 / 163 Taxman 259 , a Division Bench of the Delhi High Court held :
“Applying the principles laid down by the Full Bench of this Court as well as the observations of the Punjab and Haryana High Court, we find that if the entire material had been placed by the assessee before the Assessing Officer at the time when the original assessment was made and the Assessing Officer applied his mind to that material and accepted the view canvassed by the assessee, then merely because he did express this in the assessment order, that by itself would not give him a ground to conclude that income has escaped assessment and, therefore, the assessment needed to be reopened. On the other hand, if the Assessing Officer did not apply his mind and committed a lapse, there is no reason why the assessee should be made to suffer the consequences of that lapse.”
Reverting to the merits of the case, the controversy revolves upon the provisions of section 44BB, 44D, section 9, section 115A and section 44DA of the Act.
During the period in question, the petitioner had received revenues from Reliance Industries Ltd., Pride Foramer SAS, BG Exploration & Production India Ltd, ONGC, Niko Resources Ltd, etc. on account of providing services and facilities in connection with the exploration and extraction of and production of mineral oil. The petitioner offered the revenues received from these Companies for taxation under section 44BB of the Act. The Assessing Officer, after considering the material placed before it and considering other factors and after due verification and enquiry, passed an assessment order, dated 29-11-2005 under section 143(3) of the Act.
Section 44BB of the Act provides that where an assessee, being a non-resident, is engaged in the business of providing services or facilities in connection with, or supplying plant & machinery or hire used, or to be used, in prospecting for, or extraction or production of, mineral oils, in which case, a sum equal to ten per cent of the aggregate of the amounts specified in sub-section (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head “profits and gains of business or profession”.
The proviso to section 44BB further clarifies that the sub-section (1) of section 44BB would not apply where the provisions of section 42, or section 44D or section 115A or section 293A apply for the purposes of computing profits or gains or any other income referred to in these sections.
Section 44D is a special provision for computing income by way of royalties and fees for technical services in the case of foreign companies. It starts with a non-obstante clause “notwithstanding anything to the contrary contained in sections 28 to 44C”. section 44D (b) of the Act provides that in the case of an assessee, being a foreign company, no direction in respect of any expenditure or allowance shall be allowed under any of the said sections in computing the income by way of royalty or fees for technical services received. The Explanation to section 44D provides that “fees for technical services” shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9.
Section 9(1)(vii) of the Act provides that income by way of fees for technical services payable by a Govt. or a person shall be deemed to accrue or arise in India. Explanation 2 provides that “fees for technical services” means any consideration for the rendering of any managerial, technical or consultancy services, including the provision of services of technical or other personnel but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head “salaries”.
Section 115A(1)(b)(B) of the Act provides that where the total income of a foreign company includes any income by way of royalty or fees for technical services, the amount of income tax calculated on the income by way of fees for technical services, would be at the rate of thirty per cent if such fees is received in pursuance of an agreement made on or before 31-5-1997 and 20% where such fees for technical services are received in pursuance of an agreement made after 31-5-1997.
Under the existing provisions contained in section 44BB, 44D, section 115A and under Explanation II of section 9(1)(vii) of the Act, it was open to the Assessing Officer to tax the petitioner either under section 44BB or 44D or under section 9(1)(vii) on the basis of the material produced before him. Relevant and primary facts were placed before the Assessing Officer. The Assessing Officer applied its mind to the facts of each case. The Assessing Officer considered the documents filed by the assessee and after due verification and enquiry, came to the conclusion that the assessee was liable to be taxed under section 44BB which was accepted by the assessee.
A perusal of the assessment order of the petitioner in Writ Petition No. 2197 of 2010, indicates that the Assessing Officer has considered 29 contracts / agreement entered by the petitioner with others relating to providing services and facilities in connection with the exploration & production of mineral oils and the revenues received by the assessee. The Assessing Officer rejected the stand taken by the revenue authorities and held that the income of the petitioner was chargeable under section 44BB of the Act. Once an order is passed under section 143(3) of the Act, a presumption is raised that such an order has been passed on an application of mind.
By the Finance Act, 2003, section 44DA was inserted in the Act w.e.f. 1-4-2004. This is another special provision for computing income under the head “profits and gains of business or profession” by way of royalty or fees for technical services received by a non-resident or foreign company which carries on a business in India through a permanent establishment. The Explanation to this section provided that “fees for technical services” shall have the same meaning as provided in Explanation 2 to clause (vii) of sub-section (1) of section 9.
Section 44DA was amended w.e.f. 1-4-2011 by Finance Act, 2010, and a proviso was added indicating that the provisions of section 44BB shall not apply in respect of income referred to in this section.
After the insertion of section 44DA in the Act, the combined effect of the provisions of sections 44BB, 44DA, 115A and Explanation 2 of section 9(1)(vii) of the Act as per the stand of the revenue is that if the income of a non-resident is in the nature of a fee for technical services, it would be taxable under the provisions of either section 44DA or section 115A read with Explanation 2 to section 9(1)(vii) irrespective of the business to which it relates and that section 44BB would apply only in a case where consideration was for services and other facilities relating to exploration activity which are not in the nature of technical services.
Inspite of the insertion of section 44DA in the Act, a grey area remained regarding the scope of section 44BB and section 44DA, namely, whether the fee for technical services relating to the exploration sector would be covered under section 44BB of the Act. In order to remove the grey area, section 44DA and 44BB was amended w.e.f. 1-4-2011 so as to exclude the applicability of section 44BB to the income which is covered under section 44DA. The aforesaid was provided in the Explanatory Note to the Finance Bill, 2010, which was ultimately amended in the relevant section 44BB and 44DA w.e.f. 1-4-2011.
In the light of the aforesaid, the contention of the revenue is, that the services contemplated under section 44BB are services other than those coming within the purview of Explanation 2 to section 9(1)(vii) of the Act. The services extended by the petitioner falls under Explanation 2. Consequently, the income by way of fees for technical services chargeable under section 9(1)(vii) has to be computed under section 44DA of the Act.
To recapitulate, the reasons given for initiating proceeding under section 148 of the Act is :
(a)that the services rendered are technical in nature and is liable to be taxed as a fee for technical services in view of the decision of the Uttarakhand High Court in the Case of CIT v. O.N.G.C. (Foramer France) [2008] 299 ITR 438 , and
(b)Explanatory Note to the Finance Bill indicating that the combined effect of the provision of sections 44BB, 44DA and 115A is that the income of a non-resident is in the nature of fee for technical services, and that it is taxable under the provision of section 44DA or section 115A irrespective of the business to which it relates.
In view of the decision of this Court in 259 ITR 33 and that of the Gujarat High Court in 312 ITR 70, this Court is of the view that subsequent pronouncement by a Court or a Superior Court does not entitle the Assessing Officer to reopen the assessment proceedings on the ground that the Assessing Officer has reasons to believe that income has escaped assessment or that the assessee has not fully and truly disclosed all the material facts. The claim of the assessee could not be termed to be either lacking in material particulars nor could it be termed to be untrue. The assessee has disclosed all material facts and no false facts have been stated. The reasons recorded shows that the Assessing Officer has reasons to believe that income has escaped assessment on the basis of a subsequent decision rendered by this Court. In the opinion of the Court, this reasoning amounts to a change of opinion by the Assessing Officer. Further, there is no failure on the part of the assessee in disclosing fully and truly all material facts.
In so far as the second reason is concerned, the Court finds that the primary facts had been disclosed by the petitioner, namely, the agreement/contracts were placed before the Assessing Officer. The Court further finds that the Assessing Officer had discussed the contracts in the assessment order passed under section 143(3) of the Act. The Court finds that the Assessing Officer had applied its mind, made necessary enquiry and upon verification of facts rejected the stand of the revenue and concluded that the income was liable to be charged under section 44BB of the Act and not under section 44D read with Explanation 2 of section 9(1)(vii) of the Act. The Assessing Officer was of the opinion that the services provided by the petitioner falls under section 44BB of the Act. The Full Bench of the Delhi High Court in the case of Kelvinator (supra) has held that where as assessment order has been passed under section 143 (3) of the Act, a presumption can be drawn that such an order had been passed on due application of mind.
The Supreme Court in Calcutta Discount’s case (supra) has held that primary facts has to be disclosed by the assessee and thereafter, it is for the Assessing Officer to draw inferences from the facts and apply the law and determine the liability. Once the Assessing Officer has framed an assessment on the facts and documents placed before it, the Assessing Officer, could not, at another point of time, by forming another opinion on the primary facts, arrive at a conclusion that he had committed an error in computing the taxable income of the assessee and reopen the assessment proceedings. This view of the Court is fortified by a decision of the Delhi High Court in Jindal Photo Films Ltd. v. Dy. CIT [1998] 234 ITR 170 /[1999] 105 Taxman 386 .
As stated earlier, the combined effect of the provisions of sections 44BB, 44DA and 115A of the Act will not have a bearing to the cases in hand inasmuch as the Explanatory Note to the Finance Bill, 2010 clearly indicates that the amendments proposed in section 44BB and 44DA of the Act would take effect from 1st April, 2011 and would apply in relation to the assessment year 2011-12 and subsequent years. The amendment is prospective in nature and would not apply to the cases in hand which is of the earlier assessment years. Under the existing provisions contained in section 44BB, 44D, section 115A and Explanation II of section 9(1)(vii) of the Act, it was open to the Assessing Officer to tax the petitioner either under section 44BB or 44D or under section 9(1)(vii ) of the Act on the basis of the material produced before him. The primary facts were placed by the assessee before the Assessing Officer, who after due enquiry and verification, applied its mind to the facts of each case and came to the conclusion that the assessee was liable to be taxed under section 44BB of the Act. The Explanatory Note to the Finance Bill has removed the doubts, which had been raised regarding the scope of section 44BB vis-Ã -vis section 44DA has only been made prospectively and cannot be used or applied for reopening the case under sections 147 and 148 of the Act. In any case, the explanatory note does not mean that there was failure on the part of the assessee as envisaged by the provisions of section 147 or in any manner the assessee suppressed the material facts or failed to disclose fully and truly all material facts necessary for the assessment.
In view of the aforesaid, the court is satisfied that the petitioner has made out a case for a writ of certiorari and accordingly the notice issued by the respondent under sections 147 and 148 of the Act are quashed. All proceeding initiated by the Assessing Officer pursuant to the said notice and orders passed therein are quashed. The writ petitions are allowed. In the circumstances of the case, parties shall bear their own cost.
[Citation : 339 ITR 169]
