THE HIGH COURT OF DELHI AT NEW DELHI % Judgment delivered on: 30.07.2014 + W.P.(C) 1349/2014 & CM APPL. 2821/2014 GREAT EASTERN ENERGY CORPORATION LTD. GURGAON ..... Petitioner versus DY. COMMISSIONER OF INCOME TAX, CIRCLE 12(1), AND ANR. ..... Respondents Advocates who appeared in this case: For Petitioners : Mr Satyen Sethi with Mr Arta Trana Panda. For Respondents : Mr Balbir Singh, Sr Standing Counsel with Mr Arjun Harkauli, Jr Standing Counsel and Mr Abhishek Singh Baghel. CORAM: HON'BLE MR. JUSTICE S. RAVINDRA BHAT HON'BLE MR. JUSTICE VIBHU BAKHRU JUDGMENT VIBHU BAKHRU, J 1. This petition has been filed by petitioner impugning notice dated 28.03.2013, issued under Section 148 of Income Tax Act, 1961 (hereinafter mentioned as Act ) for reopening assessment for Assessment Year 2006-2007. petitioner also challenges order dated 10.02.2014 passed by Deputy Commissioner of Income Tax rejecting objections filed by petitioner questioning validity of notice dated 28.03.2013. 2. principal controversy to be considered in present petition is whether income of petitioner (also referred to as assessee ) W.P.(C) 1349/2014 Page 1 of 11 for Previous Year 2005-2006, relevant to Assessment Year 2006- 2007, had escaped assessment on account of failure on part of assessee to disclose, fully and truly, material facts necessary for assessment. 3. Briefly stated, facts of case are as under: 3.1 petitioner company is engaged in business of exploration and development of Coal Bed Methane Gas (CBM Gas) trapped in coal seams in Rani Ganj Coal Field in West Bengal. On 04.07.2005, Energy Ventures, L.L.C (hereinafter referred to as Energy Ventures ), company incorporated under laws of Delaware, USA, entered into Memorandum of Understanding dated 04.07.2005 (MOU) with petitioner company for acquiring upto 20% farm-in , i.e. participating interest, in petitioner's contract area under Production Sharing Contract with Directorate General of Hydrocarbon, Ministry of Petroleum and Natural Gas, Government of India. As per terms of MOU, Energy Ventures had agreed to fund USD 25,000,000/- against approved work programme during development phase. petitioner company had received US$ 200,000/- (`87,13,000/-) as non refundable advance from Energy Ventures, subject to approval of Government of India. said amount was forfeited by petitioner on non-fulfillment of terms and conditions of MOU. 3.2 On 30.11.2006, petitioner filed return for AY 2006-07, declaring loss of `1,07,89,125/-. non-refundable advance of `87,13,000/- received by petitioner from Energy Ventures was W.P.(C) 1349/2014 Page 2 of 11 claimed as capital receipt towards extinguishment of right in business and same was not offered to tax under Act. case of petitioner was selected for scrutiny and notice under section 143(2) of Act was sent on 18.10.2007. After scrutiny, Assessing Officer (AO) passed assessment order dated 23.12.2008 under Section 143(3) of Act, whereby expenditure of `1,61,09,642/- pertaining to period prior to 14.01.2006 was disallowed. AO also disallowed depreciation to extent of `5,85,078/- and assessed total income at `59,05,595/-. Aggrieved by assessment order, petitioner filed appeal before Commissioner of Income Tax (Appeals). By order dated 02.05.2012, CIT(A) partly allowed appeal and disallowance of expenditure, to extent of `1,51,11,880/- out of `1,61,09,642/-, and disallowance of depreciation was deleted. 3.3 Thereafter, notice dated 28.03.2013 under Section 148 of Act was issued to petitioner for reopening assessment for AY 2006- 2007 under Section 147 of Act. said notice is hereinafter referred to as impugned notice . petitioner requested that original return filed be treated as return pursuant to impugned notice and further sought reasons as to why AO believed that income of petitioner had escaped assessment. On 02.12.2013, respondent no.1 furnished reasons to believe that income chargeable to tax had escaped assessment. 3.4 Thereafter, on 24.01.2014, petitioner objected to assumption of jurisdiction to reassess income for AY 2006-07, by asserting W.P.(C) 1349/2014 Page 3 of 11 that there was no failure on part of petitioner to disclose, fully and truly, all material facts and that reasons furnished by AO indicated only change of opinion, which did not justify reopening of assessment. objections of petitioner were rejected by Deputy Commissioner of Income Tax by order dated 10.02.2014 (hereinafter referred to as impugned order ), which is impugned in present petition. 4. controversy that has to be addressed in present petition is whether impugned notice, reopening of assessment, was in accordance with law. It is noted that whilst assessment year in question is 2006-07 and assessment order under Section 143(3) of Act was passed on 23.12.2008, impugned notice was dated 28.03.2013, after expiry of four years from end of assessment year. In terms of proviso to Section 147, no action could be taken after expiry of four years from end of relevant assessment year, unless any income chargeable to tax has escaped assessment by reason of failure on part of assessee to disclose, fully and truly, all material facts necessary for assessment. proviso to Section 147 reads as under:- 147. Income escaping assessment. xxxx xxxx xxxx xxxx xxxx Provided that where assessment under sub-section (3) of section 143 or this section has been made for relevant assessment year, no action shall be taken under this section after expiry of four years from end of relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of W.P.(C) 1349/2014 Page 4 of 11 failure on part of assessee to make return under section 139 or in response to 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: 5. principal question, whether in given facts, condition that assessee had failed to fully and truly disclose all material facts was met, can be best answered by referring to reasons furnished by AO for reopening assessment. AO s letter dated 02.12.2013 discloses following reasons for reopening assessment:- Reasons for belief that income has escaped assessment in case of M/s. Great Eastern Energy Corporation Ltd. assessment of above company for assessment year 2006-07 was completed after scrutiny in November 2008 at income of Rs.77,72,709/-. It is gathered that assessee classified Software of Rs.9,22,148 under Computer and claimed depreciation at rate of 60%. These assets are classifiable as intangible assets, subject to depreciation at rate of 25%. This mistake resulted in incorrect allowance of depreciation and consequent under assessment of income to extent of Rs.3,22,752/- having tax effect of Rs.1,44,489/-. It is also revealed that assess received Rs.87,13,000 as nonrefundable advance from another company LLC (EV) and same amount was credited to profit and loss account, but during computation amount was deduction. This amount should have been disallowed by assessing officer. mistake resulted in underassessment of income of Rs.87,13,000/- involving tax effect of Rs.39,00,617/-. It is further revealed that assessee company is involved in exploration, development and exploration of petroleum (CBM). company has entered into agreement with Govt W.P.(C) 1349/2014 Page 5 of 11 of India under which company is eligible for specified allowance while calculating profit and gains under section 42 of Income tax Act, 1961 and for benefits available under section 80IA. It is gathered that in profit and loss account there is no income accruing from sale of CBM. Neither is any stock of goods produced from normal operation. In notes to financial statements it has been stated that 'the company is in exploration phase of CBM Gas operations. Wells under exploration will be converted to producing properties, when well is ready to commence commercial production. Capital expenditure incurred for these wells will be allocated to Producing Properties'. It is clear that company has neither started commercial production nor is ready to commence. But company has charged Rs.4,81,29,174/- to profit and loss account under head of Administrative and General expenses. Out of Rs.4,81,29,174/- only Rs.1,61,09,642/- was disallowed by Assessing Officer. mistake resulted in underassessment of income of Rs.3,20,19,532/- involving tax effect of Rs.1,43,34,436/-. assessee company has deducted amount of Rs.47,72,982/- in computation of income under head of depreciation. Since assessee has not commenced its business, depreciation charged should have been disallowed by assessing officer. mistake resulted in underassessment of income of Rs.47,72,982/-involving tax effect of Rs.21,36,756/-. 6. Thus, according to AO, income is stated to have escaped assessment on four counts. first being on account of depreciation claimed on computer software. In this respect, it is noted that returns furnished by assessee had been duly scrutinized by AO. Undeniably, amount of depreciation claimed by assessee was examined by AO. This is also apparent from fact that AO had disallowed depreciation to extent of `5,85,078/-, which was claimed by W.P.(C) 1349/2014 Page 6 of 11 assessee in respect of building and warehouse. AO has now alleged that depreciation on computer software was to be allowed only to extent of 25% instead of 60% as admitted earlier. Apart from fact that depreciation as claimed by assessee had been examined during assessment proceedings. contention that rate of depreciation allowable on computer software is 25% is also apparently erroneous. depreciation on computer software is either to be charged at 60% or in certain cases, expenditure on computer software is treated as revenue expenditure. Be that as it may, it is apparent that dispute raised with regard to rate of depreciation by AO merely indicates change of opinion and there has been no failure on part of assessee to disclose any material fact in this regard. 7. second reason furnished by AO is with respect to sum of `87,13,000/- received as non-refundable advance from Energy Ventures. It has been pointed out by assessee that specific reference was made to this advance in schedule 11 to audited accounts furnished by assessee. relevant extract from Schedule 11 reads as under:- company had entered into Memorandum of Understanding (MOU) with Energy Ventures, L.L.C (EV) on 4th Jul, 2005, company incorporated under laws of Delaware, USA for acquiring upto 20% farm-in i.e. participating interest in company s contract area under Production Sharing Contract with Director General of Hydrocarbon Ministry of Petroleum and Natural Gas, Government of India. As per terms of MOU, EV had agreed to fund USD 25,000,000 against approved work programme for development phase. company had received USD 200,000 (INR 8,713,000) as non refundable W.P.(C) 1349/2014 Page 7 of 11 advance from EV, subject to approval of Government of India. 8. In addition, assessee had also by its letter dated 16.05.2007 furnished clarifications with regard to claim of deduction made by assessee in respect of this sum received from Energy Ventures as non- refundable advance. Thus, indisputably, petitioner had made full and complete disclosure with regard to deduction claimed on account of aforementioned sum. 9. other two reasons given by AO, justifying reopening of assessment, pertain to allocation of expenses and depreciation relating to pre-production period. This issue was also, undeniably, considered by AO as is evident from fact that he disallowed sum of `1,61,09,642/- on account of expenses being relatable to period prior to commencement of business activities. 10. As we see it, AO has sought to reopen assessment not on account of failure on part of assessee to disclose any material particulars, but on account of change of opinion with regard to certain deductions claimed and allowed by assessee. It is now well settled that assessment cannot be reopened on mere change of opinion. Hon ble Supreme Court in case of CIT v. Kelvinator of India Limited: (2010) 320 ITR 561 (SC) affirmed decision of full Bench of this Court that mere change of opinion cannot form basis for reopening of assessment. W.P.(C) 1349/2014 Page 8 of 11 11. Although AO has recorded that he has reasons to believe that income chargeable to tax exceeding ` 1 lac. had escaped assessment, as assessee had not disclosed, fully and truly, all material facts necessary for his assessment for relevant assessment year, there is no allegation made in reasons as furnished by AO that there had been failure on part of assessee to disclose, fully and truly, any particular fact that was necessary for assessment. In view of express language of proviso to Section 147, reopening of assessment after expiry of four years from end of assessment year is impermissible unless this pre- condition is met. This Court in case of in case of Wel Intertrade P. Ltd. & Anr. v. ITO: (2009) 308 ITR 22 (Del) and Haryana Acrylic Manufacturing Company v. CIT & Anr.: (2009) 308 ITR 38 (Del) had held that unless income has escaped assessment on account of failure, on part of assessee, to disclose all necessary material facts, assessment cannot be reopened beyond period of four years. relevant extract from decision in Wel Intertrade P. Ltd. (supra) reads as under:- plain reading of said proviso makes it more than clear that where provisions of section 147 are being invoked after period of four years from end of relevant assessment year, in addition to Assessing Officer having reason to believe that any income chargeable to tax has escaped assessment, it must also be established as fact that such escapement of assessment has been occasioned by either assessee failing to make return under section 139, etc., or by reason of failure on part of assessee to disclose fully and truly all material facts necessary for his assessment, for that assessment year. In present case, question of making of return is not in issue and only W.P.(C) 1349/2014 Page 9 of 11 question is with regard to second portion of proviso, which relates to failure on part of assessee to disclose fully and truly all material facts necessary for assessment. Insofar as this pre- condition is concerned, there is not whisper of it in reasons recorded by Assessing Officer. In fact, as indicated above, Assessing Officer could not have made this ground because Assessing Officer had required petitioner to furnish details with regard to loss occasioned by foreign exchange fluctuation which petitioner did by virtue of reply dated February 5, 2002. Since petitioner had fully and truly disclosed all material facts necessary for assessment, pre- condition for invoking proviso to section 147 of said Act had not been satisfied. In this connection, it may be relevant to note one decision, although there are several others. said decision is that of Punjab and Haryana High Court in case of Duli Chand Singhania v. Asstt. CIT : (2004) 269 ITR 192. In said decision, High Court of Punjab and Haryana was faced with similar situation. court noted that there was not even whisper of allegation that escapement in income had occurred by reason of failure on part of assessee to disclose fully and truly all material facts necessary for his assessment. court observed that absence of this finding, which is sine qua non for assuming jurisdiction under section 147 of Act in case falling under proviso thereto, makes action taken by Assessing Officer wholly without jurisdiction. We agree with these observations of Punjab and Haryana High Court and are of view that in present case also, Assessing Officer has acted wholly without jurisdiction. invocation of section 147, issuance of notice under section 148 and subsequent order on objections are all without jurisdiction. impugned notice as well as proceedings pursuant thereto are quashed. W.P.(C) 1349/2014 Page 10 of 11 12. In view of settled law, proceeding initiated by AO for reopening assessment for AY 2006-2007 is without authority of law. petition is, accordingly, allowed and impugned notice dated 20.03.2013 as well as impugned order dated 10.02.2014 are set aside. parties are left to bear their own costs. VIBHU BAKHRU, J S. RAVINDRA BHAT, J JULY 30, 2014 RK/pkv W.P.(C) 1349/2014 Page 11 of 11 Great Eastern Energy Corporation Ltd. v. Dy. Commissioner of Income-tax, Circle 12(1), And Anr