DOLPHIN DRILLING LIMITED V. ASTT DIRECTOR OF INCOME TAX and ANOTHER

WPMS/2655/2011

AI Insights

The case involves Dolphin Drilling Ltd., a UK-incorporated company engaged in oil exploration and extraction, challenging a notice and order related to income reassessment for the assessment year 2004-05. The Income Tax Department issued a notice under section 148 of the Income Tax Act, citing that transactions with associate enterprises were not referred to the Transfer Pricing Officer (TPO) for arm's length pricing. The petitioner argued that the reassessment was unjustified, but the court upheld the reassessment, emphasizing that it was based on tangible material and not a mere change of opinion.

• Counselvise Citation: [2017] 140 COUNSELVISE.COM (IT) 672879 (HC-UTTARAKHAND)
• Appeal Type: Others
• Pronouncement Date: 03-11-2017
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income Tax Delhi v. Kelvinator of India Ltd., Consolidated Photo & Finvest Ltd. V. Asst. CIT (Delhi)
• Laws Referred To: Income Tax Act
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: H M BHATIA
• Assessee Lawyers: P R MULLICK
• Keywords: Arms' Length; Associate Enterprises; Income Tax; Reassessment; Tangible material
• Section: 148; 143(3); 139(1); 44BB(3)

Judgement Text

"Reserved Judgment IN THE HIGH COURT OF UTTARAKHAND AT NAINITAL Writ Petition (M/S) No.2655 of 2011 Dolphin Drilling Ltd. ……. Petitioner Versus Assistant Director of Income Tax & another …… Respondents Mr. P.R. Mullick, Adv. for the petitioner. Mr. H.M. Bhatia, Standing Counsel, for the Income Tax. Reserved on: 23.10.2017 Delivered on: 03.11.2017 Hon’ble Rajiv Sharma , J. This petition has been filed challenging the notice dated 28.3.2011 (Annexure No.6) and order dated 12.12.2011 (Annexure No.10). 2. Key facts necessary for the adjudication of this petition are that petitioner company is incorporated in the United Kingdom which is engaged in the business of providing services and facilities in connection with exploration and extraction and production of mineral oils. During the year under consideration, the assessee has filed the return of income on 29.10.2004 at Rs.444,006,980/- u/s 44BB(3) of the Income Tax Act (hereinafter to be referred as ‘the Act’). The return was scrutinized u/s 143(3) of the Act. The order was passed on 30.12.2005 at an income of Rs.212,140,550/-. The notice was issued to the petitioner company u/s 148 of the Act to reassess the income for the assessment year 2004-05. Petitioner company submitted before the respondent no.1 that the return filed u/s 139(1) of the Act may be treated as return filed u/s 148 of the Act. 2 Petitioner company was directed to submit the return within 30 days in the prescribed format. Petitioner company sent a communication to the respondent no.1- Assistant Director of Income Tax, International Taxation, Dehradun on 13.4.2011 seeking reasons for reassessing the assessment. The respondent no.1 assigned the reasons for reopening of the case vide Annexure No.8. Petitioner company filed objections to the reasons for reopening of case vide Annexure No.9 on 19.8.2011. The respondent no.1, vide the impugned order dated 12.12.2011, rejected the objections filed by the petitioner company to the notice issued u/s 148 of the Act. 3. It has come on record that the petitioner company had transactions with M/s Alfa Crew AS, Fred Olsen Brokers AS, Dolphin AS & M/s Dolphin Drilling Pte. Ltd. These are the Associate Enterprises of the assessee. The case of the Revenue is that the transactions with the assessee were never referred to the TPO for computation of the income at arms’ length. It has come specifically in the reasons assigned for reopening of the case that the proceedings for the relevant assessment year show that the issue, whether the 3CEB was to be referred to the TPO, was never even taken up by the Assessing Officer. Rather, the Assessing Officer did not consider it proper referring to 3CEB report for arm’s length computation. It is in these circumstances, the notice u/s 148 of the Act was issued to the petitioner company on 28.3.2011. The objections raised by the petitioner company to the reasons assigned for reopening of case have been discussed in length by the respondent no.1. 4. Their Lordships of Hon. Supreme Court in (2010) 2 SCC 723 in the matter of ‘Commissioner of 3 Income Tax Delhi v. Kelvinator of India Ltd.’ has held that after amendment of 1989, the A.O. can reopen assessment provided he has ‘reason to believe’ that income has escaped assessment based on tangible material. It was further held that mere ‘change of opinion’ does not empower the A.O. to review assessment in the garb of reassessment. Their Lordships have held as under: - “5. On going through the changes, quoted above, made to Section 147 of the Act, we find that, prior to the Direct Tax Laws (Amendment) Act, 1987, reopening could be done under the above two conditions and fulfilment of the said conditions alone conferred jurisdiction on the assessing officer to make a back assessment, but in Section 147 of the Act (with effect from 1-4-1989), they are given a go-by and only one condition has remained viz. that where the assessing officer has reason to believe that income has escaped assessment, confers jurisdiction to reopen the assessment. Therefore, post-1-4-1989, power to reopen is much wider. However, one needs to give a schematic interpretation to the words “reason to believe” failing which, we are afraid, Section 147 would give arbitrary powers to the assessing officer to reopen assessments on the basis of “mere change of opinion”, which cannot be per se reason to reopen. 6. We must also keep in mind the conceptual difference between power to review and power to reassess. The assessing officer has no power to review; he has the power to reassess. But reassessment has to be based on fulfilment of certain precondition and if the concept of “change of opinion” is removed, as contended on behalf of the Department, then, in the garb of reopening the assessment, review would take place. 7. One must treat the concept of “change of opinion” as an in-built test to check abuse of power by the assessing officer. Hence, after 1-4-1989, the assessing officer has power to reopen, provided there is “tangible material” to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief. Our view gets support from the changes made to Section 147 of the Act, as quoted hereinabove. Under the Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words “reason to believe” but also inserted the word “opinion” in Section 147 of the Act. However, on receipt of representations from the companies against omission of the words “reason to believe”, Parliament reintroduced the said expression and deleted the word “opinion” on the ground that it would vest arbitrary powers in the assessing officer. 8. We quote hereinbelow the relevant portion of Circular No. 549 dated 31-10-1989, which reads as follows: “7.2. Amendment made by the Amending Act, 1989, to reintroduce the expression ‘reason to believe’ in Section 147.—A number of representations were received against the omission of the words ‘reason to believe’ from Section 147 and their substitution by the ‘opinion’ of the Assessing Officer. It was pointed out that the meaning of the expression, ‘reason to believe’ had been explained in a number of court rulings in the past and was well settled and its omission from Section 147 would give arbitrary powers to the Assessing Officer to reopen past assessments on mere change of opinion. To allay these fears, the Amending Act, 1989, has again amended Section 147 to reintroduce the expression ‘has reason to believe’ in the place of the 4 words ‘for reasons to be recorded by him in writing, is of the opinion’. Other provisions of the new Section 147, however, remain the same.” 5. Similarly, the Division Bench of Delhi High Court in (2006) 281 ITR 394 (Delhi) in the matter of ‘Consolidated Photo & Finvest Ltd. V. Asst. CIT (Delhi)’ has held that the Proviso to Section 147 envisages action in the ordinary course within a period of four years from the end of the relevant assessment year. That limitation does not, however, apply to cases where income chargeable to tax has escaped assessment on account, inter alia, of the failure of the assessed to disclose fully and truly all material facts. The argument that production of the account books and other documentary evidence relevant for assessment must imply a full and true disclosure of all material facts must be rejected out of hand in the light of the provisions of Explanation (1). The Division Bench further held that the there may be a presumption that the assessment proceedings have been regularly conducted, but there can be no presumption that even when the order of assessment was silent, all possible angles and aspects of a controversy had been examined and determined by the Assessing Officer. The principle that a mere change of opinion cannot be a basis for reopening computed assessments would be applicable only to situations where the assessing officer has applied his mind and taken a conscious decision on a particular matter in issue. It would have no application where the order of assessment does not address itself to the aspect which was the basis for reopening of the assessment. Their Lordships in paragraph no.19 have held as under:- “19. In the light of the authoritative pronouncements of the Supreme Court referred to above, which are binding upon us and the observations made by the High Court of Gujarat with which we find ourselves in respectful agreement, the action initiated by the assessing officer for reopening the assessment cannot be said to be either incompetent or otherwise improper to call for interference by a 5 writ court. The Assessing Officer has in the reasoned order passed by him indicated the basis on which income exigible to tax had in his opinion escaped assessment. The argument that the proposed reopening of assessment was based only upon a change of opinion has not impressed us. The assessment order did not admittedly address itself to the question which the assessing officer proposes to examine in the course of re-assessment proceedings. The submission of Mr. Vohra that even when the order of assessment did not record any explicit opinion on the aspects now sought to be examined, it must be presumed that those aspects were present to the mind of the assessing officer and had been held in favor of the assessed is too far fetched a proposition to merit acceptance. There may indeed be a presumption that the assessment proceedings have been regularly conducted, but there can be no presumption that even when the order of assessment is Page 436 silent, all possible angles and aspects of a controversy had been examined and determined by the assessing officer. It is trite that a matter in issue can be validly determined only upon application of mind by the authority determining the same. Application of mind is, in turn, best demonstrated by disclosure of mind, which is best done by giving reasons for the view which the authority is taking. In cases where the order passed by a statutory authority is silent as to the reasons for the conclusion it has drawn, it can well be said that the authority has not applied its mind to the issue before it nor formed any opinion. The principle that a mere change of opinion cannot be a basis for reopening computed assessments would be applicable only to situations where the assessing officer has applied his mind and taken a conscious decision on a particular matter in issue. It will have no application where the order of assessment does not address itself to the aspect which is the basis for reopening of the assessment, as is the position in the present case. It is in that view inconsequential whether or not the material necessary for taking a decision was available to the assessing officer either generally or in the form of a reply to the questionnaire served upon the assessed. What is important is whether the assessing officer had based on the material available to him taken a view. If he had not done so, the proposed reopening cannot be assailed on the ground that the same is based only on a change of opinion.” 6. In the present case, the Assessment Officer while assessing the income of petitioner company, has ignored the transactions made by it with its Associate Enterprises. He has also overlooked whether Section 3CEB was to be referred to the TPO. It is thus, not the change of opinion but the reassessment has been ordered on the basis of the tangible material placed on record necessitating the reassessment. Sufficient reasons have been assigned for reopening of the assessment. The objections raised by the petitioner company have been specifically dealt with by the respondent no.1. Impugned order dated 12.12.2011 passed by the respondent no.1 is detailed and reasoned and in conformity with the law laid 6 down by Their Lordships in the judgments cited hereinabove. 7. Accordingly, there is no merit in this petition and the same is hereby dismissed. (Rajiv Sharma, J.) Rdang "