M/S NATIONAL PETROLEUM CONSTRUCTION COMPANY V. UNION OF INDIA and OTHERS

WPMS/2192/2009

AI Insights

The case involves M/s National Petroleum Construction Company, a UAE-based firm, challenging the validity of a notice and subsequent reassessment proceedings initiated by the Indian tax authorities under Section 148 of the Income Tax Act, 1961. The petitioner argued that the reassessment was based on a mere change of opinion and lacked the necessary allegations of non-disclosure of material facts, which are required to justify reopening an assessment after four years. The court examined the legal provisions under Sections 147 and 148 of the Act, relevant judicial precedents, and the specifics of the case, ultimately finding in favor of the petitioner and quashing the reassessment notice.

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 677348 (HC-UTTARAKHAND)
• Appeal Type: Others
• Pronouncement Date: 20-08-2011
• Assessment Year: misc
• Other Referred Cases: GKN Driveshafts (India) Ltd. Vs. Income Tax Officer & others, Hyundai Heavy Industries, McDermott International Inc. Vs. Additional Commissioner of Income Tax & other, Austin Engineering Co. Ltd. Vs. Joint Commissioner of Income-Tax, Commissioner of Income Tax Vs. Kelvinator of India Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Keywords: DTAA; Income escaping assessment; Income Tax; Permanent establishment; Reassessment
• Section: 147; 148; 143(3); 143(1)

Judgement Text

"Reserved HIGH COURT OF UTTARAKHAND, AT NAINITAL Writ Petition No.2192 of 2009 (M/S) M/s National Petroleum Construction Company (through its CEO) Shri Aqueel A Madhi PO Box 2058, Abu Dhabi … Petitioner Versus Union of India & others …. Respondents Dated:- 20th August, 2011 Hon’ble Tarun Agarwala, J. 1. By means of this writ petition, the petitioner has challenged the validity and legality of the notice dated 31st March, 2009 issued by the Assessing Officer under Section 148 of the Income Tax Act, 1961 (hereinafter referred to as the Act) as well as the order dated 15.12.2009 by which the objection of the petitioner to the initiation of the reassessment proceedings was disposed off. 2. The facts leading to the filing of the writ petition is, that the petitioner is a company incorporated under the existing laws of United Arab Emirates and, is engaged in the business of fabrication and installation of onshore and offshore oil facilities and sub-marine pipelines and pipelines coatings. 3. For the assessment year 2002-2003, the petitioner filed its return of income declaring a total income of Rs.5,02,34,840/- disclosing its total income on the basis of income returned and assessed in the preceding years. The petitioner declared its gross revenues at US$ 25,406,750/- and offered revenues of US$ 871,694/- for inside India activities and revenue of US$ 1,63,695/- for outside India operations @ 10% and 1% respectively. The income offered by the petitioner was under the presumptive scheme under the Act by adopting income @ 10% for revenues earned inside India and @ 1% for revenues accrued 2 outside India. The return was processed under Section 143(1) of the Act, but, subsequently, it was selected for scrutiny. The Assessing Officer issued a notice dated 28th June, 2004 under Section 142 (1) of the Act directing the petitioner to furnish various details and information. The information sought by the Assessing Officer is as under :- i. Copy of the work order / contract. ii. State the reason as to how article 11 of the DTAA is available. iii. Detail of employees who came to India during the relevant assessment period, and whether returns in respect of these have been filed. iv. A certificate stating period of stay of the employees during the last three years and during the relevant year. v. Copies of invoices alongwith the attachments submitted to relevant contractors. vi. Copy of TDS returns. vii. Justification of allow ability of sub-contractor cost. 4. The petitioner submitted all the information in its reply dated 17.11.2004. The copy of the contract / work order was furnished alongwith the revised pricing schedule to the contract. The petitioner also submitted the amounts offered to tax, the description of work executed and the basis of taxation of contract receipts. The Assessing Officer, after making due enquiry and verification and after applying its mind and, upon a scrutiny of the evidence and other material placed before it, passed a speaking order dated 24.11.2004 under Section 143 (3) of the Act computing the total income of the petitioner at Rs.5,02,34,840/-. The assessment order indicated the taxability of the income of the petitioner which was earned from inside activities in India and operations outside India. The relevant portion of the assessment order passed under Section 143 (3) of the Act is extracted hereunder :- “3. It may now be seen that the income of the assessee has been computed at Rs.5,02,16,381/- by considering 10% of the contractual revenues from the work done 3 inside India after claiming deduction of sub-contractions cost covered by TDS and by considering cost covered by TDS and by considering 1% of the contractual revenues from the work done outside India based on the principle and rationale laid down in instruction No.1767 of CBDT, New Delhi. 4. The Assess NRC has filed the return claiming benefit of Double Taxation Avoidance Agreement between India and UAE (“the treaty”). As per Section 90(2) of the IT Act, 1961 the assessee can compute its income either under the DTAA or under the Income Tax Act, 1961, whatever is more beneficial to it. The DTAA being more beneficial to the assessee NRC, the assessee has claimed the benefit of Article 7(3) which lays down that expenses incurred for the purposes of its business of the Permanent Establishment (“PE”) including executive general administrative expenses will be allowed. Expenses, therefore, claimed towards sub-contractors covered by TDS are, therefore, likely to be allowable if it is incurred for the purposes of business. 5. The submissions made by the assessee has been perused with the Article 7 Para 3 which says “In determining the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment, including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere.” 6. During the financial year under consideration the assessee received revenues from ONGC vide contract No.ZA WELL PLATROM (ZA-PWW) Project (Job No.37) and contract No.MRBC/E&C/MM/ZA-WPP/02/2000. In the previous assessment years the gross total income of the assessee was arrived at after allowing sub- contractors & other cost as deduction from the gross receipts (on which tax has been deducted at source) and on the balance amount, 10% was estimated as taxable profits of the assessee under Article 7(3). The provision of Article 7(6) of the DTAA provides that profit of PE shall be determined by the same method year by year unless there is good and sufficient reasons to the contrary. Therefore, for this year also assessment is being completed on the same method as adopted in the assessee’s own case for the previous assessment years.” 5. After a lapse of more than four years, the Assessing Officer issued a notice dated 31st March, 2009 under Section 148 of the Act calling upon the petitioner to show cause as to why the reassessment proceedings should not be initiated on the ground 4 that the income of the petitioner company has escaped assessment. Pursuant to the impugned notice, the petitioner furnished its return of income under protest objecting to the proceedings initiated by the Assessing Officer and requested that a copy of the reasons recorded for reopening the assessment proceedings be supplied. The reasons recorded was subsequently supplied to the petitioner. For facility, the extract of the reasons recorded under Section 148 of the Act is quoted hereunder :- “The assessee company is incorporated under the laws of United Arab Emirates Return of income declaring income of Rs.5,02,34,830/- was filed on 29.10.2002. Later on the case was selected for scrutiny and accordingly assessment was completed under Section 143(3) vide order dated 24.11.2004 on total income of Rs.5,02,16,381/- and income from other sources Rs.18,459/- the assessee company has claimed to be assessed under DTAA with India and UAE. The company has claimed gross revenues of US$ 10,35,389 and offered revenues of US$ 87,16,938 for inside operations @ 10% and Revenues of US$ 1,63,69,535 for outside India operations have been offered for being taxed @ 1%. Accordingly assessment was completed on total income of Rs.5,02,16,381/- as under:- Particulars US$ US$ Work Inside India Gross Revenues 90,34,215 Less :- Sub contractors cost 3,17,275 Net revenues 87,16,939 Profits @ 10 % 8,71,694 Work Outside India Profit @ 1% 1,63,695 10,35,389 Total Taxable income converted into INR 5,02,16,381 Income from other sources 18,459 The assessee has shown gross receipts to the extent US$ 90,34,215/- in respect of inside India operation and has claimed expenses to the extent of Rs. US$ 3,17,275 in respect of which TDS was deductible. No P&L A/c and Balance Sheet has been filed. Similarly, the assessee has 5 shown outside India revenues to the extent of US$ 1,63,69,535 and has offered 1% of the same for taxation. As the return of the income has been filed in view of the provisions of DTAA and the assessee was supposed to file the P&L A/c and Balance Sheet alongwith return of income which has not been filed. The assessee’s incomes from outside India is required to be brought to tax in view of the decision of Hon’ble Supreme Court in the case of Hyundai Heavy Industries wherein it has been observed that “the attraction rule implies that when an enterprise (GE) sets up PE in another country, it brings itself within the fiscal jurisdiction of that another country to such a degree that such another country can tax all profits from the GE derives from the source country whether though PE or not. It is the act of setting out a PE which triggers the taxability of transaction in the source State and other applicable ruling of the Hon’ble Court”. Keeping in view of above, I have reasons to believe that income of the assessee as alleged to have earned outside India has escaped assessment as the same has been offered to tax only 1% of the gross revenues whereas the same should have been assessed in view of the provision of the DTAA. The income escaping assessment is more than Rs.1 Lacs.” 6. Pursuant to the procedure evolved by the Supreme Court in the case of GKN Driveshafts (India) Ltd. Vs. Income Tax Officer & others 259 I.T.R. 19 (SC), the petitioner filed a detailed objection questioning the validity of the proceedings initiated under Section 147 & 148 of the Act. The petitioner submitted that in the reasons recorded, there is no allegation or even a whisper that the assessee had failed to disclose fully and truly all material facts which is sine-quo-non for initiating 6 proceeding under Section 147 of the Act. The petitioner submitted that in the absence of any allegation that the assessee has failed to disclose fully and truly all material facts, no proceedings could be initiated under the proviso to Section 147 of the Act after the expiry of 4 years from the end of the relevant assessment year. The petitioner further submitted that there was no satisfaction of the Assessing Officer to the effect that there has been a failure on the part of the assessee to disclose fully and truly all material facts nor the allegation that the assessee has failed to disclose fully and truly all material facts emanates from the “reasons to believe” nor does it exists. In the light of the aforesaid, the petitioner submitted that the proceedings initiated under Section 147 & 148 of the Act was barred by limitation. It was further submitted that the reasons to believe recorded by the Assessing Officer was nothing else, but a change of opinion which was not permissible and that the reassessment proceedings which has been initiated does not bring on record any new fact or information to substantiate that any income chargeable to tax has escaped assessment. 7. The Assessing Officer, by its order dated 15.12.2009, rejected the contention of the petitioner holding that a valid notice has been issued under Section 148 of the Act. The Assessing Officer held that even though, the notice was issued after the expiry of 4 years, nonetheless, the case was reopened before 6 years upon an approval being granted by the Commissioner who was satisfied that the assessee had not disclosed fully and truly all material facts and therefore there was a clear cut failure on the part of the assessee. The Assessing Officer contended that no profit and loss account was submitted with the return of income which was mandatory in law. The description of revenues disclosed by the assessee being done 7 inside India and outside India was not divisible on account of the fact that the contract executed was a turnkey contract which was signed and executed in India and that the assessee had misled the Income Tax Department in thinking that there were two separate contracts. It was further contended that the assessee had misled the department that it does not have a Permanent Establishment (P.E.) in India whereas it had a P.E. in India for negotiation and execution of the contract. It was further pointed out that the assessee had misled the department into thinking that the inside India works started only at the time of installation, whereas the projects started from the day the agreement was executed and therefore there was a clear cut failure on the part of the assessee to disclose fully and truly all material facts. It was submitted that in view of the decision of the Supreme Court in the case of Commissioner Income Tax & another Vs. Hyundai Heavy Industries Co. Ltd. 291 I.T.R. 482 (SC), the P.E. of the assessee came into existence before the project started and none of the material was supplied to ONGC outside India and in fact the title of the goods were transferred in India. 8. The petitioner, being aggrieved by the aforesaid notice and the order passed by the Assessing Officer, has filed the present writ petition. 9. In the light of the aforesaid facts, the court has heard Mr. C. S. Agarwal, the learned senior counsel assisted by Mr. P. R. Mullick, the learned counsel for the petitioner and Mr. Arvind Vashisht, the learned counsel assisted by Mrs. Monika Pant, the learned counsel for the respondents. 10. The learned senior counsel for the petitioner submitted that the notice issued under Section 148 of the Act does not 8 contain any reason and, therefore, on this short ground, the notice was liable to be quashed. In support of his submission, the learned senior counsel for the petitioner placed reliance upon a decision of Delhi High Court in Haryana Acrylic Manufacturing Co. Vs. Commissioner of Income Tax & another 308 I.T.R. 38. The learned senior counsel for the petitioner further submitted that in the reasons recorded there is no whisper that the assessee has failed to disclose fully and truly all material facts necessary for the assessment and in the absence of any satisfaction being recorded by the Assessing Officer to this effect, no proceedings for reassessment could be initiated in view of the embargo imposed under the proviso to Section 147 of the Act. In support of his submission, the learned senior counsel placed reliance upon a decision in I.B.M. World Trade Corporation Vs. N. D. Bhatt, IAC of Income Tax, Foreign Companies Range-I, Bombay & another 138 I.T.R. 742 and McDermott International Inc. Vs. Additional Commissioner of Income Tax & other 259 I.T.R. 138. 11. On the other hand, Mr. Arvind Vashisht, the learned counsel for the Income Tax Department submitted that the writ petition was not maintainable and was liable to be dismissed on the ground of alternative remedy. The learned counsel for the department submitted that pursuant to the proceedings initiated under Section 147 of the Act, a draft assessment order has been issued by the Assessing Officer. The petitioner has objected to the draft assessment order and has filed its objection before the Dispute Resolution Panel under Section 144 C of the Act. The Panel has issued certain directions on the basis of which the Assessing Officer has passed a final assessment order. Consequently, the learned counsel submitted that the petitioner has an alternative remedy to challenge the assessment order 9 before the Tribunal and that the writ petition has been rendered infructuous. 12. On the merits of the case, the learned counsel for the Income Tax Department submitted that there is no requirement to furnish reasons while issuing a notice under Section 148 of the Act and that reasons so recorded for reopening the proceedings were duly supplied to the petitioner. The learned counsel for the department further submitted that in the reasons recorded for reopening the proceedings, it was sufficient for the Assessing Officer to record that he has reasons to believe that the income chargeable has escaped assessment and that it was not necessary that the reasons should record that the assessee had failed to disclose fully and truly the material facts necessary for his assessment. In support of his submission, the learned counsel for the department placed reliance upon the decision of the Supreme Court in Calcutta Discount Co. Ltd. Vs. Income- Tax Officer, Companies District I, Calcutta & another, 41 I.T.R. 191. The learned counsel further submitted that the Assessing Officer, while passing the assessment order under Section 143 (3) of the Act, had relied mechanically on the assessment made in the earlier assessment years and consequently on the basis of the information gathered by the department, reassessment proceeding has been initiated. The learned counsel further submitted that the satisfaction recorded by the Assessing Officer that he has reasons to believe that the income chargeable to tax has escaped assessment was based on relevant facts which did not amount to a change of opinion. 13. In the light of the rival stand adopted by the parties, it would be appropriate for the court to deal with the preliminary 10 objection raised by the learned counsel for the department with regard to the maintainability of the writ petition. 14. On 24.12.2009, the court passed an interim order which is extracted hereunder:- “Mr. C. S. Agarwal, Senior Advocate assisted by Mr. P. R. Mullick, Advocate for the petitioner. Mr. Arvind Vashisth, Advocate for the respondents. Counter affidavit to be filed within three weeks. Rejoinder affidavit to be filed within two weeks thereafter. List this matter on 9.2.2010 in the daily cause list. Meanwhile the assessing authority shall proceed with the reassessment of the matter under Section 147 of the Income Tax Act and pass appropriate orders thereon in accordance with law. However, the orders passed therein shall not be given effect to except by leave of this Court.” 15. Subsequently, the writ petition was admitted on 01st July, 2010 and the interim order dated 24.12.2009 was modified to the extent that the Assessing Officer was restrained from passing a final assessment order till the next date of listing, the order dated 01st July, 2010 is extracted hereunder:- “Mr. C. S. Agarwal, Senior Advocate assisted by Mr. P. R. Mullick, Advocate for the petitioner. Mr. Arvind Vashisth, Standing Counsel (Income Tax) for the respondents. Heard learned counsel for the parties. Admit the petition. The interim order dated 24.12.2009, passed by this court, is modified to the extent that the Assessing Officer shall not pass final assessment till the next date of listing. Other proceedings may go on. Counter and rejoinder affidavits between the parties have already been exchanged. List on 12.08.2010 for final hearing.” 16. The matter could not be decided and the interim order was extended from time to time. On 18th September, 2010, the 11 interim order was extended till the disposal of the writ petition. The order dated 18.09.2010 is extracted hereunder:- “Mr. C. S. Agarwal, the learned senior counsel for the petitioner. Mr. Arvind Vashist, the learned counsel for the respondents. Heard the learned senior counsel for the petitioner at length. The hearing is not concluded. List this matter for further hearing on 05th October, 2010. Interim order, if any to continue till the disposal of the writ petition.” 17. The matter, at that stage, was pending before the Dispute Resolution Panel. It transpires that the Dispute Resolution Panel issued certain directions, by its order dated 30th September, 2010, to the Assessing Officer, pursuant to which, the Assessing Officer passed a final assessment order dated 29th October, 2010 alongwith a notice of demand under Section 156 of the Act. The said assessment order and the notice of demand was passed in gross violation of the interim order dated 01st July, 2010 by which the Assessing Officer was restrained from passing any final assessment order. The petitioner, being aggrieved by the issuance of the final assessment order and issuance of a demand notice under Section 156 of the Act, filed an amended writ petition before this Court which could not be taken on record since there was no application praying to amend the writ petition nor was there any order of the court permitting the petitioner to amend the writ petition or file an amended writ petition. Consequently, till the hearing of the petition, the petitioner chose not to file an application to amend the writ petition, but, submitted that all orders passed by the Assessing Officer in contravention to the interim order dated 01st July, 2010 was a nullity and that any subsequent action taken by the respondents would also be a nullity in the eyes of law. 12 18. In Surjit Singh Vs. Harbans Singh AIR 1996 SC 135, the Supreme Court held:- “4. ……………………………. In defiance of the restraint order, the alienation/assignment was made. If we were to let it go as such, it would defeat the ends of justice and the prevalent public policy. When the Court intends a particular state of affairs to exist while it is in seisin of a lis, that state of affairs is not only required to be maintained, but it is presumed to exist till the Court orders otherwise. The Court, in these circumstances has the duty, as also the right, to treat the alienation/assignment as having not taken place at all for its purposes.” 19. Similarly, in All Bengal Excise Licensees Association Vs. Raghabendra Singh & others AIR 2007 SC 1386, the Supreme Court held that a party to the litigation cannot be allowed to take an unfair advantage by committing breach of an interim order. The Supreme Court further held :- “A party to the litigation cannot be allowed to take an unfair advantage by committing breach of an interim order and escape the consequences thereof. By pleading misunderstanding and thereafter retaining the said advantage gained in breach of the order of the Court and the wrong perpetrated by the respondent-contemnors in contumacious disregard of the order of the High Court should not be permitted to hold good. In our opinion, the impugned order passed by the High court is not sustainable in law and should not be allowed to operate as a precedent and the wrong perpetrated by the respondent- contemnors in utter disregard of the order of the High Court should not be permitted to hold good.” 20. In Gurunath Manohar Pavaskar Vs. Nagesh Siddappa Navalgund AIR 2008 SC 901, the Supreme Court held that a Court, in exercise of its inherent jurisdiction under Section 151 of the Code of Civil Procedure, 1908, in the event of 13 coming to the conclusion that a breach to an order of restraint had taken place, may bring back the parties to the same position as if the order of injunction had not been violated. The Supreme Court held that any order passed by an authority having knowledge of the interim order of the court, was of no consequence and that the said order remained a nullity in the eyes of law. The Supreme Court held that the order passed by the State Government in contravention of the interim order remains unenforceable and in-executable. 21. In P.K. Nair Vs. I.T.O. A-Ward Alwaye & others 90 I.T.R. 512 (Kerala), it was held :- “We have already referred to the question whether we will justified in interfering in view of the assessment orders having been passed for the five years after we issued notice on this petition. We think the procedure will have to be following by us. Any assessments completed during the pendency of this writ application, we consider, must depend on the decision that we take in this case and if there was no jurisdiction to take action under Section 147 of the Act the whole proceedings are vitiated as without jurisdiction and it necessarily follows that the assessment orders that followed such action cannot stand. We think that in the interest of justice the assessment orders should be set aside. 22. In the light of the aforesaid, a party to the litigation could not be allowed to take unfair advantage by committing a breach of the interim order and thereafter turn around and contend that the writ petition has been rendered infructuous and that the petitioner has an alternative remedy which he could avail. It is well settled that a person who violates an interim order of the court cannot be permitted to enjoy and / or keep the fruits of his willful disobedience. The court has the plenary powers to set the wrong right and cannot allow perpetuation of the wrong doing 14 and can nullify the assessment order. The court is consequently of the opinion that the preliminary objection raised by the learned counsel for the department is patently erroneous and is accordingly rejected. The writ petition is maintainable and if necessary, the court, exercising its plenary power will set the wrong right and will not allow the order of the Assessing Officer to continue unjustifiably. The court would be justified, in an appropriate case, to give appropriate directions for remedying or rectifying the act done in violation of its orders. 23. Coming back to the merits of the case, it would be appropriate to first peruse Section 147 and 148 of the Act. For facility, the said provisions are extracted hereunder:- “Income escaping assessment. 147. 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: 15 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.” “Issue of notice where income has escaped assessment. 148. [(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 16 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.” 17 24. A perusal of the aforesaid provisions indicates that the Assessing Officer has wide powers to reopen the assessment if he has reasons 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. 25. The proviso to Section 147 of the Act stipulates that in case 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. 26. 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 18 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. 27. A Division Bench of this Court in McDermott International Inc. Vs. Additional Commissioner of Income Tax & other 259 I.T.R. 138 has found that the reasons recorded by the Assessing Officer did not disclose the fact that there was failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. The Division Bench of this Court held that it is the failure or omission on the part of the assessing authority, which does not lead in any manner to constitute failure or omission on the part of the assessee entitling them to invoke Section 147 of the Act, after the prescribed period of four years. It was further held by the Division Bench of this Court that:- “The submission of the learned counsel is devoid of merit for this reason that the reason or ground for reopening of assessment in terms of the proviso to Section 147 are totally non-existent. According to our reasoning, we have addressed only the absence of ground and not the sufficiency. Learned counsel for the respondents could not satisfy that there was any failure on the part of the assessee as envisaged by the proviso to Section 147 or in any manner by suppression or omission, he took advantage and escaped the assessment.” 28. In Commissioner of Income-Tax and another Vs. 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 19 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.” 29. In Foramer Vs. Commissioner of Income Tax and another, 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 Commissioner of Income Tax Vs. Foramer France, 264 ITR 566. 30. In the light of the aforesaid, it is clear that the Assessing Officer is conferred with the jurisdiction when he has reasons to believe that the income chargeable to tax has escaped assessment, by reason of omission or failure on the part of the 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. Both the conditions are necessary and are required to be 20 satisfied after which the Assessing Officer could issue a notice for reassessment after the expiry of four years from the end of the relevant assessment year. In the present case, the court finds that there is no whisper in the reasons recorded to show that the assessee has failed to disclose fully and truly all material facts necessary for the assessment. This is a condition precedent which is required to be fulfilled before the Assessing Officer could have jurisdiction to issue a notice under Section 148 of the Act for reassessment after the expiry of the period of four years. In the absence of recording such reasons that the assessee has failed to disclose fully and truly all material facts necessary for the assessment, no reassessment proceedings could be initiated and, on this short ground, the notice under Section 148 of the Act could not be sustained. The court further finds that the reasons cannot be supplemented in the order while rejecting the objections filed by the petitioner. The reasons has to be recorded prior to the stage of issuance of notice under Section 148 of the Act and that the reason to believe or the satisfaction recorded under Section 148 of the Act cannot be supplemented by the Assessing Officer in a subsequent order. The Supreme Curt in the case of Mohinder Singh Gill & Another Vs. The Chief Election Commissioner, New Delhi & others 1978 (1) SCC 405 held:- “8. The second equally relevant matter is that when a statutory functionary makes an order based on certain grounds, its validity must be judged by the reasons so mentioned and cannot be supplemented by fresh reasons in the shape of affidavit or otherwise. Otherwise, an order bad in the beginning may, by the time it comes to Court on account of a challenge, get validated by additional grounds later brought out. We may here draw attention to the observations of Bose, J. in Commissioner of Police, Bombay Vs. Gordhandas Bhanji AIR 1952 SC 16: 21 Public orders, publicly made, in exercise of a statutory authority cannot be construed in the light of explanations subsequently given by the officer making the order of what he meant, or of what was in his mind, or what he intended and are intended to affect the actings and conduct of those to whom they are addressed and must be construed objectively with reference to the language used in the order itself. Orders are not like old wine becoming better as they grow older.” 31. The aforesaid view of the Supreme Court was reiterated by the Supreme Court in Hindustan Petroleum Corporation Ltd. Vs. Darius Shapur Chenai & others 2005 (7) SCC 627 and Bahadur Singh Lakhubhai Gohil Vs. Jagdishbhai M. Kamalia & another 2004 (2) SCC 65. 32. There is another aspect of the matter. The genesis for issuing the notice under Section 148 of the Act is based on the decision of the Supreme Court in the case of the Hyundai Heavy Industries (supra) wherein the Supreme Court held :- “12. There is one more aspect to be discussed. The attraction rule implies that when an enterprise (GE) sets up a PE in another country, it brings itself within the fiscal jurisdiction of that another country to such a degree that such another country can tax all profits that the GE derives from the sources country-whether though PE or not. It is the act of setting out a PE which triggers the taxability of transactions in the source State. Therefore, unless the PE is set up, the question of taxability does not arise- Whether the transactions are direct or they are through the PE. In the case of a Turnkey Project, the PE is set up at the installation stage while the entire Turnkey Project, including the sale of equipment, is finalized before the installation stage. The setting up 22 of PE, in such a case, is a stage subsequent to the conclusion of the contract. It is as a result of the sale of equipment that the installation PE comes into existence. However, this is not an absolute rule. In the present case, there was no allegation made by the Department that the PE came into existence even before the sale took place outside India. Similarly, in the present case, there was no allegation made by the Department. that the price at which ONGC was billed/invoiced by the assessee for supply of fabricated platforms included any element for services rendered by the PE. In the present case, we are concerned with assessment years 1987-88 and 1988-89. Therefore, we are not inclined to remit the matter to the adjudicating authority. We reiterate, in the circumstances, not all the profits of the assessee company from its business connection in India (PE) would be taxable in India, but only so much of profits having economic nexus with PE in India would be taxable in India. To this extent, we find no infirmity in the impugned judgment of the Tribunal. Accordingly, we are of the view that the Tribunal was right in holding that profits attributable to the Korean Operations was not taxable in view of Article 7 of CADT.” 33. A perusal of the reasons recorded by the Assessing Officer for reopening the assessment proceedings under Section 148 of the Act which has also been extracted earlier clearly indicates that the reassessment proceedings have been initiated on the basis of the decision of the Supreme Court in the case of Hyundai Heavy Industries Co. Ltd. (supra). 34. In Mcdermott International Inc. Vs. Additional Commissioner of Income Tax and another, 259 ITR 138, 23 a Division Bench of this Court held that the judgment of a higher authority was no ground to reopen the assessment under Section 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.” 35. In Austin Engineering Co. Ltd. Vs. Joint Commissioner of Income-Tax [2009] 312 ITR 70, a Division Bench of the Gujrat High Court found that the Supreme Court delivered a decision in the case of Commissioner of Income Tax Vs. Sterling Foods [1999] 237 ITR 579, wherein export incentive benefits was not an income derived from manufacturing and, consequently, not eligible for deduction under Section 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 Section 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 24 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.” 36. In the light of the aforesaid, it is clear that merely because the Supreme Court has pronounced a law subsequently does not entitle the Assessing Officer to initiate reassessment proceedings under Section 148 of the Act. In fact, such reasons so recorded amounts to a change of opinion. In Commissioner of Income Tax Vs. Kelvinator of India Ltd., 256 ITR 1, 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 25 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 Section 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 assessed 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 26 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.” 37. The aforesaid decision was affirmed by the Supreme Court in Commissioner of Income Tax Vs. Kelvinator of India Ltd., 320 ITR 561 wherein the Supreme Court held that the “reasons 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. 38. In Consolidated Photo and Finvest Ltd. Vs. Assistant Commissioner of Income Tax [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. 39. In the light of the aforesaid, the court finds that the Assessing Officer committed a manifest error in reopening the assessment proceedings under Section 148 of the Act. 40. For the reasons stated above, the notice dated 31st March, 2009 issued under Section 148 of the Act does not comply with 27 proviso to Section 147 of the Act. The reasons recorded does not indicate that the assessee has failed to disclose fully and truly all material facts necessary for the assessment. Consequently, the notice issued under Section 148 of the Act cannot be sustained and is quashed. The proceedings initiated in pursuance of the notice under Section 148 of the Act are wholly illegal and without jurisdiction and cannot be executed since the final assessment order and the notice of demand under Section 156 of the Act was issued in gross violation of the interim order of this court. The same is a nullity in the eyes of law and cannot be enforced. The writ petition is accordingly allowed. In the circumstances of the case, the parties shall bear their own cost. 41. Before parting, the court records and cautions the petitioner that it is always appropriate to bring on record subsequent proceedings initiated by an authority after the filing of the writ petition, and if an order has been passed by an authority which is pre-judicial to the interest of the petitioner, the same should be brought on record with a specific prayer for its quashing. In the present case, subsequent proceedings have not been brought on record, which was however not fatal to the result of the case, but, nonetheless it has an impact on the ultimate result of the case. (Tarun Agarwala, J.) Dated 20th August, 2011 LSR "