Explanatory note do not mean failure of assessee u/s147 (of Income Tax Act, 1961) to reopen assessment,HC.

1. The assessee was a British company and was engaged in the business of providing services and facilities in connection with the exploration and extraction as well as the production of mineral oils. It was an assessee under the Act since the financial year 1985-86 and was being assessed to income-tax. For the assessment year 2003-04, it filed the return of income offering its gross revenue to be taxed under section 44BB (of Income Tax Act, 1961).

2. The Assessing Officer directed the assessee to supply particulars and documents in support of such claim. The assessee furnished 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 assessee and, after applying its mind, issued an assessment order under section 143(3) (of Income Tax Act, 1961).

3. After a lapse of more than four years, the Deputy Director of Income-tax, International Taxation, issued a notice under section 148 (of Income Tax Act, 1961) proposing to reassess the income of the assessee on the grounds;(1) that in view of the decision of the High Court of Uttaranchal in CIT v. O.N.G.C. [2008] 299 ITR 438 , the income of the assessee was required to be assessed as 'fees for technical services' and was not covered by the provision of section 44BB (of Income Tax Act, 1961).; and (2) that in view of the Explanatory Note to the Finance Bill, 2010 indicating that the combined effect of the provisions of sections 44BB, 44DA and 115A 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 (of Income Tax Act, 1961) or under section 115A (of Income Tax Act, 1961) and that section 44BB (of Income Tax Act, 1961) 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.

4. The assessee objected to the notice 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 were being initiated on the same material which was already on the record which amounted to a change of opinion and 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 assessee 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 Income Tax Act, 1961). The assessee also contended that the proposed amendment as per the Finance Bill, 2010 was prospective in nature and was not applicable. The Assessing Officer rejected the objections of the assessee.

On writ HC held as under:

5. A perusal of provisions of sections 147 and 148 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 reason to believe is not based nor can it be an outcome of a change of opinion.

6. Further, the proviso to section 147 (of Income Tax Act, 1961) 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, he must also indicate that the assessee had failed to disclose fully and truly all material facts necessary for his assessment for that assessment year.

7. 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. In the light of several decisions of the Supreme Court, 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.

8. Explanation 2 provides that the following shall be deemed to be cases where income chargeable to tax has escaped assessment: 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 under assessed 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.

9. 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 underassessment 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 conditions precedent to be satisfied before the Assessing Officer could have jurisdiction to issue a notice for reassessment after the expiry of the period of four years.

10. 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 underassessment. 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 sections 147 (of Income Tax Act, 1961) and 148.

11. 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 reassessment cannot be initiated on a mere change of opinion to merely reexamine an issue on 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' can 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 disclose a mere change of opinion, in that event, the assessment proceedings could not be initiated.

12. In the instant case, the assessee had received revenue from certain companies on account of providing services and facilities in connection with the exploration and extraction of and production of mineral oil and offered the revenues received from these companies for taxation under section 44BB (of Income Tax Act, 1961).

13. Under the existing provisions contained in sections 44BB, 44D, 115A and under Explanation II of section 9(1)(vii) (of Income Tax Act, 1961), it was open to the Assessing Officer to tax the assessee either under section 44BB (of Income Tax Act, 1961) or 44D or under section 9(1) (of Income Tax Act, 1961)(vii ) on the basis of the material produced before him. Relevant and primary facts were placed before the Assessing Officer.

14. The Assessing Officer applied his mind to the facts of each case. He 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 (of Income Tax Act, 1961) which was accepted by the assesse.

15. A perusal of the assessment order of the assessee, indicates that the Assessing Officer has considered 29 contracts /agreements entered by the assessee with others relating to providing services and facilities in connection with the exploration and 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 assessee was chargeable under section 44BB (of Income Tax Act, 1961). Once an order is passed under section 143(3) (of Income Tax Act, 1961), a presumption is raised that such an order has been passed on an application of mind.

16. By the Finance Act, 2003, section 44DA (of Income Tax Act, 1961) was inserted in the Act with effect from 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 (of Income Tax Act, 1961).

17. Section 44DA (of Income Tax Act, 1961) was amended with effect from 1-4-2011 by the Finance Act, 2010, and a proviso was added indicating that the provisions of section 44BB (of Income Tax Act, 1961) shall not apply in respect of income referred to in this section.

18. After the insertion of section 44DA (of Income Tax Act, 1961), the combined effect of the provisions of sections 44BB, 44DA, 115A and Explanation 2 of section 9(1)(vii) (of Income Tax Act, 1961) 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 (of Income Tax Act, 1961) or section 115A (of Income Tax Act, 1961) read with Explanation 2 to section 9(1)(vii) (of Income Tax Act, 1961) irrespective of the business to which it relates and that section 44BB (of Income Tax Act, 1961) 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.

19. In spite of the insertion of section 44DA (of Income Tax Act, 1961), a grey area remained regarding the scope of section 44BB (of Income Tax Act, 1961) and section 44DA (of Income Tax Act, 1961), namely, whether the fee for technical services relating to the exploration sector would be covered under section 44BB (of Income Tax Act, 1961). In order to remove the grey area, sections 44DA and 44BB were amended with effect from 1-4-2011 so as to exclude the applicability of section 44BB (of Income Tax Act, 1961) to the income which is covered under section 44DA (of Income Tax Act, 1961). The aforesaid was provided in the Explanatory Note to the Finance Bill, 2010, which was ultimately amended in the relevant sections 44BB and 44DA with effect from 1-4-2011.

20. In the light of the aforesaid, the contention of the revenue is, that the services contemplated under section 44BB (of Income Tax Act, 1961) are services other than those coming within the purview of Explanation 2 to section 9(1)(vii) (of Income Tax Act, 1961). The services extended by the assessee fall under Explanation 2. Consequently, the income by way of fees for technical services chargeable under section 9(1)(vii) (of Income Tax Act, 1961) has to be computed under section 44DA (of Income Tax Act, 1961).

21. In view of the decision of Delhi High Court in Bhai Sunder Dass & Sons Co. (P.) Ltd. v. CIT [2002] 124 Taxman 685/[2003] 259 ITR 33 and that of the Gujarat High Court in Austin Engg. Co. Ltd. v. Joint CIT [2009] 312 ITR 70 , 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.

22. The assessee has disclosed all material facts and no false facts have been stated. The reasons recorded show that the Assessing Officer has reasons to believe that income has escaped assessment on the basis of a subsequent decision rendered by 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.

23. Insofar as the second reason is concerned, it is found that the primary facts had been disclosed by the assessee, namely, the agreements/contracts were placed before the Assessing Officer. The Assessing Officer had discussed the contracts in the assessment order passed under section 143(3) (of Income Tax Act, 1961). 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 Income Tax Act, 1961) and not under section 44D (of Income Tax Act, 1961) read with Explanation 2 of section 9(1)(vii) (of Income Tax Act, 1961). The Assessing Officer was of the opinion that the services provided by the assessee fall under section 44BB (of Income Tax Act, 1961).

24. The combined effect of the provisions of sections 44BB, 44DA and 115A would 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 sections 44BB and 44DA would take effect from 1-4-2011 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.

25. Under the existing provisions contained in sections 44BB, 44D, 115A and Explanation 2 of section 9(1)(vii) (of Income Tax Act, 1961), it was open to the Assessing Officer to tax the assessee either under section 44BB (of Income Tax Act, 1961) or 44D or under section 9(1)(vii) (of Income Tax Act, 1961) 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 his mind to the facts of each case and came to the conclusion that the assessee was liable to be taxed under section 44BB (of Income Tax Act, 1961).

26. The Explanatory Note to the Finance Bill has removed the doubts, which had been raised regarding the scope of section 44BB (of Income Tax Act, 1961) vis-a-vis section 44DA (of Income Tax Act, 1961) which has only been made prospectively and cannot be used or applied for reopening the case under sections 147 (of Income Tax Act, 1961) and 148. 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 (of Income Tax Act, 1961) or in any manner the assessee suppressed the material facts or failed to disclose fully and truly all material facts necessary for the assessment.

27. In view of the aforesaid, the assessee has made out a case for a writ of certiorari and, accordingly the notice issued by the Assessing Officer under sections 147 (of Income Tax Act, 1961) and 148 is to be quashed. All proceeding initiated by the Assessing Officer pursuant to the said notice and orders passed therein also are to be quashed. 

Case Reference-B.J. Services Company Middle East Ltd. v. Deputy Director of Income-tax (International Taxation), Dehradun

HIGH COURT OF UTTARAKHAND