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Dreat eastern energy corporation ltd. gurgaon Vs. Dy. commissioner of income tax, circle 12(1), and
August, 25th 2014
           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 the Petitioners  : Mr Satyen Sethi with Mr Arta Trana Panda.
For the 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 the petitioner impugning a notice
dated 28.03.2013, issued under Section 148 of the Income Tax Act, 1961
(hereinafter mentioned as the `Act' ) for reopening the assessment for the
Assessment Year 2006-2007. The petitioner also challenges an order
dated 10.02.2014 passed by the Deputy Commissioner of Income Tax
rejecting the objections filed by the petitioner questioning the validity of
the notice dated 28.03.2013.

2.      The principal controversy to be considered in the present petition is
whether the income of the petitioner (also referred to as the "assessee")



W.P.(C) 1349/2014                                                Page 1 of 11
for the Previous Year 2005-2006, relevant to the Assessment Year 2006-
2007, had escaped assessment on account of failure on the part of the
assessee to disclose, fully and truly, the material facts necessary for the
assessment.

3.      Briefly stated, the facts of the case are as under:

3.1     The petitioner company is engaged in the 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'), a company
incorporated under the laws of Delaware, USA, entered into a
Memorandum of Understanding dated 04.07.2005 (MOU) with the
petitioner company for acquiring upto 20% `farm-in', i.e. participating
interest, in the petitioner's contract area under the Production Sharing
Contract with the Directorate General of Hydrocarbon, Ministry of
Petroleum and Natural Gas, Government of India. As per the terms of the
MOU, Energy Ventures had agreed to fund USD 25,000,000/- against
approved work programme during the development phase. The petitioner
company had received US$ 200,000/- (`87,13,000/-) as non refundable
advance from Energy Ventures, subject to the approval of Government of
India. The said amount was forfeited by the petitioner on non-fulfillment
of the terms and conditions of the MOU.

3.2     On 30.11.2006, the petitioner filed a return for the AY 2006-07,
declaring a loss of `1,07,89,125/-. A non-refundable advance of
`87,13,000/- received by the petitioner from Energy Ventures was



W.P.(C) 1349/2014                                              Page 2 of 11
claimed as capital receipt towards extinguishment of a right in business
and the same was not offered to tax under the Act. The case of the
petitioner was selected for scrutiny and a notice under section 143(2) of
the Act was sent on 18.10.2007. After scrutiny, the Assessing Officer
(AO) passed an assessment order dated 23.12.2008 under Section 143(3)
of the Act, whereby expenditure of `1,61,09,642/- pertaining to period
prior to 14.01.2006 was disallowed. The AO also disallowed depreciation
to the extent of `5,85,078/- and assessed the total income at `59,05,595/-.
Aggrieved by the assessment order, the petitioner filed an appeal before
the Commissioner of Income Tax (Appeals). By an order dated
02.05.2012, CIT(A) partly allowed the appeal and the disallowance of
expenditure, to the extent of `1,51,11,880/- out of `1,61,09,642/-, and
disallowance of depreciation was deleted.





3.3     Thereafter, a notice dated 28.03.2013 under Section 148 of the Act
was issued to the petitioner for reopening the assessment for the AY 2006-
2007 under Section 147 of the Act. The said notice is hereinafter referred
to as the `impugned notice'. The petitioner requested that the original
return filed be treated as return pursuant to the impugned notice and
further sought reasons as to why the AO believed that income of the
petitioner had escaped assessment. On 02.12.2013, respondent no.1
furnished the reasons to believe that income chargeable to tax had escaped
assessment.


3.4     Thereafter, on 24.01.2014, the petitioner objected to the assumption
of jurisdiction to reassess the income for the AY 2006-07, by asserting



W.P.(C) 1349/2014                                               Page 3 of 11
that there was no failure on the part of the petitioner to disclose, fully and
truly, all material facts and that the reasons furnished by the AO indicated
only a change of opinion, which did not justify reopening of the
assessment. The objections of the petitioner were rejected by the Deputy
Commissioner of Income Tax by an order dated 10.02.2014 (hereinafter
referred to as the `impugned order'), which is impugned in the present
petition.


4.      The controversy that has to be addressed in the present petition is
whether the impugned notice, reopening of assessment, was in accordance
with law. It is noted that whilst the assessment year in question is 2006-07
and the assessment order under Section 143(3) of the Act was passed on
23.12.2008, the impugned notice was dated 28.03.2013, after the expiry of
four years from the end of the assessment year. In terms of the proviso to
Section 147, no action could be taken after the expiry of four years from the
end of the relevant assessment year, unless any income chargeable to tax
has escaped assessment by reason of the failure on the part of the assessee
to disclose, fully and truly, all material facts necessary for the assessment.
The proviso to Section 147 reads as under:-

        "147. Income escaping assessment.--

                    xxxx   xxxx        xxxx         xxxx         xxxx

        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



W.P.(C) 1349/2014                                                Page 4 of 11
        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:"

5.      The principal question, whether in the given facts, the condition that
the assessee had failed to fully and truly disclose all material facts was met,
can be best answered by referring to the reasons furnished by the AO for
reopening the assessment. AO's letter dated 02.12.2013 discloses the
following reasons for reopening the assessment:-

        "Reasons for the belief that the income has escaped
        assessment in the case of M/s. Great Eastern Energy
        Corporation Ltd.

        The assessment of above company for the assessment year
        2006-07 was completed after scrutiny in November 2008 at an
        income of Rs.77,72,709/-. It is gathered that the assessee
        classified Software of Rs.9,22,148 under Computer and
        claimed depreciation at the rate of 60%. These assets are
        classifiable as intangible assets, subject to depreciation at the
        rate of 25%. This mistake resulted in incorrect allowance of
        depreciation and consequent under assessment of income to
        the extent of Rs.3,22,752/- having a tax effect of Rs.1,44,489/-.

        It is also revealed that the assess received Rs.87,13,000 as
        nonrefundable advance from another company LLC (EV) and
        the same amount was credited to the profit and loss account,
        but during the computation the amount was deduction. This
        amount should have been disallowed by the assessing officer.
        The mistake resulted in underassessment of income of
        Rs.87,13,000/- involving tax effect of Rs.39,00,617/-.

        It is further revealed that the assessee company is involved in
        exploration, development and exploration of petroleum
        (CBM). The company has entered into an agreement with Govt



W.P.(C) 1349/2014                                                  Page 5 of 11
        of India under which the company is eligible for specified
        allowance while calculating profit and gains under section 42
        of the Income tax Act, 1961 and for benefits available under
        section 80IA. It is gathered that in the profit and loss account
        there is no income accruing from sale of CBM. Neither is any
        stock of goods produced from normal operation. In the notes
        to the financial statements it has been stated that 'the company
        is in the exploration phase of CBM Gas operations. Wells
        under exploration will be converted to producing properties,
        when the well is ready to commence commercial production.
        Capital expenditure incurred for these wells will be allocated
        to Producing Properties'. It is clear that the company has
        neither started commercial production nor is ready to
        commence. But the company has charged Rs.4,81,29,174/- to
        the profit and loss account under the head of Administrative
        and General expenses. Out of Rs.4,81,29,174/- only
        Rs.1,61,09,642/- was disallowed by the Assessing Officer. The
        mistake resulted in underassessment of income of
        Rs.3,20,19,532/- involving tax effect of Rs.1,43,34,436/-.
        The assessee company has deducted the amount of
        Rs.47,72,982/- in the computation of income under the head of
        depreciation. Since the assessee has not commenced its
        business, the depreciation charged should have been
        disallowed by the assessing officer. The mistake resulted in
        underassessment of income of Rs.47,72,982/-involving tax
        effect of Rs.21,36,756/-."

6.      Thus, according to the AO, income is stated to have escaped
assessment on four counts. The first being on account of depreciation
claimed on computer software. In this respect, it is noted that the returns
furnished by the assessee had been duly scrutinized by the AO. Undeniably,
the amount of depreciation claimed by the assessee was examined by the
AO. This is also apparent from the fact that the AO had disallowed
depreciation to the extent of `5,85,078/-, which was claimed by the




W.P.(C) 1349/2014                                                 Page 6 of 11
assessee in respect of the building and warehouse.        The AO has now
alleged that the depreciation on computer software was to be allowed only
to the extent of 25% instead of 60% as admitted earlier. Apart from the fact
that the depreciation as claimed by the assessee had been examined during
the assessment proceedings. The contention that the rate of depreciation
allowable on computer software is 25% is also apparently erroneous. The
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 the dispute raised with
regard to rate of depreciation by the AO merely indicates a change of
opinion and there has been no failure on the part of the assessee to disclose
any material fact in this regard.

7.      The second reason furnished by the AO is with respect to the sum of
`87,13,000/- received as non-refundable advance from Energy Ventures. It
has been pointed out by the assessee that a specific reference was made to
this advance in schedule 11 to the audited accounts furnished by the
assessee. The relevant extract from Schedule 11 reads as under:-

               "The company had entered into a Memorandum of
        Understanding (MOU) with Energy Ventures, L.L.C (EV) on
        4th Jul, 2005, a company incorporated under the laws of
        Delaware, USA for acquiring upto 20% `farm-in' i.e.
        participating interest in the company's contract area under the
        Production Sharing Contract with Director General of
        Hydrocarbon Ministry of Petroleum and Natural Gas,
        Government of India. As per the terms of the MOU, EV had
        agreed to fund USD 25,000,000 against approved work
        programme for the development phase. The 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 the approval of Government of
        India."
8.      In addition, the assessee had also by its letter dated 16.05.2007
furnished clarifications with regard to the claim of deduction made by the
assessee in respect of this sum received from Energy Ventures as non-
refundable advance. Thus, indisputably, the petitioner had made full and
complete disclosure with regard to the deduction claimed on account of the
aforementioned sum.

9.      The other two reasons given by the AO, justifying reopening of the
assessment, pertain to allocation of expenses and depreciation relating to
pre-production period. This issue was also, undeniably, considered by the
AO as is evident from the fact that he disallowed a sum of `1,61,09,642/-
on account of the expenses being relatable to a period prior to
commencement of business activities.

10.     As we see it, the AO has sought to reopen the assessment not on
account of failure on the part of the assessee to disclose any material
particulars, but on account of the change of opinion with regard to certain
deductions claimed and allowed by the assessee. It is now well settled that
assessment cannot be reopened on mere change of opinion. The Hon'ble
Supreme Court in the case of CIT v. Kelvinator of India Limited: (2010)
320 ITR 561 (SC) affirmed the decision of the full Bench of this Court that
a mere change of opinion cannot form the basis for reopening of
assessment.




W.P.(C) 1349/2014                                              Page 8 of 11
11.     Although the AO has recorded that he has reasons to believe that
income chargeable to tax exceeding ` 1 lac. had escaped assessment, as the
assessee had not disclosed, fully and truly, all material facts necessary for
his assessment for the relevant assessment year, there is no allegation made
in the reasons as furnished by the AO that there had been a failure on the
part of the assessee to disclose, fully and truly, any particular fact that was
necessary for the assessment. In view of the express language of the
proviso to Section 147, reopening of the assessment after expiry of four
years from the end of the assessment year is impermissible unless this pre-
condition is met. This Court in the case of in the 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 the income has escaped assessment on account of failure,
on the part of the assessee, to disclose all necessary material facts, the
assessment cannot be reopened beyond the period of four years.                 The
relevant extract from the decision in Wel Intertrade P. Ltd. (supra) reads as
under:-

         "A plain reading of the said proviso makes it more than
        clear that where the provisions of section 147 are being
        invoked after the period of four years from the end of the
        relevant assessment year, in addition to the Assessing Officer
        having reason to believe that any income chargeable to tax
        has escaped assessment, it must also be established as a fact
        that such escapement of assessment has been occasioned by
        either the assessee failing to make a return under section
        139, etc., or by reason of failure on the part of the assessee to
        disclose fully and truly all material facts necessary for his
        assessment, for that assessment year. In the present case, the
        question of making of a return is not in issue and the only



W.P.(C) 1349/2014                                                   Page 9 of 11
        question is with regard to the second portion of the proviso,
        which relates to failure on the part of the assessee to disclose
        fully and truly all material facts necessary for assessment.
        Insofar as this pre- condition is concerned, there is not a
        whisper of it in the reasons recorded by the Assessing
        Officer. In fact, as indicated above, the Assessing Officer
        could not have made this a ground because the Assessing
        Officer had required the petitioner to furnish details with
        regard to loss occasioned by foreign exchange fluctuation
        which the petitioner did by virtue of the reply dated February
        5, 2002. Since the petitioner had fully and truly disclosed all
        the material facts necessary for the assessment, the pre-
        condition for invoking the proviso to section 147 of the said
        Act had not been satisfied.
              In this connection, it may be relevant to note one
        decision, although there are several others. The said decision
        is that of the Punjab and Haryana High Court in the case of
        Duli Chand Singhania v. Asstt. CIT : (2004) 269 ITR 192. In
        the said decision, the High Court of Punjab and Haryana was
        faced with a similar situation. The court noted that there was
        not even a whisper of an allegation that the escapement in
        income had occurred by reason of failure on the part of the
        assessee to disclose fully and truly all material facts
        necessary for his assessment. The court observed that
        absence of this finding, which is the sine qua non for
        assuming jurisdiction under section 147 of the Act in a case
        falling under the proviso thereto, makes the action taken by
        the Assessing Officer wholly without jurisdiction. We agree
        with these observations of the Punjab and Haryana High
        Court and are of the view that in the present case also, the
        Assessing Officer has acted wholly without jurisdiction. The
        invocation of section 147, the issuance of the notice under
        section 148 and the subsequent order on the objections are
        all without jurisdiction. The impugned notice as well as the
        proceedings pursuant thereto are quashed."




W.P.(C) 1349/2014                                                  Page 10 of 11
12.     In view of the settled law, the proceeding initiated by the AO for
reopening the assessment for the AY 2006-2007 is without authority of law.
The petition is, accordingly, allowed and the impugned notice dated
20.03.2013 as well as the impugned order dated 10.02.2014 are set aside.
The 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

 
 
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