Citation Codes

Equivalent Citations

citation codes

Case Number

Writ Petition No. 729 (M/B) of 2001

Judges

Hon'ble Mr. Justice Ashok A. Desai
Hon'ble Mr. Justice Irshad Hussain

Acts

SECTION 148 INCOME TAX ACT 1961
SECTION 147 INCOME TAX ACT 1961
INCOME TAX ACT 1961
sub-section (3) of section 143 or this section
sub-section (1) of section 142 or section 148
clause (c) of Explanation 2 to section 147
section 34(1)(a) (analogous to section 147

See more information ...

Smart Summary

Structured Summary of the Opinion Delivered by A.A. Desai, C.J.

Factual and Procedural Background

This petition was filed by an assessee (a limited foreign company incorporated in Panama) challenging reassessment notices said to have been issued under section 147 read with section 148 of the Income-tax Act, 1961. The notices impugned were marked as annexures “I”, “P”, “U”, “Z” and “AE” and were issued on March 30, 2000 (for assessment year 1989–90) and March 29, 2001 (for assessment years 1990–91, 1991–92, 1993–94 and 1994–95).

The petitioner-company engaged in designing, fabricating, construction and installation as a sub-contractor to various contractors of the Oil and Natural Gas Commission (India). Under section 139 it submitted returns for the relevant assessment years and, for receipts from work done outside India, offered one per cent of gross receipts as income. The Assessing Officer completed assessments under section 143(3) and later issued the reassessment notices on the belief that income chargeable to tax had escaped assessment.

Legal Issues Presented

Whether reassessment notices issued after the expiry of four years from the end of the relevant assessment years are valid when the proviso to section 147 (which permits reopening beyond four years only where income escaped assessment by reason of failure on the part of the assessee) is not satisfied.
Whether the sanction/permission of the Commissioner under section 151 cures or dispenses with the requirements of the proviso to section 147 when notices are issued beyond the four-year period.
Whether reliance on Explanation 2(c) to section 147 (e.g., underassessment or assessment at too low a rate) can justify reopening assessments beyond four years in the absence of any failure on the part of the assessee as required by the proviso to section 147.
Whether the assessee's offer of income at one per cent (instead of ten per cent under section 44BB) or the treatment of mobilisation/demobilisation receipts as outside-India receipts amounts to suppression or failure by the assessee that would justify reopening beyond four years.

Arguments of the Parties

Petitioner's Arguments

The reassessment notices were issued after the expiry of four years from the end of the relevant assessment years and the proviso to section 147 (which conditions extension beyond four years on failure by the assessee) was not satisfied.
The impugned notices did not indicate any failure or omission on the part of the assessee as required by the proviso to section 147.
Reference to the Supreme Court decision in CIT v. Bhanji Lavji was relied upon to show that the assessee does not have a duty to instruct the Income-tax Officer on questions of law and that a wrong legal inference by the officer does not justify reassessment under the analogous provision.

Respondent's Arguments (as advanced by Mr. S.K. Posti)

If notices are issued after four years, permission of the Commissioner under section 151 is necessary and such permission had been granted; therefore the notices are valid.
For a non-resident company such as the petitioner, income for work done outside India is assessable at ten per cent of gross receipts under section 44BB; the assessing authority could have assessed at ten per cent instead of the one per cent offered by the assessee.
The assessee did not disclose total income fully: it offered only one per cent for outside-India work and excluded mobilisation/demobilisation receipts — the latter should have been treated as inside-India receipts and taxed at ten per cent; this omission/suppression was a material fact justifying reopening.
Reliance upon Explanation 2(c) to section 147 was urged (under which underassessment, assessment at too low a rate, etc., are deemed cases where income has escaped assessment).
It was also suggested that information based on decisions of superior authorities (judicial decisions) could constitute information for reopening assessment and support reassessment beyond four years.
Reference was made to Central India Industries Ltd. v. ITO to argue generally that courts should not sit in review of every statutory order unless the order is perverse causing manifest injustice.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
CIT v. Bhanji Lavji, [1971] 79 ITR 582 (Supreme Court)	Principle that the provision analogous to section 147 does not impose a duty on the assessee to instruct the Income-tax Officer on questions of law; a wrong legal inference by the officer does not of itself justify reassessment under the analogous provision.	The court accepted this principle as supportive of the assessee's position that a wrong legal inference or the assessing officer's failure to apply the law correctly does not amount to a failure on the part of the assessee permitting reopening beyond the prescribed period.
Central India Industries Ltd. v. ITO, [1990] 184 ITR 242 (Cal)	Authority cited for the proposition that writ courts should not interfere with every order of a statutory authority unless it is perverse and causes manifest injustice.	The court noted the citation but rejected reliance upon it where the statutory scheme itself does not permit the contested exercise; the court observed that if the statute does not permit the reassessment, the exercise would be illegal notwithstanding the general principle cited.
Income-tax Appellate Tribunal decisions relied on by Assessing Officer: ONGC as agent of Nippon Kokan, I.T.A. No. 3413.D of 1988; Sedco Forex Intl. Drilling Inc., I.T.A. No. 4562.D of 1991	Held that reimbursement on account of mobilisation/demobilisation should be treated as inside-India receipts and therefore taxable at the deemed rate of ten per cent rather than as outside-India receipts taxable at one per cent under the approach taken by the assessee.	The court recorded that the assessing authority relied on these ITAT decisions to treat mob/demob receipts as inside-India receipts. However, the court held that such decisions merely endorse the position of law under section 44BB and cannot be treated as constituting a failure by the assessee that would authorise reopening beyond four years under the proviso to section 147.

Court's Reasoning and Analysis

The court's analysis proceeded from the textual import of the proviso to section 147. The proviso provides that where an assessment under section 143(3) or section 147 has been made, no action shall be taken under section 147 after the expiry of four years from the end of the relevant assessment year unless the income chargeable to tax has escaped assessment by reason of the failure on the part of the assessee to make a return under section 139, or in response to a notice under section 142(1) or section 148, or to disclose fully and truly all material facts necessary for assessment for that assessment year.

The court emphasized that the proviso's conditions are imperative. It rejected the respondents' submission that the Commissioner’s sanction under section 151 validates notices issued beyond four years regardless of whether the proviso's conditions are satisfied. The court characterized the sanction under section 151 as a procedural safeguard that does not dispense with the substantive conditions imposed by the proviso to section 147.

Concerning the substantive factual contention, the court observed that the assessee had offered one per cent of total receipts for outside-India work and that the assessing authority could have assessed at ten per cent under section 44BB. The court held that any failure or omission by the assessing authority to assess at ten per cent is an error of the authority and cannot be equated with a failure on the part of the assessee that would permit reopening beyond four years.

The court addressed reliance on Explanation 2(c) to section 147 (which deems underassessment or assessment at too low a rate as cases where income has escaped assessment). It held that while Explanation 2(c) identifies categories of underassessment that justify reassessment within the permissible period, it does not relieve the assessing authority from complying with the proviso when seeking to reopen assessments after the four-year period. In other words, Explanation 2(c) cannot be used to circumvent the proviso's requirement of failure by the assessee.

The court also considered the contention that information consisting of judicial decisions (for example, ITAT decisions) could constitute the kind of information that justifies reopening. Even accepting for argument that judicial decisions may constitute information for reopening, the court found that such decisions in this case merely endorsed the statutory position under section 44BB and did not amount to a failure by the assessee to disclose material facts. Consequently, the availability of a different legal view at higher forums is not a ground to treat the assessee as having failed in disclosure and thereby justify time-barred reassessment.

The court expressly limited its inquiry to the existence of the specific grounds required by the proviso (i.e., failure on the part of the assessee) and did not entertain a broader assessment of the sufficiency of the assessing officer's reasons beyond the absence of the required proviso grounds.

Holding and Implications

Holding: The petition is allowed and the impugned reassessment notices dated March 30, 2000 and March 29, 2001 are quashed.

Implications:

Direct effect: The specific reassessment notices impugned in this petition were held to be invalid because they were issued beyond the four-year period without the proviso to section 147 being satisfied (i.e., no failure on the part of the assessee to make a return or to disclose fully and truly all material facts was shown).
Procedural clarification: Commissioner’s sanction under section 151 cannot cure the substantive requirement of the proviso to section 147; sanction does not dispense with the need to demonstrate failure by the assessee where reopening is sought after the four-year period.
Scope and precedent: The court did not purport to create a new principle beyond applying the statutory text and existing authorities; the decision confines itself to the absence of the proviso grounds and does not suggest broader implications beyond the invalidation of these notices.

Note: This summary is strictly limited to the content of the provided opinion and does not add information beyond what appears in that text.

Show full summary ...

Mcdermott International Inc. v. Additional Commissioner Of Income-Tax And Another

The Judgment of the Court was delivered by

A.A Desai, C.J:— This petition by an assessee is directed against notices (marked as annexures “I”, “P”, “U”, “Z” and “AE”) purported to have been issued under section 147 read with section 148 of the Income-tax Act, 1961 (hereinafter referred to as “the Act”). They have been impugned principally on the ground that they suffer from serious legal infirmity since they were issued after the expiry of four years from the end of the relevant assessment years, even in the absence of the condition or Conditions as envisaged by a proviso to section 147 of the Act.

2. To appreciate the challenge the relevant facts are thus:

The petitioner is a limited foreign company incorporated under the Municipal laws of Panama. The company has been engaged, inter alia, in designing, fabricating, construction, installation as a sub-contractor of various contractors of the Oil and Natural Gas Commission (India). The petitioner-company pursuant to section 139 of the Act submitted returns for the assessment year 1989–90, 1990–91, 1991–92, 1993–94 and 1994–95. The company thereunder offered one per cent, of the gross receipts of the work done outside of India as income for assessment. The respondent authority assessed the total income for the relevant years and determined the sum payable by the assessee under section 143(3) of the Act. The respondent Assessing Officer (Additional Commissioner of Income-tax, Dehradun), thereafter on March 30, 2000, issued the impugned notice for the assessment year 1989–90 and on March 29, 2001, for the assessment years 1990–91, 1991–92, 1993–94 and 1994–95, for reassessment, on the belief that the income of the company had escaped assessment.

3. Inviting our attention to the proviso to section 147 of the Act, learned counsel for the petitioner urged that apparently the notices are issued beyond the period of four years as prescribed. Such reopening of the assessment would, therefore, be permissible, only when there is failure on the part of the assessee. And there has been no such failure which could be attributable to the assessee. Even the impugned notices did not indicate any failure or omission on the part of the assessee. To appreciate the ground of challenge, it would be beneficial to reproduce section 147 and proviso:

“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.”

(emphasis1 supplied by us)

4. Explicit it is from the proviso that it renders complete support to the ground as raised by the assessee.

5. Mr. S.K Posti, learned counsel for the respondents, attempted to sustain the validity of the impugned notices, by relying on section 151 of the Act and made a submission that if the notices in question are issued after the expiry of four years, the permission of the Commissioner is necessary. And the Commissioner has accorded such permission/sanction and, therefore, the impugned notices are valid.

6. The submission is devoid of substance. The sanction to issue notices under section 151 of the Act is merely a safeguard so that the assessee need not be unnecessarily harassed by the Assessing Officer. However, grant of such sanction/permission does not dispense with the conditions as mandated by the proviso to section 147, which according to us are imperative.

7. Mr. Posti, then urged that for a non-resident company like the petitioner the income is assessable to ten per cent, of gross receipt for the work done outside India, as envisaged by section 44BB. With the assistance of learned counsel, we have perused the provision. These provisions were on the statute book since 1983. It is thus clear that it was open and permissible for the assessing authority to assess ten per cent, of the gross receipt instead of one per cent, as offered by the assessee. 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.

8. Mr. Posti submitted that the assessee has not disclosed the total income, but disclosed only one per cent, of gross income so far as work done outside India is concerned. The assessee has also not disclosed receipt on account of mobilisation and demobilisation outside of India income, which constituted the income taxable at ten per cent, as such receipt. The assessment was done in respect of the work outside of India income at one per cent, excluding the receipt on account of mobilisation and demobilisation outside India, this is a material fact suppressed by the assessee in his return.

9. The submission is far from the facts. As recorded, the assessee has offered one per cent, of the total receipts for the work outside India for assessment. The assessee though took such a stand, the assessing authority was at liberty to assess at ten per cent, of income. To calculate ten per cent, of the income, the multiples of one per cent, were more convenient. This could not be in any manner a suppression as envisaged under the relevant provision.

10. More precisely, the respondent by communication dated May 14, 2001, indicated the basis for satisfaction to reopen the assessment under section 147 of the Act, as thus:

“Assessment in this case was completed on January 12, 1993, on total income of Rs. 2,81,31,790. The income of NRC assessee was computed under the provisions of section 44BB of the Income-tax Act, 1961. The assessee NRC has offered mob/demob as outside India receipts and was assessed at the deemed profit rate of one per cent, treating the same as outside India work. In view of the decision of the Income-tax Appellate Tribunal in the case of ONGC as agent of Nippon Kokan in I.T.A No. 3413.D of 1988 and Sedco Forex Intl. Drilling Inc. In I.T.A No. 4562.D of 1991, the reimbursement on account of mob/demob is to be treated as inside India receipt as deemed profit rate of ten per cent….

Keeping in view the above facts, the income chargeable to tax has been underassessed by an amount of Rs. 29 lakhs. Therefore, I have reason to believe that income chargeable to tax has escaped assessment in view of clause (c) of Explanation 2 to section 147 of the Income-tax Act, 1961.”

11. Even the reasons as adopted by the authority do not furnish any premises for the submission made by Mr. Posti. Moreover, the communication does not suggest even remotely in any manner any failure or omission on the part of the assessee envisaged by the proviso referred to above. On the contrary the authority resorted to Explanation 2 to section 147 of the of the Act.

12. Mr. Posti, then to sustain the validity of impugned notices has placed reliance on clause (c) of Explanation 2 to section 147 which reads thus:

“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:—…

(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.”

13. The reliance is totally misplaced. The occasions as enumerated no doubt permit reassessment within the permissible period under section 147. However, to carry reassessment beyond a period of four years, the conditions under the proviso need to be complied with.

14. 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 authorises the assessing authority to reopen the assessment.

15. Moreover, the view of the apex Tribunal on which the assessing authority has relied, has merely endorsed the position of law as expressly incorporated under section 44BB. It could not be treated as change in view or approach so as to give occasion for the Assessing Officer who has a reason to believe as contemplated by section 147. If there was any erroneous or improper approach in assessment under section 143 of the Act, then certainly it could not be failure on the count of the assessee. The company sought support to the submission from the view expressed by the Supreme Court in the case of CIT v. Bhanji Lavji, [1971] 79 ITR 582, that section 34(1)(a) (analogous to section 147 as reproduced above) does not cast any duty upon the assessee to instruct the Income-tax Officer on the question of law.

16. The Supreme Court in the same case having regard to the facts further observed that the Income-tax Officer was apprised of all the primary facts necessary for assessment, and he proceeded to “drop the assessment proceedings”. He may have raised a wrong legal inference from the facts disclosed but on that account he was not competent to commence reassessment proceedings under section 34(1)(a) for the two assessment years 1947–48 and 1948–49.

17. Mr. Posti then relying on a decision in Central India Industries Ltd. v. ITO, [1990] 184 ITR 242 (Cal) urged that the writ court will not sit in appeal over each and every order of the statutory authority unless the order is perverse in nature causing manifest injustice. We do not propose to do so, but the authority for them flows only from the statutory scheme and if the statute does not permit, the exercise will be manifestly illegal leading to substantial failure of justice. He then tried to urge that the writ court cannot assess the sufficiency of the ground or reason to believe as envisaged under section 147. The submission of 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.

18. In the result, we allow the petition and quash the impugned notices dated March 30, 2000 and March 29, 2001.

Mcdermott International Inc. v. Additional Commissioner Of Income-Tax And Another

Structured Summary of the Opinion Delivered by A.A. Desai, C.J.

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Petitioner's Arguments

Respondent's Arguments (as advanced by Mr. S.K. Posti)

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Mcdermott International Inc. v. Additional Commissioner Of Income-Tax And Another

Comments