TaxTMI 
TaxTMI 
2013 (5) TMI 416
X X X X Extracts X X X X
X X X X Extracts X X X X
....ngs for reassessment of income for the period relevant to the assessment year 2001-02. The challenge in the Writ Petition No. 7707 of 2007 is with respect to the notice dated 12.3.2007 issued under Section 148 of the Act for initiating re-assessment proceedings in relation to the Assessment year 2002-03. As both the writ petitions raised similar issues, the same were taken up for hearing together and are being disposed off by this common order. 2. The petitioner is a Government Company and was incorporated on 15.09.2000 under the Companies Act, 1956. Prior to the incorporation of the petitioner company, the telecommunication services were being provided by Government of India, Ministry of Communication through its two departments, namely Department of Telecommunication Services (in short "DTS") and Department of Telecommunication Operation (in short "DTO"). The petitioner company was incorporated pursuant to the policy of the Government of India (National Telecom Policy 1999) to hive off its business of providing telecom services and operate the same through a corporate entity. The petitioner was constituted as a wholly owned Government of India enterprise for taking over the busi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....upees Five Thousand crores to the VENDOR or his nominees), Rs 1500 crores ways, and means advance and the balance as a mix of long term debt, free reserves and preference share capital. The accounting treatment of this mix shall be notified later. (v) The capital structure of Bharat Sanchar Nigam Limited will be finalized by the Ministry of Communications, Department of Telecommunications in consultation with Ministry of Finance and the Comptroller and Auditor General of India, if necessary. (vi) The Company, Bharat Sanchar Nigam Limited shall be liable to make repayment of bonds raised by MTNL for DoT/DTS/DTO, which are now being transferred, to the Company. (vii) The Company as the successor company shall be responsible for all assets and liabilities and for satisfactory execution of all agreements, contracts and obligations in force, which pertain the business being transferred to it. (viii) The Company shall be solely responsible for honouring and performing all contracts/agreements and shall be liable for any defaults, delays or non-performance. The Company shall keep for all times the Government indemnified from all claims. (ix) After finalization of assets and liabiliti....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ways and means advance and the balance as a mix of long term debt free reserves and preference share capital. The accounting treatment of this mix shall be notified later." 5. The petitioner filed its return of income for the period 15.09.2000 to 31.03.2001, relevant to the assessment year 2001-02 on 26.03.2002 and declared a loss of Rs 58,46,31,20,000/-. The said return was taken up for scrutiny and the Assessing Officer framed an assessment under Section 143(3) of the Income Tax Act vide the assessment order dated 11.02.2004 assessing a net loss of Rs 39,53,78,45,000/-. However, the company was covered under the provisions of section 115JB of the Act and it declared taxable book profit at Rs 1801,28,11,000/- and paid tax on it as per section 115JB of the Act. 6. The Assessing Officer issued a notice dated 23.11.2005 under section 148 of the Act stating that he had reasons to believe that income of the petitioner had escaped assessment within the meaning of section 147 of the Act and called upon the petitioner to file its return of income for the said period. The petitioner requested for the reasons for reopening of the assessment under section 148 of the Act which were furnishe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ich had been met by the Government of India in the form of a subsidy, a grant or a reimbursement. The reserves were neither a subsidy nor a grant or reimbursement by the Government of India and, therefore, the premise on which the assessment was sought to be reopened was erroneous. 8. The objections raised by the petitioner were rejected by the Assessing Officer by an order dated 08.02.2006. The petitioner thus filed the present writ petition on 02.03.2006. However, the Writ Petition No. 550 of 2007 was not listed as the petitioner had sought approval from COD which had not been accorded at the material time. The COD granted its approval to proceed with the writ petition at its meeting held on 21.12.2006 which was communicated to the petitioner vide a letter dated 03.01.2007. In the meantime, the Assessing Officer completed the reassessment proceedings for the year 2001-02 by his order dated 22.12.2006. The Assessing Officer recomputed the allowable depreciation at Rs 56,28,89,21,000/- against the amount of Rs 1,26,46,77,42,000/- as computed earlier. The excess depreciation of Rs 70,17,88,21,000/- has been added to the income of the petitioner for the relevant assessment year and ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Liabilities taken over from DoT In pursuance of the Memorandum of Understanding dated 30th September 2000 executed between President of India and BSNL all assets and liabilities in respect of business carried out by DTS and DTO were transferred to the Company with effect from 1st October 2000 at a provisional value of Rs 630,000 Million. The value was subject to finalisation with Ministry of Finance by 31st March 2001, which has not yet been done. The assets and liabilities as on 1st October 2000 have been classified broadly under the following heads: Assets (Rs. In Million) -- Fixed Assets 501078.6 -- Capital Work-in-progress 47900.9 -- Inventory 18132.2 -- Sundry Debtors 33103.8 Liabilities 600215.5 -- Customer Deposits (Excluding interest accrued thereon) 38606.5 -- Net assets taken over by the Company 571609 -- Contingent liabilities taken over by the Company --- The net assets (including liabilities) transferred to the Company as of 1st October 2000 are subject to confirmation by DoT as regards to ownership and the value. The Capital structure for BSNL concurred in by Ministry of Finance and conveyed by Department of Telecommunications vide their UN.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ecided that the precise value of the total assets would be arrived at in due course and in any case it would not be less than Rs 63,000 Crore. Till the process of precise ascertainment of the value of the assets transferred was completed it was expected that the amount would keep changing. This is true also because in the next year the assessee took over further assets amounting to Rs 3578 Crore and these were adjusted with the assets taken over as on 1.10.2000. Therefore, on the liability side the fixed components, consisting of capital and loan were only adding up to Rs 20,000 Crore as detailed above. The balancing figure was to represent the 'reserves' on the liability side and with the change in the value of the assets taken over the Rs.reserve' was to be increased or decreased correspondingly. This formed the balance sheet of the company at the time of transfer of business from Government of India to BSNL." 14. It is thus contended on behalf of the petitioner, that the Assessing Officer was fully conscious of all relevant facts which had been duly disclosed before him. The provisions of Explanation 10 of Section 43(1) were not applicable and consequently the cost of assets ha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....h were being carried out earlier by Department of Telecommunication Services (DTS) and Department of Telecommunication Operations (DTO). As per the decision of the Government of India, the business being conducted by DTO and DTS were vested with the petitioner company. This was pursuant to NTP 1999, whereunder the Government had decided to corporatise certain services and operations being carried on by the Department of Telecommunications under the Ministry of Communications. Thus, in a sense the Government decided to incorporate a new company as a Government of India enterprise to carry on the business of telecom services instead of conducting the same directly. The assets were to be transferred at book values. The value of net assets was agreed to be in excess of Rs 63,000 Crores and, therefore, the same was provisionally taken as a book value of the business being transferred. The consideration for the same was agreed to be met by issue of equity capital of Rs 5000 Crores (500 Crore shares of the face value of Rs 10/- each), preference share capital of Rs 7500 Crores and debt of Rs 7500 Crores. The balance consideration was reflected as reserves. This capital structure was also ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f 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 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...." 20. Admittedly, no new tangible material has been discovered subsequent to the framing of the first assessment relating to the assessment year 2001-02. The reasons as furnished by the Assessing Officer, ex-facie, indicates that he has sought to make certain inferences based on disclosures which were already on record and had been considered while framing the first assessment. The relevant portion of the reasons for issue of notice under Section 148 are quoted below: "The assessee company came into existence on 1st October 2000 and the year under consideration is the first year of the assessee. The history of the assessee company is that in pursuance to the New Telecom Policy, 1999 the Government decided to corporatise the service provision functions ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lain the nature of reserves as mentioned in the capital structure of BSNL. In response the assessee stated that it is in the nature of a 'capital reserve' and is the 'balance of asset value transferred'. The assessee further gave a mathematical equation for reserves as: RESERVES = Asset - Liabilities - Paid-up Equity Capital - 9% (NC) Preference Share Capital - Government Loan - MTNL Loan. Thus, from the assesse's definition of reserves, the following can be derived: ASSET = Reserves + Liabilities + Paid-up Equity Capital + 9% (NC) Preference Share Capital + Government Loan + MTNL Loan. The assets transferred to BSNL include fixed assets as well as trading assets. Therefore from the above equation it is clear that part of the cost of fixed assets of the assessee company are met by the reserves, which as per the assessee are in the nature of capital reserves. This means that to the extent of reserves, the cost, of fixed assets of the assessee company is met by the Government. Now, sub-section (1) of section 43 of the Income-tax Act, 1961 defines actual cost for the purpose of depreciation as the actual cost of assets to the assessee, reduced by that portion of the cost thereof,....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... two conditions and fulfillment of the said conditions alone conferred jurisdiction on the Assessing Officer to make a back assessment, but in section 147 of the Act (with effect from 1st April, 1989), they are given a go-by and only one condition has remained, viz., that where the Assessing Officer has reason to believe that income has escaped assessment, confers jurisdiction to reopen the assessment. Therefore, post-1st April, 1989, power to reopen is much wider. However, one needs to give a schematic interpretation to the words "reason to believe" failing which, we are afraid, section 147 would give arbitrary powers to the Assessing Officer to reopen assessments on the basis of "mere change of opinion", which cannot be per se reason to reopen. We must also keep in mind the conceptual difference between power to review and power to reassess. The Assessing Officer has no power to review ; he has the power to reassess. But reassessment has to be based on fulfilment of certain pre-conditions and if the concept of "change of opinion" is removed, as contended on behalf of the Department then, in the garb of reopening the assessment, review would take place. One must treat the concept ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mbursement for meeting the cost of assets transferred. We find no basis for such an assumption. We are hard pressed to imagine as to how free reserves and surpluses of a company can be considered anything but as part of shareholders funds. The Assessing Officer erred in completely ignoring that reserves and surpluses of a company are a part of shareholders funds and the book value of equity share consists of not only the paid up capital but also the reserves and surpluses of the company. The format of the balance sheet as prescribed under Schedule VI of the Companies Act, 1956 also clearly indicates that reserves and surpluses are a part of shareholders fund. The balance sheet of the petitioners company also reflects the reserves and surpluses as a part of shareholders' funds. The relevant portion of the balance sheet of the petitioner company as on 31.03.2001 is quoted below:- "Shareholders' Funds Capital A 50.000,000 Preference Capital pending allotment (Refer Note 2.3 on T) 75,000,000 Reserves & Surplus B 339,079,523 Loan Funds Secured Loan C 5,100,000 Unsecured Loans D 107,983,258 Total 577,162,781" 26. The scheme of hiving off the business of te....