TMI Blog2016 (12) TMI 235X X X X Extracts X X X X X X X X Extracts X X X X ..... siness income, since section 44(2)(b) only seeks to reverse, under certain circumstances, the deduction for prospecting expenses already granted to the assessee in computation of business income but no part of the prospecting expenses incurred by the assessee, in respect of the participation interests sold, was ever allowed as deduction in computation of business income. The receipt of ₹ 14,52,08,400, which was in the nature of part consideration for sale of participation interests in PY-1 and CT-OSN-97/1 oil and natural gas exploration site, was liable to be taxed in the hands of the assessee as capital gain. However, such capital gain could be taxed in the hands of the assessee only in the assessment year 2006-07 as transfer of related capital asset, i.e. participation interests in PY-1 and CT-OSN-97/1 oil and natural gas exploration site, took place in the previous year relevant to the assessment year 2006-07. It was for this reason that the said capital gain could not be taxed in the assessment year before us, i.e. 2010-11. In view of the fact that the Assessing Officer has the power, as indeed the corresponding duty, under section 153(6) read with Explanation 2 the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rds the consideration for transfer of partial interests in PY2, the assessee received US $ 1,97,512, out of which US$ 1,67,353 pertained to the Overriding Royalty Interest (ORRI) payment and US $ 30,159 pertained to interest on ORRI due. These receipts were also in the period relating to the assessment year before us. [4] In the income tax return filed by the assessee for the assessment year 2006-07, the assessee took into account receipt of US $ 10.5 million (Rs 45,64,45,986) and offered the capital gains of ₹ 9,01,86,186 to tax. The amount of capital gain was worked out by reducing the total prospecting expenditure incurred in this regard, which had remained unallowed, from the capital sum received, and as no part of the expenditure incurred by the assessee was allowed as deduction, no income was offered to tax under section 42(2)(b). The computation, as set out in the respective assessment order, was as follows: Rs. Capital sum received 45,64,45,986 Total expenditure remaining unallowed 36,62,59,800 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 40% was computed at ₹ 5,73,39,232 while processing the return of income . When the assessee was confronted with, what the Assessing Officer apparently treated as an error in computation of tax liability, it was explained by the assessee that while the tax was correctly computed by the assessee @ 21.1115%, the inadvertent error committed by the assessee was in showing the income as business income, whereas the income in question was actually a capital gain which can only be brought to tax @ 21.1115%. A reference was made to Section 42(2)(b) which justifies the stand of the assessee. The Assessing Officer was thus urged to take into account the above fact and treat the amount as capital gains. [7] The Assessing Officer did not accept the submissions of the assessee. He was of the view that since the time limit for filing an income tax return under section 139(5) has already elapsed, the assessee cannot file any revised return at this stage. The Assessing Officer further held that after filing the original return of income, the assessee cannot change the head of income through filing a letter during the course of assessment proceedings and that there is no bonafide inadv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aining unallowed (a-b) 36,71,63,621 h) Amount chargeable to income-tax as profits and gains in the A.Y. 2010-11 [lower of (f) (g)] 13,44,60,035 With the above profit, if the receipt of Over Riding Royalty Interest of ₹ 88,88,040/- is added, the profit would be ₹ 14,33,48,0755 which is the same as income admitted by the assessee in the return of income. Therefore, even if the profit is computed under section 42(2)(b) and as prescribed in the circular No.772 issued on 23.12.1998, the returned income of the assessee will be taxable a income under head profits and gains from the business or profession and the taxable income would be same as the returned income of ₹ 14,33,48,075/-. [8] Aggrieved by the stand so taken by the Assessing Officer, assessee carried the matter in appeal before the CIT(A) but without any success. Learned CIT(A) justified the conclusions arrived at by the Assessing Officer and held that the amounts in question were liable to be taxed as business income under section 44(2)(b). He also held that in terms of the provisions of Section 44(2) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital gains to the Appellant. 5. The Ld CIT(A) has erred in upholding the order of the Ld AO, which was merely based on the bona fide mistake committed by the Appellant in filling the income under a wrong column while e-filing the return of income. The Ld CIT{A) has failed to appreciate that the Ld AO should not take advantage of a bona fide mistake of the Appellant. 6. The Ld CIT(A) has erred in not rectifying the bona fide mistake in the original return of income, wherein the Appellant had wrongly described the head of income as business income as against capital gains, which was subsequently sought to be rectified vide letter dated March 15, 2013 and also through the revised return of income filed on March 19, 2013. 7. The Ld CIT(A) has erred in treating the ORRI relating to the transfer of participating interest in oil block PY-1 as 'business income' as against 'capital gains'. 8. The Ld CIT(A) has erred in not considering the remand report dated January 28, 2015 submitted by the Ld Commissioner of Income Tax, International Taxation, through which it was clearly brought to the notice of the Ld CIT(A) that the Ld AO has, for AY 2006-07 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se grounds are on the same issue and interconnected. In substance, in our considered view, the questions actually required to be adjudicated by us are as follows: - Whether the CIT(A) ought to have held that Assessing Officer should have first issued a draft assessment order in this case, and whether the Assessing Officer s failure to do so, on the facts and in the circumstances of this case, has rendered the impugned assessment order null and void? - Whether the CIT(A) ought to have held that the assessee s alleged mistake in disclosing the income of ₹ 14,52,08,040 on account of transfer of participation rights as business income, by itself, could be put against the assessee in his assessment of income? - Whether the CIT(A) was justified in holding that the income of ₹ 14,52,08,040, on the facts and in the circumstances of the case, be brought to tax as business income of the assessee, as against capital gains claimed by the assessee, in the assessment year before us, and, as a corollary thereto, whether or not, as is issue raised in ground of appeal no 10, the learned CIT(A) has erred in stating that the income earned by the Appellant during the AY 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee which is prejudicial to the interest of such assessee , since the Assessing Officer has merely accepted the returned income, as filed by the assessee, the second condition is not fulfilled. In the present case, while making the impugned assessment under section 143(3), the Assessing Officer has not made any variation in the income or the loss returned by the assessee. The Assessing Officer has simply accepted the income returned by the assessee, and the variations, if at all, are in the computation of tax payable in respect of income returned by the assessee. The variation, as the statutory provision unambiguously states, has to be vis- -vis returned income or loss. That is certainly not the case before us. The assessee s contention is that the income returned by the assessee was an inadvertent mistake and the Assessing Officer ought to have corrected the mistake as all the relevant facts were on record and what the Assessing Officer can bring to tax is income of the assessee in accordance with the law. We will deal with that aspect of the matter separately as and when the occasion comes to deal with the matter on merits. So far as the application of Section 144C is co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnot levy the tax simply because the assessee himself has offered so. It is only elementary that the income liable to be taxed has to be worked out in accordance with the law as in force. In this process, it is not open to the Revenue authorities to take advantage of mistakes committed by the assessee. Tax cannot be levied on an assessee at a higher amount or at a higher rate merely because the assessee, under a mistaken belief or due to an error, offered the income for taxation at that amount or that rate. It can only be levied when it is authorised by the law, as is the mandate of Art. 265 of the Constitution of India. [19] As for the Goetze India (supra) decision relied upon by the Assessing Officer, we may only refer to the decision of Hon ble jurisdictional High Court, in the case of Ramco Cements Ltd Vs DCIT [(2015) 373 ITR 146 (Mad)] , wherein Their Lordships have held that where there is a bonafide lapse on the part of the assessee in making a claim, he can very well do so before the CIT(A). In effect thus, a mistake by the assessee at the assessment stage, with respect to a claim, does not prejudice the claim of the assessee on merits. Therefore, even if the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 42 are as follows: Special provision for deductions in the case of business for prospecting, etc., for mineral oil. 42. [(1)] For the purpose of computing the profits or gains of any business consisting of the prospecting for or extraction or production of mineral oils in relation to which the Central Government has entered into an agreement with any person for the association or participation of the Central Government or any person authorised by it in such business whch agreement has been laid on the Table of each House of Parliament, there shall be made in lieu of, or in addition to, the allowances admissible under this Act, such allowances as are specified in the agreement in relation - (a) to expenditure by way of infructuous or abortive exploration expenses in respect of any area surrendered prior to the beginning of commercial production by the assessee ; (b) after the beginning of commercial production, to expenditure incurred by the assessee, whether before or after such commercial production, in respect of drilling or exploration activities or services or in respect of physical assets used in that connection, except assets on which allowance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business carried on by the assessee is no longer in existence, the provisions of this clause shall apply as if the business is in existence in that previous year; (c) are not less than the amount of the expenditure incurred remaining unallowed, no deduction for such expenditure shall be allowed in respect of the previous year in which the business or interest in such business is transferred or in respect of any subsequent year or years: . . Explanation - For the purposes of this section, mineral oil includes petroleum and natural gas [23] So far as Section 42(1) is concerned, it provides for deduction, in lieu of or in addition to deductions otherwise admissible under the Act, in respect of prospecting expenses in certain circumstances. Clearly, therefore, nothing in Section 42(1) can be put against the assessee so far taxability of income is concerned. Similarly, coming to Section 42(2), clause (a) and (c) of this sub section also deal with availability of deduction in case where sale consideration of the transfer of business interest is less than the expenditure remaining unallowed so far, and non availability of deductio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resents the expenditure in respect of which the assessee has already been allowed as deduction, will be taxable as business income. It is in the nature of reversal of, what the statue apparently treats as, undue relief granted to the assessee. If Section 44(2)(b) was not to be on the statute, on one hand the assessee has a capital gain which gets taxed at a concessional rate, on the other hand, in respect of a part of such capital gains, the assessee is allowed a deduction in computation of business income which is taxable at normal rates. It is apparently to remove this incongruity that Section 44(2)(b) finds place in the scheme of the Act. In effect thus, it is a part of capital gain, representing the deduction already allowed, which can be brought to tax under section 44(2)(b). It is also important to bear in mind the fact that even under section 44(2)(b), the taxability can only be in the year in which the asset is transferred, i.e. in which capital gains arise, as it is specifically stated that the said income shall be chargeable to income-tax as profits and gains of the business in the previous year in which the business or interest therein, whether wholly or partly, had be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in question represent consideration received by the assessee for transfer of his entire participating interests in PY 1, and part of his interests in CY-OSN-97/1, to Hindustan Oil Exploration Ltd, and that since definition of capital asset, under section 2(14), includes property of any kind held by an assessee, whether or not connected with business or profession , these participation interests are required to be treated as capital assets. Under section 45, any profits or gains arising from the transfer of a capital asset, effected in the previous year shall, save as otherwise provided in sections 54, 54B, 54D, 54 E, 54EA, 54EB, 54F, 54G and 54 H, be chargeable to income tax under the head capital gains and shall be deemed to be the income of the previous year in which the transfer took place . The gains on transfer of these participation rights is, therefore, required to be treated as capital gain and is liable to be taxed in the year in which the transfer of related asset takes place. Under these circumstances, in our considered view, there cannot be any dispute about the legal position that the gains on transfer of participation interests are required to be treated as cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of US $ 13,500,0000 which had remained unpaid as this part of the payment was deferred for payment till first sale of commercial gas from oil block PY-1 . The character of these amounts is consideration for sale of interests in oil blocks, which is a capital asset, and the gains on such sale can only be taxed as capital gains. [28] As we hold that the amounts received by the assessee, on sale of his participation interests in the business of prospecting for, or extraction or production of, petroleum gas , can only be brought to tax as capital gains in the hands of the assessee, we must also point out that the capital gains in question can only be taxed in the hands of the assessee in the assessment year in which the asset in question is transferred. The fact that a part of the consideration was to be, and has been, received later does not alter the year of taxability. Section 45 categorically provides that any profits or gains arising from the transfer of a capital asset, effected in the previous year shall .. be chargeable to income tax under the head capital gains and shall be deemed to be the income of the previous year in which the transfer took place (Empha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itiated by the Assessing Officer not to bring to tax the remining portion of capital gains, which has remained to be taxed in the assessment year 2006-07, but this initiation of reassessment proceedings was initiated with an objective to treat the capital receipts on sale of participating interests as business income- in response to the audit objection. Such a treatment would have resulted in refund to the assessee, as entire prospecting expenditure was to be then allowed as deduction in the year in which business is treated to have commenced. This aspect of the matter is clear from the following extracts from the letter dated 21st January 2015 (supra) written by the Assessing Officer: Your kind attention is invited to the subject. It is submitted that the assessments in the case for the AY 2006-07 and 2007-08 was completed treating the receipts as Capital Gains, as the Business Income u/s 42 of the IT Act resulted in NIL Income. By characterizing the Income of the assessee as capital gains in the assessment u/s, 143(3), a sum of ₹ 9,01,86,186 for AY 2006-07 and ₹ 4,93,45,013 for AY 2007-08 have been brought to tax as capital gains. Later the assessments for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment year, then, an assessment of such income for another assessment year, for the purpose of section 150 and this section, be deemed to be one made in consequence to or giving effect to any finding or direction contained in the said order . As to the nature of findings or directions which can be given in an appellate order, Hon ble Supreme Court, in the case of Rajinder Nath Vs CIT [(1979) 120 ITR 14 (SC)] , has, inter alia , observed as follows: 7. The expressions finding and direction are limited in meaning. A finding given in an appeal, revision or reference arising out of an assessment must be a finding necessary for the disposal of the particular case, that is to say, in respect of the particular assessee and in relation to the particular assessment year. To be a necessary finding, it must be directly involved in the disposal of the case . It is possible in certain cases that in order to render a finding in respect of A, a finding in respect of B may be called for. For instance, where the facts show that the income can belong either to A or B and no one else, a finding that it belongs to B or does not belong to B would be determinative of the issue whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsider it appropriate to make some observations about the fact that, during the course of hearing, it was pointed out by the assessee that this appeal is a covered matter in as much as like in the cases of Vijay Television (supra), Jazzy Creations (supra) and Capsugel Healthcare (supra), the Assessing Officer did not first issue a draft assessment order, and that, for this short reason alone, the impugned assessment order should be quashed. On the face of it, it did appeal to us too. What was missed out, however, was the crucial difference in the facts of these cases vis- -vis the facts of the case before us. All those cases, as we have pointed out earlier, were the cases in which the applicability of Section 144C itself was not in slightest of doubt, whereas, in the case before us, the Assessing Officer has set out the reasons, which eventually met our approval, as to why the provisions of Section 144 C did not apply to this case. In the case before us, the provisions of Section 144C itself have been held to be inapplicable even though the assessee is an eligible assessee, i.e. foreign company, because the no variation in his income vis- -vis returned income was propo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee. (b) The mere fact that the assessee had offered the income of ₹ 14,52,08,040 to tax as business income, by itself, cannot justify the said income being taxed as business income. (c) The receipt of ₹ 14,52,08,400 which was brought to tax in the hands of the assessee as business income under section 44(2)(b) could not be taxed in the hands of the assessee as a business income, since section 44(2)(b) only seeks to reverse, under certain circumstances, the deduction for prospecting expenses already granted to the assessee in computation of business income but no part of the prospecting expenses incurred by the assessee, in respect of the participation interests sold, was ever allowed as deduction in computation of business income. (d) The receipt of ₹ 14,52,08,400, which was in the nature of part consideration for sale of participation interests in PY-1 and CT-OSN-97/1 oil and natural gas exploration site, was liable to be taxed in the hands of the assessee as capital gain. However, such capital gain could be taxed in the hands of the assessee only in the assessment year 2006-07 as transfer of related capital asset, i.e. participation intere ..... 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