ACIT, MUMBAI vs. RELIANCE INDUSTRIES LIMITED, MUMBAI

On the facts and in the circumstances of the case and in law, the Hon'ble CIT(A): Reassessment order is in contravention of Section 144C of the Act and hence bad in law

1. erred in not quashing the final assessment order passed u/s 147 read with section 144B of the Act, even though no draft assessment order under section 144C of the Act was passed. 2. failed to appreciate that variation in Long Term Capital Losses returned is as a consequence of the Transfer Pricing Officer’s order and hence, the assessment order passed under section 147 read with Section 144B without complying with the provisions of Section 144C is bad in law and liable to be quashed Deduction u/s 10AA of the Act in respect of Refinery SEZ 3. erred in not adjudicating the ground that Refinery unit in Jamnagar SEZ ('Refinery SEZ') commenced manufacturing activity in FY 2009-10 relevant to AY 2010-11 (being the 1st year) and therefore, the year under consideration i.e. AY 2014-15 was the 5th year of claim, eligible for deduction of 100% of 'profits and gains' derived from export of articles or things as per provisions of section 10AA, instead of 50% allowed by the Learned AO. 4. erred in not adjudicating the ground that the Learned AO having accepted the initial year of operation in assessment of AY 2010-11, such initial year cannot be changed in AY 2014-15. 5. erred in not adjudicating the without prejudice and alternate claim of the appellant that since the appellant had complied with the conditions for deduction specified u/s 10AA and 80IB(9) of the Act, it is eligible for deduction of profit and gains derived from the unit/undertaking Jamnagar Refinery SEZ under those sections, whichever is more beneficial. Charging of additional depreciation u/s 32(1)(iia) of the Act while computing profits in respect of KG-DWN-98/3 (‘KGD6 Block’) for the purpose of computing the deduction u/s 80IB(9) of the Act 6. erred in not adjudicating the ground that the effect of additional depreciation u/s 32(iї)(a) of the Act has already been considered while computing deduction u/s 80-IB(9) in respect of KGD6 block in the order giving effect to the order of the CIT(A) dated 30.05.2019 for AY 2014-15 itself, and hence, reducing the deduction u/s 80IB(9) of the Act again would result in double disallowance. Revised profits for deduction under section 10AA of the Act in respect of Polypropylene ('PP') SEZ

14. erred in not adjudicating the ground that the Learned AO ought not to have added the principal portion of lease rent of Rs 3,07,88,252 to book profit u/s 115JB of the Act since the accounting of lease rent was in accordance with the Accounting Standard (AS) 19 and consequently was in accordance with Schedule VI of the erstwhile Companies Act, 1956. 15. erred in not adjudicating the ground that since as per the CBDT Circular No 2/2001 dated 09.02.2001, the appellant (being lessor) was entitled to claim depreciation u/s 32 of the Act on the principal component of lease rent, the appellant had offered to tax the principal component of lease rent while computing income under normal provisions of the Act. 16. erred in not adjudicating the ground that adjustment to book profit, if any, can be made only as per clause (a) to (k) of Explanation 1 to section 115JB of the Act. Each of the above Grounds of Cross Objections are without prejudice to each other. 3. Briefly stated, the facts of the case are that the assessee company is engaged in the exploration and production of mineral oil from various oil fields, including the Krishna Godavari Basin (specifically, the 'KGD6' site). Additionally, the company is involved in the refining of mineral oil for the manufacture of petroleum products through its refineries located in the Special Economic Zone (SEZ) at ‗Motikhavdi‘, Jamnagar, Gujarat, along with other associated business activities.

3.1 For the year under consideration, the assessee filed its return of income on 28.11.2014, declaring a total income of ₹15620,67,15,350 under the normal provisions of the Income-tax Act, 1961 (hereinafter referred to as "the Act") and book profit of ₹277226,48,68,867 under section 115JB of the Act. The assessment was completed under section 143(3) read with section 144C(3) of the Act on 02.02.2018, wherein certain additions and disallowances were made both under the normal provisions and in the computation of book profit under section 115JB. On appeal, ld first appellate authority granted partial relief to the assessee.

3.2 Subsequently, the assessment records were audited by the office of the Comptroller and Auditor General of India (C&AG), which raised certain objections and observations. Although the Assessing Officer (AO) did not accept these objections, he nevertheless initiated remedial action by reopening the assessment under section 147 of Act, after the expiry of four years from the end of the relevant assessment year. The AO recorded reasons to believe that income had escaped assessment and accordingly issued a notice under section 148 of the Act on 31.03.2021. Following the prescribed procedure under the law, the AO completed the reassessment under section 147 read with section 144B of the Act on 29.03.2022 and made additions/disallowances in line with the reasons recorded. Aggrieved by the reassessment order, the assessee preferred an appeal before the learned CIT(A) challenging both the validity of the reassessment proceedings and the additions made on merits.

3.3 The learned CIT(A) quashed the reassessment proceedings on the grounds: firstly, (i) the reopening was based on a mere 'change of opinion' without any fresh tangible material; secondly, (ii) there was no failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment; thirdly, (iii) the reasons recorded for reopening were based on 'borrowed satisfaction' from the C&AG audit; and fourthly, (iv) the issues raised in the reasons for reopening were already the subject matter of appellate proceedings.

3.4 Although the learned CIT(A) discussed the merits of the additions while addressing the issue of reassessment, no separate or conclusive finding was recorded on the merits of the individual additions. Aggrieved by the order of the CIT(A), both the Revenue and the assessee have filed cross-appeals before us—challenging, respectively, the quashing of the reassessment proceedings and the additions made. The grounds raised by both parties also include contentions on the merits of the additions. Accordingly, we proceed to adjudicate the issues in respect of the five disputed additions raised in the respective grounds of appeal.

(i) The First objection raised was that the in respect of Jamnagar refinery (i.e. refinery unit of RPL, which got merged with the assessee), the first year of claim of deduction u/s 10AA was assessment year 2009-10 and accordingly, the year under consideration was sixth year of operations, thus the assessee was entitled for claiming deduction u/s 10AA limited only to 50 percentile of the eligible profit of refinery as against 100 percentile deduction claimed by the assessee. The Audit team relied on the letter dated 21.06.2009 issued by the predecessor of the assessee i.e. Reliance Petroleum Ltd. (RPL) intimating to the Development Commissioner of Special Economic Zone (CEZ) that the refinery of the assessee commenced crude processing on 25.12.2008. The Audit team also referred to the annual report for financial year 2008-09 to show that refinery was successfully started. It was also noted by the Audit team that assessee had claimed depreciation on assets of SEZ during assessment year 2009-10.

(ii) The second objection raised was that while allowing deduction u/s 80IB(9) of the Act in respect of profit of ‗KGD6‘ undertaking ( i.e. undertaking engaged in exploration of mineral oil) additional depreciation u/s 32(1)(iia) of the Act was not considered.

(iii) Third objection raised by the Audit team was that while allowing deduction u/s 10AA for Polypropylene (PP) SEZ Unit, revised profit due to adjustment of interest expenditure was not considered, which resulted into excess deduction Rs. 11,18,79,995/- allowed to the assessee.

(iv) The fourth objection raised by the Audit team was that the Assessing Officer omitted to disallow ‗long term capital loss‘ on sale of preference shares, which was held by the Ld. Transfer Pricing Officer (TPO) as loan transaction in his order u/s 92CA(3) of the Act.

(v) Further, the Audit Team raised the fifth objection that while computing book profit u/s 115JB of the Act, the assessee did not included principal portion of the lease rent as income.

5.2 The Assessing Officer vide his letter dated 29.10.2018 and 24.06.2019 disagreed to above audit objections, still he recorded reasons to believe on all the above issues of the audit objection that income escaped assessment.

Sr. Description of Income escaping Materials relied by the Amount No. assessment AO while recording (Rs. In reasons crores) 1. Excess deduction allowed u/s. Letter dated 21/1/2009 3715.10 10AA by treating the year under from predecessor of consideration as 5th year of Assessee to the manufacturing instead of 6th year Development of manufacturing Commissioner and Annual Report for FY 2008-09. It was stated in the reasons recorded that - "on perusal of the records "

7.1 The facts in brief qua the issue in dispute are that in the reasons recorded by the Assessing Officer noted that RPL Jamnagar refinery SEZ Unit had actually commenced manufacturing in financial year 2008-09 relevant to assessment year 2009-10 and hence, the assessment year 2014-15 being the sixth year of the claim of the deduction, the assessee is eligible for deduction at the rate 50 percentile of the profit of the undertaking. The relevant part of the reasons recorded is extracted as under:

“2. on perusal of the records it was observed that the assessee claimed deduction of Rs. 7454,69,01,696/- u/s 10AA in respect of hundred per cent of profit and gains of Refinery SEZ. Further, from the Form 56-F, it was noticed that the assessee stated that the SEZ refinery started manufacturing activity on 01/04/2009 relevant to AY 2010-11 and this is the fifth consecutive assessment year of the undertaking. Accordingly assessee claimed hundred per cent deduction us 10AA of profits of the undertaking. The claim of the assessee was accepted vide para no.13 of assessment order and was allowed hundred per cent deduction of Rs. 7430,20,42,998/- after making adjustment to the extent of Rs. 24, 48,58, 708/- It was seen from the records that the approval for setting up of the unit in the SEZ at Jamnagar was granted then to M/s Reliance Petroleum Ltd (RPL) by the concerned Development Commissioner vide its letter dated 04/05/2006. In pursuant of the above approval letter, the RPL (later on merged with the assessee company w.e.f. 01/04/2008) vide its letter dated 21/01/2009 intimated to the concerned Development Commissioner that the Unit at Jamnagar Refinery commenced operation (Crude processing) on 25/12/2008 i.e., in F. Y 2008- 09relevant to AY 2009-10. Further this fact is confirmed as evident from the annual report of FY 2008-09, wherein assessee has disclosed under the heading Refining Hub of the World and Major Subsidiaries-Jamnagar SEZ that the first SEZ Unit, the crude petroleum refinery and polypropylene plant (RPL) were successfully started. In addition to this, assessee also claimed depreciation u/s 32 of the Act on addition of assets of RPL SEZ during AY 2009-10. Thus from the above, it transpires that the refinery unit at Jamnagar SEZ commenced manufacturing activity in the previous year 2008-09 relevant to AY2009-10 and as such the first year of operation is AY 2009-10 as against the claimed AY 2010-11. Accordingly, the year under consideration i.e., AY 2014-15should have been the sixth consecutive assessment year and consequently the eligible deduction was to be restricted to fifty percent of the profits to the extent ofRs. 3715,10,21,449/- (50% of Rs. 74302042998/-). The facts were not examined which resulted in excess allowance of deduction of Rs. 3715,10,21,449/-W/s 10AA.".” 7.2 In the reassessment order passed, accordingly the Assessing Officer disallowed the 50 percentile of the deduction claimed u/s 10AA of the Act amounting to Rs.3715,10,21,449/-. During re- assessment proceedings, the assessee submitted that during original assessment proceedings, the assessee claimed deduction u/s 10AA of the Act at the rate of 100 percentile in view of audit report of the Chartered Accountant filed in the prescribed form No. 56F and Form No. 10CCB of the Income-tax Rules, 1962. in respect of refinery SEZ. During the reassessment proceedings, it was further submitted before the AO that all the details/documents filed during the original assessment proceedings before the AO were duly verified in the original assessment proceedings. The Ld. counsel also referred that the claim of the deduction was verified but same was recomputed in view of revised interest figure debited to profit and loss account in respect of refinery SEZ unit leading to increase in the profit of the unit and corresponding increase in the claim of the deduction u/s 10AA of the Act. Additionally, the Assessing Officer also adjusted the total turnover u/s 10AA of the Act by excluding Ocean Freight and Insurance. The Ld. counsel for the assessee accordingly submitted that in the original assessment proceedings, the Assessing Officer had duly applied his mind on the claim of the assessee made u/s 10AA of the Act and the claim of deduction u/s 10AA was also subject matter of appeal before the Ld. CIT(A). But the AO rejected the contention of the assessee for the reasons, firstly, letter dated 04.05.2006 of RPL to Development Commissioner stated commencing of crude production on 25.12.2008 i.e. in financial year 2008-09 relevant to assessment year 2009-10, and secondly, the annual report of the assessee company for financial year 2008-09 also disclosed under the head ‗refinery hub of the world and measure subsidiary, Jamnagar SEZ‘ that the first SEZ Unit crude petroleum refinery and oil plant (RPM) were successfully started, and thirdly, the assessee claimed depreciation on assets for FY 2008-09, and held that first year of manufacturing was in financial year 2008-09 relevant to assessment year 2009-10.

7.3 In background of above factual observations, the grounds raised by the Revenue challenging invalidation of reassessment proceedings are adjudicated below.

7.4 Firstly, the Revenue has challenged the finding of ld CIT(A) that there was no failure on the part of the assessee in disclosing all the material facts fully and truly. The Ld. CIT(A) in this regard has held that there was no failure on the part of the assessee in disclosing all the material facts on the issue in dispute truly and fully. The relevant finding of the Ld. CIT(A) is reproduced as under:

“Thus, it could be seen that from AYs.2010-11 to 2014-15, the appellant has been stating that Jamnagar SEZ Refinery commenced commercial production on 01.04.2009. These facts were never controverted by the AO in the assessment order of AYs.2010-11, 2011-12 and 2012-13 and also not challenged before the ITAT. The ITAT being final fact finding authority, has also recorded the fact that refinery commenced commercial production on 01.04.2009 and the fact was never controverted by the AO in any of the assessment year from AYs. 2010-11 to 2012-13. From the reasons recorded itself, it is noticed that the AO has relied upon the assessment records which contained the approval of Development Commissioner of SEZ refinery at Jamnagar, communication by RPL to Development Commissioner regarding starting of the operation and the annual report of FY.2009-10 stating that operation of the refinery was started in FY.2009-10. All these facts, which were relevant to assessment of the income related to deduction u/s. 10AA were fully and truly disclosed by the appellant during the AYs.2010-11, 2011-12, 2012-13, 2013-14 and 2014-15. The AO examined the details submitted by the appellant such as Form No.56F and Form No. 10CCB and submission made during assessment proceedings and finally concluded that appellant was eligible for deduction u/s. 10AA of the Act during the AY.2014-15. The facts regarding initial year of claim of deduction in 2010-11 was never disputed in any of the assessment order of AYs.2010-11 to 2014-15. All the material facts relevant to the deduction u/s. 10AA were disclosed by the appellant during the original assessment proceedings of the relevant assessment years. The case of the appellant for AY. 2014-15 on the issue of deduction u/s. 10AA has been re-opened beyond four years from the end of the relevant assessment year and the AO has not brought on record any evidence from which it could be stated that there was failure on the part of the appellant to disclose fully and truly material facts to the assessment of the income related to section 10AA of the Act.” 7.5 The Ld. CIT(A) relied on following decisions (i) Citius Tehch Healthcare Technology (P.) Ltd. v. DCIT [2023] 155 taxmann.com 334 (Bombay)

(ii) Sandesh Procon (P.) Ltd. v. ACIT [2023] 152 taxmann.com 503 (Gujarat) (iii) New Delhi Television Ltd. v. DCIT [2020] 116 taxmann.com 151 (SC) (iv) Noshir Darabshaw Talati v. DCIT [2023] 156 taxmann.com 498 (Bombay) (v) Milton Plastics Ltd. v. Mudit Nagpar [2023] 151 taxmann.com 24 (Bombay)

7.6 The ld DR submitted that the Ld. CIT(A) has ignored the fact that issue whether AY 2014-15 was the 6th consecutive assessment year for the claim of deduction u/s 10AA of the Act and hence the issue that deduction was to be restricted to only 50 percentile of the profit was never before the Assessing Officer for consideration. The AO had only examined the issue of eligibility of profit for deduction and not whether it was the 5th or the 6th consecutive assessment year. She further submitted that it was only later the Assessing Officer culled out the letter dated 25.01.2009 of M/s Reliance Petroleum Ltd. to the Development Commissioner intimating that the Unit at Jamnagar Refinery had commenced crude processing on 25.12.2008 i.e. during AY 2009-10 and hence this fact of production of 6th year was not disclosed fully and truly by the assessee. In support of her contention she relied on the decision of Hon‘ble Madras High Court in the case of Consolidated Construction Consortium Ltd. v. Commissioner of Income-tax, Chennai [2021] 130 taxmann.com 356 (Madras). The Counsel on the other hand relied on submission made before the ld CIT(A) and on the decision of ld CIT(A) along with the decisions relied upon by the ld CIT(A).

7.7 We have heard rival submissions of the parties and perused the relevant materials on record. From the reasons recorded it is evident that no new material has been referred by the Assessing Officer for reopening of the assessment on the ground of excess deduction u/s 10AA of the Act. The Assessing Officer has referred to the records which were already available before the Assessing Officer in the record. The material fact containing the letter under reference addressed by the predecessor of the company to the Development Commissioner and the annual report for financial year 2008-09 both were available on the record. The material facts in respect of deduction were already available on the record. Since the assessment has been reopened beyond the period of four years from the end of the relevant assessment year, the Assessing Officer was specifically required to mention as what was the material fact which was not disclosed fully and truly in respect of issue in dispute, but no such fact, much less material fact, has been referred in the reasons recorded, which was not disclosed fully and truly in respect of issue in dispute. The proviso to section 147 of the Act specify that where an assessment u/s 143(3) has been made then in such a case no action of reassessment shall 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 for such assessment year by reason of the failure on the part of the assessee to disclose all the material facts fully and truly necessary for his assessment. Since, the Assessing Officer has not mentioned any material fact qua the issue in dispute, which was not disclosed by the assessee, the requirement of the said proviso to section 147 of the Act is not fulfilled by the Assessing Officer. In the case of Consolidated Construction Consortium Ltd. (supra), the Hon‘ble Madras High Court held that the retention money which was claimed by assessee as expenditure by debiting it to profit and loss account was actually held back by assessee and was not truly disclosed by assessee in its return of income, annual reports, disclosures, audit reports, memo of total income, thus, there was no full and true disclosure of facts by assessee, impugned reopening notice was justified. In the instant case, the ld AO has not brought on record any material fact which was not disclosed by the assessee. We, accordingly uphold the finding of the Ld. CIT(A) on the issue in dispute in view of decisions relied upon.

7.8 The next ground for quashing the reassessment proceedings in respect of issue of deduction u/s 10AA is on the basis of the, „change of the opinion‟/ „absence of any new tangible material‟. The Ld. CIT(A) in this respect has after considering the facts qua the issue in dispute has held it as a clear case of ‗change of opinion‘ by the Assessing Officer. The relevant finding of the Ld. CIT(A) is reproduced as under:

“6.2.3.2 From perusal of the assessment order and the order giving effect to CIT(A)'s order as well as the order of the ITAT for preceding years, it is seen that the issue regarding claim of deduction u/s. 10AA was examined by the AO during the scrutiny proceedings for AYs. 2011-12 to 2014-15. After completion of assessment proceedings, the CAG audited the assessment records. During the course of assessment proceedings of earlier years, the AO examined the issue at length and verified Form No.56F and other relevant documents submitted by the appellant. The appellant has been claiming that AY.2010-11 was the first year of the claim of deduction u/s.10AA of the Act as the commencement of production started on 01.04.2009. The same facts were accepted by the AO in the assessment order of AYs.2010-11 to 2013-14 and CAG has also not raised any objection regarding the first year of claim of deduction/u/s.10AA being AY 2010-11. The order of AO for AYs.2011-12 to 2013-14 were subject to appeal before CIT(A) as well as ITAT. The claim of deduction u/s. 10AA considering AY.2010-11 being the first year has attained finality after the order of the ITAT. Even after the audit objection was raised by the CAG audit for AY.2014-15, the AO replied to the audit query and stated that the claim of deduction u/s.10AA considering AY.2010-11 as the first year of claim was examined and claim of deduction u/s. 10AA in AY.2014-15 was allowed as the fifth year of the claim. All the facts indicate that the AO had accepted AY.2010-11 was the first year of claim of deduction u/s. 10AA made by the appellant. Once AY.2010- 11 is accepted as the first year of claim of deduction u/s. 10AA, the claim u/s. 10AA for AY.2014-15 would be the fifth year of the claim. Unless and until the claim in AY.2010-11 has been disturbed and claimed to be the second year of claim u/s. 10AA, the facts of AY.2014-15 regarding claim of deduction u/s. 10AA @ 100% for fifth year would not be changed. In the assessment order for AY.2014-15, the AO has examined the issue in detail and after examining various aspects of the issue regarding claim of deduction u/s, 10AA, the AO has allowed deduction u/s.10AA @ 100% after making certain adjustment in the eligible profit. Thus, as far as the claim. of deduction u/s. 10AA @ 100% in AY.2014-15 is concerned, it is a clear case of change of opinion by the AO. xxxxxxxxxxxxxxxxxxxxxxxxxxxxx From the above discussion, it is seen that the issues on which the AO has re- opened the assessment were already considered by the AO while passing the original assessment order u/s. 143(3) of the Act. No new tangible material came to the knowledge or possession of the AO on the basis of which the AO could form a belief that the income in respect of such issues had escaped the assessment for AY.2014-15.” 7.9 The Ld. CIT(A) further relied on following decisions in support of his findings :

(i) ITO v. TechSpan India (P.) Ltd. [2018] 404 ITR 10 (SC)

(ii) Commissioner of Income-tax, Delhi v. Kelvinator of India Ltd. [2010] 187 Taxman 312 (SC)

(iii) ACIT v. ICICI Securities Primary Dealership Ltd. [2012] 24 taxmann.com 310 (SC)

(iv) Mangalore Refinery and Petrochemicals Ltd. v. DCIT [2022] 138 taxmann.com 379 (Bombay)

(v) Gaurang Manhar Gandhi v. ACIT [2024] 160 taxmann.com 647 (Bombay)

(vi) Jean Ibrahim Somji v. ITO (International Taxation) [2024] 161 taxmann.com 361 (Bombay)

(vii) Kidderpore Holdings Ltd. v. ITO [2024) 161 taxmann.com 768 (Bombay). (viii) Vibrant Securities (P.) Ltd. v. ITO [2024] 161 taxmann.com 243 (Bombay) (xi) Yes Bank Ltd. v. ACIT [2024] 160 taxmann.com 329 (Bombay)

7.10 The Ld. DR submitted that no opinion was framed by the Assessing Officer in the year under consideration on the issue in dispute as to whether it was the the 5th year of deduction or the 6th year of the deduction of entitlement. Therefore, the change of the opinion did not attract in the facts of the instant case. The ld counsel for the assessee on the other hand relied on submission made before the ld CIT(A) and also relied on finding of ld CIT(A) along with decisions relied upon by the ld CIT(A).

7.11 We have heard rival submissions of the parties and perused the relevant materials on record. On perusal of the reasons recorded qua the issue of deduction u/s 10AA of the Act in respect of Jamnagar refinery, we find that the Assessing Officer in the reasons recorded has not referred to any new material, much less the tangible material. The Assessing Officer has re-appreciated the material which was already available before him and on the basis of which the opinion was already framed in the original assessment proceedings. In the assessment order for the assessment year 2010- 11, the Assessing Officer has specifically mentioned that in the year under consideration the refinery commenced production and accordingly he allowed the claim of the deduction u/s 10AA of the Act, which was claimed by the assessee for the first time in respect of the refinery. This fact has been further affirmed by the Tribunal while deciding the appeal of the assessee for assessment year 2010- 11. Therefore, the contention of the Ld. DR that Assessing Officer had not examined the issue whether the assessment year 2010-11 was the first year of the production and the claim of deduction u/s 10AA of the Act was made for the first time in AY 2010-11. In view of decision of the Hon‘ble Delhi High Court in the case of Kelvinator of India (supra), the Assessing Officer is barred from reopening the assessment on the same set of facts available on record without there being any new tangible material for framing opinion different from the opinion which was framed in the original assessment proceedings. The reopening on the material already available on record would amount to review of the assessment, which the Assessing Officer has no authority, except there is a tangible material to come to conclusion that there is a escapement of income from assessment. Therefore, the reason recorded is based on the change of the opinion of the Assessing Officer. Accordingly, we uphold the finding of the Ld. CIT(A) on the issue in dispute.

7.12 The reassessment qua the addition has been further assailed on the ground that reopening has been based on the borrowed satisfaction based on audit objections. The relevant finding of the Ld. CIT(A) is reproduced as under :

“In the case of the appellant, the revenue audit has raised the audit objection that AY.2014-15 should be the sixth year for claim of deduction u/s 10AA of the Act, therefore, the deduction u/s. 10AA was wrongly allowed by the Department at 100% instead of 50%. The audit objection was based on (i) approval for setting up of unit in SEZ, Jamnagar, was granted to the then M/s. Reliance Petroleum Ltd. (RPL) by concerned Development Commissioner vide letter dated 04.05.2006, (ii) M/s. RPL vide letter dated 31.01.2009 intimated to Development Commissioner that Jamnagar Refinery SEZ commenced crude processing on 25.12.2008, i.e. in FY.2008- 09, (iii) in the annual report of FY.2008-09, it was disclosed under the head "Refining Hub of the World and Major Subsidiaries-Jamnagar SEZ, that the first SEZ unit, the crude petroleum refinery and polypropylene plant (RPL) were successfully started and (iv) depreciation u/s.32(1) of the Act was claimed on, addition in the assets of RPL SEZ during the AY.2009-10. Thus, the audit considered commencement of manufacturing activity by refinery unit SEZ, Jamnagar in FY.2008-09 relevant to AY.2009-10 and, it was the first year of operation. Therefore, AY.2014-15 was the sixth consecutive assessment year and eligible deduction u/s.10AA was to be restricted to 50% of the profit. In response to the audit objection, the AO had submitted a reply. Vide letter dated 02.11.2018, the AO had stated that AY.2010-11 was considered as the first year of commencement of manufacturing for deduction u/s.10AA of the Act. Even though there was a book profit but as per the computation of total income, there was a loss, therefore, no claim of deduction u/s. 10AA was made in the first year, i.e. in AY.2010-11. Depreciation and additional depreciation was also claimed on the assets capitalised during the AY.2009-10.

During the course of assessment proceedings for AY.2010-11, the assessee had submitted CA certificate in Form 56F in respect of refinery unit in SEZ Jamnagar, profit & loss account of the undertaking for claim of deduction under section 10AA of the Act. After examining the facts of the case and details on record, AY.2010-11 was considered as the first year of claim of deduction u/s.10AA in respect of refinery SEZ. The assessment records for AY.2010-11 were audited by CAG. Thereafter, the assessment records prior to AY.2014-15 were also audited by CAG. Therefore, in the assessment order for AY.2014-15, AY.2014-15 was considered as fifth year of claim of deduction u/s.10AA in respect of refinery SEZ. The AO had submitted that a legal requirement for running a unit/operation in SEZ was as per SEZ Act, 2006, whereas allowability of deduction under the IT Act was governed by the IT Act. The AO also submitted that as per settled legal position for claim of deduction, assessee had to begin manufacturing/production and it was treated as production only when commercial production started. Thus, the AO had requested the audit to drop the audit objection. The reply submitted by the audit was not considered by the revenue audit party. The revenue audit party reiterated that in the letter to the Development Commissioner the assessee had declared refinery SEZ unit started manufacturing/production in FY.2008-09 relevant to AY.2009-10. Thereafter, the AO furnished a further detailed reply. In the subsequent reply, the AO stated that the first year of commencement of manufacturing for the purpose of deduction u/s. 10AA was AY.2010-11 and there being loss as per IT Act, no deduction u/s.10AA was claimed in the first year of claim. The AO had reproduced the submission made by the appellant during the assessment proceedings for AY.2010-11 in reply to the audit. It was stated by the assessee that new refinery SEZ was being set-up alongwith ancillary units. The assessee had provided details of pre-operative expenses of new refinery. The project development expenditure was included in capital work in progress (CWIP). Further, pursuant to trial run, some portion of CWIP pertaining to refinery SEZ was capitalised. During the assessment proceedings, the assessee had submitted the details and CA certificate regarding first year of claim of deduction u/s.10AA. The same has been produced by the AO in the reply to audit. It was submitted by the assessee that CA certificate in Form 56F and P&L account of refinery SEZ for claim of deduction u/s.10AA were submitted. The CA had certified that the manufacturing or production commenced on 01.04.2009, accordingly AY.2010-11 was the year of claim of deduction u/s. 10AA of the Act. Despite book profit, there was loss as per IT Act, no deduction u/s, 10AA was claimed in AY.2010- 11. The assessee had submitted that the refinery was a complex set-up consisting of various units like (i) Crude Distillation Unit-for distillation, (ii) Hydrotreaters for removal of Sulphur, (iii) Fluid Catalytic Cracking Units-to process heavy oil and (iv) Coker to process residue to obtain coke: It was submitted that all the operations couldn't commence simultaneously due to a time gap. In the refining process, intermediate products were kept in storage or poor quality products were sold till full completion after all test runs. A sustained operation of the refinery was possible only when all the units operated as per their design performance level. It was also submitted that refinery activity consisted of commissioning of utilities and offsite facilities, followed by commissioning by the primary unit being the Crude and Vacuum distillation unit, followed by the finishing and secondary conversion units In the letter dated 21.04.2010, it was communicated to the Development Commissioner of Kandla Special Economic Zone that crude processing commenced on 25.12.2009. It was also stated in the letter that the secondary processing unit was under synchronization and commissioning and the entire refinery was expected to attain full capacity shortly. The assessee also submitted that in RIL media release for the quarter ended 30.06.2009, it was stated that during the quarter ended 30.06.2009, RPL had successfully commissioned all key processing units including the Fluidized Catalytic Cracking Unit (FCCU), Vacuum Gas Oil (VGO), Hydrogen manufacturing Unit (HMU), Diesel Hydro De- Sulphurization (DHDS), Propylene Recovery unit (PRU), Coker Unit etc. Thus, it was submitted that a sustained operation of the refinery was possible only when all units were proven and operative as per their design performance levels. On analysis of the reply submitted by the AO during the assessment proceedings for AY.2010-11 while replying to the audit, the AO summarized that (i) setting up of the business was different from commencement of the business, (ii) during the period of trial run, it could be stated that business was set up but not commenced manufacturing or production of article or things, (iii) mere production of intermediate goods was not manufactured / production of goods, (iv) working at much lower than the installed capacity did not amount to manufacture and during the period of trial run, the assessee was eligible to claim depreciation. Thus, the AO had submitted to the audit that AY.2010-11 was first year of claim of deduction u/s.10AA in respect of SEZ refinery, Jamnagar.

From perusal of audit objection and reply of AO to the audit objection, it is seen that audit objection was raised on the basis of approval letter of Development Commissioner, Kandla SEZ, communication made with RPL to the Development Commissioner regarding commencement of operation of cold processing and the annual report of FY.2008-09. The inference was drawn by the audit party that refinery SEZ, Jamnagar commenced manufacturing activity in FY.2008-09, therefore, FY.2009-10 was the first year of operation, hence AY.2014-15 being sixth consecutive year, deduction u/s.10AA @ 100% was allowed in excess of 50% of deduction. In response to the audit query, the AO had replied to the audit party that during the assessment proceedings for AY,2009-10, it was explained to the AO that in respect of refinery SEZ, deduction of pre- operative expenses was claimed. From the details of pre- operative expenses, it was submitted by the appellant that new refinery unit was to be set up alongwith ancillary units and project development expenses were included in CWIP. Further, pursuant to trial run, some portion of CWIP was capitalized. Further, during the assessment proceedings for AY.2010-11, the appellant had explained to the AO that for claim of deduction u/s.10AA in respect of SEZ refinery, a report in Form 56F alongwith separate P&L account of the refinery SEZ undertaking was submitted. The CA in the auditor's report had certified that manufacturing or production of SEZ refinery unit commenced on 01.04.2009. The appellant explained that setting up of refinery involved setting up of various units such as (i) Crude Distillation Unit-for distillation, (ii) Hydrotreaters for removal of Sulphur, (iii) Fluid Catalytic Cracking Units-to process heavy oil and (iv) Coker to process residue to obtain coke. It was also explained that due to lack of time, all the units could not be set-up simultaneously, therefore, sustained operation of the refinery was possible only when all units were proven and operative as per their design performance levels. The appellant had also explained that vide letter dated 21.01.2009, it was communicated to Development Commissioner that company had commenced crude processing on 21.12.2009 and the secondary processing units were under synchronization and commissioned and entire refinery was expected to attain full capacity shortly. Thus, during the assessment proceedings for AY.2010- 11, the appellant had explained to the AO that considering the complex nature of functioning of refinery and synchronization of all the units, the entire refinery got operational from 01.04.2009, date on which commercial production was started. Thus, AY.2010-11 was first year of commencement of manufacturing/production, as far as the claim of deduction u/s, 10AA was concerned. Considering all these facts, while replying to the audit, the AO had stated that (i) setting up of business was different from commencement of business, (ii) during the period of trial run, it could be stated that business was set up but not commenced manufacturing or production of article or things, (iii) some production of intermediate goods or production of goods at lower than the installed capacity did not mean manufacturing and (iv) during the period of trial run, the assessee was eligible to claim depreciation. Accordingly, AY.2010-11 was the first year of claim of deduction u/s.10AA. Thus, the AO submitted a reply to the audit party after examining the assessment records for AYs.2009-10, 2010-11 and also AYs.2011-12, 2012-13, 2013-14 and 2014-15 and submitted that the commercial production commenced on 01.04.2009 and the first year of claim of deduction u/s.10AA was AY.2010-11. From perusal of the reasons recorded, it is seen that the AO has picked up the same words and sentences from the audit objection in the reasons for re- opening of the assessment. This is a case of non- application of mind on the part of the AO and after submitting a detailed reply based on the appreciation of facts on records and examination of evidences, reopening of assessment on the issue of deduction u/s.10AA is nothing but it is a case of re-opening of the assessment only on the basis of audit objection.” ( emphasis supplied) 7.13 In support of the contention that reopening of assessment was merely on the basis of audit objection, which is bad in law, the Ld. CIT(A) relied on following decisions :

(i) Adani Wilmar Ltd. v. ACIT [2024] 162 taxmann.com 832 (Gujarat) (ii) Bennett Coleman & Co. Ltd. v. DCIT [2022] 145 taxmann.com 228 (Bombay) (iii) Castrol India Ltd. v. DCIT [2024] 161 taxmann.com 75 (Bombay) (iv) Hasmukh Estates (P.) Ltd. v. ACIT [2024] 158 taxmann.com 543 (Bombay) (v) IL and FS Investment Managers Ltd. v. ITO [2008] 298 ITR 32 (Bombay) (vi) Oriental Aromatics Ltd. v. DCIT [2023] 154 taxmann.com 437 (Bombay) (vii) Pr. CIT v. Raja Transports (2023] 154 taxmann.com 589 (Madras)

7.14 The Ld. CIT-DR submitted that nowhere in the reasons recorded for reopening, the AO has mentioned about any revenue audit objection. She further submitted that communication between the AO and the Revenue audit objection is not part of assessment proceedings and assessment records and therefore, inference drawn by the Ld. CIT(A) relying upon extraneous documents which do not formed part of the assessment records, should not be ignored. The ld counsel for the assessee on the other hand relied on submission made by the assessee before ld CIT(A) and also on the finding of ld CIT(A) along with decisions relied upon by him.

7.15 We have heard rival submissions of the parties and perused the relevant materials on record. Before us, the Ld. DR has merely objected for taking into consideration the correspondence between AO and Revenue audit team by the Ld. CIT(A). In our opinion, the correspondence of the Assessing Officer with the authorities of the C & AG, is also part of the record of the Department which cannot be simply brushed aside while examining whether the Assessing Officer has borrowed his satisfaction from the audit objections. the counsel for the assessee relied on the submission which were made before the Ld. CIT(A) and submitted that while responding to the audit objections raised by the C & AG, the Assessing Officer himself did not accept the audit observations. The Assessing Officer had not accepted the objections raised by the audit, but as a precautionary measure only reopened the assessment to satisfy the audit team. Once this fact is admitted that the Assessing Officer did not accept said observations of the Audit Wing, then recording of reasons by him is contradictory to his own belief and thus reopening of the assessment is based on the borrowed satisfaction of the Audit Wing. The Ld. counsel for the assessee relied on the decision of the Hon‘ble Bombay High Court in assessee‘s own case for assessment year 2004-05 reported in 382 ITR 574, wherein audit objection claimed allowed u/s 80IA of the Act, to which the AO disagreed with and responded that the deduction u/s 80IA was correct. However, the Assessing Officer reopened the assessment on the same ground as raised in the audit objection. The Ld. CIT(A) quashed the reopening and held that there cannot be any reasons to believe that income of the assessee had escaped assessment when the satisfaction recorded by the AO was based on the audit objection, which were even not has accepted by the Assessing Officer. The Hon‘ble High Court upheld the order of the Ld. CIT(A) and Hon‘ble ITAT.

7.16 In such circumstances recording of the reasons for reopening of the assessment are purely based on the borrowed satisfaction from the audit team and not the satisfaction of the Assessing Officer. In view of the decision relied upon by the Ld. CIT(A), we agree with the finding of the Ld. CIT(A) on the issue in dispute and accordingly, we uphold the same.

7.17 In conclusion, the reassessment on the issue of excess deduction u/s 10AA in respect of refinery SEZ cannot be sustained as the reassessment proceedings to this extent stand quashed.

7.19 Further, the question that arises for consideration is whether the Assessing Officer had, during the course of assessment for Assessment Year 2010-11, examined the fact relating to the commencement of manufacturing operations of the refinery, and if so, whether he is precluded from re-examining the very same issue in a subsequent assessment year. The learned counsel for the assessee has submitted that the commencement of refinery operations in the financial year 2009–10, as asserted by the assessee, was duly accepted by the Assessing Officer in the initial assessment year, i.e., Assessment Year 2010–11. It is contended that, in the absence of any challenge to such finding at the threshold, the issue has attained finality. Consequently, it is submitted that the Revenue is precluded from reopening or disputing the said factual foundation in subsequent assessment years.

7.20 We have duly considered the rival submissions of both parties and have carefully perused the material available on record. On a careful perusal of paragraph 2, page 2 of the assessment order for Assessment Year (AY) 2010–11, it is noted that the Assessing Officer, while elaborating on the nature of the assessee‘s business, has categorically recorded that "in the year under review, the production commenced in the integrated crude oil refinery facilities along with ancillary units in a Special Economic Zone." In our considered view, once the Assessing Officer has accepted the commencement of production during AY 2010–11, it logically follows that the year under consideration represents the fifth year of production. Furthermore, it is evident from the Assessing Officer‘s communications dated 29.10.2018 and 24.06.2019 that he expressly disagreed with the audit objection raised by the Comptroller and Auditor General (C&AG), and submitted that the claim for deduction under section 10AA was duly verified during the original assessment for AY 2010–11. The said verification included examination of the facts and materials on record, including the tax audit report in Form No. 56F.

7.21 The assessee has placed reliance on the judgment of the Hon'ble Bombay High Court in the case of Paul Brothers [(1995) 216 ITR 548 (Bom)], wherein it was unequivocally held that once the claim for deduction under section 80-IA/80-IB has been allowed in the initial year, and such relief has not been withdrawn, the deduction for subsequent years cannot be denied on the same grounds. The Hon'ble Court emphasized that in the absence of any action to withdraw the relief granted for the first year, the Revenue is stopped from denying the benefit for the later years.

7.22 Further reliance is placed on the decision of the Hon'ble Mumbai Bench of the Tribunal in the case of ACIT v. H.K. Designs (India) LLP [(2023) 155 taxmann.com 374 (Mum-Trib)], wherein the Assessing Officer disallowed the assessee‘s claim under section 10AA in the sixth year of deduction, on the ground that the conditions prescribed under the said provision were allegedly not satisfied. The Hon‘ble Tribunal, however, observed that the claim had been accepted by the Assessing Officer in the initial year, pursuant to an order passed in consequence of directions issued by the Tribunal for verification of the same. It was held that once the eligibility for deduction under section 10AA has been accepted in the initial year, the same cannot be denied in subsequent years merely on the basis of alleged non-fulfillment of conditions which were required to be examined at the time of the first year of claim.

7.23 The learned counsel for the assessee placed reliance on the decision of the Hon‘ble Gujarat High Court in PCIT v. Maps Enzymes Ltd. [(2019) 111 taxmann.com 73 (Guj.)], wherein it was held that when the Department had accepted the claim of deduction for four consecutive years, there existed no justification to disallow the same in the fifth and final year without bringing any distinguishing fact on record.

7.24 The learned counsel also placed reliance on the decision of the Delhi Bench of the Tribunal in Vimoni India Pvt. Ltd. v. DCIT [(2022) 197 ITD 488 (Del.)], where the issue related to disallowance of deduction under section 80IC in a subsequent year. In that case, the Tribunal held that once the claim had been accepted in the initial years, the same could not be rejected in a subsequent year unless fresh facts were brought on record by the Assessing Officer.

7.25 Respectfully, considering ratio of the above judicial precedents and keeping in mind the facts on record, we find merit in the submissions of the learned counsel for the assessee. The claim of assessee under section 10AA was accepted by the Assessing Officer in AY 2010–11, holding the same as first year of operation. The said finding of the AO in Ay 2010-11 could not have been re-evaluated in the reassessment proceedings for the year under consideration in the absence of any new tangible material. It is a settled position in law that the Assessing Officer cannot review his own assessment in the guise of reassessment. Accordingly, we hold that the reassessment proceedings initiated in this case are not sustainable in law.

7.26 The next question which arises for consideration is in which year the refinery actually commenced manufacturing? The Ld. counsel for the assessee submitted that documents filed during the course of the original and reassessment proceedings substantiate the claim of the assessee that commissioning of the refinery was completed in financial year 2009-10 and it was eligible to the claim deduction u/s 10AA of the Act only from AY 2010-11. The assessee, while challenging the conclusions drawn by the Assessing Officer (AO), has submitted a chronological and factual foundation demonstrating that manufacturing activity at the SEZ Refinery unit did not commence until FY 2009–10, relevant to AY 2010–11, and thus the deduction under Section 10AA was rightly claimed from that year. The genesis of the unit lies in the Letter of Approval dated 04.05.2006 issued for setting up the refinery in the Jamnagar SEZ, which was later extended until 03.05.2009. It is a matter of record that Reliance Petroleum Limited (RPL), which had received this LOA, merged into Reliance Industries Limited (RIL) with effect from 01.04.2008. The ld Counsel submitted that the AO has placed undue reliance on two documents: (i) a letter dated 21.01.2009 addressed to the Development Commissioner (DC), and (ii) extracts of the Annual Report for FY 2008–09. In the opinion of the assessee, both documents have been misconstrued and fail to support the conclusion that manufacturing commenced in FY 2008–09. The letter dated 21.01.2009 merely intimates that crude processing commenced on 25.12.2008. However, this communication also explicitly notes that various critical units remained under synchronization and commissioning. It is the assessee‘s consistent position that, in the context of a complex integrated refinery, manufacturing can only be said to have commenced when all key units operate in synchronization and the refinery is capable of producing the intended value-added products in a stable and sustained manner. Processing of crude alone, bereft of the functioning of units like FCCU, DHDS, Coker, and others, cannot amount to commencement of manufacture. The mere presence of intermediate or by-products does not establish that the ‗unit‘, as a whole, has begun manufacturing. The assessee further submits that the Annual Report for FY 2008–09 contains statements referring to full operational capacity; however, those references must be read in light of their temporal context—such reports include disclosures of significant post-balance sheet events and do not ipso facto indicate that such events occurred within the financial year under review. The Chairman‘s message in the Annual Report is dated 07.10.2009, which squarely falls in FY 2009–10, and aligns with the subsequent media release dated 24.07.2009, wherein it was officially communicated that all key units had been successfully commissioned during the quarter ending 30.06.2009. The assessee has also clarified the treatment of depreciation on assets: while some assets were capitalized and put to use in FY 2008–09, the bulk of operational assets integral to the refinery came into use in FY 2009–10. This factual position was placed before the AO, who, upon being satisfied, did not pursue the depreciation issue further in the reassessment order. Reliance is also placed on the judgment of the Hon‘ble Supreme Court in CWT v. Ramaraju Surgical Cotton Mills Ltd., where it was held that a unit cannot be said to be set up unless it is in a position to carry out the functions for which it is established. Similarly, the Bombay High Court in CIT v. Piem Hotel Pvt. Ltd. held that mere partial use of an asset does not imply commencement of business. Applying the same principles, a refinery, being a highly integrated and capital- intensive operation, cannot be considered to have commenced manufacture by virtue of partial crude processing alone. Hence, the assessee contends that the refinery ‗unit‘—the relevant focus for the purposes of Section 10AA—became fully operational and commenced manufacturing only in FY 2009–10, and was rightly eligible for deduction from AY 2010–11 onwards.

7.27 We have duly considered the rival submissions of both parties. Upon careful perusal of the material placed before us, we find considerable merit in the contention advanced by the assessee. The letter dated 21/01/2009 of ‗RPL‘ addressed to Development Commissioner is the main basis of conclusion by the AO in reassessment proceedings that refinery started manufacturing in AY 2009-10. The copy of the said relevant letter is available on page 450 of the Paper Book. So for ready reference, the relevant part of the said letter is reproduced as under:

“Reliance Petroleum Limited Dated: 21.01.2009 The Development Commissioner. Kandla Special Economic Zone, Gandhidham-Kutch. Sir, Sub: Commissioning of Refinery Unil Ref: LOA NO. KASEZ/P&C/PRO/JAM/RPI/UNIT/06/498 dated 04.05.2006 This has reference to the above referred Letter of Approval (LOA) issued from your office for setting-up of a Unit in the Jamnagar Special Economic Zone. In this connection, we intimate to your office that our company commenced crude processing on 25.12.2008. The secondary processing units are under synchronization and commissioning. The entire refinery complex is expected to attain full capacity shortly. Kindly note the above information and acknowledge. Thanking you, Yours faithfully. For Reliance Petroleum Limited.”

7.28 The letter dated 21.01.2009 addressed to the Development Commissioner SEZ, when read in its entirety, does not conclusively establish that the refinery unit had commenced full-scale manufacturing during the financial year 2008–09. On the contrary, said communication candidly acknowledges that only preliminary crude processing had commenced, while various critical secondary units were still under synchronization and commissioning. It is well settled that commencement of manufacture, particularly in the case of a highly integrated and complex refinery, must be ascertained with reference to the functional readiness of the entire unit as a whole, and not by isolated activity in a single process segment.

7.29 The Assessing Officer, in our considered view, has selectively relied on portions of the letter which were favorable to his conclusion, while omitting to take cognizance of other contemporaneous and equally relevant information, including the latter part of the very same letter which clearly states that the full commissioning was still underway. If the refinery was ready for manufacturing on the date of letter, the assessee was not required to inform that synchronization of secondary processing units was under commissioning and entire refinery was expected to attain full capacity shortly. The complex nature of process of entire refinery manufacturing has been explained by the assessee before the assessing officer, which is reproduced as under:

“ 2.11.13.3. In order to understand the above it is submitted that, Refining adds value by converting crude oil (which in itself has little end-use value) into a range of refined products, including transportation fuels. The primary economic objective in refining is to maximize the value added in converting crude oil into finished products. Petroleum refineries are large, capital-intensive manufacturing facilities with extremely complex processing schemes. They convert crude oils and other input streams into dozens of refined (co-)products, including:  Diesel fuel  Gasoline   Jet fuel   Liquified petroleum gases (LPG)   Kerosene (for lighting and heating)   Petrochemical feedstocks   Lubricating oils and waxes   Home heating oil   Fuel oil (for power generation, industrial and district heating)

2.11.13.4. Of these, the transportation fuels (such as Diesel fuel, Gasoline and Jet fuel) have the highest value; lubricating oils, fuel oils and home heating oils have the lowest value. The Refinery is therefore set up to produce such high value added products from complex processing of crude oil. No refinery business can be economically viable if it produces only mid or low value added products. Therefore, the objective of a refinery is the above listed products and not by-products which are inevitably generated at each stage of complex processing e.g due to distillation or cracking of crude oil at various heating temperatures. 2.11.13.5. Thus, a Refinery is a complex set up consisting of various units like:

 Crude Distillation Unit - for distillation   Hydrotreaters - for removal of Sulphur   Fluid Catalytic Cracking Units - to process heavy oil   Coker - to process residue to obtain coke

2.11.13.6. All the units in a Refinery can't commence operation simultaneously and there will always be a time gap. In the case of Refinery, unless the intended products on processing of crude are not obtained, existence of intermediate products which are kept in storage or poor quality products resulting during stabilizing and synchronizing activities, which are improved or improvised through further core processing got done on job work basis outside in another refinery, it cannot be said to be commencement of manufacturing by the 'unit' when unit happens to be a 'refinery'. A sustained operation of the Refinery is possible only when all sub-units are proven and operating as per their design performance levels. The commissioning, synchronization and stabilizing process got complete in the FY 2009-10 and accordingly that was the year in which the commencement of manufacturing of products was commenced after refining of crude oil by the refinery. 2.11.13.7. Generally Refinery Start up activity consists of the following major activities: Commissioning of Utilities and Offsite facilities, followed by commissioning by the Primary unit being the Crude and Vacuum distillation unit, followed by the finishing and secondary conversion units. 2.11.13.8. It is not possible to sustain the operation of the refinery in part, both operationally and economically for prolonged periods until all the units are commissioned and operated sustainably. 22.11.13.9. It is worthwhile to indicate that the intermediary products and bye products resulting from the stage wise sequential commissioning and stabilizing activity being carried out in the unit, were got improvised to some extent by means of job work (the fact which was submitted before AO, vide letter 15.2.2022) being got done from another refinery unit. This also establishes the fact that core refinery process in the SEZ unit of the Assessee had neither stabilized nor was free from gaps and there was absence of various operating facilities at the time which is critical to ensure manufacturing output of an integrated set up like a refinery. 2.11.13.10. Therefore, the assessee had intimated to the Development Commissioner, vide letter dated 21.1.2009, that various other units are under synchronization and commissioning and the entire refinery complex is expected to attain full capacity shortly. Thus, from the letter dated 21.01.2009 it cannot be inferred that the Refinery SEZ had commenced manufacturing.” 7.30 Further, the reliance placed upon the Annual Report for FY 2008–09 is also misplaced. The references therein to the refinery operating at ‗full capacity‘ on page 17 of the annual report (PB 454) and ‗presently the refinery is operating at its design capacity’ on page 85 of the annual report (PB 456)‘ must be interpreted in the context of post-balance sheet developments, particularly in light of the undisputed fact that the Annual Report was approved and published after the commissioning of all major units during the quarter ending June 2009. In this regard, the principles laid down in Accounting Standard AS-4 issued by the Institute of Chartered Accountants of India support the position that post-balance sheet events of material significance are to be appropriately disclosed without altering the financials of the preceding year. Thus, the Annual Report cannot be taken as conclusive proof of operational commencement in FY 2008–09.

7.31 Further, the ‗media release‘ of the company as on 24.07.2009 in respect of the quarter ending on 30.06.2009, a copy which is available on Paper Book page 473 to page 486, corroborates the Annual Report for FY 2008-09, wherein it is mentioned that Reliance Petroleum Ltd. has successfully commissioned all key processing units including the FCCU (Fluidized Catalytic Cracking Unit) VGO (Vaccum Gas Oil) HMU (Hydrozen Manufacturing Unit) DHDS (Deigel Hydro De-Sulphurization) PRU (Propiline Recovery Unit) Cokeer Unit and the Polypropylene Complex).

7.32 Moreover, it is not in dispute that the Assessing Officer has not brought on record any concrete evidence to establish that the full suite of processing units—such as the FCCU, DHDS, Coker, and others—had become operational in FY 2008–09. No details of finished products or output matching the designed capacity have been demonstrated by the AO in reassessment proceedings, whereas, the Ld. counsel for the assessee referred to the finished or intermediately products produced and available as part of the closing stock to support the reply of the AO to the Audit Team that some production of intermediate goods or production of goods at lower than the installed capacity did not mean manufacturing . Thus, the production was limited to intermediate goods or to activities falling short of full-scale manufacturing, as per the audit records.

7.33 With respect to the depreciation claim, the materials on record clearly show that the depreciation in FY 2008–09 was restricted to assets partially put to use, and that a substantial portion of the refinery‘s capital assets were commissioned and put to use only in FY 2009–10. This further corroborates the assessee‘s stand that the manufacturing operations, in their complete and intended form, commenced only in FY 2009–10.

7.34 In light of the above, and taking into account the totality of the evidences on record, we are of the firm view that the refinery unit commenced manufacturing activity within the meaning of Section 10AA only in Financial Year 2009–10, corresponding to Assessment Year 2010–11. The assessee is, therefore on merit eligible for deduction under Section 10AA from Assessment Year 2010–11 onwards.

Excess deduction u/s 80IA(9) in respect of KGD6 Block

8.1 Briefly stated, in the return of income, the assessee claimed deduction under section 80IB in respect of profits earned from the 'KGD6' Block pertaining to the exploration of mineral oil. The assessee had acquired a participating interest in the said Block pursuant to a Production Sharing Contract (PSC) dated 12.04.2000 entered into with the President of India through the Ministry of Petroleum and Natural Gas. Treating this interest as a 'commercial right', the assessee classified it as an 'intangible asset' and capitalized the pre-commercial production expenditure incurred up to 01.05.2009 accordingly. Depreciation on the said intangible asset was claimed at 25%.

8.2 However, beginning from AY 2010–11, the Assessing Officer (AO) consistently rejected this treatment and, relying on the provisions of the PSC, allowed depreciation by classifying various assets—such as plant, machinery, buildings, etc.—under their respective heads. This issue remained a subject of protracted litigation. During the assessment proceedings for AY 2016–17, the assessee, having undertaken a cost-benefit analysis of further litigation, opted to withdraw its claim of treating the participating interest as an intangible asset. Instead, it revised the opening WDV of relevant asset blocks, aligned them with the AO‘s classification, and recomputed both normal and additional depreciation for earlier assessment years, including AY 2014–15, which is presently under appeal. The reassessment was reopened for the year under consideration on this issue recording the reasons as under:

"2.1. Further, it was observed from the records that the net profit of KGD6 unit was computed vide para no. 14 of the assessment order at Rs. 187,59,53,019/- an ddeduction 801B (9) in respect of Oil segment (20.97 percent of net profit) was allowed to the extent of Rs. 39,33,87,348/-. It was noticed that the deduction was computed without considering additional depreciation of Rs. 72,77,72,160/- allowable u/s 32(1)(ia) on additions to P&M of Rs.363.88 crore during the year. This resulted in excess determination of profits and gains of the undertaking by Rs. 72,77,72, 160/-leading to excess allowance of 801B(9) deduction to the extent of Rs. 15,26,13,821/- (20.97 % of Rs. 72,77,72, 160/-). It is pertinent to note that non allowing additional depreciation during tax holiday period not only result in higher claim of deduction but also result in higher carry forward of WDV which would reduce the profitability of the assess after tax holiday period. Therefore I am of the view that income to the extent of amount of Rs. 15,26,13,821/-, as explained above, has escaped assessment." 8.3 In the reassessment order, the AO concluded that the profits of the eligible undertaking had been overstated due to the omission of additional depreciation and, thereby, the deduction under section 80IB(9) was erroneously allowed in excess. The assessee, however, contended that the alleged excess deduction, if rectified, would be tax neutral as any reduction in profits eligible for deduction under section 80IB(9) would correspondingly enhance depreciation allowable under section 32(1)(iia), leaving the total income unaffected under normal computation.

8.4 The Ld. CIT(A) firstly held that the AO had not demonstrated any failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. Secondly he referred to paragraph 14 of the original assessment order, wherein the AO had examined in detail the depreciation computation under both the return and the PSC framework. The revised depreciation and profits for KGD6 Block were duly considered, and the additional depreciation claim was consciously dealt with by the AO. Therefore, in the absence of any fresh tangible material, the reassessment was held to be a mere‘ change of opinion‘. The relevant finding of ld CIT(A) is reproduced as under:

The issue regarding inclusion of additional depreciation u/s.32(1)(iia), in computation of profit in respect of KGD6 block for the purpose of computing deduction u/s.801B(9), was discussed by the AO in para 14 of the assessment order. In para 14.7 of the assessment order, the AO worked out revised depreciation and profit of KGD6 block. The AO examined the working of the depreciation as per Return of income and depreciation as per PSC in respect of KGD6 block. After careful examination of the working of depreciation, the claim of additional depreciation while computing profit for the purpose of deduction u/s.80IB(9) was examined and dealt with by the AO in the assessment order. Once the opinion is formed in the assessment order after detailed discussion, raising the same issue in the re-assessment proceedings without any new tangible material amounts to "change of opinion". 8.5 The CIT(A) further observed that while giving effect to appellate directions in earlier years, the AO had accepted the revised depreciation computation, including additional depreciation, and accordingly revised the quantum of deduction under section 80IB(9). As a result, the deduction had already been recalibrated, rendering the reassessment redundant. The adjustment was thus held to be a tax neutral, and the disallowance made was effectively double disallowance.

8.6 On the issue of reopening being based on an audit objection, it was noted that the reasons recorded were verbatim reproduction of the audit objection. Though the AO initially disagreed with the audit findings and recorded the tax neutrality of the adjustment in correspondence dated 30.07.2019, the reassessment was nevertheless initiated on the very same lines, thereby indicating a mechanical satisfaction and borrowed reasoning. The relevant finding of ld CIT(A) on the issue is reproduced as under:

From perusal of the reply submitted by the AO to the audit, it is seen that the AO had stated that deduction u/s.80IB(9) for KGD6 block was allowed to the extent of Rs.20.97% of profit. The AO had also stated that during the assessment proceedings for AY.2016-17, the revised claim of depreciation u/s.32 and revised deduction u/s.80IB(9) was claimed and allowed as per provisions of PSC after allowing additional depreciation from AYs.2012-13 to 2014-15. After considering the depreciation, the profit of KGD6 block for AY.2014-15 increased by Rs.49,89,64,935/ . After giving effect to the order of the CIT(A), 100% of profit of KGD6 block would qualify for deduction and thus, the deduction u/s.80IB(9) would increase by Rs.49,89,64,935/-. Consequently, depreciation allowable for AY.2014-15 would got reduced by Rs.49,89,64,935/-. Thus, the overall effect of additional depreciation for AY.2014-15 would be taxed neutral. After that, the AO has changed his stand on the issue and recorded the reasons for re-opening on this issue, which is merely reproduction of language used in the audit objection 8.7 The Ld. DR on the other hand submitted that the claim of depreciation and additional depreciation on plant and machinery was to be calculated as per the provisions of the Act and therefore, reopening on the same would not amount to change of the opinion by the Assessing Officer. She further submitted that in the original return, the assessee had not claimed additional depreciation, and hence the profits eligible for deduction under section 80IB(9) were overstated. This, according to the Revenue, amounted to non- disclosure of material facts fully and truly . On the issue of the reopening on the basis of the audit objection also the Ld. CIT-DR submitted that communication between the Assessing Officer and the Revenue Audit Authority is not the part of the assessment proceedings. Further she submitted that Assessing Officer culled out more information from the books of account available on record and not relied merely on the audit objection for reopening of the assessment.

8.8 On the other hand, the ld counsel for assessee, in response, submitted that the effect of additional depreciation was already given while implementing the appellate order dated 30.05.2019. Hence, reopening the assessment on this issue not only amounted to review but also led to a double disallowance of the same amount, which had already been factored in.

8.9 With respect to the impact on the opening WDV post tax holiday period, it was pointed out that the assessee had, during the course of assessment proceedings for AY 2016–17, made a written submission dated 19.03.2019 requesting the AO to re-compute opening WDV, which was accepted. Hence, no adverse inference could be drawn on this count either.

8.10 The Ld. counsel for the assessee assailed the reopening as it was based on same set of facts, which were available on record and in absence of any new tangible material. The Ld. counsel for the assessee submitted that as far as reasons recorded for reopening is concerned, the Assessing Officer has mentioned that observed from the records in the original assessment order, the net profit KGD6 unit was computed without considering additional depreciation of Rs.72,77,72,160/- allowable u/s 32(1)(iia) of the Act on addition of plant and machinery of Rs.363.88 crores during the year. The assessee emphasized that the Assessing Officer has only referred to the records and did not point out any new or fresh intangible material for reopening assessment on this issue. In view of the above, the Ld. counsel submitted that this action of the Assessing Officer amounts to review of the records by way of change of opinion only and which is not permitted in accordance with law.

8.11 On careful examination of the records, it is evident that all facts pertaining to the classification and depreciation of the KGD6 Block assets were duly available with the AO at the time of the original assessment. The reassessment proceedings do not refer to any new or tangible material that surfaced subsequently. The action of the AO, therefore, constitutes a clear case of change of opinion, which is impermissible in law, as enunciated in the landmark judgment of CIT v. Kelvinator of India Ltd. [2010] 320 ITR 561 (SC).

8.12 Moreover, the reasons recorded are a mere reproduction of the audit objection, despite the AO‘s initial disagreement therewith. This indicates absence of independent application of mind and renders the reassessment proceedings invalid.

8.13 On the merits, the additional depreciation had already been considered while giving effect to the CIT(A)‘s order, and appropriate adjustments were made in the deduction under section 80IB(9). The repetition of the same adjustment in reassessment proceedings amounts to duplication and indicates non-application of mind.

8.14 In light of the foregoing, we find no infirmity in the findings recorded by the Ld. CIT(A) and uphold the conclusion that the reassessment was both procedurally and substantively unsustainable Excess deduction allowed u/s 10AA for Polypropylene SEZ unit

9.1 The issue under consideration pertains to the excess deduction allowed under section 10AA of the Income Tax Act, 1961, in respect of the Polypropylene (PP) SEZ unit, owing to the non- recognition of revised profit figures. The assessee had claimed deductions under section 10AA for the PP SEZ unit, under section 80-IB for the Refinery SEZ unit, and under section 80-IB(9) for the KGD6 block. During the assessment proceedings under section 143(3), the assessee, vide its letter dated 15.12.2017, revised the interest expenditure allocated to each unit, as summarized below:

Sr. No. Name of Unit Revision in interest Impact in deduction figures 1. PP SEZ unit FromRs. 12.03 crs Reduction of the deduction to Rs. 27.04 crs claimed u/s 1OAA of the Act by Rs 11,18,79,995 (erroneously mentioned as Rs 10,89,87,086 in the Reassessment Order) 2. Refinery SEZ From 516.7 crs to Increase in deduction u/s 10AA Unit Rs.420.83 crs and u/s 80-IB by Rs.86,48,78,954 and by Rs.9,45,06,280 respectively 3. KGD6 Unit From 512.6 crs to Increase in deduction u/s 80-IB by Rs.469.41 crs Rs.43,24,33,714 9.2 The Assessing Officer, however, rejected the revised claim, relying solely on the Hon‘ble Supreme Court's decision in Goetze (India) Ltd. v. CIT [(2006) 284 ITR 323 (SC)].

9.3 In appeal, the learned CIT(A), by order dated 31.01.2019, allowed the assessee‘s claim. The said order was subsequently upheld by the Tribunal.

9.4 Thereafter, while giving effect to the CIT(A)‘s order, the Assessing Officer recomputed the deduction under sections 10AA and 80-IB by incorporating the revised interest allocation across the respective units.

9.5 Notwithstanding , the revised and higher interest expenditure was already considered while computing deduction u/s 10AA of the Act while giving effect to the order of the Ld. CIT(A) against the original assessment order, the AO proceeded to reopen the assessment on this issue by recording the reasons as under:

“2.2 Further, on perusal of the records it is seen that the revised profits of PP SEZ had been discussed vide para no. 20 Deduction ws 10AA in respect of Polypropylene SEZ and considered at Rs.858,33,07,450/- as against Rs.873,30,97,289/- declared in return of income. It was observed from the computation of deduction u/s 10AA that while computing deduction the profit of PP SEZ was adopted inadvertently atRs.873,30,97,289/-as per the returns instead of revised profits Rs.858,33,07,450/-.Mistake in adoption of correct figure resulted in excess allowance of deduction ofRs. 10,89,87,086/- (72.76% of Rs. 149789839/-) involving under assessment of income to the same extent. Therefore, I am of the view that income to the extent of amount of Rs. 10,89,87,086/, as explained above, has escaped assessment." 9.6 In reassessment order, the AO accordingly further revised the deduction allowed to the assessee. But the Ld CIT(A) invalidated the reassessment proceedings on charges of full and true disclosure of material facts by the assessee, change of opinion and borrowed satisfaction.

9.7 Before us the Ld. CIT-DR argued that the original rejection of the claim was based solely on Goetze (India) Ltd. (supra) and no verification of the revised computation was undertaken by the AO. Therefore, it could not be termed a case of change of opinion.

9.8 Before us, the Ld. counsel for the assessee submitted that the Assessing Officer has simply brushed aside the submission of the assessee that deduction u/s 10AA was already recomputed for PP SEZ unit by increasing the interest expenditure and merely stated that submission made by the assessee had already been considered and not found satisfactory. The Ld. counsel for the assessee submitted that the deduction u/s 10AA for PP SEZ Unit already been recomputed by the Assessing Officer by adopting the revised enhanced interest cost, vide his order dated 30.05.2019. Further, rejection in deduction u/s 10AA for PP SEZ unit resulted into double disallowance which is not permitted in law. The Ld. counsel for the assessee accordingly challenged the reopening of the assessment assailing that there was no income which had escaped assessment while computing the profit of KGD6 unit. There was no income which had escaped assessment nor considered the enhanced interest cost.

9.9 In this regard, the Ld. counsel submitted that even before recording reasons interest expenditure was already increased for computing the deduction u/s 10AA of PP SEZ Unit and thus there was no income which had actually escaped assessment and therefore, the reopening assessment on this issue was without application of mind.

9.10 Further, the Ld. counsel assailed the reopening on the issue based on the satisfaction borrowed from the audit wing. In this respect also a query was raised by audit wing vide its Audit Memo which was objected by the Assessing Officer vide his letter dated 14.11.2018 while stating that since the revision in interest expenditure also resulting in increase deductions for PP SEZ, Refinery SEZ and KGD6 units. The assessee further intimated to the audit wing that while giving effect to the order of the Ld. CIT(A) against the original assessment order the claim of the assessee was accordingly withdrawn.

9.11 Therefore despite not agreeing with the audit objection, the Ld. Assessing Officer reopened the assessment on the same issue in dispute amounts to recording reasons on the borrowed satisfaction which is not permitted in law.

9.12 The Ld. counsel for the assessee also assailed the reopening on this ground as based on the change of opinion without any new tangible material. The Ld. counsel referred that in the reasons recorded, the Assessing Officer relied only records available before him and no fresh material has been recorded and therefore, it amounts to change of opinion which is not permitted in law. In this regard, he referred to the finding of ld CIT(A), which is reproduced as under:

As far as the revised profit for deduction u/s, 10AA in respect of Polypropylene (PP) SEZ is concerned, the AO in para 20.2 of the assessment order has mentioned that vide letter dated 15.12.2017, the assessee had submitted that interest expenditure of Rs. 12,03,10,161/- was debited in Profit & Loss account instead of correct figure of Rs.27,01,00,000/-. The AO verified and considered the same and revised profit of PP-SEZ was worked out at Rs.858,33,07,450/- (Rs.8733097289 + Rs.120310161 Rs270100000). However, in the computation of deduction u/s.10AA, the AO took the profit as per the original P&L account at Rs.873,30,97,289/- and not profit of Rs.858,33,07,450/-. Thus, there was an inadvertent error by the AO to take the revised profit for the purpose of computation of deduction u/s. 10AA of the Act. While giving effect to the order of the CIT(A), the AO in the order dated 30.05.2019 has allowed less deduction u/s 10AA in respect of PP-SEZ, after considering the the revised revised ised interest interest expenditure submitted by the appellant. Thus, at the time of giving effect to the order of the CIT(A), the AO himself has taken into consideration the revised profit giving effect to the correct claim of interest in the P&L account. Thus, in the assessment the correct figure of interest Mexpenditure related to PP-SEZ unit was considered to work out revised profit. however, the AO did not consider it while computing deduction u/s. 10AA of the Act. The mistake in the assessment order was taken care by the AO at the time of giving effect to the order of the CIT(A). Thus, at the time of re-opening of the assessment, there was no reason for the AO to believe that income with respect to interest expenditure for computation of profit for deduction u/s.10AA had escaped assessment. Thus, re-opening of assessment on this issue by the AO was without any basis and it cannot be sustained.

9.13 On the issue of satisfaction borrowed from the Audit party pf C&AG while recording reasons to believe, the ld CIT(A) held as under:

While replying to the audit, the AO had stated that during the assessment proceedings, the assessee had given a revised computation of profit of refinery SEZ, PP-SEZ and KGD6 block after relocating the interest to respective units. In the P&L account, interest of Rs.516.77 crores, Rs.12.03 crores and Rs.512.66 crores was debited in the accounts of the refinery SEZ, PP-SEZ and KGD6 Block. In the revised account, interest of Rs.420.87 crores, Rs.27.01 crores and Rs.469.41 crores was allocated to refinery SEZ, PP-SEZ and KGD6 Block, respectively. The AO replied that such revision of Page 89 of 130 AAACR5055K- RELIANCE INDUSTRIES LIMITED A.Y. 2014-15 ITBA/APL/S/250/2024-25/1065322243(1) interest expenditure would decrease the profit of PP-SEZ and increase the profit of refiner SEZ and KGD6 block, which would result in reduction in the claim of deduction u/s.10AA in respect of PP-SEZ and would increase the claim of deduction u/s.10AA in respect of refinery SEZ and u/s.80IB(9) in respect of KGD6 block. As revision of profit was sought by the assessee by filing a letter and not by way of revising the Return of income, therefore, as per the decision of Hon’ble Supreme Court in the case of Goetze (India) Ltd vs. CIT (284 ITR 323 (SC), such claim was not acceptable by the AO. The AO further replied to the audit that on the issue, the appellant filed an appeal before the CIT(A) and CIT(A) allowed the ground in favour of the assessee. As the claim of the assessee was allowed by the CIT(A), audit objection should be deleted. From reply submitted to the audit, it could be seen that the AO following the decision of Hon’ble Supreme Court in the case of Goetze (India) Ltd vs. CIT (supra), had not entertained the claim of revision of interest expenditure debited to refinery SEZ, PP-SEZ and KGD6 Block unit and consequential decrease in the profit of PP-SEZ u/s.10AA, increase in the deduction u/s.10AA in respect of refinery SEZ and increase in deduction u/s.80IB(9) in respect of KGD6 unit. However, the claim of the assessee was entertained by CIT(A). As there was no dispute regarding the genuineness of interest and debiting it to various units of the assessee, the claim of the assessee regarding revision of interest expenditure to PP- SEZ, Refinery SEZ and KGD6 unit got settled by the decision of CIT(A). On the facts of the issue, the AO had taken a correct view while replying to the audit and thereafter at the time of re-opening of the assessment, the AO had changed his opinion which is not permissible u/s.147 of the Act. Thus, the re-opening of the assessment for AY.2014-15 on this issue was merely based on the audit objection”

9.14 We have considered the rival submissions and examined the material available on record. It is evident that the revised interest expenditure for the PP SEZ unit had already been considered by the Assessing Officer while giving effect to the appellate order. Hence, the issue raised in the reasons for reopening did not exist at the time of such recording. The reopening is, therefore, vitiated by non- application of mind and is also hit by the principles of change of opinion and borrowed satisfaction. The view taken by the learned CIT(A) is found to be correct and does not call for any interference. Accordingly, the reassessment proceedings initiated on this ground are quashed. On merits as well, the disallowance is untenable as the revised deduction was already factored into the computation prior to the reopening.

Incorrect allowance of long term capital loss on preference shares

10.1The facts in brief qua the issue in dispute are that for the year under consideration, the assessee in its books of account recorded long term capital loss of Rs.7,26,35,105/- on redemption of non- cumulative compulsorily convertible preference shares (NCCPS) of associated enterprises, Reliance Global Business BV (RGBV). During the course of original assessment proceedings, the ld TPO computed interest on these NCCPS by re-characterizing it as loan. but omitted to disallow the capital loss on redemption on NCCPS.

10.2 The Assessing Officer reopened the assessment on this issue by recording reasons as under:

"2.3. Further, it was observed that while computing total income of the assessee, the assessee was allowed set off of current years long term capital loss of Rs. 509.36crore. The above loss inter-alia included long term capital loss of Rs.7,26,35, 105/-aroused on sale of preference shares of one of its overseas Associate Enterprise namely Reliance Global Business BV. In this context it is observed from Transfer Pricing order passed u/s 92CA(3) dt. 31/10/2017. (para no.6 of the order) that the TPO had examined in detail the transaction of Investment in the NCCPS in the above mentioned Associate Enterprise. After elaborate discussion in the order, TPO came to the conclusion that there was an arrangement, understanding between Assesse company and AE, whereby the loan transaction has been shown as issue of preference shares. Consequently, it was inferred that the intention was only to provide loans under the garb of preference shares to avoid tax liability on interest earned had it been shown as loans. Accordingly TPO made an addition of Rs. 19.82crore towards interest on preference shares subscribed in above mentioned overseas Associate Enterprise. From the above facts narrated, it is crystal clear that loss made in sale of preference shares of AE is fabricated loss and arrived as a result of understanding between assessee and AEs. Consequently as per the decision of Apex Court in the case of M/s Mcdowell co. Ltd vs CTO 154 ITR 148, wherein it had held that though tax planning may be legitimate, colourable device cannot form part of tax planning, the artificial LTCL of Rs.7,26,35, 105/- made by resorting to colourable device was required to be disallowed. This resulted in irregular carry forward of LTCL to the extent of Rs. 7,26,35, 105/- Therefore I am of the view that income to the extent of amount ofRs.7,26,35, 105/-, as explained above, has escaped assessment." 10.3 In reassessment order passed the AO accordingly disallowed the claim of loss on preference shares. On further appeal , The ld CIT(A) invalidated the reassessment proceedings on this issue on the ground of all material facts disclosed fully and truly by the assessee, change of opinion, and borrowed satisfaction.

10.4 The ld. CIT-DR contended that the ld. CIT(A) erred in invalidating the reassessment proceedings and urged for reversal of the order.

10.5 In response, the assessee‘s counsel submitted that the AO‘s stand was based on earlier assessments for AYs 2016-17 and 2017- 18, which were subsequently reversed by the CIT(A) and confirmed by the Tribunal. It was emphasized that the Tribunal had consistently held NCCPS to be capital assets, and not loans. Therefore, the resultant capital loss on redemption was allowable.

10.6 We have carefully considered the rival contentions and perused the material on record. The issue regarding the nature of NCCPS has been consistently adjudicated by the Tribunal in favour of the assessee in AYs 2011-12 to 2018-19, where the TPO‘s re- characterization of the transaction was rejected. Consequently, the disallowance of capital loss in the reassessment order is not sustainable on merits.

10.7 The assessee further challenged the validity of the reopening, asserting that it was based entirely on the audit objection, despite the AO initially disagreeing with the same. The AO, in his response dated 05.02.2019 to the audit team, had defended the original allowance of capital loss, noting that the investment was on capital account and that re-characterization was impermissible under the Act. On the issue of satisfaction for reopening borrowed from the Audit team is concerned, the ld CIT(A) observed as under:

While replying to the audit query, the AO had stated that capital loss of Rs.7,26,35,105/- arose from redemption of NCCPS of Reliance Global Business BV (RGBV) as it constituted international transaction, a reference was made to the TPO Page 92 of 130 AAACR5055K- RELIANCE INDUSTRIES LIMITED A.Y. 2014-15 ITBA/APL/S/250/2024-25/1065322243(1) and in order u/s.92CA (3) the TPO re-characterized the transaction as that giving loan to AE and made adjustment of Rs.19.82 crores towards interest receivable on investment of Rs.35,28,87,000/- in preference shares of RGBV. It was mandatory for the AO to follow the order of the TPO and give effect to it. Further, under the IT Act, re-characterization of transaction was not permissible, therefore, in original assessment order the long term capital loss was allowed. The AO further stated that as per books of account, there was a gain of Rs.3.06 crores of redemption of such preferences, however, as per IT Act, after allowing the benefit of indexation, loss of Rs.7.26 crores was claimed by the assessee. Further, the CIT(A) has also deleted the adjustment of interest on re- characterization of such redemption of shares as giving loan to AE. Thus, the AO had replied to the audit that the audit objection should be treated as settled. The objection raised by the audit and the reply of the AO to the audit shows that in the order u/s.92CA(3), the TPO re-characterized the transaction of redemption of preference shares of AE as loan to AE and adjustment of interest receivable of Rs.19.82 crores. The investment in NCCPS of AE was on capital account and on redemption of such shares, there was capital gain of Rs.3.06 crores, however, after allowing indexation under IT Act, there was a long term capital loss of Rs.7.26 crores on redemption of such shares. While replying to the audit, the AO had taken a correct view that re-characterization of the transaction was not permissible under the IT Act. Further, the CIT(A) has also not approved re-characterization of transaction of redemption of preference shares to loan to AE and has deleted the adjustment of interest amounting to Rs.19.82 crores. Thus, the entire fact shows that the claim of long term capital loss made by the appellant on redemption of NCCPS was permissible as per the provisions of IT Act. Such position was taken by the AO while replying to the audit. After that the AO reconsidered his reply and changed his mind from considering the redemption of shares as not capital asset and, therefore, it was not allowable as long term capital loss. Such change of opinion subsequently by the AO is not in consonance with the provisions of IT Act. Thus, the re-opening of the assessment on the issue of allowability of long term capital loss on redemption of NCCPS was merely based on the audit objection and it is not permissible in the eyes of law 10.8 We concur with the CIT(A) that the reassessment proceedings, initiated solely on the basis of an audit objection, lack independent application of mind by the AO. Such "borrowed satisfaction" cannot form the basis for valid reopening, as held by various judicial precedents.

10.9 Furthermore, the reopening having been initiated beyond four years from the end of the assessment year, the proviso to section 147 mandates that there must be failure on the part of the assessee to fully and truly disclose all material facts. No such failure has been established in the reasons recorded by the AO. The reliance placed solely on subsequent year findings does not meet the statutory threshold for reopening in such cases.

10.10 Further, the reopening of the assessment on this issue has been assailed on the ground that absence of any new tangible material on verification of the reasons recorded on this issue, which amount to change of opinion by the AO. The relevant finding of the CIT(A) is reproduced as under:

With respect to re-opening on the issue of claim of long term capital loss on redemption of NCCPS of Reliance Global Business BV in the original assessment order, the AO had given effect to the order of the TPO in para 10.1 of the assessment order. Based on the TPO's order, the AO has made adjustment of Rs.25, 16,59,278/- as interest chargeable on preference shares. In the order u/s 92CA(3), the TPO had re- characterized the transaction of redemption of NCCPS as the transaction of loan and charged interest on such loan. In the original assessment order u/s.143(3), the AO had allowed the long term capital loss claimed on redemption of NCCPS. At the time of re-opening of the assessment, the AO referring to the order u/s.92CA(3) regarding re-characterization of redemption of NCCPS as loan considered investment in preference shares as not as capital asset and thus, disallowed the long term capital loss on redemption of such shares. In absence of any new tangible material on the issue, the AO had no reason to believe that income in respect of claim of long term capital loss on redemption of NCCPS had escaped income for AY.2014-15. It is a clear case of change of opinion by the AO.

10.11 We find that the reopening of the assessment has been initiated based on the findings of the Assessing Officer (AO) in subsequent assessment years. In our considered opinion, such findings constitute fresh information or material, which can be regarded as valid and relevant for the purpose of reopening the assessment. The Hon‘ble Supreme Court in the case of Ess Ess Kay Engineering Co. P. Ltd Vs CIT 1997 (7) TMI 114 held that reopening of the assessment on the basis of finding of fact, made on the basis of materials in the course of assessment of the subsequent assessment year is valid. The learned Commissioner of Income Tax (Appeals) [CIT(A)] has taken the view that the findings of the AO in subsequent years were later reversed by higher appellate authorities, and therefore, such findings cannot be relied upon as relevant material for reopening. We respectfully disagree with this conclusion of the learned CIT(A). If this reasoning is accepted, it would mean that in cases where the findings of the first or second appellate authorities are subsequently reversed by the Hon‘ble High Court, the statutory time limit for initiating remedial action in respect of the year under consideration would expire, thereby preventing the AO from relying upon his own earlier findings, even if ultimately upheld by the higher judiciary. Therefore, since the reopening in the present case is based on fresh information in the form of findings recorded in subsequent assessment years, it cannot be treated as a mere change of opinion without the availability of new material. To this extent, the finding of the learned CIT(A) is set aside.

10.12 Given that reassessment proceedings on the other two issues have also been held to be invalid, the reassessment as a whole fails. On merits, in light of consistent decisions of the Tribunal in assessee‘s favour in earlier years, we hold that the capital loss on redemption of preference shares is allowable. Accordingly, while the ground of the Revenue challenging the validity of reassessment is partly allowed, the issue on merits is decided in favour of the assessee Non-inclusion of the principal component of lease rentals for book profit

11.1 The facts in brief qua the issue in dispute are that The assessee had leased certain IT assets to M/s. Reliance Info- solutions Pvt. Ltd. under a finance lease agreement dated 28.03.2008. The breakup of lease rentals received during the relevant assessment year (AY 2014–15) is as under:

AY Interest Portion Principle Total Lease Rent already credited to P&L Portion (Rs) Received (Rs) (Rs)

2014-15 6,85,777 3,07,88,252 3,14,74,029 11.2 Before the AO in reassessment proceedings, the assessee submitted that the accounting standard-19 issued by the Institute of Chartered Accountant of India prescribe that in case of finance lease, the lessor is required to recognize the assets given as finance lease in its balance sheet as a lease receivables at amount equal to the net investment in the lease. The lease installment is required to be bifurcated into interest component and principal component. The interest component is credited to the profit and loss account and the principal portion of lease rent is to be reduced from the "Lease Receivable" in the Balance Sheet. Since interest portion of lease rent was credited to the P&L account, the assessee offered the same to tax both under Normal and MAT Provisions. The principal component of lease rent was not credited to the profit and loss account in the books of account , so, it was not offered to tax for computation of book profit under MAT provisions. For computation of income under normal provisions of the Act, in view of the CBDT Circular No 2/2001 dated 09.02.2001, the Assessee being lessor is entitled to claim depreciation u/s 32 of the Act. Hence, while computing income under normal provisions of the Act , the principal component of lease rent was offered to tax by the assessee. However, the Assessing Officer reopened the assessment on the ground that the principal component of lease rent, being income in substance, ought to have been included in the profit and loss account and consequently in the book profit under section 115JB. He recorded the following reasons-

"2.4 Further, it was observed from the computation of total income that the assessee is not routing income of Rs.3,07,88,251/- from asset given on lease through P&L a/c, however the same is being offered to tax in the statement of computation of income under normal provisions of the act. However book profit of the year is not increased by the revenue income kept out of P&L A/c by the assessee. This resulted in underassessment of book profit of Rs.3,07,88,251/-. Therefore I am of the view that income to the extent of amount of Rs. 3,07,88,251/-, as explained above, has escaped assessment.” 11.3. The assessee challenged the reassessment both on grounds of jurisdiction and on merits. The learned CIT(A) upheld the assessee‘s contention, quashing the reassessment on legal grounds, while also discussing the merits though without an express adjudication.

11.4 Before us, the learned Departmental Representative (DR) argued that if the principal component is taxed under normal provisions, it should similarly form part of the book profits prepared under the Companies Act 11.5 We have heard the rival submission and perused the relevant material on record. Before us, the Ld. counsel for the assessee submitted that in the reassessment order, the Assessing Officer held that as per the Schedule III of the Companies Act, 2013, a company is expected to include all its income, whether operational or other income on credit side of profit and loss account, but there was no justification for not including principal component of lease rent, which is undisputedly in the nature of the income in the profit in books of account.

11.6 In response, the learned counsel for the assessee reiterated that the principal component was excluded from the profit and loss account in accordance with mandatory accounting standards, and that the Assessing Officer has no authority to alter the book profit computation beyond the adjustments specifically enumerated in the Explanation to section 115JB(1), as upheld in Apollo Tyres Ltd. v. CIT [(2002) 255 ITR 273 (SC)].

11.7 It is further noted that although the audit objection was initially raised on this issue, the Assessing Officer, in his response to the audit note dated 07.07.2021, clearly stated that no adjustment could be made to book profit beyond the permissible heads under the Act. Despite disagreeing with the audit team, the AO proceeded to reopen the assessment solely on the basis of the audit objection.

11.8 The ld CIT(A) on this issue allowed in favour of assessee observing as under:

“ While replying to the audit objection the AO had stated that as per the lease agreement dated 28.03.2008, the assessee had given certain IT assets/equipments on finance lease to M/s. Reliance Info Solutions Pvt. Ltd. for a fixed period of sixteen months. During FY.2013-14 relevant to AY.2014-15, total lease rent of Rs.3,14,74,029/- was received which included principal amount of Rs.3,07,88,252/- an interest of Rs.6,85,777/-. The interest component of lease rent was included in the P&L account and the principal component of lease rent was not routed through P&L account and it was shown as “lease rental receivable under the head long term loans and advances” in the balance-sheet. The reason for not routing the principal component of lease rent in the P&L account was that the assessee was following Accounting Standard (AS) 19 (para 8 and 26), therefore, whenever lease installment was received, principal component of lease rent was reduced from lease receivable in the balance-sheet, therefore, it was not routed through P&L account. Further, interest on lease rent was offered for taxation under normal and MAT provisions. No depreciation was claimed as there were no fixed assets in the books of the assessee. As such principal portion of lease rent was not considered for book profit u/s.115JB of the Act. The AO relied upon the decision in the case of Apollo Tyres v. CIT [2002] 255 ITR 273 (SC) and stated that the AO has no power to go beyond P&L account except to the extent of adjustment enumerated in Explanation to Section 115JB of the Act

From the audit objection and the reply submitted by the AO to the audit, it is seen that while replying to the audit, the AO had taken a correct stand that the assessee was following AS-19 Accounting Standard, which was mandatory for the appellant to follow. The lease of assets was finance- leased and the interest portion was included in the P&L account and offered for taxation whereas the principal component of lease rent was shown as “loan and advance receivable” in the balance sheet following AS-19 of the Accounting Standard. On receipt of lease rent, the amount of principal component was reduced from loans and advances as per Accounting Standard regularly followed by the appellant. The AO took support from the decision of the Hon’ble Supreme Court in the case of Apollo Tyres (supra) and stated that the AO has the power to make adjustment in the computation of 115JB only in respect of adjustment mentioned in Explanation to section 115JB of the Act. Once a correct stand has been taken by the AO while replying to the audit, the law Page 97 of 130 AAACR5055K- RELIANCE INDUSTRIES LIMITED A.Y. 2014-15 ITBA/APL/S/250/2024-25/1065322243(1) does not permit the AO to change the position taken by the AO earlier. Thus, on this issue, the AO has re-opened the assessment merely on the basis of audit objection and it could not be permitted u/s.147 of the IT Act 11.9 We are of opinion that despite disagreeing to the audit objection, the Assessing Officer reopened this issue and recorded the reasons which amounts to reopening based on the borrowed satisfaction, which is not in accordance with law and therefore, reopening on this issue cannot be sustained. We, accordingly uphold the above finding of ld CIT(A) on this issue.

11.10 Further, the Ld. counsel for the assessee assailed the reopening on this issue based on the change of opinion without any new tangible material. The finding of ld CIT(A) on the issue is reproduced as under:

One of the reason for re-opening of the assessment was non- inclusion of principal portion lease rent in computation of book profit u/s. 115JB of the Act. As per the lease agreement dated 28.03.2008, the assessee had given certain IT assets/equipments on finance lease to M/s. Reliance Info Solutions Pvt. Ltd. for a fixed period of sixteen months. During FY 2013-14 relevant to AY.2014-15, total lease rent of Rs.3,14,74,029/ was received which included principal amount of Rs.3,07,88,252/- an interest of Rs.6,85,777/-. The interest component of lease rent was included in the P&L account and the principal component of lease rent was not routed through P&L account and it was shown as "lease rental receivable under the head long term loans and advances in the balance-sheet. In the original D assessment order in the computation of book profit u/s 115JB, the AO had made adjustment on account of disallowance u/s.14A and addition of wealth tax. No adjustment regarding principal portion of lease rent was made in computation u/s.115JB of the Act. While re-opening the assessment, there was no new material in possession of the AO as far the issue regarding inclusion of principal portion of lease income is concerned in computation of book profit u/s. 115JB of the Act. 11.11 We find that while recording reasons to believe, the Assessing Officer has not referred to any new fresh material and he has relied material which was already available on record and therefore, now taking the altered opinion on the issue amounts to change of opinion without any fresh tangible material which is not permitted in the law as held in the case of Kelvinator of India ltd (supra). In view of above, the grounds raised by the assessee challenging the finding of the Ld. CIT(A) on the validity of the reassessment are dismissed. On merit also, following the decision of Hon‘ble Supreme Court in Apollo Tyres(supra), no adjustment is possible to book profit otherwise than prescribed under Explanation to section 115JB of the Act. The principal portion of lease rent has not been prescribed under said Explanation and in the Audit report the Auditor under Company laws has not pointed any discrepancy in books of account regarding book entries of principal portion of lease rent. Thus, on merit also this addition is not sustainable.

6.2.5 During the appellate proceedings, on this ground of the appeal, the appellant has filed a written submission. The appellant has submitted that against the order of the AO u/s 143(3) of the Act, the appeal was pending before the ITAT when the reopening proceedings were going on for A.Y. 2014-15. It is submitted that the issues, such as deduction u/s 10AA in respect of Refinery SEZ, charging additional deprecation in computation of profit for deduction u/s 80 IB(9) in respect of KGD6 unit, deduction u/s 10AA in respect of PP SEZ unit and long term loss on redemption of NCCPS, were raised in the grounds of appeal before the ITAT. The AO reopened the assessment on the same issues. As per 3rd proviso to section 147 the AO cannot reopen the assessment on the issues which are subject matter of the appeal. To strengthen the argument the appellant has relied upon the decision of the High Court of Gujarat in the case of CIT vs Sun Pharmaceutical Industries Ltd. 241 Taxmann 332 (Guj).

6.2.5.1 The submission made by the appellant has been considered. The decision of the Hon’ble Gujarat High Court in the case of CIT vs Sun Pharmaceutical Industries Ltd. (supra) has also gone through. Identical issue has been decided by the Hon’ble High Court of Bombay in the case of Shanmukhananda Fine Arts And Sangeetha Sabha Vs Deputy Director of Income Tax Page 106 of 130 AAACR5055K- RELIANCE INDUSTRIES LIMITED A.Y. 2014-15 ITBA/APL/S/250/2024-25/1065322243(1) (Exemptions) 1(2) and Ors (Writ Petition No. 2689 of 2015) in the order dated 19/01/2024. In this case the Hon’ble Bombay High Court has held that the A.O. has no jurisdiction to assess or reassess any income which was the subject matter of an appeal. The relevant paras of the decision of Hon’ble High Court of Bombay are reproduced as under: “…17. The third proviso to Section 147 of the Act provides “………. provided also that the Assessing Officer may assess or re- assess such income, other than the income involving matters which are the subject matters of any appeal, reference or revision, which is chargeable to tax and has escaped assessment”.

Respectfully, following the above-mentioned decisions, reopening of the assessment on the issues which were subject matter before the ITAT was not in accordance with the provisions of section 147 of the Act.‖ 13.1 The Revenue has not challenged this ground of appeal in its appeal, thus, in a way the Revenue has accepted the finding of ld CIT(A) invalidating the reassessment proceedings, thus, the entire appeal by the Revenue becomes infructuous. However, since neither of parties have raised this issue and we have already upheld the finding of ld CIT(A) invalidating the reassessment proceedings on other ground, we are not commenting on this issue.

Order pronounced in the open Court on 29/04/2025.