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Income Tax Appellate Tribunal, “D” BENCH, AHMEDABAD
Before: SHRI MAHAVIR PRASAD & SHRI WASEEM AHMED
PER WASEEM AHMED, AM : These are the appeals filed by the assessee against two separate orders of the learned Commissioner of Income Tax (Appeals), Gandhinagar dated 12.01.2010 and learned Commissioner of Income-tax (Appeals)-13, Ahmedabad dated 29.05.2015 passed for Assessment Years 2003-04 and 2006-07 respectively.
First, we take up the appeal of the assessee bearing ITA No. 1128/Ahd/2010 for AY 2003-04 for the purpose of adjudication. The assessee has raised the following grounds of appeal:
The order passed by the Commissioner of Income Tax (Appeals) is bad in law and requires to be quashed. It is submitted that it be so held now.
ITA Nos. 1128/Ahd/2010 & 2389/Ahd/2015 AY : 2003-04 & 2006-07 2
The CIT(A) erred in confirming the reopening of the assessment u/s 147 based on change of opinion by holding that there was omission on the part of the AO. It is submitted that it is a change of opinion on the part of the AO and not an omission as held by the CIT(A) . The reopening in the said case is not justified having regard to section 147. It is submitted it be so held now.
The C1T(A) erred in rejecting the appellant's contention that the reassessment proceedings ought to have been completed within four years from the end of the assessment year. It is submitted that as per proviso to section 147 the AO ought to have completed the reassessment proceeding within four year from the end of the assessment year. It is submitted it be so held now.
The CIT(A) erred in disallowing claim of deduction under section 42 of the Act. It is submitted that in the facts and circumstances of the case the appellant is entitled to deduction under section 42 of the Act. It is submitted that it be so held now.
1 The CIT(A) erred in not granting deduction of depletion allowance u/s 42(1)(c) of the Act. It is submitted that in the facts and circumstances of the case the appellant is entitled to deduction of depletion allowance. It is submitted that it be so held now.
2 Without prejudice to above, the learned CIT (A) erred in not giving direction to grant depreciation on the value of assets capitalised on which deduction u/s.42 of the Act was denied.
3 The CTT(A) erred in not keeping the appeal in abeyance till the disposal of Writ petition filed by the appellant before Hon'ble Delhi High Court involving the issue of deduction u/s 42. 5. The CIT(A) erred in not following the Hon'ble Gujarat High Court decision staying the operation of section 80IB(9) while directing the AO to verify & grant deduction under the said section as per the new Explanation to the said section.
The CIT(A) erred in holding that oil well is part of the building within the extended meaning of the term building given in the appendix 1 to the Income Tax Rules and hence entitled to depreciation @ 10%. It is submitted that the oil well with all its structures and equipment inside it, is in the nature of plant & machinery & hence is entitled to depreciation @ 80% as applicable to the plant & machinery of the mineral oil concern. It is submitted it be so held now.
The assessee in ground Nos. 1, 2 and 3 has challenged the validity of the assessment framed under section 147 read with section 143(3) of the Act.
The assessee in the year under consideration filed its return of income declaring loss of Rs.28,50,573/- which was accepted in the assessment framed under section 143(3) of the Act vide order dated 14th December 2005. 4.1 Subsequently, the AO found that the income of the assessee has escaped assessment and for this purpose he recorded the reasons for initiating the proceedings under section 147 of the Act. It was pointed out in the reasons
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recorded that the assessee has claimed deduction under section 42 of the Act amounting to Rs. 97,45,989/- for which the assessee was not eligible. As per the AO such deduction under section 42 of the Act can be made available to the assessee if it is specifically provided in the agreement entered between the assessee and the Government of India. But the assessee was allowed the deduction under section 42 of the Act in the assessment framed under section 143(3) of the Act despite the fact that there was no provision in the agreement for the deduction to the assessee under the provisions of section 42 of the Act.
2 Based on the above reasons the AO initiated the proceedings under section 147 of the Act by issuing a show cause notice under section 148 of the Act dated 28th March 2008. The assessee vide letter dated 14th May 2008 and 24th December 2008 4.3 objected on the initiation of proceedings under section 147 of the Act by contending that the AO during the assessment proceedings under section 143(3) of the Act has sought clarification vide notice issued under section 142(1) of the Act with respect to the deduction claimed by it (the assessee) under section 42 of the Act which duly replied with justification.
4
In view of the above the assessee contended that the AO during the assessment proceedings under section 143(3) of the Act has formed opinion with respect to the deduction claimed by the assessee under section 42 of the Act which was subsequently allowed. Thus, the initiation of the proceedings under section 148 of the Act is based on the change of opinion which is not permitted under the provisions of law.
5 However, the AO rejected the contention of the assessee by observing that it is one of the prerequisite for claiming the deduction under section 42 of the Act that there has to be necessary clauses in the production sharing contract for allowing the deduction under section 42 of the Act. Nevertheless, the AO in the case on hand without examining the necessary details has allowed the deduction
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to the assessee under the provisions of section 42 of the Act. Thus, once primary document has not been examined by the AO, then the question of forming of the opinion does not arise and consequently the issue of changing the opinion becomes redundant. The AO also observed that the assessment order under section 143(3) of the Act is silent with respect to the deduction allowed to the assessee under the provisions of section 42 of the Act. Accordingly, the AO was of the view that no opinion has been formed by the AO during the assessment proceedings. The AO in holding so relied on the judgment of Hon’ble Juri ictional
Aggrieved assessee preferred an appeal to the learned CIT (A) who has confirmed the order of the AO by observing as under:
“6. 4. The matter has been given due consideration but I am afraid I do not agree with the with the Authorised Representative. A reading of the assessment order would show that neither the then Assessing Officer has referred to the issue of deduction u/s. 42 nor has he expressed any opinion about its allowability or otherwise. The letter dated 26/09/2005, referred to by the Authorised Representative, which had been filed during the course of original assessment proceedings also, does not contain any such discussion or clarification.
As far as the issue of the change of opinion and the scope of the reopening exercise within four years of the end of the assessment year is concerned, it is very clear that the issue is not a change of opinion, as sought to be covered by the Authorised Representative by reference to the various case laws (supra). Instead it is a case where an omission on the part of the Assessing Officer has come to light. Since the main part of section 147 would cover both, omissions on the part of the appellant as well as on the part of the Assessing Officer and since the action has been taken within four year of the end of the assessment year, in my view, the reopening is justified and is confirmed.”
Being aggrieved by the order of the learned CIT (A), the assessee is in appeal before us.
The learned AR before us filed a paper book running from pages 1 to 447 and submitted that the AO during the assessment proceedings have made enquiries by issuing notice under section 142(1) of the Act with respect to the deduction claimed under section 42 of the Act. The queries raised by the AO were duly answered by the assessee vide letter dated 29th September 2005as evident from the details placed on pages 18 to 20 of the paper book. Thus the AO during the assessment proceedings under section 143(3) of the Act has formed the ITA Nos. 1128/Ahd/2010 & 2389/Ahd/2015 AY : 2003-04 & 2006-07 5
opinion with respect to the deduction claimed under section 42 of the Act. Accordingly, it was contended by the assessee that initiation of present proceedings under section 147 of the Act is based on the change of opinion which is unwarranted under the provisions of law. The learned AR further submitted that on same ground reopening under section 147 was also made in A.Y. 2004-05 in own case of the assessee which was contested before this tribunal in ITA No. 2388/Ahd/2015 where appeal was decided in favour of the assessee.
On the contrary, the learned DR contended that the production sharing contract between the assessee and the Government of India which is the basis for allowing the deduction under section 42 of the Act was not available before the AO during the assessment proceedings. As per the learned DR the production sharing contract was the basis of deciding the issue for allowing or disallowing the deduction under section 42 of the Act. Thus in the absence of such document, there remains no ambiguity that no opinion has been formed by the then AO in the assessment framed under section 143(3) of the Act. The learned DR in support of his contention relied on the judgment of Hon’ble Delhi High Court in case of CIT vs. Usha International Ltd. reported 25 taxmann.com 200, Hon’ble Bombay High Court in case of Export Credit Guarantee Corporation of India Ltd. vs. ACIT reported 30 taxmann.com 211, Hon’ble Juri ictional High Court in case of Gujarat Corpn. Ltd. reported 26 taxmann.com 51. The learned DR vehemently supported the order of the authorities below.
We have heard the rival contentions of both the parties and perused the materials available on record. At the outset we find that identical issue was there before the coordinate bench of this tribunal in own case of the assessee for A.Y. 2004-05 in ITA No. 2388/Ahd/2021 where the bench vide order dated 25th October 2021 decided the issue in favour of the assessee by observing as under:
We have heard the rival contentions of both the parties and perused the materials available on record. The words and phrases 'Mere Change of Opinion' do not appear in the provision. As such Change of opinion' postulates formation of opinion and then change thereof. The formation of opinion is possible only after examining the facts and application of mind. If particular deduction claim by the assessee not examined by AO in original assessment under section 143(3), it is a case of 'no opinion. Thus question of 'change of opinion' does not arise.
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1 In the case of CIT v. Kelvinator of India Ltd. [2010] 320 ITR 561/187 Taxman 312 (SC), Hon’ble J. Kapadia held that the concept of 'change of opinion' must be treated as an in-built test to check abuse of power by the Assessing Officer and that the reasons must have a live link with formation of belief. Important excerpt of the decision is reproduced hereunder: "However, one needs to give a schematic interpretation to the words 'reason to believe', failing which section147 would give arbitrary powers to the Assessing Officer to reopen assessments on the basis of 'mere change of opinion', which cannot be per se reason to reopen. One must also keep in mind the conceptual difference between power to review and power to reassess. The Assessing Officer has no power to review; he has the power to reassess, but the reassessment has to be based on fulfilment of certain pre-conditions and if the concept of 'change of opinion' is removed as contended on behalf of the department, then in the garb of reopening the assessment, review would take place. One must treat the concept of 'change of opinion' as an in-built test to check abuse of power by the Assessing Officer.”
2 In the light of the above discussion, we have to see whether any opinion was formed by the AO during the assessment proceedings under section 143(3) of the Act. For this purpose, we refer the notice issued by the AO under section 142(1) of the Act dated 9th May 2006 raising the following questions relating to the deduction claimed under section 42 of the Act. Please refer to the ‘Statement of Total Income’ attached with your ROI. Please justify your claim of deduction u/s.42 and explain how it is admissible.
3 The above queries were answered by the assessee in the manner as detailed below: During- the year under consideration we have spent Rs.4,24,67,907 on the exploration activities and the same was claimed as deduction in the return of income filed in accordance with provisions of Section 42 of the Income Tax Act,, 1961. A specific note was appended to (he return of income. The same is reproduced hereunder for your goodself’s ready reference:
“3. stated above assessee company is extracting oil as per the agreement ''with Central Government and therefore, entitled for deduction under section 42 of the Income Tax Act and the same is claimed as deduction . No depreciation has been claimed in respect of such expenditure.” XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX Thus, as shown above in view of the provisions of Section 42{1)(b) of the Income Tax Act, 1961 any capital expenditure incurred for the exploration activities are admissible as deduction. We are enclosing herewith the details of the expenditure incurred marked as ANNEXURE - A. From the details filed your goodself will appreciate that all the expenses are incurred for the purpose of acquisition of asset7 well for the exploration activities" and therefore, the same are admissible as deduction. We would like to state that as all the conditions prescribed in Section 42 are complied with the claim was rightly made and no disallowance is required to be made while finalizing the assessment. We would like to state that assessee Is involved only on the exploration activities and company is not carrying any other activity. Expenses are incurred on the acquisition of assets which are used only for the exploration activities only and thus deduction is admissible u/s 42 of the Act. Further, we would like to stale that we have not claimed any depreciation on the assets which are claimed as deduction u/s 42 of the Income Tax Act, 1961. Further, we would like to state that in the immediately preceding year the claim is allowed as deduction in the regular assessment.
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In view of above we would like to submit that deduction u/s 42 is rightly claimed in the return of income and no disallowance is required to be made while finalizing the assessment.
4 From the preceding discussion, it is transpired that the AO has applied his mind during the assessment proceedings under section 143(3) of the Act and thereafter reached to the conclusion by allowing the deduction to the assessee under section 42 of the Act. The question whether the AO has correctly or wrongly given the deduction under section 42 of the Act becomes irrelevant. It is for the reason that the AO being one of the authority under the Income Tax Act has examined the issue and allowed the deduction to the assessee. Thus the view was formed by the AO. Subsequently changing the opinion on the same issue by issuing a notice under section 147 of the Act will amount to review of the order passed under section 143(3) of the Act. Such, proposition is not warranted under the Act as held by the Hon’ble courts as discussed above.
5 It is a fact on record that the proceedings in the present case were initiated within the period of 4 years but the same cannot alter the principles laid down by the Hon’ble courts. In other words, there is no power granted to the AO under the statute to review the order in the garb of initiating the proceedings under section 147 of the Act. Accordingly we hold that, there will not be any difference whether the proceedings were initiated within 4 years or beyond the 4 years as far as change of opinion is concerned.
6 On perusal of the assessment order framed under section 143(3) of the Act, it is not discernible whether AO has applied his mind with respect to the deduction claimed by the assessee under the provisions of section 42 of the Act. The order of the AO under section 143(3) of the Act silent on this aspect. Thus the question arises whether the AO has formed any opinion during the assessment proceedings with respect to the deduction claimed by the assessee under section 42 of the Act. In this regard we note that is not necessary for the AO to record his finding in his assessment order with respect to the matters where he was satisfied after necessary verification that no addition/disallowances is warranted.
7 It is also pertinent to note that the authorities below and the learned DR has made references to various judicial precedents in support of the contention that there was no opinion formed by the AO during the assessment proceedings with respect to the deduction claimed by the assessee under the provisions of section 42 of the Act. One of the bone of contention was that the production sharing agreement which is the basis of giving right to the assessee for claiming the impugned deduction was not available during the course of assessment proceedings under section 143(3) of the Act which was prerequisite for claiming the deduction under section 42 of the Act. As per the learned DR, in the absence of such crucial piece of evidence, it cannot be said that the AO has made his opinion consciously. However we disagree with the observations of the learned authorities below as well as learned DR. It is for the reason that though the document being production sharing contracts was essential for claiming the deduction under section 42 of the Act but what is inferred the given facts and circumstances is this that the AO has applied his mind by raising the queries which were duly answered by the assessee. Thus it seems to us that the AO has taken a conscious decision by allowing the deduction under section 42 of the Act. Such opinion of the AO may be right or may be wrong under the provisions of law but that does not give the authority to the AO to initiate the proceedings under section 147 of the Act otherwise it would lead to review of the order which is not in the juri iction of AO.
8 Admittedly, the production sharing contract was not available before the AO during the assessment proceedings under section 143(3) of the Act which was necessary to reach to the conclusion whether the assessee was entitled for the deduction under section 42 of the Act. But the AO without having such contract in his hands has allowed the deduction under section 42 of the Act after conducting the necessary verification which has already been discussed in the preceding paragraph. Now the reference to the production sharing contract becomes redundant in view of the fact that the AO has taken some view after the ITA Nos. 1128/Ahd/2010 & 2389/Ahd/2015 AY : 2003-04 & 2006-07 8
application of mind. That application of mind whether right or wrong cannot be subject matter of dispute in the proceedings initiated under section 147 of the Act.
9 In the light of the above discussion, we are not impressed with the finding of the authorities below on this technical issue. Accordingly, we set aside the finding of the learned CIT (A) by holding that the assessment framed under section 147 read with section 143(3) of the Act is bad in law. Hence the ground of appeal of the assessee is allowed.
1 Before us, no material has been placed on record by the Revenue to demonstrate that the decision of Tribunal as discussed above has been set aside / stayed or overruled by the higher Judicial Authorities. Before us, Revenue has not placed any material on record to point out any distinguishing feature in the facts of the case for the year under consideration and that of earlier years nor has placed any contrary binding decision in its support. Thus, respectfully following the order this tribunal in own case of assessee the we set aside the finding of the learned CIT(A). Thus, the ground of appeal raised by the assessee is hereby allowed.
2 As the preliminary issue has been decided in favour of the assessee by quashing the proceedings initiated under section 147 of the Act, we are not inclined to decide the issues on merit. As such, the issues raised on merit become infructuous. Thus the grounds of appeal of the assessee on merit are dismissed as infructuous.
In the result, the appeal of the assessee is partly allowed.
Coming to the ITA No. 2389/AHD/2015 of assessee pertaining to AYs 2006-07
The appeal on hand was recalled by the ITAT vide order dated 23-03-2022 for the limited purpose of adjudication of claim of the assessee for the additional depreciation under section 32(1)(iia) of the Act. The relevant additional ground raised by the assessee reads as under:
While upholding the disallowance u/s 42 the learned CIT(A) has erred, in not directing the AO to grant additional depreciation u/s 32(l)(iia) of the Act on additions made to oil well and oil field equipment during the year. It is submitted that it be so held now.
ITA Nos. 1128/Ahd/2010 & 2389/Ahd/2015 AY : 2003-04 & 2006-07 9
The learned AR before us contended that the oil well is a plant and therefore the assessee is entitled for additional depreciation.
On the other hand, the learned DR vehemently supported the order of the authorities below.
We have heard the rival contentions of both the parties and perused the materials available on record. There is no dispute to the fact that the assessee is eligible for depreciation on the machinery being oil well at the rate of 60% in view of the judgment of Hon’ble Gujarat High Court in the case of Niko Resources Ltd. reported in 88 taxmann.com 691. Once the oil well has been treated as plant and machinery then the assessee is also entitled for additional depreciation as provided under the provisions of section 32(1)(iia) of the Act as the assessee in engaged extraction of mineral oil which in our consideration view amount to production of articles or things. In holding so we draw support and guidance from the judgment of Hon’ble Supreme court in case of CIT vs. Sesa Goa Ltd reported in 271 ITR 331 where the Hon’ble court held as under:
The reasoning given by the High Courts, in the decisions noted by us earlier, is, in our opinion, unimpeachable. This Court had, as early as in 1961, in Chrestien Mica Industries Ltd. v. State of Bihar [1961] 12 STC 150 defined the word "production", albeit, in connection which the Bihar Sales Tax Act, 1947. The definition was adopted from the meaning ascribed to the word in the Oxford English Dictionary as meaning "amongst other things that which is produced; a thing that results from any action, process or of fort, a product; a product of human activity or effort". From the wide definition of the word "production", it has to follow that mining activity for the purpose of production of mineral ores would come within the ambit of the word "production" since ore is "a thing", which is the result of human activity or effort. It has also been held by this Court in CIT v. N.C. Budharaja& Co. [1993] 204 ITR 4122 (SC) that the word "production" is much wider than the word "manufacture". It was said : " The word 'production' has a wider connotation than the word 'manufacture'. While every manufacture can be characterised as production, every production need not amount to manufacture. The word 'production' or 'produce' when used in juxtaposition with the word 'manufacture' takes in bringing into existence new goods by a process which may or may not amount to manufacture. It also takes in all the by-products intermediate products and residual products which emerge in the course of manufacture of goods." (p. 415)
1 Thus in view of the above observation of Hon’ble Supreme Court we hold that the assessee was engaged in extraction of mineral oil requires action, process, human activity or effort which bring a things being mineral oil. Thus the ITA Nos. 1128/Ahd/2010 & 2389/Ahd/2015 AY : 2003-04 & 2006-07 10
assessee is eligible for additional depreciation on oil well plant which is installed after 31st day of March 2005. Hence the ground of appeal of the assessee is hereby allowed.
In the result appeal of the assessee is allowed.
In the combined results, the appeal of the assessee bearing ITA No. 1128/Ahd/2010 for A.Y 2003-04 is partly allowed and ITA No.2389/Ahd/2015 for A.Y. 2006-07 is allowed. Order pronounced in the open Court on 17th August 2022 at Ahmedabad. (MAHAVIR PRASAD) ACCOUNTANT MEMBER Ahmedabad, Dated 17/08/2022 आदेशक"""त"ल"प"े"षत/Copy of the Order forwarded to : 1. अपीलाथ"/ The Appellant
""यथ"/ The Respondent. 3. संबं"धतआयकरआयु"त/ Concerned CIT 4. आयकरआयु"त(अपील) / The CIT(A)
"वभागीय""त"न"ध, आयकरअपील"यअ"धकरण/ DR, ITAT, 6. गाड"फाईल / Guard file.
आदेशानुसार/BY ORDER,उप/सहायकपंजीकार (Dy./Asstt.