BHARAT PETROLEUM CORP LTD ( KOCHI REFINERIES LTD),MUMBAI vs. ACIT CIR 1(1) RG 1, MUMBAI

The facts in brief are that the original assessment was completed on 31.01.2003 under section 143(3) of the Act determining the total income of Rs.121,87,07,270/-. The case of the assessee was reopened thereafter by issuing notice under section 148 of the Act on 31.03.2005 and reassessment was completed on 31.12.2005 by framing assessment under section 143(3)/147 of the Act assessing the total income of Rs.121,90,92,650/-. The case of the assessee was once again reopened by the AO under section 147 by issuing notice under section 148 dated 03.07.2006. The said notice was complied with by the assessee by filing a return of income on 04.08.2006 declaring the same income as returned in the original return of income. The AO supplied the copy of reasons recorded for re-opening the assessment to the assessee. As is clear from the assessment order the assessment was reopened on the ground that deduction under section 80IA of the Act is to be recomputed by excluding certain item of income included under the head business 4 & ors. M/s. Bharat Petroleum Corp. Ltd., (Kochi Refineries Limited) income and secondly that deduction under section 80IA of the Act was wrongly granted in respect of Crude Distillation Unit (hereinafter referred to as CDU-11 ) new unit in the ratio of Gross Block of Fixed Assets (hereinafter referred to as GBFA) in the ratio of 0.3611 which needs to be revised as the assessee has made huge additions to the fixed assets over the years however, the GBFA ratio was not revised accordingly on the basis of additions in the fixed assets. The facts in brief are that the assessee company commissioned a Capacity Expansion Project (hereinafter referred to as CEP) on 21.12.1994 comprising Crude Distillation Unit (CDU-II) with a refining capacity of 3 Million Metric Tons Per Annum (hereinafter referred to as MMTPA ) which was increased to a total refining capacity of 7.5 MMTPA. During 1995-96 the assessee first time claimed deduction under section 80IA @ 30% of the profits from the CEP. As per the assessee due to certain complexity of operations involved it was not possible to determine separately and independently the profit of CEP and therefore a mechanism namely administered price mechanism was adopted to determine the profit by applying the ratio of GBFA relating to CEP to the GBFA of the assessee (KRL) as a whole. Pertinent to state that the method adopted was accepted by the Revenue in the assessment and reassessment proceeding for determining the quantum of deduction under section 80IA of the Act. The said ratio was worked out at 0.3611 by taking GBFA of CEP at Rs.30063 lakhs and that of KRL as a whole at Rs.83259 lakhs and accordingly the profit of the assessee was apportioned and deduction was claimed u/s 5 & ors. M/s. Bharat Petroleum Corp. Ltd., (Kochi Refineries Limited) 80IA of the Act which was allowed by the Revenue in the assessment/reassessment proceedings. According to the AO the apportionment of profit of KRL (Kochi Refinery Ltd.) for the purpose of ascertaining profits of the CEP for claiming deduction u/s 80IA of the Act has to be carried out on the basis of investments in fixed assets, however, the same was not done and the constant ratio of 0.3611 was followed in all the subsequent years which is not correct and required to be revised on the basis of investments/addition to fixed assets i.e. GBFA pertaining to CEP and also relating to KRL as a whole year after year. As per the AO the assessee has not revised the said ratio despite the substantial additions made in the block of fixed assets in KRL i.e. in A.Y. 1995-96 GBFA of KRL was Rs.83259 lakhs whereas in A.Y. 2004-05 it stood at Rs.226085 lakhs which shows that the GBFA ratio as calculated in A.Y. 1995-96 would change substantially in the subsequent years and only for this reason the case was reopened to revise the GBFA ratio strictly as per the GBFA of CEP vis-à-vis KRL. The assessee also filed objections to the reopening of the assessment before the AO on the ground that the issue proposed to be raised and raked up in the reassessment proceeding was fully examined by the AO in the assessment proceedings by raising a specific query which was answered by the assessee by way of written submission filed on 30.01.2003. It was also submitted by the assessee before the AO that so far as AY 2000-01 is concerned , the reopening of the assessment proceeding was initiated after four years from the end of the relevant assessment year which could only 6 ITA No.2826/M/2011 & ors. M/s. Bharat Petroleum Corp. Ltd., (Kochi Refineries Limited) be done if there is failure on the part of the assessee to disclose fully and truly all the material facts in terms of 1st proviso to section 147 of the Act otherwise not whereas there has been no such failure on the part of the assessee during the year to disclose fully and truly all materials facts necessary for assessment or reassessment. However, the contention of the assessee did not find favour with the AO and he went ahead with the framing of the assessment vide order dated 31.10.2006 passed under section 143(3) read with section 147 of the Act without even disposing of the objections as filed by the assessee against re-opening of assessment.

I do not agree with the authorized representative that the A.O. is not justified in reopening the assessment as per amended provision of section 147 if the A.O. is having reasonab1e belief that any income has escaped assessment then he is empowered to reopen the assessment. In this case the A.O. has noted that the assessee company was allowed excessive deduction u/s. 801A/80IB without looking into the fact that certain additions have been made in the Gross 7 & ors. M/s. Bharat Petroleum Corp. Ltd., (Kochi Refineries Limited) Block of Fixed Assets. Accordingly, the ratio of deduction is required to be changed. Hence the A.O. is justified in reopening the assessment. The case laws cited by the appellant is distinguishable on facts. Hence this ground of appeal is dismissed.”

The Ld. A.R. vehemently argued before us that the re- assessment framed by the AO was without any valid jurisdiction and thus suffered from the serious defects and deficiencies which go to the roots of the assessment and therefore the assessment is liable to be quashed. The ld AR argued that the order of the first appellate authority affirming the said order of AO is also bad in law as the ld CIT(A) failed to appreciate the legal issue raised by assessee. The first serious defect in the assessment framed which is not curable is as regards the non disposal of objections filed by the assessee against the reopening of assessment u/s 147 r.w.s. 148 of the Act by the AO by way of speaking order as laid down by the Hon’ble Supreme Court in the case of GKN Driveshafts (India) Pvt. Ltd. vs. ITO (2003) 259 ITR 19 (SC). The Ld. A.R. submitted that where the reassessment order is passed without disposing of the objections filed by the assessee/appellant by way of speaking order, the assessment so framed would be void ab initio and bad in law. In defense of his arguments, the Ld. A.R. relied on the following decisions: • KSS Petron Pvt. Ltd. vs. ACIT (ITA No.224 of 2014) (Bombay High Court) • CIT vs. Tupperware India Pvt. Ltd. (2016) 236 Taxman 494 (Delhi) • DCIT vs. National Bank for Agriculture and Rural Development (ITA No.4964/Mum/2014 The ld. AR submitted that the second serious non curable defect in the re-opening of assessment is that the same was done by the AO beyond four years from the end of the relevant assessment year which could only be done validly only if there is a failure on the part of the assessee to disclose fully and truly all material facts in terms of 1st proviso to section 147 of the Act otherwise not. However, in the present case the assessee has disclosed all the material facts fully and truly during the course of assessment proceedings. The Ld. A.R. contended that even on this count the assessment so framed is bad in law and has to be quashed. The Ld. A.R. in support of his arguments placed reliance on the following decisions: • Hindustan Lever Ltd. v/s. ITO (2004) 268 ITR 332 (SC) • National Bank for Agriculture and Rural Development (2014) 224 Taxman 190 (Bombay) • Tao Publishing (P.) Ltd. v/s. DCIT (2015) 370 ITR 135 • Betts India (P.) Ltd. v/s. DCIT (2015) 235 Taxman 77 (Bombay) • Bhavesh Developers v/s. AO (2010) 188 Taxman 123 (Bom). • Purity Techtextiles Pvt Ltd v ACIT (2010) 325 ITR 459 (Bom.) Lastly the Ld. A.R. stated that the issue proposed to be raked up in the reassessment proceeding has been examined during the course of original assessment which was specifically raised 9 & ors. M/s. Bharat Petroleum Corp. Ltd., (Kochi Refineries Limited) by the AO during those proceedings and replied by the assessee vide letter dated 30.01.2003 by submitting that it was a consistent practice to apportion the taxable business income in the ratio of GBFA of new industrial unit (CEP) to total GBFA of KRL for arriving at the profit of the CEP for the purpose of section 80IA of the Act. It was further stated that DHDS (Dehydro Diesel Desulphurization Unit) project added during the financial year 1999-2000 as a common facility for both the crude units i.e. existing unit as well as CEP unit as the purpose of this project is to reduce the sulphur contents in diesel oil and thereby meeting pollution control requirements and standards. As the capacity of CEP is 3 MMTPA against the capacity of existing unit of 4.5 MMTPA, the apportionment of GBFA of DHDS, based on capacity of the crude units will not materially alter the already established and calculated ratio. The Ld. A.R. submitted that the issue proposed to be examined by the AO in the reassessment of proceedings has been examined in depth after being replied by the assessee vide letter dated 30.01.2003 and only after considering the same, no addition/disallowance was made on this issue. Further, the ld AR stated that there was no tangible material with the AO which was not available before the AO at the time of assessment proceeding meaning thereby the material that was available with the AO in the original assessment proceeding was reappraised, reviewed and re-examined while making this reassessment which is beyond the competence and jurisdiction of the AO. Thus the reassessment was done merely on the change of opinion which is not permissible 10 ITA No.2826/M/2011 & ors. M/s. Bharat Petroleum Corp. Ltd., (Kochi Refineries Limited) under the Act and thus is bad in law. In defense of his arguments, the Ld. A.R. relied on the following decisions: • ITO v/s. TechSpan India (P.) Ltd. (2018) 92 taxmann.com 361 (SC) • CIT v/s. Kelvinator of India Limited (2010) 320 ITR 561 (SC) • Satnam Overseas v/s. DCIT (2010) 188 Taxman 172 (Del) • CIT vs. Eicher Ltd. (2007) 294 hR 310(DeI).

The Ld. D.R., on the other hand, relied heavily on the order of Ld. CIT(A) and submitted that the case of the assessee was rightly reopened after following the due procedure as laid down in the Act in order to bring to tax the income which has escaped due to wrong apportionment of 11 & ors. M/s. Bharat Petroleum Corp. Ltd., (Kochi Refineries Limited) profit to CEP out of total profit of (KRL)Kochi Refinery Ltd. on the basis of GBFA calculated in 1995-96 even in the current assessment year in gross disregard of the fact that a substantial amount of additions were made in the fixed assets over the years and the said GBFA was not revised. The Ld. D.R. contended that reassessment was validly initiated after recording the reason under section 148(2) of the Act and forming a belief that income has escaped assessment owing to application of wrong ratio of GBFA. The Ld. D.R. submitted that the assessee has failed to disclose truly and materially all the facts in the assessment proceedings and thus the argument of the assessee that it could not have re-opened the assessment after six years carried no weight and has to be dismissed. The Ld. D.R. further argued that even if the fact that ratio of GBFA has been examined by the AO in the original assessment proceedings but a wrong appreciation of facts by the AO would not debar the Revenue from reopening of assessment to tax the escaped income. The Ld. D.R. submitted that there was a material before the AO for forming belief and therefore the reassessment proceedings were rightly affirmed by the Ld. CIT(A) after considering all the contentions and arguments of the Ld. A.R. in the appellate proceedings before the Ld. CIT(A). In defense of his arguments, the Ld. D.R. relied on a series of decisions namely;

Crown Consultants (P.) Ltd. vs. CIT (2014) 44 taxmann.com 397 (Bombay) 2. Nishith Madanlal Desai vs. CIT (2014) 49 12 & ors. M/s. Bharat Petroleum Corp. Ltd., (Kochi Refineries Limited) taxmann.com 336 (Bombay) 3. Debashu Services (P.) Ltd. vs. DCIT (2014) 49 taxmann.com 41 (Bombay ) 4. Eleganza Jewellery Ltd. vs. CIT (2014) 52 taxmann.com 46 (Bombay)

We have heard the rival submissions of both the parties and perused the material on record including the impugned decisions and the case laws relied by both the parties. The facts in brief are being recapulated and briefly touched upon for the purpose of better understanding of the issue at hand. The assessee Kochi Refinery Ltd.(KRL) increased its refining capacity to 7.5 MMTPA which was 4.5 MMTPA prior to the commissioning of said (CEP)capacity expansion project. Due to practical difficulties and operational problems it was not possible to ascertain the profit relating to CEP (capacity expansion project) for the purpose of claiming deduction under section 80IA/IB and therefore a mechanism was adopted known as administered price mechanism by applying the ratio of GBFA which was calculated on the basis of gross value of block assets of the CEP vis-à-vis the total gross block assets of the assessee (KRL) which worked out to 0.3611. Thereafter, the same ratio was consistently followed and the profits were apportioned for the purpose of claiming deduction under section 80IA/IB of the Act on the said ratio without 13 & ors. M/s. Bharat Petroleum Corp. Ltd., (Kochi Refineries Limited) revising the same in the subsequent years which witnessed the additions to the fixed assets. According to the AO such ratio required revision in the light of the huge investments/additions in fixed assets and thus the reassessment proceedings were initiated after recording reason under section 148(2) of the Act. In this background, the assessee’s contention appears to carry weight that the issue of gross value of block of assets i.e. GBFA in the light of additions of fixed assets stood examined in the original assessment proceedings. Upon a query raised by the AO, the assessee specifically replied the same vide letter dated 30.01.2003 explaining the reasons why the said ratio was not revised even after the additions to the fixed assets. A perusal of the said letter reveals that accordingly to the assessee it is a consistent practice to apportion the taxable business income in the ratio of GBFA of the new industrial undertaking i.e. CEP to the total GBFA of the assessee i.e. KRL for calculating the profit of CEP unit for claiming deduction under section 80IA/80IB of the Act. It was also clarified in the said letter that the DHDS project (Dehydro Diesel Desulphurization Unit) which represented additions to fixed assets was a common facility for both the units new as well as the old one as the project was intended to reduce the sulphur content in the diesel oil and was intended to meet the pollution control requirements. The assessee also submitted that since the capacity of CEP new unit is 3 MMTPA against the capacity of existing new unit of 4.5 MMTPA, the apportionment of GBFA of DHDS based on capacity of crude units would not materially 14 & ors. M/s. Bharat Petroleum Corp. Ltd., (Kochi Refineries Limited) alter the already established ratio. So after carefully analysing the facts on record, we are of the considered view that the issue on the basis of which a belief was formed by the AO stands examined by the AO in the original assessment proceedings and only thereafter the assessment was framed without making any addition/disallowance qua the profits on the basis of GBFA. Under these circumstances, we are not in agreement with the conclusion drawn by the Ld. CIT(A) that assessment proceedings were validly initiated as this the re- opening of assessment was based upon the re-examination, re-appreciation and review of the same facts as were before the AO in the original assessment proceedings which is a case change of opinion which is not permissible under the Act. In the case of CIT vs. Kelvinator India Ltd. (2010) 187 taxman 312 (SC) wherein the Hon’ble Supreme Court has held that the concept of change of opinion must be treated as inbuilt test to check the abuse of power by the AO. The Hon’ble Supreme Court has held that AO has power to reopen provided there is tangible material to come to the conclusion that there is escapement of income from assessment and the reasons have live link with the formation of belief. Similarly, the Hon’ble Supreme Court has held in the case of ITO vs. Techspan India Pvt. Ltd. (supra), Satnam Overseas vs. DCIT (supra), CIT vs. Eicher Ltd. (supra) that no reassessment could be initiated on the basis of reappreciation/reexamination of the same records as available before the AO in the original assessment proceedings and in absence of any new tangible material the assessment proceedings are bad in law. After 15 & ors. M/s. Bharat Petroleum Corp. Ltd., (Kochi Refineries Limited) perusing the case laws relied by the revenue, we find them to be distinguishable on facts. In the case of Nishith Madan Lal Desai Vs CIT (Supra) the case was re-opened where the assessment was completed u/s 143(1) and not u/w 143(3) and also that the Hon’ble court has held that there was material found and received during the assessment for the subsequent year. In Crown Consultants P Ltd Vs CIT (Supra) the fresh plea was raised by the assessee before the High Court whereas no such plea was taken up by the assessee in the objections filed against the re-assessment proceedings before the AO. In the case of Eleganza Jewellary Ltd Vs CIT (Supra) the High Court dismissed the writ petition on the ground that the reasons recorded for re-opening the assessment were not the issues which were examined and considered by the AO at the time of passing assessment order.Like wise the other decisions relied by the revenue are also not relevant in the present facts. So far as the non disposal of objections filed by the assessee against the reopening of assessment is concerned the Hon’ble Supreme Court in the case of GKN Driveshafts (India) Pvt. Ltd. vs. ITO (supra) has clearly held that the disposal of objection filed by the assessee against the reopening of assessment proceeding have to be disposed of by the AO by way of passing a speaking order. Further, the Hon’ble Bombay High Court in the case of KSS Petron Pvt. Ltd. vs. ACIT (supra) has held that the reassessment order framed without disposing of the objections filed by the assessee by a speaking order would render the reassessment order to be bad in law. Similar view 16 & ors. M/s. Bharat Petroleum Corp. Ltd., (Kochi Refineries Limited) has been held by the Hon’ble Delhi High Court in the case of CIT vs. Tupperware India Pvt. Ltd. (supra). So on the ground of non disposal of objection the reassessment as framed by the AO is also bad in law and has to be quashed. We also find merit in the contentions of the assessee that there was no failure on the part of the assessee to disclose fully and truly all material facts and since reopening beyond a period of four years from the end of the relevant assessment year is bad in law as there was no failure on the part assessee to disclose fully and truly all materials facts qua the additions to fixed assets before the Revenue Authorities and therefore case of the assessee was re-opened without jurisdiction under the Act. The assessee has correctly relied on the order Hon’ble Supreme Court in the case of Hindustan Lever Ltd. v/s. ITO (supra) and the decision of Tribunal in the case of DCIT vs. National Bank for Agriculture and Rural Development (supra) wherein the assessment reopened beyond a period of four years from the end of the relevant assessment year were held to be bad in law where there was no failure on the part of the assessee to disclose the material facts fully and truly in the assessment proceedings. Finally to conclude , in view of the discussions as referred above and the ratio laid down by the various judicial forums, we are of the view that the reassessment framed by the AO is bad in law for the three reasons namely that re-assessment is proposed to be done after four years despite there being no failure on the part of the assessee to disclose materials facts in the return of income of original assessment proceedings; that the re-opening of 17 ITA No.2826/M/2011 & ors. M/s. Bharat Petroleum Corp. Ltd., (Kochi Refineries Limited) assessment is just change of opinion without being any tangible material before the AO and that the objections filed by the assessee against the re-opening before the AO were not disposed off by way speaking order and therefore quah the re-assessment proceedings as being without valid jurisdiction and also the consequent order. Accordingly, this ground is allowed.

Since we have decided the legal issue supra in favour of the assessee , the other grounds raised by the assessee on merit are rendered academic in nature and need not to be adjudicated.

Appeal of the assessee is partly allowed.

The facts in the above three years are slightly different from that of A.Y. 2000-01 to the tune that the reassessment proceedings were initiated within a period of four years from the end of the relevant year whereas in 2000-01 the same were initiated beyond the period of four years. Except this, all the facts are identical. Therefore, our finding in that re-assessment proceedings are invalid and without jurisdiction on the ground of change of opinion and non disposal of objections filed by the assessee before AO against the re-assessment proceedings, would ,mutatis mutandis, apply to these appeals as well. Accordingly, the 18 ITA No.2826/M/2011 & ors. M/s. Bharat Petroleum Corp. Ltd., (Kochi Refineries Limited) reassessment proceedings as well as the consequent order framed are held to be invalid and bad in law and accordingly quashed.

Accordingly, all the appeals of the assessee are partly allowed.