2013 (5) TMI 416 - HC - Income Tax

Re opening of assessment - capital structure of the petitioner company and the inference drawn by AO was that the cost of assets was being met by the general reserve as reflected in the capital structure of the company, a sum equal to the general reserve would be required to be reduced from the cost of the assets in terms of Explanation 10 of Section 43(1) - depreciation had been claimed by the petitioner on the cost of the assets without reducing the proportionate amount of reserves therefrom thus had claimed excessive depreciation - Held that - As the the earlier AO had not thought it fit to conclude that the cost of the fixed assets were required to be reduced to the extent of the reserves during the first round of assessment, the reasons as recorded disclose that this was sought to be done by reopening the assessment. This represents a clear change in the opinion without there being any further tangible material to warrant the same as a mere change of opinion cannot be a reason for reassessing income under Section 147 as decided in CIT vs. Kelvinator of India Ltd. (2010 (1) TMI 11 - SUPREME COURT OF INDIA) AO seems to have proceeded on an assumption that whereas the value of share capital, issued to the Government as part consideration for the transfer of business to the petitioner company, is limited only to the face value of the shares, the reserves represent a subsidy, grant or reimbursement for meeting the cost of assets transferred. No basis for such an assumption as it is hard pressed to imagine as to how free reserves and surpluses of a company can be considered anything but as part of shareholders funds. AO erred in completely ignoring that reserves and surpluses of a company are a part of shareholders funds and the book value of equity share consists of not only the paid up capital but also the reserves and surpluses of the company. The format of the balance sheet as prescribed under Schedule VI of the Companies Act, 1956 also clearly indicates that reserves and surpluses are a part of shareholders fund. The balance sheet of the petitioners company also reflects the reserves and surpluses as a part of shareholders funds. No basis, at all, for AO to surmise that reserves represent a subsidy, grant or reimbursement from which the cost of assets of the petitioner company are met and the whole consideration received by the GOI for transfer of business is limited to the value of loans and the face value of the shares issued to the GOI. A reserve represents the shareholders fund and may be utilized in various ways including to declare dividends or for issuing bonus shares. There is no plausible reason to assume that the value of shareholders holding in a company is limited to the face value of the issued and paid up sharecapital and the reserves represent a subsidy or a grant or a reimbursement by the shareholders from which directly or indirectly the cost of the assets in the hands of a company are met. Thus reasons as furnished by AO for reopening the assessments could not possibly give rise to any belief that income of the petitioner had escaped assessment -In favour of assessee.

Summary

Issues Involved:
1. Legality and jurisdiction of reassessment proceedings under Section 148 of the Income Tax Act.
2. Whether reassessment is based on tangible material or a mere change of opinion.
3. Applicability of Explanation 10 to Section 43(1) of the Income Tax Act regarding the cost of assets.

Detailed Analysis:

1. Legality and Jurisdiction of Reassessment Proceedings:
The petitioner, Bharat Sanchar Nigam Limited (BSNL), challenged the notices under Section 148 of the Income Tax Act for reopening the assessments for the assessment years 2001-02 and 2002-03. The petitioner argued that the reassessment proceedings were illegal and without jurisdiction since all relevant facts were disclosed during the original assessment. The court noted that the petitioner had filed its returns and the assessments were completed under Section 143(3) of the Act. The Assessing Officer later issued notices for reassessment, claiming that income had escaped assessment. The petitioner contended that this was a mere change of opinion, which is not permissible under the law for reopening assessments.

2. Reassessment Based on Tangible Material or Mere Change of Opinion:
The court examined whether the reassessment was based on any new tangible material or merely a change of opinion. The petitioner highlighted that all material facts, including the capital structure and valuation of assets, were disclosed during the original assessment. The court referred to the Supreme Court's decision in CIT v. Kelvinator of India Ltd., which held that reassessment cannot be initiated on a mere change of opinion. The court found that the Assessing Officer had not discovered any new material and was attempting to reassess based on the same facts already considered. Therefore, the court concluded that the reassessment proceedings were based on a mere change of opinion and not on any new tangible material.

3. Applicability of Explanation 10 to Section 43(1) of the Income Tax Act:
The Assessing Officer's reason for reopening the assessment was that the cost of assets should be reduced by the proportionate amount of reserves, as per Explanation 10 to Section 43(1) of the Act. The petitioner argued that the reserves did not represent a subsidy, grant, or reimbursement by the government and thus, Explanation 10 was not applicable. The court noted that the reserves were part of the shareholders' funds and not a subsidy or grant. The court found no basis for the Assessing Officer's assumption that reserves represented a subsidy or grant. The court concluded that the reasons provided by the Assessing Officer for reopening the assessments did not justify the belief that income had escaped assessment.

Conclusion:
The court held that the reassessment proceedings initiated under Section 148 of the Income Tax Act were illegal and based on a mere change of opinion without any new tangible material. The court also found that Explanation 10 to Section 43(1) was not applicable as the reserves did not represent a subsidy, grant, or reimbursement. Consequently, the court quashed the notices and all proceedings initiated pursuant to them. The parties were left to bear their own costs.