9911796707
TMI Blog2013 (5) TMI 416X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der. 2. The petitioner is a Government Company and was incorporated on 15.09.2000 under the Companies Act, 1956. Prior to the incorporation of the petitioner company, the telecommunication services were being provided by Government of India, Ministry of Communication through its two departments, namely Department of Telecommunication Services (in short "DTS") and Department of Telecommunication Operation (in short "DTO"). The petitioner company was incorporated pursuant to the policy of the Government of India (National Telecom Policy 1999) to hive off its business of providing telecom services and operate the same through a corporate entity. The petitioner was constituted as a wholly owned Government of India enterprise for taking over the business of providing telecommunication services from DTO and DTS. The petitioner started functioning w.e.f. 01.10.2000. The terms of transfer of undertaking of telecom services from DTO and DTS to BSNL was recorded in an Office Memorandum dated 30.9.2000 and the relevant portion of the same is quoted below: "3. Government of India has decided to transfer all assets and liabilities (except certain assets which will be retained by Department of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mptroller and Auditor General of India, if necessary. (vi) The Company, Bharat Sanchar Nigam Limited shall be liable to make repayment of bonds raised by MTNL for DoT/DTS/DTO, which are now being transferred, to the Company. (vii) The Company as the successor company shall be responsible for all assets and liabilities and for satisfactory execution of all agreements, contracts and obligations in force, which pertain the business being transferred to it. (viii) The Company shall be solely responsible for honouring and performing all contracts/agreements and shall be liable for any defaults, delays or non-performance. The Company shall keep for all times the Government indemnified from all claims. (ix) After finalization of assets and liabilities and assets to be retained by Dot regular transfer deed(s) will be executed subsequently in respect of transfer of business to the Company listing out specifically all the assets being transferred. These orders will come into force from 1st October, 2000." 3. A Memorandum of Understanding (MOU) was executed between the Government of India, Ministry of Telecommunications and BSNL on 30.09.2000 for the purpose of transferring assets and li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent under Section 143(3) of the Income Tax Act vide the assessment order dated 11.02.2004 assessing a net loss of Rs 39,53,78,45,000/-. However, the company was covered under the provisions of section 115JB of the Act and it declared taxable book profit at Rs 1801,28,11,000/- and paid tax on it as per section 115JB of the Act. 6. The Assessing Officer issued a notice dated 23.11.2005 under section 148 of the Act stating that he had reasons to believe that income of the petitioner had escaped assessment within the meaning of section 147 of the Act and called upon the petitioner to file its return of income for the said period. The petitioner requested for the reasons for reopening of the assessment under section 148 of the Act which were furnished by the Assessing Officer under the cover of his letter dated 22.12.2005. The reasons for issuance of notice under section 148 of the Act, as furnished by the Assessing Officer, referred to the capital structure of the petitioner company and the inference drawn by him was that the cost of assets was being met by the general reserve as reflected in the capital structure of the company. As per the Assessing Officer, a sum equal to the genera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion on 02.03.2006. However, the Writ Petition No. 550 of 2007 was not listed as the petitioner had sought approval from COD which had not been accorded at the material time. The COD granted its approval to proceed with the writ petition at its meeting held on 21.12.2006 which was communicated to the petitioner vide a letter dated 03.01.2007. In the meantime, the Assessing Officer completed the reassessment proceedings for the year 2001-02 by his order dated 22.12.2006. The Assessing Officer recomputed the allowable depreciation at Rs 56,28,89,21,000/- against the amount of Rs 1,26,46,77,42,000/- as computed earlier. The excess depreciation of Rs 70,17,88,21,000/- has been added to the income of the petitioner for the relevant assessment year and the Assessing Officer has raised a demand for a sum of Rs 802,93,34,358/- by the notice of demand dated 22.12.2006. The present petition (i.e. Writ Petition No. 550 of 2007) was thereafter listed for hearing and by the order dated 01.03.2007 this Court directed that the date of filing of the petition be deemed to be 24.01.2007. 9. The issues raised in Writ Petition No.7707/2007 are identical and pertain to the subsequent period i.e., Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n done. The assets and liabilities as on 1st October 2000 have been classified broadly under the following heads: Assets (Rs. In Million) -- Fixed Assets 501078.6 -- Capital Work-in-progress 47900.9 -- Inventory 18132.2 -- Sundry Debtors 33103.8 Liabilities 600215.5 -- Customer Deposits (Excluding interest accrued thereon) 38606.5 -- Net assets taken over by the Company 571609 -- Contingent liabilities taken over by the Company --- The net assets (including liabilities) transferred to the Company as of 1st October 2000 are subject to confirmation by DoT as regards to ownership and the value. The Capital structure for BSNL concurred in by Ministry of Finance and conveyed by Department of Telecommunications vide their UN. No. 1-2/2000-B (Pt.) dated 1 December 2001 as consideration for transferring the above stated assets and liabilities is as follows: -- Equity 50000 -- Non-cumulative preference Shares (9%) 75000 -- 15 Years Government Load (12%) 75000 -- Loan from MTNL (Refer Note 101) 30000 -- Reserves # 331609 571609 12. It has also been brought to our notice that during the assessment proceedings relevant to the assessment year 2001-02, the Assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2000. Therefore, on the liability side the fixed components, consisting of capital and loan were only adding up to Rs 20,000 Crore as detailed above. The balancing figure was to represent the 'reserves' on the liability side and with the change in the value of the assets taken over the Rs.reserve' was to be increased or decreased correspondingly. This formed the balance sheet of the company at the time of transfer of business from Government of India to BSNL." 14. It is thus contended on behalf of the petitioner, that the Assessing Officer was fully conscious of all relevant facts which had been duly disclosed before him. The provisions of Explanation 10 of Section 43(1) were not applicable and consequently the cost of assets had been taken at the book value and depreciation was computed accordingly. The subsequent action of the Assessing Officer in seeking to apply the provisions of Explanation 10 to Section 43(1) of the Act would only tantamount to a change of opinion as no new material was discovered which would warrant re-computation of depreciation, on the contrary, the issues relating to depreciation and value of assets had been discussed in the first round of assessment it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of Communications. Thus, in a sense the Government decided to incorporate a new company as a Government of India enterprise to carry on the business of telecom services instead of conducting the same directly. The assets were to be transferred at book values. The value of net assets was agreed to be in excess of Rs 63,000 Crores and, therefore, the same was provisionally taken as a book value of the business being transferred. The consideration for the same was agreed to be met by issue of equity capital of Rs 5000 Crores (500 Crore shares of the face value of Rs 10/- each), preference share capital of Rs 7500 Crores and debt of Rs 7500 Crores. The balance consideration was reflected as reserves. This capital structure was also duly disclosed by the petitioner company in its Directors Report forming a part of the first annual report as under:- "CAPITAL STRUCTURE & FINANCING The Authorised Share Capital of your Company is Rs 10000 crores, and the present paid up capital is Rs 5000 crores. Pursuant to the MoU dated 30th September, 2000, signed with the Government of India, Ministry of Communications, your Company took over the business of erstwhile Deptt. of Telecom Services and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no new tangible material has been discovered subsequent to the framing of the first assessment relating to the assessment year 2001-02. The reasons as furnished by the Assessing Officer, ex-facie, indicates that he has sought to make certain inferences based on disclosures which were already on record and had been considered while framing the first assessment. The relevant portion of the reasons for issue of notice under Section 148 are quoted below: "The assessee company came into existence on 1st October 2000 and the year under consideration is the first year of the assessee. The history of the assessee company is that in pursuance to the New Telecom Policy, 1999 the Government decided to corporatise the service provision functions of the Department of Telecommunication (DoT) were carved out for providing telecom services in the country and maintaining the telecom network factories. The business of providing telecom services and running the telecom Factories was transferred to the new company i.e. BSNL w.e.f. 1.10.2000 AND THE Government retained functions of policy formulation, licencing, R&D etc. The takeover of the assets and liabilities by the Company was in terms and condi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e derived: ASSET = Reserves + Liabilities + Paid-up Equity Capital + 9% (NC) Preference Share Capital + Government Loan + MTNL Loan. The assets transferred to BSNL include fixed assets as well as trading assets. Therefore from the above equation it is clear that part of the cost of fixed assets of the assessee company are met by the reserves, which as per the assessee are in the nature of capital reserves. This means that to the extent of reserves, the cost, of fixed assets of the assessee company is met by the Government. Now, sub-section (1) of section 43 of the Income-tax Act, 1961 defines actual cost for the purpose of depreciation as the actual cost of assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority. Explanation 10 to this sub-section further states that where a portion of the cost of an asset is met directly or indirectly by the Central Government in the form of a subsidy or grant or reimbursement (by whatever name called), then so much of the cost as is relatable such subsidy or grant or proviso to this explanation further states that where such subsidy or grant or reimbur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wider. However, one needs to give a schematic interpretation to the words "reason to believe" failing which, we are afraid, section 147 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. We 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 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. Hence, after 1st April, 1989, the Assessing Officer has power to reopen, provided there is "tangible material" to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief." 22. Following the aforesaid view we are of the opinion that the notices dated 23.11.2005 and 12.03.2007 under Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. The relevant portion of the balance sheet of the petitioner company as on 31.03.2001 is quoted below:- "Shareholders' Funds Capital A 50.000,000 Preference Capital pending allotment (Refer Note 2.3 on T) 75,000,000 Reserves & Surplus B 339,079,523 Loan Funds Secured Loan C 5,100,000 Unsecured Loans D 107,983,258 Total 577,162,781" 26. The scheme of hiving off the business of telecom services by Government of India to a corporate entity entailed incorporation of a wholly owned government company (i.e, the petitioner company) and the transfer of the business as a going concern along with all its assets and liabilities to the company. The net assets were transferred at book value, which was agreed to be at least Rs 63,000/- Crores and in consideration of this the petitioner company accepted a liability of Rs 7500 Crores and issued both equity and pre ..... X X X X Extracts X X X X X X X X Extracts X X X X
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