Learned Counsel for the Respondents waives ::: Downloaded on - 09/06/2013 17:58:20 ::: Dmt 2 wpl2560-11 service.

By consent taken up for final hearing on the request of learned Counsel for the parties.

By a notice of the First Respondent dated 17 March 2011 issued under Section 148 of the Income Tax Act, 1961 an assessment for Assessment Year 2006-07 has been sought to be reopened.

The Petitioner is engaged in the business of general insurance.

For Assessment Year 2006-07 the Petitioner filed a return of income on 30 November 2006 declaring a loss of Rs. 504.68 crores after excluding exempt incomes under clauses (15), (23G), (33) and (38) of Section 10.

On 12 October 2007, the Assessing Officer issued a notice under Section 142 (1) seeking details of income exempted and of expenditure under Section 14A. The Petitioner, during the course of the assessment proceedings, made a submission before the Assessing Officer in a letter dated 25 October 2007 inter alia in regard to the claim of exemption under Section 10 (38).

Reliance was placed on a ::: Downloaded on - 09/06/2013 17:58:20 ::: Dmt 3 wpl2560-11 communication dated 21 February 2006 of the Central Board of Direct Taxes to the Chairman of the Insurance Regulatory Development Authority (IRDA) to the effect that exemptions available to any other assessee under any clause of Section 10 are also available to a person carrying on non-life insurance business subject to fulfillment of the conditions under the particular clause under which an exemption is sought.

By a further communication dated 22 November 2007 the assessee once again relied upon the aforesaid circular.

In the computation of income for the assessment year, the assessee had claimed inter alia an exemption under Section 10 (15) of the interest on tax free bonds under Section 10 (23G) on interest on investment with infrastructure companies and under Section 10 (33) on dividend income.

In the notes forming part of the computation of income, the assessee also stated that it was reserving its right to claim an exemption under Section 10 (38).

The Assessing Officer while passing an order of assessment on 31 March 2008 denied to the ::: Downloaded on - 09/06/2013 17:58:20 ::: Dmt 4 wpl2560-11 assessee the benefit of an exemption under Section 10 (38) on the ground that during the assessment year, the assessee had carried on a regular business of trading in equity shares the intention of the assessee being to earn profit and not to act as an investor.

The exemptions claimed under Section 10(15), 10(23G) and 10(33) were however, allowed.

The Assessing Officer issued a notice under Section 148 on 17 March 2011 purporting to reopen the assessment for Assessment Year 2006-07.

The reasons which have been disclosed to the assessee for reopening the assessment are as follows : The assessee company is involved in general insurance business, hence the income is to be assessed as per special provisions for assessment given in section 44.

Section 44 provides that the total income of the assessee company has to be assessed as per the First Schedule of the Act.

The ::: Downloaded on - 09/06/2013 17:58:21 ::: Dmt 5 wpl2560-11 insurance company in the business other than life insurance are to be assessed as per Rule 5 of the First Schedule and the company involved in life insurance business as per Rule 1 to 4 of the first Schedule.

On combined reading of section 44 and First Schedule it can be ascertained that no other sections of the Act applies to these companies except for the provisions provided in the First Schedule Rule 5.

In view of this, the claim of the assessee for exemption of dividend income u section 10(34), interest on tax-free bonds u section 10(15) is not according to law and deserves to be disallowed.

However, for this assessment year, in the assessment u section 143(3) of the Act, the above claims have been wrongly allowed.

The assessee submitted objections to the reopening of the assessment on 25 April 2011 which have been disposed of by an order dated 14 November 2011.

::: Downloaded on - 09/06/2013 17:58:21 ::: Dmt 6 wpl2560-11 Learned Counsel appearing on behalf of the assessee submitted that : During the course of assessment proceedings, the assessee had claimed an exemption under four clauses of Section 10 and had specifically placed reliance on a circular of the Central Board of Direct Taxes dated 21 February 2006.

The Assessing Officer brought his mind to bear on whether the assessee has fulfilled the conditions for the grant of exemption under Section 10 and specifically disallowed the claim for an exemption under Section 10 (38).

The exemptions under the other three clauses were allowed The Assessing Officer had no new material and certainly no tangible material on the basis of which the assessment could be reopened even ::: Downloaded on - 09/06/2013 17:58:21 ::: Dmt 7 wpl2560-11 within the period of four years.

As a matter of fact, the reasons which have been disclosed to the assessee state that in the assessment under Section 143 (3) exemptions have been wrongly allowed and this is reiterated in the order disposing of the objections which states that the Assessing Officer failed to correctly apply the statutory provisions.

There is in the present case, it is urged, only a change of opinion and the Assessing Officer has purported to review his earlier decision, which is not permissible in view of the law laid down by the Supreme Court.

On the other hand, learned Counsel appearing on behalf of the Revenue urged that : No case has been made out for exercise of the writ jurisdiction under Article 226 of the Constitution since it would be open to the assessee ::: Downloaded on - 09/06/2013 17:58:21 ::: Dmt 8 wpl2560-11 following the reopening of the assessment to urge all appropriate contentions before the Assessing Officer in regard to the entitlement of the assessee to claim an exemption under Section 10 The exercise of the writ jurisdiction is not warranted having regard to the factual issues which arise and Since the reopening has taken place within a period of four years, there was no bar on the Assessing Officer reopening the assessment, once he comes to the conclusion that income had escaped assessment.

The record before the Court discloses the fact that during the course of the assessment proceedings the Assessing Officer had brought his mind to bear on the issue as to whether the assessee which carries on the business of general ::: Downloaded on - 09/06/2013 17:58:21 ::: Dmt 9 wpl2560-11 insurance is entitled to an exemption under Section 10.

Both in the letter dated 25 October 2007 and in the subsequent communication dated 22 November 2011 the assessee had relied upon a communication issued by the CBDT, in response to a query, to the Chairperson of the Insurance Regulatory and Development Authority (IRDA).

The communication is to the following effect : The undersigned is directed to refer to the write-up on the captioned subject submitted by you during the month to the Honble Finance Minister and Secretary (Revenue).

It is clarified that the exemption available to any other assessee under any clause of section 10 of the Income-tax Act 1961 (including clause (38) of section 10 regarding long-term capital gains) is also available to a person carrying on non-life insurance business subject to fulfillment of the ::: Downloaded on - 09/06/2013 17:58:21 ::: Dmt 10 wpl2560-11 conditions, if any, under a particular clause of section 10 under which exemption is sought.

General Insurance Companies are therefore, on par with other assesses who are entitled to or are eligible for exemption under section 10 of the Income-tax Act of long-term capital gains.

The Assessing Officer declined to grant the benefit of an exemption under Section 10(38) to the assessee on the ground that during the assessment year the assessee had carried on a regular business activity of trading in shares and was not an investor.

The exemptions under clauses (15), (23G) and (33) of Section 10 were however allowed.

The Assessing Officer, in the reasons which have been declared to the assessee for reopening assessment has now taken the view that on a combined reading of Section 44 of the Income Tax Act, 1961 and the First Schedule the position that emerges is that no other Section of the Act applies to a company which carries on general insurance business except the provisions contained ::: Downloaded on - 09/06/2013 17:58:21 ::: Dmt 11 wpl2560-11 in Rule 5 of the First Schedule.

On this basis, it has been contended that the claims have been wrongly allowed.

We find merit in the contention of the Petitioner that the reasons which have been set out by the Assessing Officer constitute a mere change of opinion and there was no tangible material on the basis of which the assessment could be reopened.

Our reasons for this are now set out.

Under Section 147 the Assessing Officer is empowered to reopen an assessment where he has reason to believe that any income chargeable to tax has escaped assessment for any assessment year.

Under clause (3) of Explanation 2 the Legislature has set out cases where income chargeable to tax is deemed to have escaped assessment.

Such cases include a case where an assessment is made but (i) income chargeable to tax has been underassessed or (ii) such income has been assessed at too low a rate or (iii) such income has been made the subject of excessive relief under the Act or (iv) excessive loss or depreciation allowance or any ::: Downloaded on - 09/06/2013 17:58:21 ::: Dmt 12 wpl2560-11 other allowance under the Act has been computed.

The power of the Assessing Officer to reopen an assessment even within a period of four years is structured.

Following the amendment of Section 147 by the Direct Tax Laws (Amendment) Act, 1987 with effect from 1 April 1989 Parliament has provided for only one condition for exercise of the power to reopen an assessment within four years which is that the Assessing Officer has reason to believe that income has escaped assessment.

While recognizing that after 1 April 1989 the power to reopen assessment is wider than before, the Supreme Court has held in Commissioner of Income-Tax v. Kelvinator of India Ltd, 1 that a schematic interpretation should be given to the words reason to believe failing which Section 147 would confer arbitrary power upon the Assessing Officer to reopen an assessment on the basis of a mere change of opinion.

In that context, Honble Mr. Justice S.H. Kapadia (as the learned Chief Justice of India then was) speaking for the Supreme Court held as follows : 1 2010 320 ITR 561 (SC) ::: Downloaded on - 09/06/2013 17:58:21 ::: Dmt 13 wpl2560-11 Therefore, post- 1st April, 1989, power to reopen is much 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 ::: Downloaded on - 09/06/2013 17:58:21 ::: Dmt 14 wpl2560-11 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.

Our view gets support from the changes made to section 147 of the Act, as quoted hereinabove.

Under the Direct Tax Laws (Amendment) Act,1987, Parliament not only deleted the words reason to believe but also inserted the word opinion in section 147 of the Act.

However, on receipt of representations from the companies against omission of the words reason to believe, Parliament reintroduced the said expression and deleted the word opinion on the ground that it would vest arbitrary powers in the Assessing Officer.

In the present case, it is apparent that the ::: Downloaded on - 09/06/2013 17:58:21 ::: Dmt 15 wpl2560-11 Assessing Officer had applied his mind to the claim of the assessee to exemption under clauses (15), (23G), (33) and (38) of Section 10.

The exemption under clause (38) was specifically denied.

The reasons for reopening the assessment merely postulate that the exemption under Section 10 was wrongly allowed.

This is clearly a situation where there is a change in opinion by the Assessing Officer.

There is no tangible material for the Assessing Officer to reopen the assessment.

Section 44 of the Income Tax Act, 1961 stipulates as follows : Notwithstanding anything to the contrary contained in the provisions of this Act relating to the computation of income chargeable under the head Interest on securities, Income from house property, Capital gains or Income from other sources, or in section 199 or in sections 28 to 43B, the profits and gains of any business of ::: Downloaded on - 09/06/2013 17:58:21 ::: Dmt 16 wpl2560-11 insurance, including any such business carried on by a mutual insurance company or by a co- operative society, shall be computed in accordance with the rules contained in the First Schedule.

Section 44 provides that the profits and gains of any business of insurance of a mutual insurance company shall be computed in accordance with the rules in the First Schedule.

Part A of the First Schedule containing Rules 1 to 4 deals with profits of life insurance business while Part B consisting of Rule 5 deals with computation of profits and gains of other insurance business.

Rule 5 provides as follows : 5.

The profits and gains of any business of insurance other than life insurance shall be taken to be the balance of the profits disclosed by the annual accounts, copies of which are required under the Insurance Act, 1938 (4 of 1938), to be furnished to the Controller of Insurance, subject to ::: Downloaded on - 09/06/2013 17:58:21 ::: Dmt 17 wpl2560-11 the following adjustments :- (a) subject to the other provisions of this rule, any expenditure or allowance including any amount debited to the profit and loss account either by way of a provision for any tax, dividend, reserve or any other provision as may be prescribed which is not admissible under the provisions of sections 30 to 43B in computing the profits and gains of a business shall be added back (b) (c) such amount carried over to a reserve for unexpired risks as may be prescribed in this behalf shall be allowed as a deduction.

The Assessing Officer has in the reasons for reopening the ::: Downloaded on - 09/06/2013 17:58:21 ::: Dmt 18 wpl2560-11 assessment proceeded on the premise that in computing the profits and gains of business for an assessee who carries on general insurance business no other section of the Act would apply and that the computation could be carried out only in accordance with Section 44 read with Rule 5 of the First Schedule.

In Life Insurance Corporation of India, Bombay v. Commissioner of Income-Tax, Bombay City-III 2 a Division Bench of this Court construed the provisions of Section 44 and of the First Schedule.

The assessee in that case which carried on life insurance business had made a claim to exemption under Section 10 (15) and Section 10 (1).

In a reference before the Court the questions referred included whether in computing the profits and gains of the business of insurance under Section 44 read with the First Schedule certain items which were ordinarily not includible in the total income were rightly included in the taxable surplus.

The Division Bench of this Court held as follows : 2 115 ITR 45 ::: Downloaded on - 09/06/2013 17:58:21 ::: Dmt 19 wpl2560-11 The question which essentially falls to be determined in this reference is whether, in view of the provisions in section 44 or rule 2 of the First schedule, the Life Insurance Corporation will not be entitled to claim the deductions which are otherwise admissible in the case of an assessee, computation of whose income is governed by the other provisions of the Act.

The argument of Mr. Kolah for the Life Insurance Corporation is that unless there are express provisions which disable the Corporation from claiming the deductions referred to above, the Corporation cannot be deprived of the benefit of the provisions referred to in the questions Numbers 1 to 6.

Section 44, which deals with computation of profits and gains of business of insurance, begins with a non-obstante clause, the effect of which is that the provisions of the Act relating to the computation of income chargeable under the head Interest on securities, ::: Downloaded on - 09/06/2013 17:58:21 ::: Dmt 20 wpl2560-11 Income from house property, Capital gains or Income from other sources do not apply in the case of computation of income from insurance business.

The effect of the non-obstante clause so far as the earlier part of section 44 is concerned, therefore, is that the provisions of section 44 will prevail notwithstanding the fact that there are contrary provisions in the Act relating to computation of income chargeable under the four heads mentioned in section 44.

The only other overriding effect of section 44 is that its provisions operate notwithstanding the provisions of section 191 and of sections 28 to 43A. Thus, the only effect of section 44 is that the operation of the provisions referred to therein is excluded in the case of an assessee who carries on insurance business and in whose case the provisions of rule 2 of the First Schedule are attracted.

If the deductions which are claimed by the assessee do not fall within the ::: Downloaded on - 09/06/2013 17:58:21 ::: Dmt 21 wpl2560-11 provisions which are referred to in section 44, it will have to be held that the applicability of those provisions in the case of an assessee whose assessment is governed by section 44 read with rule 2 in the First Schedule is not excluded.

This judgment is sought to be distinguished by the Assessing Officer while disposing of the objections on the ground that the decision was rendered in the context of an assessee which carried on life insurance business to whom Rules 1 to 4 of the First Schedule applied whereas in the case of the assessee in this case which carries on general insurance business Rule 5 could apply.

According to the Assessing Officer, Rule 5 would not permit any adjustment to the balance of profit as per annual accounts prepared under the Insurance Act, and hence the judgment would not be applicable.

The Assessing Officer has clearly not noticed that the decision in Life Insurance Corporation (supra) though rendered in the context of an assessee which carries on life insurance business, followed an ::: Downloaded on - 09/06/2013 17:58:21 ::: Dmt 22 wpl2560-11 earlier decision of a Division Bench of this Court in Commissioner of Income-Tax v. New India Assurance Company Limited,. 3 That was a case of an assessee which carried on non life insurance business.

In New India Assurance Company Limited, the Division Bench dealt inter alia with the provisions of Section 10(7) of the Income Tax Act, 1922.

The questions referred to this Court included whether the assessee was entitled to claim an exemption from tax under Section 15B and 15C (4) and in respect of interest on a government loan under a notification issued under Section 60.

Section 10 (7) of the Income Tax Act, 1922 provided that notwithstanding anything to the contrary contained in Section 8, 9, 10, 12 or 18, the profits and gains of any business of insurance and the tax payable thereon shall be computed in accordance with the rules contained in the Schedule to the Act.

The Division Bench held that upon the language of sub-section (7) of section 10 read along with rule 6 it was impossible to hold that the provisions relating to exemptions stood excluded from operation.

In that context the 3 1969 71 ITR 761 (Bom) ::: Downloaded on - 09/06/2013 17:58:21 ::: Dmt 23 wpl2560-11 Division Bench held as follows : It is only after the profits and gains of a business are computed that any question of granting exemptions arises and if the latter stage were intended to be excluded by the law we should have thought that a clearer provision than is made in sub-section (7) of section 10 and in rule 6 would have been made.

In the subsequent judgment of the Division Bench in Life Insurance Corporation (Supra) the Division Bench noted that there was a difference in the language of section 10(7) of the Act of 1922 when compared with Section 44 of the Act of 1961 since Section 44 does not refer to the computation of tax but merely to the computation of profits and gains in the business of insurance.

The Division Bench held that this would however not make any difference to the principle laid down by the Court in the earlier decision in the case of New India ::: Downloaded on - 09/06/2013 17:58:21 ::: Dmt 24 wpl2560-11 Assurance Company Limited Accordingly, the decision in Life Insurance Corporation (Supra) could not have been ignored by the Assessing Officer on the supposition that the decision was rendered in the context of an assessee who carried on life insurance business and was, therefore, not available to an assessee which carries on general insurance business.

In General Insurance Corporation of India v. Commissioner of Income-Tax 4 the Supreme Court considered in an appeal arising out of a judgment of the High Court the issue as to whether a sum of Rs. 3 crores, being a provision for redemption of preference shares, was not liable to be added back in the total income of the assessee for Assessment Year 1977-78?.

The Supreme Court held that a plain reading of rule 5(a) of the First Schedule made it clear that in order to attract the applicability of the provision the amount should firstly be an expenditure or allowance and secondly it should be one not admissible under the provisions of section 30 to 43A. The 4 1999 240 ITR 139 ::: Downloaded on - 09/06/2013 17:58:21 ::: Dmt 25 wpl2560-11 Supreme Court held that the sum of Rs. 3 crores in that case which was set apart as a provision for redemption of preference shares could not have been treated as an expenditure and hence could not have been added back under rule 5 (a).

In that context, the Supreme Court held as follows : There is another approach to the same issue.

Section 44 of the Income-tax Act read with the rules contained in the First Schedule to the Act lays down an artificial mode of computing the profits and gains of insurance business.

For the purpose of income-tax, the figures in the accounts of the assessee drawn up in accordance with the provisions of the First Schedule to the Income-tax Act and satisfying the requirements of the Insurance Act are binding on the Assessing Officer under the Income-tax Act and he has no general power to correct the errors in the accounts of an insurance business and undo the entries made ::: Downloaded on - 09/06/2013 17:58:21 ::: Dmt 26 wpl2560-11 therein.

The question whether an assessee who carries on general insurance business would be entitled to avail of an exemption under Section 10 did not arise.

The issue as to whether the assessee which carries on the business of general insurance would be entitled to the benefit of an exemption under clauses (15), (23G) and (33) of Section 10 is directly governed by the decision rendered by the Division Bench in Life Insurance Corporation vs Commissioner of Income-tax (supra) following the earlier decision in Commissioner of Income-tax vs New India Assurance Company Limited (supra).

The Assessing Officer could not have ignored the binding precedent contained in the two Division Bench decisions of this Court.

Moreover, the Assessing Officer in allowing the benefit of the exemption in the order of assessment under Section 143(3) specifically relied upon the view taken by the CBDT in its communication dated 21 February 2006 to the Chairman of IRDA.

The communication clarifies that the exemption available to any other assessee ::: Downloaded on - 09/06/2013 17:58:21 ::: Dmt 27 wpl2560-11 under any clauses of Section 10 is also available to a person carrying on non-life insurance business subject to the fulfilment of the conditions, if any, under a particular clause of Section 10 under which exemption is sought.

It needs to be emphasised that it is not the case of the Assessing Officer that the assessee had failed to fulfil the condition which attached to the provisions of the relevant clauses of Section 10 in respect of which the exemption was allowed.

This of course is apart from clause (38) of Section 10 where the Assessing Officer had rejected the claim for exemption in the original order of assessment under Section 143 (3).

The Assessing Officer above all was bound by the communication of the CBDT.

Having followed that in the order under Section 143 (3) he could not have taken a different view while purporting to reopen the assessment.

Having applied his mind specifically to the issue and having taken a view on the basis of the communication noted earlier, the act of reopening the assessment would have to be regarded as a mere change of opinion which has also not been based on any tangible ::: Downloaded on - 09/06/2013 17:58:21 ::: Dmt 28 wpl2560-11 material.

Consequently, we hold that the reopening of the assessment is contrary to law.

The Petition would have, therefore, to be allowed.

Rule is, therefore, made absolute by quashing and setting aside the notice dated 17 March 2011 reopening the assessment under Section 148 of the Income Tax Act, 1961.

In the circumstances of the case, there shall be no order as to costs.

(Dr. D.Y. Chandrachud, J.) A. Sayed, J.) ::: Downloaded on - 09/06/2013 17:58:21 :::

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By this petition under Article 226 of the Constitution of India the challenge is to the assumption of jurisdiction by the Deputy Director of Income Tax (International Taxation) (hereinafter referred to as Assessing Officer) under Section 147 to 151 of the Income Tax Act, 1961 (hereinafter referred to as the the Act).

The Assessing officer has assumed jurisdiction by issuing a notice dated 28/3/2011 under Section 148 of the Act seeking to reassess the petitioners income for assessment year 2004-05 (hereinafter referred to as the impugned notice) and dismissed the petitioners objection to his above assumption of jurisdiction by an order dated 20/10/2011 (hereinafter referred to as the impugned order).

The petitioner is a joint stock company incorporated under the laws of Russain Federation.

An agreement dated 20/11/1988 and a supplementary agreement dated 20/6/1998 were entered into between the then Union of Soviet Socialistic Republic and the Republic of India for co-operation in the construction of a nuclear ASN 2/22 WP-377.sxw ::: Downloaded on - 09/06/2013 18:55:48 ::: power station at Kudankulam, Tamil Nadu.

Consequent to above, the Nuclear Power Corporation of India Limited (NCPL) and the petitioner entered into an agreement dated 20/7/1998 for setting up the power station.

In the course of executing the contract NPCL and the petitioner entered into three Offshore Service Contracts dated 17/12/2001, 28/3/2002 and 02/11/2002 and four Offshore Supply Contracts dated 12/2/2002, 23/8/2002, 23/8/2002 and 7/10/2003.

4) On 31/3/2006, the petitioner filed its return of income for assessment year 2004-05 declaring a total income of Rs.14.6 crores.

In its return the petitioner offered for tax the amount received on account of the offshore service contracts by applying Section 44BBB of the Act.

In so far as the offshore supply contracts were concerned, the petitioner did not offer the same to tax because according to them the transfer of title to the equipment under the offshore supply contracts had taken place outside India and the consideration for the same had also been received outside India.

Therefore, according to the petitioner the amounts received on account of the offshore supply contracts were not chargeable to tax in India.

ASN 3/22 WP-377.sxw ::: Downloaded on - 09/06/2013 18:55:48 ::: On 7/1/2008, the Assessing Officer issued a notice under Section 148 of the Act seeking to reopen the assessment for the assessment year 2004-05 on the ground that the Assessing Officer had reason to believe that the petitioners income chargeable to tax had escaped assessment.

The petitioner subjected itself to the jurisdiction of the Assessing Officer for reassessment.

During the course of reassessment proceedings the Assessing officer raised ig specific queries with regard to service contracts and the offshore supply contracts.

By a letter dated 10/12/2008 the petitioner inter alia pointed out that under all the offshore supply contracts the sale and supply of equipment were outside India as the same were sold by the Petitioner on FOB basis outside India to NPCL.

Further, the payments and consideration for the sale of equipment were also received by the petitioner outside India.

The petitioner.

contended therefore that no income accrued or arose in India in respect of offshore supply contracts to make it taxable in India.

Thereafter, the Assessing officer passed an order on 31/12/2008 under Section 143(3) read with Section 147 of the Act ASN 4/22 WP-377.sxw ::: Downloaded on - 09/06/2013 18:55:48 ::: reassessing the petitioner to tax for the assessment year 2004-05.

It is important to note that the assessment order expressly records the aforesaid facts furnished by the petitioner as well as the petitioners submission that no income would accrue or arises in India in respect of the Offshore supply contracts inter alia in view of the decision of the Supreme Court in Ishikawajima Harima Heavy Industries Limited v. Director of Income Tax reported in 288 ITR Page 408.

In respect of the Offshore Service Contract the Assessing officer held that the same would be taxable as fees for technical services and royalty and consequently the benefit of Section 44BBB of the Act as claimed by the petitioner would not be available.

The Commissioner of Income Tax (Appeals) by an order dated 30/11/2009 held that the petitioner was entitled to the benefit of Section-44BBB of the Act in respect of the offshore service contracts.

However, he upheld the order of the Assessing Officer to the extent that it held that the service part of the offshore supply contract would be taxable in India.

Against the order dated 30/11/2009 of the Commissioner of Income Tax (Appeals), the Assessing officer as well as the petitioner ASN 5/22 WP-377.sxw ::: Downloaded on - 09/06/2013 18:55:48 ::: have filed appeals before the Income Tax Appellate Tribunal which are pending.

On 29/3/2011, the Assessing Officer issued the impugned notice seeking once again to reopen the assessment for the assessment year 2004-05 on the ground that he had reason to believe that the income chargeable to tax had escaped assessment for the assessment year 2004-05.

Along with the impugned notice the reasons for reopening the assessment were furnished to the petitioner.

The reasons for reopening the assessment as provided to the petitioner read as under:- The return of income disclosing a total income of Rs.14,06,95,494 was furnished on 31st march,2006.The return was processed on 28/3/2007.The case was not selected for scrutiny assessment and no notice u s 143(20 was issued.

Subsequently, a notice u s.148 dated 7/1/2008 was issued to the assessee.

The order u section 143(3) read with section 147 was passed on 31/12/2008 and the total income was determined at Rs.160,30,71,820/-.

In the reassessment order dated 31/12/2008, the income from so called offshore services contract amounting to Rs.1217687860/- was treated as royalty.

Another Rs.53853520/- received on account of services for deputation of specialists was treated as fee for technical services.

Similarly, an amount of Rs.135413560/- received on account Training of Indian Personnel was treated as FTS.

The amount of Rs.19,61,16,880/- received on account of services for ASN 6/22 WP-377.sxw ::: Downloaded on - 09/06/2013 18:55:48 ::: contract Number26000 was held as FTS income.

In the assessment, the receipts on account of four offshore supply contracts were treated as exempt.

The CIT(A) in its appellate order has held that all the receipts treated as Royalty by the AO is to be taxed as business income under Section 44BBB of the I. T. Act.

The assessee was given a contract by Nuclear Power Corporation of India Limited (NPCIL) for construction of a Nuclear Power Station.

It was a Turnkey project.

For executing this contract, the assessee entered into various contracts -Offshore Supply contract and Offshore Service Contracts.

There were 4 Offshore Supply contracts and 3 offshore Service Contracts.

Although the power plant is to be erected in India, the assessee has termed the contract as Offshore Supply and Offshore Services Contract.

The work of constructing the project is in India.

In the return of income, the assessee had claimed that the receipts on account of 4 Offshore Supply contracts as exempt from taxation in India, In respect of 3 Offshore Service Service Contracts, the assessee has filed its return of income.

In respect of 3 offshore Service Contracts,the assessee has paid taxes under Section 44BBB of the I.T.Act.

In respect of offshore Supply Contracts, the assessee has not disclosed any income in its return of income.

The Dispute Resolution Panel (DRP) in its directions for the A.Y. 2006-07 and 2007-08 has held that : Receipts from offshore Services contracts are covered by provisions of section 44BBB of the Income Tax Act.

Receipts from Offshore Supply contracts are also covered by provisions of section 44BBB of the Income Tax Act.

ASN 7/22 WP-377.sxw ::: Downloaded on - 09/06/2013 18:55:48 ::: The DRP has further held that Section 44BBB refers to computation of profits in case of foreign company engaged in the business of civil construction etc.

In Turnkey Power Projects which are approved by the Central Government.

The fact that this contract has been awarded on a turnkey basis to the assessee is evident from the contract dated 20/11/1998.

It is seen that the provisions of section 44BBB clearly indicates that sum payable for erection and construction of power plant is to be included in the amount for applying 10 of profit margin.

In the case of power plaint being constructed on turnkey basis as envisaged in section 44BBB includes construction, erection and commissioning and these as such include equipment plant and machinery which are installed for setting up the power plant so as to make it a turnkey project .Accordingly, the sum payable for offshore supply should also be included for purposes of computing the profit 10.

Accordingly, in order to compute the income u s.44BBB, the revenue from all the contracts entered into by the assessee with Government of India or Indian Entity like Nuclear Power Corporation are to be included and, therefore, the profit rate of 10 as envisaged in section 44BBB is to be applied.

The details of payment received by the assessee in respect of all the 7 contracts are as under: Contract Contract Name Amount in Amount in No. USD INR 20500 Delivery of 5199544 286731962 equipments with long manufacturing cycle ASN 8/22 WP-377.sxw ::: Downloaded on - 09/06/2013 18:55:48 ::: 22600 Delivery of 68090615 2006081931 Equipments and materials 22700 Supply of 18690000 841391400 equipments raw material from third countries 26000 Supplies from CIS 754130 33650359 countries functions to be performed by the contractor for offshore Supplies Total 92734289 3167855652 No. Contract Contract Name Amount in INR 16200 Elaboration of Wording 1217687860 Documentation 22800 Contract for deputation of 53853520 specialist 24700 Offshore Training Contract 135413560 Total 1406954940 The assessee has disclosed income under section 44BBB on the receipts amounting to Rs.14,06,95,494 (10 of Rs.140,69,54,940) only.

Such income is disclosed in respect of only three contracts.

The assessee had a total receipts amounting to Rs.457,48,10,591/- from the turnkey project being carried out in India.

Thus, the income that the assessee is supposed to disclose in its return of income should have been Rs.45,74,81,059/- - (10 of Rs.4,57,48,10,591/-).

Thus receipts of Rs.3167855651/- have not been disclosed in the return of income.

ASN 9/22 WP-377.sxw ::: Downloaded on - 09/06/2013 18:55:48 ::: As a result, income to the extent of Rs.31.67.85,565/- has escaped assessment within the meaning of section 147 of the Income tax Act, 1961.Such income thus been subjected to relief to which the assessee is not entitled.

As the assessee has not disclosed proper income in its return of income therefore, I have reason to believe that income chargeable to tax has escaped assessment within the meaning of section Therefore, notice under section 148 is being issued.

On 26/4/2011, the petitioner objected to the reopening of the assessment.

The petitioner pointed out that in this case the condition precedent for issuing the impugned notice (as issued after more than 4 years from the end of the relevant assessment year) is that not only must there be a reasonable belief that income has escaped assessment but there must also be a failure on the part of the petitioner to disclose fully and truly all material facts necessary for assessment.

In this case the petitioner contended that both the conditions precedent had not been satisfied.

In fact there is no allegation in the grounds that the petitioner has failed to disclose truly and fully all material facts necessary for assessment.

Further, during the reassessment proceedings consequent to the notice dated 7/1/2008 under Section 148 of the Act, the Assessing officer had examined the issue with regard to taxability of the payments received ASN 10/22 WP-377.sxw ::: Downloaded on - 09/06/2013 18:55:48 ::: under the four offshore supply contracts in detail and did not bring the same to tax as he was satisfied that in respect thereof no income arose in India.

Consequently, action regarding reopening of the assessment for the assessment year 2004-05 is merely based on a change of opinion and therefore, is completely without jurisdiction.

On 20/10/2011, the Assessing officer by the impugned order rejected the petitioners objection to the reopening of assessment for the assessment year 2004-05.

The relevant portion of the order is as under: By this order, I propose to dispose the objections raised by the assessee in terms of the principles laid down by the Honble Supreme Court in case of GKN Driveshafts (India) Limited vs ITO (2003) 259 ITR 19.

The objections filed by the assessee against the reasons recorded have been gone through properly.

The contentions of the assessee cannot be accepted for the following reasons: The Re-assessment was made under section 143(3) r.w.s. 147 by the AO and later on DRP while deciding the assessees case for A.Y.2006-07 and 2007-08 has held that the work undertaken by the assessee for setting up of nuclear Power Station is of a Turnkey contract which is taxable u s 44BBB of the I.T. Act, 1961.

Hence, all the receipts by the assessee in connection with the work should be combined and taxed accordingly.

3.1 While there can be no dispute with the general propositions, this office is unable to accept that there was failure to comply with requirements of Section The relevant portion of Section 147 of the Act ASN 11/22 WP-377.sxw ::: Downloaded on - 09/06/2013 18:55:48 ::: reads as follows: if the AO has reason to believe that any income chargeable to tax has escaped assessment for any Y., he may, subject to the provisions of Section 148 to 153, assess or re-assess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this Section or re-compute the loss of the depreciation allowance or any other allowance, as the case may be, the assessment year concerned/ In the above Section, the main term is reason to believe and the same has been interpreted by numerous judicial authorities.

The principles behind all the judgments (related to this phrase and referred by the assessee in its objections) is that the AO should not use genral and irrational material to come at the conclusion that income has escaped assessment and that is all that was taken into consideration by the AO while recording reasons for re-opening the case in hand.

In the present case, reasons recorded for re-opening are sufficient to prove that there are material facts a reasonable grounds on which one can have reason to believe for reopening the case, as income chargeable to tax has escaped assessment.

In the case of Bawa Abhai Singh V section DCIT (2001) 1 17 Taxman 12, Delhi High Court elaborated on this issue.

Relevant portion of this order reads as below: The only condition for action is that AO should have reason to believe that income has escaped assessment, which belief can be reached in any manner and is not qualified by a precondition of faith and true disclosure of material fact by an assessee as contemplated in the pre-amended Section 147(a) and the AO can under the amended provision legitimately reopen the assessment in respect of an income was has escaped assessment viewed in that angle power to reopen assessment is much wider under the amended provision and can be exercised even after assessee has disclosed fully and truly all ASN 12/22 WP-377.sxw ::: Downloaded on - 09/06/2013 18:55:48 ::: the material facts.

There must be relevant material before the AO on the basis of which he may form a belief.

It may be said that information must be something more that a rumour or gossip or hunch.

There must be some material which can be regarded as information, on the basis of which the AO can have reason to believe that action under section 147 is called for.

Information means the communication or reception of knowledge or intelligence.

It includes knowledge obtained from investigation, study or insurrection.

Reasons which may weigh with the AO may be the result of his own investigation and may come from any source that he considers reliable.

Formation of his belief is not a judicial decision but is an administrative decision.

The principle that emerges from the above judgment is that if the AO has some information based upon which he has reason to believe that the income has escaped assessment for any assessment year under the provisions of the Act, he she can reopen the case u s 147 of the Act.

In the case under reference, it is apparent from the record that the AO has acted fairly judiciously and had enough reasons to believe for reopening the case.

The necessary prerequisite for issuance of notice u section 148 is the formation of belief that income chargeable to tax within the meaning of Section 147 of the Act has escaped assessment on the basis of information and material available with the AO.

The reassessment proceedings initiated after issuance of the notice would necessarily require enquiries to ascertain the correct tax liability of the assessee.

Accordingly, the objection of the assessee stands disposed off.

The assessee is directed to co- operate in the assessment proceedings and submit the details information as called for vide notices issued during the assessment proceedings under the T. Act, 1961.

ASN 13/22 WP-377.sxw ::: Downloaded on - 09/06/2013 18:55:48 ::: 13 Mr. S.E. Dastur, Senior Counsel in support of the petition submits as under: The impugned notice is without jurisdiction as the conditions precedent for issuing the same have not been satisfied.

Though the assessment is sought to be reopened is more than 4-years from the end of the relevant assessment year.

It is not alleged in the impugned notice that there was a failure on the part of the petitioner to fully and truly disclose all material facts relevant for assessment.

There was no reasonable belief on the part of the respondent to conclude that income has escaped assessment.

This is so, as all facts with regard to the offshore supply contracts were examined by him during the reassessment proceedings and the same were not brought to tax.

Therefore, the impugned notice issued now is mainly on account of a change of opinion and not on any tangible material.

On merits, no part of the petitioners income arising out of offshore supply contract had escaped assessment as equipments were not only sold and supplied ASN 14/22 WP-377.sxw ::: Downloaded on - 09/06/2013 18:55:48 ::: outside India but the consideration for the same was also received by the petitioner outside India.

Consequently, no part of the income arising on account of the offshore supply contracts had arisen in India.

The reasons for reopening the reassessment itself record that in the assessment proceedings the receipts on account of the four offshore supply contracts were treated as exempt.

The impugned order dated 20/12/2011 rejecting the petitioners objection to initiation of reassessment proceedings by the impugned notice is a non speaking order.

The impugned order does not deal with the various objections raised by the petitioner.

As against the above Mr. Tejveer Singh Counsel appearing for the respondent submits as under: The objections raised by the petitioner to the reopening of the assessment by the impugned notice are not tenable and the same had had been appropriately disposed of by impugned order.

Therefore, he submits that the impugned notice is not without jurisdiction and ASN 15/22 WP-377.sxw ::: Downloaded on - 09/06/2013 18:55:48 ::: The Court should not issue a writ in the present proceeding to stop the respondents from reassessing the petitioner for the assessment year 2004-05.During the course of reassessment proceeding the petitioner can submit on merits that no tax is at all payable under the offshore supply contracts and the same would be considered and disposed of on merits.

In view of the above, it is his submission that the present writ petition should not be entertained.

In cases such as this, where the assessment is sought to be opened after the expiry of 4 years from the end of the relevant assessment year the respondent revenue must not only have reason to believe that income chargeable to tax has escaped assessment but such escapement of income must be due to the petitioners failure to fully and truly disclose all material facts necessary for assessment.

In the present case, the reasons recorded for reopening of the assessment by the notice dated 28/3/2011 itself records that the receipts on account of the four offshore supply contracts was treated as exempt in the assessment proceedings.

Further, though the reasons ASN 16/22 WP-377.sxw ::: Downloaded on - 09/06/2013 18:55:48 ::: record that the petitioner had not disclosed proper income in his return of income, it does not allege that there was any failure on the part of the petitioner to fully and truly disclose all material facts necessary for the assessment.

This is particularly so as the four offshore supply contracts were the subject matter of consideration and were duly considered while passing the order dated 31/12/2008 under Section 143 read with Section 147 of the Act.

In fact, the petitioners objection on the aforesaid ground has not been dealt with in the impugned order dated 20/10/2011.

16) Besides the above, our Court in the matter of Hindustan Lever Limited v. R.B. Wadkar reported in 268 ITR Page 332 has set aside a notice u s.148 of the Act seeking to reopen an assessment inter alia on the ground that the reasons recorded by the Assessing Officer nowhere states that there was a failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment of that assessment year.

On the aforesaid ground itself the assumption of jurisdiction by the Assessing officer is illegal.

On merits also the impugned notice is without jurisdiction for the reason that the same has been issued merely on account of a ASN 17/22 WP-377.sxw ::: Downloaded on - 09/06/2013 18:55:48 ::: change of opinion as all facts with regard to petitioners offshore supply contracts were considered and dealt with in the reassessment proceeding leading to the order dated 31/12/2008.

In fact the petitioners submission that amounts received under the four offshore supply contracts were not taxable in view of the decision of the Supreme Court in Ishikawajima Harima Heavy Industries Limited Vs.

Director of Income tax (supra) as no income arose or accrued in India were also recorded in the order dated 31/12/2008.

Therefore, the impugned notice under Section 148 of the Act is merely on account of change of opinion as no fresh tangible material was available with the Assessing Officer to issue the impugned notice.

The Apex Court in the matter of CIT v. Kelvinator India Limited reported in 320 ITR 561 has observed as under:- However, one needs to give a schematic interpretation to the words reasons 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 fulfillment 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 ASN 18/22 WP-377.sxw ::: Downloaded on - 09/06/2013 18:55:48 ::: take place.

One must treat the concept ofchange of opinion as an in built test to check abuse of power by the Assessing Officer.

Hence, after 1 st 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 life link with the formation of the belief.

Therefore, reassessment has to be based on fulfillment of certain pre conditions and in the garb of reopening an assessment revenue is not permitted to review its earlier order.

The reopening of assessment has to be based on some tangible material which leads to a reasonable belief that income has escaped assessment.

In the present case, all the material which is the basis of seeking to reopen the assessment was examined in the earlier reassessment proceeding leading to the order dated 31/12/2008 under Section 143(3)read with Section 147 of the Act.

Consequently there was no tangible material to lead to a reasonable belief that the income has escaped assessment for the assessment year 2004-05.

The reason for reopening the assessment for the assessment year 2004-05 also places reliance upon the dispute resolution panel directions for the assessment year 2006-07 and 2007-08 wherein direction dated 13/8/2008 states that receipts from offshore supply contracts are also to be considered while applying Section 44BBB of the Act in respect of ASN 19/22 WP-377.sxw ::: Downloaded on - 09/06/2013 18:55:48 ::: suppli contracts.

However, this direction by the Dispute Resolution Panel is its view opinion on the facts considered during the reassessment proceeding leading to the order of the Assessing officer dated 31/12/2008.

Further, the opinion of the Dispute Resolution Panel dated 13/8/2008 was available to the Assessing officer when he passed the order dated 31/12/2008 under Section 143(3) read with Section 147 of the Act on reassessment proceedings.

Therefore, there is no tangible material for the Assessing Officer to form a reasonable belief that income has escaped assessment.

All facts were considered while passing the order dated 31/12/2008 under Section 143(3) read with Section 147 of the Act as is evident from the fact that in the order dated 31/12/2008 subjects the service portion of the four offshore supply contracts to tax.

As held by this Court in the matter of Bhavesh Developers v. Assessing officer reported in 329 ITR 249 that a power to reopen an assessment after a lapse of four years is an exceptional power conferred upon the revenue.

The conditions as laid down for exercise of such an exceptional power must be strictly fulfilled and in its absence, exercise of such a power is not sustainable.

The impugned notice has been issued merely on account of change of ASN 20/22 WP-377.sxw ::: Downloaded on - 09/06/2013 18:55:48 ::: opinion.

There has been no failure on the part of the petitioner to disclose truly and fully all material facts necessary for assessment.

(assessment includes reassessment in view of Section 2(8) of the Act).

Consequently, the condition precedent for assuming jurisdiction is not satisfied.

Therefore, the impugned notice is bad in law.

The impugned order rejecting the petitioners objection to initiation of reassessment proceedings does not deal with the objections of the petitioner.

In any event as we have held, the impugned notice is without jurisdiction and therefore, the impugned order is also bad.

In view of the above, the impugned notice and the impugned order dated 28/3/2011 and 31/12/2011 respectively are quashed and set aside.

The writ petition is accordingly disposed of with no order as to costs.

( M.S. SANKLECHA, J. ) ( section J. VAZIFDAR, J.) ASN 21/22 WP-377.sxw ::: Downloaded on - 09/06/2013 18:55:48 ::: ASN 22/22 WP-377.sxw ::: Downloaded on - 09/06/2013 18:55:48 :::

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