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IN THE HIGH COURT OF JUDICATURE AT BOMBAY
O. O. C. J.
WRIT PETITION NO.2513 OF 2009
M/s. Hindustan Petroleum Corporation
Limited, Mumbai ..Petitioner.
Vs.
The Deputy Commissioner
Income Tax-1(1), Mumbai and another ..Respondents.
.....
Mr. Percy J. Pardiwala, Senior Advocate with Mr. Atul K. Jasani for
the Petitioner.
Mr. Vimal Gupta for the Respondents.
ig ....
CORAM : DR.D.Y.CHANDRACHUD &
J.P.DEVADHAR, JJ.
18 June 2010.
ORAL JUDGMENT (Per DR.D.Y.CHANDRACHUD, J.) :
1. Rule, by consent returnable forthwith. With the consent of
Counsel and at their request the Petition is taken up for hearing and
final disposal.
2. An assessment for Assessment Year 2002-03 has been
sought to be reopened under Section 147 of the Income Tax Act, 1961
beyond the period of four years of the end of the Assessment Year, by
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the issuance of a notice of 23 March 2009. The issue which falls for
determination in these proceedings is as to whether there was, within
the meaning of the proviso to Section 147, a failure on the part of the
assessee to “disclose fully and truly all material facts necessary for his
assessment, for that assessment year”.
3. For Assessment Year 2002-03 the Petitioner filed a return of
income on 30 October 2002 by which it returned a total income of Rs.
739.35 Crores. An assessment order was passed under Section
143(3) on 21 March 2005 determining the total income at Rs.750.62
Crores. On 23 March 2009 a notice under Section 148 was issued to
the Petitioner proposing to reopen the assessment. Reasons have
been disclosed in support of the notice for reopening the assessment
on 23 October 2009. Objections to the issuance of the notice were
filed on 4 November 2009. The Assessing Officer rejected the
objections by an order dated 4 December 2009.
4. The reasons which have been disclosed to the Petitioner for
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reopening the assessment pertain to three issues. Firstly, the
Petitioner had claimed a deduction under Section 80-IA on the
generation of electricity by a Captive Power Plant (‘CPP’) in the
amount of Rs.86.37 lacs. The Assessing Officer notes that a scrutiny
of the Profit and Loss Account shows that the Petitioner claimed a
saving in Low Sulphur Heavy Stock (‘LSHS’) due to the use of steam
generated as a byproduct in the generation of electricity which was
quantified at Rs.29.95 Crores. On the basis of this, a profit of Rs.
86.37 lacs was claimed by the Petitioner in respect of its CPP and a
deduction was sought under Section 80-IA. According to the Assessing
Officer there has been an escapement of income as a result.
Secondly, the Petitioner claimed a deduction under Section 80-IB in
respect of the Vizag Refinery Expansion Project (VREP-II). According
to the Assessing Officer this project which was initiated to increase
the capacity of the refinery did not constitute an independent
undertaking but was a reconstruction of a business already in
existence and hence the conditions prescribed by Section 80-IB(2)
were not fulfilled. The conditions stipulate that an industrial
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undertaking should not be formed by the splitting up or the
reconstruction of a business already in existence. Thirdly, the
Petitioner claimed a deduction under Section 80-IB(4) in respect of its
Lube Blending Plant at Silvassa. According to the Assessing Officer
the plant at Silvassa does not manufacture or produce any article or
thing within the meaning of the statutory provision since it is engaged
only in processing, involving the mixing of lube based stock and
additives. Not being engaged in manufacture, the Petitioner is held
not to be entitled to the deduction under Section 80-IB(4).
5. On behalf of the Petitioner learned counsel submitted that
(i) The reopening of the assessment having taken place beyond the
period of four years of the end of Assessment Year 2002-03 the
validity of the action would depend upon whether there was a failure
on the part of the Petitioner to disclose fully and truly all material
facts necessary for the assessment; (ii) The record before the Court
would show that on each of the three issues, the Petitioner had fully
and truly disclosed all the material facts necessary for the assessment;
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(iii) During the course of the assessment proceedings a notice was
issued to the Petitioner under Section 142(1) on 19 February 2004 to
which a detailed reply was submitted on 24 June 2004 and it was
only thereafter that an assessment was framed under Section 143(3)
on 21 March 2005; (iv) On each of the three issues the Petitioner had
disclosed that a deduction was being claimed under Section 80-IA, or
as the case may be, under Section 80-IB; the computation of profits
was disclosed, the basis of the claim was set forth. There was a
disclosure of all the primary facts necessary for the assessment. In
these circumstances, the jurisdiction under Section 147 could not
have been exercised in the present case where the assessment is
sought to be reopened beyond four years of the end of the relevant
Assessment Year.
6. On behalf of the Revenue it has been submitted that where
the reopening of an assessment takes place after the expiry of four
years from the end of the relevant Assessment Year, the validity of the
action would depend upon whether there was a full and true
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disclosure of the material facts. In the present case, it was urged that
the issue relating to the entitlement of the claim of the Petitioner to a
deduction under Section 80-IA in respect of the CPP was not
considered by the Assessing Officer. The Assessing Officer having
failed to consider the ground on which the assessment is sought to be
reopened, the action must be held to be lawful and proper.
7.
The parameters of the enquiry of the Court in the present
case would be defined by the circumstance that the assessment for
Assessment Year 2002-03 is sought to be reopened beyond a period of
four years. Consequently, the test to be applied is as to whether the
assessee had failed to disclose fully and truly all material facts
necessary for the assessment. Under the proviso to Section 147 where
an assessment has been made under Section 143(3), no action can be
taken under the Section after the expiry of four years from the end of
the relevant Assessment Year unless the income chargeable to tax has
escaped assessment by reason of the failure on the part of the
assessee to disclose fully and truly all material facts necessary for his
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assessment for that Assessment Year. Now it is in the background of
the legal position as it emerges from section 147 that the facts of the
case would have to be scrutinized.
8. In the computation of income, the Petitioner computed its
taxable income under the head of profits and gains of business at Rs.
899.48 Crores. Deductions were claimed under Section 80-IA and 80-
IB in the amount of Rs.157.09 Crores. In the notes appended to the
computation the Petitioner disclosed that a claim for relief under
Section 80-IA/IB has been made in respect of the newly established
industrial undertakings commissioned from financial year 1992-93 to
the financial year 2001-02. During the year 1999-2000 a major
expansion took place of the Vizag refinery by which the capacity of
the refinery was expanded. The Petitioner claimed that the profits
made by the expanded unit were eligible for deduction for seven
consecutive years under Section 80-IB(a). No claim was made for
Assessment Years 1999-2000 and 2000-01 since the expanded unit
did not generate profits. During the year in question the expanded
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unit had contributed to the profits to the extent of Rs.138.47 Crores
and accordingly a deduction was claimed. The tax audit report
under Section 44-AB was annexed to the return as is mandatorily
required by law. The nature of the deductions claimed under Section
80-IA and 80-IB was explained in the annexures. The deduction
under Section 80-IA on the CPP was claimed at Rs.86.37 lacs, on the
Lube Blending Plant at Silvassa under Section 80-IB at Rs. 14.44
Crores and under Section 80-IB on the VREP-II project of Rs.138.47
Crores.
9. For facilitating exposition, it would now be appropriate to
deal with each one of the three issues on which the assessment is
sought to be reopened, by considering the nature of the disclosures
made by the assessee : The first issue on which the assessment is
sought to be reopened is that in respect of its CPP at Vizag, the
assessee claimed a profit of Rs.86.37 lacs in respect of which a claim
for deduction was made under Section 80-IA. The profit and loss
account of the Gas Turbine generators discloses an income from the
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generation of electricity of Rs.56.43 lacs. In addition, the assessee
computed a saving in LSHS of Rs.29.95 Crores, thus reflecting an
income of Rs.86.39 Crores. The expenses being to the extent of Rs.
85.53 Crores the assessee reported a profit of Rs.86.37 lacs. The
bone of contention relates to the saving in LSHS of Rs.29.95 Crores.
According to the Assessing Officer, but for the aforesaid item, the
operations of the CPP would have actually reported a loss for the
Assessment Year and this was obviated by the savings in LSHS which
as noted above is reported at Rs.29.95 Crores. Together with its
profit and loss account for the unit, the assessee in its working notes
disclosed (i) the computation of profits and (ii) the break up on the
basis of which the computation was arrived at. The assessee disclosed
that the income was broken up into two components – (1) the value
of the electricity generated was computed at the rate at which
electricity could be purchased from the Andhra Pradesh Electricity
Board and (2) the value of the steam generated from the CPP was
computed in terms of the value of LSHS saved while generating
steam. According to the assessee, the captive power unit generated
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electricity and, based on the co-generation of power steam generation
is also unavoidable. Two options would have been available to the
assessee in the computation of the income arising out of the steam
generation. These would be either by taking the price in the open
market if the product was saleable or was actually sold or in the
alternative by considering the savings in the cost of the alternative use
made of the product. In the case of the steam generated, the
possibility of the use of the steam in the refinery process ruled out,
according to the assessee, the possibility of sale in the open market.
Since the consumption of LSHS to that extent as fuel would have
increased the cost of fuel / raw material in the refinery operations
and since the generation of steam in the co-generation of power and
steam in the captive power unit resulted in savings, the assessee
considered that to be its income in the profit and loss account of the
CPP at the Vizag refinery.
10. During the course of the assessment proceedings a notice
was issued to the assessee under Section 142(1) on 19 February 2004
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in which a specific disclosure was sought inter alia in respect of the
following :
“In Note no. 4 of the Notes to the return of income, you
have claimed relief u/s. 80IA, 80IB on LPG Bottling Plants
(Rs.297.70 lakh), Captive Power Plant (86.37 lakh),
Propylene Recovery Unit (Rs.330.43 lakh) and LubeBlending Plant (Rs.144.87 lakh) and Visakh Refinery
Expansion Phase II (Rs.13847.28). You are caused to
justify the claim on LPG Bottling Plants and to how bottling
plants are manufacturing units. Similarly, to justify yourclaim on Captive Power Plant, Propylene Recovery Unit,
Lube Blending Plant and Visakh Refinery Expansion PhaseII. In this regard you are also requested to furnish
complete, working for deductions u/s. 80IA/80IB for each
of the above units and method of allocation of H.O.
Expenses including interest, R&D, etc. to all these units.”
11. In response thereto the assessee submitted a reply on 24
June 2004 in which the claim to deduction under Section 80-IA on
the profit made by the CPP was discussed. The assessee also noted
that the deduction under Section 80-IA had been allowed in its own
case during the course of the earlier Assessment Years.
12. The material which has been placed on the record would
support the contention of the assessee that there was a full and true
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disclosure of all material facts relating to the claim of the assessee for
a deduction under Section 80-IA in respect of the profits made by the
CPP at Vizag. In computing those profits, the assessee disclosed the
two components which form a constituent element of the income of
the unit. The assessee furnished a break up of the value which it
placed on the generation of electricity and on the steam which had
been generated as a byproduct. There was a disclosure that the basis
for valuing the generation of electricity was the rate prescribed by the
Andhra Pradesh State Electricity Board and that the basis for the
valuation of the steam generated was the saving in LSHS which
would otherwise be the raw material for the generation of the steam.
Whether the assessee was correct or otherwise in adopting a
particular method for valuation does not fall for determination in
these proceedings since the question to which the Court has to
address itself is as to whether there was a full and true disclosure by
the assessee. The assessee disclosed that it claimed a deduction
under Section 80-IA. The computation of profits was disclosed. The
break up was explained. The assessee disclosed that its revenues
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were determined by taking two components viz. (i) the revenues
relating to the generation of electricity and (ii) the saving on the cost
of LSHS that was utilized in valuing the steam generation. In these
circumstances, the Revenue is not correct in its submission that there
was a failure on the part of the assessee to fully and truly disclose all
the material facts necessary for the assessment. As a matter of fact
we must also note that the submission which has been urged on
behalf of the Revenue is that the issue was not considered by the
Assessing Officer when the order of assessment was passed. The
question before the Court, however, is whether that in itself would
justify the inference that a full and true disclosure was not made.
Such an inference cannot be drawn since the record before the Court
would show that as a matter of fact there was a full and true
disclosure. Besides this, the attention of the Court has also been
drawn to the circumstance that a similar claim of deduction under
Section 80-IA has been consistently made and allowed in the case of
the assessee since 1990-91. The record before the Court inter alia
contains an application for rectification made by the assessee on 31st
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March, 1999 in respect of a deduction inter alia under Section 80-IA
on the CPP units of the Mumbai and Vizag refineries, the profit and
loss account for the Vizag refinery for 1995-96 which contains a
similar computation of income including the saving in LSHS and an
order dated 6 April 1999 passed under Section 154 by the Joint
Commissioner of Income Tax, Special Range -56 Mumbai. For all
these reasons were are of the view that the first issue on which the
assessment is sought to be reopened, the Revenue has failed to
establish a case for the reopening of the assessment beyond four
years.
13. The second issue on which the assessment is sought to be
reopened is that a claim under Section 80-IB was made in respect of
the VREP-II project. This according to the Assessing Officer did not
constitute the establishment of a new unit but would constitute a
splitting up or reconstruction of an existing business and therefore no
deduction was allowable. The record before the Court shows that in
response to the notice that was issued by the Assessing Officer under
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Section 142(1) on 19 February 2004 the assessee by its response
dated 24 June 2004 clarified that the Ministry of Petroleum and
Natural Gas had granted its approval for treating the additional
capacity of the expanded project at par with that of new refineries for
the purpose of the payment of import parity price. A copy of a letter
dated 17 June 2002 of the Petroleum Planning and Analysis Cell set
up by the Government of India in the Ministry of Petroleum and
Natural Gas was annexed. The assessee also made a further
disclosure in the following terms :
“Further, we submit that the eligibility of the expansion
unit for deduction u/s. 80I was considered by the Assessing
Officer for the Asst. Year 1990-91 when the first phase ofexpansion had eligible profits for deduction under the
Section. Copy of the relevant paras of the assessment
order for the Asst. Year 1990-91 accepting the claim of
deduction u/s. 80I for Visakh Refinery expansion as well as
Mumbai Refinery expansion is attached (Attachment 7).
For the same Asst. Year the deduction under the Section
including the marketing margin was adjudicated by the
CIT(A) vide his order dated 15.9.93. The learned CIT(A)
after examining the working of profit for the expanded unit
in detail, has held that the profits made by the expandedunit should also include the marketing profits for
computation of eligible profits of the Visakh Refinery
Expansion unit and Mumbai Refinery Expansion unit.
The Dept. has accepted the learned CIT(A)’s order and no
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16appeal has been preferred against the CIT(A)’s order. The
issue of inclusion of marketing profit for computing theeligible profits for deduction under Section 80I therefore
has reached finality.”
14. The assessee therefore clearly disclosed the basis on which
it was claiming a deduction under Section 80-IB in respect of the
VREP-II project. The attention of the Assessing Officer was
specifically drawn to the basis of the claim.
15. As regards the third ground on which the assessment is
sought to be reopened, the Assessing Officer has in his notice of
reopening stated that the Lupe Unit at Silvassa does not manufacture
any article or thing, but merely carries out the activity of processing.
Here as well, the assessee by its letter dated 24 June 2004 had
explained before the Assessing Officer, the basis on which a deduction
under Section 80-IB was claimed. The relevant disclosure in the letter
dated 24 June 2004 was to the following effect :
“We wish to submit that the activity of blending lubricating
oils is an activity amounting to manufacture since the
activity results in producing a new product different from
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17and Rules even an activity of labeling, relabelling,
repacking of lubricating preparations have been defined toamount to manufacture. … We submit that our claim of
deduction for the profits made by the Lube Blending Plantshave been accepted by the Assessing Officer in the earlier
Asst. Years.”
16. The Assessing Officer while framing the issue under Section
143 had observed thus :
“In respect of the Lube Blending Plant at Silvassa this is the
third year of the claim. It is seen that deduction claimed on
the Captive Power Plants product recovery units at the
Mumbai and Vizag refineries and on the LPG Bottling Plantshave been analysed in great detail during the course of
assessment proceedings for A.Y. 1995-96 where it has
already been held that the activity carried out by the
company at its LPG bottling unit did not constitutemanufacturing activity, as intended by the legislature since
it did not bring into existence any new substance nor was
the product, which was produced at the bottling plants is
commercially different or distinct article, and the bottling
activity has been described by the company itself as‘Marketing’ and not as ‘Manufacture’. The above stand of
the revenue has also been upheld by the CIT(A) from A.Y.
1992-93 onwards including A.Y. 1997-98 by the CIT(A)-1,
Mumbai in the order dated 1-1-2001.”
17. Following his discussion the Assessing Officer allowed a
deduction to the assessee only on the income from the CPP and
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Propylene Recovery unit and the Lube Blending Plant at Silvassa and
on a revised profit of the VREP-II unit which is thereafter computed in
the order of assessment. These facts would show that there was a
due application of mind by the Assessing Officer upon a full and true
disclosure being made by the assessee of the relevant facts.
18. In these circumstances, we have arrived at a conclusion
that the condition precedent to a valid exercise of the power to
reopen an assessment beyond the period of four years from the end of
the relevant year, Assessment Year 2002-03 has not been
demonstrated to exist. The Petition would have to be allowed and is
accordingly allowed by setting aside the notice issued by the Deputy
Commissioner of Income Tax on 23 March 2009 under Section 148
of the Act seeking to reopen the assessment for Assessment Year
2002-03. Rule is made absolute in these terms. There shall be no
order as to costs.
(Dr. D.Y.Chandrachud, J.)
(J.P. Devadhar, J.)
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