The Hindu Business Line : Throwing stones into still waters

THE finality of an assessment can be upset if the assessing officer (AO) has recourse to the provisions for reopening the completed assessment under Sections 147 and 148 of the Income-Tax Act, 1961. Section 147 had been radically amended by the Direct Tax Laws (Amendment) Act of 1987 with effect from April 1, 1989. The clauses conferring power to reopen on the basis of information and on the basis of reason to believe suppression of income were all altered and a proviso was added to Section 147 limiting the power to reopen an assessment to four years unless there has been a failure to file a return or make full disclosure.

There is also the power to reopen on the basis of a finding or direction given in appeal. The law prior to the amendment was that mere change of opinion on the part of the income-tax officer (ITO), would not entitle him to reopen a completed assessment. It was also held in the past that mere obiter in an appellate order will not amount to a finding or direction.

The Department was under the impression that these settled propositions of law may not hold water under the amended law. The matter was being disputed in several High Courts. The Supreme Court has said the last word on the subject in CIT vs Foramer France (264 ITR 556) on January 16, 2003.

Foramer was a foreign company incorporated in France, engaged in the business of oil exploration and providing expertise and assistance in the said field throughout the world. The company was operating under three contracts with the ONGC for drilling operations by employing its own rig and for manning and management services for supervision of drilling activities carried on by the ONGC on its rigs.

It supplied its own technical personnel and expertise in manning such contracts. It was assessable only in respect of income accrued or deemed to accrue in India. As per Article XVI of the Indo-French Double Taxation Avoidance Agreement, it filed a return disclosing income by way of proceeds from manning and management contract as fee for technical services.

The income-tax officer (ITO) issued an order under Section 195(2) directing the ONGC to deduct tax at 30 per cent on the income from the contract. The income relating to the rig was returned as ordinary business income. In the assessment on the company made under Section 143(3), the AO held that the proceeds from manning and management contracts with the ONGC were taxable as business income. The CBDT consulted the Attorney General and issued instructions in November 1990 affirming this view. The assessments had become final.

In November 1998, the Department issued notices under Sec 148 to initiate re-assessment proceedings. It referred to the ruling of the Tribunal relating to the taxability of income of an expatriate employee of the company holding that the company's income was to be treated as fees for technical services and not as business income. This was in the case of Boudier Christian, a technician.

The reassessment notice was challenged before the Allahabhad High Court as being without jurisdiction. It was pleaded that all the facts were disclosed and there was no escapement of income attributable to any failure on the part of the company to furnish a return under Section 139 or respond to a notice under Section 142 or 148.

No re-opening was possible after four years unless there was a failure to disclose material facts. The company had returned the income as fees for technical services but the Department chose to tax the same as business income.

Thus, the reopening was based on mere change of opinion.

The Tribunal's observation in the Boudier Christian case cannot govern the question of taxability of the corporate income of the company. The Revenue contended before the court that the reassessments were based on the findings of the Tribunal in the cases of the company's employees, wherein it was held that the income of the company was assessable as fees for technical services.

It was also pleaded that after the amendment with effect from April 1, 1989, the existence of pre-conditions in the earlier law were no longer necessary. Re-assessment was necessitated not because of change of opinion but because of the findings recorded by the Tribunal in the Boudier Christian case.

The Allahabhad High Court rejected the submissions on behalf of the Department. It pointed out that the amended law has made a radical departure from the original Section 147. When the notice was issued under Section 148 in November 1998, the amended Section 147 had come into force.

There was admittedly no failure on the part of the company to make a return or to disclose material facts necessary for the assessment.

The Tribunal's observation in the cases of the employees of the company will not amount to a direction or finding contemplated by Section 153(3)(ii).

The observations of the Tribunal should have been made in the case of the company's appeal to amount to a direction or finding. While employees were governed by Article XIV, company's income was to be computed under Article III or XVI of the Treaty.

The observations of the Tribunal cannot be considered either as a direction or finding. The Department's action was based on a mere change of opinion. It was barred by limitation mentioned in the proviso of Section 147.

This ruling of the Allahabahad High Court was upheld by the Supreme Court.

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