Bharat Sanchar Nigam Ltd v. Deputy Commissioner Of Income

THE HIGH COURT OF DELHI AT NEW DELHI %Judgment delivered on: 09.05.2013 +W.P.(C) 550/2007 BHARAT SANCHAR NIGAM LTD. versus .. Petitioner DEPUTY COMMISSIONER OF INCOME .. Respondent AND +W.P.(C) 7707/2007 & CM 14692/2007 BHARAT SANCHAR NIGAM LTD. versus .. Petitioner DEPUTY COMMISSIONER OF INCOME TAX AND ORS. .. Respondents Advocates who appeared in these case:For the PetitionerFor the Respondent :Mr M.S. Syali, Sr. Advocate with Mr MayankNagiand Ms Husnal Syali, Advocate.:Mr Sanjeev Rajpal, Advocate. CORAM:- HON’BLE MR JUSTICE BADAR DURREZ AHMEDHON’BLE MR JUSTICE VIBHU BAKHRU JUDGMENT VIBHU BAKHRU, J 1.These two writ petitions are filed by Bharat Sanchar Nigam Limited(BSNL) and seek to challenge the notices under Section 148 of the Income TaxAct (hereinafter also referred to as “the Act") and the proceedings initiatedpursuant thereto, for reopening the concluded assessments for the assessmentyear 2001-02 and 2002-03. The petitioner has, inWrit Petition No. 550/2007 challenged the notice dated 23.11.2005 issued under Section 148 of the Act andthe order dated 08.02.2006 passed by the Assessing Officer rejecting theobjections raised by the petitioner against the reasons for issuance of the noticedated 23.11.2005. The Assessing officer had, by the notice dated 23.11.2005,initiated proceedings for reassessment of income for the period relevant to theassessment year 2001-02. The challenge in the Writ Petition No. 7707 of 2007 iswith respect to the notice dated 12.3.2007 issued under Section 148 of the Act forinitiating re-assessment proceedings in relation to the Assessment year 2002-03.As both the writ petitions raised similar issues, the same were taken up forhearing together and are being disposed off by this common order. 2.The petitioner is a Government Company and was incorporated on15.09.2000 under the Companies Act, 1956.Prior to the incorporation of thepetitioner company, the telecommunication services were being provided byGovernment of India, Ministry of Communication through its two departments,namelyDepartment of Telecommunication Services (in short “DTS”) andDepartment of Telecommunication Operation (in short “DTO”). The petitionercompany was incorporated pursuant to the policy of the Government of India(National Telecom Policy 1999) to hive off its business of providing telecomservices and operate the same through a corporate entity. The petitioner wasconstituted as a wholly owned Government of India enterprise for taking over thebusiness of providing telecommunication services from DTO and DTS. Thepetitioner started functioning w.e.f. 01.10.2000. The terms of transfer ofundertaking of telecom services from DTO and DTS to BSNL was recorded in anOffice Memorandum dated 30.9.2000 and the relevant portion of the same isquoted below: “3.Government of India has decided to transfer all assets andliabilities (except certain assets which will be retained by Department of Telecommunications required for the units and offices undercontrol of DoT, to be worked out later on), to Bharat Sanchar NigamLimited w.e.f. 1[st]October, 2000. The transfer of assets and liabilitiesto the Company will be subject to the following terms and conditions:- (i)TheCompanywillcarryoutthedutiesandresponsibilities regarding establishing, maintaining andworking all types of telecommunication services in thecountry in accordance with and under the terms andconditions of the licence granted by the CentralGovernment under the Indian Telegraph Act, 1885 andsuch other directions as may be given by the CentralGovernment from time to time,responsibilities regarding establishing, maintaining andworking all types of telecommunication services in thecountry in accordance with and under the terms andconditions of the licence granted by the CentralGovernment under the Indian Telegraph Act, 1885 andsuch other directions as may be given by the CentralGovernment from time to time, (i)TheCompanywillcarryoutthedutiesandresponsibilities regarding establishing, maintaining andworking all types of telecommunication services in thecountry in accordance with and under the terms andconditions of the licence granted by the CentralGovernment under the Indian Telegraph Act, 1885 andsuch other directions as may be given by the CentralGovernment from time to time,responsibilities regarding establishing, maintaining andworking all types of telecommunication services in thecountry in accordance with and under the terms andconditions of the licence granted by the CentralGovernment under the Indian Telegraph Act, 1885 andsuch other directions as may be given by the CentralGovernment from time to time, (ii)TheassetsandliabilitiesoftheDepartmentofTelecommunications, Department of Telecom ServicesandDepartmentofTelecomoperations(theGovernment) will stand transferred to the Company,with effect from 1[st]October, 2000. The details of theassets will be worked out as per records available withthe various Divisions and other units as on 30[th]September,2000afterrecordsandaccountsarefinalized up to this period.Telecommunications, Department of Telecom ServicesandDepartmentofTelecomoperations(theGovernment) will stand transferred to the Company,with effect from 1[st]October, 2000. The details of theassets will be worked out as per records available withthe various Divisions and other units as on 30[th]September,2000afterrecordsandaccountsarefinalized up to this period.(iii) The assets and liabilities in respect of the businesscurrentlybeingcarriedoutonaccountoftheGovernment shall stand transferred to the Company onthe book value thereof, which will be ascertained in themanner aforesaid.The book value of the assetscomprising the business being transferred to theCompany has been provisionally assessed as Rs 63,000crores. The said sum of Rs 63,000 crores will be treatedas theprovisionalvalue ofthebusiness beingtransferred to and taken over by the Company subjectto finalization of the transfer value by 31.03.2001 inconsultation with Ministry of Finance.currentlybeingcarriedoutonaccountoftheGovernment shall stand transferred to the Company onthe book value thereof, which will be ascertained in themanner aforesaid.The book value of the assetscomprising the business being transferred to theCompany has been provisionally assessed as Rs 63,000crores. The said sum of Rs 63,000 crores will be treatedas theprovisionalvalue ofthebusiness beingtransferred to and taken over by the Company subjectto finalization of the transfer value by 31.03.2001 inconsultation with Ministry of Finance. (iv) The Assets are being transferred to the Company inconsideration of Rs 5,000 crore equity (for which theCompany will issue Five Hundred crores Equity Sharesof face value of Rupees Ten each fully paid up havingconsideration of Rs 5,000 crore equity (for which theCompany will issue Five Hundred crores Equity Sharesof face value of Rupees Ten each fully paid up having aggregate value of Rupees Five Thousand crores to theVENDOR or his nominees), Rs 1500 crores ways, andmeans advance and the balance as a mix of long termdebt, free reserves and preference share capital. Theaccounting treatment of this mix shall be notified later. (v)The capital structure of Bharat Sanchar Nigam Limitedwill be finalized by the Ministry of Communications,Department of Telecommunications in consultationwith Ministry of Finance and the Comptroller andAuditor General of India, if necessary.will be finalized by the Ministry of Communications,Department of Telecommunications in consultationwith Ministry of Finance and the Comptroller andAuditor General of India, if necessary. (vi) The Company, Bharat Sanchar Nigam Limited shall beliable to make repayment of bonds raised by MTNL forDoT/DTS/DTO, which are now being transferred, tothe Company.liable to make repayment of bonds raised by MTNL forDoT/DTS/DTO, which are now being transferred, tothe Company. (v)The capital structure of Bharat Sanchar Nigam Limitedwill be finalized by the Ministry of Communications,Department of Telecommunications in consultationwith Ministry of Finance and the Comptroller andAuditor General of India, if necessary.will be finalized by the Ministry of Communications,Department of Telecommunications in consultationwith Ministry of Finance and the Comptroller andAuditor General of India, if necessary. (vi) The Company, Bharat Sanchar Nigam Limited shall beliable to make repayment of bonds raised by MTNL forDoT/DTS/DTO, which are now being transferred, tothe Company.liable to make repayment of bonds raised by MTNL forDoT/DTS/DTO, which are now being transferred, tothe Company. (vii) The Company as the successor company shall beresponsible for all assets and liabilitiesand forsatisfactory execution of all agreements, contracts andobligations in force, which pertain the business beingtransferred to it.responsible for all assets and liabilitiesand forsatisfactory execution of all agreements, contracts andobligations in force, which pertain the business beingtransferred to it. (viii) The Company shall be solely responsible for honouringand performing all contracts/agreements and shall beliable for any defaults, delays or non-performance. TheCompany shall keep for all times the Governmentindemnified from all claims.and performing all contracts/agreements and shall beliable for any defaults, delays or non-performance. TheCompany shall keep for all times the Governmentindemnified from all claims. (ix) After finalization of assets and liabilities and assets tobe retained by Dot regular transfer deed(s) will beexecuted subsequently in respect of transfer of businessto the Company listing out specifically all the assetsbeing transferred.be retained by Dot regular transfer deed(s) will beexecuted subsequently in respect of transfer of businessto the Company listing out specifically all the assetsbeing transferred. These orders will come into force from 1[st]October, 2000.” 3.A Memorandum of Understanding (MOU) was executed between theGovernment of India, Ministry of Telecommunications and BSNL on 30.09.2000for the purpose of transferring assets and liabilities from the Ministry of Communications to the petitioner. In terms of the said MOU, the function ofproviding telecommunication services was taken over by the petitioner companyand an agreement for transfer of business was also entered into between theGovernment of India, Ministry of Communication and BSNL.The saidagreement for transfer of business, inter alia, recorded that “the business ofprovidingtelecomservicesandtelecomnetwork,inter-alia,comprising,management, control, operations and maintenance of communications networkand services spread all over India, manufacturing, research and developmentand other facilities, some being also spread all over India, which business(hereinafter also referred to as “the Business"), recently entrusted to, andbeing currently carried on by DTO and DTS shall stand transferred to andvest in BSNL who has taken over or deemed to have taken over the same, asrunningconcern,subjecttotheprovisionsandstipulationsofthisAgreement.” 4.As per clause 6 of the agreement of transfer, the assets and liabilities inrespect of the business currently carried on account of DTS and DTO weretransferred to the petitioner at book values, which were at the relevant time beingascertained.The agreement also recorded that the parties had agreed that thetotal book value of the assets comprising the business of the petitioner would bein excess of Rs 63,000 Crores and therefore the said sum would be taken as theprovisional value of the business being transferred. Clause 7 of the agreementrecorded the consideration at which the assets were being transferred as under :- 4.As per clause 6 of the agreement of transfer, the assets and liabilities inrespect of the business currently carried on account of DTS and DTO weretransferred to the petitioner at book values, which were at the relevant time beingascertained.The agreement also recorded that the parties had agreed that thetotal book value of the assets comprising the business of the petitioner would bein excess of Rs 63,000 Crores and therefore the said sum would be taken as theprovisional value of the business being transferred. Clause 7 of the agreementrecorded the consideration at which the assets were being transferred as under :- “7.The Assets are being transferred to the Company inconsideration of Rs 5,000 crore equity (for which the Companywill issue Five hundred crores Equity Shares of face value ofRupees Ten each fully paid up having aggregate value of RupeesFive Thousand crores to the VENDOR or his nominees), Rs1500 crores ways and means advance and the balance as a mixconsideration of Rs 5,000 crore equity (for which the Companywill issue Five hundred crores Equity Shares of face value ofRupees Ten each fully paid up having aggregate value of RupeesFive Thousand crores to the VENDOR or his nominees), Rs1500 crores ways and means advance and the balance as a mix of long term debt free reserves and preference share capital. Theaccounting treatment of this mix shall be notified later.” 5.The petitioner filed its return of income for the period 15.09.2000 to31.03.2001, relevant to the assessment year 2001-02 on 26.03.2002 and declareda loss of Rs 58,46,31,20,000/-. The said return was taken up for scrutiny and theAssessing Officer framed an assessment under Section 143(3) of the Income TaxAct vide the assessment order dated 11.02.2004 assessing a net loss of Rs39,53,78,45,000/-. However, the company was covered under the provisions ofsection115JBoftheActanditdeclaredtaxablebookprofitatRs1801,28,11,000/- 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 148of the Act stating that he had reasons to believe that income of the petitioner hadescaped assessment within the meaning of section 147 of the Act and called uponthe petitioner to file its return of income for the said period.The petitionerrequested for the reasons for reopening of the assessment under section 148 ofthe Act which were furnished by the Assessing Officer under the cover of hisletter dated 22.12.2005. The reasons for issuance of notice under section 148 ofthe Act, as furnished by the Assessing Officer, referred to the capital structure ofthe petitioner company and the inference drawn by him was that the cost of assetswas being met by the general reserve as reflected in the capital structure of thecompany. As per the Assessing Officer, a sum equal to the general reserve wouldbe required to be reduced from the cost of the assets in terms of Explanation 10of Section 43(1) of the Act. The Assessing Officer observed that the depreciationhad been claimed by the petitioner on the cost of the assets without reducing theproportionate amount of reserves therefrom and on this basis the AssessingOfficer had formed a belief that the assessee had claimed excessive depreciation.The Assessing Officer indicated that the proportionate amount of reserves had to be reduced from the fixed assets to arrive at their actual cost on whichdepreciation would be allowable. be reduced from the fixed assets to arrive at their actual cost on whichdepreciation would be allowable. 7.The petitioner filed its objections on 20.01.2006 to the reasons asfurnished by the Assessing Officer in terms of the decision of the Supreme Courtin the case of M/s GKN Driveshafts (India) Ltd. v. ITO: (2003) 259 ITR 19(SC). The petitioner contended that all material facts had been placed before theAssessing Officer during the first round of assessment and various queries wereraised by the Assessing Officer inter-alia with respect to the valuation of theassets as well as the depreciation claimed by the petitioner and thus there was nonew fact which had been discovered subsequent to the assessment order whichwould warrant reopening of the concluded assessment. The petitioner objected tothe proposition that reserves were required to be reduced from the value of theassets for purposes of computing depreciation. It was contended by the petitionerthat this was only a change of opinion as to how depreciation was to be computedand thus it was impermissible for the Assessing Officer to initiate reassessmentproceedings on this ground. The petitioner also contended that Explanation 10 toSection 43(1) of the Act had no application in the present case as theconfiguration of the capital structure of the company could not possibly lead to aconclusion that the reserves of the petitioner company represented cost of assetswhich had been met by the Government of India in the form of a subsidy, a grantor a reimbursement.The reserves were neither a subsidy nor a grant orreimbursement by the Government of India and, therefore, the premise on whichthe assessment was sought to be reopened was erroneous. 8.The objections raised by the petitioner were rejected by the AssessingOfficer by an order dated 08.02.2006. The petitioner thus filed the present writpetition on 02.03.2006. However, the Writ Petition No. 550 of 2007 was notlisted 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 thewrit petition at its meeting held on 21.12.2006 which was communicated to thepetitioner vide a letter dated 03.01.2007. In the meantime, the Assessing Officercompleted the reassessment proceedings for the year 2001-02 by his order dated22.12.2006. The Assessing Officer recomputed the allowable depreciation at Rs56,28,89,21,000/- against the amount ofRs 1,26,46,77,42,000/- as computedearlier. The excess depreciation of Rs 70,17,88,21,000/- has been added to theincome of the petitioner for the relevant assessment year and the AssessingOfficer has raised a demand for a sum of Rs 802,93,34,358/- by the notice ofdemand dated 22.12.2006.The present petition (i.e. Writ Petition No. 550 of2007) was thereafter listed for hearing and by the order dated 01.03.2007 thisCourt 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 pertainto the subsequent period i.e., Assessment year 2002-03. The petitioner had filedits return of income for the relevant assessment year 2002-03 on 30.10.2002declaring a loss of Rs 19,27,43,00,000. However, the audited balance sheetdisclosed a profit of Rs 68,57,32,00,000 which was liable to tax under Section115JB of the Act. The said return was taken up for scrutiny and the AssessingOfficer framed the assessment under Section 143(3) of the Act vide theassessment order dated 28.02.2005. 10.The Assessing Officer issued notice dated 12.03.2007 of the Act forreopening the assessment for the period relevant to the Assessment Year 2002-03. At the request of the assessee, the Assessing Officer supplied the reasons forissuance of notice under Section 148 of the Act, under the cover of his letterdated 28.05.2007. The reasons furnished by the Assessing Officer for reopeningthe assessment are similar to the reasons as furnished by the Assessing Officer 10.The Assessing Officer issued notice dated 12.03.2007 of the Act forreopening the assessment for the period relevant to the Assessment Year 2002-03. At the request of the assessee, the Assessing Officer supplied the reasons forissuance of notice under Section 148 of the Act, under the cover of his letterdated 28.05.2007. The reasons furnished by the Assessing Officer for reopeningthe assessment are similar to the reasons as furnished by the Assessing Officer for initiating reassessment proceedings for the assessment year 2001-02 whichare the subject matter of challenge in the Writ Petition No. 550/2007. 11.The learned counsel for the petitioner contended that the reassessmentproceedings are illegal and without jurisdiction. It is contended that action of theAssessing Officer in seeking reassessment for the reasons as supplied indicatethat the assessments were sought to be reopened only on a mere change ofopinion as all relevant facts were within the knowledge of the Assessing Officerduring the first round of assessment and were subject matter of inquiry in theinitial assessment proceedings. The learned counsel for the petitioner has drawnour attention to Para 2 of Schedule T to the notes of accounts to the auditedbalance sheet which had been submitted to the Assessing Officer.The notesclearly disclose the value of the assets as well as the capital structure of thecompany. The relevant paragraph of the notes to accounts is quoted below:- “Assets and Liabilities taken over from DoT In pursuance of the Memorandum of Understanding dated30[th]September 2000 executed between President of India andBSNL all assets and liabilities in respect of business carried outby DTS and DTO were transferred to the Company with effectfrom 1[st]October 2000 at a provisional value of Rs 630,000Million. The value was subject to finalisation with Ministry ofFinance by 31[st]March 2001, which has not yet been done. Theassets and liabilities as on 1[st]October 2000 have beenclassified broadly under the following heads: -- Customer Deposits (Excluding interest accrued thereon)38606.5-- Net assets taken over by the Company571609-- Contingent liabilities taken over----- Contingent liabilities taken over---by the Company The net assets (including liabilities) transferred to theCompany as of 1[st]October 2000 are subject to confirmation byDoT as regards to ownership and the value. The Capital structure for BSNL concurred in by Ministry ofFinance and conveyed by Department of Telecommunications videtheir UN. No. 1-2/2000-B (Pt.) dated 1 December 2001 asconsideration for transferring the above stated assets and liabilitiesis as follows: -- Equity50000-- 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 assessmentproceedings relevant to the assessment year 2001-02, the Assessing Officerissued a questionnaire dated 13.12.2002 seeking various explanations for thepurpose of framing the assessment.Question nos. 5 and 6 of the saidquestionnaire are relevant as the Assessing Officer had raised queries regardingthe value of the reserves as well as the taxability of the treatment of the surplus inthe hands of the transferors (Department of Telecommunication Services andDepartment of Telecommunication Operation) the said queries are quotedbelow:- “5. Explain as to how the value of reserve, which factually is thebalance of surplus amounting to Rs 3,31,609/-, has been workedout. Whether any final decision as to the surplus available on account of such takeover in the hands of DTS and DTOseparately of the above said amount was finalized?” 6. In case no finalization as to the taxability or treatment of suchsurplus in the hands of DTS and DTO have been finalized,explain as to why such surplus should not be subjected to tax inthe hands of the assessee company?” “5. Explain as to how the value of reserve, which factually is thebalance of surplus amounting to Rs 3,31,609/-, has been workedout. Whether any final decision as to the surplus available on account of such takeover in the hands of DTS and DTOseparately of the above said amount was finalized?” 6. In case no finalization as to the taxability or treatment of suchsurplus in the hands of DTS and DTO have been finalized,explain as to why such surplus should not be subjected to tax inthe hands of the assessee company?” 13.The petitioner replied to the queries and the assessment order was framedafter considering the same. The assessment order also noted that the assets hadbeen transferred at book value which would not be less than Rs 63,000 Crores.The components, on the liability side of the balance sheet of the petitioner wereexamined and the Assessing Officer noted that the fixed components on theliability side consisted of share capital and loans aggregating to Rs20,000 Croresand the balance amount would be reflected as reserves which would increase ordecrease corresponding to the change in the book value of the assets as finalized.The relevant portion of the assessment order dated 11.02.2004 for the assessmentyear 2001-02 is quoted below:- "10.2It should be clearly understood that given the huge assetbase, it was not possible to arrive at the precise value of theassets handed over by the Government. Therefore, it wasdecided that the precise value of the total assets would bearrived at in due course and in any case it would not be lessthan Rs 63,000 Crore. Till the process of precise ascertainmentof the value of the assets transferred was completed it wasexpected that the amount would keep changing. This is true alsobecause in the next year the assessee took over further assetsamounting to Rs 3578 Crore and these were adjusted with theassets taken over as on 1.10.2000. Therefore, on the liabilityside the fixed components, consisting of capital and loan wereonly adding up to Rs 20,000 Crore as detailed above. Thebalancing figure was to represent the 'reserves' on the liabilityside and with the change in the value of the assets taken over the`reserve' was to be increased or decreased correspondingly. Thisformed the balance sheet of the company at the time of transferof business from Government of India to BSNL." 14.It is thus contended on behalf of the petitioner, that the Assessing Officerwas fully conscious of all relevant facts which had been duly disclosed beforehim. The provisions of Explanation 10 of Section 43(1) were not applicable andconsequently the cost of assets had been taken at the book value and depreciationwas computed accordingly. The subsequent action of the Assessing Officer inseeking to apply the provisions of Explanation 10 to Section 43(1) of the Actwould only tantamount to a change of opinion as no new material was discoveredwhich would warrant re-computation of depreciation, on the contrary, the issuesrelating to depreciation and value of assets had been discussed in the first roundof assessment itself. 15.The learned counsel for the petitioner also relied on a full bench decisionof this court in the case of CIT v. Kelvinator of India Ltd.:99 (2002) DLT 221,wherein it has been held that if the Assessing Officer has examined the facts andnot made an addition, it cannot be presumed that he had not applied his mind tothe assessment. The learned counsel also cited the decision of this court of in thecase ofCIT v. Usha International Ltd.: (2012) 348 ITR 485 (Del.) as also thedecision of the Supreme Court in the case ofCIT Vs. Kelvinator of India Ltd.:(2010) 320 ITR 561 (SC), in support of his contention that reassessmentproceedings cannot be initiated on a mere change of opinion. 15.The learned counsel for the petitioner also relied on a full bench decisionof this court in the case of CIT v. Kelvinator of India Ltd.:99 (2002) DLT 221,wherein it has been held that if the Assessing Officer has examined the facts andnot made an addition, it cannot be presumed that he had not applied his mind tothe assessment. The learned counsel also cited the decision of this court of in thecase ofCIT v. Usha International Ltd.: (2012) 348 ITR 485 (Del.) as also thedecision of the Supreme Court in the case ofCIT Vs. Kelvinator of India Ltd.:(2010) 320 ITR 561 (SC), in support of his contention that reassessmentproceedings cannot be initiated on a mere change of opinion. 16.The learned counsel for the petitioner also urged that, even on merits, noreasonable person could come to the conclusion that the reserves of the companyrepresented cost of the assets of the company being met by the government in theform of a subsidy, grant or reimbursement so as to attract the provisions ofExplanation 10 to Section 43(1) of the Act.It is contended that treating thereserves separately from the capital was fallacious as the reserves represented shareholder’s fund and the value of the shares would include not only the facevalue of shares but also reserves and surpluses. 17.We have heard the learned counsel for both the parties and the principalquestion that needs to be addressed is whether the action of the Assessing Officerin reopening the assessment is based on any tangible material or represents only amere change of opinion? The second issue that can be considered is whether, onthe basis of the capital structure of the petitioner, an inference could be drawnthat reserves represented cost of assets met by the government so as to fall withinthe ambit of Explanation 10 to Section 43(1) of the Act? 18.The petitioner company has been incorporated to provide the telecomserviceswhichwerebeingcarriedoutearlierbyDepartmentofTelecommunication Services (DTS) and Department of TelecommunicationOperations (DTO). As per the decision of the Government of India, the businessbeing conducted by DTO and DTS were vested with the petitioner company.This was pursuant to NTP 1999, whereunder the Government had decided tocorporatise certain services and operations being carried on by the Department ofTelecommunications under the Ministry of Communications. Thus, in a sensethe Government decided to incorporate a new company as a Government of Indiaenterprise to carry on the business of telecom services instead of conducting thesame directly. The assets were to be transferred at book values. The value of netassets was agreed to be in excess of Rs 63,000 Crores and, therefore, the samewas provisionally taken as a book value of the business being transferred. Theconsideration for the same was agreed to be met by issue of equity capital of Rs5000 Crores (500 Crore shares of the face value of Rs 10/- each), preferenceshare capital of Rs 7500 Crores and debt of Rs 7500 Crores. The balanceconsideration was reflected as reserves.This capital structure was also duly disclosed by the petitioner company in its Directors Report forming a part of thefirst 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 MoUdated 30[th]September, 2000, signed with the Government of India,Ministry of Communications, your Company took over the business oferstwhile Deptt. of Telecom Services and Deptt. of Telecom Operationswith effect from 1[st]October, 2000 on a going concern basis alongwithall the assets, liabilities and all the contractual obligations. Thebusiness was transferred to the Company at an estimated valueof Rs 63,000 crores. The Capital Structure of the Company asindicated by DoT is as under : Rs 5000 croresFully paid up Equity Capital.Rs 7500 croresPreference Share Capital.Rs 7500 croresLoans. The Balancing figure will be represented by the Reserves.” The Authorised Share Capital of your Company is Rs 10000 crores,and the present paid up capital is Rs 5000 crores. Pursuant to the MoUdated 30[th]September, 2000, signed with the Government of India,Ministry of Communications, your Company took over the business oferstwhile Deptt. of Telecom Services and Deptt. of Telecom Operationswith effect from 1[st]October, 2000 on a going concern basis alongwithall the assets, liabilities and all the contractual obligations. Thebusiness was transferred to the Company at an estimated valueof Rs 63,000 crores. The Capital Structure of the Company asindicated by DoT is as under : Rs 5000 croresFully paid up Equity Capital.Rs 7500 croresPreference Share Capital.Rs 7500 croresLoans. The Balancing figure will be represented by the Reserves.” 19.Paragraph 2 of schedule T to the Final accounts for the period 15.9.2000to 31.3.2001 containing the notes to the accounts as reproduced hereinbefore alsodisclosed the value at which the assets were transferred to the petitioner and alsothe capital structure as was decided at the material time.Indisputably, theAssessing Officer had occasion to examine the aspect of valuation of assets andthe same is also clearly evident from the questionnaire framed by the Assessingofficer for the purposes of scrutiny of the return filed by the petitioner. Merelybecause there is no discussion regarding applicability of Explanation 10 toSection 43(1) of the Act cannot lead to the conclusion that the Assessing Officerwas ignorant of the said provisions. There is no occasion for us to presume thatthe assessment order framed by the Assessing Officer was without application of mind as to the relevant facts and the applicable laws. A full bench of this courthas held in the case ofCIT v. Kelvinator of India Ltd. (DHC)(supra) as under: “43. We also cannot accept submission of Mr Jolly to the effect thatonly because in the assessment order, detailed reasons have not beenrecorded on analysis of the materials on the record by itself mayjustify the Assessing Officer to initiate a proceeding under Section147 of the Act.The said submission is fallacious.An order ofassessment can be passed either in terms of Sub-section (1) ofSection 143 or Sub-section (3) of Section 143. When a regular orderof assessment is passed in terms of the said Sub-section (3) ofSection 143 a presumption can be raised that such an order has beenpassed on application of mind. It is well known that a presumptioncan also be raised to the effect that in terms of Clause (e) of Section114 of the Indian Evidence Act the judicial and official acts havebeen regularly performed.…” 20.Admittedly, no new tangible material has been discovered subsequent tothe framing of the first assessment relating to the assessment year 2001-02. Thereasons as furnished by the Assessing Officer, ex-facie, indicates that he hassought to make certain inferences based on disclosures which were already onrecord and had been considered while framing the first assessment. The relevantportion of the reasons for issue of notice under Section 148 are quoted below: “The assessee company came into existence on 1[st]October2000 and the year under consideration is the first year of the assessee.The history of the assessee company is that in pursuance to the NewTelecom Policy, 1999 the Government decided to corporatise theservice provision functions of the Department of Telecommunication(DoT) were carved out for providing telecom services in the countryand maintaining the telecom network factories. The business ofproviding telecom services and running the telecom Factories wastransferred to the new company i.e. BSNL w.e.f. 1.10.2000 AND THEGovernment retained functions of policy formulation, licencing, R&Detc. “The assessee company came into existence on 1[st]October2000 and the year under consideration is the first year of the assessee.The history of the assessee company is that in pursuance to the NewTelecom Policy, 1999 the Government decided to corporatise theservice provision functions of the Department of Telecommunication(DoT) were carved out for providing telecom services in the countryand maintaining the telecom network factories. The business ofproviding telecom services and running the telecom Factories wastransferred to the new company i.e. BSNL w.e.f. 1.10.2000 AND THEGovernment retained functions of policy formulation, licencing, R&Detc. The takeover of the assets and liabilities by the Company wasin terms and conditions with the Office Memorandum No.-2-30/2000dated 30.09.2000 issued by the Ministry of Communications, Govt. ofIndia. In terms of this OM dated 30.09.2000, the total book value ofthe assets transferred to BSNL was provisionally assessed as `63,000crores subject to finalization of the transfer value by 31.03.2001. Inthe consultation with the Ministry of Finance. The assets transferredincluded fixed assets (like land, building etc.) and trading assets (likedebtors raised by DOT and not realized till the time of transfer ofbusiness). Para 3 (iv) of the OM further mentioned that the assets weretransferred to the Company in consideration of Rs 5000 crores equity(for which the Company will issue Five Hundred crores Equity Sharesof face value of Rs 10/- each fully paid up having aggregate value ofRs Five Thousand crores to the VENDOR or his nominees), Rs 1500crores ways and means advance and the balance as a mix of long termdebt, free reserves and preference share capital. It was also mentionedthat the accounting treatment of this mix would be notified later. Para 3 (v) of the OM mentioned that the capital structure ofBSNL would be finalized by the Ministry of Communications,Department of Telecommunications in consultation with Ministry ofFinance and the Comptroller and Auditor General of India, ifnecessary. Accordingly, another Office Memorandum No. 67-2/2002-OCdated19.06.2002wasissuedbytheDepartmentofTelecommunications, Govt. Of India regarding the terms of capitalstructure and package of measures in the form of financial reliefs. Asper this OM the capital structure of BSNL was as follows: Paid up Equity Share CapitalRs 5000 crores9% (Non-Cumulative) PreferenceRs 7500 croresGovernment LoanRs 7500 croresMTNL LoanRs 3000 croresReservesBalance of assetValue transferred. During the course of assessment for the A.Y. 2003-04, theassessee was required to explain the nature of reserves as mentionedin the capital structure of BSNL. In response the assessee stated that itis in the nature of a ‘capital reserve’ and is the ‘balance of asset value transferred’. The assessee further gave a mathematical equation forreserves as: RESERVES = Asset – Liabilities – Paid-up Equity Capital – 9% (NC)Preference Share Capital – Government Loan – MTNL Loan. Thus, from the assesse’s definition of reserves, the following can bederived: 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 astrading assets. Therefore from the above equation it is clear that partof the cost of fixed assets of the assessee company are met by thereserves, which as per the assessee are in the nature of capitalreserves. This means that to the extent of reserves, the cost, of fixedassets of the assessee company is met by the Government. transferred’. The assessee further gave a mathematical equation forreserves as: RESERVES = Asset – Liabilities – Paid-up Equity Capital – 9% (NC)Preference Share Capital – Government Loan – MTNL Loan. Thus, from the assesse’s definition of reserves, the following can bederived: 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 astrading assets. Therefore from the above equation it is clear that partof the cost of fixed assets of the assessee company are met by thereserves, which as per the assessee are in the nature of capitalreserves. This means that to the extent of reserves, the cost, of fixedassets 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 actualcost of assets to the assessee, reduced by that portion of the costthereof, if any, as has been met directly or indirectly by any otherperson or authority. Explanation 10 to this sub-section further statesthat where a portion of the cost of an asset is met directly or indirectlyby the Central Government in the form of a subsidy or grant orreimbursement (by whatever name called), then so much of the cost asis relatable such subsidy or grant or proviso to this explanation furtherstates that where such subsidy or grant or reimbursement is of suchnature that it cannot be directly relatable to the asset acquired, somuch of the amount which bears to the total subsidy or reimbursementor grant the same proportion as such asset bears to all the assets suchasset in respect of the or with reference to which the subsidy or grantor reimbursement is so received, shall not be included in the actualcost of the asset to the assessee. In the instant case part of fixed assets and part of other assetsin met by the Government in form of reserves created at the time ofcorporatisation. Thus, the actual cost of fixed assets to the assesseemust be reduced by that proportion of the reserves as the fixed assetsbears to all the assets taken over at the time of corporatization.” 21.It is apparent from the above that the conclusion drawn by the AssessingOfficer that the cost of fixed assets of the petitioner company has been met by theGovernment is based on the capital structure as was recorded in variousdocuments including the Office Memorandum dated 30.09.2000 issued by theMinistry of Telecommunication, Government of India.Whereas the earlierAssessing Officer had not thought it fit to conclude that the cost of the fixedassets were required to be reduced to the extent of the reserves during the firstround of assessment, the reasons as recorded disclose that this was sought to bedone by reopening the assessment. This in our view represents a clear change inthe opinion without there being any further “tangible material” to warrant thesame. It is trite law that a mere change of opinion cannot be a reason forreassessing income under Section 147 of the Act. The Supreme Court in the caseof CIT vs. Kelvinator of India Ltd. (SC)(Supra) has held as under:- “On going through the changes, quoted above, made to section 147of the Act, we find that, prior to the Direct Tax Laws (Amendment)Act, 1987, reopening could be done under the above two conditionsand fulfillment of the said conditions alone conferred jurisdiction onthe Assessing Officer to make a back assessment, but in section 147of the Act (with effect from 1[st]April, 1989), they are given a go-byand only one condition has remained, viz., that where the AssessingOfficer has reason to believe that income has escaped assessment,confers jurisdiction to reopen the assessment.Therefore, post-1stApril, 1989, power to reopen is much wider. However, one needs togive a schematic interpretation to the words “reason to believe”failing which, we are afraid, section 147 would give arbitrary powersto the Assessing Officer to reopen assessments on the basis of “merechange of opinion”, which cannot be per se reason to reopen. Wemust also keep in mind the conceptual difference between power toreview and power to reassess. The Assessing Officer has no powerto review ; he has the power to reassess. But reassessment has to bebased on fulfilment of certain pre-conditions and if the concept of“change of opinion” is removed, as contended on behalf of theDepartment then, in the garb of reopening the assessment, reviewwould 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 toreopen, provided there is “tangible material” to come to theconclusion 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 dated23.11.2005 and 12.03.2007 under Section 148 of the Act and all proceedingsinitiated pursuant thereto are illegal and are liable to be quashed. 23.In view of our decision above, it is not necessary to examine the questionwhether the configuration of the capital structure of the petitioner could by itselfprovide a reason for the Assessing Officer to believe that provisions ofExplanation 10 to Section 43(1) of the Act were applicable and the book value atwhich the assets were vested with the petitioner were required to be reduced tothe extent of the reserves of the company. However, having heard the counsel forthe parties on this issue, it is apposite that we consider the same. 24.Explanation 10 to Section 43(1) of the Act is as under: “Explanation 10. - Where a portion of the cost of an asset acquiredby the assessee has been met directly or indirectly by the CentralGovernment or a State Government or any authority establishedunder any law or by any other person, in the form of a subsidy orgrant or reimbursement (by whatever name called), then, so muchof the cost as is relatable to such subsidy or grant or reimbursementshall not be included in the actual cost of the asset to the assessee: Provided that where such subsidy or grant or reimbursement is ofsuch nature that it cannot be directly relatable to the asset acquired,so much of the amount which bears to the total subsidy orreimbursement or grant the same proportion as such asset bears toall the assets in respect of or with reference to which the subsidy orgrant or reimbursement is so received, shall not be included in theactual cost of the asset to the assessee.” 25.The Assessing Officer seems to have proceeded on an assumption thatwhereas the value of share capital, issued to the Government as partconsideration for the transfer of business to the petitioner company, is limitedonly to the face value of the shares, the reserves represent a subsidy, grant orreimbursement for meeting the cost of assets transferred. We find no basis forsuch an assumption. We are hard pressed to imagine as to how free reserves andsurpluses of a company can be considered anything but as part of shareholdersfunds. 25.The Assessing Officer seems to have proceeded on an assumption thatwhereas the value of share capital, issued to the Government as partconsideration for the transfer of business to the petitioner company, is limitedonly to the face value of the shares, the reserves represent a subsidy, grant orreimbursement for meeting the cost of assets transferred. We find no basis forsuch an assumption. We are hard pressed to imagine as to how free reserves andsurpluses of a company can be considered anything bu