M/S Ortel Communications Ltd v. Dy. Commissioner of Income Tax

SANJIV KHANNA, J. (ORAL) Ortel Communications Limited by this writ petition impugns reassessmentnotice dated 26"^ March, 2012 issued under Section 147 read with Section 148 of the Income Tax Act, 1961 (Act, for short). The petitionerhas also impugnedorder dated 14'*^ February,2013 by which objections to the reassessment notice have been rejected.

¶2The petitioner is a company and for assessment year 2007-08 had filed their returnof incomeon 29^*^ October,2007 declaring'NIL' income. The case was taken up for scrutiny assessment and assessment order dated 24^*^ December, 2009 was passed in which disallowances/additions were made on account of fixed assets written off of Rs.44,68,170/- and sundry creditors outstanding since 31^' W.P.(C) 1992/2013 Certify that the digital and physical file have been compared and the digital data is as per the physical file and no page is missing. March, 2003 of Rs.3,70,231/-. However,income of the assesseewas determinedat 'NIL' after giving set of|broughtforward losses and bookprofitswere determinedat Rs.2,01,39,407/-under Section115JB of the Act. We shall refer to the original assessmentproceedingsand the communicationsaddressed by the petitioner-assesseein the said proceedings, subsequently.

¶3Afterthe originalassessment,auditobjectionwas raisedthat the ^ petitioner had claimed and was allowed expenditure of Rs.3,22,93,098/-on account of bandwidthcost in the profit and loss account. The audit objectionrecordsthat the amounthad been paidto upgrade the bandwidth and the expenditureincurred gave enduring benefit and, therefore, was required to be capitalised and added back to the income of the petitioner.

¶4Thereafter, the Assessing Officer recorded the following 'reasons to believe' and issued notice under Section 147 read with Section 148 of the Act:- "The perusal of the assessment records of M/s ^ Ortel Communicationsfor the assessmentyear 2007-revealed that the assessee claimed and was allowed expenditure of Rs.3,22,93,098/- on account of bandwidth cost in the profit and loss account. The same has been paid to upgrade its Bandwidth. Since, this expenditure gave an enduring benefit; of the assessee, it was required to be capitalized and added back to the income of the assessee. The mistake resulted in under assessment of income of Rs.3,22,93,098/- involving tax effect of Page2 of 16 Rs.1,08,69,855/-."

¶5The contentionofthe petitioneris that the 'reasonsto believe recorded above are factually incorrect and even otherwise a mere surmiseand conjecture.This was acase of 'changeofopinion'as this aspect and questionwas specificallyansweredand advertedto in the originalassessmentproceedings.Learnedcounselfor the respondents, on the otherhand, submitsthatthe AssessingOfficerhad not examined and consideredthe questionwhetherthe bandwidthupgradationcost was capitalor revenueexpenditureand, therefore,it is acase of 'non-appUcationor non-consideration'andnot 'changeofopinion'.

¶6The petitioner-assesseewas engagedin the businessofbuilding and operatingHybridFibreCoaxial(HFC)broadbandcommunications networksin the State ofOrissa. They provide cable TV, high speed internet services and telephone services. The cable network was designedand constructedwith returnpath capabilityand was capable ofprovidinghigh-speedcablemodemservice. ^

¶7In the written submission filed before the Assessing Officer duringthe courseoforiginalassessmentproceedingswith referenceto bandwidth cost of Rs.3,22,93,098/-, the petitioner-assesseehad specificallystatedas under:- "That during the year under assessment, company Incurred bandwidth cost of Rs 3,22,93,098/- to Page3of16 J. ^ enhance the capacityto transfer the data which is necessary to match with upgrading technology. Amount was paid to Reliance communications, Railtel and ViSNL. Bandwidth was upgraded from E3 level to DS 3 level. Expenses incurred has been claimed in profit and loss account being revenue exp. [Copies of Assessment Order, order passed by CIT (A) and Hon'ble ITAT, Delhi for AY 2001-02 and 2002-03 along with copies of Assessment order and order of CIT (A) for AY 200304, 2004-05 and 2005-06 with copy of assessment order of AY 2006-07 are annexed and marked as Annexure —l.Ucollvl."

¶8In the profit and loss account under the head 'expenditure' bandwidth cost of Rs.3,22,93,098/- has been separately and specificallydeclaredand claimedas a revenue expense. It is evident from the reply quoted above that the petitioneron being questioned aboutthe said expenditure,had highlightedthe natureand characterof the expenditureto the AssessingOfficerand had enclosedcopy of the earlier assessment orders etc. It was stated that bandwidth was upgraded from E3 level to DS3 level and the amount was paid to Reliance Communications, Railtel and VSNL for the said purpose. The said expenditurewas claimedas revenueexpenditurein the profit and loss account. The said statement was made in clear and categorical term without any ambiguity or doubt. It was not a fact or an entry whichrequiredelucidationi.e. an entrywhichwas hiddenor had to be deciphered. The claimofthe petitionerwas raisedand stated. Page4of16 foi /I

¶9In view of the aforesaidposition,the submissionofthe Revenue that duringthe originalassessment proceedings,expenditureincurred to upgrade bandwidth from E3 level to DS3 level which was not revenuebut capitalhad escapednotice and thus not examined,is not acceptable. The letter/writtensubmissions filed by the petitioner quotedabove, clearlyindicatesthatthe AssessingOfficerhad raiseda query and answerto the same was furnishedby the assessee. It may ^ not be possibleto ascertain,how and in whatmannerquerywas raised, but the undisputedpositionand accepted factual position is that the aforesaid response was filed before the Assessing Officer. It is obvious that the said responsehad a precursorand antecedent. The petitionerhad givendetailsandparticulajofthe saidexpense.

¶10It transpiresthat after audit objectionwas raised,the petitioner was asked to respondents and had submitted a letter dated 20 September, 2010 to the Assessing Officer. In the said letter it was ^ reiterated:- -•u ^ "Since the bandwidth refers to the capacity of the cables to transmit the data therefore, no questionarise about acquiringsuch cables by the assessee company because the assessee company has been availing bandwidth from M/s Reliance Communications Ltd, Railtel & VSNL to provide internet services to all its subscribers as is the case with other internet service providers like MTNL, BSNL, Airtel etc who have been availingbandwidth from other service providers.The company pays the Page5of16 bandwidth cost to the company who is providing bandwidth for to transmit the data on the internet and the cost is payable accordingto the capacity of the bandwidth availed. During the year the company has upgradedits bandwidthpurchasesto E3 level and DS3 level so to provideimprovedservicesto its subscriber which reduce the cost of the company as well as of the subscriber because with this upgradation services the subscriber is able to transmit the data or download the data at a higherspeedwith a lessertime. The company has not incurredany capitalexpenditurefor upgrading its bandwidth because technological developments causedthese changeson regularbasis as is the normal V^ case with other serviceslike mobile telephonewhich -rrT " were originally confined to only mobile telephone services whereas today with the technological developmentvalue added serviceslike e-mails,video and audio download are also being provided. Since the companyhas not incurredany expenditurefor making out a new asset and the amount claimed was paid only for availingthe transmissionof its data therefore,the same is allowable as revenue expense."

¶11Thus, the aforesaid explanationof the petitioner-assesseewas available before the Assessing Officer and was on record before 'reasonstobelieve'wererecordedon 26^^ March,2012.

¶12The AssessingOfficerin responseto the audit query and before recordingreasonsto believehad acceptedthe said factualpositionand had accordinglyreplied that the audit objectionwas not acceptable. The Assessing Officer had elucidate "A letter was issued to the assessee asking for a written reply on the above said audit objection. The assesseehas submitteda writtenreply (copy enclosed) on 20.09.2010 intimating that during the year the assesseeupgradedits bandwidthpurchasedto E3 level Page6of16 V-' J o. and DS3 level so to provide improved services to it subscriberwhich reduce the cost of the company as well as of the subscriberbecausewith this upgradation services the subscriber is able to transmit the data or downloadthe data at a higher speed with a lesser time. The company has not incurred anv capital expenditure for making out a new asset. The amount claimed was paid for availing the transmission of its data. Further. the assessee has claimed the similar expenditure in earlier years also." (emphasis supplied)

¶13Similar submissionwas made in the objections raised by the petitioner before the Assessing Officer to the reassessment notice. It was specifically pleaded:-

¶3That the assessee company in the normal course of business has been claiming bandwidth cost as revenue exp since assessment year 2001-2002 and the detail of bandwidth cost claimed and allowed in the assessments completed under section 143(3) of Act is as under: - Assessment year Bandwidth cost claimed Detail of assessment order 2001-2002 16,98,380 143(3) 2002-2003 22,65,098 143(3) 2003-2004 27,72,433 143(3) 2004-2005 64,34,524 143(3) 2005-2006 1,17,44,587 143(3) 2006-2007 2,53,94,261 143(3) 2007-2008 3,22,93,098 143(3)

¶4That in the assessment year 2007-2008 assessee Page7 of 16 J Sv O-companyclaimedbandwidthcostofRs. 3,22,93,098/-and in para 5.2 of the 12'' annual report it was mentionedthat the company has upgraded its bandwidthpurchase to E3 and DS3 level in the currentyear. The relevantparagraphs mter-aha reads: - . ^ at- "Your company is well equipped with its upgraded Network Operating Centre (NOC) with inability redundancyofkey elementsin the systemto supportand sustain the higher level of customer base and service. The company is planningsubstantialinvestmentin key network equipments such as fiberization and node poweringwhich will increasethe uptime of the services. The companyhas upgradedits purchasesto E3 and DS3 level in the current year. This apart from bringing in substantial cause reduction of bandwidth charges, will improvethe customerexperienceofhigh speed internet."

¶5That the assessee during the assessmentyear made paymentofbandwidthcostto the followings:-a) RelianceCommunicationsLtd. Rs. 3,11,38,210/-b) Railtel 4,32,879/-Rs, 7,22,012/-

¶6Assesseesubmitsthatthe bandwidthis onlythe capacity to transferdatathroughcableon internetand upgradingthe bandwidthrefer to increasingits capacity to transmitthe data which does not create any new asset. Increasing bandwidthis akin to wheelingofelectricityon the network installedby the distributioncompanies.The meaningofthe bandwidth is available on net in www.wikipedia.orqis annexed and marked as Annexure-3."

¶14It was furthersubmittedin the objections:- Assesseesubmits that admittedlythe notice under section 148 has been issuedbased on the materialthat was already available on record even at the time of completing assessment under section 143(3) of Act and further notice has been issued merely based upon the audit objections raisedby the auditpartyby actingas post officesimplicitor and without satisfyingthe sine-qua-nonof section 147 of Act and hence the notice issued is liable to be withdrawn." W.P.(C) 1992/2013 J

¶15In the impugnedorderdated 14^ February,2013, the Assessing Officerwhile rejectingthe objectionshas not dealt with the aforesaid submissionand contention. The impugnedorderrefersto the case law but not the factual matrix and the issue in question. This is not the correctway to deal with objectionsin which factual aspectshave been raised and it has been submittedthat the issue was consideredand debated mthe first round and 'reasonsto believe' as recordedwere surmisesand conjecturesand did nothave any foundationor basis.The contentionof the petitioner,therefore,has not been dealt with in the orderdisposingofthe objections. Evenin the counteraffidavitfiledby the respondents,there is no avermentnegating and contradictingthe factual matrix.

¶16The petitioner,it is accepted,was providingbroadbandservices. To provideimprovedand betterservicesto their subscribers,they had upgraded bandwidthfrom E3 level to DS3 level. The amount was g paid to third parties from whom the petitioner had procured bandwidth services. It is not the case where the petitioner had upgraded their assets to provide superiorbandwith from E3 level to DS3 level. No expenditurewas incurredon upgradingor towardsfixed assets/capitalowned by the petitioner. This is neither averred nor stated in the reasons to believe' or even in the order rejecting objectionsto reopening. The notepreparedby the AssessingOfficerin W-P-(C)1992/2013 Page9of16 V response to the audit objectionis to the contrary and states that the assesseehad not upgradedor enhancedthe bandwidthcapacityofhis own fixed assets. There is no allegationor assertionthatthe allegation IS false or wrong. That apart, we have alreadynotedthatthe question whether the expenditureincurred on upgradationof bandwidth was revenueor capitalin naturewas specificallyadvertedto and answered by the petitioner-assesseeduring the course of original assessment proceedings. The Assessing Officer acceptedthe stand and did not •make any addition.

¶17In the aforesaid factual position, ratio of the Full Bench's decisionin CommissionerofIncomeTax Vs. UshaInternationaltd. [2012] 348 ITR 485 (Delhi)is applicableon two counts;(i) 'changeof opinion and (ii) reasonsto believe'do not show any nexus and prima facie show and indicate that income chargeableto tax had escaped assessment.We wouldlike to reproducethe followingparagraphsfrom thejudgmentin the caseofUshaInternationalLtd. (supra):- "12. The said observationshave been rightly held to be contraryto the Full Bench decisionof the Delhi High Courtin KelvinatorofIndiaLtd. [2002] 256 ITR 1(Delhi) [FB] in EicherLtd. [2007] 294 ITR 310 (Delhi).The said decision in Eicher Ltd. (supra) makes reference to the decisionof KLM RoyalDutchAirlinesv. Asst. Directorof I. T. [2007] 292 ITR 49 (Delhi).KLM Royal case (supra) dealswith some otherissueson whichwe do not expressor make any observationapprovingor disapproving.Some of these aspects have been consideredand explainedin other decisionsin the lightofthejudgmentofthe SupremeCourt in the case of Rajesh Jhaveri Stock Brokers Pvt. Ltd. W.P.(C) 1992/2013 J [2007] 291 ITR 500 (SC).

¶13It is, therefore, clear from the aforesaid position that:

(1) Reassessment proceedings can be vahdly initiated in case return of income is processed under section 143(1) and no scrutiny assessment is undertaken. In such cases there is no change of opinion.

(2) Reassessment proceedings will be invalid in case the assessment order itself records that the issue was raised and is decided in favour of the assessee. Reassessment proceedings in the said cases will be hit by the principle of y "changeofopinion".

(3) Reassessment proceedings will be invalid in case an issue or query is raised and answered by the assessee in original assessment proceedings but thereafter the Assessing Officer does not make any addition in the assessment order. In such situations it should be accepted that the issue was examined but the Assessing Officer did not find any ground or reason to make addition or reject the stand of the assessee. He forms an opinion. The reassessment will be invalid because the Assessing Officer had formed an opinion in the original assessment, though he had not recorded his reasons.

¶14In the second and third situation, the Revenue is not without remedy. In case the assessment order is erroneous and prejudicial to the interest of the Revenue, they are entitledto and can invokepowerundersection263 nJ ofthe Act. This aspectand positionhas beenhighlightedin CIT V. DLF Power Ltd. I. T. A. No. 973 of 2011 decided on November 29, 2011-since reported in [2012] 345 ITR 446 (Delhi) and BLB Ltd. v. Asst. CIT Writ Peti-tion (Civil) No. 6884 of 2010 decided on December 1, 2011-since reportedin [2012] 343 ITR 129 (Delhi). In the last decision it has been observed (page 135) : "The Revenue had the option, but did not take recourse to section 263 of the Act, in spite of audit objection. Supervisoryand revisionarypowerundersection263 ofthe Act is available, if an orderpassed by the Assessing Officer is erroneous and prejudicial to the interest of the Revenue. Page 11 of16 Ir a An erroneous order contrary to law that has caused prejudiced can be correct, when jurisdiction under section 263 is invoked."

¶15Thus, where an Assessing Officer incorrectly or erroneously applies law or conies to a wrong conclusion and income chargeable to tax has escaped assessment, resort to section 263 of the Act is available and should be resorted to. But initiationof reassessmentproceedingswill be invalid on the groundof changeof opinion.

¶16Here we must draw a distinction between erroneous application/inter-pretation/understanding of law and cases where fresh or new factual infor-mation comes to the knowledge of the AssessingOfficer subsequentto the passing of the assessment order. If new facts, material or information comes to the knowledge of the Assessing Officer, which was not on record and available at the time of the assessment order, the principle of "change of opinion" will not apply. The reason is that "opinion" is formed on facts. "Opinion"formed or based on wrong and incorrectfacts or which are belied and untrue do not get protection and cover under the principle of "change of opinion". Factual information or material which was incorrector was not availablewith the AssessingOfficerat the time of original assessmentwould justify initiation of reassessment proceedings. The requirement in such cases is that the information or material available should relate to material facts. The expression "material facts" means those facts which if taken into account would have an adverse effect on the assessee by a higher assessment of income than the one actuallymade. They shouldbe proximateand not have remote bearing on the assessment. The omission to disclose may be deliberateor inadvertent.The question of concealmentis not relevant and is not a precondition which confersjurisdictionto reopenthe assessment. The aforesaid decisions/facts cases must be distinguished from cases where the material facts on record are correct but the Assessing Officer did not draw proper legal infer-ence or did not appreciate the implications or did not apply the correct law. The second category will be a case of "change of opinion" and cannot be reopened for the reason that the W.P.(C) 1992/2013 n V assessee, as required, has placed on record primary factual material but on the basis of legal understanding, the Assessing Officer has taken a particular legal view. However, as stated above, an erroneous decision, which is also prejudicial to the interests of the Revenue, can be made subject-matter of adjudication under section 263 of the Act."

¶18In Usha International (supra) reference was made to the decision of the Supreme Court in CIT Vs. P. V. S. Beedies P. Ltd. 1999] 237 ITR 13 (SC) and the following passage from the judgment in the case of New Light Trading Co. v. Commissioner ofIncome-tax [2002] 256 ITR 0391 (Del) was quoted:- "In the case of CIT v. P. V. S. Beedies P. Ltd. 1999] 237 ITR 13 (SC), the apex court held that the audit party can point out a fact, which has been overlooked by the Income-tax Officer in the assess-ment. Though there cannot be any interpretation of law by the audit party, it is entitled to point out a factual error or omission in the assessment and reopening of a case on the basis of factual error or omission pointed out by the audit party is permissible under law. As the Tribunal has rightly noticed, this was not a case of the Assessing Officer merely acting at the behest of the audit party or on its report. It has independently examined the materials collected by the audit party in its report and has come to an independent conclusion that there was escapement of income. The answer to the question is, therefore, in the affirmative, in favour of the Revenue and against the assessee."

¶19The present case clearly is not a case where entry or claim/deduction was not examined by the Assessing Officer. It was W.P.(C) 1992/2013 TjO examined and even answeredby the petitioner. No factual error or omission is pointed out or referred.

¶20On the second aspect we would like to quote the following paragraphfrom UshaInternational(supra) "As recorded above, the reasons recorded or the i documentsavailablemust show nexusthat in fact they are germane and relevant to the subjective opinion formed by the AssessingOfficerregardingescapement of income. At the same time, it is not the requirement ] that the Assessing Officer should have finally ascertained escapement of income by recording conclusive findings. The final ascertainment takes place when the final or reassessmentorderis passed.It is enoughifthe AssessingOfficercan showtentatively or prima facie on the basis of the reasons recorded and with reference to the documents available on record that incomehas escapedassessment."

¶21It would be appropriateto referto the decisionofthe Supreme Court in Sheo Nath Singh v. ACIT, (1971) 82 ITR 147 wherein interpretingthe expression"reasontobelieve",itwas held: There can be no manner of doubt that the words ^ 'reasonto believe'suggestthat the beliefmust be that of an honest and reasonable person based upon V reasonable grounds and that the Income-tax Officer may act on direct or circumstantial evidence but not on mere suspicion, gossip or rumour. The Income-tax Officer would be acting without jurisdiction if the reason for his belief that the conditions are satisfied does not exist or is not material or relevant to the belief requiredbythe section. The courtcan alwaysexamine this aspectthoughthe declarationor sufficiencyofthe reasons for the belief cannot be investigatedby the court." (Emphasissupplied) Page 14of16 \ J

¶22In Ganga Saran Sons (P)Ltd. v. ITO, (1981)130ITR 1 (SC), it has been observed as under: " The important words under s. 147(a) are "has reason to believe" and these words are stronger than the words "is satisfied". The belief entertained by the ITO must not be arbitrary or irrational. It must be reasonable or , in other words, it must be based on reasons which are relevant and material. The court, of course, cannot investigate into the adequacy or sufficiency of the reasons which have weighed with the ITO in coming to the belief, but the court can certainly examine whether the reasons are relevant and have a hearing on the V matters in regard to which he is required to entertain the belief before he can issue notice under S.147(a). if there is no rational and intelligible nexus between the reasons and the belief so that, on such reasons, no one properly instructed on facts and law could reasonably entertain the belief the conclusion would be inescapable that the ITO could not have reason to believe that any part of the income of the assessee had escaped assessment and such escapement was by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts and the notice issued by him would be liable to be struck down as invalid."

¶23Referring to the said judgment in the case of ACIT v. Rajesh Jhaveri Stock Brokers

(P) Ltd (2007) 291 ITR 500 (SC), it was ^ elucidated "16. Section 147 authorises and permits the Assessing Officer to assess or reassess income chargeable to tax if he has reason to believe that income for any assessment year has escaped assessment. The word "reason" in the phrase "reason to believe" would mean cause or justification. If the Assessing Officer has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot be read to mean that the Assessing Officer should have finally ascertained the fact by legal Page 15of 16 ] \ f V: ; s evidence or conclusion. The fiinction of the Assessing Officer is to administer the statute with soUcitude for the public exchequer with an inbuilt idea of fairness to taxpayers. As observed by the Delhi High Court in Central Provinces Manganese Ore Co. Ltd. v. ITO [1991 (191) ITR 662], for initiation of action under section 147(a) (as the provision stood at the relevant time) fulfillment of the two requisite conditions in that regard is essential. At that stage, the final outcome of the proceeding is not relevant. In other words, at the initiation stage, what is required is "reason to believe", but not the established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief. Whether the materials would conclusively prove the escapement is not the concern at that stage. This is so because the formation of belief by the Assessing Officer is within the realm of subjective satisfaction (see ITO v. Selected Dalurband Coal Co. Pvt. Ltd. 1996 (217) ITR 597 (SC)]; Raymond Woollen Mills Ltd V. ITO [ 1999 (236) ITR 34 (SC)]."

¶24In view of the aforesaid position, the writ petition is allowed and the reassessment notice and proceedings are quashed/set aside. No cgsts. DECEMBER 18,2013 NA ^ W.P.(C) 1992/2013 SANJIV KHANNA, J L SANJEEV SACHDEVA, J

<> $-22 * IN THE HIGH COURT OF DELHI AT NEW DELHI Date of decision: 18^*^ December,2013 + W.P.(01992/2013 M/S ORTEL COMMUNICATIONS LTD Petitioner Through Mr. Yogesh Jagia and Mr. Amit Sood Advocates. versus DY. COMMISSIONER OF INCOME TAX Respondent Through Ms. Suruchi Aggarwal, Sr. Standing Counsel. CORAM: HON'BLE MR. JUSTICE SANJIV KHANNA HON'BLE MR. JUSTICE SANJEEV SACHDEVA