By TIOL News Service

CHENNAI, JAN 29, 2018: THE issue is - Whether if SCN does not refer to the provisions of Section 80IB(5), such mistake is serious in nature and cannot be cured by taking recourse to Section 292B. YES is the answer.

Facts of the case

The Assessee-company, a subsidiary of an entity by the name Cairn Energy PLC. Cairn Energy PLC, engaged in oil and gasexploration in India. The Assessee had filed its return for the relevant AY declaring its total income after claiming a deduction u/s 80-IB(9). In the course of the assessment proceeding, the AO noted that the Assessee had acquired participating interest in five oil and gas blocks. For acquiring such participating interest, Assessee had entered into production sharing contracts (PSC) with Indian Govt and joint operating agreement (JOA) with other joint venturers involved in exploration of oil and operation of oil fields. Furthermore, to carry on exploration and operations of each of the blocks, the Assessee entered into an "Unincorporated Joint Venture Agreements" (UJV) with other joint venturers. As per the joint venture agreements, Assessee had to operate each of the block. The Assessee stated that the deduction so claimed was attributable to two gas fields namely, the Satellite Gas Field (SGF) and Laxmi Gas Field (LGF). Further, notices u/s 143(2) were issued and the Assessee was asked to submit its justification with regard to its claims for deduction. In reply, the Assessee submitted that it had operated two eligible tax holidays undertakings, i.e., the SGF unit and the LGF unit. The Assessee had also furnished supporting documentary evidences alongwith Chartered Accountant's (CA's) certificate for each of the two gas fields, the Audit Report in the prescribed form i.e., 10CCB and the P&L account. It was mentioned that of the two units, namely, SGF and LGF on which deductions u/s 80-IB(9) were being claimed, the SGF commenced production in September, 2001 and LGF commenced production in November, 2002. The Assessee also mentioned that the computation of such deduction was done on similar lines in its returns for the preceding AYs. However, the AO recomputed the Assessee's income and disallowed the claims under three heads i.e, (i) provision made with respect to site restoration cost; (ii) purchase of software; and (iii) club membership fee. The deduction claimed u/s 80IB(9) was sustained. However, the DIT(IT) issued notice u/s 263 proposing to revise the assessment order passed by the AO as it was erroneous and prejudicial to the interest of the Revenue. In response to the said notices, the Assessee primarily replied that the assessment was completed after due examination. As per the assessee, the AO had duly examined its claim and allowed it after examination as required. However, as per the DIT(IT), AO had allowed the claim u/s 80-IB(9) without examining the issue in the manner required under law. The DIT(IT) noted that the Assessee failed to maintain separate accounts for the units on which it had claimed deduction u/s 80-IB and the SGF unit was only a part of Ravva block, which was in operation since 1994 and was not a separate undertaking, as required u/s 80-IB(5). Further, the audited accounts for preferring a claim u/s 80-IB was filed for the relevant AY only and expenses incurred for SGF unit, prior to year of its commercial production, were never carried forward or set off before working out the eligible deduction. Again, the DIT(IT) noted that apportionment of expenses on a pro rata basis was itself an indicator that separate accounts for the units preferring claim u/s 80-IB, were never maintained and separate audits were never done by the Assessee. Likewise, for LGF unit, observation of DIT(IT) was that it was not a distinct undertaking but only a part of CBOS 2 block. Therefore, the AO was directed to re-examine the allowability of deduction u/s 80-IB.

On further appeal, the Tribunal stated that the Assessee's claim for deduction with regard to the SG and LGF unit was supported by separate audit reports, as required u/s 80IA(7), in the prescribed form, i.e., Form No.10CCB. Alongwith the two audit reports concerning the SGF and LGF unit, the Assessee had also filed a computation setting out the manner in which, it had arrived at the deduction claimed by it u/s 80IB(9). The AO had sought information from the Assessee as to the basis on which, deduction was claimed by the Assessee u/s 80IB(9). Therefore, the Tribunal sustained the findings made by the DIT(IT).

On appeal, the High Court held that,

++ this court believes that, if, the Assessee is not confronted with material, which is available with the DIT, which has caused him to exercise the revisional power vested in him u/s 263, the exercise of jurisdictional would be irregular. Section 263 confers powers on the DIT to revise the assessment order, albeit, after giving the Assessee an opportunity of being heard, and after making and causing such enquiry to be made, as may be deemed necessary. Therefore, failure to put to the Assessee areas of concern and/or objection and underlying material, if any, that the DIT may have in his possession would turn the exercise of granting an oral hearing an empty formality;

++ the Revenue's record disclosed that the proposal to exercise power u/s 263 emanated from an audit objection. Based on the audit objection SCN was issued to the Assessee. The record further showed that the SCN, which is dated 21.01.2009, in the first instance, fixed the date of hearing as 13.02.2009, which was adjourned to 05.03.2009, at the request of the Assessee. The record also disclosed that the one and only time the Assessee's representative was called for hearing was on 05.03.2009. On that date, the Assessee filed, via its representative, Chartered Accountant, written submissions dated 25.02.2009. There is nothing on record to suggest that the concerns and/or objections that the DIT may have had vis-a-vis the assessment order were put to the Assessee. There is nothing on record which would suggest that the DIT had confronted the Assessee with any material, in particular, with regard to the conclusion that he has reached which is that the two units, that is, SGF and LGF units, were not separate undertakings and hence, not eligible to claim deduction u/s 80IB;

++ therefore, even if, this court accept, for the moment, the line of reasoning taken by the Tribunal that there was no effective variance between what was stated in the SCN and that, which was found mentioned in the DIT's order, it is unable to accept the stand of the Revenue that the DIT had, in fact, put his concern and/or the material, on which he relied, to the Assessee, before reaching a conclusion in the matter that the power vested in him u/s 263 was required to be exercised;

++ the order of the DIT consists of several factual errors, which ignores, completely, the material placed on record by the Assessee. Aspects as to whether or not SGF and LGF units were separate undertakings and as to why SGF unit ought to have carried forward the losses of the period prior to the date of commencement of commercial production and have it set it off against profits derived from the said unit, were, evidently, not put to the Assessee. The Tribunal, in its judgement and order, skirts this vital issue. Therefore, this court believes that there is no finding returned by the Tribunal that the concerns articulated in the order of the DIT were put to the Assessee with an opportunity to rebut the same;

++ the Tribunal seems to have, clearly, erred in holding that since, the SCN did not refer to the provisions of Section 80IB(5), it could not be construed as a cardinal error rendering the proceedings void or invalid, as the lacunae could be cured, by taking recourse to Section 292B. Section 80IB(5) has no relevance for claiming deduction u/s 80IB(9);

++ the matter is remanded to the DIT, for passing a fresh order. The DIT before passing the order will articulate his concerns/objections in writing and also confront the Assessee with the material, on which, he wishes to place reliance before passing an order u/s 263. A personal hearing will be given to the Assessee, if so demanded. A prior written intimation will be given by the DIT, in this behalf, to the Assessee. The notice will also indicate the date, time and venue of the hearing.

(See 2018-TIOL-165-HC-MAD-IT)