TMI Blog2012 (10) TMI 403X X X X Extracts X X X X X X X X Extracts X X X X ..... Non-remission of export sale proceeds - Held that:- The assessee had made full disclosure about the claim under section 80HHC including the the sum of Rs.3,03,970/- towards the export sale proceeds, for which the assessee had also also sought extension. When such material was placed before the AO, at the time of original assessment, he could have disallowed the same. However, by no stretch of imagination, it can be said that the assessee failed to fully and truly disclose all material facts. In fact, in the original assessment AO scrutinized the claim of the assessee under section 80HHC. Even in the order disposing of the objections, the Assessing Officer has nowhere stated that the assessee failed to disclose full facts with respect to such claim - in favour of assessee. Assessee had debited lease equalization amount in the profit loss and account - Held that:- Neither in the reasons recorded nor even in the order disposing of the objections of the petitioner, the Assessing Officer has been able to demonstrate that the assessee had failed to disclose truly and fully all material facts. On this ground, reopening of assessment would not be permissible - in favour of assessee I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment was sought to be reopened by the Assessing Officer for which purpose, the impugned notice came to be issued on 25.2.2004. In the notice, the Assessing Officer called upon the petitioner to file return of income within 30 days from the date of service of notice. 4. At the request of the petitioner, the Assessing Officer supplied the reasons recorded by him for reopening the assessment. We will take note of such reasons in detail later, which can be broadly divided into six separate grounds. At this stage, suffice it to notice that the main plenary ground taken in such reasons was that the Assessing Officer while scrutinizing the return of income of the assessee for the subsequent years, found that the assessee's claims were not proper. He noted that the assessee had submitted voluminous records along with the return of income which were not required. Various details were confusing which complicated the matter. Those details were supplied with an object to "frustrate quick understanding". On these plenary grounds, the Assessing Officer noted, in the reasons recorded, six different grounds on which he believed that income chargeable to tax in the case of the assessee had esc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ugust 2004, dropped certain grounds of reopening. He pointed out that certain objections with respect to specific grounds which the petitioner had raised were not refuted by the Assessing Officer in the said order. The Assessing Officer, therefore, should be deemed to have dropped such grounds. 11. Counsel further took us through various documents and made detailed submissions with respect to each separate ground of the reasons recorded by the Assessing Officer. We would advert to such contentions while dealing with each ground separately. 12. In support of his contentions, counsel relied on the following decisions: 12.1 In the case of Calcutta Discount Co. Ltd. v. Income-Tax Officer, 41 ITR 191, wherein the Apex Court held that to confer jurisdiction to issue notice for reopening the assessment beyond the period of four years, two conditions are required to be satisfied. First, the Income Tax Officer must have reason to believe that income, profits and gains chargeable to income tax have been under-assessed and second, that he must have also reasons to believe that such under-assessment had occurred by reason of either omission or failure on the part of an asssessee to make ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 148 of the Act after expiry of four years from the end of the assessment year. 13. On the other hand, learned Senior Counsel Shri Manish Bhatt for the Department opposed the petition contending that the assessee had produced voluminous documents and details which were not necessary and thereby deliberately created confusion. Such complex data which included accounting entries made the task of verifying the validity of various claims difficult. He submitted that mere placing on record certain details would not absolve the assessee from the responsibility of truly and fully disclosing all material facts necessary for assessment. 14. He submitted that with respect to certain grounds raised in the reasons recorded there was total non-disclosure on the part of the assessee. He reiterated that there was deliberate attempt on the part of the assessee to prevent the Assessing Officer from discerning true facts. 15. In support of his contention, counsel relied upon the following decisions: 15.1 In the case of Kantamani Venkata Narayana and Sons v. 1st Addl. I.T., 63 ELT 638 wherein the Apex Court discussed the aspect of true and full disclosures in the context of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. They should be proximate and not have any remote bearing on the assessment. Omission to disclose may be deliberate or inadvertent. This is not relevant, provided there is omissions or failure on the part of the assessee. The later confers jurisdiction to reopen the assessment." Special Leave Petition against the said decision came to be dismissed by the Apex Court, which order is reported in 340 ITR 64. 16. Having thus heard the learned counsel for the parties, we may proceed to examine the material on record more closely. In the reasons recorded by the Assessing Officer, he had stated as under: "I. The scrutiny assessment U/s.143(3) was completed in this case on 22.03.2000. While scrutinizing the return of income for assessment of subsequent years, it is seen that the assessee's claims are not proper. It is seen that the assessee has submitted voluminous details along with the return of income which are not at all required to be filed along with the return of income. What is required is the Tax Audit Report, Profit and Loss Account and Balance Sheet, Other Statutory Reports pertaining to deductions u/s.80HHC and 80IA, Computation of income, Proof of payment of Advance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Aditya Medisales Ltd. has been given the task of distributing the formulation drugs produced by the units of Silvasa and Vapi on Sun Pharma Industries Ltd. It pays the interest @ 24% to the latter on the overdue bills which is much more than the prevailing market rate of interest in this line of business which varies from 15% to 18%. By adopting this modus operandi, the Sun Group has reduced the taxable profit of M/s.Aditya Medisales Ltd. and at the same time it has increased the profit of Silvasa Unit because the interest income is directly added to the sales figure, on which the deduction u/s 80IA is available. These facts are not clear from the working of deduction u/s.80IA given by the assessee along with the return of the income. This is not permissible as per the provisions of Section 80IA(10) of the Act and the rate of interest payable to SPIL has to be restricted @ 15% to 18% which will automatically reduce the profits of units entitled for 80IA deduction and consequently the deduction u/s.80IA claimed by the assessee will be reduced. IV. In the assessment order passed, the A.O. had not added the following amounts. 1. It has been mentioned in the Auditor's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... them in different compartments. (1) Claim of R and D expenditure which was bifurcated into capital expenses and revenue expenses. According to the Assessing Officer, the claim did not tally with the Tax Auditors Report. (2) With respect to R and D expenditure where the Assessing Officer believed that the assessee had made double claim of deductions, once by way of depreciation on the capital expenditure pertained to R and D under section 35 of the Act and for the same amount, once again, depreciation of capital expenditure on R and D by forming the same part of the fixed assets. (3) Higher deduction under section 80-IA of the Act by collecting interest at the rate of 24% from a sister concern, namely, Aditya Medisales Ltd. (4) Excess claim of deduction under section 80HHC of the Act to the extent of Rs.3,03,970/- since the assessee had not been able to show that such amount was remitted in foreign exchange within the statutory time limit. (5) Excess deduction under section 80-IA of the Act with respect to Silvasa unit on which deduction under section 80HHC was also claimed. (6) With respect to computation under section 115JA of the Act wherein, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 23.87 3622 Testing Charges 5.16 3623 Demurrage Charges (R and D) 0.19 3625 Purchase of Patents 1.76 3627 Product Developments Charges 1.08 3628 Misc. Expenditure for R and D 0.91 3713 Gas Cylinder Refiling Charges 1.12 64.81 [B] Sch. No. Nature of Expenses 16 and 17 Personnel Cost and consultancy Charges 14.12 14.12 [C] R and D Expenses which were deferred and amortized over a period of 5 years in the books: 172.61 172.61 3 R and D Expenses claimed in Income Tax Return [a]+[b] 620.96 [a] Deduction @ 100% on Deferred Revenue expenses as mentioned in above u/s 35(i) of the Income Tax Act, 1961 172.61 [b] Deduction @ 100% on Capital expenditure U/s. 35(i) of the Income Tax Act, 1961 448.35 Assessment Year: 1997-1998 Financial Year: 1996-1997 Reconciliation of Addition to Fixed Assets as per Working of Book Depreciat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entries have been properly explained and reconciliation has been satisfactorily explained. In particular, with respect to double deduction on R and D expenditure by way of depreciation on fixed assets and deduction under section 35AB of the Act, even the Revenue could not point out how the same amount has been reflected in two separate claims. In fact, to the extent the R and D expenditure was presented before deduction under section 35AB of the Act, the same was reduced from the fixed assets drawing depreciation. More importantly and significantly, in the order that the Assessing Officer passed disposing of such objections, he did not dispute such reconciliation figures. He in fact stated as under: "On a deeper scrutiny of the schedule showing additions to the fixed assets, it is noticed that the depreciation has been claimed on a higher amount. As per Schedule-5 of Annual Accounts, the addition in plant and machinery is Rs.1157.65 lacs. As per 3 CD Report, addition of plant and machinery pertaining to R and D is Rs.143.44 lacs. Hence, the depreciation u/s.32 should have been claimed on addition of plant and machinery worth Rs.1157.65 lacs (-) Rs.143.44 lacs = Rs.1014.21 la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.4 Regarding deduction u/s.80HHC claimed in respect of unrealised exports to the tune of Rs.3,03,970/- it is mentioned that application was made to the CIT for extension of time. In the event of non grant of extension of time, the claim u/s.80HHC should have been revised." From the above, it can be seen that the assessee had made full disclosure about the claim under section 80HHC of the Act including the the sum of Rs.3,03,970/- towards the export sale proceeds, for which the assessee had also also sought extension. When such material was placed before the Assessing Officer, at the time of original assessment, may be under law, he could have disallowed the same. However, by no stretch of imagination, it can be said that the assessee failed to fully and truly disclose all material facts. In fact, in the original assessment, the Assessing Officer scrutinized the claim of the assessee under section 80HHC of the Act. Even in the order disposing of the objections, the Assessing Officer has nowhere stated that the assessee failed to disclose full facts with respect to such claim. This ground also, therefore, is not valid. 21. Ground No.5 pertains to deduction 80-IA of the Act in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 80IA of the Act for Silvasa unit was presented before the Assessing Officer. Necessary details and documents in support of such claim available. Merely because the Assessing Officer did not disallow this claim for some reason or the other would not be a ground to permit reopening of such alleged under-assessed income beyond the period of four years. 22. Insofar as ground No.6 is concerned, the petitioner has given detailed reasons why, according to the petitioner the assessee had debited lease equalization amount in the profit loss and account. The assessee had also before us canvassed that such issue is covered by a decision of the Madras High Court in the case of TVS Finance and Services Ltd v. Joint Commissioner of Income Tax, 318 ITR 435 (Mad). Counsel for the Revenue, however, submitted that such issue has not achieved finality. The Revenue has not accepted the judgment of the Madras High Court and the same has been challenged by filing Special Leave Petition before the Supreme Court and leave to appeal has been granted. 23. The prime contention of the assessee on this issue was that full details of lease equalization charge was on record. This was clearly mentioned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not on higher side looking to the fact that the debt was unsecured and the Company was exposing itself to higher risk. It was lastly contended that even if the interest was charged at a higher rate, the resultant income earned by the assessee was offered to tax. 26. Such objections of the petitioner were disposed of by the Assessing Officer in following manner: "2.3 Regarding the claim of higher deduction u/s.80IA by recovering higher interest from M/s.Aditya Medisales Ltd., it is stated that all the details are on record and there is no non-disclosure on this account. However, this is not correct. M/s.Aditya Medisales Ltd., a group concern, had paid interest @24% on the overdue bills, which is much more than the prevailing market rate of interest in in this line of business which varies from 15% to 18%. By adopting this modus operandi, the taxable profits of M/s.Aditya Medisales Ltd. on the one hand has been reduced and the profits of 'Silvasa Unit' of M/s.Sun Pharmaceuticals Industries Ltd. has been inflated which is exempt u/s.80-IA. This is a clear cut violation of section 80-IA(10) of the Act. The fact that M/s.Aditya Medisales Ltd. had paid interest @24% on over due b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit for deduction under section 80IA of the Act was exaggerated, it was within the power of the Assessing Officer while computing the deduction to take amount of profit as may be reasonably deemed to have derived from such dealing. In exercise of such powers, therefore, when the Assessing Officer finds that there is exaggeration of income by an assessee, which is eligible for deduction 80IA of the Act dealing with closely associated entity, he would make necessary adjustments in this regard. 27. Thus, it cannot be said that belief of the Assessing Officer that income chargeable to tax had escaped assessment is baseless. As noted, at this stage, it is not necessary for this Court to ascertain whether such addition would ultimately succeed or not. Sufficiency of the reason on which the Assessing Officer forms such belief is also not for the Court to decide. 28. In the case of Sri Krishna Pvt. Ltd. v. I.T.O., 221 ITR 538, the Apex Court reiterated the ratio laid down in the case of Phool Chand Bajrang Lal and observed that inquiry at the stage of finding out whether the reassessment notice is valid is only to see whether there are reasonable grounds for the Income Tax Officer to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nitiation 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)]." 32. In the case of Phool Chand Bajrang Lal (supra), the Apex Court observed as under: "From a combined review of the judgments of this Court, it follows that an Income-tax Officer acquires jurisdiction to reopen assessment under S. 147(a) read with S. 148 of the Income-tax Act, 1961 only if on the basis of specific, reliable and relevant information coming to his possession subsequently, he has reasons which he must record, to believe that by reason of omission or failure on the part of the assessee to make a true and full disclosure of all material facts necessary for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er received interest from Aditya Medisales which was higher than the normal rate of interest. Three essential facts, namely, that the petitioner received interest on overdue payments from Aditya Medisales, that Aditya Medisales was a sister concern of the petitioner Company and that such interest was charged at the rate of 24% per annum, were not discernible from the record at all. 34. Under the circumstances, from the material on record, it was not possible for the Assessing Officer to make adjustment under section 80IA(10) even if it was required. It may be that the petitioner did give the total figure of interest received. However, from such figures, it was not possible for the Assessing Officer to ascertain these vital facts. Section 147 of the Act, explanation 1 provides that "production before the Assessing Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of foregoing proviso". In the present case, even from the account books and other evidence which the assessee had produced, even after due diligence, it was not possible ..... X X X X Extracts X X X X X X X X Extracts X X X X
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