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2016 (1) TMI 788 - DELHI HIGH COURT

2016 (1) TMI 788 - DELHI HIGH COURT - [2016] 381 ITR 387 - Reopening of assessment - Held that:- Reasons 3 to 7 of the order dated 30th March, 2011, based as they are on audit objections, in terms of which the AO felt constrained as a result of the CBDT Instruction No. 9 of 2006, to reopen the assessment for the AY 2004-05, are unsustainable in law. The Court holds instruction No.9 of the CBDT dated 7th November, 2006 cannot possibly override the statutory powers to be exercised by an AO in term .....

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urn was picked up for scrutiny and after two questionnaires were answered to the AO's satisfaction by the Assessee, the assessment was framed under Section 143 (3) of the Act. In the circumstances, the reference by the AO to Explanation 1 to Section 147 of the Act is, misconceived for the simple reason that once the original return was picked up for scrutiny and the accounts and other documents were subjected to a detailed examination by the AO, the question of there being no full and true discl .....

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ssed to the Assessee. Question 8 required the assessee to give details of dividend exempt under Section 10 (34) received from HDFC along with copies of accounts. It is further seen that Question 9 of the AO's letter dated 25th February, 2005 was regarding the dividend of ₹ 1.85 crores received from HDFC. The Assessee submitted detailed replies in this regard on 31st January, 2005 enclosing the complete details. Another reply was furnished on 16th March, 2005. Para 8 of the said reply deals .....

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, 2011. It was explained that USD 1,03,69,250/- was a total of six of the seven receipts and was, therefore, included in the sum of USD 1,13,17,472/-. A certificate was also provided from Ranbaxy USA to the effect that no other amount was paid by them during the relevant period. In the counter affidavit filed by the Respondent, it is simply reiterated that the Petitioner had not reflected USD 948,222 as income in the relevant AY despite the fact that Ranbaxy USA has disclosed this in its return. .....

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axy USA. The Court is, therefore, satisfied that reason 8 is also unsustainable in law. - Decided in favour of assessee - W. P. (C) 6729/2011 - Dated:- 14-1-2016 - S. Muralidhar And Vibhu Bakhru, JJ. For the Petitioner : Mr M.S. Syali, Senior Advocate with Mr V.P. Gupta, Mr Mayank Nagi, Mr Arunav Kumar and Ms Husnal Syali, Advocates with Mr Subir Kachroo, Manager Taxation For the Respondents : Mr P. Roy Chaudhuri, Senior Standing Counsel ORDER Dr. S. Muralidhar, J. 1. The Petitioner, Sun Pharmac .....

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4 crores. Along with its return, the Petitioner submitted, inter alia, a copy of the annual accounts, a copy of the Tax Audit Report under Section 44AB of the Act, a copy of the report under Section 115JB of the Act, a copy of the report for arm's length price (ALP) for the international transactions in Form 3CEB, a copy of the reports under Sections 80 HHC, 80 IB and 80-O of the Act and other supporting documents. 3. The return was picked up for scrutiny and a notice was issued by the Asses .....

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4. The Petitioner received a notice dated 25th January, 2011 from the Assistant Director of Income Tax (Investigation) Unit-III (3), New Delhi requiring the appearance of the Petitioner on 4th February, 2011. The ADIT sought confirmation from the Petitioner in respect of 2 transactions of receipts in foreign currency from M/s Ranbaxy Pharmaceuticals Inc. USA ('Ranbaxy USA) of USD 1,13,17,472 and USD 1,03,69,250. By the letter dated 11th February 2011, the Petitioner informed the ADIT that i .....

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After verifying the records, the following points are noted: 1. The assessee company has claimed an amount of ₹ 2,15,99,534/- as "Provision for Doubtful Debts and Advances . This amount had to be added back for the purposes of calculation of Book Profit u/s 115JB. This is as per clause (i) of Explanation 1 to Section 115JB of the I.T. Act, 1961. This has not been done. Omission to do so has resulted in underassessment of income amounting to ₹ 2,15,99,534/-. 2. Secondly, the ass .....

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ks out to be a figure of ₹ 36.65 crores. This is liable to be disallowed. Over and above the interest expenses, other common expenses like managerial, administrative expenses also have to be apportioned. Omission to do so has resulted in escapement of income. Apportionment of expenses would imply a disallowance of ₹ 36.65 crores as expenses relatable to earning exempt income and this escapement should be brought to tax. 3. While allowing deduction u/s 80IB, the Assessing Officer omit .....

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le to these units which are established after 31st March 1990. It has been judicially held that the use of the term 'derived from' in the relevant provisions of the Act indicates the restricted meaning given by the legislature to cover only the profits and gains directly accruing from the conduct of the business undertaking. The omission resulted in excess allowance of deduction of ₹ 67,91,538/-. 4. Further, it is noted that the assessee claimed and was allowed deduction of ₹ .....

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ure, laid out wholly or exclusively for the business is allowable as deduction in computation of the income chargeable under the head 'profits and gains of business or profession . The omission resulted in excess allowance of deduction / under assessment of income of ₹ 7,10,64,204/-. 5. Further, it is also noted that while computing the deduction u/s 80- HHC, trade discount and R&D (Capital) expenses was not included in the indirect cost. The omission resulted in excess allowance o .....

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t out of India is of goods or merchandise manufactured or processed by the assessee and also of trading goods the profit derived from such export shall be the aggregate of the adjusted profit in preparation to the export turnover in relation to the manufacturing / processing of goods and in relation to the trading activity the amount arrived after deducting the direct and indirect costs of the trading from the export turnover of the activity. 6. While claiming deduction u/s 80-IB, the assessee h .....

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ing. The deductions equal to 30 percent / 100 percent of such profit is allowable to these units which are established after 31st March 1990. It has been judicially held that the use of the term 'derived from' in the relevant provisions of the Act indicates the restricted meaning given by the legislative to cover only the profits and gains directly accruing from the conduct of the business undertaking. The omission resulted in excess allowance of deduction of ₹ 13,28,16,481/-. 7. A .....

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provides that where deduction is required to be made of any income, under any section included under Chapter VIA, and which is also included in the gross total income, for the purpose of computing the deduction under that section, the amount of that nature (before making any deductions under Chapter VIA) shall alone be deemed to be the income of that nature which is received by the assessee and included in the assessee's gross total income. The omission resulted in excess allowance of deduct .....

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anbaxy Laboratories Ltd. from Ranbaxy Pharmaceuticals Inc., U.S.A. Queries were raised from the assessee company regarding the same. However despite numerous opportunities given, the assessee company was unable to reconcile receipts amounting to US Dollars 10369250. The average rate of exchange during 2003 was ₹ 46.6 for every 1 USD. Therefore, income amounting to ₹ 48,32,07,050/- should have been added to the income of the assessee. 6. Towards the end of these reasons it was stated .....

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lieve that income chargeable to tax amounting to ₹ 109,53,38,686/- has escaped assessment in the case and the same had to be brought to tax under Section 147/148 of the Act. 8. The Petitioner submitted a letter dated 26th April, 2011 listing out its objections to the aforementioned notice. By an order dated 29th July, 2011/01st August, 2011 the AO rejected these objections. It was stated by the AO, in response to the objection that there was no fresh material on the basis of which a belief .....

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ings under Section 147 were initiated. 9. Thereafter, the present writ petition was filed. In response to the notice issued on 15th September 2011, the Respondent filed a reply. It may be mentioned, at this stage, that while issuing notice, the Court directed that the AO will not frame the assessment order till the next date. That interim order has continued thereafter. 10. This Court has heard the submissions of Mr M.S. Syali, learned Senior Advocate for the Petitioner, and Mr. P. Roy Chaudhuri .....

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as result of Instruction No. 9/2006 dated 7th November, 2006 issued by the Central Board of Direct Taxes ( CBDT ). 12. In para 15 of the writ petition it is stated that the Petitioner inspected the file of the Department on 16th and 17th June, 2011 and this "revealed that in respect of five issues out of eight issues raised for reassessment respondent himself had replied to the Audit Party that there has been no underassessment in respect of the issues and claim had been allowed after full .....

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e audit has not settled these objections. Remedial action has to be taken compulsorily as per Instruction No. 9/2006. 14. Mr P. Roy Chaudhuri, learned counsel for the Revenue, submitted that the AO was constrained to take remedial action in terms of the binding CBDT Instruction No. 9/2006. 15. A copy of the said Instruction No. 9 of 2006 has been placed before the Court. The purpose of issuing instructions is "to set out the procedure to be followed at different stages of audit objections a .....

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raised by the audit is not accepted by the Commissioner of Income-tax (CIT). This is evident from para 4 of the instructions which reads as under: 4. Remedial action: (i) An Audit objection should be accepted and remedial action should be taken in a case where the audit objection relating to an error of facts or an issue of law is found to be correct. (ii) Even if objection is not accepted by the CIT, remedial action should be initiated, as a precautionary measure, in respect of such audit objec .....

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ere the interpretation of fact or law by the audit is in conflict with any decision of a High Court (not being the jurisdictional High Court) which is squarely applicable to the facts of the case, or (c) where there are conflicting decisions of different High Courts (not being the jurisdictional High Court), or (d) where the matter involves interpretation of statute and there is no decision of any High Court on the matter. However, in cases falling under (b), (c) and (d) above, the remedial acti .....

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conflict with a decision of the Supreme Court and the decision squarely applies to the facts of the case, or (b) the CIT is of the view that the interpretation of fact or law by the audit is in conflict with a decision of the jurisdictional High Court, which is squarely applicable to the facts of the case and the operation of which has not been stayed by the Supreme Court, or (c) the CIT is of the view that the Assessing Officer has acted in conformity with Board's Instruction/Circular, or .....

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he relevant Divisions of the Board for examination and decision. The CsIT should ensure that necessary reply/reference is sent to the AG (Audit) concerned/the Board within a month of the receipt of the Local Audit Report. 17. It is submitted by Mr Syali, learned Senior counsel for the Petitioner on the strength of decisions in M.P. Tiwari v. Y.P. Chawla ( 187) ITR 506 (Del), Dr. M.L. Passi v. CBDT (188) ITR 685 (Del) and CIT v. Greenworld Corporation 314 ITR 81 (SC) that the decision to reopen t .....

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articular assessment or to dispose of a particular case in a particular manner. It is, accordingly, submitted that as far as reasons 3 to 7 above are concerned, since they were purely based on audit objections with which the AO/CIT did not agree, the persistence with the reopening of the assessment by issuance of notice under Section 147/148 of the Act was unsustainable in law. 18. That a quasi judicial authority, which is expected to exercise statutory functions on an objective criteria, cannot .....

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of Police and not the State Government. It was held that "no other person or authority can do it". 20. In Sirpur Paper Mills v. Commissioner of Wealth-Tax (1970) 77 ITR 6 (SC) when a Commissioner of Wealth Tax (CWT) sought instructions from the CBDT on how an assessment should be framed, the court had no hesitation in setting aside the consequent orders passed by the CWT. It took exception to the CWT having merely "carried out the directions of the Board" instead of himself .....

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e AO passed the order under Section 148 of the Act on the dictates of the CIT. The Supreme Court stated that without going into the question of the bona fides of the authorities under the Act, "the order of assessment passed by the Assessing Officer on the dictates of the higher authority, being wholly without jurisdiction, was a nullity". 23. In M.P. Tewari v. Y.P. Chawla (supra), this Court was dealing with a circular issued by CBDT which sought to delineate certain offences which co .....

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tral board cannot dilute the discretion of the Commissioner which has been conferred by the statute. 24. In Dr. M.L. Passi v. CBDT (supra) the above legal position was reiterated. In CIT v. SPL s Siddhartha Ltd [2012] 345 ITR 223 (Del) the Court found that for the purposes of Section 151 (1) of the Act the approval for issuance of notice under Section 147 had to be given only by the Joint Commissioner or Additional Commissioner. Instead the approval was taken, in that case, from the CIT (3) who .....

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as defined. It is also established principle of law that if a particular authority has been designated to record his/her satisfaction on any particular issue, then it is that authority alone who should apply his/her independent mind to record his/her satisfaction and further mandatory condition is that the satisfaction recorded should be independent and not borrowed or dictated satisfaction. Law in this regard is now wellsettled. In Sheo Narain Jaiswal v. ITO [1989] 176 ITR 352 (Patna), it was h .....

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had not in the first place been accepted by the AO. 26. Consequently, reasons 3 to 7 of the order dated 30th March, 2011, based as they are on audit objections, in terms of which the AO felt constrained as a result of the CBDT Instruction No. 9 of 2006, to reopen the assessment for the AY 2004-05, are unsustainable in law. The Court holds instruction No.9 of the CBDT dated 7th November, 2006 cannot possibly override the statutory powers to be exercised by an AO in terms of Section 147 of the Act .....

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es of calculation of book profits in terms of clause (i) of the Explanation 1 to Section 115JB of the Act. It is pointed out by the Petitioner that the said clause was inserted with retrospective effect from 1st April, 2009. Clearly, the said clause did not exist at the time of filing of the return of income on 29th October, 2004. It is further pointed out that in CIT v. HCL Comnet Systems and Services Ltd [2008] 305 ITR 409 (SC), the Supreme Court clarified that the question of adding back the .....

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which covers the relevant previous year, it cannot be said that there was any failure on the part of the Assessee to disclose truly and fully all the material facts. 29. In the present case, the Assessee had already made a full and true disclosure of all the relevant materials in the first instance when the original assessment was framed. This included the account books, tax audit reports etc. The return was picked up for scrutiny and after two questionnaires were answered to the AO's satisf .....

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mention which material was failed to be disclosed by the Assessee. In similar circumstances in Global Signal Cables (India) Pvt. Ltd. v. Dy. CIT [2014] 368 ITR 609 (Del) this Court invalidated the re-opening of the assessment under Section 148 of the Act. 30. Reason (2) for reopening of the assessment is that despite the Assessee earning dividend of ₹ 1,85,30,220/- which was treated as exempt under Section 10 (34) of the Act, no disallowance of expenditure was made under Section 14-A of t .....

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rther seen that Question 9 of the AO's letter dated 25th February, 2005 was regarding the dividend of ₹ 1.85 crores received from HDFC. The Assessee submitted detailed replies in this regard on 31st January, 2005 enclosing the complete details. Another reply was furnished on 16th March, 2005. Para 8 of the said reply deals with in detail with the query regarding the dividend of ₹ 1.85 crores received from HDFC. 32. Here again it requires to be observed that the reason for re-open .....

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a relation or link with an objective fact, in the form of information or facts external to the materials on the record. Such external facts or material constitute the driver, or the key which enables the authority to legitimately re-open the completed assessment. In absence of this objective 'trigger', the AO does not possess jurisdiction to re-open the assessment." 33. In CIT v. Kelvinator of India Ltd [2002] 256 ITR 1(Del) it was observed that an order that has been purportedly pa .....

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e examined the subject matter because the aspect or question may be too apparent and obvious. In Swarovski India Pvt. Ltd. v. Deputy Commissioner of Income Tax 368 ITR 601 (Del), it was held that the escapement of income by itself is not sufficient for reopening the assessment in a case covered by the first proviso to Section 147 of the said Act and unless and until there was failure on the part of the assessee to disclose fully and truly all the material facts necessary for assessment. It was i .....

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Section 143 (3) a presumption can be raised that such an order was passed by the AO on a proper application of mind. 34. In the present case apart from a bland statement at the end of the reasons that the assessee failed to truly disclose the material particulars, it is not pointed out which material particular was not disclosed in the course of the original assessment by the assessee. Consequently, the Court has no hesitation in holding that reason (2) for reopening the assessment is based mer .....

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