TMI Blog2018 (6) TMI 604X X X X Extracts X X X X X X X X Extracts X X X X ..... ect” rather than “reasons to believe” which fact was impliedly accepted by the Learned Commissioner wherein he has attributed the issuance of notice on the ground that “excessive deduction claimed may be sufficient for formation of requisite belief to initiate proceedings u/s 147 of the Act”. Re-assessment proceedings are not valid and consequently the additions / disallowance made therein do not stand in the eye of Law. R & D expenditure and ESOP expenses - apportionment of cost to the units which claimed exemption u/s 10B, 80IB and 80IC - Held that:- both AO as well as CIT (A) have proceeded on presumption that R & D expenses will benefit the exempted units in the long run overlooking the fact that there is nothing on record to show that all the R & D inventions / patents were never sold in outside market but only captively utilised in the exempted units. Respectfully following the decision in Bush Boake Allen (India) Pvt Ltd vs. ACIT (2003 (12) TMI 10 - MADRAS HIGH COURT), we are of the view that the Revenue has not made out a case for apportionment of R & D expenditure and ESOP cost to the exempt units. In the result, we hold that the Tax Authorities were not justified in ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 30.11.2012 passed u/s 143(3) r.w.s 144C(5) of the Act. While passing the said assessment order, A.O. admittedly apportioned the indirect expenses such as corporate overheads etc., to various units on the basis of turnover of units, based on the conclusion reached by the ITAT, Hyderabad Bench in the assessee s own case for the assessment year 2003-04. 4. The assessment made on 30.11.2012 was sought to be reopened by the Assessing Officer u/s 147 of the Act, on the ground that the assessee booked loss of ₹ 3.88 Crs as business loss from the 100% generic EOU which was not reported earlier. According to the Assessing Officer, unreported loss needs to be adjusted against the exempted income of that year. 5. Besides, it was observed that certain expenditure like R D expenditure and ESOP, claimed in the computation of income, were not apportioned to the special units of the assessee in respect of which deductions u/s 10B, 80IB and 80IC were claimed. This non-apportionment has resulted in huge anomaly in the percentage of the profit ratio, which has the effect of enhancing the exempt income and reducing the taxable profits. According to the Assessing Officer, the above factor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see for the exempted and non-exempt units. The A.O therefore concluded that there was failure on the part of the assessee in not disclosing fully and truly the information before the Assessing Officer. Therefore, he proceeded to complete the re-assessment proceedings on merits. At this stage, the assessee contended that as per proviso to section 147, reopening is not permissible since the assessee produced books of account and other evidence before the Assessing Officer during original assessment proceedings from which the Assessing Officer would have duly considered the issue. The Assessing Officer rejected the contention of the assessee. According to him, the material required in connection with R D was not furnished and therefore proceeded to reopen the assessment. 9. At this stage, it may be noticed, originally the assessment was stated to be reopened on the ground that the assessee booked a loss of ₹ 3.88 Crs which was not reported whereas during re-assessment proceedings it was noticed that by virtue of mixing of computation of total income, profits of all business units falling under the same head are aggregated first, irrespective of the fact whether they are eli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r was of the opinion that the expenditure not apportioned to non-exempt units has to be apportioned against all the units, including taxable unit. Accordingly, assessment was completed on a total income ₹ 363.90 Crs. 12. It may be noticed that in respect of AYs 2009-10 and 2010-11, the only reason mentioned for issuing a notice u/s 148 was the non-apportionment of R D expenditure and ESOPs to special units of the assessee wherein deduction u/s 10B, 80IB and 80IC was claimed resulting in huge anomaly in the percentage of profit ratio returned. According to the Assessing Officer, this anomaly has the effect of enhancing the exempt income and reducing the taxable profits. A.O. also accepted that R D expenditure and ESOPs are indirect expenses. In his opinion, the same has to be apportioned to special units. In respect of A.Y. 2009-10 and 2010-11, the returns of income were filed on 30.09.2009 and 04.10.2010 respectively and the assessments were completed on 26.12.2013 and 23.02.2015 whereas the notices were issued u/s 148 of the Act on 31.03.2014 and 31.03.2015 which is beyond the period of four years from the end of relevant assessment years. As noticed in the order for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessing Officer accepted the contention of the assessee and dropped this observation and did not proceed for reassessment on this ground. It can thus be seen that the A.O. has no reason to believe that income has escaped assessment, on this aspect. 16. The second reason given was that certain expenditure like R D expenditure, ESOPs etc., are not apportioned to special units which resulted in huge anomaly in the percentage of profit ratio. In this regard, Learned Counsel for the Assessee submits that in the scrutiny assessment proceedings, the assessee furnished all the necessary documents pertaining to deduction claimed under sections 10B, 80IB and 80IC of the Act. The assessee also furnished Form No. 3CM and 3CL pertaining to claim of expenditure on R D and after considering the record, the A.O. completed the assessment u/s 143(3) of the Act. Under these circumstances, if an assessment has to be reopened beyond four years, it is the duty of the Assessing Officer to prove that there is some new material available on record or there was omission or failure on the part of the assessee so as to issue a notice for reassessment. 17. It was contended that both the conditions a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s been incurred. In fact, the R D carried out in the IPDO may or may not see the light of the day. Thus there is no direct link / nexus between R D work carried out in the IPDO and the products manufactured in the other unit, so as to apportion the R D expenditure. Assessee relied upon a decision of the Hon ble Bombay High Court in the case of Zandu Pharmaceutical Works Ltd (350 ITR 366) wherein the Court accepted a similar contention. In this regard, the Court observed that unless the expenditure incurred on R D works relates to the undertaking / unit in question, the same cannot be apportioned. Reliance was also placed upon a decision of the ITAT Mumbai Bench in the case of Wockhard Ltd (ITA No.6323/Mumbai/2010, dated 13.04.2012). 21. It was also stated that the allocation of R D expenditure to special units on a presumptive basis, on the ground that the profits of these units were skewed is fallacious. Profit percentage of each unit is independent, based on the type of product produced, targeted market of the product, product mix etc. Hence the A.O. is not right in proceeding with the allocation of expenditure on such a presumptive basis. 22. Even hypothetically ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and circumstantial evidence. The word reason to believe does not mean a subjective satisfaction on the part of the Assessing Officer but if the AO has a cause or justification to think or suppose, he can initiate proceedings. 25. Ld. CIT(A) observed that the justification of his belief is not to be judged from the standards of proof required for coming to a final decision. A belief, though justified for the purpose of initiation of proceedings u/s 147, may ultimately stand altered after hearing the assessee or on the basis of intervening enquiry. In otherwords, the Assessing Officer is not required to base his belief on any final adjudication of the matter. According to the Ld. CIT(A), the case law relied upon by the assessee are distinguishable since, in the instant case there is a reason to believe that income has escaped assessment. 26. The next issue is with regard to fulfilling the second condition i.e., whether there is failure to disclose fully and truly all material facts so as to enable the Assessing Officer to issue a notice u/s 148 of the Act. 27. Ld. CIT(A) observed that the narration of the Assessing Officer with regard to non-reporting of the loss would b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... failure or omission to disclose fully and truly all material facts and once there exists reasonable ground for the A.O. to form a belief, that would be sufficient to cloth him with jurisdiction to issue notice though the reasons may not be adequate. 29. With regard to the change of opinion, the Ld. CIT(A) observed that in the instant case there is no discussion on the issue in the original assessment order and no details were called for by the Assessing Officer or filed by the assessee on the issue. Thus, there is no question of change of opinion which contemplates formation of some opinion at an earlier stage. A wrong application of Law cannot be held as permissible view and that can always be changed for appreciating correct legal position. In his opinion, cases of excess deduction / exemption would warrant formation of requisite belief to initiate proceedings even in a case where full disclosure was made. Though the document / claims were supported by Form No. 10CCB, but the Assessing Officer having not called for any details of R D expenditure, except with regard to claim of weighted deduction, it cannot be held that the Assessing Officer has applied his mind to the issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure which is not directly attributable cannot be taken into consideration; he observed that section 80IC, among other similar provisions, speaks of allowing deduction in respect of profits and gains derived by certain undertakings or enterprises. In otherwords, the assessee is under legal obligation to compute profits and gains of eligible undertakings separately and that of the others separately. 33. Ld. CIT(A) rejected the contention on the ground that profits and gains of eligible undertaking implies that profit has to be arrived at after deducting all the expenses, both direct and indirect, among all the operating units. Further, the devices adopted to reduce or inflate the profits of eligible business should be rejected in view of the overriding provisions of section 80IA(5) of the Act. 34. All direct expenses have to be adjusted from the profits and gains of eligible business and while computing the profits and gains of an eligible business, the Assessing Officer has to compute as if such eligible business were the only source of income of the assessee which implies that common or head office expenditure should be assumed to have incurred for such eligible busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion u/s 10B, 80IA and 80IC of the Act by not considering the fact that the said units are self-sustaining units and such allocation is not required in terms of sections 10B, 80IB and 80IC of the Act. In respect of Assessment Years 2008-09 and 2010-11, it was also contended that no R D expenditure was incurred, during the previous years relevant to the assessment years under consideration, on products manufactured from these undertakings. With regard to ESOP, connected to R D, similar plea was raised before us. 37. At the time of hearing, Learned Counsel for the Assessee elaborately contested the validity of reopening of assessment as well as the validity of apportionment of R D expenditure as well as ESOP to the exempted units and thereafter placed before us summary of his arguments which is extracted for immediate reference:- Summary of Arguments S. No Particulars AY 2008-09 AY 2009-10 AY 2010-11 ITA No.1844/H/2017 ITA No. No.1845/H/2017 ITA No. No.1844/H/201 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l have to be allocated to tax holiday units and reduced the quantum of deduction at the time of regular assessment. Accordingly, all the issues have been examined and considered at the time of regular assessment. Even in the reassessment proceedings, the AO has not alleged or indicated that the same is based on new material or information he is proposing to reopen the assessment. It is based on existing information already available on record at the time regular assessment. Therefore, the reassessment is purely on the basis of change of opinion. Further, the AO has not proved failure on the part of the Appellant to disclose fully and truly all necessary information and as such the reassessment beyond 4 years is barred by limitation. 1.3 From the above, it may be noted that there is no fresh material available on the record for the AO to re-open the assessment, reassessment beyond 4 years is barred by limitation and the allocation of R D expenses to special units is a mere change of opinion. Hence, the proceedings u/s 148 of the Act are void ab initio and deserves to be quashed. 1.4 In this regard, we rely on various case laws as referred to in the case law compendium. Without ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n other income cannot be considered as derived from 801 unit similarly other corporate office expenditure should also not be allocated to 801 unit. CIT Vs Kanmani Metals Alloys Ltd 183 ITR 327 (Bom) it was held in the context of Section 80J that for the purpose of deduction only liability pertaining to the unit should be considered and not the overall liability of the Appellant Tide Water Oil Co (India) Ltd Vs CIT 353 ITR 300 (Cal) held that no expenditure at the corporate level which is remotely or indirectly related should be taken in to account while computing the deduction u/s.80IC 2.5 Further, with respect to allocation to R D expenses, we wish to submit that the Company's research and development activities can be classified in to the following business segments namely Global Generics, formulations, Biologics Pharmaceutical services and active ingredients (PSAI) and Proprietary Products details of which are enunciated below: Finished Dosage Formulations (FDF), where our Research and Development activities are directed at the development of product formulations, process validation, bioequivalence testing and other data needed to prepare a gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inafter referred as BD 9 Unit Manufacture and Export sale of Bulk Drugs 10B 2.7. The following is the abstract of the business wise R D expenditure incurred:- Sl No. Particulars of R D Remark AY 2008-09 AY 2009-10 AY 2010-11 1 Finished Dosage Formulations R D is incurred for generics for US markets and formulations 135 179 169 2 Pharmaceutical Services and Active Ingredients (PSAI) Active Pharmaceuticals Ingredient 71 72 85 3 Biologics R D is for new products based on bio-similar (for biological products based on living organism) which does not manufacture any of the special units 29 34 23 4 Proprietary Products (NCE / Speciality) Innovative products (Not generic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In view of the above, we pray before your honors that the re-assessment proceedings u/ 148 of the Act initiated by the AO beyond 4 years need to quashed. Without prejudice to re-assessment u/s 148, we pray before your honors that since, the R D expenses and ESOP expenses are not derived/linked from special units and not having a direct nexus between products manufactured in special units and products being developed in R D units, the addition made towards allocation of R D expenses and ESOP need to be deleted. 38. On the other hand, Learned Departmental Representative relied upon the orders passed by the Tax Authorities. 39. We have carefully considered the rival submissions and perused the record. We have also carefully analysed the cases referred to by A.O. as well as CIT (A). 40. We shall first deal with the justification of issuing notice u/s 148 of the Act since the assessee challenged the very basis for reopening of assessment. As per section 147 of the Act, Assessing Officer should furnish reasons which prompted him to reopen the assessment. The expression reason to believe was subject matter of consideration by various Courts. The words reason to believ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment and it is on account of failure on the part of the assessee by not disclosing material facts. In the case of Sirpur Paper Mills Limited (113 ITR 393) the Court observed that if the Assessing Officer subsequently feels that he arrived at an erroneous conclusion earlier, the same cannot be a reason for reopening of assessment so long as primary facts are disclosed to the Assessing Officer during the course of original assessment proceedings. In otherwords, while initiating proceedings u/s 147 of the Act, Assessing Officer has to take an appropriate decision as to whether there is a reason to believe that income escaped assessment and it is on account of non-disclosure of true and correct particulars of income. The reasons recorded by the Assessing Officer, as could be noticed from page 203 of the paper book is as under:- With reference to the A.Y. 2008-2009 the reasons for reopening assessment u/s 147 of the IT Act is communicated as under: It was found during the assessment proceedings for the A.Y. 2011-12 that this assessee has booked a loss of ₹ 3.88 Crores as business loss from the 100% generic EOU situated at Hyderabad. During the course of assessment proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h can form the basis for reopening of assessment. In otherwords, there is no live link between the reasons recorded and the factual matrix of the case. 46. In our considered opinion, reopening should not be based on any prejudiced apprehension that the assessee might have purposely followed the practice of claiming deduction of expenses incurred in relation to exempted units against the taxable income. In fact, the CIT (A) also mentioned that even on the principle of equity, the expenditure has to be apportioned both amongst taxable units as well as exempted units, overlooking the fact that equity and taxation are strangers and one has to go by strict interpretation of provisions. Merely because the assessee claimed exemption on certain units it should not have been assumed that expenditure claimed against taxable income is attributable to the exempt units. Ld CIT (A) also observed, vide para 5.13, that cases of excess deduction / exemption of income chargeable to tax would warrant formation of requisite belief to initiate proceedings where full disclosure were made and yet an income chargeable to tax had escaped from being included in the assessment order . In our humble opini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mstances, we are of the view that re-assessment proceedings are not valid and consequently the additions / disallowance made therein do not stand in the eye of Law. 48. Since elaborate arguments were advanced on merits of the case i.e., with regard to correctness of apportionment of R D expenditure and ESOP cost between taxable and exempted units and also in view of the fact that it is a recurring issue, we proceed to consider this issue also on merits. 49. The case of the assessee, all through, was that R D expenditure was incurred by the assessee in a separate unit known as IPDO , which is meant for carrying on R D. It is also not in dispute that formulations / products arising out of it may or may not be utilised in the special units wherein the assessee is eligible for deduction / exemption. It is not controverted that formulations / products arising out of it can be sold in the open market and need not necessarily be utilised in the existing special units. The Hon ble Bombay High Court in the case of Zandu Pharmaceuticals Limited (350 ITR 366) considered an identical issue wherein the assessee carried on business of manufacture of Ayurvedic medicines which had fou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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