Ajanta Pharma Ltd. vs Asst. Commissioner of Income Tax and Others

This Petition under Article 226 of the Constitution of India, challenges the notice dated 21st April, 2003 issued under Section 148 of the Income Tax Act, 1961 (the Act) and also the reasons in support thereof seeking to reopen the assessment for the Assessment Year 1996-97.

Brief facts leading to this Petition are as under:

(a) On 30th November, 1996, Petitioner filed its Return of Income for Assessment Year 1996-97, declaring the income of Rs.1050/-. In its computation of income filed with the Return of Income, the Petitioner has specifically claimed deduction of Rs.13.98 Crores, under Section 80HHC of the Act. However, its gross total income was Rs.12.08 Crores, the Petitioner restricted its claim for deduction under Section 80HHC of the Act to Rs.12.08 Crores in view of Section 80A of the Act;

(b) An enquiry was made during assessment proceedings inter alia in respect of Petitioner''s claim for benefit of deduction under Section 80HHC of the Act. Thereafter, assessment order dated 23rd March, 1999 was passed under Section 143(3) of the Act. The order dated 23rd March, 1999 restricted the Petitioner''s claim for deduction under Section 80HHC of the Act to Rs.9.66 Crores i.e. gross total income while assessing the Petitioner to taxable income of Rs.1050/-;

(c) Being aggrieved by order dated 23rd March, 1999 the Petitioner had preferred an appeal to Commissioner of Income Tax (Appeals) (CIT[A]) in respect of claim for deduction under Section 80HHC of the Act. The CIT[A] by order dated 9th July, 1999 allowed the appeal;

(d) On 24th January, 2003, the impugned notice was issued. The reasons in support of the impugned notice reads as under:

"The assessee company is engaged in manufacturing of pharmaceuticals and sale in domestic market as well as export of pharmaceutics and engineering items. The return of income for assessment year 1996-97 was filed by the assessee on 30.11.1996 declaring income of Rs.1050/-. This returned income was declared after claiming deduction u/s. 80HHC at Rs.12,08,74,663/-. Along with the return the assessee company had filed certificate of auditors in Form No. 10CCAC for claiming deduction u/s. 80HHC. In this certificate the total turnover was shown at Rs.79,28,29,146/-. The trading export turnover was shown at Rs.22,81,18,382/-. The direct cost of trading goods exported was shown at Rs.5,51,85,803/- and indirect cost was shown at Rs.3,38,99,134/-.

The profit on trading export was shown by the assessee company at Rs.13,97,33,445/. The assessment u/s. 143(3) of the Income Tax Act was made, view order dated 23/03/1999 in which assessee''s claim of deduction u/s. 80HHC was accepted. In the computation of deduction u/s. 80HHC, the assessee has not adjusted the profit on trading export against the loss on manufacturing export as was called for. Thus, if filed untrue particulars of deduction u/s. 80HHC.

Perusal of assessment records and details filed by the assessee company reveals that profit claimed on the export of trading goods was disproportionately high with reference to the ratio of trading export turnover to the total turnover. But the assessee company did not file invoice wise details of purchases of trading goods exported and did not correlate the trading export sales with invoicewise purchase of trading goods exported. Thus, it suppressed the purchases i.e. the direct cost on the export of trading goods and increased the profits and hence the deduction u/s. 80HHC in respect of export of trading goods which resulted in escapement of income. The escapement of income/ excessive deduction u/s. 80HHC to the assessee company was on account of failure on the part of the assessee company to disclose fully and truly all material facts necessary for the purpose of assessment.

In view of this, I have reasons to believe that income has escaped assessment within the meaning of the proviso of Section 147 of the Act.

The assessment is required to be reopened u/s. 147 of the I.T. Act, 1961 for which necessary approval of C.IT. is sought as per proviso to section 15(1) r.w.s. 147 and section 149(1)(a) of the I.T. Act, 1961."

(e) The Petitioner''s challenge to the impugned notice dated 24th January, 2003 was admitted on 3rd July, 2003. At that time, an interim stay of the impugned notice was also directed.

Mr. Mistri, learned Senior Counsel in support of the Petition submits as under:

(a) The impugned notice having been issued beyond a period for four years from the end of the relevant Assessment Year is without jurisdiction as there has been no failure on the part of the Petitioner to disclose fully and truly all material facts necessary for the assessment as is evident from :

(i) Its Return of Income was accompanied with Computation of Income and a certificate in Form 10CCAC by an independent Accountant in respect of deduction claimed under Section 80HHC of the Act - wherein the claim for deduction of Rs.13.98 Crores and the basis for the same was tabulated and certified to be correct;

(ii) The nonsetting off of losses of Rs.31 lakhs in respect of export of manufactured goods was made clear in the computation of Income; and

(iii) During Assessment proceedings, the Assessing Officer had enquired into the claim for deduction under Section 80HHC of the Act and the same was considered while passing of an Assessment Order dated 23rd March, 1999 in regular assessment proceedings.

(b) Reliance was placed upon the decision of this Court in Petitioner''s own case in Ajanta Pharma Ltd. Vs. Assistant Commissioner of Income Tax and Others, wherein on identical ground, notices for reopening of an assessments for Assessment Years 1998-99, 1999-2000 and 2000-01 made by the Revenue, were held to be bad by this Court. The only distinction being that in Ajanta Pharma (supra), the reopening proceedings had been initiated for a period of less than four years from the end of the relevant assessment years while in this case, it is beyond a period of four years from the end of the relevant assessment year;

(c) In any event, the impugned notice is without jurisdiction as it is a mere change of opinion as all the facts relied upon in the reasons in support of the impugned notice were a subject matter of investigation and enquiry during the assessment proceedings, leading to a formation of opinion for passing the order dated 23rd March, 1999; and

(d) In any case, the Assessment Order dated 23rd March, 1999 was challenged in Appeal with reference to deduction claimed under Section 80HHC of the Act by the Petitioner which was allowed by order dated 9th July, 1999 by CIT(A). This resulted in the merger of the order dated 23rd March, 1999 into the order dated 9th July, 1999 of CIT(A). Thus, the impugned notice dated 24th January, 2003, seeking to reopen assessment, is without jurisdiction, as the order of assessment is now merged into order dated 9th July, 1999 of CIT(A).

As against the above, Mr. Pinto, learned Counsel appearing for the Revenue in support of the impugned notice submits as under:

(a) The impugned notice and the reasons in support are correct in law as there was a failure on the part of the Petitioner to disclose fully and truly all material facts necessary for assessment as is evident from following:

(i) the letter dated 18th February, 1999 addressed by the Petitioner to the Assessing Officer that the deduction in respect of both direct and indirect expenses was being claimed on proportionate basis as different sets of account books for manufacture and trading activities is not maintained; and

(ii) the Affidavit in reply dated 15th May, 2003 of one Mr. M.V. Panikkar, Asstt. Commissioner of Income Tax Range 9(1) who states that on examination of the records, it was noticed that the supporting documents/ invoices in support of the Petitioner''s claim for deduction submitted under Section 80HHC of the Act had not been furnished.

It is settled law that the condition precedent to clothe the Assessing Officer with jurisdiction to reopen an assessment are reason to believe that income chargeable to tax has escaped assessment (a mere change of opinion would not be reason to believe). An additional jurisdictional condition for reopening of an assessment beyond a period of four years from the end of the relevant assessment year is the failure to truly and fully disclose all material facts necessary for assessment.

In this case, admittedly the impugned notice has been issued beyond a period of four years from the end of the relevant Assessment Year. Therefore, we shall first examine the primary contention raised by the Petitioner - that there is no failure on its part to disclose truly and fully all material facts necessary for assessment. The reasons in support of the impugned notice as reproduced hereinabove are the following :

(i) On perusal of the record, it is noticed from the record filed by the Petitioner that the assessee had claimed higher profit on export of trading goods with reference to the ratio of trading export turnover to the total turnover;

(ii) The Petitioner did not file invoicewise details of purchases of trading goods exported and did not correlate the trading export sales with invoicewise purchase of trading goods exported; and

(iii) The computation of deduction under Section 80HHC of the Act had not been determined after adjusting the profit on trading export against the loss on manufacturing export.

So far as ground (i) above is concerned, the reasons itself indicate that it is on perusal of record and details filed by the Petitioner that claim of the Petitioner in respect of export of trading goods is concerned, is disproportionately higher. Thus, the aforesaid ground itself indicates that there has been no failure on the part of the Petitioner to disclose fully and truly all material facts necessary for the assessment.

So far as ground (ii) above is concerned, reasons indicate that no invoicewise details of purchase of trading goods exported and failure to correlate the trading export with the purchases has resulted in failure to make a true and full disclosure. During the course of hearing before us, attention is invited to communication of the Petitioner dated 11th November, 1998 to the Assessing Officer in response to a specific queries enclosing a complete statement of exported sales bills Nos, value in US $, F.O.B. value in Rupees, purchase order Number and name of the party from whom the goods were purchased as well as the value of the purchase. These details were examined by the Assessing Officer before passing of order dated 23rd March, 1999 under Section 143(3) of the Act. However, according to Mr. Pinto for the Revenue, the aforesaid statement filed by the Petitioner during the course of assessment proceedings, though gave complete details and did correlate the export of trading goods with the purchases made in respect thereof, yet, this would not amount to full and true disclosure as the Petitioner had not furnished the invoices in support thereof. For this, support is drawn from the reasons and the affidavit in reply filed by the Revenue. We have reproduced the reasons herein above, however, for the purpose of appreciating the objections of Mr. Pinto, we reproduce the relevant portion relied upon by the him which reads as under:

" .... .... .... .... But the assessee company did not file invoice wise details of purchases of trading goods exported and did not correlate the trading export sales with invoicewise purchase of trading goods exported. "

(emphasis supplied)

We do not read the above as an indication of failure to supply invoices being the basis for reopening of assessment. This is a gloss added to the reasons by the Revenue at the hearing. Therefore, it is not accepted. Further, reliance is placed upon the affidavit in reply to submit that the invoices were not submitted. First of all, it is a settled position accepted by this Court on numerous occasions that the reasons for re-opening cannot be supplemented by affidavits. The reasons have to be read as they are and cannot be improved upon by filing affidavits. Thus, the reliance upon the affidavit is not acceptable. Besides, in any event, the same objection on the basis of affidavit and identically word was taken in reply affidavit by the Revenue in Ajanta Pharma Ltd. (supra) while dealing with the challenge to reopening for assessment for Assessment Years 1998-99, 1999-2000 and 2000-01 and this Court rejected the affidavit in following terms:

"A bare reading of the reasons in support of the notice disclose that the conclusion regarding escapement of the income was on the basis that nondisclosure of the invoicewise details of purchases of trading goods exported and the failure to correlate the trading export sales with invoicewise purchase of trading goods exported, whereas the affidavit in reply claims nondisclosure of the materials in support of such details. In other words, the details were in fact disclosed by the petitioners and, therefore, the reasons given for issuance of notice are contrary to the materials placed before the Department by the petitioners. It is also pertinent to note that the petitioners have categorically stated about the disclosure of details of trading goods exported along with direct cost of purchases for the assessment year along with their return and the said fact also finds corroboration from the affidavit of the Assistant Commissioner of Income Tax wherein he has made a grievance only of nonfurnishing of documents in support of those details. Not only that, but the Department has clarified that nonfurnishing of material facts was by way of nonfurnishing of documents in support of the details furnished to the Department. Apparently, the reasons for issuance of notice did not disclose to be borne out from the records. In other words, the so called reasons are totally flimsy, as has been contended on behalf of the petitioners, and, by no stretch of imagination, can be said to be sufficient to draw the conclusion about escapement of income which could empower the authorities to invoke powers under Section 148 of the said Act. Obviously, therefore, there was no material on the basis of which the Department could have reopened the case in exercise of powers under Section 148 of the said Act."

(Emphasis supplied)

Thus, there is no merit in the objections of the Revenue on the above ground.

So far as ground (iii) above is concerned viz: set off of trading profits against the loss of manufactured exports for purposes of claiming deduction under Section 80HHC of the Act not being done, is alleged to be a failure to disclose all facts. It is pertinent to note that in this case, the Petitioner had pointed out in its return of income that the loss on account of export of manufactured goods is ignored for the purpose of calculation of deduction under Section 80HHC of the Act as it is an incentive provisions. Besides, reliance was also placed in the note on the opinion of Bombay Chartered Accountant Society. Thus, there was a complete disclosure. In the above circumstances, the impugned notice is hit by the first proviso to Section 147 of the Act. It may be pointed out that the Assessing Officer in the Assessment Order dated 23rd March, 1999 has himself ignored the set off on account of loss on manufactured exports as that was the prevailing understanding. In fact, it was only later that in the case of IPCA Laboratories Ltd. Vs. Deputy Commissioner of Income Tax, this Court took a view that the loss in any of the two segments has to be set off against the other for the purpose of determining the deduction available under Section 80HHC of the Act. The aforesaid view is upheld by the Supreme Court in IPCA Laboratory Ltd. Vs. Deputy Commissioner of Income Tax, Mumbai, . These decisions in no manner impact the true and full disclosure of all material facts necessary for assessment.

Before closing, the other objection taken by Mr. Pinto is that in letter dated 18th February, 1999 the Petitioner had stated that they do not keep different sets of accounts for manufacturing and trading activities. This was done prior to passing of Assessment Order dated 23rd March, 1999 under Section 143(3) of the Act. We are not able to understand how the above disclosure would lead to an inference that there was a failure to disclose fully and truly all facts necessary for assessment. Thus, the impugned notice is not sustainable.

However, as we have held the impugned notice under Section 148 of the Act is unsustainable in view of no failure on the part of the Petitioner to fully and truly disclose all facts necessary for assessment, the notice is set aside on the above ground alone. The other issues raised by the Petitioner are not being examined in view of our decision on the first issue which is sufficient to dispose of the Petition.

Accordingly, we allow the Petition by quashing and setting aside the notice dated 24th January, 2013. Rule made absolute in above terms. No order as to costs.