Sun Pharmaceutical Industries Ltd. vs Deputy Commissioner of Income Tax

Akil Kureshi, J.—The petitioner has challenged a notice dated February 25, 2004, issued u/s 148 of the income tax Act, 1961 ("the Act" for short). By such notice issued by the Assessing Officer, the respondent herein, assessment of the petitioner company for the assessment year 1997-98 is sought to be reopened. Briefly, the facts may be noted, at the outset. The petitioner is a company registered under the Companies Act and is regularly assessed to tax under the Act. For the year 1997-98, the petitioner filed its return of income on November 28, 1997, declaring a total income of Rs. 3,93,08,107 u/s 115JA of the Act. The return was taken in scrutiny and the assessment order was passed on March 23, 2000, u/s 143(3) of the Act. The Assessing Officer computed the total income of the company at Rs. 4,92,57,450.

Such scrutiny assessment was sought to be reopened by the Assessing Officer for which purpose, the impugned notice came to be issued on February 25, 2004. In the notice, the Assessing Officer called upon the petitioner to file a return of income within 30 days from the date of service of notice.

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 escaped assessment.

The petitioner raised several objections to the Assessing Officer''s action of reopening the assessment under communication dated May 10, 2004. The assessee contended that notice u/s 148 of the Act was without jurisdiction. It was primarily contended that there was no failure on the part of the petitioner to disclose truly and fully all, material facts. The petitioner also individually replied to each specific head of the reasons where the Assessing Officer believed that income chargeable to tax had escaped assessment. We will advert to details of such objections at an appropriate stage, later on.

The respondent, however, disposed of such objections by order dated August 20, 2004. He gave brief, but separate reasons for dealing with each disputed item on what he believed was the case of income escaping assessment. At that stage, the petitioner filed the present petition and challenged the notice of reopening.

Learned counsel, Shri Soparkar, for the petitioner contended that notice u/s 148 of the Act was wholly without jurisdiction. The petitioner had made full disclosures in the return of income filed. In the absence of any failure on the part of the petitioner to disclose truly and fully all material facts, assessment which was previously framed after scrutiny cannot be reopened beyond the period of four years from the end of the relevant assessment year.

Counsel submitted that in the reasons recorded also, the Assessing Officer has not shown how income chargeable to tax had escaped assessment which was on account of the assessee failing to disclose truly and fully all material facts.

Counsel further submitted that the Assessing Officer at the time of original assessment had carried out detailed scrutiny of various claims put forth by the assessee. Some of the claims were disallowed. Adjustments as found necessary were made. This was thus not a case where any income chargeable to tax had escaped assessment due to failure on the part of the assessee. Any attempt on the part of the Assessing Officer to reopen such assessment would only be on the basis of a mere change of opinion.

Counsel further submitted that upon receipt of the reasons recorded by the Assessing Officer, the petitioner had raised detailed objections. While dealing with such objections, the Assessing Officer by his order dated August 20, 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.

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.

In support of his contentions, counsel relied on the following decisions:

11.1 In the case of Calcutta Discount Company Limited Vs. Income Tax Officer, Companies District, I and Another, , 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 underassessment had occurred by reason of either omission or failure on the part of an assessee to make a return of his income or omission or failure on the part of an assessee to disclose fully and truly all material facts necessary for his assessment. It was held that both these conditions are conditions precedent to be satisfied before the Assessing Officer could have jurisdiction to issue a notice for reopening the assessment beyond the period of four years. In the said decision, it was further held that the responsibility of the assessee is to disclose primary facts and on disclosure of such facts, what further facts should be inferred and what proper legal inferences the authority had to draw are not the concerns of the assessee.

11.2 In the case of Commissioner of Income Tax, Gujarat Vs. Bhanji Lavji, Porbandar, , the apex court observed that it is not for the assessee to satisfy the income tax Officer that there was no concealment with regard to any question, it was for the income tax Officer to establish that the assessee had failed to disclose fully and truly certain facts material to the assessment of income which had escaped assessment.

11.3 In the case of Gemini Leather Stores Vs. The Income Tax Officer B Ward, Agra and Others, , the apex court referring to the decision of the Calcutta Discount Company Limited Vs. Income Tax Officer, Companies District, I and Another, , reiterated that once the Assessing Officer had in possession of primary facts, it was for him to make necessary enquiries and draw proper inferences.

11.4 In the case of Parashuram Pottery Works Co. Ltd. Vs. Income Tax Officer, Circle I, Ward A, Rajkot, , the apex court finding that certain claim which was made at the rate higher than what was legally permissible, assessment with respect to the same was sought to be reopened beyond the period of four years. In that context, the apex court quashed the notice holding that there was no omission or failure on the part of the assessee to disclose truly and fully all material facts.

11.5 Counsel also relied on a Division Bench order dated August 16, 2007, passed in Special Civil Application No. 9008 of 1997 in the case of T.J. Agro Fertilizers P. Ltd. v. Deputy CIT wherein this court quashed the notice for reopening observing that though there was no discussion regarding the specific claim, at the most it may be a case of wrong claim made by the assessee, but relevant material was there before the Assessing Officer to disallow the claim. It was further observed that when the material facts were before the Assessing Officer, there was no jurisdiction to issue notice u/s 148 of the Act after expiry of four years from the end of the assessment year.

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.

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 the true facts.

In support of his contention, counsel relied upon the following decisions:

14.1 In the case of Kantamani Venkata Narayana and Sons Vs. First Additional Income Tax Officer, Rajahmundry, wherein the apex court discussed the aspect of true and full disclosures in the context of the assessee contending that all material in the form of production of books of account was before the Assessing Officer.

14.2 In the case of Indo-Aden Salt Mfg. and Trading Co. Pvt. Ltd. Vs. Commissioner of Income Tax, Bombay, , wherein the apex court rejected the assessee''s contention that the income tax Officer could have found out the correct position by further probing. The apex court observed that this would not exonerate the assessee from the duty to make full disclosure truly.

14.3 In the case of M/s. Phool Chand Bajrang Lal and another Vs. Income Tax Officer and another, , wherein it was observed that acquiring fresh information specific in nature, reliable in character, relating to concluded assessment which went to expose the falsity of the statement made by the assessee at the time of original assessment was different from drawing a fresh inference from the same facts and material available with the Assessing Officer at the time of original assessment proceedings. The apex court further observed that the belief that income chargeable to tax had escaped assessment is that of the income tax Officer and sufficiency of the reasons for forming such a belief is not for the court to judge. However, it is open to the assessee to establish that there in fact existed no belief or that the belief was not a bona fide one or was based on vague, irrelevant and non-specific information.

14.4 In the case of GVK Gautami Power Ltd. (Formerly Known as Gautami Power Ltd.) Vs. The Assistant Commissioner of Income Tax (OSD) Central Range-1 and The Deputy Commissioner of Income Tax, , wherein a Division Bench of the Andhra Pradesh High Court had occasion taking of the various judgments on the issue to cull out certain principles applicable to reopening of assessment in general.

14.5 In the case of Dishman Pharmaceuticals and Chemicals Limited Vs. Deputy Commissioner of Income Tax (OSD), , wherein, a Division bench of this court had in the context of reopening of assessment beyond a period of four years culled out certain principles emerging from various decisions of the apex court.

14.6 In the case of Honda Siel Power Products Ltd. v. Deputy CIT [2012] 340 ITR 53 (Delhi), a Division Bench of the Delhi High Court observed as under (page 61):

The law postulates a duty on every assessee to disclose fully and truly all material facts for its assessment. The disclosure must be full and true. Material facts are those facts which if taken into accounts they would have an adverse effect on assessee by the higher assessment of income than the one actually made. 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.

SLP against the said decision came to be dismissed by the apex court, which order is reported in Honda Siel Power Products Ltd. Vs. Deputy Commissioner of Income Tax and Another, .

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 March 22, 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 under sections 80HHC and 80-IA, computation of income, proof of payment of advance tax and TDS certificates. The various details submitted by the assessee are very confusing and complicate the matter pertaining to the assessment. The details filed by the assessee under 456 heads are such as filing of which are necessitated with the object to create confusing in the matte and frustrate quick understanding. The assessee has furnished the branches details. The statements furnished are not straight forward, e.g., please refer to, the profit calculation sheet/statement u/s 80-IA (copy enclosed) for a period of April, 1996, to March 1997. Though the name of the statement is profit calculation u/s 80-IA, but I do not find anywhere figure of the profit which has been determined for the purpose of section 80-IA. Thus, the assessee has deliberately presented the facts in such a manner so that it is not understood by the tax authority easily. For example, as per the tax audit report, the research and development expenses are as under:

Schedule 17 of the annual account shows research and development expenses of Rs. 64.81 lakhs whereas in the computation of income the assessee has claimed the research and development capital expenses of Rs. 4,48/34,893 and the research and development revenue expenses of Rs. 1,72,60,819. The tax audit report shows revenue expenditure of Rs. 78,93,309 whereas the details of operational expenses given in schedule 17 of the annual accounts shows the research and development expenses at Rs. 64.81 lakhs. Thus, it is not clear which figure is correct.

II. Details of fixed assets given in the annual accounts and shows addition to P & M of Rs. 11.57 crores which is inclusive of capital expenditure on the research and development equipment. On this addition, the assessee has claimed depreciation. In addition to that on capital expenditure pertaining to the research and development the assessee also claimed deduction u/s 35. Thus, there is double deduction not permitted under the Act. This has resulted into improper appreciation of the facts by the Assessing Officer.

III. While completing the assessment u/s 143(3) of the Act in the case of Aditya Medisales Ltd., a sister concern of the Sun group, it was found that the profit of the industrial unit of Silvasa of the assessee has been inflated because the same is exempt u/s 80-IA, by giving more interest on overdue bills by Aditya Medisales Ltd. 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 at 24 per cent. 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 per cent. to 18 per cent. 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 the Silvasa unit because the interest income is directly added to the sales figure, on which the deduction u/s 80-IA is available. These facts are not clear from the working of deduction u/s 80-IA given by the assessee along with the return of the income. This is not permissible as per the provisions of section 80-IA(10) of the Act and the rate of interest payable to SPIL has to be restricted at 15 per cent. to 18 per cent, which will automatically reduce the profits of units entitled for section 80-IA deduction and consequently the deduction u/s 80-IA claimed by the assessee will be reduced.

IV. In the assessment order passed, the Assessing Officer had not added the following amounts:

It has been mentioned in the auditor''s report in 10CCAC form that Rs. 3,03,970 of foreign exchange had not been brought inside India till the statutory time limit available. As per this certificate, the deduction u/s 80HHC should be reduced from Rs. 1,11,92,131 to Rs. 1,11,44,567. The assessee has brought nothing on record to show that the amount of Rs. 3,03,970 has been brought inside India within the statutory time limit. Hence, the deduction u/s 80HHC has been allowed in excess.

The assessee has shown export of Rs. 43.17 lakhs out of goods produced from the Silvasa unit. This amount has been considered for working out the deduction u/s 80HHC Again, deduction u/s 80-IA has been claimed at 100 per cent. on this amount. This means that more than 100 per cent. deduction has been claimed on the export of Rs. 43.17 lakhs from the Silvasa unit, which is not correct as per the provisions of section 80AB.

While scrutinizing the assessee''s working u/s 115JA vis-�-vis the order of the Commissioner of income tax (Appeals), it is seen that the assessee has debited the lease equalization amount of Rs. 1,77,48,070 in the profit and loss account. It has not submitted the details regarding the nature of this expense. While calculating the normal business profit, the assessee has added back the lease equalization amount of Rs. 1,77,48,070. However, while calculating the book profit, u/s 115JA, the assessee has not added back this amount. This issue has been decided by the Commissioner of income tax (Appeals) against the assessee for the assessment year 2000-01 and the assessment year 2001-02. Hence, Rs. 1,77,48,070 is left to be added while computing the book profit u/s 115JA.

V. In view of the above, I have reason to believe that the above incomes chargeable to tax have escaped assessments. Hence, notice u/s 148 of the Act is issued.

From such reasons, it can be seen that the foundation of the Assessing Officer to assert that there was failure on the part of the assessee to disclose fully and truly all material facts was that, according to the Assessing Officer, the assessee had filed voluminous details along with the return which were not necessary. Such details made the matter confusing and complicated. In fact, such extra details were provided with an object to create confusion and to frustrate quick understanding. In addition to such allegations, there were six different heads under which the Assessing Officer believed that income chargeable to tax had escaped assessment. We may briefly put them in different compartments.

(1) Claim of the research and development 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 the research and development 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 the research and development u/s 35 of the Act and for the same amount, once again, depreciation of capital expenditure on the research and development by forming the same part of the fixed assets.

(3) Higher deduction u/s 80-IA of the Act by collecting interest at the rate of 24 per cent. from a sister concern, namely, Aditya Medisales Ltd.

(4) Excess claim of deduction u/s 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 u/s 80-IA of the Act with respect to the Silvasa unit on which deduction u/s 80HHC was also claimed.

(6) With respect to computation u/s 115JA of the Act wherein, the assessee had debited the lease equalization amount of Rs. 1,77,48,070 in the profit and loss account.

We may deal with each ground separately.

In so far as ground Nos. 1 and 2 are concerned, they overlap. We, therefore, discuss them together. In response to such reasons recorded, the petitioner had in connection with these grounds, specifically raised objections and pointed out that all figures tally and that there was no double deduction claimed. It was contended that there was no failure on the part of the assessee to fully and truly disclose all material facts. In particular, with respect to the claim of double deduction of the fixed assets and the research and development expenses by way of depreciation and thereafter u/s 35 of the Act, it was pointed out that the assessee had claimed deduction u/s 35 of the Act towards the research and development expenses. On such expenses, no depreciation by way of fixed assets was claimed. In short, the case of the assessee is that there was no double deduction. Along with such objections, the petitioner had produced certain annexures to establish its case of reconciliation of the accounts and of not having claimed any double deductions. With respect to the first ground, the assessee reconciled the accounts in the following manner:

Assessment year 1997-98

Financial year 1996-1997

Reconciliation of the research and development revenue expenses as per annual report,

Form 3CD and claimed in the income tax return

Assessment year 1997-98

Financial year 1996-97

Reconciliation of addition to fixed assets as per working of book depreciation-[schedule 5 of annual accounts] and as per income tax depreciation workings and as per the research and development additions as per Form No. 3CD:

Having perused such detailed account, we find that the relevant entries have been properly explained and reconciliation has been satisfactorily explained. In particular, with respect to double deduction on the research and development expenditure by way of depreciation on fixed assets and deduction u/s 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 research and development expenditure was presented before deduction u/s 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 the annual accounts, the addition in plant and machinery is Rs. 1157.65 lakhs. As per 3CD report, addition of plant and machinery pertaining to the research and development is Rs. 143.44 lakhs. Hence, the depreciation u/s 32 should have been claimed on addition of plant and machinery worth Rs. 1157.65 lakhs (-) Rs. 143.44 lakhs = Rs. 1014.21 lakhs. However, in the depreciation chart as per the income tax Act, the depreciation has been wrongly claimed on addition of Rs. 1101.29 lakhs (Rs. 857.06 lakhs + Rs. 111.26 lakhs + Rs. 132.97 lakhs).

To our mind, this line of reasoning that the Assessing Officer took in the order disposing of the objections was entirely different from what emerged from the reasons recorded. As already noted, in the reasons recorded, he raised two contentions with respect to certain claims of deduction. Firstly, he contended that certain figures do not match with the tax audit report and, secondly, that with respect to certain expenditure of the research and development, double benefits were claimed in the form of depreciation as well as the deduction u/s 35AB of the Act. When the assessee objected to such grounds and pointed out in detail that the claims were valid and that there was no double claims made, the Assessing Officer in the order rejecting the objections went on yet different aspects altogether. We are not commenting on the validity of this new angle sought to be brought in by the Assessing officer. Suffice it to note that the notice for reopening must fail or succeed on the basis of the reasons recorded. If a new ground occurs to the Assessing Officer after he recorded the reasons for reopening of assessment and issued notice for such purpose, surely this cannot be a ground to support the notice. Under the circumstances, grounds Nos. 1 and 2 noted above would not form valid basis for reopening the assessment.

Ground No. 3 pertaining to excess claim of deduction u/s 80-IA of the Act can be discussed later on.

We presently go to ground No. 4 which pertains to non-remission of export sale proceeds. The case of the Assessing Officer was that a sum of Rs. 3,03,970 was not remitted in foreign exchange within the statutory time limit. To such ground, in the objections raised by the petitioner, it was pointed out that there was complete disclosure with respect to such non-remission. The assessee had also sought extension of time for such remission. Such extension application was neither allowed nor rejected. The assessee had, therefore, claimed deduction on such basis with full disclosure. The assessee contended that when extension was sought which was pending, the assessee could raise a valid claim. Such objections were disposed of by the Assessing Officer observing as under:

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 Commissioner of income tax 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 u/s 80HHC of the Act including the sum of Rs. 3,03,970 towards the export sale proceeds, for which the assessee had 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 u/s 80HHC of the Act. Even in the order disposing of the objections, the Assessing Officer has nowhere stated that the assessee tailed to disclose full facts with respect to such claim. This ground also, therefore, is not valid.

Ground No. 5 pertains to deduction u/s 80-IA of the Act in respect of the Silvasa unit. The Assessing Officer, noted that the assessee had claimed exemption u/s 80HHC of the Act on export of Rs. 43.17 lakhs. Once again on the same amount, deduction u/s 80-IA of the Act was also claimed. With respect to this ground, the assessee, in the objections, contended that full particulars were reflected in the return filed. Section 80AB of the Act does not mandate discarding deduction u/s 80HHC of the Act while claiming deduction u/s 80-IA of the Act. The Assessing Officer had examined the claim and reopening of the same, therefore, would only amount to change of opinion. The objections of the petitioner were disposed of by the Assessing Officer in the following manner:

2.5 The assessee has shown to have exported goods worth Rs. 43.17 lakhs from the ''Silvasa unit'' claims exemption u/s 80-IA. While scrutinizing deeply, the assessee''s claim u/s 80HHC vis-�-vis unit-wise allocation of receipt/expenses, it is noticed that export turnover of the ''Silvasa'' unit (exempt 100 per cent. u/s 80-IA) is also included in the total export turnover, while calculating deduction u/s 80HHG, thus claiming double deduction u/s 80-IA/ 80HHC, which is contrary to the provisions of section 80AB and the decisions of the hon''ble Supreme Court in the case of Escorts Limited and Others Vs. Union of India and others, and in the case of IPCA Laboratory Ltd. Vs. Deputy Commissioner of Income Tax, Mumbai, . These facts could not be readily discovered by the Assessing Officer from the records submitted by the assessee along with the return of income and details filed during the course of assessment.

From the above, it can be seen that full facts with respect to the claim of deduction u/s 80-IA of the Act were presented before the Assessing Officer. Neither in the reasons recorded nor in the order disposing of the objections, the Assessing Officer asserted that there was any failure on the part of the assessee to disclose truly and fully all material facts. He only, in the order disposing of the objections observed that these facts could not be readily discovered by the Assessing Officer from record submitted by the assessee along with the return of income. We are of the opinion that this is not sufficient to establish that the income chargeable to tax had escaped assessment due to failure on the part of the assessee to truly and fully disclose all material facts. The claim u/s 80-IA of the Act for the 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.

In so far as ground No. 6 is concerned, the petitioner has given detailed reasons why, according to the petitioner, the assessee had debited the 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., Jayalakshmi Estates Vs. The Joint Commissioner of Income Tax Special Range - XI, . 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 a SLP before the Supreme Court and leave to appeal has been granted.

The prime contention of the assessee on this issue was that full details of the lease equalization charge was on record. This was clearly mentioned in the annual accounts in schedule 12 and the Assessing Officer made no disallowance on this ground. In the order of the Assessing Officer disposing of such objections, he mainly stated that the Assessing Officer had not examined this issue at all while framing the assessment u/s 143(3) of the Act. This can hardly be a ground for permitting reopening of a closed assessment, that too beyond a period of four years. The Assessing Officer did, however, state that there was nothing on record to show what was the nature of expenditure booked under the lease equalization charge. However, there was no further elaboration on this aspect. 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.

We may now refer to ground No. 3. In this respect, the stand of the Assessing Officer is that the assessee had sold certain goods to its sister concern, Aditya Medisales, during the year under consideration. On delayed payments of such goods, Aditya Medisales paid interest at the rate of 24 per cent, which was much higher than the prevailing market rate of interest which varies between 15 per cent. to 18 per cent. By adopting such modality, the assessee had reduced the taxable profit of Aditya Medisales and at the same time increased the profit of the Silvasa unit of the assessee-company which was eligible for deduction u/s 80-IA of the Act. These facts were not clear from the working out of deductions u/s 80-IA of the Act along with the return of income. According to the Assessing Officer, the case of the petitioner would be covered u/s 80-IA(10) of the Act. Therefore, interest payable to the petitioner company should be restricted to 15 per cent. to 18 per cent, which would reduce the profit of the said unit and resultantly deduction u/s 80-IA of the Act would also be reduced.

In the objections raised, the petitioner contended that details of interest charged on overdue sale proceeds were on record. In the original assessment the assessee had dealt with such interest for the purpose of computation of deduction u/s 80HHC of the Act. Thus, there was no non-disclosure on the part of the assessee. It was further contended that interest was 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.

Such objections of the petitioner were disposed of by the Assessing Officer in the following manner:

2.3 Regarding the claim of higher deduction u/s 80-IA 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 at 24 per cent. on the overdue bills, which is much more than the prevailing market rate of interest in this line of business which varies from 15 per cent. to 18 per cent. 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 the ''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 at 24 per cent. on over due bills is not available from the record of M/s. Sun Pharmaceuticals Industries Ltd. The interest component has been merged in the figure of sales of the Silvasa unit making it difficult for the Assessing Officer to discover this modus operandi. This fact could be detected while verifying/examining the records for the assessment year 2001-02 of M/s. Aditya Medisales Ltd. This issue is discussed in detail in the assessment order u/s 143(3) in the case of M/s. Aditya Medisales Ltd.

It is not in dispute that Aditya Medisales is the sister concern of the petitioner company. It is also not in dispute that on the delayed payments of sales proceeds, Aditya Medisales paid interest at the rate of 24 per cent. to the petitioner company. Section 80-IA of the Act, as is well known, pertains to deduction in respect of profits and gains from industrial undertakings engaged in infrastructural development. Section 80-IA(10) reads as under:

(10) Where it appears to the Assessing Officer that, owning to the close connection between the assessee carrying on the eligible business to which this section applies and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business, the Assessing Officer shall, in computing the profits and gains of such eligible business for the purposes of the deduction under this section, take the amount of profits as may be reasonably deemed to have been derived therefrom.

Under section 80-IA(10) of the Act, thus, if it appears to the Assessing Officer that owing to the close connection between the assessee carrying on the business eligible for deduction under such section, and any other person or for any other reason, the course of business between them is so arranged that the business transacted produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business, the Assessing Officer shall in computing the profits and gains of such eligible business for deduction, take the amount of profits as may be reasonably deemed to have been derived therefrom. Under the circumstances, if it is found that the assessee had charged higher rate of interest from the sister concern and thereby, arranged its business in such a way that the eligible profit for deduction u/s 80-IA 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 u/s 80-IA of the Act dealing with closely associated entity, he would make necessary adjustments in this regard.

Thus, it cannot be said that the 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.

In the case of Sri Krishna Private Ltd. Etc. Vs. I.T.O., Calcutta and Others, , the apex court reiterated the ratio laid down in the case of M/s. Phool Chand Bajrang Lal and another Vs. Income Tax Officer and another, 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 believe and not whether the omission/failure and the escapement of income is established. Since the belief is that the income tax Officer, the sufficiency of reasons for forming the belief is not for the court to judge.

In the case of INCOME TAX OFFICER Vs. SELECTED DALURBAND COAL CO. (P) LTD., , the apex court held that the formation of belief by the income tax Officer is essentially within his subjective satisfaction. At the stage of issue of notice, the only question is whether there was relevant material on which the reasonable person could have formed the requisite belief.

In the case of Raymond Woollen Mills Ltd. Vs. Income Tax Officer and Others, , the apex court observed that (page 35): "In this case, we do not have to give a final decision as to whether there is suppression of material facts by the assessee or not. We have only to see whether there was prima facie some material on the basis of which the Department could reopen the case. The sufficiency or correctness of the material is not a thing to be considered at this stage. We are of the view that the court cannot strike down the reopening of the case in the facts of this case".

In the case of Assistant Commissioner of Income Tax Vs. Rajesh Jhaveri Stock Brokers Pvt. Ltd., , the apex court observed as under (page 511):

Section 147 authorises and permits the Assessing Officer to assess or reassess income chargeable to tax if he has reason to believe that income for any assessment year has escaped assessment. The word ''reason'' in the phrase ''reason to believe'' would mean cause or justification. If the Assessing Officer has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot be read to mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion. The function of the Assessing Officer is to administer the statute with solicitude for the public exchequer with an inbuilt idea of fairness to taxpayers. As observed by the Supreme Court in Central Provinces Manganese Ore Co. Ltd. Vs. I.-T.O., Nagpur, , for initiation of action u/s 147(a) (as the provision stood at the relevant time) fulfilment of the two requisite conditions in that regard is essential. At that stage, the final outcome of the proceeding is not relevant. In other words, at the initiation 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 INCOME TAX OFFICER Vs. SELECTED DALURBAND COAL CO. (P) LTD., and Raymond Woollen Mills Ltd. Vs. Income Tax Officer and Others, .

In the case of M/s. Phool Chand Bajrang Lal and another Vs. Income Tax Officer and another, , the apex court observed as under (page 477):

From a combined review of the judgments of this court, it follows that an income tax Officer acquires jurisdiction to reopen an assessment u/s 147(a) read with section 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 his assessment during the concluded assessment proceedings, any part of his income, profit or gains chargeable to income tax has escaped assessment. He may start reassessment proceedings either because some fresh facts come to light which were not previously disclosed or some information with regard to the facts previously disclosed comes into his possession which tends to expose the untruthfulness of those facts. In such situations, it is not a case of mere change of opinion or the drawing of a different inference from the same facts as were earlier available but acting on fresh information. Since the belief is that of the income tax Officer, the sufficiency of reasons for forming the belief is not for the court to judge but it is open to an assessee to establish that there in fact existed no belief or that the belief was not at all a bona fide one or was based on vague, irrelevant and non-specific information. To that limited extent, the court may look into the conclusion arrived at by the income tax Officer and examine whether there was any material available on the record from which the requisite belief could be formed by the income tax Officer and further whether that material had any rational connection or a live link for the formation of the requisite belief.

In view of the above settled legal position, at this stage, we do not find that the reasons recorded lack validity. The above observations of various decisions noted would also be relevant when we examine whether such escapement of income was due to failure on the part of the assessee in truly and fully disclosing all material facts. In this respect, the assessee had disclosed that it had received interest of Rs. 3,03,48,973. It is an admitted position that in the return filed, the assessee did not indicate whether the entire interest or part thereof was received from Aditya Medisales. Further, there is no indication that from Aditya Medisales, which was a sister concern, the assessee had received interest at the rate of 24 per cent. on the outstanding amounts. Counsel for the petitioner, however, submitted that in the tax audit report, the petitioner had disclosed that the petitioner company and Aditya Medisales are closely associated. In our opinion, this would not be a sufficient disclosure. From the facts on record, it was not possible for the Assessing Officer to ascertain that the petitioner 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 cent. per annum, were not discernible from the record at all.

Under the circumstances, from the material on record, it was not possible for the Assessing Officer to make adjustment u/s 80-IA(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 the 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 for the Assessing Officer to discover these three vital facts.

In the case of Sri Krishna Private Ltd. Etc. Vs. I.T.O., Calcutta and Others, , the apex court observed that obligation of the assessee is to disclose all material facts necessary for his assessment for that year fully and truly. It was further observed that the idea is to save the assessee from harassment resulting from mechanical reopening of assessment. This protection avails of only to those assessees who disclose all material facts truly and fully.

In the case of M/s. Phool Chand Bajrang Lal and another Vs. Income Tax Officer and another, , the apex court held as under (headnote):

Where the transaction itself, on the basis of the subsequent information was found to be a bogus transaction, mere disclosure of that transaction at the time of the original proceedings could not be said to be a disclosure of ''true'' and ''full facts'' and the officer would have jurisdiction to reopen the concluded assessment in such a case.

In the present case, as already noted, the only disclosure was that the assessee had earned interest income of Rs. 3,03,48,973. There was no further information available on record that such interest included overdue payment charges at the rate of 24 per cent, received from the sister concern, viz., Aditya Medisales. Even without the aid of Explanation 1 to the proviso to section 147, therefore, it was perhaps open for the Assessing Officer to contend that there was no true and full disclosure on the part of the assessee in this respect. At any rate, by applying such Explanation, it can be easily gathered that the assessee failed to disclose fully and truly all material facts. Counsel for the petitioner, however, vehemently contended that these were not primary facts. Only primary fact was that the assessee had earned interest income. We are, however, of the opinion that in the context of the close connection between the petitioner and Aditya Medisales, the fact that the assessee was eligible for deduction u/s 80-IA of the Act and the interest income received from the sister concern had relevance to the provisions of section 80-IA(10) of the Act, primary facts were not on record.

Under the circumstances, in so far as ground No. 3 is concerned, we find that the same cannot be stated to be invalid. In the result, the petition is dismissed. Rule is discharged with no order as to costs. Interim relief is vacated.