Dishman Pharmaceuticals and Chemicals Ltd. vs Deputy Commissioner of Income Tax

Akil Kureshi, J.—Petition was heard for final disposal at the admission stage with the consent of learned advocates for the parties. The petitioner assessee has challenged a notice dt. 8th March, 2010 for reopening of assessment for the asst. yr. 2004-05. Along with the notice, the petitioner was served with a copy of reasons for reopening of the assessment recorded by the AO. The petitioner questions the legality of such communication on various grounds.

The facts in brief are as follows.

2.1 For the asst. yr. 2004-05, the petitioner company filed the return by declaring income of Rs. 3,17,30,999 on 1st Nov., 2004. The case of the petitioner was taken in scrutiny assessment by the AO under s. 143(3) of the IT Act, 1961. On 29th Dec, 2006 the AO assessed the income of the petitioner at Rs. 8,38,88,973. The assessment order originally framed is produced on record at Annex. B to the petition. Bare perusal of the order suggests that AO had strenuously gone into the various aspects of the income of the petitioner-company such as its turnover, its profits from various activities and its claim for deduction under s. 80HHC.

2.2 By the impugned communication dt. 8th March, 2010 long after the scrutiny assessment was framed in the year 2006, the AO sought to reopen the assessment on the following ground :

The assessee company filed its return of income on 1st Nov., 2004 declaring total income of Rs. 3,17,30,999. The assessment was finalized under s. 143 on 29th Dec, 2006 determining total income at Rs. 8,38,88,973. On verification of the records, it is seen that the enhanced figure i.e. profits of business Rs. 3,84,56,031 taken was not reduced while giving effect to the order of CIT(A) and the loss from trading goods was ignored for the purpose of calculation of deduction under s. 80HHC. This resulted into under-assessment to the extent of Rs. 10,24,629.

In the light of above fact, I am of the firm belief that the income to the tune of Rs. 10,24,629 has escaped assessment within the meaning of s. 147 of the IT Act, 1961. Looking to the facts, it is a fit case of reopening the assessment for the assessment year under consideration as per the provisions of s. 147 of the IT Act. 1961.

2.3 The petitioner raised objection to the notice for reassessment vide its communication dt. 15th Oct., 2010. In this communication, the petitioner raised several grounds including that all facts and materials necessary to decide the claim of deduction under s. 80HHC of the Act were part of the original assessment and were discussed at length by the AO. The assessee further contended that there was no failure on its part to disclose fully and truly all material facts necessary for assessment made and that reasons recorded do not even suggest so.

2.4 Objections raised by the petitioner came to be disposed of by the AO by an order dt. 10th Nov., 2010. The AO recorded that there are two issues on which reassessment is required to be made. First issue is regarding excess deduction allowed under s. 80HHC and second issue is regarding deemed dividend in the hand of the assessee company.

2.5 At this stage, we may briefly notice that the second issue referred by the AO in his order disposing of the objections of the petitioner was not part of the reasons recorded for reopening the assessment. To this aspect of the matter, we may advert to at a later stage. Suffice it to say, the AO turned down various objections raised by the petitioner. The assessee was directed to furnish reply on merits, if any, by 9th Dec, 2010.

2.6 The assessee instead of filing such a reply, approached this Court, filed the present petition and challenged the reopening of notice.

From the facts on record, it emerges indisputably that an assessment already framed under s. 143(3) of the Act is sought to be reopened after 4 years of the end of the assessment year. In view of the provisions contained in s. 147 of the Act, such reopening can be permitted only if the AO has reason to believe that any income chargeable to tax has escaped assessment and that such escapement of assessment was on account of failure on part of the assessee to file return under s. 139 or in response to the notice issued under s. 142(1) or under s. 148 or to disclose fully and truly all material facts necessary for the assessment. Since, admittedly, the assessee had not failed to file the return, the question that needs to be considered in the present case is whether there was any escapement of income from assessment on account of failure on part of the assessee to disclose fully and truly all material facts necessary for assessment.

In the recent judgment in the case of Dishman Pharmaceuticals and Chemicals Ltd. Vs. Deputy Commissioner of Income Tax, , the aspects touching the powers of an AO to reopen assessment beyond 4 years of the end of assessment year under s. 147 of the IT Act came to be considered. Referring to several judgments of the apex Court and High Courts cited before the Bench following observations were made :

From the above judicial pronouncements, following principles can be culled out :

(i) To confer jurisdiction on the AO to reopen the assessment under s. 147 of the IT Act, beyond four years from the end of assessment year, following two conditions must be satisfied : (a) that the AO must have reason to believe that the income chargeable to tax has escaped assessment; and that (b) same occasioned, on account of either failure on the part of the assessee to make a return of his income for that assessment year, or to disclose fully and truly all material facts necessary for assessment of that year. (ii) Both the above conditions are conditions precedent and must be satisfied simultaneously before the ITO can assume jurisdiction to reopen assessment beyond four years of the end of assessment year. (iii) Such reasons must be recorded and if the reasons recorded by the AO do not disclose satisfaction of these two condition, reopening notice must fail. (iv) There is no set format in which such reasons must be recorded. It is not the language but the contents of such recorded reasons which assumes importance. In other words, a mere statement that the AO had reason to believe that certain income has escaped assessment and such escapement of income was on account of non-filing of the return by the assessee or failure on his part to disclose fully and truly all material facts necessary for assessment would not be conclusive. Nor, absence of any such statement would be fatal, if on the basis of reasons recorded, it can be culled out that there were sufficient grounds for the AO to hold such beliefs. (v) Such reasons must emerge from the reasons recorded by the AO and cannot be supplied through an affidavit filed before the Court. However, Gujarat High Court in the case of Aayojan Developers vs. ITO (supra) has accepted the view that to elaborate such reasons already recorded, reference would be permissible to the affidavit filed by the Department before the Court. (vi) What would amount to true and full disclosure of all material facts must depend on each case and no strait-jacket formula of universal application can be provided. It can however safely be stated that the duty of the assessee is to disclose primary facts and it is not his duty to lead the AO to any particular inference of fact or of law on the basis of such primary disclosures. In other words, once the assessee discharges his duty of stating all the primary facts, what inferences and conclusions should be drawn is the duty of the AO. (vii) At the time of ascertaining whether the notice was validly issued, what could be the probable conclusion of fresh assessment if reopening is permitted, is not the inquiry of the Court. In other words, the merits of the proposed action, through opening of the assessment, cannot be gone into by the Court beyond prima facie stage.

Bearing in mind the above legal principles, we are required to examine the contentions of both sides with reference to facts on record.

Counsel for the petitioner contended that there was no concealment or failure on part of the petitioner to fully and truly disclose all material facts for assessment of the income. He submitted that the return filed by the assessee was taken in scrutiny assessment by the AO. After threadbare examination of all the aspects of the matter, assessment was framed. Reopening of the assessment beyond 4 years thereafter, was not justified.

He further contended that AO had calculated the effect of direct and indirect cost attributable to export goods on the export turnover in respect of trading goods and found that a sum of Rs. 8,69,403 was required to be deducted from the figure of Rs. 1,13,70,679 arrived at by him on the basis of ratio of adjusted profit of the business multiplied by adjusted export turnover to adjusted total turnover. This aspect was thus very much before the AO at the time of regular assessment proceedings.

He further contended that reasons recorded by the AO nowhere either record or even demonstrate that any income escaped assessment on account of the petitioner not fully and truly disclosing all material facts necessary for assessment.

He lastly contended that issue of any income under the head of deemed dividend under s. 2(22) of the Act having escaped assessment was not part of the reasons recorded and the same cannot be pressed in service to justify reopening of the assessment.

On the other hand, counsel for the Revenue opposed the petition contending that on account of failure on the part of the assessee to fully and truly disclose material facts, income had escaped assessment. He contended that the assessee had himself agreed that additions be made under the heading of s. 80HHC but disputed only recomputation of deemed dividend income. The petition is, therefore, required to be dismissed.

Having thus heard learned advocates for the parties and having perused the record, first and foremost, we find that the reasons for reopening the assessment do not make out any case of escapement of income from assessment on account of the assessee not disclosing fully and truly all material facts necessary for the assessment. Quite apart from the fact that, no such suggestion is recorded in the reasons. independently also we do not find that the AO''s stand in the reasons recorded can in any manner be construed as suggesting that the income escaped assessment on account of the assessee not disclosing the material facts.

As already noted, reasons for reopening stated that on verification of the records, it is seen that the enhanced figure of profits of business of Rs. 3,84,56,031 taken was not reduced while giving effect to the order of CIT(A) and the loss from the trading goods was ignored for the purpose of calculation of deduction under s. 80HHC, which resulted into underassessment to the extent of Rs. 10,24,629. It is, thus, the case of the Revenue that in the assessment framed, certain loss from trading goods was ignored for the purpose of calculation under s. 80HHC. In the reasons recorded there is reference to giving effect to the order of CIT(A) but the same pertains only to a question of loss from trading goods. which was allegedly ignored. This is clear from the order passed by the AO disposing of the objections of the assessee to the reopening of assessment in which it is stated as under :

As discussed above there are two issues on which reassessments are being made. First issue is regarding excess deduction allowed under s. 80HHC and second issue is regarding deemed dividend in the hands of assessee company. On the first issue the assessee stated vide order sheet dt. 25th March, 2010 that since they are not in a position to reconcile as per detailed working provided to them. Therefore, they requested to pass order as per detailed working. In short, on the issue of excess deduction allowed under s. 80HHC, the assessee has given his consent for making addition.

On second issue of deemed dividend, the assessee has furnished written reply on 25th March, 2010. The contention of the assessee that it has repaid more amount than it received from Schutz Dishman and therefore the provisions of s. 2(22)(e) are not applicable, is not correct.

Close perusal of the reasons recorded would immediately establish that, quite apart from no suggestion in the reasons regarding any attribution on the part of the assessee in fully and truly not disclosing material facts, all facts necessary for framing the assessment with respect to the said issue were very much before the AO when he previously took the return of the assessee for scrutiny assessment.

In addition to the above, we have also perused the previous assessment order which clearly demonstrates that with respect to the claim of the assessee for benefit under s. 80HHC of the Act, the AO had undertaken detailed exercise before coming to final conclusions. In fact, with respect to question of export of trading goods, the AO worked out reduction of Rs. 8,69,403. It may be that due to some error he did not account for this sum in final calculation. This aspect clearly emerges from the assessment order, relevant portion of which Is reproduced below

Calculation of deduction under s. 80HHC(3)(c)(i) in respect of export of manufacturing goods.

(a) Here the adjusted profit of the business means : profit of the business-profit derived from export of trading goods.

Rs. 3,26,59,948 (-) nil = Rs. 3,26,59,948

(b) Adjusted export turnover = Export turnover - Export turnover in respect of trading goods

= Rs. 19,58,89,672 - Rs. 2,28,98,972

= Rs. 17,29.90,700

(c) Adjusted total turnover = Total turnover - Export turnover of business in respect of trading goods.

= Rs. 51,97,79,362 - Rs. 2.28,98,972

= Rs. 49,68,80,390

Deduction under s. 80HHC(3)(c)(i)

Calculation of deduction under s. 80HHC(3)(c)(ii) in respect of export of trading goods is worked out as under :

Export turnover in respect of trading goods - Direct and indirect cost attributable.

= Rs. 2.28,98,972 - Rs. 2.37.68.375

= (-) Rs. 8,69,403

= Indirect cost attributable to the export of trading goods -(-) Rs. 8,69.403.

The above deduction is further increased as per the provisions to this sub-section which is worked out as under :

The deduction in regard to sale made to export house is calculated as under :

Deduction under s. 80HHC(1A) r/w s. 80HHC(3A)(b) Supporting manufacturer :

Thus the total allowable deduction under s. 80HHC is computed at

Rs. 1,13,70.679

Allowable deduction = 30 per cent x 1,13,70,679

= 34,11,203.

Thus the total allowable deduction under s. 80HHC comes to be Rs. 34,11,203.

Be that as it may, irrevocably, it stands established that the AO was in possession of full facts to enable him to frame proper assessment. This is certainly not a case where the assessee could be blamed for not disclosing material facts.

Attempt on the part of the AO to rope in question of deemed dividend under s. 2(22) of the Act needs to be noted only for rejection out of hand.

In view of settled legal position, if the reopening of assessment fails, on account of non-existence of reasons for such reopening, the Revenue cannot either sustain such reopening or bring within the assessment proceedings any other head of escaped income not mentioned in the reasons for reopening.

The proceedings drawn by the AO on 25th March, 2010 reliance to which was placed by counsel for the Revenue to contend that object of reopening of assessment, in our opinion, cannot be sufficient to non-suit the petitioner-assessee. At best, such proceedings would amount to inability on part of the assessee to reconcile the working of the AO in which, as already noted, he had erroneously not accounted for reduction of Rs. 8.69,403 though computed in his assessment order. The assessee was actively and strenuously opposing the attempt to reopen the assessment. He had filed his objections to the reopening notice. He had carried the issue to the High Court opposing the notice as well as the order disposing of the objections. The assessee never acquiesced in the reopening of assessment. In the result, we are of the opinion that on the grounds noted above, reopening notice is invalid and must be declared so. Resultantly writ petition is allowed. Notice dt. 25th Sept., 2009 for reopening of assessment is quashed. Petition is disposed of accordingly.