Delhi High Court

Moser Baer India Ltd. vs Deputy Commissioner Of ... on 22 August, 2013

Author: Sanjeev Sachdeva

      *IN THE HIGH COURT OF DELHI AT NEW DELHI

     %         Judgment reserved on :  17th July, 2013
               Judgment pronounced on: 22nd August, 2013

     +                      WP(C) 1004/2013

     MOSER BAER INDIA LTD.                          ..... Petitioner
                    Through              Mr. Ajay Vohra, Ms. Kavita
                                         Jha   and     Mr.     Vaibhav
                                         Kulkarni, Advocates.
                            versus

     DEPUTY COMMISSIONER OF INCOME-TAX AND ANR.
                                      ..... Respondents
                   Through:  Mr.   Kamal       Sawhney,
                            Advocate.

     CORAM:
     HON'BLE MR. JUSTICE SANJIV KHANNA
     HON'BLE MR. JUSTICE SANJEEV SACHDEVA

     SANJEEV SACHDEVA, J.

1. The petitioner by way of the present petition has

challenged the order dated 01.02.2013, passed by the

Deputy Commissioner of Income Tax and the issuance

of notice dated 04.05.2011 under Section 148 of the

Income Tax Act, 1961 (hereinafter referred to as "the

Act") and the proceedings initiated pursuant thereto.

2. Assessment year in issue is 2005-06.

3. The petitioner is a company engaged in the business of

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manufacture and sale of optical and magnetic storage

media projects i.e. CD-Rom, Floppy Disks, etc. The

petitioner during the relevant financial year pertaining to

the Assessment Year 2005-06 had two units one at A-

164, Sector-80, Noida and the other at 66, Udyog Vihar,

Greater Noida. Both the units were eligible for deduction

under Section 10B of the Act.

4. On 31.10.2005, the petitioner filed its return of income

for the Assessment Year 2005-06 declaring a loss of

Rs.1,65,43,08,282/- under the normal provisions of the

Act and book profit under Section 115JB of the Act at a

loss of Rs.40,97,92,770/-. The petitioner claimed

deduction under Section 10B of Rs.29,08,16,451 in

respect of the profit derived from the unit at A-164,

Sector 80, Noida. No such deduction was claimed in

respect of the unit at 66, Udyog Vihar, Greater Noida.

5. Pursuant to the filing of the return, the Assessing Officer

issued various questionnaires on 31.10.2007,

01.10.2008 and 14.11.2008 seeking details/

explanations from the assessee. The questionnaires

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among other details sought explanation from the

assessee qua the claim under Section 10A/10B of the

Act as well as claim of deduction of deferred revenue

expenditure for technical know-how fee. The

petitioner/assessee responded to the questionnaires and

submitted the requisite information/explanation.

6. The assessment of the petitioner was completed under

Section 143(3) of the Act and the claim of the petitioner

under Section 10B and deduction of deferred revenue

expenditure for technical know-how fee were accepted.

The Assessing Officer completed the assessment at an

income of Rs.95,47,60,410/- under the normal provisions

making following additions and disallowances:-

               a. Addition     of    Rs.239,28,55,948       on
                  account of adjustment in the arm's
                  length    price    of   the    international
                  transaction     entered    into    by    the

Petitioner in the relevant financial year.

b. Restricting the claim of deduction under section 10B of the Act at Rs.25,42,43,918 as against Rs.29,08,16,451 claimed by the Petitioner.

c. Disallowing royalty of Rs.11,50,83,837 being 25% of Rs.46,03,35,350 as

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against actual expenditure on royalty of Rs.37,73,17,928 claimed by the Petitioner in the P&L account.

d. Disallowing expenses of Rs.9,33,27,335 alleging the same to be incurred for earning exempt dividend income invoking provisions of section 14A read with Rule 8D of the Income-tax Rules, 1962.

7. On 27.05.2009, the Assessing Officer passed an order

under Section 154 of the Act rectifying the Assessment

Order dated 31.12.2008 and reduced the claim of

deduction under Section 10B of the Act to

Rs.25,24,21,751/- as against deduction of

Rs.25,42,43,918/- allowed in the earlier assessment

order.

8. On 04.05.2011, the Deputy Commissioner of Income Tax

issued a notice to the petitioner under Section 148

proposing to re-assess the income of the petitioner. The

reasons to believe recorded for the said notice are as

under:-

                  "Return  of income      was filed on
                  30.10.2005     declaring     loss    of

Rs.1,65,43,08,282/-. Assessment under Section 143(3) was completed on 31.12.2008 at Rs.95,47,60,410/-

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subsequently, rectified under Section 154 on 27.05.2009 at an income of Rs.87,31,23,193/.

Perusal of assessment record revealed that the assessee claimed from its total income the loss/depreciation of Rs.1,44,81,23,306/- pertaining to Greater Noida unit (100% E.O.U.) which was eligible for deduction under Section 10B. As the deduction under Section 10B do not form part of total income, the loss (being negative deduction) should also have been excluded from the total income. The mistake resulted in underassessment of income of Rs.144,81,23,306/- involving tax effect of Rs.76,83,61,555/-. Further, the assessee was allowed, in computation of income, a deduction of Rs.1,36,90,221 on account of deferred revenue expenditure as one-sixth of Rs.8,21,41,326/- (sum of Rs.1,80,05,185/- & Rs.6,41,36,441/-, being expenditure on technical know- how pertaining to financial years 2001- 02 and 2002-03. Out of the above, Rs.19,29,127/- & Rs.25,72,170/- were debited to P&L a/c in F.Y. 2001-02 and 2002-03 itself as Miscellaneous Expenditure written off. Out of the remaining Misc. expenditure of Rs.7,76,40,029/-, Rs.5,20,83,202/- was capitalized and Rs.2,55,56,827/- was written off during financial year 2003-04. Hence, no balance remained out of the above expenditure to be written off.

Thus, the deduction of Rs.1,36,90,211/- was inadmissible and should have been disallowed. This mistake resulted in underassessment of income of

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Rs.1,36,90,221/- involving tax effect of Rs.72,63,911. The failure on the part of the assessee to disclose true and correct particulars of its income.

Thus, I have reason to believe that income of assessee to the extent of Rs.1,46,18,527/- has escaped assessment by way of not declaring true and correct income. Thus, there is failure on the part of the assessee to fully and truly disclose true particulars of its income and the same is required to be reassessed and taxed which requires reopening of assessment by initiation of proceedings under Section 147 by issue of notice under Section 148. Therefore, notice under Section 148 is hereby issued. The notice is issued after obtaining approval from CIT-II, New Delhi, vide her letter NO. F.No. CIT-II- Delhi/Notice u/s 148/2011-12/292 dated 29.04.2011."

9. The petitioner filed objections to the issuance of the said

notice, inter-alia, on the grounds that the issuance of

notice was barred under proviso to Section 147 as the

petitioner had made full and true disclosure of material

facts. Notice under Section 148 seeking to reopen the

assessment was based on change of opinion as no fresh

information or tangible material had come to the

knowledge of the Assessing Officer.

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10. By the impugned order dated 01.02.2013, the Deputy

Commissioner of Income Tax disposed of the objections

raised by the petitioner by rejecting on the grounds

raised by the petitioner. Aggrieved by the disposal of the

objections vide order dated 01.02.2013 and the issuance

of notice under Section 148 proposing to reopen the

assessment, the petitioner has filed the present petition.

11. In terms of the proviso to Section 147, any reassessment

sought to be initiated after the lapse of a period of four

years from the end of the relevant assessment year

already subject matter of an order under section 143(3)

of the Act, is permissible only if:-

".....any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under Section 139..... or to disclose fully and truly all material facts necessary for his assessment, for that assessment year."

12. The relevant assessment year in the present case is

2005-06 and in terms of proviso to Section 147, the

reassessment notice issued after the expiry of four years

from the end of the assessment year has to satisfy the

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requirements of the said proviso i.e. the assessee has

failed to disclose fully and truly all material facts

necessary for his assessment for that year. In the

present case, the notice seeking to reopen the

assessment has been issued on 04.05.2011, which is

clearly beyond the stipulated period of four years.

13. The contention of the petitioner is that there is full and

true disclosure of all material facts and as such, the

notice seeking to reopen the assessment was barred

and invalid and that the reassessment proceedings were

merely initiated for the purpose of reappraising the

material on record and to change the opinion formed

earlier.

14. The original assessment order passed by the Assessing

Officer was under Section 143(3) of the Act. The

reasons to believe recorded prior to the issuance of

notice dated 04.05.2011, pertain to the following: -

(i) Deduction under Section 10B of the Act;

         (ii)          Deduction on account of deferred revenue
                       expenditure    being   expenditure     on
                       technical know-how.

15. With respect to the deductions under Section 10B, the

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record reveals that the petitioner alongwith the return of

income had enclosed the profit and loss account of both

the units as well as the computation of deduction under

Section 10B in respect of both the units. In the notes

filed to the computation of income, the petitioner had

specifically disclosed that no deduction was being

claimed in respect of the unit at Greater Noida on

account of loss in the said unit and had stated as under

"1. Claim of benefit u/s 10B of the Income-

tax Act, 1961 ('the Act')

The assessee company is engaged in the business of manufacturing of compact disks, magnetic disks and other optical storage media devices, and is eligible to claim deduction u/s 10B of the Act. Accordingly, the assessee has claimed benefit u/s 10B of the Act in respect of the following units:-

(a) A-164, Sector - 80, Noida - Phase II -

The said unit is registered as a 100% Export Oriented Unit (on May 19, 1998) and is accordingly eligible for claiming tax-holiday benefits u/s 10B of the Act.

The said unit had commenced commercial production w.e.f March 1, 2000. The required Report in Form 56G in respect of the said benefit claimed u/s 10B of the Act is enclosed.

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(b) 66, Udyog Vihar, Greater Nodia - The said unit is registered as a 100% Export Oriented Unit (on November 28, 2001) and is accordingly eligible for claiming tax-holiday benefits u/s 10B of the Act. No deduction u/s 10B of the Act has been claimed in view of a loss situation. The required Report in Form 56G in respect of the said unit is enclosed.

For computing the profits of the above undertaking, certain expenses/income debited/credited in the head office have been allocated to such units in the ratio of turnover."

16. By letters dated 31.10.2007, 01.10.2008 and

14.11.2008, specific queries were raised by the

Assessing Officer with regard to the units eligible for

deduction under Section 10B, which queries were replied

to and detailed explanations rendered. After appreciating

the response of the petitioner on the said issue of

deductions under Section 10B of the Act, in respect of

the respective units, the Assessing Officer allowed the

deduction at Rs.25,42,43,918/- as against the deduction

claimed of Rs.29,08,16,451/-. It is pertinent to note that

even the allowed deduction of Rs.25,42,43,918 was

subsequently rectified under Section 154 of the Act to

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Rs.25,24,21,751/-. The original assessment allowing the

deduction claimed by the petitioner under Section 10B

and the subsequent rectification on the same by the

Assessing Officer clearly establishes that the Assessing

Officer had formed a definite opinion on the claim of

benefit under Section 10B as a deduction and also the

fact that the unit at Greater Noida of the petitioner was

eligible for such deduction. It further establishes that

having formed an opinion, the Assessing Officer now

seeks to change the opinion and has thus sought to

reopen the assessment. Further there was disclosure of

full and true material factson the manner and mode of

deduction u/s 10B and deduction was being claimed only

for one unit.

17. With regard to the reasons to believe recorded in respect

of the deferred revenue expenditure, it is pertinent to

note that the petitioner in Note No.2 attached with the

return of income explained as under:-

"3. Deferred Revenue Expenditure Written Off

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The balance in Miscellaneous expenditure written off as per annual accounts of March 31, 20013 was Rs.77,640,029 (sum of Rs.16,076,058 and Rs.61,563,971, being expenditure incurred on technical know-how i.e. Rs.18,005,185 and Rs.64,136,141 less Rs.1,929,127 and Rs.2,572,170 debited in profit and loss account in FY 2001-02 and FY 2002-03 respectively). Out of the above, Rs.52,083,202, being technical know-how has been capitalized in the books of account by adjusting the opening balance and remaining Rs.25,556,827 has been written off during the FY 2003-04.

However, as the Company would deserve the benefit from technical know- how for years to come, by relying on the Supreme Court judgment rendered in Madras Industrial Investment Corporation Ltd. Vs. CIT (225 ITR 802), the Company has deferred the cost of acquisition of technical know-how for a period of six years while computing taxable income. Accordingly, a deduction amounting Rs.13,690,221 (sum of Rs.1/6 th of Rs.18,005,185 and Rs.64,136,141) has been claimed in the previous year relevant to the assessment year 2007-08."

18. During the original assessment proceedings under

Section 143(3) of the Act, the Assessing Officer had

specifically in the questionnaire dated 31.10.2007 raised

the query regarding deduction of Rs.1,36,90,221/- being

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1/6th share of the payment of technical know-how fee

aggregating to Rs.8,21,326 pertaining to the previous

years 2001-02 and 2002-03. Vide letter dated

21.11.2008, the petitioner had submitted

details/explanation and also submitted worksheets for

arriving at the said deduction and treatment of the

deferred revenue expenditure relating to the technical

know-how fee.

19. The fact that the petitioner disclosed the deduction of

deferred revenue expenditure on account of payment of

technical know-how fee in the notes appended to the

return of income and that a specific query was raised

and responded to by the petitioner demonstrates that the

petitioner has made true and full disclosure of all

material facts. The original assessment framed after

receiving the response to the questionnaire specifically

dealing with the said issue further establishes that the

Assessing Officer had formed an opinion on the said

claim of the petitioner.

20. The reasons to believe recorded by the Deputy

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Collector, Commissioner of Income Tax do not suggest

that any fresh or further tangible material had come to

the knowledge of the Assessing Officer whereby a

reasonable bonafide belief could or was formed that

income had escaped assessment on account of failure of

the assessee to disclose truly and fully the material

facts.

21. There appears to be an intensive examination in the first

instance in respect of the said issues which are no w

sought to be made the basis for reopening of the

assessment. It was necessary for the Assessing Officer

to indicate specifically as to what other material or

relevant facts subsequently came to the knowledge of

the Assessing Officer whereby a subjective opinion could

be prima facie formed that the assessee had failed to

disclose truly and fully the material facts. There has to

be a tangible material existing on record for the reasons

to believe which should have a direct nexus to the

formation of such belief.

22. In the case of the petitioner, with respect to the

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Assessment Year 2004-05, a similar issue with regard to

the claim of deduction under Section 10B was raised by

issuance of a notice under Section 148 by the Deputy

Commissioner of Income Tax. The petitioner had filed a

writ petition - W.P.(C) 7677/2011, which was allowed

vide judgment dated 06.12.2012 and the notice and the

proceedings consequent thereto were quashed. The

Court while allowing the petition held as under: -

"17. In the present case, the original return of the assessee was subjected to scrutiny assessment, under Section 143 (3). The assessee was apparently closely questioned on various aspects, including its claim for treatment of the three units, under Sections 10-A/10B of the Act. In response to a query raised by Respondent No.1, the Petitioner by letter dated 21.02.2005 furnished information regarding the units eligible for deduction u/s 10A/10B. In the reply the Petitioner listed all three units as units eligible for claiming deduction. The issue of deduction under Sections 10A/10B was specifically examined by the Assessing Officer during the original assessment.

Furthermore, Form 56F/56G was also submitted along-with the return of income. In the forms the Petitioner had specifically claimed deduction u/s 10A/10B in respect of profits of two units whereas NIL deduction for the third unit. Furthermore, in a Note (dated 12.01.2005), appended to the return of income, the writ petitioner specifically disclosed at Point 1(c) that, the claim for benefit under Sections

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10A/10B of the Act, in respect of 66, Udyog Vihar, Greater Noida- was eligible for claiming tax- holiday benefits under Section 10B of the Act. No deduction under Section 10B of the Act was claimed in view of a loss situation. The Report in Form 56G for the said unit to was enclosed. On 27.12.2006 the Petitioner filed an approval letter from the competent authority regarding eligibility of the units for deduction u/s 10A/10B; approval letters regarding all three units were submitted.

18. In the above background of facts, when there was intensive examination in the first instance in respect of the issue, which was the basis for re-opening of assessment, it was necessary for the AO to indicate, what other material, or objective facts, constituted reasons to believe that the assessee had failed to disclose a material fact, necessitating reassessment proceedings. That is precisely the "tangible material" which have to exist on the record for the "reasons" (to believe" bearing a "live link with the formation of the belief" as spelt out in Kelvinator. When the assessment is completed, as in the present instance, under Section 143 (3), after the AO goes through all the necessary steps of inquiring into the same issue, the reasons for concluding that reassessment is necessary, have to be strong, compelling, and in all cases objective tangible material. This court discerns no such tangible materials which have a live link that can validate a legitimate formation of opinion, in this case. It is not enough that the AO in the previous instance followed a view which no longer finds favour, or if the latter view is suitable to the revenue; those would squarely be change in opinion. Perhaps,

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in given fact situations, they can be legitimate grounds for revising an order of assessment under Section 263; but not for re-opening it, under proviso to Section 147.

19. As a result of the above discussion, it is held that the impugned notice, under proviso to Section 147, and consequent reassessment proceedings, are beyond jurisdiction. They are unsustainable, and are hereby quashed. The writ petition is allowed in these terms, without any order as to costs."

23. We were informed that the respondent/revenue

had assailed the said judgment by filing a Petition for

Special Leave to appeal to the Supreme Court and

the said Special Leave Petition bearing SLP (Civil) CC

No.11048/2013 has been dismissed vide order dated

05.07.2013.

24. In view of the above, we are of the considered

opinion that the assessee cannot be held to have

failed to disclose truly and fully all the material facts. It

is also not a case where fresh tangible material has

come to the knowledge of the Assessing Officer. The

Assessing Officer, at the time of original assessment,