Gujarat High Court
Torrent vs Assistant on 28 March, 2011
Author: Akil Kureshi
Bench: Akil Kureshi
SCA/14470/2011 10/ 10 ORDER IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION No. 14470 of 2011 ========================================================= TORRENT PHARMACEUTICALS LTD. - Petitioner(s) Versus ASSISTANT COMMISSIONER OF INCOME TAX - Respondent(s) ========================================================= Appearance : MR SN SOPARKAR, SR COUNSEL WITH MS BHOOMI M THAKORE WITH MRS SWATI SOPARKAR for Petitioner(s) : 1, MRS MAUNA M BHATT for Respondent(s) : 1, ========================================================= CORAM : HONOURABLE MR.JUSTICE AKIL KURESHI and HONOURABLE MS JUSTICE SONIA GOKANI Date : 25/01/2012 ORAL ORDER
(Per : HONOURABLE MR.JUSTICE AKIL KURESHI) Rule.
Mrs. Mauna Bhatt waives service of rule for respondent. Heard learned advocate for the parties for final disposal of the petition.
The petitioner, a public limited company has challenged notice dated 28.3.2011 seeking to reopen the assessment of the petitioner for the assessment year 2005-2006. Petition arises in view of following facts :
2.1 The petitioner is regularly assessed to tax under the Income Tax Act, 1961. For the assessment year 2005-2006, the petitioner filed its return of income on 30.10.2005 declaring total income of Rs. 12.79 crores(rounded off) and book profit under Section 115JB of the Act at Rs.57.23 crores(rounded off). The return was taken in scrutiny by the Assessing Officer. After series of queries, correspondences and deliberations, the Assessing Officer framed his assessment on 26.12.2008. Assessing Officer thereafter, issued impugned notice dated 28.3.2011 seeking to reopen the assessment for the year 2005-2006. In the notice, he recorded that he had the reason to believe that income chargeable to tax for the said year had escaped assessment. He therefore, proposed to reassess the income. Assessee was allowed 15 days time to file the return.
2.2 At the request of the petitioner, Assessing Officer supplied the reasons for reopening the assessment which reads as under :
"Section 35(2AB)(1) of the I.T. Act, 1961 provides for deduction of one and one half time of expenditure incurred on scientific research to a company engaged in the business of manufacture or production of any drugs, pharmaceuticals, etc. on in-house research and development facility, as approved by the prescribed authority. Thus, expense incurred outside the in-house facility is not admissible for deduction.
The Assessee is engaged in the business of manufacture of pharmaceuticals. It is observed that the assessee has claimed weighted deduction of Rs.757789643 under section 35(2AB) of the Act against revenue expenditure of Rs.505193095 incurred on in-house research facility. The expense of Rs.505193095 included an amount of Rs.74387000 being expenses incurred outside approved facility, like clinical trials, overseas patent filings, etc. The provisions of section 35(2AB) of the Act contemplate weighted deduction for scientific research in-house. The expenses incurred for clinical trial outside the in-house facility was not eligible for weighted deduction. Similarly, expenses incurred for overseas patents filing etc. was, as per the explanation below section 35(2AB)(1) of the Act, not allowable for weighted deduction.
In view of above facts, the assessee was not entitled for weighted deduction under Section 35(2AB) of the Act on expenses incurred outside the in-house facility.
The provisions of Section 145A of the Act mandate inclusive method of accounting for the purpose of the Act in respect of duty, cess and taxes even though the assessee might be following exclusive method of accounting.
The Assessee followed mercantile system of accounting. It followed exclusive method for accounting of CENVAT as derived from the statement in Anneuxre 3 to clause 12(b) of Form 3 CD, furnishing details of deviation from the method of valuation prescribed under section 145A of the Act. As per Annexure 8 to clause 22(a) of report in Form 3 CD, at the end of the previous year ending on 31-3-06, the unutilized CENVAT credit with assessee amounted to Rs.29232264. The opening balance of unutilised CENVAT credit was Rs.8781562 only. Thus, the increase in unutilized CENVAT credit at the end of the previous year 2005-06 was Rs.20450702 [Rs.29232262-Rs.8781562].
Thus, in view of the provisions of section 145A of the Act which mandate inclusive method of accounting, this portion of unutilized CENVAT credit was to be added to the total income of the assessee.
Section 14A of the I.T. Act, 1961 specifies that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. The expenditure is required to be disallowed in accordance with Rule 8D of the I.T. Rules.
The Assessee claimed exempt income of Rs.36279050/- u/s.10(33) of the Act. The disallowance was liable to be worked out in accordance with the provisions of section 14A read with Rule 8D of the Act.
In view of the above facts I have reason to believe that income chargeable to tax has escaped assessment within the meaning of section 147 of the Act."
2.3 The petitioner raised its objection dated 4.7.2011 to such reopening of the assessment. Assessing Officer however, vide his communication dated 27.7.2011 disposed of such objections. The petitioner has therefore, approached this Court by filing this petition challenging the notice of reopening of assessment.
From the reasons recorded, we may notice that there were three grounds indicated by the Assessing Officer for reopening the assessment.
First pertained to claim of weighted deduction made by the petitioner under Section 35(2AB) which provides for deduction with respect to expenditure on scientific research on in-house research and development facility as approved by the prescribed authority incurred by the Company engaged in the business of bio-technology or in business or manufacture or production of any article or thing not being an article or thing specified in the list of the Eleventh Schedule. The Assessing Officer was of the opinion that expenditure which was incurred outside the approved facility like clinical trials, overseas patent filings, etc., would not qualify for such deduction.
4.1 With respect to such ground counsel for the petitioner submitted that the petitioner had produced all the materials with respect to its claim of weighted deduction under Section 35(2AB) of the Act before the Assessing Officer. The Assessing Officer after thorough scrutiny had disallowed part of the claim whereas to the extent same was found allowable, deduction was granted. He therefore, submitted that there was no failure on part of the assessee to disclose truly and fully all material facts.
4.2 Counsel further submitted that in any case once such expenditure was certified by the prescribed authority, there was thereafter, no occasion for the Assessing Officer to make any disallowance with respect to the same.
4.3 On the other hand counsel for the Revenue submitted that the petitioner merely filed its accounts before the Assessing Officer. The fact that part of the expenditure pertained to facilities outside of the approved facility and was not in-house expenditure, was not brought to the notice of the Assessing Officer. In terms of explanation to Section 147 of the Act, this cannot be stated to be true and full disclosure of material facts necessary for assessment. Counsel further submitted that role of the prescribed authority is only to certify that the research and development facility of assessee is approved for the purpose of Section 35(2AB) of the Act and the extent of such expenditure or allowability of deduction with respect to the same would not be part of the inquiry of such authority. He therefore, submitted that despite certificate being issued by the prescribed authority, it was open for the Assessing Officer to question the claim for deduction.
4.4 On this issue, we are of the opinion that the petitioner had made full and true disclosure before the Assessing Officer at the time of original assessment. We may recall that return filed by the assessee was taken in scrutiny. Series of questions were raised. Such questions and queries were replied by the petitioner. Only thereafter, the Assessing Officer framed the assessment. In fact as pointed out by the petitioner, the Assessing Officer had called upon the petitioner to state whether any expenditure had been claimed in respect of exempt income and also to supply details of research and development expenditure debited in books and how the company had benefited therefrom. The petitioner was also asked to justify deduction claimed under Section 35(2AB) of the Act with detailed evidence. In response to such queries, the petitioner had given detailed reply. After such scrutiny, the Assessing Officer in the assessment order granted part of the claim of weighted deduction under Section 35(2AB) of the Act. The Assessing Officer noticed that the petitioner assessee had claimed such deduction giving following break-up of expenditure incurred :
Financial Year 2004-05 (Rs.In lac) Sr. Claimed Granted Disallowed
(i) Capital Expenditure Land Building NIL 230.70 NIL 230.70 0.00 0.00
(ii) Capital Expenditure (other than land & building) 1427.33 1344.34 82.99
(iii) Recurring Expenditure (building related) 38.33 38.33 ...
(iv) Recurring Expenditure (other than building) 4269.73 4184.55 85.18
(v) Total cost of In-house research facility excluding land & building
(ii) +(iv) 5697.06 5528.89 168.17
(vi) Total cost of In-house research facility including land & building
(v) plus (under (iii) above) 5735.39 5567.22
(vii) Expenses outside approved facility (clinical trials, overseas patents filing etc.) 743.87 743.87
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TOTAL OF (iii), (iv) &(vii) 5051.93 4966.75 4.5 After taking into account the statements of the assessee, the Assessing Officer disallowed part of the claim making following observations :
"8.4 The submission of the assessee has been carefully considered. However, in view of the report of the Department of Scientific & Industrial Research and considering the facts of the case, the contention of the assessee is not acceptable. In accordance with provisions of section 35(2AB), weighted deduction is not allowable in respect of expenditure on building. Therefore, weighted deduction on expenditure of Rs.38.33 lacs related to Building is not allowable. As per Form No. 3 CL dated 02/04/2007, the Department of Scientific & Industrial Research (DSIR) has disallowed expense of Rs.85.18 lacs under recurring expenditure treating it as not attributable to research & development. Hence,the weighted deduction u/s. 35(2AB) is not allowable on this expenditure. Hence, a total expenditure of Rs. 123.51 lacs(Rs.85.18 lacs + Rs.38.33 lacs) do not qualify for weighted deduction. The weighted component on such revenue expenditure@50% of Rs.123.51 lacs) comes to Rs.61.755 lacs which is disallowed. Further, the Department of Scientific & Industrial Research has certified that the expenditure of Rs.82.99 lacs on account of capital expenditure has been disallowed treating it as not for research and development purpose. The assessee has stated that this expenditure constitutes of purchase of motor car of Rs.44.54 lacs and capitalized interest expenses of Rs.38.45 lacs. The assessee has not produced any evidence to prove that these expenses have been incurred for research and development purpose. Therefore, keeping in view the findings of the DSIR, these expenses do not qualify for deduction u/s 35 (2AB) and hence, 150% of such expenditure is disallowed which comes to Rs.124.485 lacs. The total disallowance u/s 35(2AB) of the I.T. Act comes to Rs.186.24 lacs.(Rs.61.755 lacs + Rs.124.485 lacs). The disallowance has been made on this issue in earlier years on similar lines and appeal on this issue is pending at appellate stage."
4.6 From the above, it can be seen that the factum of assessee claiming such deduction under Section 35(2AB) of the Act with respect to various expenditures incurred including expenses outside the approved facility such as clinical trials, overseas patent filings, etc., was not only presented before the Assessing Officer, same was noticed by the Assessing Officer who had taken note of it in the assessment order itself. By no means, assessee can be stated to have failed to disclose truly and fully all material facts necessary for assessment. Even with the aid of explanation to Section 147 of the Act, the assessee cannot be blamed for not bringing these facts to the notice of the Assessing Officer. In fact the Assessing Officer while framing the original assessment had noticed these facts, despite which, no disallowance in this regard was made.
Second ground on which the assessment is sought to be reopened pertains to non inclusion of cenvat credit. The Assessing Officer recorded that as per Section 145A of the Act, the assessee had to adopt inclusive method of accounting with respect to duty, cess taxes etc. Assessee however, followed exclusive method.
5.1 With respect to such ground counsel for the petitioner submitted that full details and facts were presented before the Assessing Officer at the time of original assessment. There was no failure on part of the assessee to disclose truly and fully all material facts.
5.2 It was further contended that in any case there would be no effect on the tax liability of the assessee in either of the two methods.
5.3 Counsel for the Revenue submitted that the assessee did not follow the mandate of Section 145A of the Act and followed exclusive method of accounting and thereby giving distorted figure of the profit.
5.4 From the perusal of the reasons recorded,it emerges that the opinion formed by the Assessing Officer with respect to this ground is based on material on record. In fact the Assessing Officer has referred to the statement filed by the assessee in Form 3 CD in which full accounts have been presented. Only upon perusal of the material on record, the Assessing Officer formed an opinion that the assessee did not follow inclusive method of accounting though required in Section 145A of the Act. There was therefore, no failure on part of assessee to disclose fully and truly all material facts. It is not even the allegation of the Assessing Officer that on account of such failure, income chargeable to tax has escaped assessment with respect to this ground.
Third ground pertains to disallowance of expenditure relatable to earning of income which does not form part of the total income of the assessee. From the reasons recorded it can be seen that the assessee had claimed exempt income under Section 10(33) of the Act. Expenditure relating to earning of such income according to the Assessing Officer had to be disallowed in terms of Section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962.
6.1 With respect to such ground, counsel for the petitioner submitted that there was no failure on part of the assessee to disclose truly and fully all material facts. In fact the Assessing Officer after verifying the records had disallowed the expenditure of Rs.3,00,000/- relatable to earning such income. Assessee had carried the matter in appeal. CIT(Appeals) had though rejected assessee's appeal on this issue, in view of second proviso to Section 148, principle of merger would apply and that therefore, it would not be open for the Assessing Officer to base reopening on such grounds.
6.2 Counsel further submitted that Rule 8D was introduced with effect from 24.3.2008, therefore, could not have been applied to the assessment in question by giving retrospective effect. She pointed out that Assessing Officer while disposing of the proceedings, relied on decision of Tribunal of Mumbai Bench in case of (SB) Income-tax Officer,Ward6(2)(2), Mumbai v. Daga Capital Management (P.) Ltd reported in (2009) 117 ITD 169(Mum.) which decision has been overruled by Bombay High Court in case of Godrej and Boyce Mfg. Co. Ltd v. Deputy Commissioner of Income-tax and another reported in (2010) 328 ITR 81(Bom.) 6.3 With respect to this last ground also, we find that there was no failure on part of the assessee to disclose fully and truly all materials facts. In fact the expenditure incurred for earning such exempt income came up for consideration before the Assessing Officer. After considering the material on record, Assessing Officer disallowed sum of Rs.3 lakh under Section 147 of the Act. Such issue cannot be reopened beyond the period of four years relying on Rule 8D of the Rules which was not in statutory books at the relevant time. Therefore, even without going into question of retrospectivity or otherwise of Rule 8D, we are of the opinion that such ground would not permit the Assessing Officer to reopen the assessment beyond period of four years.
In the result, to our mind, none of the grounds for resorting to reopening of assessment are valid. Notice of reopening dated 28.3.2011 is therefore, quashed. Rule made absolute accordingly.
(Akil Kureshi,J.) (Ms. Sonia Gokani,J.) (raghu)