*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 SANJ IV 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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WP(C) 1004/2013 Page 2 of 18
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 adjustm ent 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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WP(C) 1004/2013 Page 3 of 18
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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WP(C) 1004/2013 Page 4 of 18
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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WP(C) 1004/2013 Page 5 of 18
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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WP(C) 1004/2013 Page 7 of 18
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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WP(C) 1004/2013 Page 8 of 18
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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WP(C) 1004/2013 Page 9 of 18
(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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WP(C) 1004/2013 Page 10 of 18
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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WP(C) 1004/2013 Page 11 of 18
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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WP(C) 1004/2013 Page 12 of 18
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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WP(C) 1004/2013 Page 13 of 18
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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WP(C) 1004/2013 Page 14 of 18
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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WP(C) 1004/2013 Page 15 of 18
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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WP(C) 1004/2013 Page 16 of 18
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,
clearly formed an opinion on both the issues and a
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WP(C) 1004/2013 Page 17 of 18
notice under Section 148 seeking to reopen the
assessment is clearly an instance of change of
opinion, which is impressible in law.
25. In view of the above, the impugned order dated
1.02.2013 is set aside and the notice dated
04.05.2011 and the proceedings initiated consequent
thereto are hereby quashed.
26. The writ petition is accordingly allowed with costs
of Rs.10,000/-.
SANJEEV SACHDEVA, J.
SANJIV KHANNA, J.
August 22, 2013
st
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