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RANBAXY LABORATORIES LTD Vs. DEPUTY COMMISSIONER OF INCOME TAX AND ANR
January, 31st 2013
       THE HIGH COURT OF DELHI AT NEW DELHI
%                                      Judgment delivered on: 24.01.2013

+      W.P.(C) 6728/2011

RANBAXY LABORATORIES LTD                                 ... Petitioner

                                        versus

DEPUTY COMMISSIONER OF INCOME
TAX AND ANR                                              ... Respondents
Advocates who appeared in this case:
For the Petitioner  : Mr M. S. Syali, Sr Advocate with Mr V. P. Gupta,
                      Mr Mayank Nagi and Mrs Husnal Syali Nagi
For the Respondents : Mr Abhishek Maratha with Ms Anshul Sharma

CORAM:-
HON'BLE MR JUSTICE BADAR DURREZ AHMED
HON'BLE MR JUSTICE R.V.EASWAR

                                  JUDGMENT

BADAR DURREZ AHMED, J (ORAL)

1.     By way of this writ petition, the petitioner is challenging the notice

dated 29.03.2010 issued under Section 148 of the Income Tax Act, 1961

(hereinafter referred to as `the said Act'), whereby the Assessing Officer has

proposed to re-open the assessment for the assessment year 2003-04. Earlier,

the assessment had been framed under Section 143(3) by virtue of an

assessment order dated 28.03.2004.







WPC 6728/2011                                                             Page 1 of 17
2.     The purported reasons for re-opening the assessment for the assessment

year 2003-04 are as under:-

       "Reasons for the belief that income has escaped assessment:

       Incorrect allowance of deduction in respect of royalty received
       from foreign enterprise.

              The assessment of M/s Ranbaxy Laboratories Ltd. for the
       assessment year 2003-04 was completed u/s 250/143(3)
       01.08.2004 determining an income of ` 3,10,79,46,649/- after
       allowing deduction under Section 80-O. It was later observed
       that the deduction was allowed on gross receipts of
       ` 49,96,75,364/- without deducting the proportionate expenses
       to such income after considering the total expenses debited to
       the relevant profit and loss account allocated on pro-rata basis
       between the receipts from foreign enterprise and other income
       the admissible deduction worked out to ` 2,69,82,469/- against
       ` 9,99,35,082/- allowed by the department. The incorrect
       allowance of deduction resulted in under assessment of income
       of ` 7,29,52,603/- involving tax effect of ` 2,68,10,082/,-

       Incorrect allowance of deduction in respect of export profits

              The assessment of M/s Ranbaxy Laboratories Ltd. for
       assessment year 2003-04 was completed u/s 143(3) 250 on
       01.08.05 determining on income of ` 3107946649/-. It was
       later observed that while computing the deductions trade
       discount and R&D (Capital) expenses was not incurred in the
       indirect cost. The omission resulted in excess allowance of
       deduction of ` 45741309 involving tax effect of ` 16809930/-.

       Incorrect allowance of deduction in respect of profit and gains
       from newly established undertakings.

             The assessment of M/s Ranbaxy Laboratories Ltd. for the
       assessment year 2003-04 was completed u/s 250/143(3) on
       01.08.05 determining an income of ` 3,10,79,46,649/-. It was


WPC 6728/2011                                                     Page 2 of 17
       later observed that while claiming deduction under section 80
       IB, the assessee had apportioned allowed by AO and was 30
       percent of R&D (Revenue) expenses and 75 percent of head
       office expenses in the separate accounts of individual
       undertaking in the ratio of sales whereas 100 percent expenses
       were required to be apportioned. The omission resulted in
       excess allowance of deductions of ` 29,00,11,919/- involving
       tax effect of ` 10,65,79,380/-.

       Incorrect allowance of deduction in respect of profit and pains
       from newly established industrial undertakings.

              The assessment of M/s Ranbaxy Laboratories Ltd. for the
       assessment year 2003-04 was completed u/s 250/143(3) on
       1.08.05 determining an income of ` 3,10,79,46,649/-. It was
       later observed that while allowing deductions under section 80
       IB, the assessee had apportioned allowed by AO and was 30
       percent of R&D (Revenue) expenses and 75 percent of head
       office expenses in the separate accounts of individual
       undertaking in the ratio of sales whereas 100 percent expenses
       were required to be apportioned. The omission resulted in
       excess allowance of deductions of ` 17,20,35,049/- involving
       tax effect of ` 6,32,22,880/-.

       Incorrect allowance of non-business expenditure.

              The assessment of Ranbaxy Laboratories Ltd. for the
       assessment year 2003-04 and 2004-05 was completed u/s
       250/143(3) and 154/143(3) on 27.4.04 and 5.4.05 determining
       an income of ` 3,63,45,44,931/- and ` 3,10,79,46,649/-
       respectively. It was later observed that as per 3 CD report
       annexed to the return, an amount of ` 10,77,769/- and
       ` 27,95,827/- for the assessment years 2003-04 and 2004-05
       were debited to the profit and loss account on account of
       `expenditure incurred at clubs' which were allowed as
       deduction. As the said expenditure were personal in nature and
       not related to the assessee's business, the entire amount should
       have been disallowed. Omission to do so resulted in under



WPC 6728/2011                                                   Page 3 of 17
       assessment of income of ` 38,73,596/-. Involving tax effect of
       ` 13,99,081/-. From the preceding paras it is evident that the
       assessee has failed to disclose all material facts truly and fully
       that were necessary for assessment. Here it is relevant to
       mention the explanation 1 in section 147 that states that
       "production before the AO of account books or other evidence
       from which material evidence could with the diligence have
       been discovered by the AO will not necessarily amount to
       disclosure with the meaning of the foregoing proviso".





3.     After receipt of a copy of the said purported reasons on 10.08.2010, the

petitioner filed its objections on 06.09.2010. Detailed objections comprising of

about 48 pages were given by the petitioner explaining each of the purported

reasons. However, the Assessing Officer did not accept the objections and

rejected the same by virtue of an order dated 29.07.2011/ 01.08.2011. The said

order reads as under:-

       "Order against Objection for issuing notice u/s 147 r.w. sec.148
       of the Income Tax Act, 1961 in the case of M/s Ranbaxy
       Laboratories Ltd. for A.Y. 2003-04.

       Assessment in the case of M/s Ranbaxy Laboratories Ltd. for
       the A.Y 2003-04 was completed on 26.03.2004 u/s 143(3) at an
       income of Rs.315,80,98,132/- under normal provision and
       Rs.270,59,86,259 u/s 115313 of the Income Tax Act. The
       income was further revised vide order u/s 250/143(3) dated
       30.03.2006 at Rs.310,72,35,131/- under normal provisions and
       at Rs.570,19,15,570/- u/s 115313. The case was reopened u/s
       147 read with section 148 of the Act. The Assessing officer had
       reasons to believe that income has escaped assessment and
       recorded the reasons in writing for reopening of assessment.
       Notice u/s 147 read with section 148 of the Act dated
       29.03.2010 was served upon the assessee. The assessee



WPC 6728/2011                                                        Page 4 of 17
       complied with the notice and asked for a copy of reasons
       recorded. The reasons vide letter dated 10.08.2010 were
       supplied to the assessee on 16.08.2010.

       Vide its letter dated 06.09.2010, the assessee filed objections
       and the same are discussed as under:-

       1.    Assessee raised the objection that there was no fresh
       material on the basis of which belief was formed by AO that
       some income has escaped assessment. Assessee's objection is
       not acceptable as the AO had fresh material in the form of
       Audit Memos which were analyzed by the AO and only after
       properly recording the reasons for the same, AO issued notice
       u/s 148 of The Act. The Hon'ble Apex Court in the case of CIT
       Vs P.V.S. Beedies Ltd. 237 ITR 13, has held the reopening
       done u/s 147, on the basis of factual error pointed out by the
       Audit, as valid in law.

       2.     Assessee raised the objection that each of the items
       mentioned in the reasons recorded were duly considered by the
       AO while passing the order u/s 143(3). These items were
       specifically claimed as deduction in the Return of income and
       similar claims were also made in earlier years and the same
       were allowed in earlier years. The assessee objected that
       reasons recorded by the AO reflect a change of opinion.

       Assessee's objection is not acceptable as after the conclusion of
       assessment proceedings, AO had fresh material, from the
       Revenue Audit and the reasons recorded cannot be termed as
       change of opinion. The reasons of reopening have been
       recorded in detail while arriving at reasons to believe that
       income has escaped assessment. Excerpts of referred case law
       by Supreme Court in the case of CIT Vs PVS Beedies is
       reproduced below:-

       "We are of the view that both the Tribunal and the High Court
       were in error in holding that the information given by the
       internal audit party could not be treated as information within



WPC 6728/2011                                                    Page 5 of 17
       the meaning of section 147(b) of the IT Act. The audit party has
       merely pointed out a fact which has been overlooked by the ITO
       in the assessment The dispute as to whether reopening is
       permissible after the audit party expresses an opinion on a
       question of law is now being considered by a larger Bench of
       this Court. There can be no dispute that the audit party IS
       entitled to point out a factual error or omission in the
       assessment. Reopening of the case on the basis of a factual
       error pointed out by the audit party is permissible under law. In
       view of that we hold that reopening of the case under section
       147(6) in the facts case was on the basis of factual information
       given by the internal audit party and was valid in law."

       3.     Next issue raised by the Assessee relates to pendency of
       proceedings u/s 154 at the time of issue of notice u/s 148 on the
       issues mentioned in the reasons recorded for reopening.

       Assessee's objection is not acceptable as the proceedings u/s
       154 stands automatically filed once proceedings u/s 147 are
       initiated as elaborated in the G.P. Aggarwal Vs. ACIT (1994)
       208 ITR 795 (Allahabad). Section 154 of the Act is applicable
       only for mistakes apparent from record and accordingly, the
       issues raised vide notices u/s 154 dated 06.10.2005 and
       16.11.2005 stood automatically filed after issue of notice u/s
       148.

       Assessee has further raised objections against the specifics
       issue mentioned in the reasons for reopening. Apart from the
       objections discussed earlier, Assessee has taken a common plea
       that the deductions have been allowed in earlier years and the
       facts remaining the same, the same cannot be the basis for
       reopening. Since the principle of Res Judicata is not applicable
       to Income Tax proceedings, the objection is not acceptable.

       In view of the same the objections filed by the assessee are
       rejected and area held to be devoid of any merits."




WPC 6728/2011                                                    Page 6 of 17
4.     Mr Syali, the learned senior counsel appearing on behalf of the

petitioner, submitted that the impugned notice dated 29.03.2010 under Section

148 of the said Act is invalid inasmuch as it has been issued beyond the period

of four years and there has been no failure on the part of the petitioner to fully

and truly disclose all material facts necessary for the assessment. Mr Syali also

submitted that although the purported reasons merely state that there was

failure on the part of the assessee to fully and truly disclose all material facts

necessary for the assessment, the reasons do not disclose as to which facts were

not pointed out by the assessee for the purposes of the assessment in respect of

the assessment year 2003-04. He further submitted that even the order dated

29.07.2011/ 01.08.2011 rejecting the objections, does not point out as to which

fact was not disclosed by the assessee which was necessary for his assessment

under Section 143(3) of the said Act. He also submitted that all the points,

which have been sought to be raised in the purported reasons, had been

considered by the Assessing Officer at the time of the original assessment and

what is sought to be done by issuance of the said notice under Section 148 is

merely a review of what has already been examined and would, in any event,

amount to nothing but a mere change of opinion.


5.     Mr Syali took us through the purported reasons and demonstrated as to

how each of them had been considered by the Assessing Officer at the time of




WPC 6728/2011                                                          Page 7 of 17
the original assessment. He, first of all, took us to the purported reason of

incorrect allowance of deduction in respect of royalty received from foreign

enterprises. This was an issue with regard to the deduction under Section 80-O

of the said Act in respect of gross receipts from the foreign enterprise in

convertible foreign exchange without considering expenses on a pro rata basis.

The learned counsel for the petitioner pointed out that a specific claim in the

return supported by a certificate in Form No. 10HA along with copies of

FIRC/TAR/ accounts had been submitted by the assessee. A copy of the list of

enclosures to the return has been annexed at page 53 of the paper book and we

find that serial No. 18 has a specific reference to certificates in Form 10HA in

support of deduction claimed under Section 80-O. Thus, according to Mr

Syali, there was a complete disclosure on the part of the assessee. Moreover,

the Assessing Officer had raised a specific query in his detailed questionnaire

issued on 27.02.2004, wherein question No. 23 was as under:-


       "23. Details of expenses incurred during the year for earning
       royalty income eligible for deduction u/s 80-O. Why not the
       deduction u/s 80-O should be allowed on net income after
       deducting expense incurred during the year to earn such
       royalty."

A specific and detailed reply was given to this query by a letter dated

19.03.2004 and it had been specifically dealt with in Annexure-C to the said

letter, which was a detailed note on the deduction under Section 80-O on




WPC 6728/2011                                                        Page 8 of 17
royalty income. Although a reference had been made to the Bombay High

Court decision in the case of CIT v. Asian Cable Corporation: 262 ITR 535

for the proposition that deduction under Section 80-O is allowable on the gross

amount received in convertible foreign exchange, the assessee had taken an

alternative plea in paragraph (f) of the said note to the effect that only expenses

which were directly or indirectly related to earning of income could be

deducted provided the same had been incurred during the year in question. It

was the plea of the petitioner that there was no direct expenditure during the

year relating to earning from the foreign enterprise. The point that was made

by the learned counsel for the petitioner was that the issue of deduction under

Section 80-O was specifically considered by the Assessing Officer and the

query which was raised had been replied to in detail. It was after considering

the reply given by the assessee that the Assessing Officer had allowed the

deduction in the assessment order on 28.03.2004. Thus, it was contended that

not only had the assessee disclosed all the material facts that were necessary for

the claim of the deduction under Section 80-O of the said Act but that the

Assessing Officer had also raised a specific query with regard to the same and

it is only after receipt of a detailed reply from the assessee that the deduction

was allowed.




WPC 6728/2011                                                          Page 9 of 17
6.     Similarly, with regard to the purported reason of incorrect allowance of

deduction in respect of export profits, a specific claim had been made by

the assessee in the return duly supported by the report of the Chartered

Accountant/ Tax Audit Report/ accounts. The list of enclosures to the

return of income which we have referred to above, mentions the audit

report under Section 80HHC(4) of the Act at serial No. 15. Thus, the

claim was specifically supported by the audit report which was annexed

to the return. In any event, a specific query was also raised in the said

questionnaire dated 27.02.2004 by virtue of question No. 20, which reads

as under:-

       "20. Please justify the deduction made on export profits u/s
       80HHC. Also explain why the entire research & development
       expenditure were not considered as a part of indirect cost while
       computing the said deduction. Also confirm as to whether 90%
       of interest income credited to Profit & Loss Account has been
       disallowed as per explanation (baa) below section 80HHC(4B)
       of the Act, while computing business income for deduction u/s
       80HHC."

A specific reply was also given by the petitioner/ assessee in the following

terms:-

       "7. As regards deduction made on export profits u/s 80HHC,
       your goodself has asked to explain as to why the entire
       Research & Development expenses were not considered as a
       part of indirect cost, while computing the said deduction. Your
       goodself has also desired to know as to whether the 90% of



WPC 6728/2011                                                       Page 10 of 17
       interest income has been disallowed as per explanation (baa)
       below Section 80HHC (4B) of the Act, while computing
       business income for deduction u/s 80HHC. In this respect, we
       would like to submit that deduction u/s 80HHC in respect of
       profits and gains derived from exports of traded and
       manufactured products is computed in accordance with the
       provisions of Section 80HHC(3). The R&D expenditure is
       incurred by the assessee for discovery of, new drugs and the
       same is not related directly or indirectly to the export activity,
       which relates to existing products. Accordingly the expenditure
       incurred on R&D has not been deducted from profits and gains
       as an indirect cost. It is confirmed that while computing
       business income for the purposes of deduction u/s 80HHC, 90%
       of the interest amounting to Rs.5,15,51,926 has been reduced
       from the business income as provided in explanation (baa)
       below section 80HHC(4B) of the Act."

       "15. The details of discount allowed are enclosed. The trade
       discounts are allowed to the dealers against the sale price and
       deducted from the bill. The cash discount is allowed for timely
       payment. The other discounts are also allowed as per the
       pharma industry practice to boost the company's sales and
       therefore, the same is allowable as a business expenditure."


7.     Thereafter, it was pointed out by Mr Syali that there was discussion of

the claim under Section 80HHC in the assessment order itself in paragraphs 5.5

and 5.6 of the said assessment order. The claim was ultimately allowed, as

indicated in paragraph 6 of the assessment order as per annexure-A thereto.

Therefore, it was contended by Mr Syali that here also, the assessee had fully

disclosed all the material facts and the Assessing Officer had also applied his

mind to the point in issue.




WPC 6728/2011                                                       Page 11 of 17
8.     We find that there are similar submissions made with regard to the

purported reasons for incorrect allowance of deduction in respect of profit

and gains from newly established undertakings, both on the capital

account as well as on the revenue account and the research and

development expenses both on the capital account as well as on the

revenue account as also the question of apportionment insofar as the

research and development expenses and head office expenses on the

revenue account are concerned. These were also specifically claimed by

the assessee in his return as also indicated in the tax audit report and

accounts submitted along with the return. Specific queries had been

raised in respect of these items also which had been answered by the

assessee in detail and it is only thereafter that the Assessing Officer had

completed the assessment on 28.03.2004.


9.     The last purported reason for re-opening has been indicated to be

the incorrect allowance of non-business expenditure. Essentially, this

relates to the expenditure incurred on clubs, which, according to the

purported reasons, ought not to have been allowed as a deduction,




WPC 6728/2011                                                    Page 12 of 17
whereas, the Assessing Officer in the first round had allowed the same as

a deduction.



10.    Mr Syali pointed out that in the tax audit report in Form 3-CD at

serial No. 17(d), the expenditure incurred on clubs has been specifically

mentioned and the break-up with regard to the expenditure on entrance

fee and subscriptions as also cost for club services and facilities used

have also been specified. Therefore, according to Mr Syali, there has

been no failure to disclose the said expenditure at clubs. Furthermore,

Mr Syali invited our attention to the document at page 249, which is a

reply given by the Assessing Officer to the Deputy Director (Revenue

Audit) in respect of the audit memo No. 56 dated 06.09.2005 for, inter

alia, assessment year 2003-04. The said audit memo was as under:-

       "Audit scrutiny revealed that as per 3CD report annexed to the
       return an amount of Rs.10,77,769 and Rs.27,95,827 for A.Y.
       2003-04 and 2004-05 were debited to the profit & loss account
       on account of expenditure incurred at clubs and were allowed as
       deduction. As the said expenditure were personal in nature / not
       related to assessee's business, the entire amount should have
       been disallowed. Omission to do so resulted in under
       assessment of income of Rs.38,73,596 involving tax effect of
       Rs.13,99,081."




WPC 6728/2011                                                   Page 13 of 17
In response to the said audit memo, the Assessing Officer submitted his

reply to the Deputy Director (Revenue Audit) on 10.02.2006 which, inter

alia, reads as under:-

       "In this connection, it is pointed out that the assessee company
       is engaged in the business of manufacturing and sale of various
       types of pharmaceutical products. The business necessarily
       requires advertisement, publicity through different platforms.
       One of these platforms is club where executives and officers of
       the company develop contacts with potential customers. The
       assessee company is a corporate member of some of the clubs
       to promote its business interest through its employees. As per
       the tax audit report u/s 44AB filed by the assessee, these
       expenses mainly represent club subscription fee. Secondly, the
       assessee's employees in terms of their appointment are also
       required to become members of clubs and payment of
       subscription is included in the amount having been paid under a
       contractual obligation. The club fee paid is considered by the
       assessee as additional compensation and tax at source has been
       deducted out of the employee's salary on the same. Such
       expenses are taxed as perquisites in the hands of employees and
       therefore, the additional compensation paid to the employees
       under a contractual obligation has been rightly allowed as a
       business deduction. Thus the clubs expenses incurred for
       promoting company business is not a personal expense of the
       company. The Hon'ble courts including the Bombay High Court
       in the case of Oits Elevator Co. (India) Ltd. vs. CIT, 195 ITR
       682 and Gujarat High Court in the case of Gujarat State Export
       Corporation Ltd. vs. CIT, 209 ITR 649 have also held that
       payment of club fee made to promote business interests is
       allowable as a business expenditure.
              In view of the above, the objection is not accepted and
       the same may kindly be dropped."




WPC 6728/2011                                                   Page 14 of 17
11.    It is apparent that the Assessing Officer has defended himself by

virtually stating the case of the petitioner. This also raises doubts as to

whether the Assessing Officer could, on the one hand, have had reasons

to believe that there was escapement of income when on the very same

point on the other hand he had virtually defended the petitioner in his

response to the audit memo No. 56.


12.    For all these reasons, the learned counsel for the petitioner

submitted that the notice under Section 148 was bad in law and was liable

to be quashed.



13.    Mr Maratha appearing on behalf of the respondents, vehemently

supported the re-opening of the assessment in respect of the assessment

year 2003-04 and submitted that there was failure on the part of the

assessee to fully and truly disclose all material facts which were

necessary for assessment. He strongly relied upon the 4th reason, that is,

of club expenses by stating that the assessee had not disclosed this at the

time of the assessment. On a pointed query, Mr Maratha could not show

as to which particular information or material fact had not been disclosed

by the assessee at the time of the original assessment proceedings. He




WPC 6728/2011                                                    Page 15 of 17
only sought to place reliance on Explanation 1 to Section 147 which reads

as under:-

       "Explanation 1: 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."

However, we do not see as to how Mr Maratha could place reliance on

the said Explanation. Insofar as all the purported reasons other than the

reason pertaining to club expenses are concerned, specific queries had

been raised and the Assessing Officer had considered the material placed

by the petitioner before him. As regards club expenses, Mr Maratha

states that since no specific query had been raised, Explanation 1 would

get triggered. We do not agree with this submission. This is so because

the club expenses were specifically mentioned at serial No. 17(d) of the

tax audit report in Form No. 3CD which was annexed along with the

return. This was a clear statutory disclosure on the part of the assessee

with regard to the claim of club expenditure. It was not a piece of

evidence which was hidden in some books of accounts from which the

Assessing Officer could have possibly, with due diligence, discovered the

same. On the contrary, this was material which was placed before the




WPC 6728/2011                                                  Page 16 of 17
Assessing Officer along with the return which the Assessing Officer was

duty bound to go through before completing the assessment. Clearly this

does not fall in the category of material which is referred to in

Explanation 1 to Section 147 of the said Act.



14.    Having considered the matter at length, we find that this is clearly

not a case of failure on the part of the assessee to fully and truly disclose

all material facts necessary for the assessment.       This is of material

significance because the notice under Section 148 has been issued after

expiry of four years from the end of the relevant assessment year.

Therefore, the notice is time barred. Apart from this, we also feel that it

amounts to a mere change of opinion. On both counts, the petitioner is

entitled to succeed. Consequently, the impugned notice dated 29.03.2010

is quashed and all proceedings pursuant thereto are also quashed. The

writ petition is allowed. There shall be no order as to costs.


                                        BADAR DURREZ AHMED, J



                                                R.V.EASWAR, J

JANUARY 24, 2013
SR



WPC 6728/2011                                                     Page 17 of 17
 
 
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