1. Petitioner has challenged notice dated 11.03.2017 issued by the respondent-Assessing Officer to reopen the petitioner's assessment for the assessment year 2010-11.
2. Brief facts are as under.
3. Petitioner is a company registered under the Companies Act and is engaged in the business of manufacturing pharmaceutical drugs and other healthcare related businesses. For the assessment year 2010-11, the petitioner had filed the return of income on 28.09.2010 declaring 'Nil' income. Return was taken in scrutiny by the Assessing Officer, during which, several issues came up for consideration. Assessing Officer raised written queries under a communication dated 16.12.2013, to which, the petitioner had replied under a letter dated 06.01.2014. The Assessing Officer passed the order of assessment under section 143(3) of the Income Tax Act, 1961 ('the Act' for short) on 06.02.2015 making several adjustments and disallowances and computed the assessee's taxable income at Rs. 106.04 crores (rounded off) under section 115JB of the Act.
4. To reopen such assessment, the Assessing Officer issued the impugned notice. In order to do so, the Assessing Officer recorded following reasons:
"In this case the assessee filed its return of income for AY 2010-11 on 28.09.2010 declaring loss of Rs. 12,51,73,967/- and paid the tax under MAT provisions on book profit of Rs. 160,04,09,477/-. The assessment u/s. 143(3) rws 144C(3) was finalized on 06.02.2015 determining total loss of Rs. 106,21,34,600/- after making various additions under normal provision and tax was levied under MAT provisions on book profit of Rs. 160,04,09,477/-.
From the computation of income, it is seen that Company has claimed an amount of Rs. 130 crore as exempt Income u/s. 28(v) being the remuneration received from Partnership Firm but disallowed u/s. 40(b) In Firm's income. The assessee company is a partner of the Firm viz. M/s. Zydus Healthcare, Sikkim and also received share of profit and interest from the firm. This particular item of Income i.e. remuneration paid by the firm was disallowed by the Firm in the computation of income on the ground the partner is not a working partner. Therefore, the assessee company i.e. recipient has claimed it as exempt income u/s. 28(v).
It is also found from the records that the assessee company is a partner in the firm of M/s. Zydus Healthcare Sikkim having 96% share in the said firm and also interest as per the partnership deed entered into on 1.3.2007 initially, there was no provisions for payment of any remuneration to the partners in the partnership deed dated 1.3.2007. The said firm enjoys deduction of its income u/s. 80IC of the Act. After the execution of the partnership deed, the assessee company entered into a MOU on 15.3.2008. According to the conditions of MOU, the assessee company markets the products and provides all business auxiliary marketing services like consignment, sales agent and after sale services of the product of the firm M/s. Zydus Healthcare Sikkim for which the assessee company is entitled to get remuneration 12.5% of the total turnover.
For payment of remuneration to the assessee company, it is noticed that the Partnership Firm entered an agreement/Addendum dated 1/4/2007 with assessee company for marketing its products and providing all business auxiliary marketing services like consignment and sales agent and after-sales services for which the assessee company would be entitled to get remuneration @ 12.5% of the total turnover of the Firm, vide Memorandum agreement dated 15/3/2008. As stated above, M/s. Zydus Healthcare enjoys deduction u/s. 80IC of the Act thereby whatever the profit earned during the year is exempt from taxation. As such, any expenditure disallowed in the computation of income does not make any difference for the firm as regards the taxation of the firm is concerned. Therefore, the addendum brought on 15.3.2008 was only an afterthought to claim deduction u/s. 28(v) of the Act in the hands of the assessee company. The payment by the firm to the assessee company was towards various services rendered for providing auxiliary marketing services to the Firm and for which it has used its network and infrastructure spread all over India.
In this regard, it is important to note the definition of working partner as per the provisions of the Act which is as under:
"40(b) Explanation 4-For the purposes of this clause, "working partner" means an individual who is actively engaged in conducting the affairs of the business or profession of the firm of which he is a partner"
From the above it appears that the working partner has to be an individual. The term "individual" has not been defined under the Act and the dictionary meaning of the same is 'of or for a particular person'. 'Person' is an inclusive term under the Act and in the absence of any qualifying definition under the Act and the facts of the issue involved and since the issue has not been disclosed by the assessee the income/remuneration received from the Firm is required to be treated as 'Income of the assessee company from other sources' under section 56 of the IT Act since the assessee is not eligible for treating it as exempt Income. This has resulted in under assessment of income amounting to Rs. 130,00,00,000/- which is chargeable to tax and has escaped assessment for the A. Y. 2010-11.
Therefore, I have reason to believe that income amounting to Rs. 130,00,00,000/- which is exceeding Rs. 1,00,000/- and which is chargeable to tax, has escaped assessment for the A.Y. 2010-11 within the meaning of section 147 of the Act. The assessment made u/s. 143(3) r.w.s. 144C(3) of the Act is therefore required to be reopened."
5. Being supplied with the reasons recorded by the Assessing Officer, the petitioner raised objections under letter dated 16.05.2017. Such objections were rejected by the Assessing Officer by an order dated 02.06.2017. Hence, this petition.
6. Appearing for the petitioner, learned counsel Shri R.K. Patel submitted that the original assessment was framed after thorough scrutiny. Impugned notice has been issued beyond a period of four years from the end of relevant assessment year. There was no failure on the part of the assessee to disclose truly and fully all material facts necessary for assessment. In fact, the ground on which the Assessing Officer desires to reopen the assessment was also examined during the original assessment proceedings. It was therefore impermissible for the Assessing Officer to reopen the assessment.
7. On the other hand learned counsel Shri Bhatt for the department opposed the petition contending that at this stage, the Court would not interfere and allow the Assessing Officer to complete the assessment.
8. We are dealing with the case where the return filed by the petitioner was taken in scrutiny and the Assessing Officer had passed a scrutiny assessment order. The impugned notice has been issued beyond a period of four years from the end of relevant assessment year. In that view of the matter, the questions of change of opinion as well as the failure on part of the assessee to disclose truly and fully all material facts necessary for assessment would assume significance. In this context, we have examined the materials on record.
9. The sole objection of the Assessing Officer in the reasons recorded for reopening the assessment is with respect to a sum of Rs. 130 crores received by the assessee company by way of remuneration as a partner of one Zydus Healthcare, Sikkim. The assessee claimed that the said income was exempt in terms of section 28(v) of the Act. Such sum was paid to the assessee company by Zydus Healthcare, Sikkim, whose income is exempt under section 80IC of the Act. The remuneration was paid to the partner at the rate of 12.5% of the total turnover for the purpose of marketing the products of the partnership firm and giving of business auxiliary marketing services. This provision for payment of remuneration to the partner was brought by way of an addendum in the partnership agreement by way of addendum dated 15.03.2008. According to the Assessing Officer, this was an afterthought and more importantly, the remuneration could be paid only to a working partner as per section 40(b) of the Act. The Assessing Officer referred to explanation-4 to section 40(b) to contend that only an individual can be a working partner. In the present case, the assessee being a company could not have claimed a status of working partner. This in the nutshell, was the objection of the Assessing Officer.
10. As correctly pointed out by the counsel for the petitioner, this issue had arisen in the original scrutiny assessment proceedings and in fact, this was not the first time such an issue had arisen in case of this very assessee. For the present year in the statement of income filed along with the return of income, the assessee had claimed exempt income of Rs. 130 crores by way of "remuneration from partnership firm since disallowed u/s. 40(b) in the firm's income." In the accounts for the period relevant to the assessment year, the assessee had showed the income reduced by the said sum in the column "other income from operations".
11. It was in the background of such disclosures by the assessee in the return of income during the scrutiny assessment, the Assessing Officer in his letter dated 16.12.2013 while raising multiple queries about several other issues, in this regard had called upon the assessee to explain the following:
"3) In the statement of income you have claimed deduction of Rs. 130 Crore as remuneration from partnership firm. Please give a note as to how the income under the head "Remuneration from Partnership Firm" of Rs. 130 Crore, is exempt in the hands of the Company."
12. In reply to such query, the assessee in the communication dated 06.01.2014, provided following information:
"3. Reply to Point No. 3 of your letter dated 16/12/2013
As regards your query as to how the income under the head 'Remuneration from Partnership Firm' of Rs. 130 Crores is exempt in the hands of the assessee company, we wish to submit as under:
The assessee company has claimed the amount of remuneration from partnership firm of Rs. 130 Crores as not chargeable to tax, since the same has been added to the total income as disallowable u/s. 40(b) in the Firm's case (refer Statement of Total Income filed separately, above), as envisaged under the Proviso to Sec. 28(v) of the Act. In this regard, kindly refer to copy of the Addendum to the Partnership Deed Enclosed herewith, marked as Annexure-4. We are also enclosing herewith, a copy of the 'Memorandum of understanding recording determination of partner's remuneration payable by M/S Zydus Healthcare to Cadila Healthcare Ltd. for F.Y. 2009-10', marked as Annexure -5. The identical claim was came to be allowed in the past scrutiny assessments for A.Y. 2008-09 and A.Y. 2009-10."
13. It was after such scrutiny that the Assessing Officer passed order of assessment in which no disallowances or the part thereof of the said sum of Rs. 130 crores was made.
14. What can therefore be gathered from the documents on record is that this very question of the assessee's claim of exemption of income of Rs. 130 crores by way of remuneration as a partner of the firm had come up for consideration before the Assessing Officer in the original assessment proceedings. The Assessing Officer had called upon the assessee to explain the said deduction as remuneration from partnership firm. He called upon the assessee to state how such income was exempt in the hands of the company. In reply to such question, the assessee had explained that such income was not chargeable to tax since the same was added to the total income of the firm and disallowed under section 40(b) of the Act, the assessee would therefore get the benefit of section 28(v) of the Act. The assessee also drew the attention of the Assessing Officer to the addendum to the partnership deed, in which, the provision for payment of remuneration to the partner at the prescribed percentage was made. The assessee also pointed out that identical question had come up for consideration during the scrutiny assessments for the assessment years 2008-09 and 2009-10 and the claim of the assessee was accepted.
15. It was after
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such consideration that the Assessing Officer passed the order of assessment and made no disallowance on the assessee's claim of exempt income of Rs. 130 crores. Two things thus immediately become clear. First is that, there was no failure on the part of the assessee to disclose the relevant facts truly and fully. The claim was made in the return with full disclosures in the statement of income and the accounts maintained by the assessee. The fact that the claim was supported by an addendum in the partnership deed was pointedly brought to the notice of the Assessing Officer in reply to the queries raised by him. There was thus, true and full disclosure of all material facts. The second thing is that this very issue with all its elements had come up for consideration before the Assessing Officer during the original assessment for this very assessment year and we also believe the assessee's contention for the earlier assessment years also. The notice for reopening therefore must fail both on the ground of no failure on the part of the assessee to disclose truly and fully all material facts and also on the ground of attempt on part of the Assessing Officer to reexamine the claim which was originally scrutinized and therefore on the principle of change of opinion. 16. Impugned notice dated 11.03.2017 is therefore set aside. Petition is allowed and disposed of.