Akil Kureshi, J. (Oral)

1. The petitioner has challenged a notice dated 12.03.2015 issued by the respondent Assessing Officer to reopen the petitioner's assessment for the assessment year 2010-11, which was framed after scrutiny.

2. Brief facts are as under.

3. The petitioner is a company registered under the Companies Act and is engaged in manufacturing and sale of pharmaceutical drugs. For the assessment year 2010-11, the petitioner had filed return of income on 15.10.2010 declaring total income of Rs.25.17 crores (rounded off) and book profit under section 115JB of the Act at Rs.96.56 crores (rounded off). The case of the company was taken in scrutiny by the Assessing Officer. One of the major claims of the petitioner was of deduction under section 80IC of the Income Tax Act, 1961 ('the Act' for short) relating to its unit eligible for exemption situated in Himachal Pradesh. Such claim was examined by the Assessing Officer in the scrutiny assessment. Many other issues came up for consideration. Eventually, the Assessing Officer passed the order of assessment on 28.03.2014, assessing the petitioner's total income at Rs.65.87 crores (rounded off).

4. In order to reopen such assessment, the Assessing Officer issued impugned notice which, as can be seen, was done within a period of four years from the end of relevant assessment year. In order to do so, he has recorded following reasons:

"The assessee company engaged in the business of production of pharmaceutical and cosmetic products. The assessee filed its return of income for AY 2010-11 on 15/10/2010 declaring total income at Rs. 25,17,45,874/-. The case was selected for scrutiny and assessment u/s 143(3) r.w.s. 144 completed on 28/03/2014 determining total income at Rs.47,62,72,774/-. The assessee i.e. M/s Paras Pharmaceuticals Pvt Ltd had claimed deduction u/s 80IC of Rs.72,67,34,821/- for AY 2010-11.

Subsequently, it was noticed from case records that the turnover figures of the assessee were not verified with Central Excise Authority. On verification with Excise Authority it was found that the assessee had furnished a turnover of Rs. 21942.12 lakhs to the Excise Department in respect of the Uttranchal unit of Paras Pharmaceuticals Pvt. Ltd. Income from which is eligible for deduction u/s 80IC. However, assessee had furnished turnover at Rs.24783.89 lakhs in its P&L Account for claiming deduction u/s 80IC.

Therefore, I have reason to believe that income has escaped assessment for AY 2010-11 equivalent to turnover difference of Rs.2841.77 lakhs and accordingly assessment is required to be reopened u/s 147 of the I.T.Act. Necessary approval for reopening of assessment u/s 147 of the Act has been granted by Addl. CIT, Range-3(1), Ahmedabad vide letter No. Addl CIT/R3(1)/Audit/2014-15 dated 02.03.2015. Issue notice u/s 148 of the Income Tax Act, 1961."

5. Upon receipt of the notice and the reasons recorded with the Assessing Officer, the petitioner raised detailed objections to the reopening of the assessment under communication dated 10.07.2015. In such objections, the assessee interalia contended that there was no escapement of income chargeable to tax. In this regard, the assessee contended as under:

"2.3 No escapement of income

2.3.1 It is submitted that in the reasons recorded your good self has noted that there is difference of Rs.2,841.77 lakhs in the turnover of Baddi as per Excise records and turnover of Baddi as per Excise records and turnover of Baddi as P&L Account which has led to escapement of income.

2.3.2 It is submitted that the facts of RBHIL are opposite to the usual situation. It is not a case where turnover as per excise is higher than the turnover as per the financial statements. As per reasons recorded, turnover of Baddi unit as per the financial statements is more than the turnover as per excise records by Rs.2,841.77 lakhs. Since, Baddi unit of RBHIL is eligible to deduction under section 80IC of the Act, it appears that there is an allegation of traded products or products manufactured at Kalol unit may have been considered as products sold from Baddi unit. Accordingly, there is an allegation of higher deduction being claimed under section 80IC of the Act.

2.3.3 RBHIL manufactures more than 15 types of products (in the form of Tablets, cream, powder and liquid) in different Stock Keeping Units (SKUs). The products sold by RBHIL are subject to Legal Metrology Act, 2009 and accordingly, it is required to disclose Maximum Retail Price ('MRP') on the products.

2.3.4 Levy of Excise Duty in India is governed by the provisions of Central Excise Act, 1944. Excise Duty is levied on manufacture of goods and collected at the time of removal of goods from the registered unit as per the provisions of the said Act. In the instant case, the moment the manufactured products are cleared from Baddi unit, the same are reflected in the excise records. However, the same may not have been sold and hence, may not be recorded as sales in the audited financial statements, at a given point of time.

2.3.5 Valuation of excisable goods for purposes of charging of duty of excise is governed by Section 4 of the said Act. However, valuation in respect of those notified goods, on which declaration of retail sale price is mandatory under Legal Metrology Act, 2009 is governed by Section 4A of the said Act which overrides Section 4. As per the section 4A, excise duty is leviable on MRP declared on the goods less any abatement notified by Central Government in the Official Gazette.

2.3.6 Valuation of Products manufactured by RBHIL for the purpose of charging excise duty is governed by section 4A (MRP based abatement) of the Central Excise Act, 1944. In respect of the products manufactured by RBHIL during the year, Government of India has notified abatement of 35 percent. The relevant notification is attached as Annexure 2 for your ready reference.

2.3.7 Accordingly, turnover as per Excise Records was required to be reported at MRP less abatement of 35 percent which made the turnover value equal to 65 percent of MRP (10035). However, turnover as per audited financials is recorded at actual sales price at which products are sold by RBHIL to its customers. The actual sale price is generally above 65% of MRP. Copies of sample invoices, reflecting MRP and actual sale price, are enclosed as Annexure 3 for your reference.

2.3.8 However, turnover as per audited financials is recorded at actual sales price at which products are sold by RBHIL to its customers. The actual sale price is generally above 65% of MRP. Copies of sample invoices, reflecting MRP and actual sale price, are enclosed as Annexure 3 for your reference.

2.3.9 Since, the standard abated value of the products is lower than the actual sale price, the turnover recorded in the audited financial statements is higher than turnover as per the excise records.

2.3.10 Summary of MRP of products cleared during each month of FY 2009-10 from Baddi unit is enclosed as Annexure 4. During the year, MRP of products cleared during the year from Baddi unit amounted to Rs.3,45,84,66,964 (excluding products exported outside India). Further, products, manufactured in Baddi unit, amounting to Rs.2,42,49,28,473 (excluding products exported outside India) has been sold during the year and recorded in the P&L. A/c for the year under consideration. Copy of audited financial statements is enclosed as Annexure 5.

2.3.11 As may be seen, percentage of actual sales to MRP of products cleared during the year works out to 70%. As - the actual sale price is generally above 65% of MRP.

2.3.12 Percentage of actual sale price as percentage of MRP of products sold shown in a sample invoices is enclosed as Annexure 6 for your reference.

2.3.13 On perusal of the sample sales invoices of products manufactured at Baddi unit, it can be observed that actual sale price is generally above 65% of MRP, which broadly correspond to 70% being the percentage of actual sales to MRP. Accordingly, it can be understood that sales of Baddi unit as per audited financial statements is correct.

2.3.14 Further, it is also submitted that the excise records can be basis of reassessment proceedings in a situation where turnover as per excise is higher than the turnover as per the financial statements. In other words, proceedings under excise laws showing clandestine removal of stocks outside books of account may be basis for reassessment proceedings under the Income-tax Act, 1961.

2.3.15 However, in an opposite scenario, there has to be definite or material information showing or indicating traded products or products manufactured at Kalol unit being considered by RBHIL, which contains no such comment/remark, in absence of any tangible/material information and merely on the basis of difference in two separate records, reassessment proceedings is bad in law."

6. The Assessing Officer however, by an order dated 08.02.2016, rejected the objections. The petitioner thereupon filed this petition.

7. Learned counsel for the petitioner contended that the entire exercise of reopening the assessment was done by the Assessing Officer at the behest of audit party. He submitted that the Assessing Officer did not hold an independent belief that income chargeable to tax has escaped assessment. Under compulsion from the audit party, he had issued notice for reopening, which was wholly impermissible. He relied on the following decisions.

I. In case of Indian and Eastern Newspaper Society v. Commissioner of Income Tax, New Delhi, reported in (1979) 119 ITR 996

II. In case of Adani Exports v. Deputy Commissioner of Income-Tax (Assessments) reported in (1999) 240 ITR 224 (Guj)

Though in the petition other grounds are raised, counsel for the petitioner, after some discussion at the bar, pressed only the above contention.

8. On the other hand, learned counsel Shri Nitin Mehta for the department opposed the petition contending that the Assessing Officer has recorded independent reasons and the petition may therefore be rejected.

9. The law on the question is sufficiently clear. The Supreme Court in case of Indian and Eastern Newspaper Society (supra), held and observed that the statute does not support the conclusion that an audit party can pronounce on the law and that such pronouncement amounts to information within the meaning of section 147(d) of the Act. In every case, the Income Tax Officer must determine for himself what is the effect and consequence of law mentioned in the audit note and whether any consequence of the law which has now come to his notice, he can reasonably believe that income has escaped assessment. The basis of this belief must be the law of which he has now become aware. The opinion rendered by the audit party in regard to the law cannot, for the purpose of such belief, add to or colour the significance of law. The true evaluation of the law in its bearing on the assessment must be made directly and solely by the Income Tax Officer.

10. In case of Adani Exports (supra), Division Bench of this Court noted from the record that right from the beginning when the Assessing Officer was apprised of the audit objection, at no point of time, he betrayed any suggestion or holding any doubt about the correctness of his earlier decision in the assessment proceedings. Despite holding such a view, he suggested to the superior officer that if the view is not acceptable, recourse may be had to section 147 or section 263 of the Act. In such background, the Court relying upon and referring to the decision of Supreme Court in case of Indian and Eastern Newspaper Society (supra) observed as under:

" The ratio fully governs the present case and the record illuminates the failure of the AO to adhere to this principle while issuing notice under section 148 in the present case.

It is true that satisfaction of the AO for the purpose of reopening is subjective in character and the scope of judicial review is limited. When the reasons recorded show a nexus between the formation of belief and the escapement of income, a further enquiry about the adequacy or sufficiency of the material to reach such belief is not open to be scrutinised. However, it is always open to question existence of such belief on the ground that what has been stated is not correct state of affairs existing on record. Undoubtedly, in the face of record, burden lies, and heavily lies, on the petitioner who challenges it. If the petitioner is able to demonstrate that in fact the AO did not have any reason to believe or did not hold such belief in good faith or the belief which is projected in papers is not belief held by him in fact, the exercise of authority conferred on such person would be ultra vires the provisions of law and would be abuse of such authority. As the aforesaid decision of the Supreme Court indicates that though audit objection may serve as information, the basis of which the ITO can act, ultimate action must depend directly and solely on the formation of belief by the ITO on his own where such information passed on to him by the audit that income has escaped assessment. In the present case, by scrupulously analysing the audit objection in great detail, the AO has demonstrably shown to have held the belief prior to the issuance of notice as well as after the issuance of notice that the original assessment was not erroneous and so far as he was concerned, he did not believe at any time that income has escaped assessment on account of erroneous computation of benefit under section 80HHC. He has been consistent in his submission of his report to the superior officers. The mere fact that as a subordinate officer he added the suggestion that if his view is not accepted, remedial actions may be taken cannot be said to be belief held by him. He has no authority to surrender or abdicate his function to his superiors, nor the superiors can arrogate to themselves such authority. It needs hardly to be stated that in such circumstances conclusion is irresistible that the belief that income has escaped assessment was not held at all by the officer having jurisdiction to issue notice and recording under the office note on 8th February, 1997 that he has reason to believe is a mere pretence to give validity to the exercise of power. In other words, it was a colourable exercise of jurisdiction by the AO by recording reasons for holding a belief which in fact demonstrably he did not held that income of assessee has escaped assessment due to erroneous computation of deduction under section 80HHC, for the reasons stated by the audit. The reason is not far to seek."

11. In case of Commissioner of Income-Tax v. P.V.S. Beedies Pvt. Ltd., reported in (1999) 237 ITR 13, the Supreme Court found that the audit party had merely pointed out a fact which was overlooked by the Assessing Officer in the assessment. In such background, it was observed that there can be no dispute that the audit party is entitled to point out a factual error or omission in the assessment. It was observed as under:

" We are of the view that both the Tribunal and the High Court were in error in holding that the information given by internal audit party could not be treated as information within the meaning of Section 147(b) of the Income Tax Act. The audit party has merely pointed out a fact which has been overlooked by the Income Tax Officer in the assessment. The fact that the recognition granted to this charitable trust had expired on 22.9.1992 was not noticed by the Income Tax Officer. This is not a case of information on a question of law. The dispute as to whether reopening is permissible after 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(b) in the facts of this case was on the basis of factual information given by the internal audit party and was valid in law. The judgment under appeal is set aside to this extent."

12. In view of such legal position and the contention of the petitioner regarding the insistence of the audit party, we had called for the original files to satisfy ourselves as to in what background the Assessing Officer had recorded reasons and issued notice for reopening of assessment. Before taking note of the contents of the file documents, we may recall, as per the reasons recorded by the Assessing Officer, the assessee had claimed deduction under section 80IC of the Act of Rs.72.67 crores. The record showed that the assessee had furnished a turnover of Rs.247.87 crores (rounded off) in P&L account for claiming such deductions in respect of unit eligible for exemption. These figures were not verified with the Central Excise Authorities. On verification, it was found that the assessee had shown a turnover of Rs.219.42 crores to the Excise Department in respect of the same unit. According to the reasons, it is this difference in turnover of Rs.28.41 crores resulted into excess claim of deduction under section 80IC of the Act. We may also recall, in the objections raised by the assessee, it was contended that the discrepancy was on account of discounted price being shown for excise clearances which came close to 35% of the MRP price. If such discounted price is taken into consideration, there would be no mismatch between the excise turnover and the turnover reflected in the P&L account of the company.

13. The original departmental files reveal that the audit party had brought such discrepancy to the notice of the department under a letter dated 23.12.2014. The Assessing Officer however, replied to such audit objection that the turnover of the unit of the assessee which was eligible for deduction under section 80IC of the Act, had been verified from the available records. Thus, from the beginning the Assessing Officer was reluctant to accept point of view of the audit party. It appears that despite such reluctance, he was compelled to issue notice for reopening. What exactly happened after replying to the audit objection as mentioned above and the date of issuance of notice, is not immediately clear from the documents made available to us and we would have required the department to produce such further materials under ordinary circumstances. However, the files made available to us show a letter dated 13.07.2015 which was written by the Assessing Officer after the issuance of notice for reopening, nevertheless, reflects his consistent thought process leading to only one possible conclusion viz. that at no point of time, he agreed with the point of view of the audit party that on account of discrepancy in the two sets of turnover data, there had been under assessment of income. In the said letter, the Assessing Officer after reproducing the opinion of the audit party regarding escapement of income, he conveyed as under:

"3. Vide an earlier letter of even number dated 01/06/2015 that the objection was not acceptable in principle but the remedial action had been initiated in consonance of CBDT instruction no.6 of the 2006. Subsequently, new facts have come to the knowledge of this office, in light of which the nonacceptance of the objection in reiterated.

4. The levy of Excise Duty in India is governed by the provisions of Central Excise Act, 1944. Excise Duty is levied on manufacture of goods and collected at the time of removal of goods from the registers unit as per the provisions of the said act. Valuation of excisable goods for purposes of charging of excise duty is governed by Section 4A (MRP based abatement) of the Central Excise Act, 1944. In respect of the products manufactures by Reckitt Benckiser Healthcare India Ltd. (herein and after referred to as RBHIL) during the year under consideration, Government of India had notified abatement of 35% vide Notification No.49/2008 Central Excise (N.T.) dated 24/12/2008 (copy enclosed at Annexure 'A'). Now for reporting turnover to excise authorities, the excise records have to be reported at MRP minus 35% abatement, which would reduce the annual turnover to 65% of the MRP in Central Excise records.

4.1 Contrary to this, the Audited P&L account of the assessee submitted to Department of Income Tax reports turnover in terms of actual sale prices. The verification of the bills of the assessee reveals that the actual sales for relevant A.Y. had taken place at prices more that 65% of the MRP (Copies of sample sales bills attached at Annexure 'B'). Since the analysis of highly voluminous unit wise data of each and every product is unviable, a ramdom verification of sales bill had been done. On averaging the same over multiple products manufactures and sold by the assessee, their prices and unit sold during the relevant year the 'Sales Turnover' reported to Income Tax Department would converge down to approximately 7374% of the MRP of all the products manufactured during the year.

4.2 Going by the methodology of filing 'Sales Tax Returns' such that to report turnover as MRP minus 35% abatement and 'Income Tax Returns' such that to report audited P&L containing actual sales, a difference of approximately 8% is bound to occur.

5. If the date provided by your good office is analysed the turnover of baddi unit reported to Excise authority stands at Rs.21974.42 lacs, which if extrapolated, is 65% of Rs.33757.57 lacs. The turnover reported to Income Tax department stands at Rs.24783.89 lacs which is 73.4% of the extrapolated turnover of Rs.33757.57 lacs attributable to baddi unit of RBHIL. So, the difference in percentae terms would be 8.42 percent. This is approximately same as what was reached to in para 4.2 above.

6. Further, if 8.42% of the extrapolated turnover of Rs.33757.89 lacs is derived, the same arrives at Rs.2842.387 lacs. The figure reported by you i.e. Rs.2841.77 lacs is not far from it. Taking into consideration the error of sampling, the actual

data and figures reported by you are almost identical. 7. In view of the discussion above, the objection should be dropped and an acknowledgment regarding same may be sent to this office immediately." 14. The above quoted portion of the Assessing Officer's letter dated 13.07.2015 makes it abundantly clear that he was not agreeable to the objection of the audit party from the beginning and even during the process between issuance of notice for reopening and rejecting the objections of the petitioner, he had satisfied himself about the correctness of the petitioner's contention in this regard. We have reproduced the relevant portion of the petitioner's objections. The explanation of the petitioner in such objections to the discrepancy in the turnovers convinced the Assessing Officer that there had been no escapement of income chargeable to tax. He accepted the petitioner's ground that the excise turnover would show MRP price less 35% discount. If the turnover figures are adjusted accordingly, there would be hardly a discrepancy of 8% which in case of such a large turnover could easily occur. He in fact argued that if such discrepancy of 8.42% is extrapolated over the total turnover; the assessee's turnover from the eligible unit would match the correct figures. 15. We have therefore no hesitation in coming to the conclusion that neither the reasons recorded by the Assessing Officer, nor the decision to issue notice for reopening were those of the Assessing Officer himself. He had acted under the compulsion of the audit party which held a belief that on account of discrepancy in the turnover figures, income chargeable to tax had escaped assessment. The Assessing Officer was inclined to believe the petitioner's explanation that such discrepancy could be reconciled. If the department was not convinced about the opinion of the Assessing Officer, it was always open for the Commissioner to take the order of assessment in revision. The action of reopening of assessment however, stands on entirely different footing and as per settled law, can be resorted to by the Assessing Officer only if he has tangible material at his command to form a reasonable belief that income chargeable to tax had escaped assessment. Such belief of the Assessing Officer cannot be substituted by that of the opinion of the audit party. 16. In the result, impugned notice dated 12.03.2015 is set aside. The petition is allowed and disposed of.