IN THE HIGH COURT OF DELHI AT NEW DELHI
Judgment delivered on: 08.08.2014
W.P.(C) 1909/2013
M/S SWAROVSKI INDIA PVT LTD ..... Petitioner
versus
DEPUTY COMMISSIONER OF INCOME TAX ..... Respondents
Advocates who appeared in this case:
For the Petitioner : Mr M.S. Syali, Sr. Advocate with Ms Husanl Syali and Mr Mayank
Nagi, Advocates.
For the Respondent : Mr Kamal Sawhney, Advocate with Mr Sanjay Kumar, Advocate.
CORAM:
HON'BLE MR JUSTICE BADAR DURREZ AHMED
HON'BLE MR JUSTICE SIDDHARTH MRIDUL
JUDGMENT
BADAR DURREZ AHMED, J (ORAL)
1. By way of this writ petition a writ of certiorari has been sought for
quashing the notice dated 23.03.2012 issued by the Assistant Commissioner
of Income Tax under section 148 of the Income Tax Act, 1961 (hereinafter
referred to as ,,the said Act) as also the order dated 25.02.2013 passed by the
WP(C) 1909/2013 Page 1 of 12
Deputy Commissioner of Income Tax disposing the objections raised by the
petitioner in respect of the assessment year 2005-2006.
2. Admittedly, the issuance of the notice under section 148 of the said
Act is beyond the period of four years from the end of the relevant
assessment year i.e. assessment year 2005-2006. Consequently, there is no
dispute that the first proviso to section 147 of the said Act would be relevant.
The first proviso to Section 147 of the said Act is reproduced hereinbelow:-
"147. .... Provided that where an assessment under
sub-section (3) of section 243 or this section has
been made for the relevant assessment year, no
action shall be taken under this section after the
expiry of four years from the end of the relevant
assessment year, unless 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 in
response to a notice issued under sub-section (1) of
section 142 or section 148 or to disclose fully and
truly all material facts necessary for his
assessment, for that assessment year."
3. The facts are that the petitioner had filed its return of income on
31.10.2005 whereunder it had claimed a deduction of `6,34,90,243/- under
section 10B of the said Act on the ground that it is a 100 per cent export
oriented unit at Pune which had been set up in the assessment year 2000-
2001 and had earned profit to the extent of `6,34,90,243/- which were not
WP(C) 1909/2013 Page 2 of 12
exigible to tax on account of the fact that it was engaged in
manufacturing/production activity in the said unit. According to the
petitioner it was engaged in the business of manufacturing/processing of raw
beads into finished imitation pearls.
4. The assessment order was passed by the Assessing Officer on
28.11.2008 under section 143(3) of the said Act after incorporating the order
passed by the Transfer Pricing Officer (TPO) under section 92CA of the said
Act with regard to computation of the Arms Length Price in relation to
international transactions with associated enterprises reported in form 3CEB.
5. Thereafter a notice under section 154 of the said Act was issued on
21.04.2010 whereby it was proposed that the deduction of `6,34,90,243/-
claimed under section 10B of the said Act ought to be disallowed inasmuch
as the petitioner had undertaken activities on ,,job work basis. There was
another proposal also that the ,,other income of `1,32,97,000/- had not been
taxed separately and had been included in the deduction claimed under
section 10B of the said Act.
6. The petitioner filed detailed submissions in reply to the said notice on
24.05.2010. The petitioner indicated that it would eligible for the deduction
under section 10B of the said Act for the Pune Unit inasmuch as the
WP(C) 1909/2013 Page 3 of 12
petitioner was engaged in the manufacturing/production of finished imitation
pearls after carrying out the processing activities on raw beads. On the
submission of the said reply by the petitioner, no further action was taken by
the Department pursuant to the said notice under section 154 of the said Act.
7. In the meanwhile, a notice under section 148 of the said Act had been
issued on 19.03.2010 within the period of four years from the end of the
relevant assessment year (i.e., 2005-06). The said notice culminated in the
re-assessment order dated 26.10.2010. Subsequent thereto the impugned
notice dated 23.03.2012 was issued under section 148 of the said Act. The
purported reasons for issuance of the said notice were also furnished to the
petitioner. Thereafter, the petitioner filed its objections dated 14.01.2013,
which have been rejected by virtue of the order dated 25.02.2013. It is in this
background that the present writ petition has been filed challenging the
notice dated 23.03.2012 and the order dated 25.02.2013.
8. The point urged by Mr Syali, the learned Senior Counsel appearing on
behalf of the petitioner, was that in a case where the proviso to section 147
of the said Act was applicable, it must be clearly indicated that the
escapement of income was on account of the failure on the part of the
assessee to fully and truly disclose all material facts necessary for the
WP(C) 1909/2013 Page 4 of 12
assessment. Mr Syali took us through the purported reasons behind the
issuance of the notice under section 148 of the said Act. The purported
reasons as indicated by the Assistant Commissioner of Income Tax were as
under:-
1 Reasons for the belief The original assessment u/s
that income has 143(3) was completed in
escaped assessment December 28/11/2008, at
64,36,160 u/s 143(3) as
against the returned loss of
Rs.(-)4,71,20,033/-. Perusal
of records revealed that the
assessee had claimed
deduction u/s 10B on Pune
Unit amounting to
Rs.6,34,90,243/- as 100%
EOU, which undertook
activities on job work basis.
This section applies to any
undertaking which
manufacturing or produces
any article on things or
computer software. Hence,
the deduction u/s 10B should
have been disallowed. This
has resulted in incorrect
allowance of deduction u/s
10 amounting to
Rs.6,34,90,243/-. Secondly,
the assessee has not taken the
income from the other
sources to the tune of
Rs.1,32,97,000/- separately
and included in deduction
which should have been
separately considered and
taxed. The mistake resulted
in under assessment of
income to the tune of
Rs.1,32,97,000/- involving
WP(C) 1909/2013 Page 5 of 12
potential tax effect.
I have therefore, reason to
believe that an amount of
Rs.7,67,87,243/- has escaped
assessment within the
meaning of section 147(c) of
the IT Act, 1961. The
escapement of the income
has been by the reason of
failure on the part of the
assessee to disclose fully and
truly, all material fact
necessary for assessment.
Since the assessment has
been completed u/s 143(3) of
the IT Act, 1961 and 4 years
have since elapsed. The
assessment record is being
submitted for kind perusal
and approval u/s 151(1) of
the IT Act, 1961 for issuance
of notice u/s 148 of the IT
Act, 1961.
9. On going through the above reasons, it is evident that while the
Assessing Officer mentioned that income had escaped assessment because of
the failure on the part of the assessee to fully and truly disclose the material
facts for assessment, he has not indicated as to which material fact had not
been fully and truly disclosed by the assessee. Presumably the material fact
could have been the fact that the assessee was carrying out its activities at its
Pune unit on a ,,job work basis. In this backdrop, the point we have to
consider in this case is whether the petitioner had, in fact, failed to disclose
fully and truly all the material facts which were necessary for the purposes of
WP(C) 1909/2013 Page 6 of 12
assessment.
10. The learned counsel for the petitioner placed reliance on a decision of
this court in the case of Haryana Acrylic Manufacturing Co. vs.
Copmmissione rof Income-Tax and Another: [2009] 308 ITR 38 (Delhi).
While considering the provisions of sections 147 and 148 of the said Act, in
particular the first proviso thereof, this court observed as under:-
"29. In the reasons supplied to the petitioner, there
is no whisper, what to speak of any allegation, that
the petitioner had failed to disclose fully and truly
all material facts necessary for assessment and that
because of this failure there has been an
escapement of income chargeable to tax. Merely
having a reason to believe that income had escaped
assessment, is not sufficient to reopen assessments
beyond the four year period indicated above. The
escapement of income from assessment must also
be occasioned by the failure on the part of the
assessee to disclose material facts, fully and truly.
This is a necessary condition for overcoming the
bar set up by the proviso to section 147. If this
condition is not satisfied, the bar would operate
and no action under section 147 could be taken.
We have already mentioned above that the reasons
supplied to the petitioner does not contain any such
allegation. Consequently, one of the conditions
precedent for removing the bar against taking
action after the said four year period remains
unfulfilled. In our recent decision in Wel
Intertrade Private Ltd. [2009] 308 ITR 22 (Delhi)
we had agreed with the view taken by the Punjab
and Haryana High Court in the case of Duli Chand
Singhania [2004] 269 ITR 192 that, in the absence
WP(C) 1909/2013 Page 7 of 12
of an allegation in the reasons recorded that the
escapement of income had occurred by reason of
failure on the part of the assessee to disclose fully
and truly all material facts necessary for his
assessment, any action taken by the Assessing
Officer under section 147 beyond the four year
period would be wholly without jurisdiction.
Reiterating our view-point, we hold that the notice
dated March 29, 2004, under section 148 based on
the recorded reasons as supplied to the petitioner
as well as the consequent order dated March 2,
2005, are without jurisdiction as no action under
section 147 could be taken beyond the four year
period in the circumstances narrated above."
(underlining added)
11. The same view has been expressed in Rural Electrification
Corporation Ltd. vs. Commissioner of Income Tax: [2013] 355 ITR 356. It
may not be out of place here to mention that this court in Microsoft
Corporation (I) Pvt Ltd vs. Deputy Commissioner of Income Tax & Anr:
[WP(C) 284/2013 decided on 23.05.2013] had observed as under:-
"From the above, it is evident that merely having a reason
to believe that income had escaped assessment is not
sufficient for reopening the assessment beyond the four
year period referred to above. It is essential that the
escapement of income from assessment must be occasioned
by the failure on the part of the assessee to, inter alia,
disclose material facts, fully and truly. If this condition is
not satisfied, there would be a bar to taking any action
under Section 147 of the said Act."
12. It is clear that the escapement of income by itself is not sufficient for
reopening the assessment in a case covered by the first proviso to Section
WP(C) 1909/2013 Page 8 of 12
147 of the said Act unless and until there is failure on the part of the assessee
to disclose fully and truly all the material facts necessary for assessment. In
the present case, it has not been specifically indicated as to which material
fact or facts was/were not disclosed by the petitioner in the course of its
original assessment under Section 143(3) of the said Act. We can, as pointed
out above, presume that the assessing officer had in mind the fact that the
petitioner was carrying out its activities on ,,job work basis when he
observed that the petitioner had failed to disclose fully and truly all material
facts. But even on this presumption we find that the Assessing Officer was
not correct. This is so because in the Transfer Pricing Report submitted by
the assessee it had been clearly indicated that it had processed raw beads to
the extent of 1,03,213 Kgs into finished imitation pearls in the financial year
2004-2005 which related to the assessment year 2005-2006. The entire
process had been set out in the Transfer Pricing Report as under:-
"The following are the steps of processing carried
out by SIPL:
1. Raw beads are examined by SIPL;
2. Raw beads are fixed on the frames;
3. Beads are dipped in a lacquer based on nitro
cellulose (made of nitro cellulose, Butyl
Acetate & Ethanol) within DSW developed
machinery supplied to EOU.
4. Subsequent to dipping the glass beads are
WP(C) 1909/2013 Page 9 of 12
subjected to several coating processes, which
impart the qualities of a pearl.
5. Beads are then enameled.
6. After dipping and coating, the semi-finished
pearls are pre-dried and removed from the
frames.
7. Thereafter the pearls are baked in ovens to
ensure that the layers coated on the glass beads
are permanently stable.
8. The next step is to wash the pearls in soft water
to remove any extraneous material.
9. Process of visual quality control.
10.Quality control is carried out on the standard
operating procedures of DSW.
11.Pearls are knotted, packed, babeled and sent
back to DSW."
13. Apart from this, in the course of the original assessment proceedings
the petitioner, in response to a notice under Section 143(2) and 143(1) of the
said Act submitted information on the point raised by the Assessing Officer
with regard to the business activity of the petitioner. The petitioner had
submitted a letter dated 09.09.2008 which clearly indicated as under:-
"2. Point 2: Brief Note on Business Activity.
Swarovski India Pvt. Ltd. is a group company of
Swarovski AG, Austria and has two divisions in
India viz. Pune Unit and Delhi Unit.
Pune Unit is a 100% Export Oriented Unit (EOU)
and is undertaking activities such as coating of raw
beads, polishing, stringing and knotting, quality
control customs bonded warehousing etc. on job
work basis."
(underlining added)
WP(C) 1909/2013 Page 10 of 12
14. It is evident from the above that the petitioner had categorically stated
that the Pune Unit was a 100 per cent export oriented unit and was
undertaking activities on raw beads such as coating, polishing, stringing and
knotting etc., on "job work basis". Therefore, it is abundantly clear that the
petitioner had on a specific query raised by the Assessing Officer informed
the Assessing Officer that it was carrying out the manufacturing/production
activity on "job work basis".
15. It may be further pointed out that even in the re-assessment order
dated 26.10.2010, pursuant to the first re-assessment notice for this very year
i.e. assessment year 2005-06, the Assessing Officer has categorically noted
that the petitioner was engaged in the business of manufacturing/processing
imitation pearls and in the business of import and sale of crystal and related
items in India. From this, also, it is evident that the entire activity and
particularly the nature of manufacturing/production activity carried out by
the petitioner "on job work basis" was clearly revealed before the Assessing
Officer in the original round as well as in the round of re-assessment.
Therefore, the statement of the Assessing Officer in the purported reasons in
support of the impugned notice dated 23.03.2012 that there had been failure
on the part of the petitioner/assessee to fully and truly disclose the material
WP(C) 1909/2013 Page 11 of 12
facts, is completely belied by the records of the case.
16. Consequently, the notice dated 23.03.2012 as also the order dated
25.02.2013 are liable to be quashed and set aside. It is ordered accordingly.
All the proceedings pursuant to the said notice dated 23.03.2012 also stand
quashed.
17. The writ petition is allowed. There shall be no order as to costs.
BADAR DURREZ AHMED, J
SIDDHARTH MRIDUL, J
AUGUST 08, 2014
dn
WP(C) 1909/2013 Page 12 of 12
|
