(Per : HONOURABLE MR.JUSTICE AKIL KURESHI) 1. The petitioner has challenged a notice dated 30.3.2009, as at Annexure “A” to the petition, by which the respondent sought to reopen the assessment of the petitioner for the assessment year 2002-03. The petition arises in following factual background.
2. The petitioner – Dhara Vegetable Oil & Foods Co. Ltd. (now merged with Mother Dairy Fruits & Vegetables Pvt. Ltd.), is a company registered under the Companies Act, 1956 and assessed to tax regularly. For the assessment year 2002-03, the petitioner filed its return of income declaring a total income of Rs.7.87 crores (rounded off). Such return was taken in scrutiny by the Assessing Officer and an assessment under section 143(3) of the Income Tax Act, 1961 (“the Act” for short) was framed on 17.3.2005 determining total income at Rs.32.22 crores (rounded off). In the return of income, the assessee had claimed certain deductions under sections 35(1)(i), (ii) and (iv) of the Act. The Assessing Officer had, on 18.8.2004, raised certain queries, one of them pertained to laboratory and research expenses and called upon the assessee to furnish documents to substantiate the claim of deduction under sections 35(1)(i), (ii) and (iv) of the Act. The petitioner in response to such query, produced certain documents. In the final assessment order that the Assessing Officer passed, he made no disallowances towards such claim of laboratory and research expenses. He, of course, had not discussed this issue, nor given any reasons for making no disallowances. Be that as it may, the issue rested at the level of the Assessing Officer.
3. More than four years after the end of the relevant assessment year, the Assessing Officer issued the impugned notice calling upon the petitioner to furnish a return of income stating that he had reason to believe that the income chargeable to tax for the assessment year 2002-03 had escaped assessment.
4. The petitioner was furnished reasons recorded by the Assessing Officer to issue such a notice. Such reasons read as under:
“Reason for reopening the assessment u/s 147 of the I.T. Act In this case, the assessment orders u/s 143(3) for A.Y. 2005-06 and 2006-07 were completed on 17.12.2007 and 11.12.2008 respectively. It was noticed that the assessee had claimed expenditure on scientific research under sub-clause (i), (ii) and (iv) of sub-section (1) of section 35 of the I.T. Act. In the assessment order, the AO has disallowed the claims as assessee could not substantiate its claims with supporting evidence. It was unearthed that though the expenditure on research was carried out by Mother Dairy Foods Processing Limited, Delhi, and not by the assessee. The assessee had reimbursed the claim of Mother Dairy Ltd. and yet the assessee claimed such payment u/s 35(1)(i) and 35(1) (iv) which was not allowable u/s u/s 35(1)(i) and 36(1)(iv). It was also unearthed that the claims u/s 35(1)(ii) were in respect of payments to Delhi University, Nagpur University etc., however, the assessee could not produce the proofs evidencing that the universities were approved in accordance with Rule 5C and subject to conditions as per Rule 5-E as required u/s 35(1)(ii). The assessee during the course of assessment proceedings for A.Y. 2006-07 had (i) withdrawn sizable amount of claim, (ii) certain amount of claim was withdrawn from section 35(1)(ii) and claimed u/s 35(1)(i). However, the claims were disallowed.
The perusal of the records for A.Y. 2002-03 reveals that the assessee had claimed deductions under sub-
clause (i), (ii) and (iv) of sub-section (1) of section 35 of the I. T. Act. The details of which are as under :-
U/s 35(1)(i) Rs.95,01,669/-
U/s 35(1)(ii) Rs.90,98,541/-
U/s 35(1)(iv) Rs. 3,04,671/-
The claims as above are made without supporting evidences / proofs and therefore not allowable. In view of the above discussion, income chargeable to tax has escaped assessment by reason of the failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment. I have therefore reason to believe that income to the extent of Rs.1,89,04,881/- has escaped the assessment.
Issue notice u/s 148 of the Act.”
5. The petitioner thereupon raised its objections under communication dated 15.8.2009. The petitioner contended that the assessment which was previously framed after scrutiny cannot be reopened beyond a period of four years since there was no failure on the part of the assessee to disclose fully and truly all material facts.
6. The petitioner further contended that the question of deduction for scientific and research expenditure not carried out in-house, the issue has been decided in favour of the assessee by the Bombay High Court in case of National Rayon Corporation Ltd., reported in 140 ITR 143.
7. With respect to payments made to Delhi University and Nagpur University, the petitioner contended that such universities were duly approved under the Income Tax Act of 1922 and by virtue of section 297(2)(k) of the Act, such notification issued in the Income Tax Act of 1922 would be valid under the Income Tax Act, 1961 also.
8. The petitioner contended that in any case, both the issues were examined by the Assessing Officer while framing the original assessment and any addition now on the same ground would be a mere change of opinion.
9. The Assessing Officer disposed of such objections vide his order dated 03.09.2009. He held that the assessee's reliance on the note regarding the claims made in the original return, audit report of the tax auditor and the details of documents filed during the assessment proceedings were not conclusive evidence of the claim of deduction under section 35(1)(i) of the Act. He was of the opinion that the assessee instead of carrying out activities itself, had made payments for such research made by some other agency. With respect to the decision of the Bombay High Court, he observed that there was no decision of the Gujarat High Court or the Supreme Court on the point. He was also of the opinion that payments made to the universities could not be given benefit of deduction in absence of approval.
10. At that stage, the petitioner approached this Court and challenged the impugned notice for reopening the assessment on various grounds. Counsel Shri Saurabh Soparkar appearing for the petitioner contended that both the claims of deduction under section 35(1) for research and development expenditure and payments made to the universities for such purpose, were examined threadbare by the Assessing Officer during the original assessment. No disallowance was made in a detailed order of assessment which the Assessing Officer had passed, though he had made various other additions and disallowances in such order.
10.1 Counsel submitted that the petitioner had placed full material before the Assessing Officer in the form of disclosure in the original return filed, the tax auditor's report, as also additional documents which were produced in response to queries issued by the Assessing Officer. There was, thus, no failure on the part of the assessee to disclose truly and fully all material facts. He, therefore, submitted that the notice is without jurisdiction.
10.2 Taking us through the details of such claims, counsel pointed out that the very issue of scientific research came to be decided by the Bombay High Court in favour of the assessee in case of National Rayon Corporation Ltd. (supra).
10.3 With respect to the payments made to the universities, counsel drew our attention to the copies of notifications produced on record under the Income Tax Act of 1922, approving such universities by the prescribed authority for deduction in respect of the expenditure on scientific research.
11. On the other hand, counsel Shri Parikh for the revenue opposed the petition contending that the petitioner failed to disclose truly and fully all material facts. With respect to the research and development work carried out at Mother Daily, Delhi, the petitioner never brought true and correct facts on record in the return filed, as also during the assessment proceedings. He pointed out that some of the claims under section 35(1) of the Act were withdrawn by the assessee in the subsequent assessment years.
11.1 Counsel submitted that the Assessing Officer after recording reasons, had issued the notice for reopening. Sufficiency of such reasons cannot be gone into by the Court at this stage. In short, he contended that the fresh assessment pursuant to such notice must be allowed to be completed.
12. Having thus heard the learned counsel for the parties and having perused the documents on record, it clearly emerges that in the present case, notice for reopening of the assessment previously framed under section 143(3) of the Act is sought to be reopened beyond a period of four years from the end of the relevant assessment year. In that view of the matter, in addition to the Assessing Officer having reason to believe that the income chargeable to tax has escaped assessment, the additional requirement that such escapement of income was for reason of the assessee's failure to disclose fully and truly all material facts necessary for such assessment, must also be satisfied.
13. Short question is, in the present case, can it be stated that there was failure on the part of the assessee to disclose material facts. We may recall that the Assessing Officer cited two reasons why he believed that the income chargeable to tax had escaped assessment. First was with respect to the payment for scientific research made for the research which was done at the premises of the Mother Dairy, New Delhi. Second was with respect to the payments made to Delhi University and Nagpur University for which the claim under section 35(1)(ii) of the Act was raised.
14. In the return of income, the assessee had claimed research and development expenditure under sections 35(1)(i) and 35(1)(ii) of the Act. In the note attached to the return of income, the petitioner assessee had stated as under :
“6. The company has been carrying on research and development work on oilseeds at Delhi and Nagpur universities which are institutions approved for the purpose of section 35(1)(ii) of the Income Tax Act, 1961. In addition, the company has also done the research and development at the research facilities set up at Mother Dairy, Delhi. The expenditure incurred being in the nature of revenue as well as capital, has been claimed under different sub-sections of section 35(1).”
14.1 Along with the return, the petitioner had further given details of such expenditure in following manner :
“(a) Debited to Profit and Loss Account.
(i) Research and development expenses.
Note: Delhi University and Nagpur University are approved Institutes under section 35(1)(ii).”
14.2 Such claims of the petitioner for deduction under section 35(1) of the Act were examined by the Assessing Officer during the scrutiny assessment. In a notice dated 18.8.2004 issued by the Assessing Officer, besides others, he called for the following information :
“(xiii) Please furnish the details of Laboratory and Research expenses and also furnish the documents to substantiate your claim u/s 35(1)(i), (ii), (iv).”
14.3 In reply to such query, the petitioner produced various documents. Such documents are placed before us along with a statement of Aparna Parlekar on behalf of the petitioner. Along with such statement, documents and accounts which were produced before the Assessing Officer in response to such query have been placed on record.
14.4 It was after such scrutiny that the Assessing Officer framed his assessment on 17.3.2005 making several additions and disallowances, and assessing total income of the assessee at Rs.34.22 crores against the declared income of Rs.7.87 crores. It can, thus, be seen that whenever the Assessing Officer had reason to believe that a claim of deduction or disallowance was not to be granted, he made necessary adjustments. Significantly however, with respect to the petitioner's claim for deduction for scientific research under section 35(1) of the Act, he made no disallowance. In other words, without any discussion, he did not disturb the petitioner's claim of deduction under such provision.
15. It can, thus, be seen that the claim of deduction was at large before the Assessing Officer. He applied his mind. Called upon the petitioner to supply necessary details to substantiate such claims. If thereafter no disallowances were made, to our mind, it cannot be stated that the petitioner failed to disclose all material facts. Along with the return and during the course of assessment proceedings, the assessee had made necessary disclosures to substantiate such claims. If the Assessing Officer was of the opinion that such claims were not allowable or that further inquiry was necessary, he was free to do so. However, having dropped the inquiry at that stage and indirectly having accepted the claims, in facts of the case, it was thereafter not open to issue a notice for reopening of the entire assessment beyond a period of four years from the end of the relevant assessment year.
16. It may be that the jurisdictional High Court had not expressed any opinion with respect to the issue of scientific research done outside the petitioner's premises. However, when the Bombay High Court had, long before the return was filed by the assessee, held the issue in favour of the assessee, raising such a claim, surely, cannot be stated to be a claim not bona fide made or that the assessee had raised a wholly wrong claim.
17. With respect to the second issue, we find that the Universities of Delhi and Nagpur were duly approved under notification issued under Income Tax Act of 1922 and such notifications were held to be valid for the purpose of successor Act also. Merely because such notifications were not produced on record during the original assessment, can hardly be a ground for reopening the assessment beyond a period of four years. If the Assessing Officer had any doubt about any such notifications, he could have asked the petitioner to produce the same in the earlier assessment proceedings.
18. In the result, the impugned notice dated 30.3.2009 is quashed. Rule is made absolutely accordingly with no order as to costs.
[AKIL KURESHI, J.] [HARSHA DEVANI, J.] parmar*