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Sun Pharma Exports Vs. Deputy Commissioner of Income Tax - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Mumbai
Decided On
Judge
Reported in(2005)96TTJ(Mum.)415
AppellantSun Pharma Exports
RespondentDeputy Commissioner of Income Tax
Excerpt:
1. these two appeals are cross-appeals. it(ss)a no. 76/mum/2004 is filed by the assessee. it(ss)a no. 127/mum/2004 is filed by the revenue. these block assessment appeals are directed against the order of the cit(a), central-viii at mumbai, passed on 28th nov., 2003. these appeals arise out of the block assessment completed under section 158bc(c) r/w section 143(3) of the it act, 1961. the block assessment order has been passed on 27th dec., 2000, fixing a total undisclosed income of rs. 13,73,35,263 as against nil income returned by the assessee.2. the assessee in this case, m/s sun pharma exports (spex), is a partnership firm constituted by a deed of partnership dt. 30th sept., 1994. it was engaged in the business of pharmaceutical products having its factory at plot no. 223, span.....
Judgment:
1. These two appeals are cross-appeals. IT(SS)A No. 76/Mum/2004 is filed by the assessee. IT(SS)A No. 127/Mum/2004 is filed by the Revenue. These block assessment appeals are directed against the order of the CIT(A), Central-VIII at Mumbai, passed on 28th Nov., 2003. These appeals arise out of the block assessment completed under Section 158BC(c) r/w Section 143(3) of the IT Act, 1961. The block assessment order has been passed on 27th Dec., 2000, fixing a total undisclosed income of Rs. 13,73,35,263 as against nil income returned by the assessee.

2. The assessee in this case, M/s Sun Pharma Exports (SPEX), is a partnership firm constituted by a deed of partnership dt. 30th Sept., 1994. It was engaged in the business of pharmaceutical products having its factory at plot No. 223, Span Industrial Estate, Dadra. The partnership firm carried on the said business upto 12th May, 1998, on which date the entire business of the assessee-firm was assigned to M/s Sankalp Laboratories Ltd. (SLL) as a going concern. The business of the assessee-firm was assigned as a going concern through a deed of assignment executed on 12th May, 1998 (para 2, p. 2 of assessment order).

3. The business carried on by the assessee-company for the period from 1st Oct., 1994 to 12th May, 1998, was assigned to M/s Sankalp Pharmaceuticals Ltd. (SLL) as a going concern lock, stock and barrel.

The assessee-firm has not been formally dissolved even though the business was discontinued on assignment of the same to SLL.

4. There was a search and seizure operation conducted on 7th Dec, 1998, in the premises of Sun group of concerns. In the course of said search operation, the premises at plot No. 223, Span Industrial Estate, Dadra, was also searched. It was in these premises that the assessee-firm (SPEX) had in fact carried on its business for the initial period from 1st Oct., 1994 to 12th May, 1998 and where afterwards M/s SLL, carried on the business.

5. On the basis of the materials collected in the course of search conducted at the premises at plot No. 223, Span Industrial Estate, Dadra, the AO came to the conclusion that evidences are available against the assessee-firm justifying initiation of block assessment proceedings to assess the undisclosed income in the hands of assessee-firm. According to the assessing authority, the adverse materials pertained to the deductions claimed by the assessee-firm under Sections 80HHC and 80-IA in the past. According to the assessing authority, those deductions claimed by the assessee-firm through its regular returns and allowed in the regular assessments were wrongly done. The materials collected in the course of search showed that those deductions had not been claimed by the assessee-firm on genuinely fulfilling the conditions attached thereto. The assessing authority held that those deductions already accepted in the regular assessments required to be withdrawn and such withdrawal of deductions would result in assessment of undisclosed income in the hands of the assessee-firm.

6. Therefore, notice under Section 158BC was issued on 16th June, 1999, on the assessee-firm to furnish the return of undisclosed income. As the assessee-firm had carried on the business only for the period from 1st Oct., 1994 to 12th May, 1998, the block period, for the purpose of block assessment in the hands of the assessee, has been limited by the assessing authority to the period from 1st Oct., 1994 to 12th May, 1998. Notice under Section 158BC was issued requiring the assessee to furnish the block return for the above limited period. In response to the notice issued by the AO, the assessee-firm filed a nil return.

7. In fact, the assessee-firm had filed its regular returns of income for the past assessment years prior to the date of search. To be more specific, the assessee- firm had filed its regular returns of income for the asst. yrs.. 1995-96, 1996-97, 1997-98, 1998-99 and 1999-2000, even before the search and/or before the issue of notice under Section 158BC. The assessee-firm had claimed deductions under Section 80HHC for all the above five assessment years and further claimed deductions under Section 80-IA for the three asst. yrs. 1997-98, 1998-99 and 1999-2000. The deductions were claimed in the regular returns of income filed for those assessment years. In total, the assessee had claimed a deduction of Rs. 12,48,80,263 under Section 80-IA, which was allowed by the AO in the respective regular assessments. The assessee-firm was a recognised export house and had been regularly claiming deduction under Section 80HHC since its inception in 1994. The deductions have been regularly allowed by the Department.

8. It is the above deductions claimed by the assessee-firm and allowed by the assessing authority in the regular assessments that have now become the basis for the impugned block assessment. The AO has held out a case that those claims under Sections 80HHC and 80-IA were made by the assessee-firm wrongly. As far as the deduction under Section 80-IA is concerned, the assessee- firm was supposed to fulfil five conditions enumerated therein for claiming the deduction. The first condition is that the unit should not have been formed by splitting up or the reconstruction of a business already in existence. It is the opinion of the assessing authority that it has to be seen as a result of search that the business set up by the assessee-firm as SPEX had been formed by the reconstruction of the business already in existence and carried on by another firm, M/s Bhaskar Pharma Industries (BPI). According to the assessing authority, the business was carried on by BPI and the same was assigned to the assessee as a going concern and no new business was established by the assessee-firm. According to the assessing authority, the first condition was not fulfilled.

9. The second condition to be fulfilled by the assessee was that the business should not have been formed by transfer of plant and machinery to a new business but which were previously used for any purpose. The AO noticed that the plant and machinery were erected by BPI and, therefore, the new business needs to be construed as formed by transfer of plant and machinery used previously. Therefore, the assessing authority held that the second condition also was not fulfilled by the assessee.

10. The AO also held that the value of the used plant and machinery transferred to the industrial undertaking of the assessee-firm exceeded 20 per cent of the total value of the plant and machinery used in the business. This is a violation of the third condition laid down in the provisions.

11. The fourth condition that should have been complied by the assessee-firm was that the assessee should manufacture or produce any article or thing not being any article or thing specified in the list mentioned in XI Schedule. It is the case of the assessing authority that the details and evidences collected in the course of search have proved that the assessee-firm was not in fact carrying on any manufacturing activity at its factory. Therefore, according to the assessing authority, the fourth condition also was not fulfilled by the assessee-firm.

12. The fifth condition that should have been complied by the assessee-firm is that the assessee should have employed ten or more workers in the manufacturing activity carried on with the aid of power.

The AO held that the search has also made out a case that the assessee-firm never employed the required number of workers in its manufacturing process. According to him, the fifth condition also was not fulfilled by the assessee-firm.

13. The AO, in short, came to the conclusion that the conditions specified in Section 80-IA(2)(i), (ii), (iii) and (iv) were not satisfied by the assessee and, therefore, it was not in fact entitled for the deduction available under Section 80-IA of the IT Act, 1961.

He, therefore, held that the said deduction was wrongly allowed in the regular assessments. Therefore, he withdrew the deductions under Section 80-IA already allowed to the assessee in the regular assessments. The withdrawals amounted to Rs. 12,48,80,263. This has been treated as the undisclosed income of the assessee-firm. The final conclusion arrived at by the AO as found in p. 42 of the assessment order is extracted below : "Hence, for the purpose of this order, the deduction under Section 80-IA allowed to the assessee in the regular assessments is withdrawn and added to the undisclosed income of the assessee for the block period. The year-wise quantum of deduction under Section 80-IA allowed to the assessee in the regular assessment which is withdrawn in this order and added to the undisclosed income of the assessee for the block period is as under: Accordingly, a sum of Rs. 12,48,80,263 is added as undisclosed income for the block period for the various assessment years specified above which represents withdrawal of the deduction under Section 80-IA allowed to the assessee in the regular assessments in view of the evidences found during the course of the search as discussed above." 14. On further verification of the seized materials, the assessing authority came to a conclusion that even though the assessee was entitled for deduction under Section 80HHC, excessive deduction was granted to the assessee in the regular assessments. This is because of the reason that the assessee has not apportioned its expenses pertaining to salaries of the international marketing division of its sister-concern which looked after the export activities of the assessee-firm. If a reasonable portion of the said expenditure had been debited to the working of the assessee-firm, the export profit would have come down to that extent as a result of which assessee would be entitled for deduction under Section 80HHC only for a lesser amount.

Therefore, the assessing authority worked out the apportionment and found that the assessee had claimed an excess deduction under Section 80HHC to the extent of Rs. 1,24,55,000. The said amount also has been withdrawn by the assessing authority. This amount of Rs. 1,24,55,000 has again been treated as undisclosed income of the assessee.

15. The ultimate finding of the AO on this issue is available in pp. 48 and 49 of the assessment order, which is extracted below : "Hence, the total indirect expenses of exports, which are not considered by the assessee while computing 80HHC, would be as per Clause XI of Annex. 1. This would also represent the excess amount of deduction under Section 80HHC claimed by the assessee. This is so because the profits eligible for deduction under Section 80HHC would be lower by this amount as compared to the profits determined eligible for deduction under Section 80HHC; under Section 143 in the regular assessments. Thus, this would represent the undisclosed income of the respective assessment years which has been allowed as excess deduction under Section 80HHC, under Section 143. The same is accordingly added as undisclosed income of the block period. It may be mentioned that the above findings are on the basis of seized material found during the course of search referred to above.

Thus, the amount of deduction under Section 80HHC which is withdrawn and added as income of the assessee is as under (details as per Annex. 1 enclosed) : 16. The impugned block assessment has been initiated and completed by the assessing authority on the basis of the abovementioned withdrawals of deductions which have been otherwise allowed in the regular assessments. The assessing authority has withdrawn the deductions under Section 80-IA in full and has withdrawn the deduction under Section 80HHC in part.

17. The abstract of the computation of the undisclosed income is extracted from p. 49 of the assessment order, below.

"Subject to the above discussion, the undisclosed income for the block period is computed as under :Asst. yr.

Description Undisclosed income (Rs.)1995-96 Withdrawal of deduction under Section 80HHC 2,53,0001996-97 Withdrawal of deduction under Section 80HHC 37,73,0001997-98 Withdrawal of deduction under Section 80HHC 42,71,0001997-98 Withdrawal of deduction under Section 80-IA 3,70,72,9931998-99 Withdrawal of deduction under Section 80HHC 36,05,0001998-99 Withdrawal of deduction under Section 80-IA 8,01,43,2661999-2000 Withdrawal of deduction under Section 80HHC 5,53,0001999-2000 Withdrawal of deduction under Section 80-IA 76,64,004 18. The assessing authority, while withdrawing the deductions already allowed to the assessee-firm under Section 80-IA, has also invoked the provisions of, Section 80-IA(10) as an alternate reason. According to the assessing authority, the goods were transferred by the assessee-firm at an unduly higher price on assignment. This conclusion was arrived at by the assessing authority for the reasons that the value of the plant and machinery used were too low as compared to the heavy profits earned; that the electricity expenses were very low; and that only three workers were employed. Therefore, without prejudice to his findings regarding the violation of the conditions attached to Section 80-IA, the assessing authority, as an alternate measure, has further relied on the provisions of Section 80-IA(10) as well.

19. In first appeal, the CIT(A) has examined the issues in detail. He agreed with the assessing authority that the assessee-firm had not satisfied the conditions stipulated under Section 80-IA(2) and, therefore, the assessee was not entitled to the deductions available under Section 80-IA. He agreed with the assessing authority that the assessee's business was formed by the transfer of plant and machinery previously used; that the assessee-firm did not carry out any manufacturing activity; that it had engaged only three workers and, therefore, violations of the conditions were proved. Accordingly, the CIT(A) confirmed the withdrawal of the deductions already allowed under Section 80-IA treating the same as undisclosed income in the hands of the assessee-firm.

20. But, regarding the alternate ground relied on by the assessing authority under the provisions of Section 80-IA(10), the CIT(A) held that the AO has not established any such case in the order of block assessment. He, therefore, held that Section 80-IA(10) was not to be held against the assussee-firm.

21. Regarding the withdrawal of deductions availed under Section 80HHC, the CIT(A) held that the recomputing of deduction under Section 80IIHC was within the scope of block assessment and, therefore, the assessing authority was justified in doing so. But on the merit of the issue, the CIT(A) has made two interventions. At the first instance, he held that for the purpose Clause (baa) of Explanation to Section 80HHC, the net amount of interest alone needs to be considered and not the gross interest receipt. Therefore he reduced the disallowance of interest to the extent of Rs. 79,57,000, resulting in direct modification in favour of the assessee. Regarding the balance amount of Rs. 44,98,000, the CIT(A) directed the assessing authority to reexamine the case in the light of the decision of the Tribunal in the case of its associate concern, M/s SPL. Thus, as against the total withdrawal of Rs. 1,24,55,000 made by the assessing authority with reference to the deduction under Section 80HHC, the CIT(A) deleted an amount of Rs. 79,57,000 and remitted back the balance of Rs. 44,98,000 to the assessing authority.

22. The assessee-firm as well as the Revenue are aggrieved by the order passed by the CIT(A), and, therefore, these cross appeals before the Tribunal.

23. The assessee-firm has raised four principal grounds in the original memorandum of appeal filed before the Tribunal. The first principal ground is that the impugned block assessment order is void for the reason that the AO had not issued any mandatory notice under Section 143(2) of the IT Act, 1961. This principal ground is highlighted by the assessee in grounds No. 1.01 and 1.02.

24. The second principal ground raised by the assessee in ground No.2.01 is that the CIT(A) has erred in concluding that the deductions earlier granted under Chapter VIA could be a subject-matter of consideration in a block assessment.

25. The third principal ground raised by the assessee firm is that the CIT(A) has erred in holding that the assessee-firm was not entitled for the deduction under Section 80-IA of the IT Act, 1961, for the alleged reason that the various conditions attached thereto have not been fulfilled by the assessee-firm. This ground has been further discussed and enumerated by the assessee-firm with special reference to the various conditions attached to Section 80-IA, in the various paragraphs of the grounds of appeal from 2.02 to 5.05.

26. The fourth principal ground raised by the assessee-firm is on the question of withdrawal of deduction granted under Section 80HHC. This principal ground also has been further elucidated in grounds Nos. 6.1 to 6.3.

27. The assessee-firm has further filed the following additional grounds of appeal before us : "1. The AO's action in having assessed in appellant-firm under Section 158BC(c),is unlawful as per the facts appearing in this case inasmuch as the business of the appellant-firm, Sun Pharma Exports, was already assigned on 12th May, 1998, to Sankalp Laboratories Ltd. and, therefore, the search action took place in the premises of Sankalp Laboratories Ltd. 2. That both the AO and the CIT(A), even after admission that the business of the appellant-firm was transferred on 12th May, 1998, erred in having utilised the material collected in the search of Sankalp Laboratories Ltd. against the appellant-firm in the block assessment framed by the AO and adjudicated by the CIT(A).

3. That the appellant-partnership firm on the date of search existed merely on paper without any assets and liabilities. The AO and the CIT(A) both erred in having held that the search was conducted in the business premises of the appellant-firm." 28. The Revenue has challenged in its appeal, the findings of the CIT(A) made with reference to the withdrawal of deduction allowed under Section 80HHC. The grounds raised by the Revenue read as follows : "1. Whether on the facts and in the circumstances of the case and in law, the learned CIT(A) was right in not confirming the disallowance of Rs. 44,98,000 made out of the assessee's claim of deduction under Section 80HHC and in directing that AO should take a decision regarding the said claim of Rs. 44,98,000 in keeping with the decision of the Hon'ble Tribunal on the same issue in the case of the flagship company of the group, namely, M/s SPIL.

2. Whether on the facts and in the circumstances of the case and in law, the learned CIT(A) was right in directing the AO to consider only the net amount debited in the P&L a/c and not the gross interest receipt of Rs. 79,57,000 for applying the provisions of Clause (baa) of Explanation to sub-s. 80HHC(4A)." 29. Shri S.K. Tulsiyan, the learned counsel appearing for the assessee-firm, first argued on the admissibility of the additional grounds, now filed before us. The learned counsel stated that the assessee-firm, SPEX, was carrying on the business only for a short period from 1st Oct., 1994 to 12th May, 1998. The business carried on by the assessee-firm was assigned to SLL by lock, stock and barrel through a deed of assignment executed on 12th May, 1998. The assessee-firm had assigned its business to SLL as a going concern.

Thereafter, the assessee-firm had no assets or properties of its own and it was not carrying on any business whatsoever and it was only an entity remained in paper. The assessee-firm for all purposes did not carry on any business after 12th May, 1998. In the present case, the search action was made on 7th Dec, 1998. The learned counsel submitted, therefore, it is clear that at the time of search, the business at the said premises was not carried on by the assessee-firm, but it was carried on by SLL, a company registered under the Companies Act, 1956, and an entirely another entity independent of the assessee-firm. In accordance with the assignment, the factory premises at plot No. 223, Span Industrial Estate, Dadra, also stood transferred to SLL and the said premises were in fact the factory premises of SLL on the date of search on 7th Dec, 1998. The learned counsel submitted that the searched premises on the date of search did not belong to the assessee-firm but belonged to an entirely different concern, SLL and, therefore, no block assessment under Section 158BC could have been lawfully completed on the assessee-firm on the basis of the materials collected, if any, in the course of the impugned search. The learned counsel submitted that the additional grounds now raised by the assessee-firm are germane to the facts of the search narrated above.

The additional grounds now raised before the Tribunal directly arise out of the basic facts of the search considered and stated above.

Therefore, it is the contention of the learned counsel that the additional grounds arise out of the orders of the assessing authority as well as the appellate authority and as the grounds raised are important legal questions about the validity of the block assessment itself, these additional grounds need to be admitted on record.

30. The learned counsel further relied on the decision of the Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT , wherein the apex Court has considered the scope of the power available to the Tribunal in matters of rectification of mistakes so also in matters of admitting new grounds before it. The Court has held that the Tribunal had jurisdiction to examine a question of law which arose from the facts as found by the IT authorities and having a bearing on the tax liability of the assessee.

31. The learned counsel also relied on the decision of the Gauhati High Court in Assam Company (India) Ltd v. CIT , in which case, again the Court has considered the power of the Tribunal to consider a new ground in the course of hearing the appeal filed before it. The Court has held that it is permissible on the part of the Tribunal to entertain a ground beyond those incorporated in the memorandum of appeal though the party urging the said ground had neither appealed before it nor it filed a cross-objection in the appeal filed by the other party.

32. Relying on the above two decisions, the learned counsel submitted that the power conferred on the Tribunal in the matter of admitting new grounds in the course of appeal has been held in the widest possible terms by the Courts of law and particularly for the purpose of rendering justice. The learned counsel submitted that the question raised in the additional grounds directly come out of the facts of the case as admitted and recorded by the lower authorities in their orders.

He, therefore, submitted that the additional grounds now filed by the assessee-firm have to be admitted and adjudicated upon.

33. We considered the rival contentions on the admissibility of the additional grounds in detail. The facts relating to the constitution of the assessee-firm on the basis of the partnership deed executed on 30th Sept., 1994, and the subsequent assignment of the business in favour of SLL on 12th May, 1998, are admitted in the assessment order itself as seen in p. 2, para 1 of the order. It is because of this, that the AO has restricted the block period for the purpose of the impugned block assessment in the hands of the assessee-firm for a short period from 1st Oct., 1994 to 12th May, 1998, even though the search was made on 7th Dec, 1998. Therefore, it is to be seen that the additional grounds now raised by the assessee-firm come out of the assessment order itself. The very same facts have been confirmed in the order of the CIT(A) as seen in para 4 in p. 1 of his appellate order. A valid question of law arises from the facts explained in the records of the lower authorities that whether a block assessment could be lawfully completed on the assessee-firm on the basis of the search carried out in the premises of another concern, viz., SLL. The law relating on the subject has been succinctly explained by the apex Court in the case of National Thermal Power Co. Ltd. v. CIT (supra). The Hon'ble Court has held therein that the Tribunal should not be prevented from considering questions of law arising in assessment proceedings, although not raised earlier. The view that the Tribunal is confined only to issues arising out of the appeal before the CIT(A) is too narrow a view to take of the powers of the Tribunal. The Court has held that the Tribunal had jurisdiction to examine a question of law which arose from the facts as found by the IT authorities and having a bearing on the tax liability of the assessee. As pointed out by the learned counsel, the principle was again laid down by the Gauhati High Court in Assam Company (India) Ltd. v. CIT (supra). In the present case, the facts giving rise to the additional grounds are discussed by the lower authorities in their orders and admitted by them without any dispute. In the facts and circumstances of the case, we find that the additional grounds now urged before us arise out of the records of the case and, therefore, the additional grounds need to be admitted and brought on record.

34. Therefore, in the facts and the circumstances of the case, we admit the above three additional grounds on record and they are numbered as grounds Nos. 8, 9 and 10 respectively.

35. On the additional grounds admitted on record, the learned counsel argued that the impugned block assessment completed under Section 158BC is bad in law. The assessee-firm, SPEX, is a partnership firm constituted through a partnership deed dt. 30th Sept., 1994. The assessee-firm came into existence on 1st Oct., 1994. It carried on the business till 12th May, 1998, on which date a deed of assignment was executed and the business was assigned as a going concern to SLL. M/s SLL is a company registered under the Companies Act, 1956, having its registered office at Sinergy House, Subhanpura, Gorwa Road, Baroda. The assessee-firm and the assignee company are two different entities. They are having different PA numbers and different assessments. The business was assigned as a whole together with all the rights, benefits and interests in the said business and all its assets including plant and machinery, work-in- progress, buildings, advances, deposits, stocks, receivables, accruals, etc. In accordance with the said assignment, the factory premises at plot No. 223, Span Industrial Estate, Dadra, also stood transferred to SLL and was undoubtedly the factory premises of SLL, on the date of search on 7th Dec, 1998. The learned counsel submitted that this fact has already been accepted by the assessing authority in his assessment order where he has stated that the assessee-firm had carried on the business only for the period upto 12th May, 1998. It is for the said reason that the assessing authority has restricted the block period from 1st Oct., 1994 to 12th May, 1998, in the impugned block assessment.

36. The learned counsel further argued that on 7th Dec, 1998, i.e., on the date of search, the assessee-firm was not carrying on any business and the searched premises being plot No. 223, Span Industrial Estate, Dadra, no longer belonged to the assessee-firm. In fact, it belonged to SLL, which was carrying on the business at that premises on the date of search. The learned counsel submitted that the CIT(A) in p. 1, para 4 of his order has clearly endorsed the findings of the assessing authority that the entire business carried on by the assessee-firm was assigned to SLL w.e.f. 12th May, 1998, and thereafter the assessee-firm had not carried on any business. He submitted that the two entities are entirely different having independent status, one being a defunct partnership firm and the other being a company and having different PA numbers and separately assessed to income-tax in distinct capacities.

The learned counsel submitted that these vital facts are not negatived either by the assessing authority or by the CIT(A). The learned counsel submitted that SLL now renamed is Sun Pharma Exports Ltd. (SPEL) had filed its returns along with the audited accounts separately.

37. It is the case of the learned counsel that in the above circumstances, where search was conducted on SLL, initiation of block assessment proceedings on the assessee-firm is unlawful. The learned counsel relied on the decision of the Karnataka High Court in the case of Abdul Sattar M. Mokashi v. CIT , wherein it was held that reassessment of an assessee in a different status than in the original assessment was invalid. The learned counsel further relied on the decision of the Bombay High Court in Madhav Motor Stores v. CIT , wherein it was held that where the notice of reassessment under Section 34(1A) of the IT Act, 1922, was issued to the assessee in the status of a firm and there was no valid notice issued in the status of a HUF, an assessment in the status of a HUF would not be valid. The learned counsel argued that in the light of the abovementioned decisions and on examining the facts of assessee's case, the block assessment has been done on an entirely different assessee being M/s SPEX whereas the search was conducted on an entirely different assessee, M/s SLL alias SPEL. The learned counsel further explained that the search was carried out on 7th Dec, 1998, and on that date searched premises did not belong to the assessee- firm and the assessee-firm had not carried on any business there. The search was in fact made in the premises of SLL and accordingly, the notice issued under Section 158BC was quite unlawful. Where the notice issued under Section 158BC itself was an unlawful notice, the subsequent assessment under Section 158BC framed on the assessee-firm is again void ab initio. The learned counsel submitted that the search was carried out on SLL and not on the assessee. The assessing authority as well as the CIT(A) even after admitting that the business of the assessee-firm was transferred to SLL on 12th May, 1998, erred in utilising the materials collected in the course of search from the premises of SLL against the assessee-firm so as to implicate the assessee in an unlawful block assessment. He, therefore, submitted that the entire proceedings in the name of the assessee-firm beginning with the issue of notice under Section 158BC and thereafter framing the block assessment in the name of the assessee are bad in law and, therefore, to be cancelled as null and void.

38. The learned counsel explained further that a similar case was considered by the Bombay High Court in the case of CIT v. Tirupati Oil Corporation . In that case, a search operation under Section 132 of the Act was carried out in the residence of the partner pursuant to which notice under Section 158BC of the IT Act was issued to the firm, requiring the firm to furnish its return of income for the block period. The assessing authority came to the conclusion that the firm was responsible with regard to the materials detected at the residence of its partner. The Tribunal in appeal, however, rightly came to the conclusion that under the IT Act, a registered firm is a taxable unit and if the AO wanted to proceed under Chapter XIV-B against the firm in the light of the materials collected in the course of search conducted in the residence of the partner, then the AO was required to invoke Section 158BD which has not been done in the case and, therefore, the block assessment made on the assessee-firm following the procedure under Section 158BC was bad in law. The learned counsel submitted that the High Court has clearly laid down the rule that a block assessment has to be invariably framed on an assessee whose premises were searched by the Department. If the premises of an assessee were not searched or no requisition for books of account was made against that assessee, an assessment under Section 158BC could not be framed on the said assessee. In the above case considered by the Bombay High Court, the searched person and the assessed person were different. In the present case also, exactly this is the issue. The assessee-firm and SLL are different persons and different entities for the purpose of income-tax. The search was made in the premises of SLL whereas the consequent block assessment has been made on the assessee-firm. In the light of the above decision of the Bombay High Court, the impugned block assessment is to be annulled as null and void.

39. Shri K.S. Bhatti, the learned CIT, appearing for the Revenue, replied in detail. The learned CIT contended that even though the assessee-firm was not carrying on any business on the date of search on 7th Dec, 1998, the firm was very much in existence. The firm was constituted on the basis of a partnership deed executed on 30th Sept., 1994. It commenced its business operations from 1st Oct., 1994, onwards. The assessee-firm carried on its business till 12th May, 1998.

Thereafter, the business was assigned as a going concern to SLL. The learned CIT pointed out that there is no dispute on the fact that the assessee-firm carried on its business for the period from 1st Oct., 1994 to 12th May, 1998, at plot No. 223, Span Industrial Estate, Dadra.

Therefore, the assessing authority has rightly adopted the block period for the impugned block assessment from 1st Oct., 1994 to 12th May, 1998. The assessing authority has utilised the materials collected in the course of search for the impugned block assessment. Even though the business in plot No. 223, Span Industrial Estate, Dadra, has been carried on by SLL from 12th May, 1998, onwards, the assessee-firm did not cease to have its address and identity at the said premises. The learned CIT submitted that w.e.f. 12th May, 1998, both the assessee-firm, SPEX, as well as the other company, SLL, were in fact utilising the same premises at plot No. 223, Span Industrial Estate, Dadra, as their business place. Even though the assessee-firm was not carrying on any business after 12th May, 1998, it still retained the same premises of plot No. 223, Span Industrial Estate, Dadra, as its registered address. Therefore, it is the case of the learned CIT that the Department has carried out the search in the right premises belonging to the assessee-firm and also that of the other company, SLL.

He submitted that the premises did not cease to belong to the assessee-firm on the date of search on 7th Dec, 1998, only for the reason that SLL was carrying on its business in the same premises. The learned CIT, therefore, submitted that the correct identity of the assessee-firm was ascertained by the Department and the search was conducted at the right premises. The Department has acknowledged the fact that the business of the assessee-firm was assigned to SLL w.e.f.

12th May, 1998 and, therefore, rightly adopted the proper block period from 1st Oct., 1994 to 12th May, 1998.

40. The learned CIT, therefore, submitted that in the facts and circumstances of the case, the entire arguments of the learned counsel on the validity of Section 158BC assessment are misconstrued. The search conducted by the Department was valid in law. Even though the assessee was not carrying on any business at the time of search, the assessee-firm was also holding the same premises as its address.

Therefore, the AO was justified in issuing notice under Section 158BC to the assessee-firm and thereafter completing the block assessment for the limited period of 1st Oct., 1994 to 12th May, 1998. He submitted that there is no illegality in the impugned block assessment on the ground of incorrect identity.

41. The learned CIT further relied on the decision of the Supreme Court in the case of CIT v. Jai Prakash Singh , wherein the Court has held that an assessment made on the basis of returns filed by one of the legal representatives cannot be said to be null and void on the ground that notices were sent to other legal representative. An omission to serve or a defect in the service of notice provided by procedural provisions does not efface or erase the liability to pay tax where such liability is created by distinct substantive provisions. Any such omission or defect may render the order made irregular, depending upon the nature of the provisions not complied with, but certainly not void or illegal. The learned CIT submitted that the dictum laid down by the apex Court in the above decision squarely applied to the present case. He submitted that the additional grounds raised by the assessee-firm may be dismissed on merits.

42. The learned counsel appearing for the assessee further argued on the merits of the case. He has furnished detailed discussions on various stipulations attached to Section 80-IA in the paper book filed before us to support his contention that the assessee has not violated any of those conditions laid down in the Act for claiming the deduction under Section 80-IA. The learned counsel submitted that no incriminating evidences were found in the course of search to suggest that the assessee had earned undisclosed income by way of wrong claim of deductions made under Chapter VI-A. He submitted that in the course of search, wage registers, excise applications, certificates issued by various authorities were found. All those documents found in the course of search and seized by the Department were already disclosed in the regular returns filed by the assessee and all the particulars were incorporated in its regular books of account. The assessee had maintained all the books in accordance with the requirement of various statutes and they were always open to inspection for the concerned authorities. No entry relating to undisclosed income or undisclosed investment was found recorded in any of the seized books. The learned counsel submitted that no fresh material was found in the course of search so as to suggest that the claims of deductions made by the assessee-firm under Sections 80HHC and 80-IA were wrongly made. The evidences relied on by the assessing authority were certain registers which were already forming part of the regular books of account maintained by the assessee in its ordinary course of business..

43. In the case of deduction under Section 80HHC also, the learned counsel submitted that the assessing authority has not specified the nature of evidences on which he had come to a conclusion that the assessee had made excessive claims of deduction under that section. All the details examined by the assessing authority in the course of block assessment were already made available to the assessing authority in the course of regular assessments.

44. Further to the above general contentions, the learned counsel again argued on merit on the question of deductions claimed under Sections 80HHC and 80-IA. Before going to examine those contentions raised by the assessee on merit in detail, we find it necessary to examine the nature of evidences said to be collected in the course of search against the assessee on the basis of which it has been stated by the assessing authority that the earlier claims of deductions made by the assessee-firm under Sections 80HHC and 80-IA were unjustified.

45. Section 158B(b) defines undisclosed income in the following manner : 'Undisclosed income' includes any money, bullion, jewellery or other valuable article or thing or any income based on any entry in the books of account or other documents or transactions, where such money, bullion, jewellery, valuable article, thing, entry in the books of account or other document or transaction represents wholly or partly income or property which has not been or would not have been disclosed for the purposes of this Act (or any expense, deduction or allowance claimed under this Act which is found to be false)." 46. The definition of undisclosed income as extracted above provides for two situations in which a case of undisclosed income may be fastened on an assessee. In the first situation, the undisclosed income may be made out on the basis of gold, jewellery, bullion or any other valuable or entries in the books of account relating to income or property found in the course of search, but not so far disclosed to the Department. The second situation where undisclosed income could be made out is the discovery of evidence to prove that the deductions, expenditures, allowances claimed by the assessee are false.

47. In the present block assessment, no case is alleged against the assessee- firm under the first situation. The case of undisclosed income has been imputed against the assessee-firm under the second situation on the ground that the deductions claimed under Sections 80HHC and 80-IA in the regular returns were false.

48. Therefore, the inquiry to be made in the present must be whether the deductions claimed by the assessee-firm under Sections 80HHC and 80-IA in the regular returns filed by it were false. Whether the search has brought out materials and evidences to hold that such claims made by the assessee-firm in the past were false 49. False means untrue; not in accordance with fact. The assessing authority has to bring out a case that the deductions were claimed by the assessee on premises untrue; that the claims were not in accordance with fact. The Hyderabad Bench of the Tribunal in Asstt. CIT v. Justice Motilal B. Naik has examined the implication of the word "false". The Tribunal has held that unless deliberate intention of criminal nature was found out by the Department, such word as "false" could not be attributed against an act or a person or a thing. Even if that much severity is not called for in the context of a block assessment, the expression "false" incorporates a large amount of responsibility on the assessing authority. In order to bring the deductions claimed by an assessee in its regular returns within the scope of undisclosed income, the assessing authority has to establish that those claims made by the assessee were false. The degree of evidence necessary for establishing such falsehood is high.

Preponderance of probability alone is not sufficient. In the present case, the deductions under Sections 80HHC and 80-IA were made by the assessee-firm in the regular returns filed by it. Those returns were accepted by the assessing authority and assessments have already been completed thereon. In such circumstances, the AO has to clearly demonstrate that evidences were collected in the course of search against the assessee so as to confirm that the deductions claimed by the assessee under Sections 80HHC and 80-IA were in fact false claims.

50. A mistake in the particulars of or in the computation of those deductions claimed by the assessee or a subsequent different view or opinion expressed by the assessing authority would not make the claim 'false'. The claims need to be proved to be untrue on the basis of material evidence collected in the course of search.

51. In p. 2 of the assessment order, the assessing authority has observed that during the course of search, of the assessee in its factory at plot No. 223, Span Industrial Estate, Dadra, and other premises of the assessee-group on 7th Dec, 1998, evidences have been found which prove that the assessee had claimed wrong deduction under Section 80-IA. The evidences so explained by the assessing authority relate to the fact that the plant and machinery in the factory of the assessee-firm were initially erected by another concern under the name and style of M/s Bhaskar Pharma Industries (BPI). After discussing the issue in detail, the assessing authority in p. 5 of his order has come to the following findings : ...

"Hence, if the principle enunciated above is applied to the facts of the case, which has come to light as a result of the search, it is clear that the business of BPI was already in existence prior to the date of assignment. As discussed, BPI was a partnership firm of the two group companies of the Sun group. After the assignment of the business of BPI to Sun Pharma Exports, Mumbai, since the same business is being carried on substantially by the same persons of the Sun Pharma group, it is clear that this undertaking has been formed by the reconstruction of the business already in existence." 52. When we examine the details on the basis of which the assessing authority has come to the above finding, we are afraid that we may draw a blank. The assessing authority has not mentioned anything about any specific material which was found out in the course of search based on which one could say that this information has come out for the first time. In fact, the assessing authority himself has stated in the last paragraph of p. 5 of his order that "the fact that the business of BPI was in existence on the date of assignment is proved by the deed of assignment itself". All the above facts considered by the assessing authority are very much available in the deed of assignment executed by the assessee-firm and produced before the assessing authority in the course of regular assessments. Therefore, the search has not contributed any specific and direct information to induce the assessing authority to come to a finding that the assessee's business was formed by splitting up or reconstruction of a business already in existence.

53. The next defect pointed out by the assessing authority is that the assessee's business was formed by the transfer to a new business of plant and machinery previously used for. any purpose. It is to be stated that in this context also, the assessing authority is not able to pinpoint the nature of material collected in the course of search by which he could come to a conclusion that the information already furnished by the assessee in the regular course of assessments was false. On the other hand, the assessing authority himself admits in p.

7 of his assessment order that all these details are collected from the balance of M/s Sun Pharma Exports (the assessee itself), filed along with the regular returns of income. The particulars of plant and machinery and the nature of their acquisition all have been already reflected in the regular accounts of the assessee-firm and summarized in its annual balance sheets which were filed along with the regular returns of income.

54. This is the same case with the next defect pointed out by the assessing authority that the value of the plant and machinery transferred by the assessee from another concern exceeded 20 per cent of the total value of the plant and machinery used in assessee's business.

55. The next defect pointed out by the assessing authority was that the assessee-firm did not manufacture or produce any article or thing. This issue is considered by the assessing authority in detail from pp. 13 to 26 of his order. The case of the assessing authority is that the basic activity carried on by the assessee-firm was that of pulverizing. Bulk drugs purchased by the assessee- firm were pulverized and made amenable to micro-size, necessary for the final production of Pharmaceuticals.

The assessee-firm never claimed that it had ever manufactured or produced anything other than this. All these details were available before the AO in the course of regular assessments. The only claim of the assessee-firm was that it had carried on the activities of pulverizing and that the said pulverizing amounted to manufacturing of a different commercial commodity and, therefore, resulted in manufacturing of a new thing or article. The claim of the assessee never went beyond this. In the block assessment also, the assessee has not explained anything different. In the course of search operations, no materials were collected by the Department to show that the assessee was not carrying on the activities of pulverizing. Where is the falsity in the information furnished by the assessee-firm in its original returns The main contention of the assessing authority is that the assessee-firm should have done "something more" so as to claim that it had produced or manufactured a thing or article. Is it not an expression of opinion 56. The next defect pointed out by the assessing authority is that the assessee- firm had not employed ten or more persons in its factory. At the time of search the requisite number of employees were not present in the factory. But, all the registers containing the particulars of all the employees working in the factory were available in the course of search. Those records were not any secret records. They were always made available to the Government authorities. In fact, the assessee has claimed expenditure by way of wages and salary on all the employees whose names were found in the wages and acquittance registers. The entire claim of wages and salary made by the assessee on the basis of those wages and acquittance registers has been allowed even in the impugned block assessment. No disallowance has been made by the assessing authority. No employees or any other workers of the assessee-firm had ever stated before the authorities that the assessee-firm had not employed requisite number of workers. The assessee also did not give any such statement before any other authorities. The search has not brought out any materials on this aspect other than the materials already disclosed by the assessee-firm to the assessing authority in the course of normal assessments.

57. Regarding partial withdrawal of the deductions allowed under Section 80HHC, again, the situation is not different. The AO has nowhere stated that his findings are based on any specific evidence or material collected in the course of search. The assessing authority himself admits in p. 43 of his assessment order that the facts relating to the claim made by the assessee for deduction under Section 80HHC were examined "in the course of block assessment proceedings". He has not referred to any evidence or materials collected in the course of search.

58. On a perusal of the block assessment order running to 52 pages including annexures to the assessment order, we find that the assessing authority has not referred to any specific material or evidence collected in the course of search based on which it would be possible for him to hold that the claims of deductions made by the assessee-firm under Sections 80HHC and 80-IA were false.

59. The details and particulars considered and discussed by the assessing authority in the impugned block assessments have been gathered from the regular books of account, other registers maintained by the assessee-firm in the ordinary course of business which have already been placed before the assessing authority in the course of regular assessments. The search has not resulted in unearthing any evidence to prove that the deductions claimed by the assessee-firm were in fact "false".

60. The whole discussion made by the assessing authority in the impugned block assessment order in fact is in the nature of a review of the earlier assessments concluded in the normal course. The assessing authority was in fact re-examining the materials which have already been considered in the regular assessments. It is possible for an assessing authority to come to a different finding on an issue in the course of a subsequent review of the earlier order passed on the same set of facts, circumstances and evidences. Such different view held by the assessing authority amounts only to change of opinion. Change of opinion does not make the claims considered in the regular assessments, false.

61. In the facts and circumstances of the case, we are of the considered view that no evidence or materials were collected in the course of search so as to hold that the deductions claimed by the assessee under Sections 80HHC and 80-IA in the regular returns were "false". The assessing authority was actually reviewing or re-examining the very same materials already available on record. Therefore, the assessing authority is not justified in withdrawing the deductions under Sections 80HHC and 80-IA which were allowed in the regular assessments. Accordingly, the computation of undisclosed income in the impugned block assessment is bad in law.

62. The validity of the impugned block assessment has been so far examined in this order in the light of the expanded definition of "undisclosed income" inserted under Section 158B(b) by the Finance Act, 2002, with retrospective effect from 1st July, 1995, The second situation in which undisclosed income could be conceived on the falsity of claims made by the assessee towards expense, deduction or allowance has been brought into the definition of "undisclosed income" by the Finance Act, 2002. The amendment brought in by the Finance Act, 2002, has stated that the enlargement of the definition of undisclosed income is made with retrospective effect from 1st July, 1995. But for the retrospective effect, the enlarged definition of undisclosed income brought in by the Finance Act, 2002, will not apply to the present case. In the present case, the search was conducted on 7th Dec, 1998.

Notice under Section 158BC requiring the assessee to file its block return was issued on 16th June, 1999. The block return was filed by the assessee on 12th July, 1999. The block assessment order was passed on 27th Dec, 2000. All the above events occurred before the amendment was brought in the definition of undisclosed income, by the Finance Act, 2002.

63. The Supreme Court in the case of CIT v. Hindustan Electro Graphites Ltd. has considered the principle regarding the applicability of a provision of law contained in the statute book, in the context of filing of return of income. The Supreme Court has held that where a return is filed, the law applicable would be the law as it stood on the date of filing of the return. There is an impression in some quarters that the above law declared by the Supreme Court in the case of CIT v. Hindustan Electro Graphites Ltd. (supra) has been later disproved by the Supreme Court in the case of Asstt. CIT v. J.K.Synthetics Ltd. . This impression is created because of the observation made by the Hon'ble Supreme Court in the last portion of the judgment that "we should add that we have reservations about the correctness of the judgment in Hindustan Electro Graphites Ltd.'s case (supra), principally because the assessee in that case had not challenged the provisions of Sub-section (1A)...." (pp. 204). The above reservation is since made in the context of examining the validity of the provisions of Sub-section (1A) of Section 143 and has not disproved the decision in the case of Hindustan Electro Graphites Ltd.'s case (supra). Therefore, the law declared by the Supreme Court in the case of Hindustan Graphites Ltd. 's case (supra) holds good on this subject.

64. In the circumstances explained above, the definition of "undisclosed income" prior to the amendment brought in by the Finance Act, 2002, is the correct law to be applied in the present case. The block return was filed by the assessee on 12th July, 1999, before the enactment of the Finance Act, 2002. Therefore, the definition of "undisclosed income" as stood at the relevant time of filing of the block return is to be considered in the present case. The definition at the relevant time stood as follows "(b) 'undisclosed income' includes any money, bullion, jewellery or other valuable article or thing or any income based on any entry in the books of account or other documents or transactions, where such money, bullion, jewellery, valuable article, thing, entry in the books of account or other document or transaction represents wholly or partly income or property which has not been or would not have been disclosed for the purposes of this Act." 65. The case of undisclosed income within the meaning of the term as defined above could be made out against the assessee if any entry in the books of account or other documents or transaction representing wholly or partly income or property was not disclosed to the Department and would not have been disclosed but for the search. The deductions under Sections 80HHC and 80-IA were claimed by the assessee-firm in the regular returns filed by it for the earlier assessment years, well before the search. The assessee has maintained regular books of account and other particulars regarding those claims and those books of account and particulars were placed before the assessing authority in the course of regular assessments. Therefore, it is not possible to hold even by any remote chance, that the assessee-firm has not disclosed the relevant particulars before the assessing authority before the date of search. It is to be seen that the computation of undisclosed income in the present case has been made on the basis of the very same materials which have already been disclosed to the Department in the course of regular assessments. The withdrawal of deductions in the impugned block assessments have been attempted by the assessing authority on a re- examination of the details already disclosed to the Department.

66. Matters which are already part of the record cannot be subject-matter of block assessment. Where the assessee had claimed exemption of house rent allowance on the basis of rent paid on sub-lease to his wife for his own property leased out to her and such information is part of the record, denial of exemption cannot be subject-matter of block assessment. It was so held in A Sadasivam v.Asstt. CIT .

67. On this short ground itself, the computation of undisclosed income by withdrawing the deductions granted under Sections 80HHC and 80-IA are unlawful and unsustainable. Accordingly, the impugned block assessment is liable to be set aside.

68. In the facts and circumstances, the impugned block assessment order is set aside on the following short grounds : (i) The search has not brought out any evidence and material to hold that the deductions claimed by the assessee-firm under Sections 80HHC and 80-IA were false (para 61).

(ii) The deductions allowed under Sections 80HHC and 80-IA have been withdrawn by the assessing authority on the basis of materials already disclosed to the Department in the course of regular assessments (paras 65, 66, 67).

69. As the block assessment order is set aside on the grounds stated above, we do not find it necessary to consider the other grounds, both of law and of facts, raised by the assessee-firm.

70. As the impugned assessment is held as bad in law and set aside, the grounds raised by the Revenue in its appeal become infructuous.

71. In the result, the appeal filed by the assessee is allowed and the appeal filed by the Revenue is dismissed. Order accordingly.


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