Matrix Clothing Pvt. Ltd v. Assistant Commissioner Of Incometax Circle -16(2)New Delhi

$~20 *IN THE HIGH COURT OF DELHI AT NEW DELHI +W.P.(C) 13397/2019 MATRIX CLOTHING PVT. LTD. ..... Petitioner Through:Mr. Salil Aggarwal, Mr. MadhurAggarwal and Mr. Uma Shankar,Advocates. versus ASSISTANT COMMISSIONER OF INCOMETAX CIRCLE -16(2)NEW DELHI ..... Respondent Through:Mr. Sunil Agarwal, Senior StandingCounsel with Mr. Tushar Gupta,Ms. Priya Sarkar and Mr. AkashPratap Singh, Advocates. CORAM:HON'BLE MR. JUSTICE VIPIN SANGHIHON'BLE MR. JUSTICE SANJEEV NARULAO R D E R%20.12.2019 C.M. No. 54390/2019 (exemption) 1. Exemption allowed, subject to all just exceptions. 2. The application stands disposed of. W.P.(C) 13397/2019 & C.M. No. 54389/2019 3. The Petitioner has preferred the present writ petition to assail the noticeunder Section 148 of the Income Tax Act dated 31.03.2019 and the orderdated 25.11.2019 disposing of the objections preferred by the Petitioner tothe said notice. The said notice relates to the assessment year 2016-17 and ithas been issued within a period of four years from the close of the assessment year 2016-17.The reasons recorded by the Respondent onissuance of the said notice are the following: “1. A survey u/s 133A of the Act has been conducted at premiseson 27.03.2019. During the course of survey a trial balance forthe F.Y. 2018-19 (upto 27.03.2019) was found, where themanufacturing expenses were as Rs.32.84 Cr. as against the totalreceipt of Rs.370.79 Cr. Therefore the manufacturing expenses inthe business comes around at 8.86% of the total receipt.However, in Return of Income for A.Y. 2016-17 relating to F.Y.2015-16, the manufacturing expenses has been claimed of Rs.70.95 Cr which is 25.86% of the total receipt of Rs. 274.28 Cr.This clearly shows that the assessee has claimed excessiveexpenses under the head manufacturing expense to tune of 17%of total receipt which is Rs. 46.65 Cr. 2. During the course of survey, it was found mat assesseeclaimed Rs.10.74 Cr. as R&D expenses. But no specificmachinery was found for the purpose of doing R&D work.Further statement of 3 persons named Ms. Komal Singh, Ms.Sanah Deepa Usmani & Ms. Sonika were recorded and it wascontended by them that they have the diploma courses in FashionDesigning and they don't have specific qualification for doingresearch work. Further, the assessee was also asked to furnish the details ofProject reports undertaken for the purpose of doing research,any specific Product or Process developed as a result of result ofresearch etc. But no details were provided. Furthermore, It wasalso found that although the assessee has claimed huge expenseof Rs. 10.74 Cr. as R&D expenses there is no sign it has resultedany significant increase in the total turnover or In theprofitability of the assessee business. Rather the bogus expensesclaimed as R & D has the effect of reducing the net profit ofbusiness by 50% compared to last year profit. Therefore,IhavereasontobelievethatanincomeofRs.57,39,00,000/- has escaped assessment under section 147 of the Income Tax Act, 1961. Since assessment u/s 143(3) of the Actfor A.Y. 2016-17. Therefore notice u/s 148 of Income Tax Act isissued for initiating proceeding u/s 147.” Therefore,IhavereasontobelievethatanincomeofRs.57,39,00,000/- has escaped assessment under section 147 of the Income Tax Act, 1961. Since assessment u/s 143(3) of the Actfor A.Y. 2016-17. Therefore notice u/s 148 of Income Tax Act isissued for initiating proceeding u/s 147.” 4. The reasons take note of the fact that the assessment was undertaken byresorting to Section 143 (3) of the Income Tax Act and it was completedvide order dated 13.12.2018. From the above reasons, it would be seen thatthe reopening is premised on the factual position uncovered during surveyunder Section 133A of the Act on 27.03.2019.There are two primaryreasons given by the Respondent.The first relates to the percentage ofmanufacturing expenses that the Petitioner claimed during the assessmentyear in question which was 25.86 percent, as opposed to the expenditureallegedly incurred towards manufacturing expenses as found in the trialbalance for the financial year 2018-19 (up to 27.03.2019), which showedthat the manufacturing expenses came to only 8.86 percent. On the basis ofthis reason, the present notice has been issued alongwith notices for theassessment years 2014-15 and 2015-16.Separate petitions have beenpreferred before us which are listed today itself, being W.P.(C)s 13418/2019& 13495/2019 in relation to the aforenoted assessment years. Prima facie,we find merit in the submission of the Petitioner that the aforesaidreasoning cannot justify the reopening of the proceedings. Consequently, inthe other two writ petitions being W.P.(C)s 13418/2019 & 13495/2019, wehave entertained the petition and issued notices, staying further proceedingsunder Section 148 of the Income Tax Act. The matter does not, however,stop here so far as the present petition is concerned which relates toassessment year 2016-17. During the relevant assessment year 2016-17, thePetitioner claimed expense of 10.74 crores as R & D expenses.During survey, it was found that there is no sign of the Petitioner having undertakenany research and development. Statement of three persons were recorded,who claimed that they have undertaken diploma courses in FashionDesigning and that they did not have any specific qualification for doingresearch work.The Petitioner had nothing to show, to establish theactivities/steps taken towards research and development (R&D). The noticetherefore,allegesthattheexpenseclaimedtowardsresearchanddevelopment is a bogus expense. 5. The submission of learned counsel for the Petitioner in this regard is thatthe Petitioner had been granted approval in terms of Section 35 (2AB) (1) ofthe Act. The said approval has been placed on record and perused by us. Itonly states that the Petitioner has adequate R & D facilities for carrying outresearch as per the research objectives contemplated. In that regard, capitalexpenditure of Rs. 106.25 lacs was certified.Learned counsel for thePetitioner emphatically relies upon the said certificate. 6. In our view, mere reliance on paper certificate would not be sufficient toestablish that, as a matter of fact, R & D activities were undertaken,entailing expenditure of Rs.10.62 crore. The Respondent has claimed thatduring survey, they have not found anything to show that any research anddevelopment activity has been undertaken by the Petitioner. In our view thesame gives sufficient reason for formation of the belief that income of theassessee has escaped assessment.The Petitioner would have ampleopportunity during the process of re-assessment to establish that, during therelevant assessment year, it had actually incurred the expenses towardsacquisition of capital assets for carrying out research and development; ithad employed competent personnel to carry out research and development; it had actually carried out research and development and for the same,expenditure to the tune of Rs. 10.62 crores came to be incurred by it. Wetherefore, do not find any merit in this petition. We make it clear that noobservation made by us shall influence the Assessing Officer when heundertakes the assessment. it had actually carried out research and development and for the same,expenditure to the tune of Rs. 10.62 crores came to be incurred by it. Wetherefore, do not find any merit in this petition. We make it clear that noobservation made by us shall influence the Assessing Officer when heundertakes the assessment. 7. The petition is disposed of in the above terms. 8. Dasti. VIPIN SANGHI, J DECEMBER 20, 2019nk SANJEEV NARULA, J