Sun Pharmaceutical Industries Ltd v. Deputy Commissioner Of Income Tax

C/SCA/2965/2013 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION No. 2965 of 2013 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE M.R. SHAH andHONOURABLE MS JUSTICE SONIA GOKANI ================================================================ 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any order made thereunder ?of the Constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ================================================================ SUN PHARMACEUTICAL INDUSTRIES LTD....Petitioner(s)VersusDEPUTY COMMISSIONER OF INCOME TAX....Respondent(s) ================================================================ Appearance:Mr SN SOPARKAR Sr Advocate with Mr B S SOPARKAR, ADVOCATE for the PetitionerMr MR BHATT Sr Advocate with Mrs MAUNA M BHATT, ADVOCATE for Respondent================================================================ CORAM: HONOURABLE Mr. JUSTICE M.R. SHAH andHONOURABLE Ms. JUSTICE SONIA GOKANI29th July 2013 ORAL JUDGMENT (PER : HONOURABLE Ms. JUSTICE SONIA GOKANI) Rule. Learned advocate Ms. Mauna Bhatt appears and waives service of notice of rule on behalf of the respondent. With the consent of the learned advocates appearing for the respective parties, the matter is heard today and disposed of by this judgment. 2.This petition, preferred under Article 226 of the Constitution of India, challenges the notice dated 30[th] March 2012 issued under section 148 of the Income-tax Act, 1961 {“Act” for short} whereby, the respondent has chosen to reopen the assessment of the petitioner for the Assessment Year 2005-06 on the ground that the same is contrary to law and without jurisdiction. 3.The petitioner-company viz., Sun Pharmaceutical Industries Limited {“SPIL” for short} is engaged in the manufacturing, trading and export of bulk drugs and formulations. The Company has its registered office at Baroda and has six associated enterprises at USA, Bangladesh, Brazil, British Virgin Islands and Mexico. During the year under consideration, it entered into international transactions with its associate enterprises. The details of such transactions have also been furnished by the petitioner in Form 3 CB. The petitioner filed its original return of income under section 139 of the Act declaring total loss at Rs. 21,90,62,215/=, which was revised and the loss was reduced at Rs. 18,91,32,791/=. The Assessing Officer raised certain queries in respect of research and development expenses. These were replied to by the petitioner-company. The Annual Report 2004-05 indicated transfer of technology by Sun Pharmaceutical Industries, INC. to Caraco Pharmaceutical Laboratories Limited, USA. The Annual Report also reflected accounts of Sun Pharmaceutical Industries INC and Caraco Pharmaceutical Laboratories Limited, USA specifying transfer of technology. transfer of technology. 3.1Return of income filed by the petitioner-Company was duly processed and was taken up for scrutiny assessment. Notices were also issued under sub-clause (2) of Section 143 of the Act and the reference was also made under Section 92CA of the Act to the Transfer Pricing Officer for verification of Arm’s Length Price in respect of the international transactions. After the review and inquiries, the Transfer Pricing Officer had, on due deliberations, made certain additions with regard to the transactions between the petitioner and Sun Pharmaceutical Industries INC. and thereafter under section 143 (3) of the Act, an order was passed on 25[th ]March 2008 whereby the assessee’s total income was assessed at Rs. 25,20,66,051/=. 3.2Such order came to be challenged before the Commissioner of Income-tax [Appeals]-IV, Ahmedabad [hereinafter referred to as, “CIT (A)”] which passed an order on 24[th] February 2009 where detailed discussion had taken place on the Research & Development expenses and the Assessing Officer was directed to recalculate the arm’s length price with regard to the commission paid to the associate enterprise. Hence, such ground of appeal was partly allowed. 3.3Thereafter, notice under section 148 of the Act for reopening of the assessment came to be issued on 30[th] March 2012. 3.4A letter dated 26[th] April 2012 was addressed by the petitioner to the respondent requesting to furnish copy of the reasons recorded and it filed revised return of income in pursuance to such notice under section 147 read with section 148, after making certain adjustments. 3.5A copy of the reasoning was furnished to the assessee on 1[st ]August 2012. The petitioner raised various objections vide its communication dated 20[th] September 2012 and requested the respondent to drop the re-assessment proceedings. Such objections came to be disposed of by the respondent on 16[th] January 2013. Therefore, the petitioner has preferred the present petition challenging issuance of notice under section 148 of the Act. 3.6On two counts, the notice of reopening of assessment has been issued – Firstly, the diversion of profit by transfer of technology by Sun BVI to Caraco, USA; and secondly, allocation of R & D expenses, whereby the products manufactured at Sun Pharma Industries & Sun Pharmaceuticals, Silvassa are being developed at the R&D facilities of Sun Pharmaceutical Industries Limited and the expenditure related to such R&D is debited in the books of account of Sun Pharmaceuticals Industries Limited – the petitioner, thereby reducing its profit and correspondingly, inflating the profit of both SPS & SPI to that extent. 3.7It would be necessary to reproduce the gist of reasonings given for reopening, which reads thus - “Reasons for reopening: A survey operation u/s. 133A was conducted in the case of Sun Pharmaceutical Industries Limited [hereinafter referred to as SPIL] by the Assistant Director of Income-tax [Inv.] Unit VII (1), Mumbai on 08.11.2011 at the six business premises belonging to the above assessee. Large number of incriminating documents were found and impounded during the course of survey operation and the same were forwarded to this office alongwith the survey report. On analysis of the impounded material and after going through the survey report, it is noticed that huge amount of income has escaped assessment. The reasons for the aforesaid conclusion / satisfaction are as under :- Diversion of profits on transfer of Technology toCaraco through Sun BVI This is in view of the device adopted by the assessee to evade Tax in India and show profit in the case of a subsidiary company M/s. Sun Pharmaceutical Global Inc. [hereinafter referred to as Sun, BVI] based in British Virgin Island, a tax heaven. Diversion of profits on transfer of Technology toCaraco through Sun BVI This is in view of the device adopted by the assessee to evade Tax in India and show profit in the case of a subsidiary company M/s. Sun Pharmaceutical Global Inc. [hereinafter referred to as Sun, BVI] based in British Virgin Island, a tax heaven. The assessee has got several subsidiaries within India and also outside India. On perusal of the impounded material and survey report it is seen that 25 technologies have been transferred by Sun BVI to Caraco, USA. These technologies were acquired by Sun BVI from either Unimed Technologies Limited [hereinafter referred to as, “Unimed”] or M.J Pharmaceuticals Limited, who in turn had acquired the same from SPIL. The cost of acquisition of these technologies in the hands of Sun BVI is normal as compared to the value at which the same are transferred by Sun BVI to Caraco. The huge profits ranging from 95 to 97% earned in Sun BVI are exempt from tax since Sun BVI is incorporated in British Virgin Islands which is a tax haven. During the course of survey dossiers and other technical details pertaining to the above mentioned 25 technologies were found at the R&D office of SPIL in Baroda and Mumbai. These dossiers and technical details were examined and relevant extracts of the same were obtained. These dossiers and technical details show that these technologies were developed at SPIL in Mumbai and Baroda and at the time of developing these technologies itself, the fact that these technologies were to be used by Caraco in USA was known and recorded in the dossiers and technical documents. xx xx xx xx In view of the above information and evidences in my possession, I have reason to believe that the assessee has adopted dubious device and thereby income to the extent of Rs. 115,88,76,177 [US$ 257,81,450] has escaped assessment.” 3.8The second ground raised is in respect of allocation of Research & Development Expenses, which reads thus - “Therefore, it can be seen that the products which are manufactured at SPI and SPS are being developed at the R&D facilities of SPIL and the expenditure related to such R&D is debited in the books of account of SPIL thereby reducing its profit. The profit of SPS and SPI is inflated to that extent. The products manufactured in units under SPS and SPI are formulations whereas both the formulations and bulk drugs are manufactured by nits under SPIL. The ratio in which the R&D expenditure is allocated between formulations and bulk drugs within the units of SPIL is 3:1 or in other words 75% of the R&D expenditure debited in the books of SPIL is allocated to R&D of formulations and 25% to the R&D of bulk drugs. Thereafter, the R&D expenses amongst formulations are distributed by SPIL on the basis of turnover of formulations. This fact is evidentially corroborated by loose paper 21 of Annexure A5 impounded from the premises of SPIL, Mumbai [Mahal Industrial Estate, Mahakali Caves Road, Andheri (E), Mumbai]. So, if the entire R&D activity of SPI and SPS is taking place in SPIL, then the expenses for the same should be re-allocated in the ratio of turnover of formulations manufactured in SPIL, SPI and SPS. xx xx xx xx and SPS. xx xx xx xx In view of the above, I have gone through the return of income originally filed and revised by the assessee, the tax audit report, balance sheet and P&L account, details submitted during the course of assessment proceedings and query raised by the then Assessing Officer and finally assessment order passed in the case of Sun Pharmaceutical Industries Limited for A.Y 2005-06. On the basis of above, I found that at no point of time, the assessee informed about the said transactions made through Unimed and M.J Pharmaceuticals and it is also found that at no point of time the then Assessing Officer has the occasion to examine the possibility of taxation of the same in the hands of SPIL arising out of the above transactions. Similarly, the assessee has never disclosed the fact that Research and development work of all the group concerns were done at the facilities of SPIL and even expenses pertaining to those concerns were accordingly debited in the books of SPIL instead of debitting the same in all the concerns separately and proportionately. In fact, as discussed in detail, as above, the assessee has intentionally indulged into such activities with a motive to reduce its taxable income by not disclosing the true nature of transactions in its books of account and the return of income. In fact, it would not have been possible for the Assessing Officer to know about the mechanism adopted by the assessee to evade the tax liability but for the evidences gathered during the course of survey operation conducted by the Asstt. Director of Income Tax [Inv] Unit VII (1), Mumbai and the enquiry and investigation conducted by the ADIT [Unit I] Baroda. Hence, this was a new fact and information for this office and in view of the same, I am satisfied that the above income has escaped assessment by reasons of the failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the assessment year under consideration. Issue Notice under section 148 of the Act.” 4. While raising the objections, the assessee has emphasized that both the grounds have already been considered in the scrutiny assessment. Moreover, for the Assessment Year 2003-04, these very details have been accepted in toto in case of the present petitioner as also in the case of Unimed Technologies and M.J Pharmaceuticals Limited. Therefore, in absence of any new material and in absence of any allegation of the petitioner having not disclosed truly and fully all material facts necessary for the purpose of assessment, the issuance of notice for reopening is bad in law. It is further alleged that only on two grounds, such notice is permissible to be issued – Firstly, when in the return of income, details are not provided and secondly, income has escaped assessment on account of petitioner not having disclosed truly and fully all material facts. As the assessment is sought to be reopened beyond the period of four years; as the four years in case of the assessment under question will get over on 31[st] March 2010, and the impugned notice is issued on 30[th] March 2012. 4.1In affidavit-in-reply filed by the Revenue, it is urged that while disposing of the objections, the objections raised by the petitioner are duly dealt with. It is further urged that both the concerns ie., Unimed & M.J Pharmaceuticals Private Limited were sister concerns of the petitioner ie., SPIL at a given point of time and these concerns had not had proper and sufficient R&D facility to develop such products have had the Assessing Officer a reason 4.1In affidavit-in-reply filed by the Revenue, it is urged that while disposing of the objections, the objections raised by the petitioner are duly dealt with. It is further urged that both the concerns ie., Unimed & M.J Pharmaceuticals Private Limited were sister concerns of the petitioner ie., SPIL at a given point of time and these concerns had not had proper and sufficient R&D facility to develop such products have had the Assessing Officer a reason to believe that those generic products were actually developed by the petitioner but shown to have been purchased by Sun Global BVI from Unimed and M.J Pharmaceuticals Private Limited. It is also alleged by the respondent that the assessee has intentionally indulged in the activities with a motive to reduce its taxable income by not disclosing the true nature of transactions in its books of account and its return of income. 5.Learned senior counsel Shri S.N Soparkar appearing with learned advocate Shri Bandish S. Soparkar forcefully submitted that not only in the queries raised during the scrutiny assessment, all the details have been revealed by the petitioner assessee but in the Annual Report of the petitioner, which was part of this compilation clearly reflects all transactions; including the transfer of 25 technologies to Unimed Technologies Limited and M.J Pharmaceuticals Limited. These companies are incorporated from the year 1991 and 1996 respectively who have sold the technology to Sun BVI, which is a wholly owned subsidiary of the petitioner, which in turn transferred the technology to Caraco, USA, which is also a wholly owned subsidiary. He further urged that in case of Unimed Technologies Limited and M.J Pharmaceuticals Limited for the A.Y 2005-06, assessment has been accepted. If at all income has escaped assessment and is required to be taxed, it would be in the case of both these companies for whom, the job work has been done by the petitioner and the petitioner’s assessment is wrongly re-opened. It is emphasized that nowhere it emerges from the entire set of documents that the petitioner has not disclosed fully and truly all material facts which it was required to reveal and on account of that, any taxable income has escaped the assessment. According to learned counsel, it is only at the time of survey carried out at the premise of the petitioner company, certain material were found which surely does not bring the case of the Revenue within the purview of Section 147 of the Act. He urged that once having disclosed all the details, the assessee is not under obligation to let the Assessing Officer know as to how to conduct his affairs. These transactions not only are reflected in the return of income but the T.P.O has also been referred to these transactions and on his report, additions also have been made by the concerned authority. He further urged that the CIT [A] having decided the appeal, the order of Assessing Officer is merged into that of CIT [A], and therefore, the Assessing Officer has no business to reopen the assessment. He has sought to rely upon the following authorities :- [1]Commissioner of Income Tax v. Durlop Dealers Limited, reported in [1971] 79 ITR 609 (SC);Limited, reported in [1971] 79 ITR 609 (SC); [2]Income Tax Officer v. Madnani Engineering Works Limited, reported in [1979] 118 ITR 1 (SC);Limited, reported in [1979] 118 ITR 1 (SC); [3]Ganga Saran & Sons {P} Limited v. Income Tax Officer, reported in [1981] 130 ITR 1 (SC);Officer, reported in [1981] 130 ITR 1 (SC); [4]Calcutta Discount Company Limited v. Income-tax Officer, reported in [1961] 41 ITR 191 (SC);Officer, reported in [1961] 41 ITR 191 (SC); [5]I.P Patel & Company v. Deputy Commissioner of Income-tax, reported in [2012] 346 ITR 207 (Guj). [1]Commissioner of Income Tax v. Durlop Dealers Limited, reported in [1971] 79 ITR 609 (SC);Limited, reported in [1971] 79 ITR 609 (SC); [2]Income Tax Officer v. Madnani Engineering Works Limited, reported in [1979] 118 ITR 1 (SC);Limited, reported in [1979] 118 ITR 1 (SC); [3]Ganga Saran & Sons {P} Limited v. Income Tax Officer, reported in [1981] 130 ITR 1 (SC);Officer, reported in [1981] 130 ITR 1 (SC); [4]Calcutta Discount Company Limited v. Income-tax Officer, reported in [1961] 41 ITR 191 (SC);Officer, reported in [1961] 41 ITR 191 (SC); [5]I.P Patel & Company v. Deputy Commissioner of Income-tax, reported in [2012] 346 ITR 207 (Guj). 5.1In essence, learned senior counsel Shri Soparkar urged that without disturbing the assessment in case of both Unimed Technologies Limited and M.J Pharmaceuticals Limited, no reopening is permissible in case of the present petition particularly on expiry of period of four years, in absence of any failure on the part of the petitioner to disclose truly and fully all the material facts. 6.Per contra, learned senior advocate Shri Manish R. Bhatt urged fervently that it is only during the course of survey carried out on 8[th] November 2011 that the material came out indicative of the fact that in correct facts have not been provided by the petitioner and as a result, M/s. Unimed Technologies Limited and M.J Pharmaceuticals Limited have been put up as a front to shield the true income of the petitioner. Till the year 2002, transfer of technology to Caraco, USA was directly by the assessee. However, after such agreement came to an end, this modus is adopted of transferring the technology to SUN BVI through its wholly owned subsidiariesviz., Unimed Technologies Limited & M.J Pharmaceuticals Limited. Sun BVI since is situated at British Virgin Islands, which is a tax heaven for the Company, huge amount has escaped the assessment on account of true nature of transactions not having come on the record. He urged that large number of documents unearthed on 8[th] November 2011 have led the Assessing Officer to formulate a reasonable belief that income has escaped the assessment for the assessment year in question. 6.1Learned counsel further urged that for the A.Y 2003-04, prior to the survey, the assessment has been completed and accepted and as the period of six years also was over for the A.Y 2003-04, assessment could not be re-opened. He heavily relied upon some of the statements recorded under section 131 of the Act which came to be recorded during the course of survey proceedings. He urged that senior scientist heading the team of developing twenty five technologies for Caraco, USA had admitted of these technologies being developed by the petitioner for none other than Caraco, USA. He, therefore urged that on the question of jurisdiction, when the Revenue is able to satisfy the Court that there is no true disclosure and that too true and full on the part of the petitioner, no interference at the stage of the notice be done as the assessee is likely to get the fullest opportunities to raise its defence in the re-assessment proceedings. He further urged that the entire channel of statutory appeals would also be available to the petitioner and therefore, at this stage, this Court may not interfere. 6.2Learned counsel Shri Bhatt further urged that as far as second question is concerned, whereby the expenses of R&D is required to be bifurcated amongst other units, that if on those grounds which were raised and decided by the CIT [A], the question of merger would arise but not on the ground that are not at all touched by the CIT [A] and re-assessment can be made permissible on such fresh ground, even when the order of CIT [A] has been merged with the CIT [A]. Reliance is also placed on the following decisions :- [1]Income Tax Officer v. Ch. Atchaiah, reported in [1996] 218 ITR 239 (SC);[1996] 218 ITR 239 (SC); 6.2Learned counsel Shri Bhatt further urged that as far as second question is concerned, whereby the expenses of R&D is required to be bifurcated amongst other units, that if on those grounds which were raised and decided by the CIT [A], the question of merger would arise but not on the ground that are not at all touched by the CIT [A] and re-assessment can be made permissible on such fresh ground, even when the order of CIT [A] has been merged with the CIT [A]. Reliance is also placed on the following decisions :- [1]Income Tax Officer v. Ch. Atchaiah, reported in [1996] 218 ITR 239 (SC);[1996] 218 ITR 239 (SC); [2]Remfry & Sagar v. Commissioner of Income Tax, reported in [2013] 351 ITR 75 (Delhi);reported in [2013] 351 ITR 75 (Delhi); [3]Sun Pharmaceutical Industries Limited v. Deputy Commissioner of Income Tax, reported in [2013] 353 ITR;Commissioner of Income Tax, reported in [2013] 353 ITR; 7.Upon thus hearing both the sides and on giving thoughtful consideration to these submissions as also all the material placed before this Court, this petition is not being entertained for the reasons to be followed hereinafter. 8.Before adverting to the facts of the instant case, the law on the subject needs to be briefly recapitulated. 8.1Section 147 of the Act permits the Assessing Officer to assessee or re-assess the income chargeable to tax, which has escaped assessment and which come to his notice, if he has a reason to so believe it, subsequently, in the course of proceedings under this section; subject to provision of Sections 138 to 153. First proviso to this section provides that no action shall be taken under this section after expiry of four years from the end of relevant assessment year, unless any income chargeable to tax has escaped assessment for the assessment year under consideration on account of failure on the part of the assessee to make a return under section 139 or in response to notice issued under sub-section (1) of section 142 or Section 148, or on account of failure of assessee to disclose fully and truly all material facts necessary for his assessment. The Assessing Officer under sub-section (1) of Section 148, before making the re-assessment or re-computation under section 147 of the Act is required to serve on an assessee, a notice requiring him to furnish; within such period as may be specified in the notice, a return of his income and the Assessing Officer shall require to record his reasons before issuing any such notice. Therefore, the requirement under the law for issuance of the notice is that the Assessing Officer must have a reason to believe that the income has escaped assessment on account of failure on the part of the assessee to disclose fully and truly all the material facts necessary for the assessment, after expiry of four years from the end of relevant assessment year. This being the case of notice under section 148 of the Act having been issued beyond the period of four years from the end of relevant assessment year, conditions required to be fulfilled is that the assessee failed to make a return under section 139 or in response to a notice under sub-section (1) of section 142 or Section 148 or it failed to disclose fully and truly all material facts necessary for his assessment. 9.Admittedly, in the instant case, notice has been issued beyond a period of four year after the survey was conducted on 8[th ]November 2011.It is not on the basis of material or evidence 9.Admittedly, in the instant case, notice has been issued beyond a period of four year after the survey was conducted on 8[th ]November 2011.It is not on the basis of material or evidence available with the Assessing Officer but the material collected during the survey proceedings that a notice has been issued to the petitioner under section 148 of the Act. A moot question therefore would be whether the Revenue would assume jurisdiction to issue a notice under section 148 of the Act from the material collected during the course of survey to hold a belief that the income chargeable to tax has escaped the assessment on account of failure on the part of the assessee to disclose truly and fully all material facts. 9.1The Apex Court in case of Commissioner of Income-tax v. Burlop Dealers Limited [Supra] was dealing with a case where the assessee was a limited company whose assessment for the assessment year 1949-50 was reopened by the Assessing Officer on the ground that income had been under-assessed owing to the failure on the part of the assessee to disclose truly and fully all necessary facts for assessment. He observed that the assessee had misled the Income-tax Officer [“ITO” for short] into believing that there was a genuine arrangement with “R” and had stated in the Profit & Loss Account that the amount paid to “R” was share of the later in the partnership firm where no such share was payable to “R”. The Tribunal was of the opinion that the assessee had produced all the relevant accounts and documents necessary for competing the assessment and the assessee was under no obligation to inform the I.T.O about the true nature of the transactions. 9.2The Apex Court held that if the assessee has disclosed primary facts relevant to the assessment, he is under no obligation to instruct the Income-tax Officer about the inference which the Income-tax Officer may raise from those facts. The terms of the Explanation to section 34 (1) of the Income-tax Act, 1922 also do not impose a more onerous obligation. Mere production of the books of account or other evidences from which material facts could with due diligence have been discovered does not necessarily amount to disclosure within the meaning of section 34 (1), but where on the evidence and the materials produced, the Income-tax Officer could have reached a conclusion other than the one which he has reached, a proceeding under section 34 (1)(a) will not lie merely on the ground that the Income-tax Officer has raised an inference which he may later regard as erroneous. 9.3In the case between Income-tax Officer v. Madnani Engineering Works Limited [Supra], while completing the assessment, the assessee company allowed deduction of interest paid to creditor on borrowed moneys and hundies. However, subsequently, the assessment was reopened on the ground that during the course of assessment proceedings for subsequent assessment years, it was noticed that various items shown as loan against security of Hundies in assessee’s books of account for assessment year under question were in fact fictitious. The Income-tax Officer in the challenge to such reopening by way of a writ petition, did not set-out any material on the basis of which he arrived at such a belief. On having found that the assessee had produced all Hundies on the strength of which it had obtained loan as also the entries in the books of account showing payment of interest, the Court held the notice issued under section 147 of the Act as void. The Court also held that the Income-tax Officer had not given any satisfactory reason to uphold its belief that a part of income of the respondent has escaped assessment by reason of its failure to make a true and full disclosure of the material facts. arrived at such a belief. On having found that the assessee had produced all Hundies on the strength of which it had obtained loan as also the entries in the books of account showing payment of interest, the Court held the notice issued under section 147 of the Act as void. The Court also held that the Income-tax Officer had not given any satisfactory reason to uphold its belief that a part of income of the respondent has escaped assessment by reason of its failure to make a true and full disclosure of the material facts. 9.4In the case of Ganga Saran & Sons (P) Limited v. Income-tax Officer, in a proceeding under section 147 of the Act of re-assessment of the income alleged to have escaped the assessment, the Income-tax Officer had a reason to believe that on non-disclosure of primary facts, the Income-tax Officer’s action under section 147 of the Act was justifiable. D, a director of company and brother-in-law of assessee’s managing director G, was looking after assessee’s Delhi branch on full time basis. The Director gifted/loaned a major part of remuneration received by him from assessee company to his brother-in-law who was the managing director. On the basis of such facts, the Income-tax Officer held that the remuneration paid to the director by the assessee company was sham, bogus and was not a permissible deduction. He issued a notice under section 148 of the Act seeking to reopen the assessment under section 147 (a) of the Act. In challenge to the notice under a writ petition, the Apex Court held that neither the Income-tax Officer had reason to believe that income of the assessee had escaped assessment nor was he right in concluding that the assessee omitted or failed to disclose fully and truly any material facts relating to its assessment, and hence, section 147 (a) was not applicable and the impugned notice issued by the Income-tax Officer under section 148 of the Act was without jurisdiction. The Court held, thus - “6.It is well settled as a result of several decisions of this Court that two distinct conditions must be satisfied before the ITO can assume jurisdiction to issue notice under section 147 (a). First, he must have reason to believe that the income of the assessee has escaped assessment and secondly, he must have reason to believe that such escapement is by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment. If either of these conditions is not fulfilled, the notice issued by the ITO would be without jurisdiction. The important words under section 147(a) are “has reason to believe” and these words are stronger than the words “is satisfied”. The belief entertained by the ITO must not be arbitrary or irrational. It must be reasonable or in other words, it must be based on reasons which are relevant and material. The Court, of course, cannot investigate into the adequacy or sufficiency of the reasons which have weighed with the ITO in coming to the belief, but the Court can certainly examine whether the reasons are relevant and have a bearing on the matters in regard to which he is required to entertain the belief before he can issue notice under section 147 (a). If there is no rational and intelligible nexus between the reasons and the belief, so that, no such reasons, no one properly instructed on facts and law could reasonably entertain the belief, the conclusion would be inescapable that the ITO could not have reason to belief that any part of the income of the assessee had escaped assessment and such escapement was by reason of omission or failure on the part of the assessee to disclose fully and truly all material facts and the notice issued by him would be liable to be struck down as invalid.” the belief, the conclusion would be inescapable that the ITO could not have reason to belief that any part of the income of the assessee had escaped assessment and such escapement was by reason of omission or failure on the part of the assessee to disclose fully and truly all material facts and the notice issued by him would be liable to be struck down as invalid.” 9.5 In the said decision, the Supreme Court noticed that the statement of accounts of the director for the relevant accounting year and also for the previous year were with the ITO at the time of original assessment and such statements of account clearly reflected that out of the amount of remuneration credited to his account, gift was made to Managing Director, who was his brother-in-law. The Income-tax Officer also was aware that this man was the managing director of the assessee company. The assessee, according to the Apex Court, could not be said to be under obligation to disclose to the Income-tax Officer in the course of assessment as to how the director, who was in the sole charge of the management of the assessee company and who was being paid remuneration for services rendered by him to the assessee company, had utilized the amount of remuneration received by him. Therefore, the Apex Court held that it was not possible to sustain the conclusion that the assessee omitted or failed to disclose truly and fully any material facts relating to the assessment. Neither of the two conditions necessary for attracting the applicability of Section 147 (a) of the Act since was found satisfied in this case, the notice issued was held without jurisdiction. 9.6 In case of Calcutta Discount Company Limited v. Income-tax Officer [Supra], the Apex Court has held that it is the duty of assessee to disclose fully and truly all primary relevant facts and once all primary facts are before assessing authority, he requires no further assistance by way of disclosure and what factual inference to be drawn from such material is not for the assessee to tell the ITO. If there is reasonable ground of there being non-disclosure as regards any primary facts, which would have a material bearing on the question of under assessment, that would give jurisdiction to the Income-tax Officer to issue notice under section 34 of the Income Tax Act, 1922. The Apex Court held that, “there can be no doubt that the duty of disclosing all the primary facts relevant to the decision of the question before the assessing authority lies on the assessee. To meet the possible contention that when some account books or other evidence has been produced, there is no duty on the assessee to disclose further facts, which on due diligence, the Income-tax Officer might have discovered, the Legislature has put in the Explanation to Section 143 (1) of the Act. The duty, however, does not extend beyond the full and truthful disclosure of all primary facts. Once all the primary facts are before the assessing authority, he requires no further assistance by way of disclosure. It is for him to decide what inferences of facts can be reasonably drawn and what legal inferences have ultimately to be drawn. It is not for somebody else-far less the assessee – to tell the assessing authority what inferences, whether of facts or law, should be drawn. Indeed, when it is remembered that people often differ as regards what inferences should be drawn from given facts, it will be meaningless to demand that the assessee must disclose what interferences – whether of facts or law - he would draw from the primary facts. If from primary facts more inferences than one could be drawn, it would not be possible to say that the assessee should have drawn any particular inference and communicated it to the assessing authority. How could an assessee be charged with failure to communicate an inference, which he might or might not have drawn ? inferences have ultimately to be drawn. It is not for somebody else-far less the assessee – to tell the assessing authority what inferences, whether of facts or law, should be drawn. Indeed, when it is remembered that people often differ as regards what inferences should be drawn from given facts, it will be meaningless to demand that the assessee must disclose what interferences – whether of facts or law - he would draw from the primary facts. If from primary facts more inferences than one could be drawn, it would not be possible to say that the assessee should have drawn any particular inference and communicated it to the assessing authority. How could an assessee be charged with failure to communicate an inference, which he might or might not have drawn ? It may be pointed out that the Explanation to the sub-section has nothing to do with “inferences” deals only with the question whether primary material facts not disclosed could still be said to be constructively disclosed on the ground that with due diligence the ITO could have discovered them from the facts actually disclosed. The Explanation has not the effect of enlarging the section, by casting a duty on the assessee to disclose “inferences” - to draw the proper inferences being the duty imposed on the Income-tax Officer. Therefore, it can be concluded that while the duty of the assessee is to disclose fully and truly all primary relevant facts, it does not extend beyond this.” 9.7 The Apex Court also held therein that on the primary facts disclosed to the Income-tax Officer, it is for him to raise inferences of facts and to conclude on such primary as well as inferential facts, however, if he commits a mistake in arriving at such conclusion, he cannot commence re-assessment proceedings on being apprised of the error. 9.8 With regard to Article 226, the Court has held that the Court cannot seek to hold an inquiry into a question whether the Income-tax Officer has reason to hold a reasonable belief. When the Constitution confers on the High Courts, the power to give relief, it becomes the duty of the Courts to give such relief in fit cases and the Courts would be failing to perform their duty if relief is refused without adequate reasons. The condition precedent for assumption of jurisdiction under section 34 of the Act of 1992, if were not satisfied, then the Court would be needed to exercise writ jurisdiction. 9.9 Apex Court in case of Income-tax Officer v. Ch. Atchaiah [Supra] held that if certain income was income of association of persons in law, AOP alone had to be taxed and merely because members of AOP had been taxed individually in respect of said income, Assessing Officer was not precluded from taxing AOP with respect to that income. The Court further held that, “..Under the 1961 Act, the Assessing Officer has no option like the one he had under the 1992 Act. He can, and he must, tax the right person and the right person alone. By ‘right person’ is meant the person 9.9 Apex Court in case of Income-tax Officer v. Ch. Atchaiah [Supra] held that if certain income was income of association of persons in law, AOP alone had to be taxed and merely because members of AOP had been taxed individually in respect of said income, Assessing Officer was not precluded from taxing AOP with respect to that income. The Court further held that, “..Under the 1961 Act, the Assessing Officer has no option like the one he had under the 1992 Act. He can, and he must, tax the right person and the right person alone. By ‘right person’ is meant the person who is liable to be taxed, according to law, with respect to a particular income. The expression ‘wrong person’ is obviously used as the opposite of the expression ‘right person’. Merely because a wrong person is taxed with respect to a particular income, the Assessing Officer is not precluded from taxing the right person with respect to that income. This is so irrespective of the fact as to which course is more beneficial to the revenue. The language of the relevant provisions of the 1961 Act is quite clear and unambiguous. Section 183 shows that where the Parliament intended to provide an option, it provided so expressly. Where a person is taxed wrongfully, he is no doubt, entitled to be relieved of it in accordance with law, but that is a different matter altogether. The person lawfully liable to be taxed can claim no immunity because the Assessing Officer has taxed the said income in the hands of another person contrary to law.” 10. This Court in case of Sun Pharmaceutical Industries Limited v. Deputy Commissioner of Income-tax, reported in [2013] 353 ITR 450 was dealing with the income escaping the assessment when the issue of notice under section 147, the assessee sold certain goods to its sister concern, it was found by the Assessing Officer that on delayed payment of such goods, interest @ 24% per annum was paid, which was higher than the prevailing market rate of interest which was between 15% - 18%. According to the Assessing Officer, by adopting such modality, the assessee reduced taxable profit and at the same time, increased the profit of its unit which was eligible for deduction under section 80IH of the Act. Certain essential facts like – assessee received interest on overdue payments from “A” and that “A” was a sister concern of the assessee company and that such interest charged was 24% per annum were not discernible from record at all. It was therefore held that the Assessing Officer was justified in initiating re-assessment proceedings. This Court, relying upon a decision in case of Phool Chand Bajrang Lal v. Income-tax Officer, reported in 203 ITR 456, held as under :- “Where the transaction itself, on the basis of subsequent information was found to be a bogus transaction, mere disclosure of that transaction at the time of original proceedings could not be said to be a disclosure of true and full facts and officer would have jurisdiction to reopen the concluded assessment in such a case.” 10.1 This Court, while sustaining the order of re-assessment, observed thus - “37. In the present case, as already noted, the only disclosure was that the assessee had earned interest income of Rs.3,03,48,973/-. There was no further information available on record that such interest included overdue payment charges at the rate of 24% received from the sister concern, viz. Aditya Medisales. Even without the aid of explanation (1) to proviso to section 147, therefore, it was perhaps open for the Assessing Officer to contend that there was no true and full disclosure on the part of the assessee in this respect. At any rate, by applying such explanation, it can be easily gathered that the assessee 10.1 This Court, while sustaining the order of re-assessment, observed thus - “37. In the present case, as already noted, the only disclosure was that the assessee had earned interest income of Rs.3,03,48,973/-. There was no further information available on record that such interest included overdue payment charges at the rate of 24% received from the sister concern, viz. Aditya Medisales. Even without the aid of explanation (1) to proviso to section 147, therefore, it was perhaps open for the Assessing Officer to contend that there was no true and full disclosure on the part of the assessee in this respect. At any rate, by applying such explanation, it can be easily gathered that the assessee failed to disclose fully and truly all material facts. Counsel for the petitioner, however, vehemently contended that these were not primary facts. Only primary fact was that the assessee had earned interest income. We are, however, of the opinion that in the context of the close connection between the petitioner and Aditya Medisales, the