Wp/14776/2010 Of M/S.matrix Laboratories Limited, A Company Incorporated v. Commissioner Of Income Tax - Iv

THE HON’BLE SRI JUSTICE V.V.S.RAOAND THE HON'BLE SRI JUSTICE RAMESH RANGANATHAN WRIT PETITION No.14776 of 2010Dated:27.09.2010 Between: M/s.Matrix Laboratories Limited. …Petitioner and Commissioner of Income Tax-IV, 3[rd] Floor, Aayakar Bhavan,Hyderabad,And others. …Respondents THE HON’BLE SRI JUSTICE V.V.S.RAOANDTHE HON'BLE SRI JUSTICE RAMESH RANGANATHAN WRIT PETITION No.14776 of 2010 ORDER:(per Hon’ble Sri Justice V.V.S.Rao) The petitioner filed its return of income for the assessmentyear 2005-2006 with the Additional Commissioner of Income Tax(ACIT). They declared a total income of Rs.73,82,10,074/- undernormal provisions and Rs.103,16,05,170/- under specialprovisions. The ACIT completed the assessment under Section143(3) of the Income Tax Act, 1961 (the Act), on 28.12.2007determining the total income at Rs.141,71,83,649/-. The firstrespondent, namely, the Commissioner of Income Tax-IV (CIT), suomotu initiated revisional jurisdiction under Section 263 of the Actproposing to revise the assessment order of the ACIT in respect oftwo factors. These related to the claim of weighted deduction(under Section 35(2)(AB) of the Act) for the four R & D units whilecomputing the eligible profits under Section 10B of the Act, and theother was the claim of exemption under Section 10B of the Act in respect of the petitioner’s units at Jeedimetla (unit 3.2) and atPashamylaram (unit 7) in Hyderabad. Be it noted, Section 10B ofthe Act enables the assessee to claim 100% deduction of profit if themanufacturing unit, being a 100% Export Oriented Unit (EOU), hasnecessary approvals under the relevant Export & Import (EXIM)policy. The CIT, in his predecisional exercise, felt that there was noproper approval/ratification by the Board of Approval (BOA)constituted to issue approval for EOU units, and that the petitionerhad not apportioned the claim of weighted deduction proportionatelyto units 3.2 and 7. The petitioner, in response to the notice, filed their objections. In so far as the claim of exemption under Section 10B of the Act isconcerned, they relied on a communication dated 17.03.2010 fromthe third respondent, namely, the Development Commissioner (DC),to the effect that the permission granted by the DC, under delegatedpowers, was ratified by the BOA in their 6th meeting (2004 series)held on 23.11.2004. The CIT, however, did not accept the plea anddisallowed the deduction under Section 10B of the Act observing asunder. In the light of the above extracts from the decision of theHon’ble ITAT, Hyderabad B Bench, in the case of InfotechEnterprises Limited (85 ITD 325), I hold that the assesseeis not eligible for exemption u/s.10B as it has not obtainedthe stipulated statutory approval from the Board appointedin this behalf by the Central Government under Section 14of the Industries (Development and Regulation) Act, 1951. The approval given by the Vizag DevelopmentCommissioner as well as the Green Card cannot beequated with the statutorily stipulated approval. Similarly,the confirmatory letter dated 17.03.2010 has no persuasiveforce in the absence of the authentic original document. Incompleting the original assessment, the Assessing Officerhad allowed the assessee’s claim of exemption withoutapplication of mind and on erroneous assumption of facts. I, therefore, direct the Assessing Officer to disallow the10B exemption granted to the assessee for theassessment year under consideration. In so far as the failure to apportion the deductionproportionately while claiming benefit under Section 10B of the Actis concerned, the CIT came to the conclusion that if the R & Dexpenditure is not apportioned it would result in the assesseeclaiming the exemption under Section 10B of the Act in excess oftheir entitlement. In so far as the failure to apportion the deductionproportionately while claiming benefit under Section 10B of the Actis concerned, the CIT came to the conclusion that if the R & Dexpenditure is not apportioned it would result in the assesseeclaiming the exemption under Section 10B of the Act in excess oftheir entitlement. The preliminary submissions were heard by this Court on28.06.2010 and 02.07.2010. The Senior Counsel for Income Taxsought time and filed the return on 31.08.2010. Inter alia, the firstrespondent raised the plea that, as on the date of the impugnedorder, the petitioner’s units 3.2 and 7 had no ratification by BOAunder the relevant policy. This was, however, demurred. We thensuo motu impleaded the DC as the third respondent and directedthe Standing Counsel for the Central Government to place thenecessary material and also file the return. Accordingly, the Central Government Standing Counsel filed the affidavit of the AssistantDevelopment Commissioner (ADC), Hyderabad, to the effect thatthere is delegation of powers to DC by BOA, that the permission byDC to Jeedimetla Unit was considered by BOA in their meeting heldon 23.11.2004 (2004 series) and “approvals granted … was noted”. As the affidavit of DC does not enable this Court to arrive at adefinite conclusion, the matter was adjourned again to enable himto place before us the necessary material. The ADC has again filedan affidavit in the Court today, which is in some detail. Thecommunications from the Government of India in the Ministry ofCommerce & Industry, Department of Commerce, purporting toinform the ratification granted by BOA are also annexed to theaffidavit. The Senior Counsel for the petitioner has taken us through therelevant chapters in the Export & Import for 2002-2007 (Volume 1). We are, prima facie, of the view that in sofar as the EOU units are concerned, except certain specifiedcategories, the Unit Approval Committee (UAC) was conferred withthe power to grant approvals in the automatic routes to thoseestablishments falling under the category of automatic routecategory. In the affidavit filed by the ADC on behalf of DC there areaverments to the effect that the BOA ratified the permission grantedto the petitioner’s units. Indisputably, this ratification was granted byBOA only after passing of the impugned order and, in any event, thishas come to light only after passing of the order. The Senior Counsel for Income Tax opposed the issue of rulenisi in this case. According to him, against the revisional orderunder Section 263 of the Act there is an effective appeal underSection 253 of the Act, where all the questions can be gone into. Inso far as the non-allocation of the R & D expenditure proportionatelyin all the units is concerned, the Counsel for the petitioner does notpress the ground for the present in this writ petition, as the same canbe agitated before the appropriate forum. In so far as the claim ofexemption under Section 10B of the Act is concerned, in the factsand circumstances of this case, especially, when the BOA, UACand DC and the authorities under the Act are involved, there islikelihood of some “communication gap” as well as vaguecommunications in granting permissions and approvals. As thismatter requires only the verification of a simple fact situation, andnow that the petitioner alleges that the BOA granted ratification –whether or not such ratification is required; and whether theratification granted is valid or not; these are the matters to be goneinto by the CIT in accordance with law including the EXIM policy forthe relevant period. The purpose of granting the benefit underSection 10B of the Act is to encourage the Pharma units to functioneffectively to meet the ever increasing demand for drugs andpharmaceuticals in the Country. If, on this simple issue, thepetitioner is relegated to the Appellate Tribunal, there is likelihoodof defeating the purpose of legislation. We, therefore, reject the pleaof the Senior Standing Counsel for Income Tax on the question ofalternative remedy. In the result, for the above reasons, we set aside theimpugned order dated 29.03.2010 bearing No.CIT-IV/263/18/2009-10, of the Commissioner of Income Tax in so far as it disallows the claim of exemption under Section 10B of the Act. We leave it open to the petitioner to agitate in appropriate forum withregard to the question of apportionment of R & D expenses on allthe units proportionately. The matter is remanded to theCommissioner of Income Tax observing that it shall be open to thesaid authority to reconsider the matter to the extent indicatedhereinabove taking into consideration all the material that may beplaced by the petitioner. It shall also be open to the Commissionerof Income Tax to seek clarification from any authority involved in thematter of granting approval/ratification to Export Oriented Unit. The Writ Petition stands disposed of accordingly without anyorder as to costs. __________________ (V.V.S.RAO, J) ______________________________ (RAMESH RANGANATHAN, J) 27.09.2010vs