M/s.Matrix Laboratories Limited, a Company incorporated vs. Commissioner of Income tax - IV,

THE HON’BLE SRI JUSTICE V.V.S.RAO AND THE HON'BLE SRI JUSTICE RAMESH RANGANATHAN

WRIT PETITION No.14776 of 2010

Dated:27.09.2010

Between:

M/s.Matrix Laboratories Limited.

…Petitioner

and

Commissioner of Income Tax-IV, 3rd Floor, Aayakar Bhavan, Hyderabad, And others.

…Respondents

THE HON’BLE SRI JUSTICE V.V.S.RAO AND THE 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 assessment year 2005-2006 with the Additional Commissioner of Income Tax (ACIT). They declared a total income of Rs.73,82,10,074/- under normal provisions and Rs.103,16,05,170/- under special provisions. The ACIT completed the assessment under Section 143(3) of the Income Tax Act, 1961 (the Act), on 28.12.2007 determining the total income at Rs.141,71,83,649/-. The first respondent, namely, the Commissioner of Income Tax-IV (CIT), suo motu initiated revisional jurisdiction under Section 263 of the Act proposing to revise the assessment order of the ACIT in respect of two factors. These related to the claim of weighted deduction (under Section 35(2)(AB) of the Act) for the four R & D units while computing the eligible profits under Section 10B of the Act, and the other was the claim of exemption under Section 10B of the Act in

respect of the petitioner’s units at Jeedimetla (unit 3.2) and at Pashamylaram (unit 7) in Hyderabad. Be it noted, Section 10B of the Act enables the assessee to claim 100% deduction of profit if the manufacturing unit, being a 100% Export Oriented Unit (EOU), has necessary approvals under the relevant Export & Import (EXIM) policy. The CIT, in his predecisional exercise, felt that there was no proper approval/ratification by the Board of Approval (BOA) constituted to issue approval for EOU units, and that the petitioner had not apportioned the claim of weighted deduction proportionately to 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 is concerned, they relied on a communication dated 17.03.2010 from the third respondent, namely, the Development Commissioner (DC), to the effect that the permission granted by the DC, under delegated powers, was ratified by the BOA in their 6th meeting (2004 series) held on 23.11.2004. The CIT, however, did not accept the plea and disallowed the deduction under Section 10B of the Act observing as under. In the light of the above extracts from the decision of the Hon’ble ITAT, Hyderabad B Bench, in the case of Infotech Enterprises Limited (85 ITD 325), I hold that the assessee is not eligible for exemption u/s.10B as it has not obtained the stipulated statutory approval from the Board appointed in this behalf by the Central Government under Section 14 of the Industries (Development and Regulation) Act, 1951. The approval given by the Vizag Development Commissioner as well as the Green Card cannot be equated with the statutorily stipulated approval. Similarly, the confirmatory letter dated 17.03.2010 has no persuasive force in the absence of the authentic original document. In completing the original assessment, the Assessing Officer had allowed the assessee’s claim of exemption without application of mind and on erroneous assumption of facts. I, therefore, direct the Assessing Officer to disallow the 10B exemption granted to the assessee for the assessment year under consideration.

In so far as the failure to apportion the deduction proportionately while claiming benefit under Section 10B of the Act is concerned, the CIT came to the conclusion that if the R & D expenditure is not apportioned it would result in the assessee claiming the exemption under Section 10B of the Act in excess of their entitlement.

The preliminary submissions were heard by this Court on 28.06.2010 and 02.07.2010. The Senior Counsel for Income Tax sought time and filed the return on 31.08.2010. Inter alia, the first respondent raised the plea that, as on the date of the impugned order, the petitioner’s units 3.2 and 7 had no ratification by BOA under the relevant policy. This was, however, demurred. We then suo motu impleaded the DC as the third respondent and directed the Standing Counsel for the Central Government to place the necessary material and also file the return. Accordingly, the Central

Government Standing Counsel filed the affidavit of the Assistant Development Commissioner (ADC), Hyderabad, to the effect that there is delegation of powers to DC by BOA, that the permission by DC to Jeedimetla Unit was considered by BOA in their meeting held on 23.11.2004 (2004 series) and “approvals granted … was noted”. As the affidavit of DC does not enable this Court to arrive at a definite conclusion, the matter was adjourned again to enable him to place before us the necessary material. The ADC has again filed an affidavit in the Court today, which is in some detail. The communications from the Government of India in the Ministry of Commerce & Industry, Department of Commerce, purporting to inform the ratification granted by BOA are also annexed to the affidavit. The Senior Counsel for the petitioner has taken us through the relevant chapters in the Export & Import for 2002-2007 (Volume 1). We are, prima facie, of the view that in so far as the EOU units are concerned, except certain specified categories, the Unit Approval Committee (UAC) was conferred with the power to grant approvals in the automatic routes to those establishments falling under the category of automatic route category. In the affidavit filed by the ADC on behalf of DC there are averments to the effect that the BOA ratified the permission granted to the petitioner’s units. Indisputably, this ratification was granted by BOA only after passing of the impugned order and, in any event, this has come to light only after passing of the order. The Senior Counsel for Income Tax opposed the issue of rule nisi in this case. According to him, against the revisional order under Section 263 of the Act there is an effective appeal under Section 253 of the Act, where all the questions can be gone into. In so far as the non-allocation of the R & D expenditure proportionately in all the units is concerned, the Counsel for the petitioner does not press the ground for the present in this writ petition, as the same can be agitated before the appropriate forum. In so far as the claim of exemption under Section 10B of the Act is concerned, in the facts and circumstances of this case, especially, when the BOA, UAC and DC and the authorities under the Act are involved, there is likelihood of some “communication gap” as well as vague communications in granting permissions and approvals. As this matter requires only the verification of a simple fact situation, and now that the petitioner alleges that the BOA granted ratification – whether or not such ratification is required; and whether the ratification granted is valid or not; these are the matters to be gone into by the CIT in accordance with law including the EXIM policy for the relevant period. The purpose of granting the benefit under Section 10B of the Act is to encourage the Pharma units to function effectively to meet the ever increasing demand for drugs and pharmaceuticals in the Country. If, on this simple issue, the petitioner is relegated to the Appellate Tribunal, there is likelihood of defeating the purpose of legislation. We, therefore, reject the plea of the Senior Standing Counsel for Income Tax on the question of alternative remedy.

In the result, for the above reasons, we set aside the impugned 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 with regard to the question of apportionment of R & D expenses on all the units proportionately. The matter is remanded to the Commissioner of Income Tax observing that it shall be open to the said authority to reconsider the matter to the extent indicated hereinabove taking into consideration all the material that may be placed by the petitioner. It shall also be open to the Commissioner of Income Tax to seek clarification from any authority involved in the matter of granting approval/ratification to Export Oriented Unit. The Writ Petition stands disposed of accordingly without any order as to costs.

__________________ (V.V.S.RAO, J)

______________________________ (RAMESH RANGANATHAN, J)

27.09.2010 vs