Tribunal upholds assessment reopening, adds income, clarifies share acquisition, merger legality

Dr. Naresh K. Trehan Versus Deputy Commissioner of Income-tax, Cent. Cir. 3, New Delhi

Dr. Naresh K. Trehan Versus Deputy Commissioner of Income-tax, Cent. Cir. 3, New Delhi - [2007] 14 SOT 101 (DELHI) Issues Involved:
1. Reopening of assessment under section 147.
2. Addition of Rs. 10.80 crores under 'Income from other sources'.
3. Application of section 2(24)(iv) regarding the benefit received by the assessee.
4. Legitimacy of the merger between EHIRC, Delhi, and EHIRC, Chandigarh.
5. Enhancement of the value of shares by the CIT(A).
6. Levy of interest under section 234B.
7. Initiation of penalty under section 271(1)(c).

Detailed Analysis:

1. Reopening of Assessment under Section 147:
The assessee challenged the initiation of proceedings under section 147, arguing that all material facts were disclosed during the original assessment. The CIT(A) held that the mere fact that investment in shares was shown in the balance sheet did not amount to full and true disclosure of all material facts. The Tribunal agreed, stating that the reopening was valid as the Assessing Officer had a prima facie satisfaction that the income chargeable to tax had escaped assessment.

2. Addition of Rs. 10.80 Crores under 'Income from Other Sources':
The Assessing Officer added Rs. 10.80 crores to the assessee's income, arguing that the shares acquired by the assessee at Rs. 10 per share had a book value of Rs. 550 per share, resulting in a benefit. The CIT(A) upheld this addition, stating that the difference in the book value and the purchase price constituted a benefit to the assessee. The Tribunal, however, found that if the shares were acquired in lieu of shares held in EHIRC, Chandigarh, the provisions of section 2(24)(iv) would not apply, following the precedent set in the case of Escorts Ltd.

3. Application of Section 2(24)(iv):
The Assessing Officer argued that the benefit received by the assessee as a director of EHIRL was taxable under section 2(24)(iv). The CIT(A) upheld this view, stating that the benefit arose to the assessee when he acquired shares at a highly concessional rate. The Tribunal directed the Assessing Officer to ascertain whether the shares were acquired directly or in lieu of shares held in EHIRC, Chandigarh. If the latter, section 2(24)(iv) would not apply.

4. Legitimacy of the Merger:
The Assessing Officer questioned the legality of the merger between EHIRC, Delhi, and EHIRC, Chandigarh, and subsequent conversion into EHIRL. The CIT(A) held that the sequence of events indicated a pre-meditated strategy to convert a charitable society into a profit-making entity. The Tribunal, however, found that the merger and conversion were legally compliant and could not be disregarded.

5. Enhancement of the Value of Shares by the CIT(A):
The CIT(A) enhanced the value of shares from Rs. 550 to Rs. 745 per share based on a valuation report. The Tribunal directed the Assessing Officer to re-evaluate this enhancement, considering the facts of the case and the precedent set in Escorts Ltd.

6. Levy of Interest under Section 234B:
The CIT(A) directed the Assessing Officer to recompute the interest under section 234B while giving effect to his order. The Tribunal upheld this, citing the Supreme Court's ruling that the levy of interest under sections 234A, 234B, and 234C is mandatory.

7. Initiation of Penalty under Section 271(1)(c):
The initiation of penalty proceedings under section 271(1)(c) was not admitted for appeal, as no appeal is provided against the initiation of penalty proceedings.

Conclusion:
The Tribunal directed the Assessing Officer to re-evaluate the facts, particularly regarding the acquisition of shares, and issue a fresh order. The appeal was partly allowed for statistical purposes.