Section 263 Upholds Reopening of Assessment Under Section 147 for Suspicious Share Application Money

M/s. Bisakha Sales Pvt. Ltd. Versus CIT (Kol. -II), Kolkata

M/s. Bisakha Sales Pvt. Ltd. Versus CIT (Kol. -II), Kolkata - [2014] 35 ITR (Trib) 715 (ITAT [Kolk])

ISSUES:

Whether the Assessing Officer (AO) made proper inquiry regarding share capital and share application money under section 68 of the Income-Tax Act.Whether the Commissioner of Income Tax (CIT) was justified in invoking powers under section 263 to revise the assessment order on the ground of erroneous and prejudicial assessment.Whether the introduction of share premium prior to the insertion of section 56(2)(viib) (effective from 01.04.2013) exempts the AO from making inquiry into share premium received before that date.Whether the CIT's order under section 263 was based on tangible material and proper application of mind.Whether the provisions of section 78 of the Companies Act regarding utilization of share premium were complied with and its relevance to taxability of share premium.Whether the AO's failure to conduct detailed inquiry and the rapid completion of reassessment proceedings within a short time frame indicate erroneous assessment prejudicial to revenue.Whether reliance on precedents regarding the scope and exercise of revisional powers under section 263 is appropriate on the facts of the case.

RULINGS / HOLDINGS:

The AO did not make proper inquiry into the share capital and share application money, especially concerning the receipt of huge share premium without apparent justification; thus, the CIT was justified in holding the assessment order as 'erroneous and prejudicial to the interest of Revenue.'The CIT validly exercised jurisdiction under section 263 based on 'substantial information' and 'tangible material' indicating creation of shell companies and money laundering through bogus share capital, warranting reassessment and further inquiry.The insertion of section 56(2)(viib) w.e.f. 01.04.2013 does not absolve the AO from making inquiry into disproportionate share premium received prior to that date under section 68; the AO's duty to examine such receipts existed independently of section 56(2)(viib).The CIT's order under section 263 was supported by specific material and detailed background inquiry, not merely generalized statements, and thus was sustainable.The provisions of section 78 of the Companies Act regulate the utilization of share premium; non-compliance may render share premium taxable as revenue receipt, and no evidence was found that the company complied with these provisions.The rapid completion of reassessment proceedings within two to four months without proper inquiry evidences a 'perfunctory' approach by the AO, supporting the CIT's conclusion of erroneous assessment.Precedents cited by the CIT and Tribunal affirm that failure to conduct normal inquiry and non-application of mind render an assessment order erroneous and warrant revision under section 263; such principles apply to the facts of this case.

RATIONALE:

The legal framework applied includes sections 68, 78, 143(1), 143(3), 147, 148, 263, and 56(2)(viib) of the Income-Tax Act, and relevant provisions of the Companies Act, 1956.Section 263 empowers the CIT to revise an assessment order if it is 'erroneous in so far as it is prejudicial to the interests of the Revenue,' which requires the CIT to apply mind to tangible material and specific information.The Court relied on authoritative precedents, including Malabar Industrial Co. Ltd. v. CIT, CIT vs Durga Prasad More, Sumati Dayal vs CIT, and others, establishing that erroneous assessment includes failure to apply mind, ignoring relevant material, and non-conduct of necessary inquiry.The Court recognized that the insertion of section 56(2)(viib) is prospective and does not negate the AO's existing powers under section 68 to scrutinize share premium received before its effective date.The Court emphasized the need to examine compliance with section 78 of the Companies Act to determine the nature of share premium receipts for tax purposes, noting that non-compliance may convert capital receipts into taxable revenue receipts.The Court noted the modus operandi of money laundering through shell companies involving staged transactions over multiple assessment years, justifying detailed inquiry and reassessment.The Court rejected the argument that the CIT's order was based on generalized assumptions, affirming that the CIT had conducted a detailed inquiry supported by specific information about the scheme of bogus share capital and money laundering.The Court distinguished precedents relied upon by the assessee on facts, holding that in the present case, the AO's inquiry was inadequate and the assessment order was therefore erroneous and prejudicial.The Court acknowledged that the CIT's directions under section 263 included guidance for further inquiry into related aspects such as change in directorship and source of realization from liquidation of assets, which are part of the broader scheme of fraudulent transactions.No merit was found in the contention that the AO's acceptance of documents without further inquiry precluded revision under section 263, as the AO's inquiry was superficial and incomplete.The Court also referred to the principle that the burden of proof lies on the assessee to substantiate the genuineness of share capital and application money, and mere submission of voluminous documents without explanation does not discharge this burden.The Court declined to consider merits of additions or other issues beyond the scope of section 263 revision, focusing solely on the question of erroneous and prejudicial assessment.