2017 (5) TMI 631 - AT - Income Tax

Tribunal invalidates proceeding initiation for lack of evidence in Income Tax Act case.

M/s. Classic Flour & Food Processing Pvt. Ltd. Versus C.I.T., Kol-IV, Kolkata

M/s. Classic Flour & Food Processing Pvt. Ltd. Versus C.I.T., Kol-IV, Kolkata - TMI Issues Involved:1. Validity of the initiation of proceedings under Section 147 of the Income Tax Act, 1961.2. Legality of the order passed under Section 263 of the Income Tax Act, 1961.3. Adequacy of inquiries made by the Assessing Officer (AO) regarding share capital and share premium.4. Justification of high share premium received by the assessee.Detailed Analysis:1. Validity of the Initiation of Proceedings under Section 147:The assessee challenged the initiation of proceedings under Section 147, arguing that the reasons recorded for reopening the assessment were vague and based on mere suspicion. The Tribunal noted that the reasons recorded by the AO alleged that the assessee had made an unexplained investment in a hotel/resort, which was not reflected accurately in the balance sheet. However, the Tribunal found that the AO's reasons lacked a clear basis and were not supported by specific evidence. The Tribunal cited the case of Hindustan Lever Ltd. vs. R.B. Wadkar, emphasizing that reasons for reopening must be clear and unambiguous. The Tribunal concluded that the initiation of reassessment proceedings was invalid as it was based on a mere pretence rather than a reason to believe that income had escaped assessment.2. Legality of the Order Passed under Section 263:The Tribunal examined whether the CIT could invoke Section 263 to revise an order passed under Section 147, which was argued to be invalid. It was held that if the original assessment proceedings under Section 147 were null and void, the CIT could not revise such an order under Section 263. The Tribunal referenced several cases, including the Hon’ble Supreme Court's decision in Kiran Singh & Ors. v. Chaman Paswan & Ors., which established that a decree passed without jurisdiction is a nullity and can be challenged in collateral proceedings. Consequently, the Tribunal quashed the orders passed under Section 263 for the assessment years 2007-08 and 2008-09, as the reassessment orders were found to be invalid.3. Adequacy of Inquiries Made by the AO Regarding Share Capital and Share Premium:For the assessment year 2009-10, the Tribunal reviewed whether the AO conducted adequate inquiries into the share capital and share premium received by the assessee. The CIT had set aside the AO's order, stating that the AO failed to properly examine the genuineness of the transactions and the justification for the high share premium. The Tribunal agreed with the CIT, noting that the AO's inquiries were insufficient and amounted to no inquiry at all. The Tribunal emphasized that the AO should have examined the rationale behind the high premium and the creditworthiness of the share applicants more thoroughly.4. Justification of High Share Premium Received by the Assessee:The Tribunal addressed whether the justification for a high share premium needed to be examined under Section 68 of the Act. It was argued that the first proviso to Section 68, introduced by the Finance Act, 2012, was prospective and did not apply to earlier years. However, the Tribunal held that Section 68 always covered any sum credited in the books, including share capital with premium, and the amendment merely made explicit what was previously implied. Therefore, the AO was obliged to examine the justification for the high share premium, and the failure to do so rendered the AO's order erroneous and prejudicial to the interests of the revenue.Conclusion:The Tribunal allowed the appeals for the assessment years 2007-08 and 2008-09, quashing the orders passed under Section 263 due to the invalidity of the reassessment proceedings. However, for the assessment year 2009-10, the Tribunal upheld the CIT's order under Section 263, finding that the AO's inquiries into the share capital and share premium were inadequate and justified the CIT's intervention.