2023 (2) TMI 427 - HC - Income Tax

Court sets aside order under Income Tax Act, emphasizes need for material facts

The Court ruled in favor of the Petitioner, setting aside the order rejecting objections and the notice under Section 148 of the Income Tax Act. It held ... Reopening of assessment u/s 147 - Petitioner had issued premium which was not valued correctly in terms of Rule 11UA r/w Section 56(2)(viib) - HELD THAT:- Supreme Court in Commissioner of Income-tax, Delhi Vs. Kelvinator of India Ltd.[2010 (1) TMI 11 - SUPREME COURT] held that there was a difference between ‘power to review’ and ‘power to reassess’ under section 147 and that the AO had no power to review and that, if the concept of ‘change of opinion’ was removed, then, in the garb of reopening of the assessment, a review would take place. There was no failure on the part of the assessee to disclose fully and truly the material facts, nor there was any tangible material with the A.O. which would have otherwise justified the reopening of the assessment by issuing the notice impugned. Petition is allowed. Issues:Challenge to notice under Section 148 of the Income Tax Act, 1961 and rejection of objections regarding reopening of assessment proceedings.Analysis:The Petitioner contested a notice under Section 148 of the Income Tax Act, 1961, dated 30th March, 2021, for the assessment year 2015-16 and the subsequent order rejecting objections to the reopening of assessment proceedings. The reasons for reopening centered around the valuation of shares issued by the Petitioner, with the contention that the premium was undervalued, leading to an alleged failure to disclose material facts. The Petitioner argued that the assessment was thorough during the scrutiny process, highlighting the valuation report submitted by a Chartered Accountant using the Discounted Cash Flow Method. The Respondents maintained that the correct valuation should have been Rs.6.48 per share, as per Rule 11UA of the Income Tax Rules, 1962. However, the Petitioner had utilized the Discounted Free Cash Flow Method, which was permissible under the rules and accepted by the Assessing Officer during scrutiny.The legal debate revolved around the interpretation of Section 56(1) and Section 56(2)(viib) of the Income Tax Act, which governs the taxation of income from sources not excluded under the Act. The Petitioner argued that the chosen valuation method was valid under Rule 11UA(2)(b) of the Rules, despite the prescribed formula under Rule 11UA(2)(a). The Court acknowledged that the Petitioner had the option to follow the Discounted Free Cash Flow Method and had adequately responded to queries during the assessment proceedings. Citing the Supreme Court's ruling in Commissioner of Income-tax vs. Kelvinator of India Ltd., the Court emphasized the distinction between the power to review and reassess under Section 147, cautioning against arbitrary use of the provision without tangible material to support income escapement.Ultimately, the Court found in favor of the Petitioner, ruling that there was no failure to disclose material facts and no justifiable reason for reopening the assessment. The order rejecting objections and the notice under Section 148 were set aside, concluding the matter in favor of the Petitioner.