TaxTMI 
TaxTMI 
2019 (8) TMI 558
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.... Act for reopening of assessments. At the time of hearing, the Ld A. R did not press the said additional ground in all the appeals. Accordingly, the additional ground urged in all these appeals is dismissed as not pressed. The remaining grounds relate to the following issues:- (a) Validity of reopening of assessment. (b) Merits of addition relating to Share application money/ share capital and share premium receipts. Other ground relating to charging of interest u/s 234B of the Act is consequential in nature and hence it does not require adjudication. 3. Since the underlying facts of all these cases are identical, the appeal filed by M/s Carmel Asia Holdings P Ltd for assessment year 2007-08 was taken up as lead case. Both parties agreed that the decision taken in the above said case can be conveniently applied to other appeals also. The facts relating to the case, as assimilated from the orders of tax authorities, are discussed in brief. Both the assessees herein belong to Shri Y. S. Jagan Mohan Reddy group. Shri Y. S. Jagan Mohan Reddy is son of Shri Rajasekara Reddy, former Chief Minister of state of Andhra Pradesh. A search was conducted by the Central B....
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....are premium remains unsubstantiated and also the share application money received also remain unsubstantiated. Accordingly, the AO assessed the share application money and share premium received by these companies as income of the assessees in the year of receipt. In the hands of Carmel Asia Holdings P Ltd, the par value of shares received from Shri Srinivasa Reddy was also added. The details of additions made by the AO are given below: - (A) CARMEL ASIA HOLDINGS: - Assessment year 2007-08 6059. 79 lakhs Assessment year 2008-09 1878. 58 lakhs** (B) JANANI INFRASTRUCTURE P LTD: - Assessment year 2007-08 1210. 17 lakhs Assessment year 2008-09 769. 55 lakhs (** In this year, entire share capital received from Shri Srinivasa Naidu has been added). 5. Before Ld CIT(A), these assessees challenged the validity of reopening of assessment. It was contended that the observations made by the assessing officer with regard to flaws in allotment of shares are imaginary and divorced from facts, since the assessee had already given appropriate replies to the Registrar of Companies on the queries raised by him in this regard. It was contended that other observati....
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....jurisdiction u/s 147 and the reopening is in order. Further the fact that the Report from CBI and the copy of FIR not being provided to the Appellant is also not opposed to principles of natural justice as no addition is based on these documents. The additions are made only looking into the activities of the appellant, its back ground, its financial standing etc and not based on the reports from CBI. No information is used from the said reports to make the addition and therefore the AO is justified in not giving copies of the same....... " 8. On merits, the Ld CIT(A) observed that the assessee has miserably failed to justify the Premium received and also not filed confirmations from the investors on the said issue. Accordingly, the Ld CIT(A) held that the assessee has not discharged the onus cast on it to justify its stand that the amount received is actually Share Premium, not only in form but also in pith and substance. He also held that the decision of Hon'ble Supreme Court rendered in the case of CIT vs. SumatiDayal (82 ITR 540) squarely applies to the facts of this case and observed as under: - "The Apex Court has held that it is trite Law that an Apparent....
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....escapement of income. Relying on the decision rendered by Hon'ble Supreme Court in the case of Pr. CIT vs. Nokia India P Ltd (2019)(413 ITR 146), the Ld A. R submitted that the reasons for reopening should satisfy the requirement of sec. 148, viz. , (a) it should contain the facts constituting "reasons to believe" and (b) it should furnish necessary details for assessing escaped income of the assessee. 11. The Ld A. R further submitted that the share premium and share application money are capital receipts in the hands of the assessee and hence there is no scope to entertain the belief that there was escapement of income. In this regard, the Ld A. R placed his reliance on the decision rendered by Hon'ble Supreme Court in the case of G. S. Homes & Hotels P Ltd (2016)(387 ITR 126), wherein it was held that the Share capital received by a housing company for allotment of sites cannot be considered as business income of the assessee. He further submitted that the AO did not consider the said receipts as unexplained cash credits in terms of sec. 68 of the Act. He has only doubted the motive of the share applicant in making investments in the assessee companies. He was also of the vie....
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....herein. He submitted that the AO has also mentioned that the share capital received by the assessee is gratuitous in nature. He submitted that any receipt, which may be gratuitous in nature would not give rise to any taxable income as per the provisions of Income tax Act. He submitted that the Hon'ble Supreme Court has held in the case of Parimisetty Seetharamamma (57 ITR 532) that the primary liability and onus is on the department to prove that a certain receipt is liable to be taxed. He submitted that the AO has, nowhere, mentioned in the reasons for reopening that share premium constitutes income of the assessee. He has only questioned the quantum of share premium. Accordingly, he submitted that there is no connection between the reasons recorded and the alleged escapement of income. Accordingly, he contended that the reopening of assessment is bad in law. 14. The Ld A. R reiterated that the AO has reopened the assessment on the basis of information received from CBI that there was quid pro quo, i. e. , the share applicants have subscribed to the shares of assessee companies only because they received benefits from Government of Andhra Pradesh. However, the CBI, vide its Mem....
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....als would conclusively prove the escapement is not the concern at that stage. This is so because the formation of belief by the Assessing officer is within the realm of subjective satisfaction (see ITO v. Selected Daluband Coal Co. Pvt Ltd (1996)(217 ITR 597)(SC); Raymond Woollen Mills Ltd v ITO (1999)(236 ITR 34)(SC). 17.... . 18. So long as the ingredients of section 147 are fulfilled, the Assessing Officer is free to initiate proceeding under section 147 and failure to take steps under section 143(3) will not render the Assessing Officer powerless to initiate reassessment proceedings even when intimation u/s 143(1) had been issued. " 16. The Ld D. R submitted that the final outcome of the reopening of assessment is not relevant at the time of reopening of assessment. He submitted that the reasons recorded by the AO should be read as a whole and if it is read so, it would show that the assessing officer did not rely upon the information received from CBI for reopening of assessments. It has only triggered the AO to look into the return of income. Accordingly, the AO has looked into the Return of Income and found that the share premium collected by the assesse....
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....ome of the assessees. Further the information received from CBI about quid pro quo has triggered the assessing officer to form the belief that there was escapement of income. Accordingly, the ld D. R contended that the reopening of assessments has been done on sound reasons and hence valid. 18. In the rejoinder, the Ld A. R submitted that the assessing officer has reopened the assessment on the basis of information received from CBI only. The assessees have made this submission before the AO in the objections filed by them for reopening of assessment, vide their letter dated 09-02-2015. In the said letter, it was submitted before the AO that the Principles of Natural justice would be satisfied if the required material which was used against the assessee (Report of Investigation wing) is put to assessee and his comments are taken thereon and considered. Accordingly, the Ld A. R submitted that the assessee had sought for copies of information received from the CBI and investigation wing during the course of assessment proceedings itself. He further submitted that the assessing officer should have independently applied his mind on the information received from the CBI, since the re....
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....e provisions of section 37 of the Indian Income tax Act the proceedings before the Income tax Officer are judicial proceedings and all the incidents of such judicial proceedings have to be observed before the result is arrived at. In other words, the assessee would have a right to inspect the record and all relevant documents before he is called upon to lead evidence in rebuttal.... " He submitted that the Principles of Natural justice has been violated by the AO in not providing copies of information received from the CBI, which formed the basis for re-opening of assessment. If the AO had not relied upon the information received from CBI, then there was no tangible material available with the AO to form the belief that there was escapement of income. 21. The Ld A. R further submitted that the reasons recorded should provide link between the evidence and conclusion reached. In this regard, he placed his reliance on the decision rendered by Hon'ble Bombay High Court in the case of Hindustan Lever Ltd vs. R. B. Wadkar, ACIT (2004)(268 ITR 332) and submitted that the AO could not have entertained any belief on escapement of income, since the details of share capital and share pr....
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.... the sake of convenience, we extract below the reasons recorded by the assessee for reopening of assessment, as communicated to the assessees by the AO in the case of Carmel Asia Holdings P Ltd: - "A search was conducted by the CBI in the case of Sri Jagan Mohan Reddy and his Group companies on 18. 8. 2011. During the course of search, certain documents were seized by the CBI and subsequently, the information was passed on to the Income Tax Department. M/s Carmel Asia Holdings Pvt. Ltd. , filed its return of income for A. Y. 2007-08 on 06. 11. 2007 which was processed on 13. 10. 2008. The company is engaged in investing in long term investments in equity shares and other securities of its group companies and subsidiaries. As per the information available, the assessee company received capital and allotted shares to the following companies and invested it at a premium during the F. Y. 2006-07, the details of which are encapsulated in the Table 1 below:- Table 1 S N Name of Investor No. Of shares allotted Nominal Value Premium collected Year of Investment (FY) 1 Silver Oak Technologies Pvt. Ltd. , 95, 418 9, 54, 180 2,....
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....y activity during the year. Therefore, there is no justification for allotting shares to the companies mentioned in Table--1 above, at a huge premium of Rs. 60, 59, 51, 640/- especially when the companies have not received any stake commensurate with the amount invested by them. I have reason to believe that the amount invested by companies mentioned in Table 1 is gratuitous in nature, M/s Carmel Asia Holdings Pvt. Ltd has not offered the amounts invested by the companies mentioned in the Table 1 above as income for the year. Thus, income of Rs. 60, 59, 51, 640/- has escaped assessment and the same needs to be taxed in the hands of M/s Carmel Asia Holdings Pvt Ltd. for AY 2007-08" 24. It is the case of the assessees that the above said reasons recorded by the assessing officer do not lead to the belief that there was escapement of income. In order to better appreciate the contentions of the parties, we may dissect the reasons recorded by the AO as under:- (a) A search was conducted by CBI in the case of Sri Jagan Mohan Reddy and his Group companies on 18. 089. 2011. During the course of search, certain documents were seized by the CBI and subsequently,....
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.... case of Hindustan Lever Ltd (supra) as under:- "21. .... . It is needless to mention that the reasons are required to be read as they were recorded by the Assessing Officer. No substitution or deletion is permissible. No additions can be made to those reasons. No inference can be allowed to be drawn based on reasons not recorded. It is for the Assessing Officer to disclose and open his mind through reasons recorded by him. He has to speak through his reasons. It is for the Assessing Officer to reach the conclusion as to whether there was failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the concerned assessment year. It is for the Assessing Officer to form his opinion. It is for him to put his opinion on record in black and white. The reasons recorded should be clear and unambiguous and should not suffer from any vagueness. The reasons recorded must disclose his mind. The reasons are the manifestation of the mind of the Assessing Officer. The reasons recorded should be self-explanatory and should not keep the assessee guessing for the reasons. Reasons provide the link between conclusion and evidence. The re....
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.... has escaped assessment. The Hon'ble Delhi High Court, after discussing catena of decisions on "reason to believe", held as under:- "18. In the present case, the reasons disclose that the assessing officer reached the belief that there was escapement of income "on going through the return of income" filed by the assessee after he accepted the return under section 143(1) without scrutiny, and nothing more. This is nothing but a review of the earlier proceedings and an abuse of power by the Assessing Officer, both strongly deprecated by the Supreme Court in CIT v. Kelvinator (supra). The reasons recorded by the Assessing Officer in the present case do confirm our apprehension about the harm that a less strict interpretation of the words "reason to believe" vis-à-vis an intimation issued under section 143(1) can cause to the tax regime. There is no whisper in the reasons recorded, of any tangible material which came to the possession of the Assessing Officer subsequent to the issue of the intimation. It reflects arbitrary exercise of power conferred under section 147. " 28. The Hon'ble Delhi High Court, in the above said case, has extracted the law discussed by Hon'....
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....cted below, at the cost of repetition: - "It is reliably learnt on the basis of the investigations carried out by the CBI that the companies have received benefits from the State Government of Andhra Pradesh. " In the paragraph recorded below the table also, the assessing officer has mentioned that "some of the companies namely, M/s Pioneer Infrastructure Holdings Ltd and M/s India Cements Ltd received benefits from the State Government of Andhra Pradesh. 30. We have noticed earlier that the Ld CIT(A) has called for a remand report from the AO and the assessing officer has furnished certain confidential facts in the remand report. For the sake of convenience, we extract below the relevant portion of the remand report furnished by the AO:- "4(iii) Confidential facts: The FIR No. RC19(A)/2011 dated 17-8. 2011 registered by the CBI alleges that various public properties, Licenses/projects, SEZ's, Mining leases, Ports, real estate permissions and other benefits were allotted to persons picked by Shri V. S. Jaganmohan Reddy violating established norms and procedures in the Government of Andhra Pradesh for quid pro quo. These beneficieries have in turn gi....
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.... are not available in the return of income. We have noticed that the AO has referred to the search conducted by CBI in the case of Sri Jagan Mohan Reddy and his Group companies in the reasons and further referred to the fact that the share applicant companies have received benefits from the State Government of Andhra Pradesh. In the remand report also, the assessing officer has referred to confidential facts, wherein he has stated that the CBI has alleged that the benefits were given to share subscriber companies for quid-pro-quo. Accordingly, we are of the view that the source of information about the alleged connection between the investments made by the share applicants in these two assessee companies and the benefits received by them from Government of Andhra Pradesh is CBI only. The next question that would naturally arise is that - whether the said information could trigger the AO to form the belief that there was escapement of income? In the reasons recorded by the AO for reopening of assessment, the AO has referred to the information received from CBI on benefits received by the share applicant companies and further questioning the high share premium collected by the assess....
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....elief that there was escapement of income. (b) "some of the companies namely M/s Pioneer Infrastructure Holdings Ltd and M/s India Cements Ltd received benefits from the State Government of Andhra Pradesh". This observation of the AO only gives information that these two investor companies have received benefits from State Government. The details of nature of benefits, how the investments made by them are related to it and how it would result in escapement of income in the hands of the assessee were not spelt out by the AO. This observation, in our view, does not lead to the belief that there was escapement of income. (c) The abovementioned investment made by the abovementioned entities was treated as income in the hands of M/s Jagati Publications P Ltd and M/s Bharathi Cement Corporation Ltd. This observation of the AO gives information about the action taken in the hands of other assessees. It is not celar as to whether the AO wished to follow the action taken in the hands of other assessees. If it is to be so, then the reopening is not valid, because it is not the belief of the AO, but borrowed belief which is not permitted u/s 147 of the Act ....
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....hat the meaning of the word "gratuitous" is "given without receiving any return value". When a person makes investment in Shares of any company, he would get share certificate for the same and further the said share certificate is transferrable to other person for consideration. This is the mechanism prescribed under the Companies Act with respect to subscription of shares. Hence, it is not legally correct to categorise the share subscription as "gratuitous" in nature. Even, if it is considered as gratuitous payment, the AO has not shown as to how it can be considered as "income" in the hands of the assessees herein, as per the provisions of Income tax Act. 34. The above said analysis of the observations made by the assessing officer in the reasons recorded for reopening of assessment would show that there was no other material available with the assessing officer to form the belief that there was escapement of income except the information received from CBI on alleged quid pro quo. Accordingly, we are of the view that the assessing officer has reopened the assessments only on the basis of information received from CBI. 35. We have noticed that the Hon'ble Delhi High Court ha....
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....thing of that sort was brought on record by the AO while recording the reasons for reopening. Hence, we are of the view that the assessing officer was not right in law in reopening the assessment, as he could not have entertained the belief about escapement of income on the basis of reasons recorded by him. 38. We have noticed that the information received from the CBI, as spelt out by the AO in the reasons recorded and in the remand report, would show that the CBI has alleged that the investments have been made by the applicants as quid pro quo to the benefits received by them. This information cannot be the basis for reopening of assessment, since it is the assessing officer who has to apply his mind on the issue and take an independent view. It is not visible from the reasons recorded by the AO that he has taken any independent view on the matter. The question that would arise is Whether this information alone is sufficient to form the belief that there was escapement of income?. In our view, it will not lead to the belief that the income of the assessee has escaped the assessment. What was received by the assessee was Share capital/Share application money/Share premium. They....
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....ees and quash the orders passed by the tax authorities. 41. Since the parties have agreed that the above said decision can be applied on three other appeals under consideration, we hold that the reopening of assessment in the case of three other appeals is also bad in law and accordingly quash the orders passed by the tax authorities. 42. The Ld. Senior Advocate, Shri Percy Pardiwala advanced his arguments on merits of the additions. The case of Carmel Asia Holdings P Ltd for assessment year 2007-08 was taken up first. The Ld AR submitted that the AO has assessed the share application money and share premium only as income of the assessee in this year. He further submitted that the AO has not referred to any of the sections of the Income-tax Act for assessing the 'share application money and share premium amount' as income of the assessee. At this point of time, the Ld D. R was asked to clarify this point, to which the Ld D. R submitted that the assessing officer has stated in page 7 of the assessment order that the sum of Rs. 6059. 52 lakhs is brought to tax as "unexplained credits". Accordingly he submitted that the AO has invoked the provisions of sec. 68 only for making t....
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....ved by the assessee are unexplained credits. 45. The ld AR submitted that the AO was not right in observing that there was no basis for charging such high premium. Inviting our attention to copy of valuation report placed in page 125 to 134 of the paper book, the ld AR submitted that the assessee has obtained a valuation report from a firm of Chartered Accountants, which would support the share premium collected by the assessee. The ld AR submitted that the above said valuation report was furnished to the AO along with the letter dated 26-03-2015. Accordingly he submitted that there was no scope for making any addition u/s 68 of the Act on the ground of high share premium. 46. The ld AR invited our attention to the letter dated 25. 2. 2015 placed at page No. 50-53 of the paper book addressed to the AO during the course of asst. proceedings. The ld AR submitted that the assessee has given detailed explanation as to why share premium cannot be assessed as income of the assessee. It was submitted that share capital and share premium receipts are capital account transactions. In this regard, the assessee took support of the decision rendered by Hon'ble Bombay High Court in the ca....
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....ed that the assessee therein was called upon by the AO to furnish details of the amount received and provide evidence to establish identity of the investor companies, credit worthiness of the creditors and genuineness of transactions. The Assessee furnished copies of income tax returns of the investor companies and submitted that the money was received from banking channels. Accordingly the assessee contended that the onus placed upon it u/s 68 of the Act stands discharged. Thereafter, the AO issued summons to investor companies. Nobody appeared before the AO, but replies were received by post. Hence the AO got field enquiries conducted independently and the result of enquiry was summarised by the AO in the assessment order, which showed that many companies did not exist at the given address or they lacked credit worthiness. Accordingly, under these set of facts, the Hon'ble Supreme Court has upheld the addition made u/s 68 of the Act. He submitted that the AO, in the instant case, has not conducted any enquiry independently nor did he point out any other deficiency. Accordingly he submitted that the decision rendered by Hon'ble Supreme Court in the above said case will not apply t....
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....tal in AY 2008-09 from Carmel Asia Holdings P Ltd to the tune of Rs. 273. 21 lakhs. The AO has assessed the same on protective basis. The Ld A. R submitted that the arguments made by him shall apply to the above said appeals also. 53. The Ld D. R, on the contrary, submitted that the assessing officer has called the assessee to substantiate the genuineness of share premium collected by the assessee. However, the assessee has failed to substantiate the same. The Ld D. R submitted that the Hon'ble Supreme Court has held in the case of NRA Iron & Steel P Ltd (supra) that the assessee is required to prove the genuineness of the transactions relating to collection of share premium. He submitted that the Hon'ble Supreme Court has sustained the addition of Share premium in the above said case, since the assessee did not offer any explanation as to why the investor companies had applied for shares of the assessee company at a high premium. He submitted that the assessee, in the instant case also, did not substantiate the share premium received by it. 54. The Ld D. R submitted that the valuation report furnished by the assessee has been rejected by the AO on noticing that it did not....
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....xed and accepted by the investing parties. 9. 1 ....... The arrangement and circumstances leading to issue and allotment of shares may draw some doubts that certain benefits may have passed on to the directors. But the question is whether the directors/shareholders have really benefitted with this arrangement and the assessee company was used as arrangement to pass on the benefit. The revenue has to prove that the investors have passed on the benefit to the shareholders/directors through this arrangement by bringing cogent material. But the AO/CIT(A) has brought on record so many incidences and alleged benefits which were enjoyed by the investors from the Govt. of AP. But, what is important is that the funds were invested in the company and the company has demonstrated that it has treated the investment as part of share capital fund and also the share premium as part of capital reserve within the company as per the provisions of Companies Act. Since the assessee is artificial person created by the Statute, we cannot trespass the legal entity. It cannot be trespassed provided the authority has evidence to prove that this legal person was used to pass on the benefit to inter....
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....es cannot be applied to business transactions, as they are based on cogent materials. In any case, the Ld D. R has agreed that the receipt of share premium has to be tested u/s 68 of the Act. Hence the theory of human probabilities cannot be applied in this case. 62. We have noticed that the Ld D. R has clarified that the additions have been made u/s 68 of the Act. From the assessment order as well as from the paper book furnished by the assessee, it can be noticed that the assessee has furnished all the details that were called for by the AO. We notice that the AO has treated the share premium has unexplained cash credit only for the reason that the same was commensurate with the size of the income and financial strength of the assessee. We have noticed that the AO has reached to this conclusion without carrying out any further investigation and without bringing any material on record. The AO has not shown that the Share premium so collected by the assessee represents assessee's own money warranting an addition u/s 68 of the Act. 63. However, the fact remains that the share premium has been collected as per the understanding reached between both the parties. We notice that t....