ACIT, NEW DELHI vs. M/S. ESCORT LTD., NEW DELHI

3. Before us, the Ld. DR submitted that assessment has been reopened within 4 years from the end of the relevant assessment year and therefore, the first proviso below the section 147 requiring issue notice of without failure on the part of the assessee to disclose fully and truly all material facts is not attracted. According to her, in the original assessment proceedings, the Assessing Officer duly mentioned that the market value of the assets of EHIRC was not in his possession and therefore he determined the addition on the basis of the book value of the assets. On receipt of the valuation report from the DVO, the assessment was reopened and thus it was not on mere change of opinion but it was based on valuation report of an expert valuer. In support of contention, the Ld. DR relied on the decision of the Hon’ble Delhi High Court in the case of Bawa Abhai Singh Vs DCIT reported in 253 ITR 83 (Delhi).

4. On the contrary, the Ld. counsel of the assessee filed a paper-book containing pages 1 to 95 and justified action of the Ld. CIT(A) in view of the reopening of the assessment made on mere “change of opinion”. The Ld. counsel also submitted that in the reassessment proceeding, the Assessing Officer has enhanced the amount of addition which was made in the original assessment proceeding. In the original assessment proceeding the addition was made by way of difference between the value of the shares worked out on the basis of the book value of the assets of EHIRC and the face value paid by the assessee. The Ld. counsel pointed out that the addition made in the original assessment proceeding has already been deleted by the Tribunal, then the enhancement made to the addition by way of adopting market value of the assets of EHIRC cannot be sustained. The Ld. counsel also relied on the decision of the Ld. CIT(A) holding that report of the Valuation Officer on its own without any other material is a mere opinion and cannot constitute reason to believe justifying the reopening of the assessment.

In the case of CIT Vs. Ramprasad 113 ITR 462 (Delhi), it was held that when the assessee devoted his time and attention to the formation and promotion of a company he could be said to be engaged in a vocation/occupation. The Hon'ble Suprme Court went further in the case of Shri P.Krishnamenon Vs. CIT, 35 ITR 48 to hold that the term business includes vocation and receipts even without any profit motive could be held to be taxable income. In the case of M/s Escorts Limited, a charitable trust was first set up in Delhi of which M/s Escorts Limited was the prime promotor. Later on in 1999, a society which was not having charitable purpose was set up in Chandigarh after seeking legal opinion of various leading advocates. This fact came to light when a survey was conducted in group of cases in August, 2003 and papers were found from the premises which indicated that persons of the Escorts group had it in their mind to get control over the assets of the charitable institute of Delhi. For this purpose they wanted to transfer all the assets of the charitable society into a company but since a direct transfer was not possible as per law, M/s Escort Heart Institute & Research Centre, Chandigarh, a society with an identical name was sought to be used as a conduit. The legal opinions given by the different advocates who were consulted by the assessee were against a step as envisaged by the assessee and other persons of the group. But they decided to go ahead with the creation of the Chandigarh society and its subsequent conversion into limited company by using all kinds of questionable and dubious means described in the preceding paragraphs. Thus, the assessee devoted time, money and effort to achieve its end of obtaining control over the assets of the charitable society at Delhi. It can therefore, be said that the assessee was engaged in a vocation which ultimately gave huge returns to the Since only Rs.60 lakhs were originally invested in the Delhi Society and subsequently the assessee subscribed to 16,00,000 shares at the rate of only Rs.10/- per share of the Chandigarh society whereas looking at the net assets (at book value of Rs.110,14,12,937/-) the value per share of the Society and later on the company Escorts Heart Institute & Research Centre Ltd, works out to Rs.550/- per share. In this way, the assessee has gained tremendously. The Hon'ble Madras High Court in the case of CIT Vs. Vardarajan [224 ITR 9] has held that the benefit of capital nature is also taxable as income under clause (iv) of section 2(24) of the I.T. Act. Since assessee was having 80% shareholding in the society and then the company, i.e. Substantial interest in both of them, it can be said that the difference in the intrinsic value of shares (16,00,000 X 55b) and the value paid by the assessee i.e. Rs.1,60,00,000/- was a benefit received by it within the meaning of Section 2(24)(iv) of the Act. Thus looking from this angle also the amount is taxable in the assessee's hands.

“5. Having gone through the submissions of the appellant, the order of assessment and the material evidences placed on the record, it emerges that during the course of the original assessment completed on 31.03.2004 u/s 143(3) of the Act, the Assessing Officer raised detailed queries on the acquisition by the appellant of the shares of EHIRC, Chandigarh, a society with specific reference to the difference between the cost of acquisition at Rs.10/ per share and the purported book value of Rs.550/- per share.

After issuing a specific show cause the Assessing Officer proceeded to make an addition of Rs.88,11,30,349/- by resort to the provisions of section 2(24)(iv) of the Act. These facts emerge from the following observations made in the assessment order: "Thus the difference of 80% of the assets transferred from the Delhi Society to Escorts heart Institute And Research Centre Ltd., Chandigarh and the initial investment of Rs.60 lakhs was proposed to be treated as income of the assessee company, M/s Escorts Ltd. u/s 2(24) of the I.T. Act for the financial year 2000-01 relevant to the assessment year 2001-02" (page 8 of the order). "The assessee company has contended that the amount proposed to be taxed does not come within the purview of section 2(24) of the I.T. Act" (page 13 of the order). "Whereas looking at the net assets (at book value of Rs.110,14,12,937/-) the value per share of the society and later on the company Escorts Heart Institute & Research Centre Ltd. works out to Rs.550/- per share" (at page 16 of the order). "Since assessee was having 80% shareholding in the society and then the company, i.e. substantial interest in both of them, it can be said that the difference in the intrinsic value of shares (16,00,000 x 550) and the value paid by the assessee i.e. Rs. 1,60,00,000/- was a benefit received by it within the meaning of section 2(24)(iv) of the Act" (page 16 of the order). "since the market value of the assets was much more but is at the moment not in possession of the undersigned, addition to the tune of 80% of the assets at book value is being made in the hands of the assessee for the time being. Addition works out to Rs.88,11,30,349/- (80% of the book value of Rs.1,10,14,12,937/-) (page 17 of the order). The fact that the issue travelled in first appeal to the CIT(A) and cross appeals by the assessee and the department to the Hon'ble ITAT is substantiated by the grounds raised before the latter in the following terms:- By Assessee "Without prejudice to the earlier grounds, there was no basis for the valuation of Rs.550/- per share worked out by the AO". By the Department "On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (appeals) has erred in reducing the addition made by the AO by assessing a sum of Rs.88,11,30,349/- being 80% of the net book worth of M/s Escorts Heart Institute & Research Centre, Delhi as on 31.03.2000 as income of the appellant u/s 2(24)(iv) of the I.T. Act, 1961 to Rs.86,40,00,000/- ignoring the details mentioned by the AO in the assessment order).

The Hon'ble ITAT while taking the view that the addition made by the AO u/s 2(24)(iv) was not sustainable in law observed as under in para 74 of its order. "Since the amount in question has been held to be not taxable. We are of the view that the question of valuation of shares as raised in the Revenue's appeal is academic." It is crystal clear that the issue of valuation of shares was consciously considered in detail by three authorities and the Assessing Officer by resort to the provisions of section 148 of the Act seeks to review/revise the said valuation but which is not the mandate of the said provision. The present reassessment in fact is a blatant attempt to enhance an assessment which stands nullified by the order of the ITAT. In effect, the Assessing Officer is trying to overcome the order of a higher appellate authority by resort to the provisions of section 148 of the Act. It is significant to note at this stage that the reasons recorded refer to a single fact namely the report of the DVO in the case of EHIRC, Chandigarh which necessitated the notice u/s 148 of the Act. This needs to be seen in the context of the observations made by the Assessing Officer in the assessment order as also the reasons recorded about the non-availability of the market value and the justification to adopt for the time being the book value. The following propositions emerge from the aforesaid:- (1) Section 148of the Act is not a tool to enable the Assessing Officer to take up assessments piece meal on whims and fancies. (2) The Assessing Officer in the original assessment was at liberty to seek the assistance of the DVO in case it was warranted. By not taking any such action the assessee could not be penalized for no fault of his. (3) There was no failure on the part of the assessee in disclosing material facts and no duty was cast on it as per law to disclose the market value of the assets of the institutions in which it held shares. As per the extract from the audited accounts namely Schedule 6 depicting the investments the company had a portfolio of shares, units and Bonds aggregating Rs.548.17 crores and compared thereto the investments in the shares of EHIRC, Chandigarh thereafter converted into EHIRC Ltd. was a miniscule amount of Rs.1.60 crores. It is not expected and neither provided by law that an assessee should furnish the market value of the assets of the company in which it purchases shares as is the expectation of the Assessing Officer in the reassessment.

Another aspect which needs to be adverted to is the effect of a valuer's report in proceedings for reassessment. In judgement after judgement, it has been held that the valuer's report on its own without any other material is a mere opinion and cannot constitute 'reason to believe' justifying the reopening of an assessment made u/s 143(3) of the Act. The report of a valuer is not treated as 'information' and the Courts have gone to the extent of terming a reference to the DVO after the assessment has been completed as incompetent in law resulting in the quashing of the reassessment order. The case of the assessee is on a much stronger footing since the report of the valuer is not in its own case but that of EHIRC, Chandigarh and not even confronted to it. Adverting at this stage to the judgements relied upon the first in line is the case of CIT vs. Eicher Ltd. in which the point at issue had been examined by the Assessing Officer in the original assessment by raising queries and receiving due response from the assessee although no finding was given in the assessment order. The plea of the assessee that it was a case of 'change of opinion' was rejected by the Assessing Officer but his view was reversed by the CIT(A) and whose order was upheld by the Tribunal. On appeal by the revenue u/s 260A of the Act, the Hon'ble High Court held as under:- "16.Applying the principles laid down by the Full Bench of this Court as well as the observation of the Punjab and Horyono High Count, we find that if the entire material had been placed by the Assessee before the Assessing Officer at the time when the original assessment was made and the Assessing Officer applied his mind to that material and accepted the view canvassed by the Assessee, then merely because he did express this in the assessment order, that by itself would not give him a ground to conclude that income has escaped assessment and, therefore, the assessment needed to be reopened. On the other hand, if the Assessing Officer did not apply his mind and committed a lapse, there is no reason why the Assessee should be made to suffer the consequences of that lapse." The case of the assessee is on an even better footing since the entire material had been placed on record, discussed by three authorities, the view of the assessee not accepted by the Assessing Officer but complete relief given by the ITAT and the reopening was done only because the Assessing Officer who completed the original assessment did not make any effort to ascertain the market value of the shares. The judgements in the case of Eicher Ltd. & Kelvinator of India Ltd. were affirmed by the Supreme Court in 320 ITR 561. The Hon'ble Apex Court held that Post 1st April 1989, the power to reopen is much wider but one needs to give a schematic interpretation to the "reason to believe" failing which, Section 147 of the Act would give arbitrary powers to the Assessing Officer to reopen assessments on the basis of "mere change of opinion" which cannot be per se reason to reopen. The only other decision which needs to be referred to is the Full Bench Judgement of the Delhi High Court in CIT vs Usha International Ltd., wherein the principle of "change of opinion" was reaffirmed in the following terms : "Reassessment proceedings will be invalid in case the assessment order itself records that the issue was raised and is decided in favour of the assessee. Reassessment proceedings in the said cases will be hit by the principle of "change of opinion". In the light of the law laid down by the Hon'ble Jurisdictional High Court and the Hon'ble Supreme Court, I hold that the order impugned is wholly based on a "mere change of opinion," being without jurisdiction, therefore null and void and liable to be quashed. In the view that I have taken to quash the order of reassessment, I do not propose to deal with the grounds raised on the merits of the addition.”

1. 1. The addition made under section 2(24)(iv) of the Act amounting to Rs.88,11,30,349/- in the original assessment proceeding in respect of the intrinsic value of the shares allotted to the assessee worked out on the basis of the book value of the assets of EHIRC, has been deleted by the Tribunal holding it to be non-taxable. In such circumstances the Assessing Officer cannot nullify the order of the Tribunal and reopen the assessment proceeding under section 148 of the Act.

2. Failure of the Assessing Officer in the original assessment proceeding for not taking market value of assets of the EHIRC and taking plea that the assessee has not provided market value of the assets of EHIRC , cannot be a ground for reopening of the assessment.

3. It is settled in view of the decision of the various courts that the valuer’s reports on its own without any other material is a mere opinion and cannot constitute reason to believe justifying the reopening of the assessment .

51. The submissions of the Id. Special Counsel is firstly that if an assessee makes investment in shares of different companies and takes active interest in the business of these companies by rendering consultation in respect of finance of such companies through its Director and where the assessee was responsible for promotion of such companies also, then it would be a case of systematic or organized course of activity and in that event the holding of investments would not be merely making investment but was a business of holding of investments. On the facts of the present case, the Id. Special Counsel contends the assessee was in the Chandigarh Society after its amalgamation would be either profits and gains under section 2(24)(i) of the Act from the business of holding of investments or would be a benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession as contemplated under section 28(n ) of the Act. He thus wants to sustain the order of the CIT(A) by contending that in any event the benefit of acquiring shares of the Chandigarh Society at less than it’s book value was income within the meaning of section 2(24)(i) read with section 28(iv) of the Act.

“71. In our opinion, as to whether the assessee was in the business of holding investments or not is an inferential fact which his deduced merely on the basis of the Annual reports but on the basis of several surrounding circumstances and material. The fad the assessee is a predominantly manufacturing company and the fact that the purchase of shares is reflected as an investment a balance sheet is not in dispute. In the past, the income on sale of investments has been declared by the assessee only under the ! "Capital Gains" and not under the head "Income from Business", which has also been accepted by the revenue. It is no doubt true the revenue authorities in a particular assessment year are free to take a different view and the principles of res judicata ire applicable to income-tax proceedings. In the present case neither the Assessing Officer nor the CIT(Appeals) deemed it plausible to hold the assessee as engaged in the business of holding investments and that the purchase of shares by it at a price less than its value was in the course of such business giving rise to income chargeable under the Act either under section 2(24)(i) read with sec 28(A) of the Act. But this background is only a pointer to the fact that the assessee was never considered as being in the business holding investments either in the past or in the assessment proceedings of the instant year. To conclude otherwise without any enquiry into the primary facts necessary for coming to such a conclusion, would not be proper. In this background, to venture to consider and hold that the assessee was in the business of holding investments would be unjustified.

Even assuming that the Annual reports of earlier years were to be considered as material available on record, but on the basis of those records alone it is not possible to conclude that the assessee was engaged in the business of holding investments. In other words, complete evidentiary facts cannot be said to be available on record to adjudicate this new plea raised on behalf of the Revenue. We therefore, decline to adjudicate on new plea raised by the revenue as to whether the purchase of shares in the Chandigarh Society (after amalgamation) by the assessee a price less than its intrinsic value would give rise of ‘income’ within the meaning of section 2(24) read with section 28(h ) of the Act”

74. Since, the amount in question has been held to be not taxable. We are of the view that the question of valuation of the shares as raised in the revenue’s appeal is academic. We therefore, allow ground No. 2 of the Grounds of appeal of the assessee and dismiss ground No.1 of the Grounds of appeal of the revenue.

11. In view of the above, it is clear that the Tribunal has held the amount of difference of book value of the shares and the actual amount paid as non-taxable. In such circumstances, the Assessing Officer is not justified in reopening the assessment and substituting the book value by way of market value of the shares based on valuation report. The Revenue if, aggrieved can prefer appeal against the order of the Tribunal, but cannot nullify the order of the Tribunal in this manner without challenging the order before the Hon’ble High Court. In our opinion, this reason itself is sufficient to hold the reassessment proceeding as invalid and, thus, we are not adjudicating the other grounds or the arguments of the parties challenging the validity of the reassessment proceeding. The ground of the appeal of the Revenue is accordingly dismissed.