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Income Tax Appellate Tribunal, “J” BENCH, MUMBAI
PER MAHAVIR SINGH, JM:
This appeal by the Assessee is arising out of the order of Commissioner of Income Tax (Appeals)-48, Mumbai, [in short CIT(A)] in appeal No. CIT(A)-48/IT-268/ACCC-42/2014-15 dated 10-03-2017. The Assessment was framed by the Assistant Commissioner of Income Tax, Circle 42, Mumbai (in short ACIT) for the assessment year 2008-09 vide order dated 24-03-2014 under section 143(3) read with section 147 of the Income Tax Act, 1961(hereinafter ‘the Act’).
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The first inter connected jurisdictional issue raised by assessee against the order of CIT(A) confirming the action of the AO in reopening the assessment by invoking the provisions of section 147 of the Act, despite the fact that on search under section 132 of the Act dated 10-01- 2011 conducted on the office premises of Lodha Developers Limited, whether from shares subscription comes share holder agreement date 10-05-2007 was ceased. For this assessee has raised following ground No. 2 and 3: -
“2. (a) On the facts of the case and in law, the learned CIT (A) erred in coming to the conclusion that the assessment had been rightly done u/s.143(3) read with Section 148 and should not have been done under Section 153C, inspite of the fact that the assessment was reopened u/s.147 based on certain seized material belonging to the appellant found during the course of search in case of another assessee.
(b) On the facts of the case and in law, the Learned CIT (A) erred in concluding that the seized documents did belong to the Appellant but they were related to or pertained to the Appellant and hence it shall not be covered u/s.153C of the IT Act, ignoring the facts and without giving any finding on facts to the contrary.
On the facts of the case and in law, the Learned CIT (A) while confirming applicability of Section 147 erred in giving a finding that non-filing of Form No.3CEB u/s.92E was a reason for the AO to invoke
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Section 147, Explanation 2(ba), inspite of the fact that the AO has accepted the submission of the Appellant that the Appellant's case was not covered u/s.92E.”
Brief facts relating to this issue are that assessee filed its return of income on 28.09.2008. The assessee claimed that it has declared in the return of income “Shareholder's fund" that its issued, Subscribed and Paid up" capital at Rs. 28,63,82,938/- comprising of share capital of Rs. 2,06,080/- and share premium of Rs. 28,61,76,858/-. The AO reopened the assessment u/s 148 of the I.T Act, by recording the following reasons:-
“During the course of search proceedings at the office premises of M/s. Lodha Developers Ltd, Lodha Pavilion, Appolo Mills Compound, N M Joshi Marg, Mahalaxmi, Mumbai-400011 a file containing loose papers Annexure A/1 numbered 1-24 were seized. On perusal of this loose paper' especially Page No. 1 to 22 it is observed that Mr. Samayak Veera and assessee company have entered into an agreement on 10-05- 2007 Vide this agreement Mr. Samayak Veera invested of Rs. 28,61,86,858/- by way of 1% deemable preference shares of ₹ 10/- each and premium of Rs.2,86,176.86/- per share and 9,608 shares of Rs 10/- each at par. At this juncture, it needs to be mentioned that Mr. Samayak Veera is a Non Resident person and considering his contribution by way of preference shares he is an associate enterprise within the meaning of section 92A of the I.T. Act, 1961. Further, assessee has not filed any report in Form 3CEB as required by provisions of section 92E of l.T. Act, 1961. As a result
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no arm's length price is determined in result of this transaction and the creditworthiness of the investor and genuineness of the transaction remains unproved. In the backdrop of above facts, the undersigned has reasons to believe that the income has escaped assessment within the meaning of section 147 of the Income Tax Act, 1961 for the A.Y 2008-09 to the extent of transaction mentioned above. Therefore, notice u/s 148 is issued.”
The assessee objected to the assumption of jurisdiction for reopening of assessment. For this assessee stated that the undisputed facts in its case are that a file containing loose papers has been found during the course of search action at the premises of Lodha Developers Limited. For such circumstances, there are separate and complete mechanism stated in section 153A to 153C of the Act dealing with the search cases which needs to be followed. Therefore, in the cases of search action, recourse to section 148 of the Act cannot be taken. The assessee raised the issue that the provisions of Section 153C of the Act were applicable on the facts of the case and there was no proof that the income of the assessee has escaped assessment justifying the reopening of assessment u/s 148 r.w.s.147 of the Act. It was claimed that the impugned amount was received on capital account and cannot be termed as taxable income of the assessee. It was also claimed that the AO has reopened the assessment for the purpose of making a roving and fishing inquiry to verify as to whether any income has in fact escaped assessment. There was no obligation to file Form 3CEB. Alternatively, non-filing of Form 3CEB cannot constitute the reason to believe that the income chargeable to tax has escaped assessment. But the AO has not accepted the contention of the assessee and assumed jurisdiction for
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reopening of assessment. Aggrieved, assessee preferred appeal before CIT(A). 5. The CIT(A) also confirmed the action of the AO by observing that the reopening by AO is as per the provisions of the Act. For this he observed as under:- “4.5. Provisions of Section 153C vs. Section 147: The primary contention of the appellant as explained in paragraph 1.2 is that the appellants case falls within the provisions of Section 153C as the incriminating documents were seized during the course of search u/s. 132 in the case of Lodha Developers Ltd. Thus, the proceeding should have been initiated under the provisions of Section 153C, it being specific, instead of Section 147. The appellant has relied upon various decisions in support of its contention. The provisions of Section 153C as applicable at the time when the matter was reopened i.e. on 25/02/2013 were as follows: (1) Notwithstanding anything contained in section 139. section 147, section 148, section 149. section 151 and section 153, where the Assessing Officer is satisfied that any money, bullion, jewelery or other valuable article or thing or books of account or documents seized or requisitioned belongs or belong to a person other than the person referred to in section 153.4, then the books of account or documents or assets seized or requisitioned shall be handed over to the Assessing Officer having jurisdiction over such other person and that Assessing Officer shall proceed against cacti such other person and issue such other person notice and assess or
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reassess income of such other person in accordance with the provisions of section 153A - The aforesaid provisions were amended by the Finance Act, 2015 w.e.f. 1.6.2015. However, since these amendments were not in force at the time of reopening of the assessment in the present case, they have not been considered. What was required in order to invoke the provisions of Section 153C was that assets or incriminating materials found during the course of search should be belonging to other person (i.e. not the person in whose case search u/s. 132 has been undertaken). In the present case, only incriminating material found as referred in the reasons is a file containing loose papers Annexure A/1 numbered 1-24. The appellant has failed to establish that this file containing loose papers was belonging to it. Unless it belongs to the appellant company, no proceeding u/s. 153C could have been initiated. Had the Assessing Officer invoked the provisions of section 153C, the appellant would have challenged it on the ground that nothing belonging to it was found during the course of search. I am relying upon the decision of Mumbai ITAT in the case of M/s Yamuna Estate Pvt. Ltd. vs. ITO [ITA No. 26721M/2012], the relevant extract of which is reproduced below: 'We have considered the rival contentions and have also gone through the records. So far as the first contention of the Ld. A.R. that the reopening in this case could have been done under section 153C only but not under section 147 of the Act is concerned, we find that during the course
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of search in the case of M/s Mahasagar Securities Pvt. Ltd. and its group companies, the documents found in their premises belonged to the searched companies and not to the assessee. The assessees name figured in the list of persons to whom the said searched person had allegedly provided accommodation entries Under such circumstances, it can be safely said that the incriminating documents belonged to the searched person but somehow related to the assessee as the name of the assessee had figured in the list of persons. The Hon'ble Gujarat High Court in the case of Viiaypyp N. Chandrani vs. ACIT (2011) 333 ITR 436 had the occasion to deal with this legal issue, The Hon'ble High Court analyzing and interpreting the provisions of section 153A, 153B and 153C has held that the provisions of section 153C are quite different from that of section 1588D. The Hon'ble High Court has observed that as per the provisions of section 153C, where the AO is satisfied that any money, bullion. Jewellery or other valuable article or thing or books of account or document seized or requisitioned belongs or belong to a person other than the person referred to in section 153A, he shall proceed against each such other person and issue notice and assess or re- assess income of the other person, whereas under section 158BD if the Assessing Officer is satisfied that any undisclosed income belongs to any person other than the person with respect to whom search was made under section 132 or whose books of account or other documents or assets were requisitioned under section 132(4), he could proceed against such other person under section 158BC. The Hon’ble Gujarat High Court, therefore, has held that the condition precedent for issuing notice under section 153C is that the money, bullion,
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jewellery or other valuable article or thing or books of account or document seized or requisitioned should belong to such other person if the above requirement is not satisfied recourse cannot be had to the provisions of section 153C. The Hon'ble High Court has further observed that though in the loose papers recovered during the search proceedings, there was a reference to the petitioner in as much as his name was reflected in the list. However, the loose papers did not belong to the petitioner. The Hon'ble High Court, therefore, has held that under such circumstances, the condition precedent for issuance of notice under section 153C was not fulfilled and any action taken under section 153C of The Act stood vitiated (The Hon’ble Delhi High Court in the case of 'Pepsico India Holding (P) Ltd v ACIT (2015) 228 Taxmans 116 (Del.) has held that the Assessing Officer should not confuse the expression belongs to' with the expression 'relates to' or 'refers to'. The Hon’ble High Court has held that unless it is established that the document in question does not belong to the searched person the question of invoking section 153C does not arise. Admittedly, the documents in the case in hand belonged to the searched person. Under such circumstances, in view of the proposition of law laid down by the Hon’ble Gujarat High Court (supra) and by the Hon’ble Delhi High Court (supra) which has been further followed by various benches of the Tribunal, the reopening an the case in hand has rightly been done under section 147 of the Act by the AO. In our humble view, the case laws relied upon by the assessee are distinguishable in the light of the decisions of the Hon’ble Gujarat High Court (supra) and that of the Hon'ble Delhi High Court (supra)."
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Respectfully following this decision, I reject the contention of the appellant regarding invoking of provisions of Section 153C as against Section 147 in the absence of any funding that the documents found during the course of search in the case of Lodha Developers Ltd. and relied upon for the purpose of reopening were 'belonging' to the appellant. 4.6. Proof regarding escapement of income: The next contention of the appellant is that there was no proof regarding escapement of income justifying the reopening u/s. 148 as mentioned in the submission in Para 1.3.2. The appellant has submitted that the issue of share capital under consideration has already been stated by it in the return of income filed and hence the information relied upon by the Ld. Assessing Officer for the purpose of reopening of the assessment is not something which is new and relevant. I have perused the copy of return of income submitted by the appellant in this regard available at pages 21 to 50 of the paper-book. The appellant has stated the amount of Rs,28,63.82,938 in the issued. Subscribed and Paid up capital in the Balance Sheet. However, the amount of issued subscribed and paid up capital of the appellant company as on 31.03.2008 is Rs.2,06,080 only. The balance amount of Rs 28,61.76,858 is premium received upon issue of preference shares to Mr. Samyak Veera which is under dispute. This amount was required to be stated separately under 'Securities Premium Account in the Reserves and Surplus. However, the appellant has merged it with the issued, subscribed and paid up capital. Thus, the appellant has attempted to hide the fact that it has received an exorbitant premium upon issue of its shares during the year under consideration while filing its return.
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Further, the name of Mr. Samyak Veera nowhere appeared in the list of persons who were beneficial owners of shares holding not less than 10% of the voting power at any time during the previous year in the return of income. The appellant has mentioned only three shareholders i.e. S/Shri Mangal Prabhat Lodha, Abhishek M Lodha and Abunandan M. Lodha in this list in its return of income. This is in spite of the fact that Mr. Samyak Veera has been allotted 9,608 equity shares to make him shareholder to the extent of 49%. Therefore, the fact regarding issue of shares at exorbitantly high premium to Mr. Samyak Vera has become available to the Assessing Officer only due to the related documents found during the course of research at the office premises of M/s. Lodha Developers Ltd. 4.7. As held by Calcutta High Court in the case of H.A. Nanji & Co. vs. ITO 120 ITR 593. at the time of issue of notice it is not incumbent on the ITO to come to a conclusive finding that income has escaped assessment Such belief obviously at that stage is a tentative belief on the basis of materials before him to be examined and scrutinized on such evidence as may be available in the proceeding for reassessment. Further, the following observations made by Hon'ble Supreme Court in the case of ACIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd. 291 ITR 500 would be very relevant in order to reject the contention of the appellant Sec. 147 authorities and permits the AO to assess or reassess income charge-able to tax if he has reason to believe that income for any assessment year has escaped assessment. The word "reason’’ in the phrase ‘’reason to believe" would mean cause or justification. If
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the AO has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot be read to mean that the AO should have finally ascertained the fact by legal evidence or conclusion. The function of the AO is to administer the statute with solicitude for the public exchequer with an inbuilt idea of fairness to taxpayers As observed by the Delhi High Court in Central Provinces Manganese Ore Co. Ltd vs. ITO (1991) 98 CTR (SC) 161 (1991) 191 ITR 662 (SC) for initiation of action under s 147(a) (as the provision stood at the relevant time) fulfilment of the two requisite conditions in that regard is essential. At that stage, the final outcome of the proceeding is not relevant. In other words, at the initiation stage, what is required is ‘’reason to believe", but not the established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief. Whether, the materials would conclusively prove the escapement is not the concern at that stage. This is so because the formation of belief by the AO is within the realm of subjective satisfaction (see ITO vs. Selected Dalurband Coal Co. (P) Ltd (1996) 732 CTR (SC) 162: (1996) 217 ITR 597 (SC); Raymond Woollen Mills ltd vs. ITO (1999) 152 CT!R (SC) 418: (1999) 236 ITR 34 (SC)) In the appellant’s case, the fact that the shares were issued at exorbitantly high premium to one individual and non-disclosure of such fact in the return as explained above would, in my opinion, be considered as
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a sufficient reasons leading to escapement of income The Assessing Officer was not expected to bring any concrete proof to substantiate escapement of income conclusively at the time of reopening of the assessment under section 147 of the Act, as contended by the appellant. 4.8. Receipt of Share Capital not taxable in view of Vodafone's decision: The appellant has relied upon the decision in the case of Vodafone India Services Pvt. Ltd. (Born) vide para 1 .3.3 contending that the appellant company had received share capital which cannot be termed as its taxable income This contention is not acceptable for the obvious reasons that the Ld. Assessing Officer has doubted the genuineness of transaction which was claimed to be of share capital. In the case of Vodafone, the genuineness of issue of shares to the holding company was not doubted at all. The only issue on that case was the difference between the arm's length price of shares issued and the issue price was brought to tax under the transfer pricing regulations. In view of these facts, it was held that the share premium cannot be characterized as income taxable under the provisions of the Act. In the appellant's case, the Ld. Assessing Officer wanted to probe into the reality of the transaction of issue of preference share having face value of Rs. 10 at a price of Rs. 28,61,86,866/- and that too having dividend rate of only 1%. Therefore, the reliance placed by the appellant on the decision in the case of Vodafone is misplaced.
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4.9. Reopening of assessment for the purpose of making roving and fishing inquiries: The appellant contends that the Assessing Officer has reopened the assessment to verify the source of premium by making roving and fishing enquiry. Hence, according to the appellant, reopening of assessment for the purpose of verification and roving or fishing inquiry is not permissible in the garb of Section 147. In order to make the assessment u/s. 147, some sort of inquiry during the course of the proceedings is inevitable. But, each and every type of inquiry cannot be said to be a roving or fishing inquiry. In the appellants case, the Assessing Officer has formed his prima facie belief about escapement of income as discussed above while reopening the assessment. It is not the case where the assessment had been reopened to know whether there was any escapement of income or not. Therefore, the decisions relied upon by the appellant are distinguishable with the facts of the appellants case.
Recently, in two cases, Hon'ble Gujarat and Madras High Courts have upheld the validity of reopening u/s. 147 where the shares were issued at a high premium disproportionate to the existing net worth of the company. The Gujarat High Court in the case of Olwin Tiles (India) (P.) Ltd. vs. ACIT held as follows:
Reverting back to the reasons recorded by the Assessing Officer, he noted that the assessee company had issued share capital of Rs. 2.66 crors (rounded off) during the Financial Year 2010-11. The assessee had issued 60,000/- shares at a face value
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of ₹ 10 per share with a premium of Ps. 990/- per share. The Assessing Officer, on the basis of assets and liabilities furnished by the assessee company in its balance sheet, after computing the net worth of the company, noted that the share valuation of the assessee company would comes to Rs. 33/-, whereas shares have been allotted at Rs. 1,000/- per share, i.e. at a premium of Ps. 967/- per share. On the basis of such working out, he recorded his reason to believe that income to the extent of Rs. 5.80 crores had escaped assessment. We do not find that the reasons are perverse or so untenable as to terminate the assessment at this stage on the ground that the Assessing Officer cannot be slated to have any reason to believe or tangible material to loan such an opinion that income chargeable to tax had escaped assessment. Prima facie, the facts appear to be glaring that, ether the assessee will be able to discharge the minimal burden of establishing identity, source and creditworthiness of the depositors is a question not possible to answer without scrutiny. Whether the assessee had started its manufacturing activity and consequently its business operations so as to earn income or not are the issues which cannot be gone into at this stage and must be made part of the reopened assessment to be judged on the basis of evidence which may be brought on record. It is always open for the assessee company to contend before the assessing authority that there has not been over valuation of the allotted shares or that for any legal reasons, in any case, addition cannot be made in the hands of the assessee, despite such glaring facts These are the issues in the realm of
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assessment, once it is allowed to be reopened. We are not inclined to terminate the assessment proceedings at this stage on the grounds pressed in service by the petitioners."
In the case of Trans Corporate Advisory Services (P.) Ltd. vs ACIT before Madras High Court, the assessment was reopened u/s. 147 on the ground that even though net worth of company was low, yet it had issued shares at a huge premium. The Assessing Officer thus taking a view that share transaction was not genuine and amount of share premium was liable to be taxed under section 68, initiated reassessment proceedings. In the writ filed by the assessee, the High Court observed as under while upholding the reopening:
As has been held the reason to believe must have a link with the formation of belief. This is Present in the instant case. The respondent while considering the objections has in seriatim referred to the same and pointed out that the reopening of the assessment is to verify the nature of receipts as seen from the records available with the Department, the Assessee can produce all evidence to show that it is a claim of receipts during re-assessment proceedings.
In view of the above decisions, I am inclined to uphold the reopening of the appellant's assessment u/s.147 of the Act.
4.10 Non-filing of audit report in Form No. 3CEB does not lead to escapement of income: The Assessing Officer has noted in the reasons recorded about the failure of the appellant to submit transfer pricing audit report in Form No. 3CEB with regard to the international transactions executed
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with Mr Samyak Veera who had become an associated enterprise by virtue of his 49% holding in the appellant company It may be noted that, independent of such an observation, the reopening of assessment has already been considered to be valid reopening due to the reasons explained above The reference to failure in submitting transfer pricing audit report, whether right or wrong, would not have any impact on deciding validly of reopening of the assessment.
However, the contentions raised by the appellant have been considered on merits. As per Section 92A(2)(a), two enterprises shall be deemed to be associated enterprises, if one enterprise who holds, directly, or indirectly, shares carrying not less than 26% of the voting power in the other enterprise at any time during the previous year. In the appellants case, Mr. Samyak Veera became owner of 9,608 equity shares which constituted 49% of the total voting power in the appellant company. Hence, he was required to be considered as an associated enterprise of the appellant company. Sub-clause (c) of clause (i) of Explanation to Section 92B included capital financing in the expression international transaction with effect from 01.04.2002. Therefore, receipt of preference share capital at a premium could be regarded as an international transaction and subject to the requirement of submission of transfer pricing audit report as per the provisions of Section 92E. Clause (ba) of Explanation 2 to Section 147 provides that where the assessee has failed to furnish a report in respect of any international transaction which he was so required u/s. 92E, it snail be deemed where income chargeable to tax has escaped assessment. This clause was inserted by the Finance Act, 2012 with effect from 1.7.2012. Explanation 4 to Section 147 provides that such provision of deeming
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escapement of income shall apply to assessment year beginning on or before 01.04.2012 also. When the Assessing Officer reopened the assessment on 25.02.2013, all the above mentioned statutory provisions were available and due to which the inference could be drawn that non-filing of transfer pricing audit report which was statutorily required to be submitted had resulted into deemed escapement of income The appellant has relied upon the decision in the case of Vodafone India Services Pvt. Ltd. (Born) contending that transfer pricing provisions are not application on issue of share capital. It may be noted in this regard that the decision in the case of Vodafone was pronounced on 13.10.2014 which was not available at the time of reopening of the assessment on 25.02.2013. The correctness of the reopening of assessment should be judged in accordance with the legal position prevailing at the time when it was reopened. Thus, this contention of the appellant is also rejected
Aggrieved, assessee came in second appeal before Tribunal.
Before Ld. Counsel for the assessee argued, based on the above facts, that the provisions of section 153A to 153C of the Act and also the circular issued by the CBDT explaining the procedure of assessment in search cases, it shows that these are separate & independent provisions of other provisions relating to reassessment, because of the non-obstante clause begins with the said sections. The language used in these sections, i.e. ‘notwithstanding anything contained' in section 139, section 147, section 148, section 149, section 151 and section 153 of the Act made it clear that provisions of these sections are not made applicable to the assessments covered by the provisions of section 153A or 153C of the Act. He explained that under the provisions of section 147 of the Act, the AO is having power to re-open the assessment, if he is of the opinion that
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the income chargeable to tax has escaped assessment. Before doing so, the AO should satisfy himself that there is material which suggests that there is an escapement of income. The AO can exercise these powers with a reasonable belief coupled with some material which suggest escapement of income. Before invoking section 148 of the Act to reopen the assessment u/s 147 of the Act, the AO has to satisfy himself that there is an escapement of income chargeable to tax. This pre-requisite condition under section 147 of the Act has been done away in the cases of search whereby the assessment of the six years of the concerned assessee shall be reopened under section 153A of the Act. Section 153A of the Act deals with the assessment of the parties who have been searched whereas section 153C of the Act deals with the assessment of the parties, documents/information belonging to whom i.e. third party have been found at the premises of the searched party. Section 153C of the Act also provides a mechanism whereby AO of the searched party, after recording the satisfaction that the documents or assets seized belonging to third party has a bearing on determination of total income, shall assess or re-assess the total income of third party. He argued that in the present case on hand, admittedly, the AO has reopened the assessment based on a search conducted in a third party case (i.e. Lodha Developers Limited (LDL)). The AO formed the opinion based on loose papers found from the premises of LDL which shows receipt of share capital which is the very basis of reopening the assessment. He narrated the facts that search was conducted on 10-01-2011 which comes under the assessment year 2011-12. The assessee’s case falls within the provisions of section 153C of the Act as the incriminating document seized in the case of search in another case. The AO, on satisfying the above condition is under obligation to issue notice to the person requiring him to furnish the return for the six assessment years immediately preceding the assessment year in which search is took place. Thereafter, the AO has to assess or reassess the total income of
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those six assessment years. The word "shall" used in section 153C of the Act made it clear that the AO has no option, but to issue notice and proceed thereafter to assess or reassess the total income u/s 153C r. w. s. 153A of the Act In the instant case, the AO issued notice u/s 148 of the Act to reopen the assessment Therefore, in view of the non-obstante clause begin with section 153C r. w.s. 153A, the A has no jurisdiction to issue notice u/s 148 of the Act to reopen the assessment of year under consideration. Though, both provisions of the Act empowers the AO to assess or reassess the income escaped from assessment, both sections are dealing with different situations. The legislators in their wisdom clearly spelt out the provisions of law applicable to search by using the word 'shall' to begin with section 153C r.w.s. 153A of the Act, made it mandatory that the AO shall issue notice u/s 153C of the Act, thereafter proceed to assess or reassess the total income, where seized material is found during search. Therefore, the re-assessment order passed u/s 143(3) r.w.s 147 of the Act is bad in law, contrary to provision under the Act, hence shall be quashed.
Ld. Counsel further argued that section 147 of the Act empowers the AO to reopen the assessment 'if the Assessing Officer has "reason to believe" that any income chargeable to tax has escaped assessment for any assessment year. Thus, the 'reason to believe" is sine qua non for reopening the assessment He specifically argued that 'reasons - must have a live link with formation of belief. He argued that in the present case there is no "reason to believe' that the income of the assessee has escaped the assessment. The AO has stated that "On perusal of this loose paper especially Page No. I to 22 it is observed that Mr. Samyak Veera and assessee company have entered into an agreement on 10-05- 2007 Vide this agreement Mr. Sarnayak Veera invested Rs.28,61,86,858/- by way of 1% redeemable preference shares of Rs. 10/- each at a premium of ₹ 2,86,176.86/-.” However, he has no reason
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to believe& that the said amount of receipts is income of the assessee. He explained that seeing something from the record per so cannot be a "reason to believe' that the income of the assessee has escaped unless and until there is some proof to substantiate the belief of the AO. In the present case, there is no proof that the income of the assessee has escaped the assessment justifying the reopening u/s 148 of the Act.
In view of the above legal position, he explained facts of the present case that the issue of shares is a realization on capital account and is not on revenue account, hence, the receipt of share capital per so cannot be termed as taxable income of the assessee which has escaped the assessment. Further, as evident from the reason recorded the AO has observed that the Mr. Samayak Veera has invested in the assessee by way 49% redeemable preference shares; however, there is no adverse allegation, whatsoever, on the premium received by the assessee Therefore, mere issuing of shares on premium cannot be a reason to believe for re-opening of the assessment in absence of any adverse allegation on the premium received by the assessee more particularly when the receipt itself is on capital account In support of our above submission, Ld Counsel for the assessee strongly rely upon the Bombay High Court Judgment in the case of Vodafone India Services Pvt. Ltd. Vs. Additional CIT 368 ITR 1 (Bom). He narrated that the reasons recorded for reopening the assessment i.e. the assessee has received premium of Rs.28,61,86,858/- on issue of preference shams is nothing but the reiteration of facts. The AO has not given any reason or brought any material on record to show that how the premium of Rs. 28,61,86,856/- on issue of shares becomes the income of the assessee; so as to treat the same as income escaping assessment liable for assessment u/s 147 of the Act. From reading of the reasons recorded for reopening the assessment in their entirety there is nothing whatsoever to indicate as to winch is the income that has not been disclosed by the assessee or that
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any income changeable to tax has in fact escaped assessment. In view of the above facts, Ld Counsel stated that the AO has reopened the assessment for the purpose of making roving and fishing inquiry to verify as to whether any income has in fact escaped assessment. From the reasons for reopening of assessment recorded by the AO it becomes abundantly clear that the AO in fact wants to verify the source of receipt of premium of Rs.28,61,86,858/- and whether any income has been escaped from assessment. The AO has not recorded any reasons as to how the premium or; shares becomes the income of the assessee. Thus, the AO wants to reopen the assessment to verify the source of premium by making roving and fishing enquiry and it is clear from the reasons recorded that the AO did not have any material before him so as to come to the conclusion that any income chargeable to tax has escaped assessment. That issuing of notice u/s 148 of the Act and reopening of assessment for the purpose of verification and roving or fishing inquiry is not permissible in the garb of section 147 of the Act as held by Courts/Tribunals in various judicial pronouncements.
Another aspect canvassed by Ld Counsel for the assessee is, while writing reasons for reopening the assessment, the AO noted that, 'At this juncture, it needs to be mentioned that Mr. Samayak Veera is a Non Resident person and considering his contribution by way of preference shares he is an associate enterprise within the meaning of section 92A of the Act. Further, assessee has not filed any report in Form 3CEB as required by provisions of section 92E of Act. As a result, no arm's length price is determined in result of this transaction and the creditworthiness of the investor and genuineness of the transaction remains unproved’. Ld Counsel stated that it is not under obligation to file Form 3CEB as per section 92E of the Act as the transfer pricing provisions are not applicable on the issue of share capital as categorically held by the Hon'ble Bombay High Court in the case of Vodafone India Services Pvt. Ltd. Vs. Additional
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CIT [368 ITR 1] (Bom). The said judgment of the Hon’ble Bombay High Court has been duly accepted by the department vide press release dated 28.01.2015. Alternative also Ld counsel argued that non-obtaining of Form 3CEB cannot, by any stretch of imagination, constitute the reason to believe that the income chargeable to tax have escaped assessment and there are separate consequence for not filing the Form 92E of the Act i.e. penalty u/s 271BA of the Act. In the present case the AO has initiated the penalty proceeding u/s 271BA of the Act; however, the same has been dropped and no penalty u/s 271BA of the Act has been levied which proves beyond doubt that the Transfer Pricing provision are not applicable to the facts of the present case.
On the other hand, the learned CIT DR argued on the given facts that specific information was that unearthed during the course of search on Lodha Developers Ltd. that one Mr. Samyak Veera has made investment in the assessee company by way of 1% redeemable preference share of ₹ 10 each at a premium of ₹ 2,86,176 per share for a total share of 9,608 equity shares. According to him the assessee has not filed report in form no. 3CEB as required by the provisions of section 92E of the Act, no arm’s length price is determined in relation to this transaction and accordingly creditworthiness and genuineness of the transaction remained unproved. He argued that the AO has reopened the assessment under section 147 of the Act after recording reasons which are directly relatable to the assessee as the creditworthiness of the investor and the genuineness of the transactions remains unproved. As regards to argument that the assessment should have been framed under section 143C of the Act, he relied on the decision of Hon’ble Delhi High Court in the case of Pepsico India Holding (P) Ltd. vs. ACIT (2015) 228 taxman 116 (Del). He argued that Hon’ble High Court has clearly held that unless it is established that the document in question does not belong to the search person, the question of invoking the provision of section 153C of the Act does not arise. Accordingly, he supported the order of the lower authorities.
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We have heard rival contentions and gone through facts and circumstances of the case. Let us examine, whether the assessment is to be framed u/s 153C of the Act or u/s 148 r.w.s. 147 & 143(3) of the Act. The provisions of section 153A, 153B and 153C of the Act provides for new scheme of assessment of cases where the search has taken place on or after 31.05. 2003. In the present the search action took place in January. 2011. Hence, the same has to be governed by the new sections/scheme. We find that during the course of search in the case of Lodha Developers Limited a file containing loose papers Annexure-A/1-1 to 24 was found and seized. On perusal of this loose paper it is noticed by the Revenue that one Mr. Samayak Veera and assessee company entered into an agreement dated 10.05.2007, whereby Mr. Samayak Veera has invested a sum of ₹ 28,61,86,858 by way of 1% redeemable preference share of ₹ 10 each at a premium of ₹ 2,86,176 per share. The total shares were at 9608 shares of ₹ 10 each at par. According to assessee, this document seized during the search 132 of the Act in the case of Lodha Developers Limited, if at all is to be considered the same should have considered while framing assessment under section 153C of the Act. But, now no assessment under section 153C was framed in the case by the Revenue, we need not to go into the legal aspect whether the assessment is to be done under section 153C of the Act based on material found during the course of search at a third party’s premises.
However, the assessee has challenged the reopening that reason to believe that income has escaped assessment within the meaning of 147 of the Act for the relevant AY 2008-09 to the extend of transaction mentioned above exists or not. The assessee objected the action of the AO in assuming jurisdiction under section 147 read with section 148 of the Act by stating that the undisputed fact in the case are that a file containing loose papers have been found during the course of search action at the premises of Lodha Developers Limited. The assessee argued that section 147 of the Act and powers the AO to reopen the assessment only if the AO has reason to
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believe that any income chargeable to tax has escaped assessment for any assessment year. The assessee before us argued that there is no reason to believe that the income of the assessee has escaped assessment. Shri Shonde argued that on perusal of loose papers pages No. 1 to 22, it can be clearly gather that Mr. Samyak Veera and assessee company entered into an agreement on 10.05.2007. Vide this agreement Shri Samyak Veera invested a sum of ₹ 28,61,86,858/- by way of 1% redeemable preference shares face value of 10 each. But the AO has no reason to believe that the said amount of receipt is income of the assessee and seeing something from the records per se cannot be reason to believe that the income of the assessee has escaped unless and until there is something to substantiate the believe of the AO.
Further, we find that in fact the issue of shares is a realization of capital account and not on revenue account and hence the receipt of share capital per se cannot be termed as taxable income, which has escaped assessment. As is evident from the reasons recorded the AO has only observed that Mr. Samyak Veera has invested as capital in the assessee company by way of 1% redeemable preference shares but there is no adverse allegation or any iota of reasonable belief that income has escaped assessment. Merely issuing of shares on premium cannot be reason to believe under section 147 of the Act for reopening of assessment in the absence of any adverse material on the premium receipt by the assessee more particularly when the receipt itself is in the capital account. From the reading of reasons noted above, recorded for reopening of the assessment in their entirety, there is nothing whatsoever to indicate as to which is the income that has not been disclosed by the assessee or that any income chargeable to tax has in fact escaped assessment.
Another aspect in the reasons recorded for the reopening of the assessment is that Mr. Samyak Veera is a non-resident person and considering his contribution by way of preference shares, he is an
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associate enterprises within the meaning of section 92A of the Act. According to AO, assessee has not filed any report in form no.3CEB as required by the provisions of section 92E of the Act and therefore no arms length price is determined and in the result this transaction and the credit worthiness of the investor and genuineness of transaction remains unproved. We find that the assessee is not under obligation to file form no. 3CEB in term of section 92E of the Act as the transfer pricing provisions are not applicable on the issue of share capital and even otherwise the AO has not referred the matter to TPO for the same during the course of re-assessment proceedings. This issue is covered by the decision of Hon’ble Bombay High Court in the case of Vodafone India Services Pvt. Ltd. vs. Additional CIT 368 ITR 1 (Bom.).
Now, we will examine the case law cited by learned Counsel for the assessee of Hon’ble Bombay High court in the case of Nivi Trading Ltd. vs. Union of India and Another (2015) 375 ITR 308 (Bom.) has considered the provisions of section 147 of the Act and held that, “has reasoned to believe” are stronger the word “is satisfied”. Hon’ble High Court observed that the believe entertained by the AO must not be arbitrary or irrational but it must be reasonable or in other words it must be based on the reasons which are relevant and material. It was further observed that the court cannot investigate into the adequacy or sufficiency of the reasons, but the court can certainly examine whether the reasons are relevant and have a bearing on the matter in regard to which he is required to entertained the believe before he issues noticed under section 148 of the Act. Hon’ble High Court finally held as under:-
“25. We are not in agreement with Mr. Gupta because the clear language of section 147 of the IT Act reveals that if the Assessing Officer has reason to believe that any income has escaped assessment, then, he can resort to
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such power. While it is true, as Mr. Gupta argued, that sub-section (1) of section 148 of the IT Act enables issuance of notice before the assessment, reassessment or re- computation under section 147 of the IT Act, but that is dealing with the service of the notice. The principal condition for issuance of notice is to be found in section 147 of the IT Act and that is on the reason to belief that any income chargeable to tax has escaped assessment for any assessment year, then, the Assessing Officer may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be. In the present case, the Respondents do not state that any income chargeable to tax has escaped assessment. All that the Revenue desires is verification of certain details and pertaining to the gift. That is not founded on the belief that any income which is chargeable to tax has escaped assessment and hence, such verification is necessary. That belief is not recorded and which alone would enable the Assessing Officer to proceed. Thus, the reasons must be founded on the satisfaction of the Assessing Officer that income chargeable to tax has escaped assessment. Once that is not to be
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found, then, we are not in a position to sustain the impugned notice. Having reproduced the same and contents thereof being clear, it is not possible to agree with Mr. Gupta that this Court should not interfere at the threshold. We find additionally that in the affidavit in reply the Revenue has stated that the concept of gift prevails between two individual persons out of love and affection, which does not prevail in the case of companies. In the case of companies, the financial transaction exists to earn profit and the transaction of the so called gift made by the Assessee is only for the purpose of avoiding capital gains tax.
This is a stand taken in the affidavit in reply but what we find is that the gift without any consideration and as noted in the reasons recorded and supplied has not been termed as one which attracts any tax or which is chargeable to tax and therefore there is any income which has escaped assessment. In other words, the amount of Rs. 1,21,33,429/- shown as gift has not been termed as an income and which is chargeable to tax and which has escaped assessment. All that is required from the Assessee is a verification and in terms of section 47(iii) of the IT Act and for enabling it, the Assessee was called upon to appear before the Assessing Officer. Thus, it is for verification of the value of these shares and whether the computation is on the market rate on the date of such transfer. This, to our mind, would not in any manner enable the
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Revenue/Respondents to resort to section 147 of the IT Act. In the view that we have taken above, it is not necessary to refer to other Judgments relied upon by Mr. Pardiwalla and which also reiterate the settled principle that the reasons ought to be recorded on the date of the issuance of the notice and which must disclose the requisite satisfaction. The reasons as recorded cannot then be substituted or supplemented by filing an affidavit in the Court. Thus, additional reasons cannot be supplied and on affidavit. We are of the view that it is not necessary to refer to this principle any further in the facts and circumstances of the present case.”
Similarly, Hon’ble Delhi High court in the case of Krown Agro Foods Pvt. Ltd vs. ACIT (2015) 375 ITR 460 (Del) has analyzed the full bench judgment of Hon’ble Delhi High Court in the case of CIT vs. Usha International ltd. (2012) 348 ITR 485 (Del) (FB) and held as under:-
“10. The law in respect of re-opening of the assessment under Section 143(3) of the Act is no longer res integra and has been the subject matter of various judicial pronouncements. The Full Bench of this High Court in CIT v. Usha International Ltd. [2012] 348 ITR 485/210 Taxman 188/25 taxmann.com 200 (Delhi) held as under:—
'5. For re-opening an assessment made under Section 143(3) of the Act, the following conditions are required to be satisfied:-
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(i) The Assessing Officer must form a tentative or prima facie opinion on the basis of material that there is under-assessment or escapement of income; (ii) He must record the prima facie opinion into writing; (iii) The opinion formed is subjective but the reasons recorded or the information available on record must show that the opinion is not a mere suspicion. (iv) Reasons recorded and/or the documents available on record must show a nexus or that in fact they are germane and relevant to the subjective opinion formed by the Assessing Officer regarding escapement of income. (v) In cases where the first proviso applies, there is an additional requirement that there should be failure or omission on the part of the assessee in disclosing full and true material facts. Explanation to the Section stipulates that mere production of books of accounts or other documents from which the Assessing Officer could have, with due diligence, inferred material facts, does not amount to "full and true disclosure of material facts". (The proviso is not applicable where reasons to believe for issue of notice are recorded and notice is issued within four years from the end of assessment year.)'
It would be the proximity of the reasons with the belief of escapement of income, which would be the determinative factor for re- opening of the assessment. The remoteness of the reasons would obviate the possibility of a belief and would bring the case in the realm of mere suspicion, which cannot be a ground for re-opening of assessment.
The reasons only record that amount of Rs. 5,00,000/- has been found with the director and the assessee and when examined on oath and asked about the source of cash of Rs.5,00,000/- he stated that Rs.2,00,000/- was withdrawn from Andhra Bank, Lawrence Road, New Delhi-35 from the account of M/s Krown Agro Foods Pvt. Ltd. on 04.02.2012. In the order, disposing of objections it has been held that, the information was received after 30.09.2013 and the information could only be
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verified by initiating assessment proceedings u/s 147/148 for A.Y. 2012-13. It is recorded that the interest of the assessee will not be adversely affected if the information received from the office of DDIT (Inv) is verified. It is further recorded that the information received needs to be examined and the credit worthiness of the assessee has to be proved beyond doubt to accept the claim of its director.
The reason to believe recorded by the Assessing officer is not based on any material that had come to the knowledge of the Assessing Officer. There is a mere suspicion in the mind of the assessing officer and the notice under section 147/148 has been issued for the purpose of verification and for clearing the cloud of suspicion. The reasons to believe recorded do not show as to on what basis the Assessing Officer has formed a reasonable belief that the said amount of Rs. 2,00,000/- had escaped assessment. It is apparent the Assessing Officer suspects that the income has escaped assessment. However, mere suspicion is not enough. The reasons to believe must be such, which upon a plain reading, should demonstrate that such a reasonable belief could be formed on some basis/ foundation and had in fact been formed by the Assessing Officer that income has escaped assessment. No such reasonable belief can be inferred from the purported reasons to believe recorded.
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The words "reason to believe" indicate that the belief must be that of a reasonable person based on reasonable grounds emerging from direct or circumstantial evidence and not on mere suspicion, gossip or rumour. The "reason to believe" recorded in the case do not refer to any material that came to the knowledge of the Assessing Officer whereby it can be inferred that the Assessing Officer could have formed a reasonable belief that the said amount had escaped assessment. The purported belief that income has escaped assessment is not based on any direct or circumstantial evidence and is in the realm of mere suspicion. The requirement of law is "reason to believe" and not "reason to suspect". In the present case, since the purported reasons to believe recorded indicate that the Assessing Officer has acted on mere surmise, without any rational basis, the action of re-opening of the Assessment is thus clearly contrary to law and is unsustainable.”
In the present case, we find that the reasons recorded nowhere form a tentative or prima facie opinion on the basis of material that there is escapement of income. But the reason only shows suspicion and from the reading of the reasons it is clear that the AO only states that because no arms length price is determined and hence the creditworthiness of the investor and the genuineness of the transaction remains unproved. The relevant reason reads as, “as a result no arm’s length price is determined in result of this transaction and the creditworthiness of the investor and the genuineness of the transaction remains unproved”. From these reasons, it is clear that the assessing officer has just suspicion, which cannot be the ground for reopening
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of the assessment. It would be proximity of the reasons with the belief of escapement of income, which will be the determining factor for reopening of assessment. The reasons recorded does not show as to on what basis the AO has formed a reasonable believe that how the investment made by Mr. Samyak Veera by way of 1% redeemable preference shares at 10 each at a premium of ₹ 2,86,176/- is not genuine or creditworthiness of the investor is not proved. The assessee has declared the entire transaction in the regular return of income filed in normal course and the entire transaction is depicted in the balance sheet and the audited accounts of the assessee. Once this is the case, and from the cumulative reading of reasons clearly shows that the AO has merely shown suspicion while recording reasons for issuance of notice under section 147 read with section 148 of the Act. In the present case, since the reasons recorded for reopening of assessment clearly indicates that the AO has acted without any rational believe, the action of the reopening of the assessment is thus contrary to law and is unsustainable. Therefore, we hold that the reassessment framed under section 147 read with section148 of the Act is set aside and quashed.
As we have already adjudicated the jurisdictional issue in favour of assessee and quashed the reassessment, we need not to go into the merits of the case. Hence, we do not adjudicate the issue on merits.
In the result, the appeal of assessee is allowed.
Order pronounced in the open court on 17-04-2018.
Sd/- Sd/- (N.K. PRADHAN) (MAHAVIR SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dated: 17-04-2018 Sudip Sarkar /Sr.PS
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Copy of the Order forwarded to: 1. The Appellant 2. The Respondent. 3. The CIT (A), Mumbai. 4. CIT BY ORDER, 5. DR, ITAT, Mumbai 6. Guard file. //True Copy// Assistant Registrar ITAT, MUMBAI