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Income Tax Appellate Tribunal, “C” BENCH, MUMBAI
Before: SHRI OM PRAKASH KANTSHRI SANDEEP SINGH KARHAIL
The assessee has filed the present appeal against the impugned order dated 25/06/2024, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [“learned CIT(A)”], for the assessment year 2009-10.
In this appeal, the assessee has raised the following grounds: -
“1. (a) The Learned Commissioner of Income-Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi ["CIT(A)"] erred in upholding the order of the Income-tax Officer, Ward 6(3)(1), Mumbai, (hereinafter referred to as the "Assessing Officer") under section 143(3) r.w.s. 147 of the Income tax Act, 1961 (the Act), which is null and void and bad in law as the appellant has filed full, correct and complete particulars of its income alongwith the return of income. b) Without prejudice to what has been stated above, the reasons for re- opening furnished by the Assessing Officer are vague and merely states that "nature" and "justification" for charging share premium over and above the intrinsic value of the shares remains unexplained and this cannot be reason for reopening and represents mere suspicion in the mind of the Assessing Officer.
2. The CIT(A) erred in upholding the action of the Assessing Officer in treating the share premium of Rs.2.76.00,000/- received by the appellant as unexplained cash credit under section 68 of the Income tax Act, 1961 (the Act).
The appellant submits that the Assessing Officer be directed:
a) to delete the addition made amounting to Rs.2,76,00.000/- under section 68 of the Act; and to modify the assessment in accordance with the provisions of the Act.
Each of the above grounds of appeal are independent and without prejudice to each other.”
3. In its appeal, the assessee has challenged the validity of the reopening of the assessment under section 147 of the Act and has also raised the grounds on merits challenged the additions made by the Assessing Officer (“AO”). Since the ground challenging the reopening of assessment under section 147 of the Act has raised jurisdictional issue, therefore the same is considered at the outset.
4. As far as the issue relating to the validity of reopening under section 147 of the Act, the brief facts are that the assessee is a domestic company incorporated on 06/08/2008 and is engaged in carrying on the business of a chain of hotels and restaurants. For the year under consideration, the assessee filed its return of income on 22/09/2009 declaring a total income of Rs.Nil. The return filed by the assessee was processed vide intimation dated 05/09/2010 issued under section 143(1) of the Act. Subsequently, before the expiry of 4 years from the end of the relevant assessment year, notice under section 148 of the Act was issued on 19/03/2014, which was served on the assessee on 26/03/2014. In response to the said notice, the assessee vide its letter submitted that the original return of income filed on 22/09/2009 may be treated as a return filed in response to notice issued under section 148 of the Act. The assessee also requested for the reasons recorded for reopening the assessment. After receipt of the reasons, the assessee filed detailed objections against the initiation of reassessment proceedings in its case, which were disposed of vide order dated 06/02/2015 rejecting the objections filed by the assessee. The AO vide order dated 30/03/2015 passed under section 143(3) read with section 147 of the Act assessed the total income of the assessee at Rs. 2,76,00,000 after making an addition on account of unexplained cash credit under section 68 of the Act.
5. In its appeal before the learned CIT(A), the assessee, inter-alia, challenged the reopening of the assessment. However, the learned CIT(A), vide impugned order, dismissed the ground so raised by the assessee and upheld the reopening of the assessment in the case of the assessee. Being aggrieved, the assessee is in appeal before us.
During the hearing, the learned Authorised Representative (“learned AR”), at the outset, inter-alia, submitted that the only basis for reopening the assessment in the present case is that the issue of receipt of share premium to the parent entity was not examined. The learned AR submitted that in the reasons recorded for reopening the assessment, the AO alleged that the amount of share premium charged has exceeded the intrinsic value of the share, however, there was neither any information with the AO with respect to the intrinsic value of the shares of the assessee nor what part of the share premium is in excess of such intrinsic value. The learned AR submitted that in the reasons recorded for reopening the assessment, there is no mention of the amount of income chargeable to tax which is escaped assessment.
On the other hand, the learned Departmental Representative by vehemently relying upon the orders passed by the lower authorities submitted that the proceedings under section 147 of the Act were correctly initiated by the AO in the present case.
We have considered the submissions of both sides and perused the material available on record. In the present case, the return filed by the assessee was processed vide intimation issued under section 143(1) of the Act and the same was not selected for scrutiny. Thus, no order under section 143(3) of the Act was passed. The AO, pursuant to the notice issued under section 148 of the Act, initiated reassessment proceedings. The reasons recorded by the AO on 19/03/2014 were provided to the assessee, which read as follows: -
“(REASONS FOR RE-OPENING) M/s. IMK Hotels Pvt. Ltd. (AABC19307C) Α.Υ. 2009-10
The assessee, M/s. IMK Hotels P. Ltd having PAN AABC19307C, is an assessee of this circle. The assessee for the A.Y. 2009-10 has filed its return of income on 22.09.2009 declaring NIL income which was processed u/s.143(1) on 01.11.2010.
From the records, it is seen that during the FY 2008-09 relevant to A.Y. 2009 10 assessee has shown receipt of share premium amounting to Rs 2,76,00,000/-. As there was no scrutiny assessment done for this year, the so- called share premium having been received by the assessee was not examined. In view of the ratio of the decision of Rajesh Jhaveri Stock Brokers Pvt. Ltd. 291 ITR 500 (SC) no assessment u/s. 143(1) has been carried out by the Assessing Officer. As a result the "nature" and the "justification" for charging share premium over and above the intrinsic value of the shares remains unexplained.
I have reason to believe that income to the extent of amount of share premium charged over and above the intrinsic value of the share has escaped assessment In view of the facts discussed above and in the light of the race of the decision cited above, I have reason to believe that income to the extent of amount of share premium charged over the intrinsic value of the share has escaped assessment.
Notice u/s 148 is therefore, issued in this case.”
From the perusal of the reasons recorded for reopening the assessment, as reproduced above, it is evident that the impugned reassessment proceedings have been initiated after the perusal of the record. This fact has also been admitted by the AO vide its order dated 06/02/2015 rejecting the assessee’s objections against impugned reassessment proceedings for the year under consideration. From the perusal of the reasons recorded for reopening the assessment, it is also evident that no new or tangible material was available with the AO for initiating the impugned reassessment proceedings. With this factual background, it is relevant to note that under the provisions of section 147 of the Act, the AO can initiate reassessment proceedings only if he has reason to believe that any income chargeable to tax has escaped assessment. The courts have interpreted that the term “reason to believe” doesn’t mean subjective belief of the AO and the same should be based on some material which has come to the knowledge of the AO before initiating proceedings under section 147 of the Act. While rejecting the objections raised by the assessee against initiation of reassessment proceedings, the AO vide order dated 06/02/2015 held that as the case was not subject to regular scrutiny assessment under section 143(3) earlier, the issue of share premium received was not examined. Though, it is true that, in the present case, as the return of income filed by the assessee was processed under section 143(1) of the Act and thus no scrutiny assessment was carried out, therefore, the impugned reassessment proceedings cannot be questioned on the ground of “change of opinion” by the AO. However, non-selection of the case for scrutiny does not in any manner belittle/reduce the significance and meaning of the term “reason to believe”, which is of paramount importance for initiating proceedings under section 147 of the Act. Further, as has been held in various decisions, the reason to believe that income has escaped assessment should be based on some new or tangible material. Such a requirement also rules out the possibility of initiation of reassessment proceedings only on the basis of suspicion without any material being available with the Assessing Officer.
In this regard, the following observations of the Hon’ble Delhi High Court in CIT v/s Orient Craft Ltd., reported in [2013] 354 ITR 536 (Del.), become relevant, as the Hon’ble High Court has also analysed the decision of Hon’ble Supreme Court in ACIT v/s Rajesh Jhaveri Stock Brokers, reported in [2007] 291 ITR 500 (SC), which has been relied by the AO while disposing assessee’s objections: –
“13. Having regard to the judicial interpretation placed upon the expression "reason to believe", and the continued use of that expression right from 1948 till date, we have to understand the meaning of the expression in exactly the same manner in which it has been understood by the courts. The assumption of the Revenue that somehow the words "reason to believe" have to be understood in a liberal manner where the finality of an intimation under Section 143(1) is sought to be disturbed is erroneous and misconceived. As pointed out earlier, there is no warrant for such an assumption because of the language employed in Section 147; it makes no distinction between an order passed under section 143(3) and the intimation issued under section 143(1). Therefore it is not permissible to adopt different standards while interpreting the words "reason to believe" vis-à-vis Section 143(1) and Section 143(3). We are unable to appreciate what permits the Revenue to assume that somehow the same rigorous standards which are applicable in the interpretation of the expression when it is applied to the reopening of an assessment earlier made under Section 143(3) cannot apply where only an intimation was issued earlier under Section 143(1). It would in effect place an assessee in whose case the return was processed under Section 143(1) in a more vulnerable position than an assessee in whose case there was a full-fledged scrutiny assessment made under Section 143(3). Whether the return is put to scrutiny or is accepted without demur is not a matter which is within the control of assessee; he has no choice in the matter. The other consequence, which is somewhat graver, would be that the entire rigorous procedure involved in reopening an assessment and the burden of proving valid reasons to believe could be circumvented by first accepting the return under Section 143(1) and thereafter issue notices to reopen the assessment. An interpretation which makes a distinction between the meaning and content of the expression "reason to believe" in cases where assessments were framed earlier under Section 143(3) and cases where mere intimations were issued earlier under Section 143(1) may well lead to such an unintended mischief. It would be discriminatory too. An interpretation that leads to absurd results or mischief is to be eschewed.
14. Certain observations made in the decision of Rajesh Jhaveri Stock Brokers (P.) Ltd. (supra) are sought to be relied upon by the revenue to point out the difference between an "assessment" and an "intimation". The context in which those observations were made has to be kept in mind. They were made to point out that where an "intimation" is issued under section 143(1) there is no opportunity to the assessing authority to form an opinion and therefore when its finality is sought to be disturbed by issuing a notice under section 148, the proceedings cannot be challenged on the ground of "change of opinion". It was not opined by the Supreme Court that the strict requirements of section 147 can be compromised. On the contrary, from the observations (quoted by us earlier) it would appear clear that the court reiterated that "so long as the ingredients of section 147 are fulfilled" an intimation issued under section 143(1) can be subjected to proceedings for reopening. The court also emphasised that the only requirement for disturbing the finality of an intimation is that the assessing officer should have "reason to believe" that income chargeable to tax has escaped assessment. In our opinion, the said
expression should apply to an intimation in the same manner and subject to the same interpretation as it would have applied to an assessment made under section 143(3). The argument of the revenue that an intimation cannot be equated to an assessment, relying upon certain observations of the Supreme Court in Rajesh Jhaveri Stock Brokers (P.) Ltd. (supra) would also appear to be self-defeating, because if an "intimation" is not an "assessment" then it can never be subjected to section 147 proceedings, for, that section covers only an "assessment" and we wonder if the revenue would be prepared to concede that position. It is nobody's case that an "intimation" cannot be subjected to section 147 proceedings; all that is contended by the assessee, and quite rightly, is that if the revenue wants to invoke section 147 it should play by the rules of that section and cannot bog down. In other words, the expression "reason to believe" cannot have two different standards or sets of meaning, one applicable where the assessment was earlier made under section 143(3) and another applicable where an intimation was earlier issued under section 143(1). It follows that it is open to the assessee to contend that notwithstanding that the argument of "change of opinion" is not available to him, it would still be open to him to contest the reopening on the ground that there was either no reason to believe or that the alleged reason to believe is not relevant for the formation of the belief that income chargeable to tax has escaped assessment. In doing so, it is further open to the assessee to challenge the reasons recorded under section 148(2) on the ground that they do not meet the standards set in the various judicial pronouncements.
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 Kelvinator of India Ltd. (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 an arbitrary exercise of the power conferred under section 147.
For the above reasons, we answer the substantial question of law framed by us in the affirmative, in favour of the assessee and against the Revenue. The appeal of the Revenue is accordingly dismissed. There shall be no order as to costs.” (emphasis supplied)
Further, the Hon’ble Jurisdictional High Court in Balakrishna Hiralal Wani v/s ITO, reported in [2010] 321 ITR 519 (Bombay), emphasised the importance of fulfilment of the jurisdictional condition, i.e. the existence of “reason to believe” on the basis of tangible material, before initiating reassessment proceedings under section 147 of the Act, by observing as follows: –
“9. Section 147 empowers the Assessing Officer to assess or reassess income, which he has reason to believe has escaped assessment for the assessment year. The existence of a reason to believe is the condition precedent to the exercise of power and the reasons must be recorded in writing. The proviso to section 147 imposes an additional condition in a situation where action is sought to be taken after the expiry of four years from the end of the relevant assessment year and that condition is that the income chargeable to tax must have escaped assessment for such assessment year by reason of the failure on the part of the assessee inter alia to disclose fully and truly all material facts necessary for the assessment for that assessment year. In the present case, admittedly, the notice under Section 148 has been issued within a period of four years of the expiry of relevant assessment year. Therefore, the condition which is imposed by the proviso to section 147 has no application. The only question in such a case is as to whether the Assessing Officer had reason to believe that income chargeable to tax had escaped assessment. Another facet of the matter which must be taken into consideration is that in the present case, an assessment order has not been passed under section 143(3), a circumstance which has been emphasised by counsel for the Revenue. The case is, therefore, at the stage of an intimation under section 143(1). After 1st April, 1989 the power to reopen an assessment has been widened as compared to the position as it stood prior to that date. But it is settled law that Section 147 has to be given a schematic interpretation to ensure against an arbitrary exercise of power. The manner in which the provisions of section 147 should be construed is clarified in the judgment of the Supreme Court in Kelvinator of India Ltd. [2010] 320 ITR 561. The Supreme Court held as follows:-
" ...post-1st April, 1989, power to reopen is much wider. However, one needs to give a schematic interpretation to the words "reason to believe" failing which, we are afraid, section 147 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. We must also keep in mind the conceptual difference between power to review and power to reassess. But reassessment has to be based on fulfilment of certain pre-conditions and if the concept of "change of opinion" is removed, as contended on behalf of the Department, then, in the garb of reopening the assessment, review would take place. One must treat the concept of "change of opinion" as an in-built test to check abuse of power by the Assessing Officer. Hence, after 1st April, 1989, the Assessing Officer has power to reopen, provided there is "tangible material" to come to the conclusion that there is escapement of income from assessment. Reasons must have a link with the formation of the belief.... " ……………
12. Thus, there was, in our opinion, no tangible material before the Assessing Officer, as explained in the judgment of the Supreme Court in Kelvinator (supra) to form a conclusion that income has escaped assessment. Hence though no assessment order was passed under section 143(3), we are of the view that the jurisdictional condition precedent prior to the exercise of the power to reopening the assessment under Section 147 of the Act has not been fulfilled. The petition will, therefore, have to be allowed.”
In view of the above, we are of the considered view that reassessment proceedings initiated by the AO under section 147 of the Act are bad in law, as there was no new or tangible material which came to the possession of the AO subsequent to the issuance of the intimation under section 143(1) of the Act and therefore, the jurisdictional condition, i.e. existence of reason to believe, is not satisfied in the present case. Thus, the reassessment proceeding is quashed. Consequently, the assessment order passed under section 143(3) read with section 147 of the Act is also quashed. Accordingly, ground no. 1 raised in the assessee’s appeal is allowed.
Since the relief has been granted to the assessee on the aforenoted jurisdictional aspect, the other grounds raised by the assessee in the present appeal on merits are rendered academic and therefore are left open.
In the result, the appeal by the assessee is allowed.
Order pronounced in the open Court on 17/12/2024