ACIT 10(1), MUMBAI vs. FIAT INDIA P.LTD ( NOW KNOWN AS NEW HOLLAND (I) P.LTD, MUMBAI

This appeal by the Revenue is directed against the order of the CIT(A)- 21, Mumbai dated 15.06.2012 for A.Y. 2004-05. The assessee has also preferred Cross Objections (CO) in respect of the aforesaid order of the CIT(A)-21, Mumbai.

1. On the facts and the circumstances of the case the Ld.CIT(A) erred in holding the view that the decision of reopening was beyond the jurisdiction u/s. 147 of the Act, without appreciating the fact that the decision of reopening u/s. 147 r.w.s. 148 of Act was on account of failure on the part of assessee to disclose fully and truly all relevant materials pertaining to cancellation of equity and preference shares.

2. On the facts and the circumstances of the case the Ld.CIT(A) erred in deleting the addition of Rs. 1444,85,34,800/- made by the Assessing Officer on account of cancellation of equity and preference shares resulting into long term capital gain, without appreciating the fact that the holding company M/s. Fiat India Automobiles Pvt. Ltd. has claimed long term capital loss on this cancellation of equity and preference shares, and provisions of sec. 45 of the Act was correctly applied by the Assessing Officer.

3. The appellant prays that the order of CIT(A) on the above ground be set aside and that of the assessing officer be restored.

4. The appellant craves leave to add, amend, vary, omit, or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of appeal.”

4. Ground at S. Nos 3 & 4 4.1 These grounds are general in nature and therefore no adjudication is called for thereon.

5. Ground No. 1 – Validity of assumption of jurisdiction under section 147 of the Act. 5.1 In this ground (supra), Revenue assails order of the learned CIT(A) holding that the AO’s the decision to reopen the assessment was beyond the jurisdiction under section 147 of the Act, without appreciating that the AO’s decision was on account of the failure on the part of the assessee to 4 ITA 5901 & CO 256/Mum/2013 M/s. Fiat India P. Ltd. disclose fully and truly all relevant material pertaining to cancellation of equity and preference shares. The learned D.R. supported the ground raised. 5.2 The learned A.R. of the assessee reiterated the submissions put forth before the CIT(A). It was contended that after the expiry of four years from the end of the relevant assessment year, the assessment can be reopened only if the assessee has failed to disclose fully and truly all material facts necessary for that assessment. In the case on hand, the assessee’s assessment for A.Y. 2004-05 was reopened on the ground that the gain arising from cancellation of 11,68,01,390 equity shares and 1,23,80,000 preference shares held by M/s. Fiat India Automobile P. Ltd. and conversion of concerned loan into equity shares was not offered to tax by the assessee. The learned A.R. of the assessee submitted that the contention of Revenue in this ground (supra) that the reopening was on account of failure on the part of the assessee to disclose fully and truly all relevant material pertaining to cancellation of equity and preference shares was factually erroneous. In this regard, it was pointed out that in submissions placed before the learned CIT(A) his attention was invited to Note 12 of Schedule 14 and Note 15 of Schedule 14 of the Balance Sheet for the year under consideration wherein this matter has been explained in detail. In view of this disclosure in the assessee’s Balance Sheet, it is contended that the assessee had fully and truly disclosed all relevant material/facts before the AO and on the basis of which the AO in earlier scrutiny assessments after examination of restructuring of share capital was of the view that this transaction did not give rise to any income. It is submitted that the then AO who had completed the earlier assessment orders, had correctly framed the orders taking into consideration material before him that the aforesaid transactions did not give rise to any capital gains taxable under section 45 of the Act and relied on the decision of the Idea Cellular Ltd. (250 ITR 1). Therefore, it is contended that on the basis of the disclosure of these two issues in the financial statements of the assessee and the earlier scrutiny assessment orders completed under section 143(3) on 29.12.2006 and under section 143(3) r.w.s. 147 of the Act vide order dated 10.08.2009, it is 5 ITA 5901 & CO 256/Mum/2013 M/s. Fiat India P. Ltd. clear that the present reopening of assessment for A.Y. 2004-05 was on account of mere change of opinion, on the same set of facts available on record, which is not permissible in law as held by the Hon'ble Apex Court in the case of Kelvinator India Ltd. (320 ITR 561) and Hon'ble Bombay High Court in Asian Paints Ltd. (308 ITR 195 (Bom). To sum up, the learned A.R. of the assessee contended that there was no failure on the part of the assessee to disclose any facts in relation to capital reduction. Mere change of opinion on same set of facts already disclosed before the AO was not a valid ground for reopening the assessment since there was no income of the assessee liable to tax escaping assessment pursuant to capital reduction and conversion of loans. Therefore in the light of the above, it was contended that the AO had erred in assuming jurisdiction under section 147 of the Act without fulfilling the conditions precedent and therefore the assumption of jurisdiction is not valid. 5.3.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncements cited. The learned CIT(A) has dealt with this issue and held the AO’s assumption of jurisdiction for reopening and assessment under section 147 of the Act was not justified and invalid as it was beyond jurisdiction since there was no failure on the part of the assessee to disclose fully and truly all relevant material before the AO. In the impugned order the learned CIT(A) has held as under at paras 2.3 to 2.3(c) thereof: - “2.3 1 have considered the facts of the case. 2.3(a) As per provisions of sec. 147 of the Act, the assessment can be reopened if the A.O. has reason to believe that any income chargeable to tax has escaped assessment. Thus, for reopening of assessment, the A.O. should have reason and on the basis of such reasons a prima facie belief can be formed that any income chargeable to tax has escaped assessment. In the case under consideration the A.O. reopened assessment by recording following reasons: "Pursuant to the capital restructuring, the gain arising from the cancellation of 116,801,390 equity shares and 12,380,000 preference shares held by M/s. Fiat India Automobiles Put. Ltd. and the conversion of unsecured loans into equity shares was not offered to tax.

6 ITA 5901 & CO 256/Mum/2013 M/s. Fiat India P. Ltd. In view of the above, I have reason to believe that income chargeable to tax has escaped assessment coming within the meaning of sec. 147 read with proviso thereto, by reason of failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. Therefore, notice u/s. 148 of the Income Tax Act has been issued. The A.O. noticed that pursuant to capital restructuring, there was cancellation of 11.68,01,390 equity shares and 1,23,80,000 preference shares held by M/s. Fiat India and also that there was conversion of unsecured loans into equity shares. The A.O. has held that gain arising from these transactions were not offered to tax. The question for consideration is whether on the basis of these facts a belief could be formed that any income chargeable to tax had escaped assessment. For the purpose of generation of capital gain there should be transfer of capital asset. That means such capital asset should be property of the assessee and should be held by assessee and thereafter, it should have been transferred by the assessee to some other person for some consideration received or to be received. The capital asset has been defined in sec.2(14) of the Act means property of any kind held by an assessee whether or not connected with his business or profession but it is not included stock in trade and other things as mentioned in sec.2(14). Thus as per provisions of sec.45(1) r.w.s. 2(14), there should be (i) existence of capital asset (ii) such capital asset should be held by an assessee (iii) there should be transfer of such capital asset from the assessee to the other party. In the case under consideration, the appellant was continuously incurring losses and there were huge accumulated losses of Rs. 1,444.85 crores. Therefore, as per the scheme approved by the Hon'ble High Court, the loss to the tune of Rs. 1,444.85 crores was wiped out by reorganizing and reducing the share capital and conversion of certain loans into equity shares. On account of this share capital restructuring, no capital asset of the appellant was transferred and consequently no income or capital gain arose to the appellant company. The appellant company did not sell anything to any person. The share capital so reduced was belonging and pertaining to the shareholders and was assets of shareholders and not of the appellant company. Such share capital reduced was liability of appellant company. In the same way, the unsecured loans payable by appellant were not the assets of the appellant company but were liabilities of the appellant company. Such unsecured loans were assets in the hands of creditors. As per provisions of sec.45(1) r.w.s. 2(14), there should be a capital asset, such capital asset should be held by assessee and such capital asset should be transferred by assessee to other person for some consideration. In the case under consideration, all these factors were missing. The appellant was not holding these (share capital and loans) as capital assets. Thus nothing was sold by the appellant and no asset was transferred by the appellant. Consequently no consideration was received by appellant. In the facts and circumstances, there could not have been 7 ITA 5901 & CO 256/Mum/2013 M/s. Fiat India P. Ltd. any income earned by the appellant or capital gain arose to the appellant. In the facts and circumstances, the reasons as recorded by A.O. for reopening assessment could not have given formation of even a prima facie belief that income /gains chargeable to tax had escaped assessment within the meaning of sec. 147 of the Act. In the facts and circumstances, the reasons recorded by A.O. were not proper for forming a belief u/s. 147 of the Act that income chargeable to tax had escaped assessment. On the basis of such improper reasons, the A.O. could not have assumed jurisdiction u/s.147 of the Act. On the basis of these reasons, no logical conclusion could have been drawn that capital gains chargeable to tax escaped assessment. The reasons so recorded were not sustaining the formation of belief 329 JTR 110 (Del) Sarthak Securities Co. The reasons so recorded were not leading to a belief that capital gains escaped assessment. There was no material available on record from which the requisite belief could be formed by A.O. There, was no "tangible material" to come to the conclusion that there was escapement of income. The belief formed by A.O. in the case under consideration was not that of an honest and reasonable person 336 ITR 451 (A.P.) G.V.K. Gautarni Power Ltd. The sufficiency of the evidence of material is not open to scrutiny by the Court but the existence of the belief sine qua non for a valid exercise of power. In the present case, it was impossible for any prudent person to form a reasonable belief that the income had escaped assessment. The reasons so recorded, could never have led a prudent person to form an opinion that the income had escaped assessment. There was absolutely no basis for the A.O. to form a belief that income chargeable to tax has escaped assessment 324 ITR 154 (Born) Prashant S. Joshi vs. ITO. 2.3(b) The appellant's argument and submissions are also have force that the present reopening was made only on the basis of change of opinion. The appellant disclosed all relevant facts pertaining to these issues in its accounts and balance sheet The appellant's return of was income scrutinized u/s.143(3) of the Act vide order dtd.29.12.2006. Thereafter the assessment was reopened and assessment order was passed u/s.143(3) r.w.s. 147 of the Act vide order dtd.10.08.2009. The facts pertaining to the issue on which present reopening has been made were also before the A.O. who completed the earlier assessment order. Therefore, it was presumed that the earlier A.0 had also considered these issue and formed opinion that there was no income/capital gains arising to the appellant on account of this arrangements. The present A.O. has reopened assessment on the basis of same facts which had already been, presumed to have been considered by the earlier A.O. There were no new facts which came into possession of A.O. after the completion of earlier assessment orders. In the facts and circumstances the appellant's argument has force that the present reopening has been made only on the basis of change of opinion which is not permissible under the law as held by Hon'ble Supreme Court in the case of M/s. Kelvinator India Ltd.

8 ITA 5901 & CO 256/Mum/2013 M/s. Fiat India P. Ltd. 2.3(c) In the case under consideration, the reopening was made after lapse of four years from the end of assessment year. As per proviso to sec. 147, where assessment had been completed u/s.143(3) of the Act, the assessment can be reopened after lapse of four years from the end of relevant assessment year only if there is failure on the part of assessee to disclose fully and truly all material facts relevant for assessment. In the case under consideration, admittedly the assessment was reopened after four years from the end of relevant assessment year. The appellant had disclosed relevant facts in note no.12 and 15 of schedule 14 of balance sheet. These were presumably considered by A.O's who framed earlier two assessment orders for this assessment year. Admittedly there was no failure on the part of the appellant to disclose fully and truly all material facts relevant for assessment. Being the facts so, the A.O. was not justified in assuming jurisdiction u/s.147 of the Act since there was no failure on the part of appellant to disclose fully and truly all relevant material.” 5.3.2 From an appreciation of the facts on record, the submissions made and the relevant portions of the impugned order, it is imperative that if reopening the assessment was as per the provisions of section 147 of the Act, the AO should have prima facie reason to believe that income of the assessee chargeable to tax has escaped assessment. The question for consideration is, whether on the basis of the reasons recorded by the AO (extracted supra at para 5.3.1), a prima facie belief to that effect could have been formed in the facts and circumstances of the case; that there was capital gain arising to the assessee on cancellation of the aforesaid 11,68,01,390 equity shares and 1,23,80,000 preference shares held not by the assessee but by M/s. Fiat India Automobiles Ltd. For capital gain to arise there should be transfer of capital asset. The prerequisites in this regard as per the provisions of section 2(14) r.w.s. 45(1) of the Act are that:- (i) there should be existence of a capital asset, (ii) such capital asset should be held by the assessee, and (iii) there should be transfer of such capital asset from the assessee to the other party. 5.3.3 In the case on hand, the facts are that the assessee had accumulated losses of `1,444.85 crores. As per scheme approved by the 9 ITA 5901 & CO 256/Mum/2013 M/s. Fiat India P. Ltd. Hon'ble Bombay High Court, this loss was to be wiped out by reorganizing and reducing the assessee’s share capital and conversion of certain loans into equity shares. We concur with the view of the learned CIT(A) that in the factual matrix as laid out above, no capital asset of the assessee was sold/transferred and therefore no capital gain arose to the assessee company. The said share capital that was reduced belonged not to the assessee but to shareholders M/s. Fiat India Automobiles P. Ltd. In the case on hand, the assessee was not owning the said shares as capital asset; therefore evidently no asset was sold/transferred by the assessee and consequently no consideration/gain arose to the assessee and therefore the conditions precedent as per the provisions of section 2(14) r.w.s. 45(1) of the Act (supra) are all missing. In this factual/legal matrix of the case, we are of the considered view that the reasons recorded by the AO for reopening the assessment could not have given rise to formation of prima facie reason to believe that income of the assessee chargeable to tax under capital gains had escaped assessment. There was admittedly no failure on the part of the assessee to disclose fully and truly all material facts relevant for making the assessment, since, the relevant facts were disclosed in its financial statements in Notes 12 and 15 of Schedule 14 of the Balance Sheet for the period under consideration, which would have been before the AO for consideration in the earlier scrutiny assessment proceedings which culminated in orders of assessment under section 143(3) of the Act dated 29.12.2006 and under section 143(3) r.w.s. 147 of the Act dated 30.03.2009. In our view, in these third round of assessment proceedings, no new facts had come into the possession of the AO after completion of the earlier assessment orders and therefore the present initiation of reassessment proceedings initiated under section 147 of the Act has been made on the basis of change of opinion which is not permissible, as held by the Hon'ble Apex Court in the case of Kelvinator India Ltd. (supra). In this view of the matter, as discussed from para 5.3.1 of this order (supra), we uphold the finding of the learned CIT(A) that the AO was not justified in assuming jurisdiction under section 147 of the Act for reopening the assessment for A.Y. 2004-05 since there was no failure 10 ITA 5901 & CO 256/Mum/2013 M/s. Fiat India P. Ltd. on the part of the assessee to disclose fully and truly all relevant material before the AO for making the assessment. Consequently, ground No.1 of the Revenue’s appeal is dismissed.