Bakhtawar Construction Co. Pvt. Ltd.1[St] Floor, Meher House, 15 Cawasji Patel,Street, Fort, Mumbai 400 001 v. Oral Judgment ( Per K. R. Shriram J

IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTIONWRIT PETITION NO. 1400 OF 2014 Bakhtawar Construction Co. Pvt. Ltd.1[st] floor, Meher House, 15 Cawasji Patel,Street, Fort, Mumbai 400 001 )))..Petitioner Versus 1. The Deputy Commissioner of Income Tax)Income Tax, Circle 2(1) Mumbai, )Aayakar Bhavan, M. K. Road,)Mumbai 400 020)2. The Commissioner of Income Tax)City-2, Mumbai, Aayajar Bhavan,)M. K.Road, Mumbai 400 020)3. The Union of India)Through the Secretary, Department of)Revenue, Ministry of Finance,)Government of India North Block,)New Delhi 110 001)..Respondents ---- Mr. P. J. Pardiwalla, Senior Advocate a/w Mr. Madhur Agarwal, Mr. FenilBhatt and Mr. Atul Jasani for Petitioner.Mr. P. C. Chhotaray for Respondents-Revenue. ---- CORAM : K.R. SHRIRAM & NEELA GOKHALE, JJDATED : 6[th] OCTOBER 2023 ORAL JUDGMENT ( PER K. R. SHRIRAM J.) : 1Petitioner is challenging the notice dated 30[th] March 2013 issued under Section 148 of the Income Tax Act 1961 (the Act) by respondent no.1to re-open the assessment for A.Y.2008-2009 and the impugned order dated6[th] February 2014 passed by respondent no.1 rejecting the objections ofpetitioner challenging the validity of the impugned notice. 2Petitioner is a closely held company and was incorporated on 22[nd]July 1958. One of the founder directors of petitioner company Mrs. MehrooIrani along with her two daughters Ms. Zinia Lawyer and Ms. BakhtawarChenoy, were the directors as well as shareholders of petitioner company.Remaining shareholders were the children of the said two daughters. 3The said Mehroo Irani died on 17[th] February 2005 and as per her lastWill and Testament dated 30[th] September 2002, most of her assets were tobe bequeathed to her two daughters. The said Will that was probated on10[th] May 2007 included certain directions with respect to one particularimmoveable property belonging to petitioner which was part of the rent freeaccommodation of Mehroo Irani. 4There were certain disputes between the two daughters which cameto be settled upon entering of a Memorandum recording familyarrangement dated 7[th] January 2008. A per the Memorandum recordingfamily arrangement, the said two daughters achieved a complete separationof all their business assets from each other including the assets they were toinherit from their mother Late Mehroo Irani. 5Petitioner was one of the signatories of the Memorandum recordingthe family arrangement. Before the family arrangement was entered into,petitioner gifted a residential flat (the said property) owned by petitionerbeing Flat No. 141 in El-Cid Building in Mumbai to Mr. Bezan Chenoy, whowas the husband of Mrs. Bakhtawar Chenoy. A gift deed dated 28[th]December 2007 was executed. The flat was originally acquired by petitioner in the year 1971 for Rs.3,47,570/-. The written-down value of the saidproperty, as on 1[st] April 2007 was Rs.83,438/-. 6On 28[th] July 2009, petitioner filed its original return of income forA.Y.-2008-09 declaring a total income of Rs.125,31,779/-. In the computation of income a note was also appended which read as under: "Long-term Capital Loss of Rs.83,438/- represents thewritten down value of the residential flat no. 141 in El-cidBuilding at the beginning of the year written off in thebooks of accounts. The transfer was by way of a registeredgift deed executed by the company in favour of one Mr.Bezen Chenoy. There was no consideration received by thecompany for the said transfer. The company does not claimcarry forward and set-off of the said loss to the nextassessment year." Petitioner's case was selected for scrutiny assessment. During the course of the assessment proceedings, respondent no.1 had raised a specificquery as to why the gift of residential flat by petitioner to Mr. Bezan Chenoyshould not be taxed under section 50C of the Act. computation of income a note was also appended which read as under: "Long-term Capital Loss of Rs.83,438/- represents thewritten down value of the residential flat no. 141 in El-cidBuilding at the beginning of the year written off in thebooks of accounts. The transfer was by way of a registeredgift deed executed by the company in favour of one Mr.Bezen Chenoy. There was no consideration received by thecompany for the said transfer. The company does not claimcarry forward and set-off of the said loss to the nextassessment year." Petitioner's case was selected for scrutiny assessment. During the course of the assessment proceedings, respondent no.1 had raised a specificquery as to why the gift of residential flat by petitioner to Mr. Bezan Chenoyshould not be taxed under section 50C of the Act. 7By its letter dated 16[th] July 2010 petitioner replied and explained whythe provisions of section 50C of the Act were not applicable on thetransaction of gift of the said flat by petitioner. 8Subsequently, additional issue was raised by respondent no.1, i.e., theassessing officer, during the original assessment proceedings as to why the gift of the said flat by petitioner should not be treated as deemed dividendin the hands of petitioner under Section 2(22)(a) of the Act and dividenddistribution tax should not be levied under section 115-O of the Act. It is petitioner’s case that the additional issue was raised because apparentlyrespondent no.1 was satisfied with reply given by petitioner vide its letterdated 16[th] July 2010 that the provisions of section 50C was not applicable tothe facts of the case. 9To the additional issue raised as noted above, petitioner filed adetailed reply dated 26[th] July 2010, inter alia, explaining that the provisionof section 2 (22)(a) of the Act was not applicable on the facts of the presentcase and the gift cannot be treated as deemed dividend income in the handsof petitioner. 10Thereafter, respondent no.1 passed assessment order dated 30[th]September 2010 under section 143 (3) of the Act holding that the gift madeby petitioner to Bezan Chenoy is considered as distribution of asset bypetitioner on behalf of existing shareholders. Respondent no.1 held thatpetitioner has undertaken the distribution of the asset to fulfill theobligation of the existing shareholders and hence, the same is to be treatedas deemed dividend as per the provisions of section 2 (22) (a) of the Act.Respondent no.1 levied additional income tax on account of dividenddistribution tax of Rs.53,70,896/- under section 115-O of the Act. It isnecessary to note that the assessment order does contain a reference to theletter dated 16[th] July 2010 by which, petitioner explained as to why theprovision of Section 50C of the Act was not applicable. 11Aggrieved by the assessment order petitioner preferred an appealbefore the Commissioner of Income Tax (Appeals), who by an order 16[th] August 2011 allowed the appeal of petitioner. The CIT(A) held that the giftof the said property by petitioner to Bezan Chenoy cannot be charged asdividend under Section 2 (22) (a) of the Act as the conditions specified inthe said Section are not fulfilled. Against this order, revenue preferred anappeal before Income Tax Appellate Tribunal (ITAT) which appeal, we areinformed, after the petition was filed came to be dismissed. It does notappear that either before CIT(A) or before the ITAT revenue has agitated theapplicability of Section 50C of the Act. 12As there were certain refunds due to petitioner, when petitionerstarted making enquiry regarding the issue of refund and giving effect to theorder passed by CIT(A), petitioner was informed that there was an auditobjection for not imposing tax as per Section 50 C of the Act on the gift ofthe said property by petitioner. 12As there were certain refunds due to petitioner, when petitionerstarted making enquiry regarding the issue of refund and giving effect to theorder passed by CIT(A), petitioner was informed that there was an auditobjection for not imposing tax as per Section 50 C of the Act on the gift ofthe said property by petitioner. 13Petitioner by its letters dated 11[th] June 2012 and 21[st] August 2012explained that the provision of Section 50C of the Act was not applicableand there was no question of reopening the assessment. Thereafter,petitioner received the impugned notice dated 30[th] March 2013 underSection 148 of the Act. The reasons to believe why there was an escapementof income was made available to petitioner on 9[th] April 2013. The reasons to believe read as under: “In this case the scrutiny assessment was completed u/s 143(3) dtd.30.09.2010. It is seen that the assessee company had gifted a flat toMr. Bejan Chenoy (husband of Mrs. Bhaktawar Chenoy) as per amemorandum of family arrangement. Assessee company had resortedto colorable device by way of gift of the said property to avoid taxliability. Therefore, this is a fit case for invoking provisions of Sec. 50C30.09.2010. It is seen that the assessee company had gifted a flat toMr. Bejan Chenoy (husband of Mrs. Bhaktawar Chenoy) as per amemorandum of family arrangement. Assessee company had resortedto colorable device by way of gift of the said property to avoid taxliability. Therefore, this is a fit case for invoking provisions of Sec. 50C and value as per Stamp Duty-authority at Rs. 4,29,03,292/- wasrequired to be considered as sale consideration and taxed as shortterm capital gain.” 14Therefore, the reasons only state that petitioner has gifted a flat toBezan Chenoy as per the Memorandum of family arrangement and thereby,petitioner has resorted to colorable device by way of gift of the said propertyto avoid tax liability. Therefore, this was a fit case for invoking provisions ofSec. 50C and value as per Stamp Duty-authority at Rs. 4,29,03,292/- wasrequired to be considered as sale consideration and taxed as short termcapital gain. 15Petitioner filed it's objection to reopening vide its letter dated 2[nd]September 2013. Petitioner’s basic objection was that the issue ofapplicability of Section 50C of the Act has been considered during theassessment proceedings and hence reopening of the assessment to applyvery same Section 50C on the same transaction is not permissible as it willtantamount to change of opinion by respondent no.1 which is notpermissible under section 147 of the Act. These objections were rejected byan order dated 6[th] February 2014, which is also impugned in this petition.After the said impugned order was passed, this petition came to be lodgedand rule was issued on 28[th] July 2014. Respondent No.3 was also restrainedfrom taking any steps pursuant to the impugned order and impugned notice. 15. Submissions of Mr. Pardiwalla:. (a)The reopening of the assessment is purely on the basis of change ofopinion which is not permissible and that cannot be a tangible material. (b) During the course of assessment proceedings specific queries wereraised with regard to the gift of the flat on the applicability of Section 50Cof the Act and also as to why it should not be treated as deemed dividendincome. (c)On the issue of Section 50C, petitioner by its letter lettered 16[th] July2010 filed a copy of the gift deed with all annexures and also explained whysection 50C cannot come into play. (d) By a letter dated 26[th] July 2010 petitioner once again explained as towhy Section 50C was not applicable. (e)During the hearing on 16[th] July 2010, petitioner was called upon toexplain as to why the market value of the said property gifted to BezanChenoy should not be treated as deemed dividend under Section 2 (22) (a)of the Act and as recorded in petitioner’s letter dated 26[th] July 2010,petitioner explained as to why the value of the flat should not be treated asdeemed dividend. (c)On the issue of Section 50C, petitioner by its letter lettered 16[th] July2010 filed a copy of the gift deed with all annexures and also explained whysection 50C cannot come into play. (d) By a letter dated 26[th] July 2010 petitioner once again explained as towhy Section 50C was not applicable. (e)During the hearing on 16[th] July 2010, petitioner was called upon toexplain as to why the market value of the said property gifted to BezanChenoy should not be treated as deemed dividend under Section 2 (22) (a)of the Act and as recorded in petitioner’s letter dated 26[th] July 2010,petitioner explained as to why the value of the flat should not be treated asdeemed dividend. (f)Thereafter, the assessment order has been passed in which theassessing officer has rejected the submissions of petitioner and treated themarket value of the said flat as deemed dividend under Section 2(22)(a) ofthe Act. (g) Therefore once a query is raised during the assessment proceedingand assessee has replied to it, it follows that the query raised was a subjectof consideration of the assessing officer while completing the assessmentand it is not necessary that an assessment order should contain reference and or discussion to disclose his satisfaction in respect of the query raised.(h) The fact that a query on the applicability of Section 50C of the Actwas raised and after the reply dated 16[th] July 2010, the assessing officer didnot pursue that query and has made reference in the assessment order, it israther obvious that the assessing officer was satisfied in respect of the queryraised. (i)The reopening could not have been on the basis of audit objectionwhich was informed to petitioner when petitioner went to enquire about therefund. It is not even mentioned in the reasons for reopening. The reopeningbased on audit objection is not permissible unless new facts came to noticethrough the audit objection. The expression ‘opinion’ used in Section 147(b)of the Act could only mean factual material and cannot include any opinionon point of law as held in judgment of the Apex Court in Indian & EasternNewspapers Society Vs. Commissioner of Income Tax1 16Submissions of Mr Chhotaray:- (a)The audit objections received by the assessing officer was the tangiblematerial and what the assessing officer seeks is to reopen the assessment asoriginal assessing officer has been careless in not bringing to fact aparticular amount which was chargeable to tax and revenue should not beprecluded from issuing notice under section 148 of the Act. (b) Oversight in passing the assessment order, will not affect assessingofficer’s jurisdiction to issue notice and for this, as held in judgment of the apex court in A.L.A. Firm Vs. Commissioner of Income Tax2 (c)Kalyanji Mavji & Co. Vs. CIT[3] which has been referred to and reliedupon in A.L.A. Firm (Supra), permits reopening in the following categoriesof cases: 1) where the information is as to the true and correct state of thelaw derived from relevant judicial decisions; (2) where the information isderived from an external source of any kind and such external source wouldinclude discovery of new and important matters or knowledge of fresh factswhich were not present at the time of the original assessment; (3) wherethe information may be obtained even from the record of the originalassessment from the investigation of the materials on the record, or the factsdisclosed thereby or from other enquiry or research into facts or law; (4)Where the Income Tax Officer derives information from the record on aninvestigation or an inquiry into facts not originally undertaken and suchinformation is received from the audit objection, it will be permissible toreopen the assessment. 4(d)Phoolchand Bajrang Lal & Anr Vs. Income Tax Officer & Anr., hasheld one of the purposes of Section 147 is to ensure that a party cannot getaway by wilfully making a false or untrue statement at the time of originalassessment and when that falsity comes to notice, to turn around and say"you accepted my lie, now your hands are tied and you can do nothing". Itwould be travesty of justice to allow the assessee that latitude. (e)Certainly, there is no bar to reopening based on audit objection. The 2. (1991) 189 ITR 285 (SC) 3. (1976) 102 ITR 287 (SC) 4. 1993(203) ITR 456 audit is an important organ of the department and its objective is to pointout the errors committed by the assessing officer after examining theassessment order after completion of the assessment. The assessing officerapplies his mind to the audit observations and takes appropriate action. Thewhole objective of the audit is to prevent loss of revenue to department dueto errors or omissions on the part of the assessing officer and this is becauserevenue cannot file appeal against the assessment order. 17Mr. Pardiwalla in rejoinder submitted that ALA Firm (Supra) wouldnot be applicable to the facts of this case, in as much as there the court hasheld that the proposition clearly envisages a formation of opinion by the ITOon the basis of material already on record provided the formation of suchopinion is consequent on "information" in the shape of some light thrown onaspects of facts or law which the ITO had not earlier been conscious of. Inthe case at hand, the ITO was certainly conscious of provision of Section50C of the Act and its possible applicability to the facts of the case becausea query was raised during the assessment proceedings which was respondedto vide letter dated 16[th] July 2010 and that explanation has been acceptedbecause that was not even discussed in subsequent query or even in theassessment order. Relying on Indian & Eastern Newspaper (Supra), Mr.Pardiwalla submitted that if the audit party had pointed out a fact which hasbeen overlooked by the ITO for the assessment, the notice could have beenissued but in this case the audit party has expressed the opinion on aquestion of law it is not permissible. FINDINGS 18This court in Commissioner of Income Tax-II Vs. Jet Speed Audio (P)Ltd.5 has held that during the original assessment proceedings, once a querywas made with regard to the same issue which was responded to by theassessee and on satisfaction of the same, the assessing officer has passed anassessment order, reopening would be purely on the basis of change ofopinion. Moreover, the court has held that the tangible material urgedshould emanate from the reasons recorded for issuing reopening noticeunder Section 148 of the Act. The tangible material as stated in the affidavitin reply and by counsel for revenue are the audit objections received by theassessing officer. But there is no mention of this in the reasons recorded forissuing reopening notice under Section 148 of the Act. Therefore, the auditobjection cannot be termed as tangible material. 19The only basis the notice under Section 148 of the Act was issued isthat petitioner had gifted a flat to Bezan Chenoy as per the Memorandum ofFamily arrangement and, therefore, has resorted to colorable device by wayof gift of the said property to avoid tax liability. Therefore, this is a fit casefor invoking provisions of Sec. 50C and value as per Stamp Duty-authorityat Rs. 4,29,03,292/- was required to be considered as sale consideration andtaxed as short term capital gain. The invoking of provision of Section 50Cof the Act was a subject of consideration during the original assessmentproceedings. In its reply dated 16[th] July 2010, in paragraph 4 petitioner has explained why Section 50C cannot come into play and it reads as under: 19The only basis the notice under Section 148 of the Act was issued isthat petitioner had gifted a flat to Bezan Chenoy as per the Memorandum ofFamily arrangement and, therefore, has resorted to colorable device by wayof gift of the said property to avoid tax liability. Therefore, this is a fit casefor invoking provisions of Sec. 50C and value as per Stamp Duty-authorityat Rs. 4,29,03,292/- was required to be considered as sale consideration andtaxed as short term capital gain. The invoking of provision of Section 50Cof the Act was a subject of consideration during the original assessmentproceedings. In its reply dated 16[th] July 2010, in paragraph 4 petitioner has explained why Section 50C cannot come into play and it reads as under: “4. As disclosed by way of a foot note to the computation of incomeduring the year the company made a gift of a residential flat in favourof one Mr. Bezan Chenoy. We are enclosing herewith a copy of Index IIin respect of the said transaction as per your request. A zerox copy ofthe registered Deed of Gift with all annexures etc is also enclosedherewith. We respectfully submit that there cannot be any issue aboutLong Term Capital Gains in this transaction because the transfer wasby way of gift and no consideration whatsoever was received by thecompany from the donee. The main reasons for the same are asunder: a) Where any capital asset is transferred as a Gift, then such atransaction is not regarded as a transfer u/s 47(iii). b) Computation section 48 also contemplates full value ofconsideration received or accruing as a result of transfer as thestarting point for computation of capital gains. If no consideration hasbeen received or accruing as a result of transfer there can be noquestion of any computation of capital gain u/s 48. c) Even u/s 50C what is contemplated is a positive figure ofconsideration received or accruing as a result of a transfer being lessthan the value adopted by the stamp valuation authority. Ifconsideration figure is zero or NIL, deeming fiction u/s 50C cannotcome in to play especially when Gifts are categorically not consideredas transfers u/s 47 referred above.” 20In the letter dated 26[th] July 2010 also when petitioner explained about the non-applicability of Section 2(22)(a) of the Act, the concluding paragraph reads as under: “For the relevant assessment year under consideration althoughsection 50C is on the statute book it cannot be attracted for thereasons explained in our last letter dated 16[th] July 2010 and Gift TaxAct has been done away with. Gift of property is also not covered u/s56 for A. Y. 2008-09 and therefore the transaction does not attract anytax in anybody’s hands.” Therefore, it is apparent that the applicability of Section 50C was a subject of consideration of the assessing officer while completing theassessment. A Division Bench of this court in Aroni Commercials Ltd. Vs. Deputy Commissioner of Income Tax-2(1)6 has held that once a query is raised during the assessment proceedings and the assessee has replied to it,it follows that the query raised was a subject of consideration of theAssessing Officer while completing the assessment. It is not necessary thatan assessment order should contain reference and/or discussion to discloseits satisfaction in respect of the query raised. If an Assessing Officer has torecord the consideration bestowed on all issues raised by him during theassessment proceeding even where he is satisfied then it would beimpossible for the Assessing Officer to complete all the assessments whichare required to be scrutinized by him under Section 143(3) of the Act. 21Therefore, there can be no doubt in the facts of this case that thereopening of the assessment by the impugned notice is merely on the basisof change of opinion of the assessing officer from that held earlier duringthe course of assessment proceedings leading to the assessment order dated30[th] September 2010. This change of opinion does not constitutejustification and/or reasons to believe that income chargeable to tax hasescaped assessment. 21Therefore, there can be no doubt in the facts of this case that thereopening of the assessment by the impugned notice is merely on the basisof change of opinion of the assessing officer from that held earlier duringthe course of assessment proceedings leading to the assessment order dated30[th] September 2010. This change of opinion does not constitutejustification and/or reasons to believe that income chargeable to tax hasescaped assessment. 22The fact that the notice was issued based on audit objections receivedby the assessing officer also does not find mention in the impugned notice.The assessing officer does not even mention in the impugned notice whatwas the information that he had received. The assessing officer has, asrecorded in the notice, formed an opinion that because the assessee hadgifted to Bezan Chenoy as per the Memorandum recording familyarrangement, petitioner had resorted to colorable device by way of gift of the said property to avoid tax liability. Therefore, this was a fit case forinvoking provisions of Section 50C of the Act. This does not indicate aboutany opinion having been received by the assessing officer by way of auditobjections. Therefore, we will also have to hold that there can be no tangiblematerial mentioned in the reasons recorded by the revenue which wouldwant a different opinion being taken than which was taken when theoriginal assessment order was passed. As held by this court in Jet SpeedAudio (P) Ltd. (Supra) it is settled law that the reopening notice can besustained only on the basis of the ground mentioned in the reasonsrecorded. It is not open to the revenue to add and/or supplement later thereasons recorded at the time of reopening notice. 23Mr. Chhotaray spent lot of time on making submission on judgment ofA.L.A. Firm (Supra). As correctly submitted by Mr. Pardiwalla, this judgmentis not applicable to the facts of this case. The first reason for us to take thisview is because the reason to believe does not mention about any opinionfrom the audit party. Moreover, as held by the Apex Court in Commissionerof Income Tax Vs. PV.S. Beedies (P) Ltd.7 which has been relied upon by theRevenue in the affidavit in reply, the information passed on by the auditparty can be only as regards the factual error or omission in the assessment.Reopening of the case on the basis of factual error pointed out by the auditparty is permissible under law. As in the case of PVS Beedies (Supra) theaudit party, as stated in the affidavit in reply, has not pointed out the fact which has been over looked by the ITO in the assessment but has only giveninformation on a question of law, i.e., applicability of Section 50C, which isnot permissible. Moreover, the Apex Court in A.L.A. firm (Supra) has heldthat the formation of opinion by ITO on the basis of material already onrecord provided the formation of such opinion is consequent on“information” in the shape of some light thrown on aspects of facts or lawwhich ITO had not earlier been conscious of. Therefore, where ITO derivesinformation from the record on an investigation into facts not originallyundertaken then reopening was permissible. That is not the case in thematter at hand because the issue of Section 50C of the Act, as noted earlier,was a subject of consideration during the assessment proceedings, the queryhaving been raised and petitioner responded to the query and the assessingofficer not taking that issue forward. During the course of assessmentproceedings a specific question was raised by the assessing officer as to whythe transaction should not be taxed under Section 50C of the Act. This wasreplied to by petitioner vide its letter dated 16[th] July 2010 where petitionerhas explained why the gift be not regarded as transfer under Section 47(iii)of the Act and the transaction cannot be regarded as transfer for thepurposes of the Act. Petitioner has explained under Section 50C of the Actwhat is contemplated is a positive figure of consideration received oraccruing as a result of a transfer being less than the value adopted by thestamp valuation authority. If consideration figure is zero or NIL, deemingfiction under Section 50C of the Act cannot come into play especially when gifts are categorically not considered as transfers under Section 47 of theAct. After considering the submissions, the assessing officer has consciouslydropped in the issue of Section 50C or not to levied any tax under Section50C in respect of the said transaction. For the same reasons PhoolchandBajrang Lal (Supra) will not be applicable to the facts of this case becausethe Apex Court has held that the assessing officer may start reassessmentproceedings either because of some fresh facts come to light which wherenot previously disclosed or some information with regard to the factspreviously disclosed comes into his possession which tends to expose theuntruthfulness of those facts. In such situations, it is not a case of merechange of opinion or the drawing of a different inference from the samefacts as were earlier available but acting on fresh information. 24In the circumstances, in our view, respondent no.1 was not justified inreopening the assessment. Rule is therefore, made absolute. The impugnednotice dated 30[th] March 2012 and the impugned order dated 6[th] February2014 are hereby quashed and set aside. 25Petition disposed. (NEELA GOKHALE, J.) (K.R. SHRIRAM, J.)