Gupta Syntex Pvt. Ltd v. Deputy Commissioner Of Income Tax, Circle 2(1)(1),Ahmedabad

IN THE HIGH COURT OF GUJARAT AT AHMEDABADR/SPECIAL CIVIL APPLICATION NO. 18887 of 2021 FOR APPROVAL AND SIGNATURE: HONOURABLE MR. JUSTICE N.V.ANJARIA andHONOURABLE MR. JUSTICE BHARGAV D. KARIA ========================================================== ========================================================== GUPTA SYNTEX PVT. LTD. Versus DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 2(1)(1),AHMEDABAD ==========================================================Appearance:MR SUDHIR M MEHTA(2058) for the Petitioner(s) No. 1MS SHAILEE S MEHTA(5873) for the Petitioner(s) No. 1 for the Respondent(s) No. 1 MR BHATT, SENIOR COUNSEL WITH MR KARAN SANGHANI FOR M R BHATT & CO.(5953) for the Respondent(s) No. 1========================================================== CORAM:HONOURABLE MR. JUSTICE N.V.ANJARIAand HONOURABLE MR. JUSTICE BHARGAV D. KARIA Date : 20/09/2022 ORAL JUDGMENT (PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA) 1.Heard learned advocate Mr. Sudhir M. Mehtafor the petitioner and learned SeniorAdvocate Mr. M.R. Bhatt with learned advocateMr. Karan Sanghani for M.R. Bhatt and Co. forthe respondent. 2.Having regard to the controversy involved inthe present case which lies in a very narrowcompass, with the consent of the learnedadvocates for the respective parties, thematter is taken up for final hearing. 3.Rule returnable forthwith. Learned advocateMr. Karan Sanghani waives service of noticeof rule on behalf of the respondent. 4.By this petition under Article 226 of theConstitution of India, the petitioner haschallenged the notice dated 27.03.2021 issued under section 148 of the Income Tax Act, 1961(For short “the Act, 1961”) for reopening ofthe assessment proceedings for the assessmentyear 2013-2014. 5.Brief facts of the case are as under : 5.1)The petitioner is engaged in fabric processing activities of different quality ofGrey Fabrics. 5.2) For the assessment year 2013-2014, the petitioner-assessee filed its return ofincome on 27.08.2013 declaring total incomeof Rs. Nil. The return of income wasprocessed under section 143(1) of the Act,1961. Subsequently, the case of the petitioner was selected for scrutinyassessment. 5.3)Show cause notice dated 5.2.2016 was issued by the respondent asking for certaindetails from the petitioner regarding thevaluation of shares. 5.4)The assessee vide reply dated7.2.2016 furnished all the relevant detailsalong with explanation of valuation of shares. 5.5)The Assessing Officer passed the order of assessment under section 143(3)dated 8.3.2016. 5.6)After a period of more than four years, the respondent issued notice undersection 148 of the Act, 1961 dated 27.3.2021 to the assessee in relation to the AssessmentYear 2013-2014 stating that he has reasons to believe that income chargeable to tax hadescaped assessment. 5.7) In response to such notice, theassessee filed its return of income for theAssessment Year 2013-2014 and addressedletter dated 9.4.2021 to the respondent forsupply of reasons arrived at by therespondent for reopening the assessment. 5.8) The respondent vide letter dated20.05.2021 supplied the reasons recorded forissuing the reopening notice under section148 of the Act, 1961. Reasons recorded by theAssessing Officer read as under : “1. Brief details of the assessee: Inthis case, the assessee L.e. M/s. GuptaSyntex Pvt. Ltd. engaged in the businessof processing and trading of fabricsfiled its return of income for A.Y 2013-14 on 27/08/2013 declaring total incomeat Nil and the same was processedu/s.143(1) of the Act and subsequentlyorder u/s 143(3) of the Act was passedon 08/03/2016 determining total incomeat Nil 2. Brief details of Informationcollected/received by the AO: On perusalof the assessment records for the year 5.8) The respondent vide letter dated20.05.2021 supplied the reasons recorded forissuing the reopening notice under section148 of the Act, 1961. Reasons recorded by theAssessing Officer read as under : “1. Brief details of the assessee: Inthis case, the assessee L.e. M/s. GuptaSyntex Pvt. Ltd. engaged in the businessof processing and trading of fabricsfiled its return of income for A.Y 2013-14 on 27/08/2013 declaring total incomeat Nil and the same was processedu/s.143(1) of the Act and subsequentlyorder u/s 143(3) of the Act was passedon 08/03/2016 determining total incomeat Nil 2. Brief details of Informationcollected/received by the AO: On perusalof the assessment records for the year under consideration, it is noticed thatthe assessee has issued 45456 shares on11/09/2012and45634shareson26/11/2012 totaling 91090 shares at apremium of Rs. 100/- per share. Theshares at a premium of Rs. 100/- wasissued on the basis of valuation ofreport of Shri C. N. Somani, Accountantdated 31/077/2012 wherein the valuationof shares was priced at Rs. 110/- pershares using discounted cash followmethod. 3.Analysisofinformationcollected/received: From the Para-2above and from the assessment records,it is noticed that the assessee hasissued 91090 shares of face value of Rs.10 at a premium of Rs. 100 and receivedshare premium of Rs. 91,09,000/-. Thepremium was fixed by the assessee as perthe valuation report of accountant dated31/07/2012 wherein the accountant usedthe method of valuation of shares usingdiscounted cash flow and as per hisvaluation the share was priced at Rs.110/- per shares including face value.The amendment in Rule-11UA of IT Rules,whereby the discounted cash flow methodwas substituted by the IT (FifthAmendment) Rules 2012 w.e.f. 29/11/2012as the valuation report of theaccountant is of 31/07/2012 prior to theamendment in Rule, the valuation ofshares only as per the formulaprescribed prior to 29/11/2012. As perthis formula, fair market value of eachissued shares comes to Rs. 33.83. As theassessee is issued the shares of facevalue of Rs. 10/- at a premium of Rs.100/-, the shares are issued at excess value of Rs. 76.17. The assessee hasissued 91090 shares, the excess amountcomes to Rs 69,38,325/-. 4. Enquiries made by the AO as sequel toinformation collected/ received: Thefacts enumerated above have been foundout on examination on the case recordsof the assesses and are selfexplanatory. Therefore, no furtherenquiry is required in this case. On thebasis of the same there are reasons tobelieve that the income chargeable totax has escaped assessment. 5. Findings of the AO: On examination ofthe assessment records, it is noticed itis noticed that the assessee has issued91090 shares of face value of Rs. 10 ata premium of Rs. 100 and received sharepremium of Rs. 91.09,000/-. The premiumwas fixed by the assessee as per thevaluation report of accountant dated31/07/2012 wherein the accountant usedthe method of valuation of shares usingdiscounted cash flow and as per hisvaluation the share was priced at Rs.110/- per shares including face value.The amendment in Rule-11UA of IT Rules,whereby the discounted cash flow methodwas substituted by the IT (FifthAmendment) Rules 2012 w.ef. 29/11/2012as the valuation report of theaccountant is of 31/07/2012 prior to theamendment in Rule, the valuation ofshares only as per the formulaprescribed prior to 29/11/2012. As perthis formula, fair market value of eachissued shares comes to Rs. 33.83. As theassessee is issued the shares of face value of Rs. 10/- at a premium of Rs.100/-, the shares are issued at excessvalue of Rs. 76.17. The assessee hasissued 91090 shares, the excess amountcomes to Rs. 69,38,325/- which theassessee ought to have considered asincome as required u/s. 56(2)(viib) ofthe Act. value of Rs. 10/- at a premium of Rs.100/-, the shares are issued at excessvalue of Rs. 76.17. The assessee hasissued 91090 shares, the excess amountcomes to Rs. 69,38,325/- which theassessee ought to have considered asincome as required u/s. 56(2)(viib) ofthe Act. 6. Basis of forming reason to believeand details of escapement of income:From the preceding paras it isestablished that the assessee has issued91090 shares at a premium of Rs. 100/-asagainst the fair market value of Rs.33.83 per shares. Thus, the assessee hasreceived excess share premium of Rs.69,38,325/- which the assessee ought tohave disclosed as income as requiredu/s. 56(2)(viib) of the Act. Failure onthe part of the assessee to disclosefully and truly all the material factsnecessary for the assessment, the incomeof the assessee exceeding Rs. 1 lakh hasescaped assessment for the AY 2013-14. Ihave, therefore, reason to believe thatincome chargeable to tax has escapedassessment within the meaning of section147 of the Act and it is a fit case toissue notice u/s. 148 of the Act.” 5.9) The assessee vide letter dated22.5.2021 tendered objections to therespondent to the reopening notice undersection 148. 5.10) The respondent by communicationdated 11.11.2021 disposed of the objectionsraised by the petitioner. 5.11) Being aggrieved by the action of therespondent, the petitioner has preferred thispetition. 6.Learned advocate Mr. Sudhir Mehta for thepetitioner submitted that on perusal of thereasons recorded by the Assessing Officer, itis apparent that though the issue with regardto the valuation of shares was considered bythe Assessing Officer at the time of originalassessment under section 143(3) of the Act,1961, again the same issue is sought to bereconsidered in the reopening proceedings. Itwas therefore, submitted that the assumptionof the jurisdiction by the Assessing Officerto reopen the assessment would amount tochange of opinion. 6.1) Learned advocate Mr. Mehta invitedthe attention of the Court to the queriesraised by the Assessing Officer during thecourse of assessment under section 143(3) ofthe Act. It was further submitted that evenoffice note placed on record clearly showsthat the Assessing Officer obtainedclarification regarding the valuation ofshares for charging the share premium as perletter dated 22.2.2016 which was foundsatisfactory. 7.On the other hand learned Senior Advocate Mr.M.R. Bhatt for the Revenue submitted that theimpugned notice under section 148 is legaland valid inasmuch as the concept of changeof opinion would not be applicable as therewas no conscious application of mind by theAssessing Officer on the issue underconsideration. It was submitted that the petitioner did not furnish valuation ofshares as per the formula provided under Rule11UA of the Income Tax Rules, 1962 (For short“the Rules, 1962”) as it stood prior to29.11.2012 and has followed the discountedcash flow method which was not applicable atthe relevant time. It was therefore, submitted that there is escapement of incomein view of the aforesaid facts which givejurisdiction to the Assessing Officer toreopen the assessment. 8.Considering the submissions made by the learned advocates on both the sides, it appears that the impugned notice undersection 148 of the Act, 1961 is issued onlyon the ground that the petitioner has failedto comply with the provisions prior toamendment of Rule 11UA of the Rules,1962. Itis not in dispute that during the course ofassessment proceedings under section 143(3) of the Act, 1961, all the details were fullyand truly disclosed by the petitioner andthere is no escapement of income chargeableto tax on account of failure on part of theassessee to disclose fully and truly allmaterial facts. 9.From the facts on record it appears that 8.Considering the submissions made by the learned advocates on both the sides, it appears that the impugned notice undersection 148 of the Act, 1961 is issued onlyon the ground that the petitioner has failedto comply with the provisions prior toamendment of Rule 11UA of the Rules,1962. Itis not in dispute that during the course ofassessment proceedings under section 143(3) of the Act, 1961, all the details were fullyand truly disclosed by the petitioner andthere is no escapement of income chargeableto tax on account of failure on part of theassessee to disclose fully and truly allmaterial facts. 9.From the facts on record it appears that initially the assessee issued 91090 shares offace vale of Rs. 10/- at a premium of Rs.100/- and the petitioner received sharepremium of Rs.91,09,000/- which was fixedand such premium was fixed by valuation ofshares using discounted cash flow method.Therefore, though valuation was made prior toamendment in Rule 11UA of the Rules, 1962,the valuation of such shares would not changein view of section 56(2)(vii)(b) of the Act,1961 which reads as under : “Income from other sources. 56. (1) Income of every kind which is not to be excluded from the total incomeunder this Act shall be chargeable toincome-tax under the head "Income fromother sources", if it is not chargeableto income-tax under any of the headsspecified in section 14, items A to E. (2) In particular, and without prejudiceto the generality of the provisions ofsub-section (1), the following incomes,shall be chargeable to income-tax underthe head "Income from other sources",namely :—…… (vii) where an individual or a Hinduundivided family receives, in anyprevious year, from any person orpersons on or after the 1st day ofOctober, 2009 but before the 1st day ofApril, 2017,— (b) any immovable property,— (i) without consideration, the stampduty value of which exceeds fiftythousand rupees, the stamp duty value ofsuch property; (ii) for a consideration which is lessthan the stamp duty value of theproperty by an amount exceeding fiftythousand rupees, the stamp duty value ofsuchpropertyasexceedssuchconsideration:” 10.It is therefore, apparent that there is change of opinion by the Assessing Officer to reopen the assessment for the Assessment Year2013-2014, more particularly, when the issueof valuation of shares is already consideredduring the assessment proceedings undersection 143(3) of the Act, 1961. TheAssessingOfficercannothaveanyjurisdiction to issue the notice undersection 148 of the Act, 1961 for reopeningthe assessment for the year underconsideration more particularly, when theassessment is sought to be reopened beyond aperiod of four years as held by the SupremeCourt in case of Commissioner of Income tax v. Kelvinator of India Ltd. reported in 2010(2) SCC 723 as under: “2. A short question which arises fordetermination in this batch of civilappeals is, whether the concept of"change of opinion" stands obliteratedwith effect from 1st April, 1989, i.e.,after substitution of Section 147 ofthe Income Tax Act, 1961 by Direct TaxLaws (Amendment) Act, 1987? xxxx 6. On going through the changes, quotedabove, made to Section 147 of the Act,we find that, prior to Direct Tax Laws v. Kelvinator of India Ltd. reported in 2010(2) SCC 723 as under: “2. A short question which arises fordetermination in this batch of civilappeals is, whether the concept of"change of opinion" stands obliteratedwith effect from 1st April, 1989, i.e.,after substitution of Section 147 ofthe Income Tax Act, 1961 by Direct TaxLaws (Amendment) Act, 1987? xxxx 6. On going through the changes, quotedabove, made to Section 147 of the Act,we find that, prior to Direct Tax Laws (Amendment) Act, 1987, re-opening couldbe done under above two conditions andfulfillment of the said conditionsalone conferred jurisdiction on theAssessing Officer to make a backassessment, but in section 147 of theAct [with effect from 1st April, 1989],they are given a go-by and only onecondition has remained, viz., thatwhere the Assessing Officer has reasonto believe that income has escapedassessment, confers jurisdiction to re-open the assessment. Therefore, post-1st April, 1989, power to re-open ismuch wider. However, one needs to givea schematic interpretation to the words"reason to believe" failing which, weare afraid, Section 147 would givearbitrary powers to the AssessingOfficer to re-open assessments on thebasis of "mere change of opinion",which cannot be per se reason to re-open. We must also keep in mind theconceptual difference between power toreview and power to re-assess. TheAssessing Officer has no power toreview; he has the power to re-assess.But re-assessment has to be based onfulfillment of certain pre-conditionand if the concept of "change ofopinion" is removed, as contended onbehalf of the Department, then, in thegarb of re-opening the assessment,review would take place. One must treatthe concept of "change of opinion" asan in-built test to check abuse ofpower by the Assessing Officer. Hence,after 1st April, 1989, AssessingOfficer has power to re-open, providedthere is "tangible material" to come tothe conclusion that there is escapementof income from assessment. Reasons musthave a live link with the formation ofthe belief. Our view gets support from the changes made to Section 147 of theAct, as quoted hereinabove. Under theDirect Tax Laws (Amendment) Act, 1987,Parliament not only deleted the words"reason to believe" but also insertedthe word "opinion" in Section 147 ofthe Act. However, on receipt ofrepresentations from the Companiesagainst omission of the words "reasonto believe", Parliament re-introducedthe said expression and deleted theword "opinion" on the ground that itwould vest arbitrary powers in theAssessing Officer. We quote hereinbelowthe relevant portion of Circular No.549dated 31st October, 1989, which readsas follows: "7.2 Amendment made by theAmending Act, 1989, to reintroducethe expression `reason to believe'in Section 147.--A number ofrepresentationswerereceivedagainst the omission of the words`reason to believe' from Section147 and their substitution by the`opinion'oftheAssessingOfficer. It was pointed out thatthe meaning of the expression,`reason to believe' had beenexplained in a number of courtrulings in the past and was wellsettled and its omission fromsection 147 would give arbitrarypowers to the Assessing Officer toreopen past assessments on merechange of opinion. To allay thesefears, the Amending Act, 1989, hasagain amended section 147 toreintroduce the expression `hasreason to believe' in place of thewords `for reasons to be recordedby him in writing, is of theopinion'. Other provisions of the new section 147, however, remainthe same."11.Inviewofforegoingreasons, considering the facts of the case impugnednotice under section 148 of the Act, 1961 isnot tenable in law and is accordingly quashedand set aside and consequentially order dated11.11.2021 disposing of the objections raisedby the petitioner is also quashed and setaside. new section 147, however, remainthe same."11.Inviewofforegoingreasons, considering the facts of the case impugnednotice under section 148 of the Act, 1961 isnot tenable in law and is accordingly quashedand set aside and consequentially order dated11.11.2021 disposing of the objections raisedby the petitioner is also quashed and setaside. 12.Rule is made absolute to the aforesaidextent. No order as to costs. (N.V.ANJARIA, J) RAGHUNATH R NAIR (BHARGAV D. KARIA, J)