M/S.nexus Electro Steel Ltd v. The Assistant Commissioner Of Income Tax, Company Circle-4(2)

IN THE HIGH COURT OF JUDICATURE AT MADRASDATED : 16-06-2021CORAM THE HONOURABLE MR. JUSTICE S.M.SUBRAMANIAMWP No.21327 of 2018AndWMP Nos.25000 and 25001 of 2018AndWMP No.267 of 2020 M/s.Nexus Electro Steel Ltd.,Represented by its Managing Director,Mr.Ketan C.Bagadia,No.202, Sivalaya Block C,16, Ethiraj Salai,Egmore,Chennai – 600 008...Petitioner vs. 1.The Assistant Commissioner of Income Tax, Company Circle-4(2), 121, Mahatma Gandhi Road, Nungambakkam, Chennai – 600 034.2.The Income Tax Officer, Corporate Ward – 4(2), 121, Mahatma Gandhi Road, Nungambakkam, Chennai – 600 034...Respondents Writ Petition is filed under Article 226 ofthe Constitution of India, praying for the issuance of a Writ ofCertiorari, calling for the records on the file of therespondents in PAN. and quash the impugned noticedated 10.08.2017 issued under Section 148 of the Income Tax Act,1961 passed by the second respondent and the consequentialproceedings in Corporate Circle – 4(2)/PAN: /2018-19dated 06.08.2018 passed by the first respondent as illegal andwithout jurisdiction. For Petitioner : Mr.R.SivaramanFor Respondents : Ms.Hema Muralikrishnan, Senior Standing Counsel for Income Tax. https://hcservices.ecourts.gov.in/hcservices/ O R D E R The writ on hand is filed by the petitioner,challenging the notice issued under Section 148 of the IncomeTax Act, 1961 [hereinafter referred to as the 'Act', in short]and the consequential proceedings dated 06.08.2018 issueddisposing of the objections submitted by the petitioner. 2. The petitioner-Company filed the Return of Incomefor the assessment year 2013-2014 on 31.03.2015. The Return wasduly processed under Section 143(1) of the Act. The case wasselected for scrutiny assessment by issue of notice underSection 143(2) of the Act and the assessment order was passed bythe Competent Authority on 31.03.2016. 3. The petitioner states that in the assessment orderdated 31.03.2016, the Assessing Officer reassessed the totalincome at Rs.3,68,43,816/- and increased the net balance taxpayable to Rs.96,15,940/-. Out of the total addition made, anamount of Rs.1,23,58,000/- was made according to Section 56(2)(viib) of the Income Tax Act, 1961 on the ground that thepetitioner-Company has issued 6,00,000 equity shares of facevalue of Rs.10 at a premium of Rs.90/-. The Assessing Officerobserved that as the petitioner-Company failed to obtainachievement targets as per the forecast the value of shareshould be recomputed and the excess share value received by thepetitioner-Company over the market value has to be disallowed asper Section 56(2)(viib) of the Act. 4. The petitioner states that over the entire additionsmade, the company has preferred an appeal before theCommissioner of Income Tax (Appeals) on all the additions/dis-allowances and the same is pending for disposal. In themeantime, on 10.08.2017, the petitioner received a notice underSection 148 of the Act, from the second respondent proposing toreopen the concluded assessment for the assessment year 2013-2014 on the premise that the Assessing Officer has reasons tobelieve that income liable to be taxed has escaped assessmentwithin the meaning of Section 147 of the Act. 5. The petitioner filed a letter dated 31.08.2017,seeking reasons for reopening. The second respondent, in letterdated 05.09.2017, furnished the reasons stating that thepetitioner-Company has converted 50,01,514 preference sharesinto equity shares and Rs.5,00,00,000/- worth debentures intoequity shares of Rs.10/- each at the premium of Rs.90/- pershare which totals to 10,00,151 shares. Since, in the assessmentorder passed under Section 143(3) of the Act, dated 31.03.2016,the difference between the market value and the share value inrespect of 10,00,151 shares to the tune of Rs.2,09,33,160 /- was 5. The petitioner filed a letter dated 31.08.2017,seeking reasons for reopening. The second respondent, in letterdated 05.09.2017, furnished the reasons stating that thepetitioner-Company has converted 50,01,514 preference sharesinto equity shares and Rs.5,00,00,000/- worth debentures intoequity shares of Rs.10/- each at the premium of Rs.90/- pershare which totals to 10,00,151 shares. Since, in the assessmentorder passed under Section 143(3) of the Act, dated 31.03.2016,the difference between the market value and the share value inrespect of 10,00,151 shares to the tune of Rs.2,09,33,160 /- was not brought to tax under Section 56(2)(viib) of the Act,proceedings are claimed to have been initiated.6.The learned counsel appearing on behalf of thewrit petitioner strenuously contended that there is no tangiblematerial available to satisfy the requirement of Section 147 ofthe Act. Thus, the reopening of assessment by issuing noticeunder Section 148 of the Act, is nothing but change of opinionby the Assessing Officer. 7. The petitioner submitted various documents,including Return of Income, Balance Sheet for the relevantassessment year, Auditor's Report etc., and the respondentswithout considering any of these documents reopened theconcluded assessment which became final. Thus, the petitionerraised an objection for reopening by elaborating the reasons. 8. It was contended before the respondents that thereis no fresh material to substantiate the requirement of reasonsto believe as contemplated under the provisions of the Act.Without considering any of these grounds, the respondents issuedthe impugned order, disposing of the objections filed by thepetitioner in proceedings dated 06.08.2018, which is underchallenge in the present writ petition. 9. The learned counsel for the petitioner solicited theattention of this Court with reference to the findings made inthe original assessment order dated 31.03.2016 and morespecifically, with reference to the achievement of target ofprofit as per the projected financial and the said portion ofthe assessment order reads as under:- “The reply of the assessee isconsidered carefully. The assessee has notachieved the target of profit as per theprojected financial. Since the projections madehave been so exorbitant and unrealistic ascompared to the actual realized in thesubsequent years, these unrealistic projectionsare hereby rejected as a basis for the sharepremium received. Rules laid down in Act/Lawcannot be misused or abused by projectionsestimates which are unrealistic. While there canbe deviations on the projections so made, butthese deviations as long as they are within areasonable limit, such projections can beaccepted. But in this case, the projections madeare so unrealistic and hence the deviationsthereon are not acceptable. Hence Valuation madeat the Growth rate of 3% held as reasonable andaccordingly the market value of share is taken at Rs.79.07. Here the entire projectedfinancials are not rejected . Only Growth rate3% is adopted. The excess of amount of Sharevalue of Rs.100 over the market value of shareRs.79.07 (100-79.07), Rs.20.93 relating 600000fresh issue of value of shares worksout toRs.1,25,58,000/-. By invoking provisions ofSection 56(2)(viib) of the Income Tax Act, 1961Rs.1,25,58,000 is added to the total income.Additions made under Section 56(2)(viib)Rs.1,25,58,000 Total Income admitted Rs.55,02,960 Add:(1)Additions made u/s 36(va Rs.14,67,297 (2)Additions made u/s 43B Rs.24,32,500 (3)Additions made u/s 40(ia) Rs.80,00,000 (4)Additions made u/s 40(ia) Rs.68,83,059 (5)Additions made u/s57(2)(viib) Rs.1,25,58,000 Total Assessed Income Rs.3,68,43,816” Total Income admitted Rs.55,02,960 Add:(1)Additions made u/s 36(va Rs.14,67,297 (2)Additions made u/s 43B Rs.24,32,500 (3)Additions made u/s 40(ia) Rs.80,00,000 (4)Additions made u/s 40(ia) Rs.68,83,059 (5)Additions made u/s57(2)(viib) Rs.1,25,58,000 Total Assessed Income Rs.3,68,43,816” 10.It is contended even in the grounds of appealfiled by the petitioner before the Commissioner of Income Tax(Appeals), ground No.5 reveals that “The Learned AssessingOfficer erred in adding the excess of share value over themarket value of 6,00,000 fresh issue of equity shares amountingto Rs.1,25,58,000/- invoking Section 56(2)(viib) of the Act.“. 11. The petitioner states that in view of the fact thatthe grounds taken before the Commissioner of Income Tax(Appeals) with reference to the reasons furnished for reopeningof the assessment, it is improper on the part of the respondentsfor initiation of reopening proceedings under Section 147 of theAct. 12. The learned counsel for the petitioner by citingthe reasons furnished by respondents, contended that suchreasons are the subject matter of appeal pending before theCommissioner of Income Tax (Appeals) and thus, respondents havecommitted an error in issuing a notice under Section 148 of theAct. 13. The Auditor's Report is also relied on for thepurpose of substantiating the grounds raised by the petitionerin the writ petition. For all these reasons, the petitionersubmitted that the writ petition is to be allowed. 14. The learned Senior Standing Counsel, appearing onbehalf of the respondents, objected the contentions raised on https://hcservices.ecourts.gov.in/hcservices/ behalf of the petitioner by stating that the reason forreopening of assessment is clearly stated in proceedings dated05.09.2017. 15. It is a case where Section 148 notice was issuedbefore expiry of 4 years and further, the reason furnished forthe purpose of reopening of assessment is no way connected withthe subject matter of the issues pending before the Commissionerof Income Tax (Appeals). The issues pending subjudice before theCommissioner of Income Tax (Appeals) are entirely different one,which are unconnected with the reasons furnished for reopeningof the assessment by initiating proceedings under Section 147 ofthe Act. 16. The learned Senior Standing Counsel, appearing onbehalf of the respondents, contended that the reasons to believecontemplated under Section 147 of the Act, squarely falls withreference to the facts of the present case. In this regard,Explanation 1 and Explanation 2 sub-clause (c)(i) is relied uponto establish that even in case where the income chargeable totax has been underassessed, the reopening of assessment ispermissible. Explanation 1 clarifies that production before theAssessing Officer of Account Books or other evidence from whichmaterial evidence could with due diligence have been discoveredby the Assessing Officer will not necessarily amount todisclosure within the meaning of the foregoing Proviso. 17. Therefore, submission of Account Books or otherevidence alone is not sufficient. Even a discovery of newmaterial, the Assessing Officer is empowered to reopen theassessment. Mere production of Account Books or other evidences,including Auditor's Report and statements, in the present case,will not amount to disclosure within the meaning of the Provisoto Section 147 of the Act as stated in Explanation 1. Thus, thepetitioner has to participate in the further proceedings inorder to defend his case and the respondents may be permitted topass assessment order by following the procedures and therefore,the writ petition is to be dismissed. 18. This Court is of the considered opinion that thereasons furnished for reopening of assessment under Section 147of the Act, is stated in proceedings dated 05.09.2017, whichreads as under:- 18. This Court is of the considered opinion that thereasons furnished for reopening of assessment under Section 147of the Act, is stated in proceedings dated 05.09.2017, whichreads as under:- “The reason recorded for reopeningthe assessment for the AY 2013-14 is asunder:-“During the year, the company hasconverted 50,01,514 preference shares intoequity shares in the ratio of 10:1 i.e.,500151 equity shares and Rs.5,00,00,000/- worth debentures into equity shares ofRs.10/- each at the premium of Rs.90 pershare i.e., 5,00,000 equity shares. The Totalof preference shares and debentures convertedinto equity shares totals to 10,00,151 Nos.In the assessment order passed under Section143(3) of the Income Tax Act dated31.03.2016, the difference between the marketvalue and share value in respect of 1000151equity shares to the tune of Rs.2,09,33,160/-(1000151*20.93) was not brought to tax underSection 56(2)(viib) of the Income Tax Act,1961. Hence, I have reason to believe thatthe Income chargeable to tax has escapedassessment for the AY 2013-14.” 19. The objections raised by the petitioner is that thereopening is based on change of opinion. The petitioner hascontended that all Books of Accounts, Auditor's Report and therelevant documents were furnished even at the time of scrutinyand the final assessment order was passed after adjudicating allthese records. Therefore, the reopening of assessment is nothingbut change of opinion and there is no tangible materialavailable on record that the Competent Authority have a reasonto believe for reopening of assessment. 20. In respect of the said contention raised by thepetitioner, this Court is of the considered opinion that withreference to the reasons, the ingredients of Section 147 of theAct, have to be looked into. Section 147 of the Act, stipulatesthat if the Assessing Officer has a reason to believe that anyincome chargeable to tax has escaped for the assessment year.The phraseology of 'reason to believe' is to be considered withreference to the Proviso Clause and Explanations. 21. Explanation 1 to Section 147 of the Act, statesthat “Production before the Assessing Officer of Account Booksor other evidence from which material evidence could with duediligence have been discovered by the Assessing Officer will notnecessarily amount to disclosure within the meaning of theforegoing Proviso”. 22. It is further contended that reasons furnished forreopening of the assessment is no way connected with the pendingappeal before the Commissioner of Income Tax (Appeals). EvenExplanation 2(c)(i) states that where an assessment has beenmade, but income chargeable to tax has been underassessed. Thenalso reopening of assessment is permissible. Thus, mereproduction of Account Books or other evidence, is insufficientto hold that the Authority has no power to reopen the https://hcservices.ecourts.gov.in/hcservices/ assessment. Even in case of underassessment, the Authority mayreopen the assessment. 22. It is further contended that reasons furnished forreopening of the assessment is no way connected with the pendingappeal before the Commissioner of Income Tax (Appeals). EvenExplanation 2(c)(i) states that where an assessment has beenmade, but income chargeable to tax has been underassessed. Thenalso reopening of assessment is permissible. Thus, mereproduction of Account Books or other evidence, is insufficientto hold that the Authority has no power to reopen the https://hcservices.ecourts.gov.in/hcservices/ assessment. Even in case of underassessment, the Authority mayreopen the assessment. 23. In the present case, the appeal filed by thepetitioner before the Commissioner of Income Tax (Appeals)reveals that the Assessing Officer erred in adding the excess ofshare value over the market value of 6,00,000 fresh issue ofequity shares amounting to Rs.1,25,58,000/- invoking Section 56(2)(viib) of the Act. However, the reasons for reopening of theassessment furnished in proceedings dated 05.09.2017 states thatduring the year, the Company has converted 50,01,514 preferenceshares into equity shares in the ratio of 10:1 i.e., 500151equity shares and Rs.5,00,00,000/- worth debentures into equityshares of Rs.10/- each at the premium of Rs.90 per share i.e.,5,00,000 equity shares. The Total of preference shares anddebentures converted into equity shares totals to 10,00,151 Nos.In the assessment order passed under Section 143(3) of theIncome Tax Act dated 31.03.2016, the difference between themarket value and share value in respect of 1000151 equity sharesto the tune of Rs.2,09,33,160/- (1000151*20.93) was not broughtto tax under Section 56(2)(viib) of the Income Tax Act, 1961. 24. Therefore grounds of appeal filed by the petitionerbefore the Commissioner of Income Tax (Appeals) cannot be aground for the purpose of quashing the reopening of assessmentproceedings issued on certain specific grounds. 25. As far as the ground of change of opinion raised bythe petitioner is concerned, this Court is of the consideredopinion that reading of Explanation 1 and Explanation 2 (c)(i)of Section 147 is unambiguous that even in case of production ofBooks of Account or other evidence and also in the cases ofunderassessment, reopening of assessment is permissible. 26. Therefore, the grounds raised in this writ petitionare devoid of merits. Accordingly, the writ petition standsdismissed. However, there shall be no order as to costs.Consequently, connected miscellaneous petitions are alsodismissed. Sd/- Assistant Registrar(CS-VIII) //True Copy// Sub Assistant Registrar Svn To 1.The Assistant Commissioner of Income Tax, Company Circle-4(2), 121, Mahatma Gandhi Road, Nungambakkam, Chennai – 600 034.2.The Income Tax Officer, Corporate Ward – 4(2), 121, Mahatma Gandhi Road, Nungambakkam,Chennai – 600 034. +1cc to Mr.Hema Muralikrishnan, Advocate, S.R.No.28246 WP No.21327 of 2018VG-II(CO)SB(22/07/2021) 16-06-2021