R.v.patil v. Deputy Commissioner Of Income}-Tax Offcer 4(3)(1), Room

R.V.Patil IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION WRIT PETITION NO.2179 OF 2022 The Suminter Organic and Fair}Trade Cottton Ginning Mill Pvt.}Ltd., having its address as G-1.}Black Diamond CHS Ltd, Dand }Para Road, Khar West, Mumbai.}…Petitioner Versus 1. Deputy Commissioner of Income}-tax Offcer 4(3)(1), Room No.543, }5[th] Floor, Aayakar Bhavan, Maharshi}Karve Road, Mumbai-400 020 } 2. Principal Commissioner of Income}tax-4, Room No. 629, 6[th] Floor, }Aayakar Bhavan, Maharshi Karve}Road, Mumbai-400 020.}3. Union of India}Through the Secretary, Ministry}of Finance, Government of India,}North Block, New Delhi-110 001}…Respondents *** Mr. S. Sriram a/w Ms. Ushashi Datta i/b Mr. Sriram Sridharan,Advocate for the Petitioner. Mr. Suresh Kumar for the Respondents. *** CORAM : DHIRAJ SINGH THAKUR & KAMAL KHATA, JJ. RESERVED ON : 23[rd] JANUARY 2023 PRONOUNCED ON : 10[th] FEBRUARY 2023 : J U D G M E N T : PER DHIRAJ SINGH THAKUR, J.: .The Petitioner challenges the notice under Section 148 ofthe Income Tax Act, 1961 (“the Act”) dated 30[th] March, 2021for the assessment year 2015-16 as also the order dated 08[th]March, 2022 rejecting the objections raised by the Petitionerregarding the reopening of the assessment proceedings. 2.The reasons for reopening are as under: The reasons for reopening is that the Petitioner hadissued premium of Rs.17 per share, which was not valuedcorrectly in terms of Rule 11UA r/w Section 56(2)(viib) of theAct and that the correct valuation of equity shares as per theaforesaid rule worked out at Rs.6.48 per share. It was thusstated that an amount of Rs.1,68,30,000/- received aspremium was required to be added as income from othersources. The reasons also refect that the assessee had failed todisclose truly and fully the material facts and, therefore, the case is required to be reopened under Section 147 of the Act. Objections were fled to the reopening by the Petitioner inwhich a stand was taken that the assesse had issued 9,90,000shares of the face value of Rs.10 at premium of Rs.17 per shareto its parent company, for a total consideration ofRs.2,67,30,000/-, which was disclosed by the assessee in itsannual income tax return fled for the assessment year 2015-16. It was also stated that the return fled to the relevantassessment year was selected under the Computer AssistedScrutiny Selection (“CASS”) System. One of the reasons forselecting the case under scrutiny, as mentioned in the noticedated 23[rd] March, 2017 was point No. 7(a) therein, pertainingto large share premium received during the year. It wasfurther stated in the objections that the queries raised duringthe scrutiny assessment were replied by the Petitioner. A valuation report obtained by the Petitioner from itsChartered Accountant (C.A.) is also stated to have beenfurnished during the scrutiny assessment, which valuationreport determined the fair value of the shares at Rs.28.41 as R.V.Patil against issue price of the shares by the Petitioner at Rs.27 pershare. The valuation was arrived at by following theDiscounted Cash Flow Method. It was therefore urged that theissue of premium collected by the Petitioner had been gone intoduring the scrutiny assessment and based upon the specifcqueries raised and the material supplied, the order ofassessment dated 08[th] November, 2017 came to be passed. 3.Learned Counsel for the Petitioner therefore urged thatthere was no failure on the part of the Petitioner to disclosefully and truly the material facts during the assessmentproceeding and that the reopening of assessment proceedingwas nothing but a change of opinion. R.V.Patil against issue price of the shares by the Petitioner at Rs.27 pershare. The valuation was arrived at by following theDiscounted Cash Flow Method. It was therefore urged that theissue of premium collected by the Petitioner had been gone intoduring the scrutiny assessment and based upon the specifcqueries raised and the material supplied, the order ofassessment dated 08[th] November, 2017 came to be passed. 3.Learned Counsel for the Petitioner therefore urged thatthere was no failure on the part of the Petitioner to disclosefully and truly the material facts during the assessmentproceeding and that the reopening of assessment proceedingwas nothing but a change of opinion. 4.Section 56(1) of the Income Tax Act envisages that theincome of every kind which is not to be excluded from the totalincome under the Act shall be chargeable to income tax underthe head “Income from other sources” if it is not chargeable toincome tax under any of the heads specifed in Section 14,items A to E. 5.In terms of Section 56(2)(viib), this Section also brings R.V.Patil inter alia within its ambit, a case where a company, not being acompany in which the public are substantially interested,receives, in any previous year, from any person being aresident, any consideration for issue of shares that exceeds theface value of such shares, the aggregate consideration receivedfor such shares as exceeds the fair market value of the shares. 6.Learned Counsel for the Petitioner urged that inaccordance with Rule 11UA2(b) of the Income Tax Rules,1962, (“the Rules”) as it stood during the relevant year, beforeits amendment in 2018, the fair market value of the unquotedequity shares could also be determined by a merchant bankeror an accountant as per the Discounted Free Cash FlowMethod. Post the amendment with effect from 24[th] May, 2018the words “or an accountant” were omitted. It was thus urgedthat Discounted Free Cash Flow Method adopted by thePetitioner certifed by the C.A. was a permissible mode fordetermining the fair market value of the shares as it had beenrightly accepted by the A.O. during the scrutiny assessmentproceedings. 7.Learned Counsel for the Respondents on the other handreiterated that the correct valuation of the equity sharesdeterminable in terms of Rule 11UA of Rules of 1962 wasRs.6.48 by applying the following formula as prescribed underRule 11UA(2)(a) of Rules, 1962. 8.While it may be true that Rule 11UA(2)(a) of Rules, 1962prescribes a particular formula as is refected therein, yet Rule11UA(2)(a) did give an option to the assessee to follow Rule11UA(2)(b) i.e. the Discounted Free Cash Flow Method ascertifed by the C.A. and, therefore, the Petitioner cannot besaid to have not disclosed facts fully and truly only because, ithad adopted a particular method of determining the fairmarket value of the shares which was otherwise permissible.The issue with regarding to the valuation of the shares wasindeed a subject matter of scrutiny by the A.O. during theassessment proceeding, which was responded to by thePetitioner leading to the passing of the order of assessmentdated 08[th] November, 2017. For purpose of facility of reference, Rule 11UA(2) is reproduced as under to show that it did provide such an optionto the assessee. “Notwithstanding anything contained in sub-clause(b) of clause (c) of sub-rule (1), the fair marketvalue of unquoted equity shares for the purposes ofsub-clause (i) of clause (a) of Explanation to clause(viib) of sub-section (2) of Section 56 shall be thevalue, on the valuation date, of such unquotedequity shares as determined in the followingmanner under clause (a) or clause (b), at theoption of the assessee, namely :- ……….” For purpose of facility of reference, Rule 11UA(2) is reproduced as under to show that it did provide such an optionto the assessee. “Notwithstanding anything contained in sub-clause(b) of clause (c) of sub-rule (1), the fair marketvalue of unquoted equity shares for the purposes ofsub-clause (i) of clause (a) of Explanation to clause(viib) of sub-section (2) of Section 56 shall be thevalue, on the valuation date, of such unquotedequity shares as determined in the followingmanner under clause (a) or clause (b), at theoption of the assessee, namely :- ……….” 9.This issue was raised by the A.O. during the assessmentproceedings can be seen from the notice dated 23[rd] March,2017, which was specifcally responded to by the Petitionervide communication dated 16[th] May, 2017 and 29[th] August,2017. 10.The Supreme Court in Commissioner of Income-tax, DelhiVs. Kelvinator of India Ltd. [1], held that there was a differencebetween ‘power to review’ and ‘power to reassess’ undersection 147 and that the AO had no power to review and that, ifthe concept of ‘change of opinion’ was removed, then, in the1[2010] 320 ITR 561 garb of reopening of the assessment, a review would take place.It was held : 4……..Therefore, post-1-4-1989, power to re-open ismuch wider. However, one needs to give a schematicinterpretation to the words “reason to believe”failing which, we are afraid, section 147 would givearbitrary powers to the Assessing Offcer to re-openassessments on the basis of “mere change ofopinion”, which cannot be per se reason to re-open.We must also keep in mind the conceptual differencebetween power to review and power to re-assess.The Assessing Offcer has no power to review; he hasthe power to re-assess. But reassessment has to bebased on fulflment of certain pre-condition and ifthe concept of “change of opinion” is removed, ascontended on behalf of the Department, then, in thegarb of re-opening the assessment, review wouldtake place. One must treat the concept of “change ofopinion” as an in-built test to check abuse of powerby the Assessing Offcer. Hence, after 1-4-1989,Assessing Offcer has power to re-open, providedthere is “tangible material” to come to theconclusion that there is escapement of income fromassessment. Reasons must have a live link with theformation of the belief…...” 11.In fact, the Supreme Court in Kelvinator of India Ltd.(Supra) had upheld the Full Bench decision of Delhi High Court in Commissioner of Income-tax Vs. Kelvinator of India Ltd.[2]. In the said judgment, a Full Bench of Delhi High Court has held : “We also cannot accept submission of Mr. Jolly2[2002] 256 ITR-1 to the effect that only because in the assessmentorder, detailed reasons have not been recorded onanalysis of the materials on the record by itselfmay justify the Assessing Offcer to initiate aproceeding under section 147 of the Act. The saidsubmission is fallacious. An order of assessmentcan be passed either in terms of sub-section (1) ofSection 143 or Sub-section (3) of Section 143.When a regular order of assessment is passed interms of the said sub-section (3) of section 143 apresumption can be raised that such an order hasbeen passed on application of mind. It is wellknown that a presumption can also be raised tothe effect that in terms of clause (e) of section 114of the Indian Evidence Act the judicial and offcialacts have been regularly performed. If it be heldthat an order which has been passed purportedlywithout anything further, the same would amountto giving premium to an authority exercisingquasi- judicial function to take beneft of its ownwrong.” 12.We have no hesitation that there was no failure on thepart of the assessee to disclose fully and truly the materialfacts, nor there was any tangible material with the A.O. whichwould have otherwise justifed the reopening of the assessmentby issuing the notice impugned. 12.We have no hesitation that there was no failure on thepart of the assessee to disclose fully and truly the materialfacts, nor there was any tangible material with the A.O. whichwould have otherwise justifed the reopening of the assessmentby issuing the notice impugned. Be that as it may, the petition is allowed. The orderimpugned dated 08[th] March, 2022 and the notice dated 30[th] R.V.Patil March, 2021 are hereby set aside. The petition is, accordingly, disposed of. (KAMAL KHATA, J.) (DHIRAJ SINGH THAKUR, J.) Digitally signedRUSHIKESHby RUSHIKESHV PATILV PATILDate: 2023.02.1018:59:40 +0530