Wp/2946/2022 Of Lakshdeep Investments And Finance Pvt Ltd v. Assistant Commissioner Of Income - Tax, Circle - 7(1)(1), Mumbai And 4 Ors

IN THE HIGH COURT OF JUDICATURE AT BOMBAY,ORDINARY ORIGINAL CIVIL JURISDICTION WRIT PETITION NO. 2946 OF 2022 Lakshdeep Investments & Finance Pvt. Ltd.3, Narayan Building, 23, L. N. Road,Dadar (East), Mumbai 400 014. ... PETITIONER V E R S U S 1.Assistant Commissioner of Income-tax, Circle-7(1)(1), Mumbai,Room No 126, 1[st ]Floor,Aayakar Bhavan, M. K. Road,Mumbai - 400020. 2.Additional Commissioner of Income-tax, Range-7(1), Mumbai,Room No 144D, 1[st] Floor,Aayakar Bhavan, M. K. Road,Mumbai - 400020. 3.Principal Commissioner of Income-tax, Mumbai - 8, Mumbai,Room No 611, 6[th] Floor,Aayakar Bhavan, M. K. Road,Mumbai - 400020. 4.National Faceless Assessment Centre,Delhi.Delhi. 5.Union of India, Through the Joint Secretary & Legal Adviser,Branch Secretariat,Department of Legal Affairs,Ministry of Law and Justice,2[nd] Floor, Aayakar Bhavan, M. K. Marg,New Marine Lines,Mumbai - 400020. ... RESPONDENTS ------------------------------------------------------------------------------------------- Mr. Nitesh Joshi i/b Mr. Atul K. Jasani, Advocate for Petitioner. Mr. Suresh Kumar with Ms. Swapna Gokhale, Advocate for Respondents. ------------------------------------------------------------------------------------------- CORAM:-DHIRAJ SINGH THAKUR AND VALMIKI SA MENEZES, JJ. PRONOUNCED ON: 13/03/2023. JUDGMENT : (PER VALMIKI SA MENEZES, J.) : 1.Rule. Rule made returnable forthwith. Heard finallywith the consent of learned counsel appearing for the parties. 2.This writ petition invokes our jurisdiction under Article226 of the Constitution of India challenging the legality andvalidity of the notice dated 30/03/2021 issued by respondent No.1under Section 148 of the Income Tax Act, 1961 ("the Act") andorder dated 04/03/2022 rejecting the objections of the petitionerto the aforementioned notice. The impugned notice relates toAssessment Year 2015-2016 for the previous year ending on31/03/2015. The facts which have led to the filing of the presentpetition, as stated by the petitioner, are as under :- a]The petitioner being engaged in investment business had initial share capital of Rs.47,69,000/- being 47,690 shares atface value of Rs.100/- each; against this share capital, thepetitioner's Reserves and Surplus stood at Rs.64,00,87,789/- as on30/09/2014 with securities held by it at the book value of Rs.19,74,88,254/- and fair market value for the shares quoted was at Rs.30,11,66,00,359/-. With a view to raise further share capital, the petitionerissued rights shares to its existing share holders in the proportionof 10 shares to every share held at face value of Rs.100/- each,had a issue price of Rs.5,75,000/- per share. It received duringthat year 5% of the value of rights share and the balance 95% ofthe issue price was to be received upon making subsequent ofcalls, thus, the petitioner received an aggregate share ofRs.2,74,16,98,100/-, which transaction was duly reflected in itsfinancial statement with necessary disclosures made in itsDirector's Report contained in the Statutory Annual Report of thepetitioner for the Financial Year 2014-2015. b]The petitioner filed its return of income for theFinancial Year 2015-2016 on 29/09/2015 declaring total incomeof Rs.1,36,07,94,510/- and since the transaction of issuance ofrights shares and the receipt of the share premium was on itscapital account, there was no requirement of bringing the saidamount to tax; however, the revenue selected the petitioner'sreturn for scrutiny under Section 143 (2) of the Act by its noticedated 29/03/2016 and in the course of assessment proceedings, it issued further notice under Section 142(1) of the Act on20/07/2017 asking for hard copy of the return of income alongwith computation thereof, financial statements and details of sharepremium received during the year along with amount, names andaddresses of the persons from whom it was received amongstother documents. b]The petitioner filed its return of income for theFinancial Year 2015-2016 on 29/09/2015 declaring total incomeof Rs.1,36,07,94,510/- and since the transaction of issuance ofrights shares and the receipt of the share premium was on itscapital account, there was no requirement of bringing the saidamount to tax; however, the revenue selected the petitioner'sreturn for scrutiny under Section 143 (2) of the Act by its noticedated 29/03/2016 and in the course of assessment proceedings, it issued further notice under Section 142(1) of the Act on20/07/2017 asking for hard copy of the return of income alongwith computation thereof, financial statements and details of sharepremium received during the year along with amount, names andaddresses of the persons from whom it was received amongstother documents. In response to this notice, petitioner, on 21/08/2017provided the required information disclosing details of all thesubscribers to whom rights shares were allotted which includedmembers of the promoters family and its Associate Concerns,along with details of their names, addresses, PAN Numbers and thepremium / total consideration derived from the allotment of rightsshares, along with a valuation report of the shares. c]Not satisfied with the reply, respondent No.1 issued yetanother notice under Section 142 (1) of the Act on 23/08/2017requiring the petitioner to appear before the respondent No.1 on28/08/2017 on which date it provided all the information assought along with valuation report of its equity shares obtainedfrom M/s Jignesh Goradiya & Associates who had valued theshares at Rs.69,062/- per share as per the valuation methodologyprescribed in Rule 11 UA of the Income Tax Rules, 1962. The explanation was submitted in terms of Explanation below Section56(2)(viib). d]On 09/11/2017, the respondent No.1 issued yetanother notice under Section 142(1) of the Act seeking furtherdetails of share premium received during Finance Year 2014-2015along with valuation report, which notice was replied by thepetitioner by letter dated 23/11/2017 providing all theinformation required; by a further communication dated28/11/2017, the petitioner also provided respondent No.1 with aNote on the issue of rights shares made during the year. Thereafter, respondent No.1 passed an assessmentorder dated 19/12/2017 under Section 143(3) of the Actaccepting the income returned by the petitioner. It is thepetitioner's contention that though there was no discussion in theassessment order on the question of rights shares issued atpremium, the issue had been thoroughly examined by theAssessment Officer and had been accepted. e]Since the assessment order contained certain mistakesapparent on the face of record, the petitioner filed an applicationunder Section 154 of the Act on 15/01/2018 requestingcorrections, which were allowed on 07/02/2018. f]Thereafter, the petitioner received the impugned noticedated 30/03/2021 under Section 148 of the Act alleging thereinthat the reasons to be recorded, the petitioner's income chargeableto tax for assessment year 2015-2016 had escaped assessment andrequired the petitioner to deliver to the respondent No.2 anincome return in the prescribed form; the petitioner filed its returnof income tax in reply to the notice on 26/04/2021 declaring atotal income of Rs.1,36,07,94,512/-. The respondent No.1 provided the petitioner with acopy of the reasons recorded by the Officer on 25/11/2021,purporting to substantiate the reopening of its assessment; theapproval obtained under Section 151 for issuance of the saidnotice was also sent to the petitioner. f]Thereafter, the petitioner received the impugned noticedated 30/03/2021 under Section 148 of the Act alleging thereinthat the reasons to be recorded, the petitioner's income chargeableto tax for assessment year 2015-2016 had escaped assessment andrequired the petitioner to deliver to the respondent No.2 anincome return in the prescribed form; the petitioner filed its returnof income tax in reply to the notice on 26/04/2021 declaring atotal income of Rs.1,36,07,94,512/-. The respondent No.1 provided the petitioner with acopy of the reasons recorded by the Officer on 25/11/2021,purporting to substantiate the reopening of its assessment; theapproval obtained under Section 151 for issuance of the saidnotice was also sent to the petitioner. g]Relying on the Judgment of GKN Driveshafts India Ltd.Vrs. ITOreported in 259 ITR 19, the petitioner filed its objectionsto the notice of reopening on 30/12/2021 taking a specificdefence therein that the reasons cited in the reopening noticeshowing that the respondent No.1 has taken Fair Market Value ofrights shares at Rs.69,062/- per share as determined under Rule11UA and taken the premium received in excess of such fair valueto be treated as income chargeable to tax, amounted to a change of opinion, which was not permissible under proviso to Section147 of the Act, which barred the reopening of assessment, beyondfour years after the relevant date. In its objections, the petitioner also requested for copiesof all the correspondence with the Revenue Audit Department,which may have formed the basis for the opinion recorded by theAssessment Officer in its reopening notice. The petitioner allegesthat till date, copies of the correspondence with the Revenue AuditDepartment had not been furnished to it. 3.Thereafter, respondent No.4 has issued a notice underSection 143(2) and Section 142(1) of the Act dated 08/02/2022asking for various details including explanation for theapplicability of Section 56(2) (viib) to which the petitionerresponded by its letter dated 18/02/2022 urging that therespondent No.4 was required to first furnish to the petitioner, thecorrespondence that it had with the Revenue Audit Department.Thereafter, the respondent No.4 passed the impugned order dated04/03/2022 rejecting the petitioner's objections. In themeanwhile, the petitioner has filed the present petition underArticle 226 of the Constitution of India contending that theimpugned orders dated 30/03/2021 issued under Section 148 and order rejecting the objections dated 04/03/2022 are illegal,contrary to law and suffer from arbitrariness, the reopening ofassessment being without jurisdiction and contrary to theprovisions of Sections 147 and 148 of the Act. 4.Heard Shri Nitesh Joshi, learned counsel for thepetitioner and Shri Suresh Kumar, learned counsel for therespondents. Also, perused the material on record of the case. 5.It is submitted by the learned counsel for the petitionerthat the Assessing Officer would assume jurisdiction under Section147 of the Act, only if he had reason to believe that the assessee'sincome chargeable to tax for the relevant year had escapedassessment, it is submitted that in the present case, the AssessmentOfficer had previously accepted the method of determining theFair Market Value of the rights shares issued which was basedupon the methods provided under the Act; The Assessing Officerhad recorded satisfaction in its assessment order dated19/12/2017 passed under Section 143 (3) of the Act, and thus,there was no ground available at law to reopen the assessment. It is further argued that the belief formed by theAssessing Officer should not be based on Audit objections, which isthe case as demonstrated herein; it is further submitted that the It is further argued that the belief formed by theAssessing Officer should not be based on Audit objections, which isthe case as demonstrated herein; it is further submitted that the respondents have failed to produce the relevant information,namely, the correspondence with the Audit Department, since itwould obviously favour the petitioner's case; that observationsmade in the impugned order that the petitioner did not suggestthe formation of remedial measures for auditing or coming to acorrect valuation were irrelevant and could not form the basis forthe formation of the belief by the Assessing Officer for reopening.It is also argued that no specific reason having been cited, it isobvious that the officer has formed his belief as to the escapementof income only on the basis of audit objections and without anyindependent application of mind. 6.It is further contended by the petitioner that theassessment order having been earlier passed on 19/12/2017 forthe relevant year, the assessment cannot be reopened after fouryears from the end of the relevant assessment year i.e. beyond31/03/2020, unless there was failure on the part of assessee todisclose fully and truly any material facts necessary for thepurposes of his assessment. There being no default on the part ofpetitioner to disclose fully and truly the facts necessary forassessment, the notice was beyond the period of limitation andwithout jurisdiction. 7.Shri Suresh Kumar, learned counsel appearing for theRevenue in support of the impugned orders, has taken us throughthe affidavit-in-reply dated 19/04/2022 filed by the AssistantCommissioner of Income Tax contending that the petitioner hasvalued shares at Rs.69,060/- under Rule 11UA as per the valuationreport of M/s. Jignesh Goradiya & Associates, CharteredAccountant and claimed that the issue of process of the shares ismuch above the Fair Market Value of the shares resulting inescapement of income. He contends that the provisions of Section151 to obtain approval for the reopening has been complied withand that the reasons cited in the notice dated 25/11/2021 forreopening assessment under Section 148 is based upon the factthat the wrong valuation had been assigned by the petitioner in itsearlier assessment to the rights shares; that the reasons stated inthe application were legal and justified for the reopening. Onperusal of the affidavit of the respondents, though the petitionershave specifically averred that it has requested for copies ofcorrespondence between the respondent No.1 and the RevenueAudit Department, which had not been provided to the petitioner,the respondents have refused to produce the same in this Courtclaiming the Revenue Audit to be an internal document whichcannot be provided to the petitioner. In Paragraph No.22 of the petition, the petitioner hasspecifically averred that in response to its submission that theRevenue Audit objections were never given to the petitioner andthe same could not be the basis on which a notice for reopeningcould be issued, it is the contention of the revenue that thepetitioner had never given any suggestion regarding themethodology of remedial measures and that in the present case,the Assessing Officer has applied his mind and formed his ownopinion on the basis of material available before him. However,there does not appear to be any documents or material referred toin the impugned notice under Section 148 or even a discussion bythe Assessing Officer to lead us to believe that such material wasconsidered, or that there was application of mind to such materialbefore proceedings to reopen the assessment. 8.A perusal of the impugned order dated 25/11/2021would reveal that in Paragraph No.2, the respondent No.1 has onlyreproduced the figures which had already been considered in theearlier assessment order passed on 19/12/2017 after scrutiny andafter notices were issued under Section 143(2) and under Section142(1). In that scrutiny proceedings, a questionnaire had beenissued and duly answered by the petitioner with a detailed note onthe conversion of the investment into Stock in Trade, with a valuation report of M/s.Jignesh Goradiya & Associates, which wasduly considered in assessment and accepted. Thereafter, thepetitioner has submitted on 15/10/2019 a reply to the report ofthe Deputy Commissioner of Income Tax, titled "Incorrectcomputation of business income", wherein it reiterates all itsearlier factual stand that the working adopted towards arriving atFair Market Value of the shares under Section 56(2) (viib) wasdetermined at Rs.6,96,511/- and issue price of the shares was lessthan the Fair Market Value determined in terms of thoseprovisions. It had also contended by the petitioner even in theearlier assessment that the capitalization of reserves does notamount to receipt of consideration for the purposes of Section56(2) (viib) and full disclosures had been made at that relevanttime. That pursuant to the rights issue, the petitioner had received5% of the issue price and the balance amount of 95% of the pricewas capitalized out of its balance capital reserves. It had thuscontended even before the previous assessment order and made alldisclosures which were accepted by the Assessment Officer whenthe order dated 19/12/2017 was passed. 9.Paragraph No.2 of the reasons for the reopening hasreferred to the terms of the rights issue being 5% of the issue priceper share and the balance unpaid amount of 95% of the issue price amounting to Rs.5,46,250/- per share being capitalized. However,this time around, the respondent No.1 claimed that on the verysame transaction and valuation, which was earlier accepted, theexcess of the issue price of the share over the Fair Market Valuewould attract the provisions of Section 56(2) (viib) and excessprice or share for the Fair Market Value would be taxable underthat provision. The notice does not refer to any other informationforming the basis for the reasons for reopening. This is, therefore,a clear case of a change of opinion on the very same materialwhich was before the earlier Assessment Officer and on whichbasis, the first assessment order was passed after scrutiny. This lineof action is impermissible under Section 147 of the Act. 10.Even otherwise, the impugned notice under Section148 appears to suffer from total non-application of mind, in that,respondent No.1 has not considered all the documents furnishedby the petitioner along with its reply / objections to the reopeningnotice, wherein its valuation report of all the details of calculationand disclosures made in the earlier scrutiny proceedings had beenproduced. The impugned notice does not even deal with a singleline of the objections of the petitioner to conclude that there wassome element of suppression of material by the petitioner in theprevious scrutiny assessment, or that, there was any material facts, which the assessee had failed to disclose in the earlier assessment,which had now come to the knowledge of the Assessing Officer toconclude that there was escapement of income which wasassessable to tax. InITO Vrs. Lakhmani Mewal Das, reported in(1976) 103 ITR 437, the Hon'ble Supreme Court interpreted theprovisions of Section 147 of the Act and held as under :- which the assessee had failed to disclose in the earlier assessment,which had now come to the knowledge of the Assessing Officer toconclude that there was escapement of income which wasassessable to tax. InITO Vrs. Lakhmani Mewal Das, reported in(1976) 103 ITR 437, the Hon'ble Supreme Court interpreted theprovisions of Section 147 of the Act and held as under :- " ..... the reasons for the formation of the belief must have arational connection with or relevant bearing on theformation of the belief. Rational connection postulates thatthere must be a direct nexus or live link between thematerial coming to the notice of the Income-tax Officer andthe formation of his belief that there has been escapement ofthe income of the assessee from assessment in the particularyear because of his failure to disclose fully and truly allmaterial facts. It is no doubt true that the Court cannot gointo the sufficiency or adequacy of the material andsubstitute its own opinion for that of the Income-tax Officeron the point as to whether action should be initiated forreopening assessment. At the same time we have to bear inmind that it is not any and every material, howsoever vagueand indefinite or distant, remote and far-fetched, whichwould warrant the formation of the belief relating toescapement of the income of the assessee from assessment.The fact that the words 'definite information' which werethere in Section 34 of the Act of 1922, at one time before itsamendment in 1948, are not there in Section 147 of the Actof 1961, would not lead to the conclusion that action cannow be taken for reopening assessment even if theinformation is wholly vague, indefinite, far-fetched andremote. The reason for the formation of the belief must beheld in good faith and should not be a mere pretence." InAnkita A. Choksey Vrs. ITO (Bom), reported in (2019) 411 ITR 207 (Bom),this Court, while dealing with therequirements of a notice under Section 148 of the Act and thecompliance with the provisions of Section 147 has held as under :- "6. It is a settled position in law that the Assessing Officeracquires jurisdiction to issue a reopening notice only when hehas reason to believe that income chargeable to tax hasescaped assessment. This basic condition precedent isapplicable whether the return of income was processed undersection 143(1) of the Act by intimation or assessed byscrutiny under section 143(3) of the Act. (See Asst. CIT v.Rajesh Jhaveri Stock Brokers (P.) Ltd. [2007] 291 ITR 500(SC) and Principal CIT v. Shodiman Investments P. Ltd.[2018] 93 taxmann.com 153 (Bom)). Further, the reasons tobelieve that income chargeable to tax has escaped assessmentmust be on correct facts. If the facts, as recorded in thereasons are not correct and the assessee points out the samein its objections, then the order on objection must deal with itand prima facie, establish that the facts stated by it in itsreasons as recorded are correct. In the absence of the order ofobjections dealing with the assertion of the assessee that thecorrect facts are not as recorded in the reason, it would besafe to draw an adverse inference against the Revenue. 7. Thus, we are of the view that even in cases where thereturn of income has been accepted by processing undersection 143(1) of the Act, reopening of an assessment canonly be done when the Assessing Officer has reason to believethat income chargeable to tax has escaped assessment. Themere fact that the return has been processed under section143(1) of the Act, does not give the Assessing Officer a carteblanche to issue a reopening notice. The condition precedentof reason to believe that income chargeable to tax hasescaped assessment on correct facts, must be satisfied by theAssessing Officer so as to have jurisdiction to issue thereopening notice. In the present case, the Assessing Officerhas proceeded on fundamentally wrong facts to come to thereasonable belief/conclusion that income chargeable to taxhas escaped assessment. Further, even when the same ispointed out by the petitioner, the Assessing Officer in hisorder disposing of the objection does not deal with factualposition asserted by the petitioner. Thus, it would be safe toconclude that the Revenue does not dispute the facts statedby the petitioner. On the facts as found, there could be noreason for the Assessing Officer to believe that incomechargeable to tax has escaped assessment." InAnkita A. Choksey (supra), this Court has madespecific reference to the fact that the Assessing Officer must dealwith the specific objections of the petitioner when the same ispointed out in its reply, while disposing of the objections. It furtherholds that when the Assessing Officer in its order disposed ofobjections does not deal with the factual position asserted by thepetitioner, it would be safe to conclude that the revenue does notdispute the fact stated by the petitioner and thus, there could beno reason for the Assessing Officer to believe that the incomechargeable to tax has escaped assessment. In the present case, aperusal of the impugned order dated 04/03/2022 quotes a largenumber of Judgments and Case Laws numbering 10 pages out oftotal of 13 pages, however, it does not deal with a singlecontention raised by the petitioner in its objection, nor does iteven refer to any of the facts or documents referred to in theobjections. In fact, the order rejecting the objections has not evenonce adverted to the valuation report submitted by the petitionerduring the earlier assessment proceedings after scrutiny, nor doesit refer to the method used by the petitioner for valuation. Ittherefore appears that the only reason and purpose for issuing theimpugned notice under Section 148 appears to be that theAssessing Officer has come to a different opinion on the question of valuation from one adopted by the petitioner, which has beenaccepted in the earlier assessment order dated 19/12/2017. 11.For the reasons stated above, we are of the opinion thatthe impugned notice dated 30/03/2021 issued under Section 148of the Act is without jurisdiction and is barred by limitation;consequently, the impugned order dated 04/03/2022 whichdismisses the objections of the petitioner, is also quashed and setaside. 12.Rule is made absolute in terms of Prayer Clause (A) ofthe petition. No costs. [VALMIKI SA MENEZES, J.] [DHIRAJ SINGH THAKUR, J.] Choulwar VITHALDigitally signed byVITHAL MAROTRAOMAROTRAOCHOULWARDate: 2023.03.06CHOULWAR10:33:45 +0530