Wp/32394/2018 Of M/S.t.t.krishnamachari And Co v. The Assistant Commissioner Of Income Tax

IN THE HIGH COURT OF JUDICATURE AT MADRASReserved On 23.02.2021Pronounced On 11.06.2021 CORAM THE HONOURABLE MR.JUSTICE C.SARAVANAN W.P. No. 32394 of 2018andW.M.P. Nos. 37589 of 2018 and 6646 of 2019 M/s.T.T.Krishnamachari & Co.,No.06, Cathedral Road,Chennai – 600 006.Represented by its Power of Attorney Holder,Mr.B.V.K.Durga Prasad ... Petitioner The Assistant Commissioner of Income Tax,Non-Corporate Circle 3, Chennai – 600 034.... Respondent Prayer: Petition filed under Article 226 of the Constitution ofIndia to issue a Writ of Certiorari to call for the records ofthe Petitioner on the file of the Petitioner on the file of theRespondent and quash the impugned notice No.ITBA/AST/S/148/2017-18/1009449470(1) dated 27.03.2018 in PAN: for theAssessment Year 2011-12 passed under Section 148 of the Act andthe consequential order passed by the Respondent inAAAFT0395D/NCC3/2018-19dated19.11.2018rejectingtheobjections. The Petitioner a partnership concern has challenged theimpugned demand notice dated 27.03.2018 bearing ReferenceNo.ITBA/AST/S/148/2017-18/1009449470(1) seeking to reopen theassessment for the Assessment Year 2011-2012 under Section 147read with Section 148 of the IT Act, 1961 and the consequentialorder dated 19.11.2018 bearing Ref.No.AAAFT0395D/NCC3/2018-19passed by the respondent rejecting the objection filed by the https://hcservices.ecourts.gov.in/hcservices/ petitioner. The assessment was completed under Section 143(1)of the Income Tax Act, 1961 (hereinafter referred to as the ITAct). 2. After the impugned notice was issued to the petitionerfor the Assessment Year 2011-2012, the petitioner asked therespondents to furnish the reasons for reopening the assessment.The respondent has furnished the reasons for reopening of theassessment vide letter dated 23.04.2018. The reasons forreopening of the assessment reads as under:- “The assessee filed its original and revisedreturn of income for the A.Y.2011-2012 on 27.09.2011and 10.02.2012 respectively, admitting an income ofRs.27,19,58,060/- in the both the returns. During the course of assessment proceedings of M/sSwiss Reinsurance Company, Zurich for AY 2014-2015,by the DCIT (International Taxation) -4(2)(2),Mumbai, it was found that during the financial yearrelevant to A.Y 2011-12, partners of the assesseefirm Shri T.T.Raghunathan & Shri T.T.Jagannathanjointly have been allotted shares of TTK HealthcareTPA Private Ltd (formerly TTK Health Services Pvt.Ltd) at Rs.10 per share. This fact was intimated tothe undersigned by the ACIT, Corporate Circle 3(1),vide letter dated 28.03.2017. Thus, it is found thatthe existing shareholders of TTK, viz., ShriT.T.Raghunathan jointly with Shri T.T Jagannathan asa firm has been allotted shares of the company atpar value of Rs.10/-. Further, as per theinformation during the same period, these shareswere allotted to M/s Swiss Reinsurance Company,Zurich at an aggregate fair market value of Rs.5141per share on 05.08.2010. It is pertinent to mention here that during thecourse of assessment proceedings for the A.Y.2010-11it is stated by the partners to the ACIT, CorporateCircle-3(1) that they held the shares in their nameson behalf of the firm and that the taxation onallocation of these shares can be done only in thehands of the firm. To prove the said point, thepartners produced evidence to show that the amountsfor purchase of shares were routed through the bankaccount of the firm and that the investment inshares has been duly reflected in the Balance Sheetof the Firm. Hence, the aggregate fair market value of the saidshares to the extent it exceeds the consideration issupposed to be shown by the assessee under Incomefrom Other Sources. However, verification of returnof income for the year shows that the same has notbeen done. Hence, the aggregate fair market value of the saidshares to the extent it exceeds the consideration issupposed to be shown by the assessee under Incomefrom Other Sources. However, verification of returnof income for the year shows that the same has notbeen done. This income so accrues has not been offered to taxduring the AY 2011-12. Hence, I am satisfied that tothis extent of income that has accrued as discussedabove, has escaped within the meaning of Sec.148 andthere is a failure on the part of the assessee firmto have disclosed full particulars within themeaning of section 148. I therefore in consequence of information in mypossession, have reasons to believe that theaggregate fair market value of the said shares tothe extent, it exceeds the consideration requires tobe taxed as deemed income of the assessee under thehead “Income from other sources” and have escapedtax in AY 2011-12.” 3. The petitioner thereafter replied to the said notice videits reply dated 23.05.2018 which has culminated in the impugnedcommunication dated 19.11.2018, wherein, the respondent hasstated that it has nowhere concluded/recorded by the AssessingOfficer that the escaped income for the Assessment Year 2011-2012 is proposed to be assessed under Section 56(2) (vii-a) orSection 56(2) (vii-b) of the IT Act, 1961 and hence thecontention of the petitioner was not accepted. 4. In the impugned communication, the respondent has alsostated that only during the course of assessment proceedings theassessing officer would decide/conclude the section as deems fitunder which the escaped income was to be taxed. Challenging theimpugned order, the petitioner has filed the present writpetition. 5. It is the contention of the petitioner that invocation ofSection 148 of the IT Act, 1961 for the purpose of re-assessmentfor the share allotted escaped income was clearly notmaintainable. It is submitted that the communication conveyingthe reasons for reopening of the assessment is vague andtherefore the impugned proceedings were liable to be quashed.It is submitted that for invoking Section 148 of the IT Act,1961, for the purpose of re-assessment under Section 147 of theIT Act, 1961, there should be proper grounds and reasons. https://hcservices.ecourts.gov.in/hcservices/ 6. It is submitted that the so called income based on thedifference in the allotted price on the par value of Rs.10 pershare to the petitioner firm and the price at which shares wereallotted to the Swiss Company namely M/s.Swiss ReinsuranceCompany Ltd., Switzerland (Swiss Re) cannot be a basis forreopening the assessment unless the Assessing Officer is clearas to how there was income that has the escaped assessment. 7. It is further submitted that as per the decision of theBombay High Court in Vodafone India Services (P) Ltd., Vs Unionof India, 369 ITR 511 and SKB BPO Services (P) Ltd., Vs ITO, 230Taxmann 192, allotment of shares were capital income andtherefore shares allotted to the petitioner were to beconsidered only as capital expenditure and therefore there is nojustification in concluding that there was “income from othersources” for the purpose of determining whether there was anyincome that had escaped assessment in the hands of thepetitioner firm. 8. The learned counsel for the petitioner also relied onother decision of the Hon'ble Supreme Court and the High Courtsto state that the notice under Section 148 of the IT Act, 1961as to have reasons and without any reasons, the proceedings wereliable to be quashed. 9. In this connection, a reference was made to the decisionin (i) Nestle SA Vs Assistant Commissioner of Income Tax, 417 ITR 213 (Del) (ii) Hindustan Lever Ltd, Vs R.B.Wadkar, 268 ITR 332 (Bom) (iii) G.S.Engineering & Construction Corporation Vs Deputy Director of Income Tax and others, 357 ITR 335 (Del.) (iv) Vodafone India Services (P) Ltd., Vs Union of India, 369 ITR 511 8. The learned counsel for the petitioner also relied onother decision of the Hon'ble Supreme Court and the High Courtsto state that the notice under Section 148 of the IT Act, 1961as to have reasons and without any reasons, the proceedings wereliable to be quashed. 9. In this connection, a reference was made to the decisionin (i) Nestle SA Vs Assistant Commissioner of Income Tax, 417 ITR 213 (Del) (ii) Hindustan Lever Ltd, Vs R.B.Wadkar, 268 ITR 332 (Bom) (iii) G.S.Engineering & Construction Corporation Vs Deputy Director of Income Tax and others, 357 ITR 335 (Del.) (iv) Vodafone India Services (P) Ltd., Vs Union of India, 369 ITR 511 (v) SKB BPO Services (P) Ltd., Vs ITO, 230 Taxmann 192 10. The learned counsel for the petitioner also relied onfew circulars issued by the Central Board of Direct Taxes (CBDT)to stress the point that premium amount for shares were issuedonly on the of capital account transactions. In thisconnection, a reference was made by CBDT circular No.2/2015dated 29.01.2015 which essentially accepted the view of theBombay High Court in Vodafone India Services (P) Ltd., Vs Unionof India. 11. The learned counsel for the petitioner also drew myattention to Circular No.10/2018, dated 31.12.2018, wherein, itwas clarified as follows:- https://hcservices.ecourts.gov.in/hcservices/ “4. It is apparent from the legislative intentthat clause (viia) was inserted in section 56(2) ofthe Act as an anti-abuse provision to prevent thepractice of transferring shares of a specifiedcompany for no or inadequate consideration. Thus,the intention was never to apply these provisions ofsaid clause (viia) to the fresh issuance of sharesas mentioned in para 2 above, by the specifiedcompany. Keeping in view the legislative intent toapply anti-abuse provision contained in section 56(2)(viia) to transfer of shares for no or inadequateconsideration, it is hereby clarified that section56(2)(viia) of the Act shall apply in cases where aspecified company or firm receives the shares of thespecified company through transfer for no orinadequate consideration. Hence, the provisions ofsection 56(2)(viia) of the Act shall not beapplicable in cases of receipt of shares by thespecified company or firm as a result of freshissuance of shares as mentioned in para 2 above, bythe specified company.” He further submits that circular was withdrawn on 04.01.2019only on the ground that the issue is still pending before thejudicial forums. 12. Apart from the above case, the learned counsel for thepetitioner also relied on few other decisions which are detailedas under:- (i) ACIT vs Dhariya Construction Company, 328 ITR 515 (SC).(ii) Scan Holdings P Ltd vs ACIT, 402 ITR 290 (Del.)(iii) CIT vs Orientcraft Ltd., 354 ITR 536 (Del.)(iv) Prashant S.Joshi vs ITO, 324 ITR 154(Bom.)(v) CIT vs Insecticides (India) Ltd., 357 ITR 330 (Del.) (vi) Nirma Bang Securities Pvt Ltd vs ACIT, 382 ITR 93 (Bom) (vii) Vodafone India Services (P) Ltd vs UOI, 369 ITR 511 (Bom) (viii) SKB BPO Services (P) Ltd vs ITO, 230 Taxman 192 (Bom)(ix) CIT vs D.P. Sandu Bros, Chembur (P) Ltd, 273 ITR 1 (SC) (x) Khoday Distilleries Ltd vs CIT – 307 ITR 312 (SC) (xi) CIT vs O.P.Srivatava – 357 ITR 1 (All)(xii) Scan Holdings P Ltd vs ACIT – 402 ITR 0290 (Del)(xiii) CIT vs Green World Corporation – 314 ITR 81 (SC)(xiv) CIT vs Orient Craft – (2013) 354 ITR 536 (Delhi)(xv) Bapalal & Co. Exports vs JT.CIT – 289 ITR 37 (xvi) M/s. Tanmac India vs CIT – 97 CCH 189 (xvii) Fenner (India) Ltd vs DCIT – 241 ITR 672 (xviii) CIT vs Kelvinator India Ltd – 320 ITR 561 (SC) (xix) CIT vs SPL’s Siddhartha Ltd – 345 ITR 223 (xx) Sheo Narain Jaiswal & Ors. vs ITO – 176 ITR 35 (Pat.) (xxi) CIT vs Aslam Ulla Khan – 321 ITR 150 (Kar)(xxii) CIT vs SFIL Stock Broking – 325 ITR 285 (Del)(xxiii) Vodafone India services Pvt Ltd vs Addl CIT,368 ITR 001(xxiv) Pr. CIT vs Apeak Infotech Ltd – 378 ITR 148 (Bom). (x) Khoday Distilleries Ltd vs CIT – 307 ITR 312 (SC) (xi) CIT vs O.P.Srivatava – 357 ITR 1 (All)(xii) Scan Holdings P Ltd vs ACIT – 402 ITR 0290 (Del)(xiii) CIT vs Green World Corporation – 314 ITR 81 (SC)(xiv) CIT vs Orient Craft – (2013) 354 ITR 536 (Delhi)(xv) Bapalal & Co. Exports vs JT.CIT – 289 ITR 37 (xvi) M/s. Tanmac India vs CIT – 97 CCH 189 (xvii) Fenner (India) Ltd vs DCIT – 241 ITR 672 (xviii) CIT vs Kelvinator India Ltd – 320 ITR 561 (SC) (xix) CIT vs SPL’s Siddhartha Ltd – 345 ITR 223 (xx) Sheo Narain Jaiswal & Ors. vs ITO – 176 ITR 35 (Pat.) (xxi) CIT vs Aslam Ulla Khan – 321 ITR 150 (Kar)(xxii) CIT vs SFIL Stock Broking – 325 ITR 285 (Del)(xxiii) Vodafone India services Pvt Ltd vs Addl CIT,368 ITR 001(xxiv) Pr. CIT vs Apeak Infotech Ltd – 378 ITR 148 (Bom). 13. Defending the impugned order, the learned counsel forthe respondent submits that the petitioner has admitted tosettle the proceedings are pending before the CIT (Appeals) forthe previous Assessment Year 2010-2011. It is submitted thatattempt of the petitioner was negated by Court by its order07.02.2018 in W.P.Nos.1533, 1534, 1537, 1538, 1557, 1558, 1562to 1565 of 2018 and W.P.Nos.1557 & 1558 of 2018 and pursuant towhich, assessment orders came to be passed and the issue is nowpending before the CIT (Appeals) for the Assessment Year 2010-2011. It is therefore submitted that any observation on meritsin this writ petition would impact the outcome of the saidproceedings. 14. The learned counsel for the respondent submits that incase, any orders are passed by this Court, the assessmentproceedings and CIT (Appeals) filed by the petitioner will haveto be decided in terms of the decision and therefore submitsthat the writ petition may be closed as was done on the previousoccasion by an order dated 07.02.2018. 15. The learned counsel for the respondent also relied uponthe decision of the Hon'ble Supreme Court in Raymond WollenMills Ltd. Vs. Income Tax Officer, [1999] 236 ITR 34 (SC),wherein, in Paragraph (3), it was held as under:- “3. In this case, we do not have to give a finaldecision as to whether there is suppression materialfacts by the assessee or not. We have only to seewhether there was prima facie some material on thebasis of which the Department could reopen the case.The sufficiency or correctness of the material isnot a thing to be considered at this stage. We areof the view that the court cannot strike down thereopening of the case in the facts of this case. Itwill be open to the assessee to prove that theassumption of facts made in the notice waserroneous. The assessee may also prove that no newfacts came to the knowledge of the Income-taxOfficer after completion of the assessmentproceeding. We are not expressing any opinion onthe merits of the case. The questions of fact andlaw are left open to be investigated and decided bythe assessing authority. The appellant will beentitled to take all the points before the assessing authority. The appeals are dismissed. There willbe no order as to costs.” 16. Finally, a reference was made by the decision of theHon'ble Supreme Court in Commissioner of Income Tax Vs ZuariEstate Development & Investment Co. Ltd., (2015) 63 Taxmann.177(SC), wherein, the Hon'ble Supreme Court held as follows:- authority. The appeals are dismissed. There willbe no order as to costs.” 16. Finally, a reference was made by the decision of theHon'ble Supreme Court in Commissioner of Income Tax Vs ZuariEstate Development & Investment Co. Ltd., (2015) 63 Taxmann.177(SC), wherein, the Hon'ble Supreme Court held as follows:- “4. We find that pursuant to the notice issuedunder Section 143 of the Income Tax Act, theassessing officer had computed the income by passingthe assessment orders on merits and rejecting thecontention of the respondent that the aforesaidtransaction did not amount to a sale in theassessment year in question. Against thatassessment order, the respondent had preferred theappeal before the Commissioner of Income Tax(Appeals) which was also dismissed. Further appealwas preferred before the Income Tax AppellateTribunal. This appeal, however, has been allowed bythe Tribunal vide orders dated 29.01.2004, simplyfollowing the impugned judgment of the High Court,whereby the assessment proceedings itself werequashed. Since we have set aside the judgment ofthe High Court, as a result, the orders dated29.01.2004 passed by the Income Tax AppellateTribunal also stands set aside. The matter isremitted back to the Income Tax Appellate Tribunalto decide the appeal of the respondent on merits.” 17. I have perused the impugned notice dated 27.03.2018 andthe impugned communication dated 19.11.2018 and the reasonsgiven to the petitioner vide communication dated 23.04.2018seeking to reopen the assessment under Section 148 read withSection 56(2)(vii) of the IT Act, 1961. 18. I have also considered the submission of the learnedcounsel for the petitioner and the learned senior standingcounsel for the respondent. 19. The petitioner is a partnership firm carrying on thebusiness. The petitioner firm is a share holder in a JointVenture Company called M/s.TTK Healthcare T.P.A Pvt. Ltd., (TPA)along with a Swiss Company named M/s.Swiss Reinsurance CompanyLtd., Switzerland (Swiss Re). In the said Joint Venture Companyi.e., M/s.TTK Healthcare T.P.A Pvt. Ltd., (TPA), the petitionerwas alloted share with a face value of Rs.10 per share, whereas,the joint promoter on the aforesaid company M/s.Swiss https://hcservices.ecourts.gov.in/hcservices/ Reinsurance Company Ltd., Switzerland (Swiss Re) was allotedshares at premium sum of Rs.5,141/- per share. 74% of theshares are held in the joint name of its partners namelyMr.T.T.Jagannathan and Mr.T.T.Raghunathan for the benefit of thepetitioner firm while the said Swiss Company holds 26% of thebalance equity shares in M/s.TTK Healthcare T.P.A Pvt. Limited. 20. The petitioner filed original return on 27.09.2011 andthereafter a revised return 10.02.2012 and admitted a totalincome of Rs.27,19,58,060/-. The assessment of the petitionerfirm was completed under Section 143(1) of the IT Act for theAssessment Year 2011-2012 on 03.01.2013. 21. The issue relating to the difference in the pricesadopted for the shares alloted to the petitioner and the saidswiss company in the joint venture company M/s.TTK HealthcareT.P.A Pvt. Ltd., (TPA) was subject matter of a dispute duringthe Assessment Year 2010-2011. 22. The petitioner had challenged the said proceeding inW.P.Nos.1567 & 1565 of 2018. The partners of the petitioner'sfirm namely Mr.T.T.Raghunathan and Mr.T.T.Jagannathan had alsochallenged the notices and the consequential orders for theAssessment Year 2011-2012 in W.P.Nos.1533, 1534, 1537, 1538,1557, 1558, 1562 to 1565 of 2018 and W.P.Nos.1557 & 1558 of 2018respectively. These writ petitions came to be disposed by acommon order dated 07.02.2018 by directing both the petitionerfirm and its partners to participate in the assessmentproceedings by the respondent. 22. The petitioner had challenged the said proceeding inW.P.Nos.1567 & 1565 of 2018. The partners of the petitioner'sfirm namely Mr.T.T.Raghunathan and Mr.T.T.Jagannathan had alsochallenged the notices and the consequential orders for theAssessment Year 2011-2012 in W.P.Nos.1533, 1534, 1537, 1538,1557, 1558, 1562 to 1565 of 2018 and W.P.Nos.1557 & 1558 of 2018respectively. These writ petitions came to be disposed by acommon order dated 07.02.2018 by directing both the petitionerfirm and its partners to participate in the assessmentproceedings by the respondent. 23. As on date, the issue now pending before the CIT(Appeals) on the very same issue for the Assessment Year 2010-2011. There the income was sought to be treated as “income fromother sources” under Section 56(1) of the IT Act, 1961. Duringthe Assessment Year 2011-2012, Section 56(2) (vii-a) hadbeen introduced with effect from 01.10.2009. 24. Prima facie, the petitioner firm which has been allottedshares below the market value ought to have offered thedifferential amount to tax. A reading of the sub-clause (vii)to Section 56(2) of the IT Act, 1961 seems to indicate itapplies to the facts and circumstances. Since the petitioner hasnot offered the differential amount of tax, in my view, therespondent was justified in reopening the assessment underSection 148 of the IT Act, 1961. 25. It is however open for the petitioner to substantiatebefore the respondent as to why sub-clause (vii) to Section 56(2) of the IT Act, 1961 was not attracted. The shares are heldin the name of the partners for the benefit of the petitioner firm. When notice for the Assessment Year 2010-2011 was issued,the petitioner and its partners filed W.P.Nos.1533, 1534, 1537,1538, 1557, 1558, 1562 to 1565 of 2018. 26. The two partners of the petitioner firm appear to havecontended that the amounts for the purchase of shares wererouted through bank account and that the investments were madein the share has been duly accounted and reflected in thebalance sheet relating of the petitioner firm. Therefore, thedeemed income cannot be assessed in their hands. This wouldimply even according to the partners of the petitioner firm, taxwas payable by the petitioner firm under Section 56(2) (vii-a)of the IT Act, 1961. 27. It is further noticed that pursuant to the directions ofthis Court on 07.02.2018 in the above writ petitions, assessmentorders have been passed for the Assessment Year 2010-2011. 28. Both the counsel for the petitioner and the respondentalso confirm that the respective appeals are pending before theCommissioner of Income Tax (Appeals). 29. Therefore, any remark on the merits of the transactionin this order will have bearing on these appeals that arepending for the Assessment Year 2010-2011. 30. Therefore, I am not inclined to interfere with thereassessment proceedings as it will scuttle the proceedingspending before the Commissioner of Income Tax (Appeals) for theAssessment Year 2010-2011. 31. It is therefore open for the petitioner to makeappropriate submissions on merits before the respondent and incase the petitioner or the respondent suffers an adverse order,the issue has to be decided only before the appellateauthorities in appeal under the hierarchy prescribed under theIT Act, 1961. There are no extenuating circumstances that arenoticeable for this Court to quash the impugned notice andorder. Under these circumstances, this Court is inclined todismiss the present writ petition. 32. Since the dispute pertains to the Assessment Year 2011-2012, the respondent shall endeavour to pass appropriate orderson merits in accordance with law within a period of sixty daysfrom the date of receipt of this order. 33. Liberty is given to the petitioner to file additionalreply/representation, if any, within a period of thirty daysfrom the date of receipt of this order. 32. Since the dispute pertains to the Assessment Year 2011-2012, the respondent shall endeavour to pass appropriate orderson merits in accordance with law within a period of sixty daysfrom the date of receipt of this order. 33. Liberty is given to the petitioner to file additionalreply/representation, if any, within a period of thirty daysfrom the date of receipt of this order. 34. It is made clear, while passing such orders, therespondent shall consider the issue independently on meritsuninfluenced by any observation herein on merits of the case.The petitioner may be given opportunity of personal hearing. 35. This Writ Petition stands disposed of with the aboveobservations. No costs. Consequently, connected WritMiscellaneous Petitions are closed. Sd/- Assistant Registrar(CS-V)//True Copy// Sub Assistant Registrar arbTo:The Assistant Commissioner of Income Tax,Non-Corporate Circle 3, Chennai – 600 034. +1cc to M/s.Subbaraya Aiyar Padmanabhan & Ramamani, Advocate, S.R.No.27742+1cc to M/s.Hema Muralikrishnan, Advocate, S.R.No.27695W.P. No. 32394 of 2018 SR-II(CO)CB(19/07/2021)