2016 (1) TMI 946 - HC - Income Tax

Reopening of assessment - capital gain addition - Held that - Under sub-clause (iii) of section 47 of the Act, therefore, nothing would apply to any transfer of capital assets under a gift or will or irrevocable trust. It is not the case of the Assessing Officer that the present case is not one of transfer of asset under a gift. In terms of sub-clause (iii) of section 47 of the Act, thus such transfer would not be governed by section 45 of the Act. For apparent reasons, the proviso to subsection (iii) of section 47 of the Act would not apply to the present case, since it applies to any transfer under gift or irrevocable trust under capital asset in the nature of shares, debentures or warrants allotted by a company to its employees under Employees Stock Option Plan or Scheme. Admittedly, this is not such a case. This proviso is in the nature of exclusion to main provisions of sub-clause (iii) of section 47 of the Act. Under the circumstances, the case on hand would be governed by the main body of sub-clause (iii) of section 47 of the Act and consequently, the provision of section 45 of the Act pertaining to capital gain would not apply. Also proviso to section 48 would not apply in the case on hand. Firstly section 48 of the Act itself provides for mode of computation of income chargeable as capital gain. Sub-clause (iii) of section 47 of the Act excludes application of section 45 of the Act in case of certain transfers. By no application of section 48 of the Act, such exclusion can be ignored. Section 48 of the Act only aims to provide for formula for computation of income chargeable as capital gain. Further, this proviso provides for computation of income which is referred to in proviso to sub-clause (iii) of section 47 of the Act, and thus, would cover cases which are to be excluded from the purview of sub-clause (iii) of section 47 of the Act. As noted, the case on hand does not fall within the proviso to subclause (iii) of section 47 of the Act, and therefore, mode of computation provided under section 48 of the Act would simply not apply. Thus The reasons recorded by the Assessing Officer to form belief that the income chargeable to tax had escaped assessment lack validity. - Decided in favour of assessee

Summary

Issues:
1. Validity of notice re-opening assessment for Assessment Year 2010-11.
2. Challenge to reasons recorded by Assessing Officer for issuing notice.
3. Interpretation of statutory provisions regarding tax liability on transfer of shares without consideration.
4. Application of further proviso to section 48 of the Income Tax Act.

Analysis:
Issue 1: The petitioner, a registered company, challenged a notice dated 24.02.2015 to re-open assessment for the Assessment Year 2010-11. The Assessing Officer issued the notice based on the transfer of shares without consideration. The petitioner objected to the notice, but objections were rejected, leading to the petition.

Issue 2: The Assessing Officer's reasons for re-opening assessment were challenged by the petitioner's counsel. The counsel argued that the reasons lacked validity as the transfer of shares to a sister concern without consideration did not incur tax liability under section 47 of the Income Tax Act. The counsel also disputed the reliance on the further proviso to section 48 by the Assessing Officer.

Issue 3: The court analyzed the statutory provisions related to the tax liability on the transfer of shares without consideration. It was highlighted that as per section 47 of the Act, transfers under a gift or will are not subject to capital gains tax. The court found that the transaction in question did not attract tax liability for the petitioner.

Issue 4: The Assessing Officer attempted to apply the further proviso to section 48 of the Act, which deals with the computation of income chargeable as capital gains. However, the court determined that this proviso did not apply to the case at hand as the transfer of shares without consideration fell under a different provision of the Act. Therefore, the court held that the reasons recorded by the Assessing Officer lacked validity, leading to the setting aside of the notice re-opening the assessment.