2016 (10) TMI 1395 - HC - Income Tax

Validity of Revision u/s 263 - unexplained investment in shell companies - allegation of benami transactions in the name of individuals of village Kharora to induct share application money/share capital - HELD THAT - In Malabar Industrial Co. Ltd. 2000 (2) TMI 10 - SUPREME COURT made it clear that even incorrect assumption of facts would satisfy the requirement of order being erroneous. In case the orders are passed without applying the principle of natural justice or without application of mind then also the Commissioner can exercise his revisional powers - As expression prejudicial to the interest of the revenue has very vide connotation and was not confined to loss of tax. If the AO adopts one or two courses available under law and it results in loss of revenue then the order cannot be said to be erroneous or prejudicial to the interest of revenue within the meaning of Section 263 but where the view taken by the Income-tax Officer is unsustainable then the order passed by the Assessing Officer is not only erroneous but also prejudicial to the interest of Revenue. As far as the present cases are concerned, the whole issue is, where did this huge amount of Rs. 39.08 crores came from? The Income Tax Officer issued a detailed notice and a questionnaire but in his order has not decided any of the questions raised by him. His order is totally a nonspeaking order and he has not even decided the issue as to from where money came into the hands of the so-called share holders of these shell companies. We are of the considered view that the Commissioner of Income Tax was fully justified in issuing notice u/s 263 of the Act and further directing the Assessing Officer to pass a fresh order after considering the entire material. It is not as if the Appellants before us will not have an opportunity to present their case before the Assessing Officer. The Settlement Commission has clearly held that the manner in which these investments were made in these shell companies leaves many questions unanswered. Truth must be found out. During search and seizure operations conducted in the office of Shri Sunil Kumar Agrawal, Chartered Accountant, 232 bank pass books of different individuals were found. All the pass books pertain to only two banks i.e. Union of India, Main Branch, Raipur and Union of India, Pandri Branch, Raipur. There has to be some explanation why all the villagers of Kharora would open bank accounts in Raipur. A number of these companies are having their registered office in the office of Shri Sunil Kumar Agrawal, Chartered Accountant. Therefore, CIT was justified in coming to the conclusion that there was ample material to point out that there may have been benami transactions in the name of individuals of village Kharora to induct share application money/share capital in the 13 shell companies. Decided against revenue.

Summary

Issues Involved:
1. Legality of the search and seizure operations under Section 132 of the Income Tax Act, 1961.
2. Validity of the notices issued under Section 153C of the Income Tax Act.
3. Legitimacy of the investments made by shell companies in M/s. Prime Ispat Limited.
4. Justification for invoking Section 263 of the Income Tax Act by the Commissioner of Income Tax.
5. Appropriateness of the order passed by the Income Tax Appellate Tribunal.

Detailed Analysis:

1. Legality of the Search and Seizure Operations:
The Income Tax authorities conducted search and seizure operations under Section 132 of the Income Tax Act, 1961, against Agrawal Group of Companies and others. During these operations, it was discovered that M/s. Prime Ispat Limited, a closely held limited company, had received investments of Rs. 39.08 crores from shell companies. The search extended to the office of a Chartered Accountant, where passbooks of 232 shareholders of the 13 shell companies were found, indicating potential benami transactions.

2. Validity of Notices Issued under Section 153C:
The Assessing Officer issued notices to the shell companies under Section 153C of the Act and a detailed questionnaire. The shell companies were asked to provide details of share capital, share premium account, and share application money, along with the complete names, addresses, occupations of the investors, and the date and mode of receipt of funds. The companies were also required to furnish explanations and supporting documents for these transactions.

3. Legitimacy of Investments by Shell Companies:
The Settlement Commission, in its order dated 07.11.2012, noted that the investments made by the shell companies in M/s. Prime Ispat Limited could not be fully explained. The Commission highlighted that the investments were made through petty account holders whose passbooks were found with the Chartered Accountant, suggesting that the investments might not be genuine.

4. Justification for Invoking Section 263:
The Commissioner of Income Tax issued a notice under Section 263 of the Act, stating that the order of the Assessing Officer was erroneous and prejudicial to the interest of the Revenue due to non-application of mind. The High Court cited various judgments, including those of the Bombay High Court and the Apex Court, to emphasize that an order is considered erroneous if it deviates from the law or is passed without application of mind. The Commissioner has the authority to revise such orders if they are prejudicial to the Revenue.

5. Appropriateness of the Order by the Income Tax Appellate Tribunal:
The Appellants challenged the Commissioner's order before the Income Tax Appellate Tribunal, which rejected their appeals. The High Court upheld the Tribunal's decision, stating that the Commissioner was justified in issuing the notice under Section 263 and directing a fresh assessment. The Court noted that the Assessing Officer's order was non-speaking and did not address the key issue of the source of funds for the shell companies. The Court emphasized the need for a thorough inquiry to uncover the truth behind the investments.

Conclusion:
The High Court dismissed the appeals, concluding that no substantial question of law arose. The Commissioner of Income Tax was justified in invoking Section 263 to ensure a proper inquiry into the investments made by the shell companies. The Court stressed that the truth must be found out, and the Appellants would have an opportunity to present their case during the fresh assessment. The appeals were dismissed in limine, affirming the need for a detailed investigation into the matter.