2017 (5) TMI 631 - AT - Income Tax

Entitlement to challenge the validity of initiation of proceedings u/s 147 in which challenged the validity of order passed u/s 263 - Held that - The re-assessment proceedings have been initiated only for the purpose of verification and examination which is not the scope of reassessment proceedings. It would be the case of rather reasons to suspect rather than reasons to belief that there was escapement of income. It is a case of the AO seeking to make fishing and roving inquiry without any basis. We have no hesitation in concluding that initiation of reassessment proceedings in the present case was not valid as the mandatory requirement of such 147 has not been satisfied. We therefore hold that reassessments orders for A.Y.2007-08 and 2008-09 dated 30.12.2011 were invalid. Consequently order passed u/s 263 of the Act dated 21.03.2014 for A.Y.2007- 08 and 2008-09 are also held to be invalid and quashed. Revision u/s 263 - addition u/s 68 - AO failed to examine as to why such high premium was paid by a person acquiring shares of the assessee company - Held that - As to whether enquiry into high share premium ought to have been made by the AO and also as to what was the justification for such high premium could to be investigated by the AO at all because the 1st proviso to Sec.68 of the Act inserted by the Finance Act, 2012 w.e.f. 1-4.2013 was only prospective in operation, we are of the view that since section 68 covers any sum credited in the books without any exception, which, inter alia, includes share capital, it cannot be held that the examination of share capital with premium etc. was earlier outside the ambit of section 68 and now this amendment has brought it into its purview. The amendment has simply made express which was earlier implied. We are therefore of the view that the assessee is always obliged to prove the receipt of share capital with premium etc. to the satisfaction of the AO, failure of which calls for addition u/s 68 of the Act. The argument with regard to non application of mind by the CIT is without any basis as all show cause notice u/s.263 of the Act were issued by him and ultimately he has passed the impugned order. There is no material brought on record to show that the CIT acted without application of mind. We therefore reject this argument on behalf of the Assessee. We are therefore of the view that the order u/s.263 of the Act is valid and proper in so far as it relates to AY 2009-10

Issues Involved:
1. Validity of the initiation of proceedings under Section 147 of the Income Tax Act, 1961.
2. Legality of the order passed under Section 263 of the Income Tax Act, 1961.
3. Adequacy of inquiries made by the Assessing Officer (AO) regarding share capital and share premium.
4. Justification of high share premium received by the assessee.

Detailed Analysis:

1. Validity of the Initiation of Proceedings under Section 147:
The assessee challenged the initiation of proceedings under Section 147, arguing that the reasons recorded for reopening the assessment were vague and based on mere suspicion. The Tribunal noted that the reasons recorded by the AO alleged that the assessee had made an unexplained investment in a hotel/resort, which was not reflected accurately in the balance sheet. However, the Tribunal found that the AO's reasons lacked a clear basis and were not supported by specific evidence. The Tribunal cited the case of Hindustan Lever Ltd. vs. R.B. Wadkar, emphasizing that reasons for reopening must be clear and unambiguous. The Tribunal concluded that the initiation of reassessment proceedings was invalid as it was based on a mere pretence rather than a reason to believe that income had escaped assessment.

2. Legality of the Order Passed under Section 263:
The Tribunal examined whether the CIT could invoke Section 263 to revise an order passed under Section 147, which was argued to be invalid. It was held that if the original assessment proceedings under Section 147 were null and void, the CIT could not revise such an order under Section 263. The Tribunal referenced several cases, including the Hon’ble Supreme Court's decision in Kiran Singh & Ors. v. Chaman Paswan & Ors., which established that a decree passed without jurisdiction is a nullity and can be challenged in collateral proceedings. Consequently, the Tribunal quashed the orders passed under Section 263 for the assessment years 2007-08 and 2008-09, as the reassessment orders were found to be invalid.

3. Adequacy of Inquiries Made by the AO Regarding Share Capital and Share Premium:
For the assessment year 2009-10, the Tribunal reviewed whether the AO conducted adequate inquiries into the share capital and share premium received by the assessee. The CIT had set aside the AO's order, stating that the AO failed to properly examine the genuineness of the transactions and the justification for the high share premium. The Tribunal agreed with the CIT, noting that the AO's inquiries were insufficient and amounted to no inquiry at all. The Tribunal emphasized that the AO should have examined the rationale behind the high premium and the creditworthiness of the share applicants more thoroughly.

4. Justification of High Share Premium Received by the Assessee:
The Tribunal addressed whether the justification for a high share premium needed to be examined under Section 68 of the Act. It was argued that the first proviso to Section 68, introduced by the Finance Act, 2012, was prospective and did not apply to earlier years. However, the Tribunal held that Section 68 always covered any sum credited in the books, including share capital with premium, and the amendment merely made explicit what was previously implied. Therefore, the AO was obliged to examine the justification for the high share premium, and the failure to do so rendered the AO's order erroneous and prejudicial to the interests of the revenue.

Conclusion:
The Tribunal allowed the appeals for the assessment years 2007-08 and 2008-09, quashing the orders passed under Section 263 due to the invalidity of the reassessment proceedings. However, for the assessment year 2009-10, the Tribunal upheld the CIT's order under Section 263, finding that the AO's inquiries into the share capital and share premium were inadequate and justified the CIT's intervention.

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