2018 (2) TMI 1216 - HC - Income Tax

Reopening of assessment - validity of reasons to believe - valuation of shares - income has escaped assessment on application of Section 56(2)(vii) - Held that - 6 Prima facie the order disposing of the objections while dealing with the objection of no reason to believe that income has escaped assessment on application of Section 56(2)(vii) of the Act has completely ignored the Explanation thereto. The Explanation to Section 56(2) (vii) of the Act states that the fair market value is to be determined in accordance with the Income Tax Rules. The office note annexed to the Assessment Order dated 28th February 2013 passed under Section 143(3) of the Act holds that on application of Rule 11 UA of the Income Tax Rules the value per share came to less than 5/per share. The impugned notice indicates a change of opinion as this very issue namely valuation of share was a subject matter of consideration during the regular assessment proceedings. Besides on the application of method of valuation as mandated by the Explanation to Section 56(2)(vii) of the Act prima facie the Assessing Officer could not have had reason to believe that income chargeable to tax has escaped assessment. Thus the impugned notice is without jurisdiction. - Decided in favour of assessee

Summary

Issues:
Challenge to show cause notice under Article 226 of the Constitution of India for reopening Assessment Year 2010-11 under Section 148 of the Income Tax Act, 1961.

Analysis:
The judgment concerns a petition challenging a show cause notice dated 30th March, 2017, issued by the Deputy Commissioner of Income Tax under Section 148 of the Income Tax Act, seeking to reopen the Assessment for Assessment Year 2010-11. The regular assessment for the said year was completed on 28th February, 2013 under Section 143(3) of the Act. The impugned notice was issued beyond the four-year period from the end of the Assessment Year 2010-11. The reasons for the notice were based on information received regarding the undervaluation of shares purchased by the petitioner, resulting in alleged income escaping assessment for the said year.

The petitioner contended that all facts were disclosed during the regular assessment proceedings and that the Assessing Officer had considered the valuation of shares of the company in question during the initial assessment. The petitioner highlighted that the valuation of shares was addressed in the context of potential undervaluation and the relevant provisions of the Income Tax Act. The petitioner argued that the Assessing Officer had already applied Rule 11 UA of the Income Tax Rules during the initial assessment, which determined the value per share to be less than ?5, thus questioning the need for the reassessment based on the same issue.

The court, in its analysis, observed that the order disposing of the objections seemed to have ignored the Explanation to Section 56(2)(vii) of the Act, which mandates the determination of fair market value in accordance with the Income Tax Rules. The court was of the view that the impugned notice appeared to indicate a change of opinion as the valuation of shares was already considered during the regular assessment proceedings. Furthermore, the court noted that based on the prescribed method of valuation, the Assessing Officer did not seem to have sufficient grounds to believe that income chargeable to tax had escaped assessment.

Consequently, the court held that prima facie, the impugned notice lacked jurisdiction and granted interim relief in favor of the petitioner. The respondents waived service, and the court provided relief as per the prayer clause.