2018 (3) TMI 585 - HC - Income Tax

Reopening of assessment - addition u/s 56 - transaction in shares - adequate consideration - Held that - Section 56(2)(viia) was brought in the statute book only w.e.f. 1st June, 2010 i.e. for AY 2011-12. In this case, we are concerned with shares purchased by the Petitioner in March, 2010 i.e. Assessment Year 2010-11. Section 56(2)(viia) not being retrospective, would have no application. Thus, it was submitted that there was no reason to believe that there was any income on account of short fall in consideration paid during the AY 2010-11. The order disposing of the objections, does not deal with any of the contentions raised by the Petitioner. The entire exercise of raising objections and the Assessing Officer taking second look at the impugned notice is turned into an empty formality, if the objections are not taken into consideration while disposing of the same. Assessing Officer could not have any reason to believe that income chargeable to tax has escaped Assessment, as prima facie, there was no income arising on account of short payment of consideration for the subject Assessment Year in case of a limited Company such as the Petitioner, prior to introduction of Section 56(2)(viia). Thus, the artificial meaning of income sought to be canvassed by the Revenue, came into the statute only w.e.f. 1st June, 2010 i.e. after the impugned transaction i.e. AY 2010-11.

Summary

Issues:
Challenge to notice under Section 148 of the Income Tax Act, 1961 for Assessment Year 2010-11.

Analysis:
The judgment by the High Court of Bombay dealt with a challenge to a notice issued by the Commissioner of Income Tax under Section 148 of the Income Tax Act, 1961 for the Assessment Year 2010-11. The notice was based on the purchase of 40 lakhs shares at a certain price, with a valuation report indicating a different fair market value. The Assessing Officer believed there was an escapement of income taxable under Section 56 of the Act due to a shortfall in consideration paid. However, the Petitioner objected, stating that the valuation report was not provided to them and that there was no income as per Section 56(2)(viia) of the Act, which was not retrospective to the Assessment Year in question. The objections were not addressed in the order disposing of them, leading to the court considering the exercise as an empty formality. The court found that there was no reason to believe that income had escaped assessment as there was no income arising from the shortfall in consideration paid before the introduction of Section 56(2)(viia) of the Act, which came into effect after the transaction in question.

In conclusion, the High Court of Bombay granted an interim stay in favor of the Petitioner, as the court found that the Assessing Officer did not have a valid reason to believe that income chargeable to tax had escaped assessment for the Assessment Year 2010-11. The court highlighted that the artificial meaning of income under Section 56(2)(viia) of the Act was not applicable retrospectively to the transaction in question, thereby supporting the Petitioner's argument that there was no income on account of the shortfall in consideration paid. The judgment emphasized the importance of considering objections raised by taxpayers and ensuring that the assessment process is not merely a formality.