2020 (2) TMI 1061 - HC - Income Tax

Validity of reopening of assessment - funds received by the assessee from a foreign entity - information has been received from DIT (Intell. Cr. Inv.) - valid reasons to believe - Assessment after merger of company - scope of section 170 - No separate notice issued for the amalgamated company - HELD THAT - In the present case, new facts, material or information have come to the knowledge of the Assessing Officer by way of the report of DIT (Intelligence and Criminal Investigation) with regards to the doubtful source of the investments made into the petitioner companies. At the time of original assessment, the AO was not aware of or in possession of information which could have indicated that the introduction of share capital from outside India has been routed through a doubtful entity. DIT (I CI) Delhi had also made detailed enquiries regarding origin of funds which were used for introduction of share capital and premium. This information was received much later after the original assessment had been completed, and is germane and relevant to the subjective opinion formed by the AO in regard to escapement of income. In the present case, the AO s reasons to believe are fortified with the tangible material in the form of specific information received by the Investigation Wing. Thus, the AO is downright justified in issuing the notice for reassessment. It is revealed from the said material available on record that a reasonable belief was formed by the Assessing Officer that income of the petitioner has escaped assessment and therefore, once the reasonable belief is articulated and expressed by the AO on the basis of cogent tangible material, he was not expected to arrive at a final conclusion thereon at the stage of issuance of notice. Even if scrutiny assessment has been undertaken in the first place, if significant new material is found in the form of information, the assessing officer can form a belief that the income of the petitioner has escaped assessment, and reopen assessment. It is also trite law that for cases relating to inter alia, share application money, three vital aspects have to be considered by the Assessing Officer, namely (i) the identity of the investors; (ii) the credit worthiness of the investors; and (iii) the genuineness of the transaction. Ex-facie, the order of assessment which was passed by the Assessing Officer under Section 143(3), does not indicate that all these aspects were gone into. Today, there is serious doubt relating to credit-worthiness of the share applicant/investor, in view of the investigation report noted above and clarity can only come in by way of reassessment. In the present case, however, the mere disclosure of the identity of the investor (as being holding company of assessee) in the return of income and the audited financial statements of the assessee as the source of share application money received, is not sufficient to constitute disclosure under the proviso to section 147. Therefore, the assessee cannot be said to have made true and complete disclosure. Hence, the notice for reassessment is justified. In the present case, the return of income merely lists Gold Singapore as the holding company and the Notes to the audited financial statement merely mention that securities application money has been received from the Holding Company, being Gold Singapore. The genuineness of this transaction as also the creditworthiness of the investor are doubtful in the present case and, therefore, mere mention of the said transaction does not amount to full and true disclosure. Therefore, this amounts to the fulfilment of the second condition, that is, failure to disclose fully and truly all material facts, relevant for his assessment in that assessment year. Requirement of sanction u/s 151 - Held that - in the present case, approval/sanction has been obtained from both, the Addl. Commissioner of Income Tax as well as Principal Commissioner of Income Tax, which is the appropriate authority for issuance of such sanction Assessment after merger of company - scope of section 170 - No separate notice issued for the amalgamated company - Held that - On the date of the reassessment notice, therefore, EDIPL and EDPL existed as a single common entity, for the relevant AY 2012-2013, i.e. beginning on 01.04.2012, which is the date of the amalgamation. Petitioner contends that the common notice for reassessment issued in the name of EDPL is bad in law as separate notices are required to be issued in the name of EDPL in its own capacity and in the name of EDPL, as successor-in-interest of EDIPL separately since during the relevant time, i.e., AY 2012-2013, they existed as separate entities. There is no dispute that in the present case, the amalgamating company does not exist on the date of issuance of notice and accordingly, the assessment had to be made in the name of amalgamated company i.e. the petitioner. We cannot construe Section 170 (2) of the Act in the manner, the petitioner has urged. The aforesaid provision nowhere requires that two separate notices and separate assessment order are to be passed. On the contrary, the petitioner as a successor would also be liable for the income of the previous year in which the succession took place upto the date of the succession. We are therefore unable to understand as to what purpose would be served by two separate assessment orders. Pertinently, as of now, we are only concerned with the requirement of issue of two separate notices under Section 147/148 and we cannot find any such requirements emanating from Section 170 (2) of the Act. In the present case also, on the date of issue of reassessment notice, i.e. 31.03.2019, EDIPL had ceased to exist as a separate entity (w.e.f. 01.04.2012). Therefore, for reopening of assessment proceedings in respect of EDIPL, now merged with EDPL, a notice can only be issued in the name of the merged entity. There is no requirement to issue two separate notices in the name of amalgamated company (i) as successor-in-interest of the amalgamating company and (ii) in its individual capacity, as the amalgamated company (EDPL) has taken over the liabilities of the amalgamating company (EDIPL) and the notice mentions the liabilities of EDIPL as it accrued pre-amalgamation in its individual capacity. Notices for reopening of assessment proceedings under section 148, are valid and the Assessing Officer has sufficiently showcased that there are reasons to believe that the income of the assessee(s) may have escaped assessment, with tangible material on record. - Decided against assessee.

Summary

Issues Involved:
1. Validity of "reasons to believe" for initiating reassessment proceedings.
2. Whether reassessment proceedings are based on a change of opinion.
3. Bar of limitation for initiating reassessment proceedings.
4. Proper sanction under Section 151 of the Income Tax Act.
5. Validity of a common reassessment notice issued to the amalgamated company.

Detailed Analysis:

(a) Validity of "Reasons to Believe" for Initiating Reassessment Proceedings:
The court examined whether the reassessment proceedings were initiated with valid "reasons to believe," based on fresh tangible material and independent application of mind. The court noted that the reasons recorded by the Assessing Officer (AO) must show application of mind to relevant facts. The AO had received information from the Directorate of Income Tax (Intelligence & Criminal Investigation) indicating that the investing company, Gold Singapore, did not carry out regular business activities and was used as a conduit to funnel funds into Indian companies. The court found that the information received was sufficient tangible material to form a "reason to believe" that income had escaped assessment. The court emphasized that at the stage of reopening, the AO only needs to have a prima facie belief of escapement of income, not conclusive evidence.

(b) Reassessment Proceedings Based on Change of Opinion:
The court discussed the principle of "change of opinion" and noted that if new facts or material come to the AO's knowledge after the original assessment, the principle of "change of opinion" does not apply. In this case, the AO received new information about the dubious nature of the source of investments, which was not available during the original assessment. The court held that the reassessment was not based on a mere change of opinion but on new tangible material.

(c) Bar of Limitation for Initiating Reassessment Proceedings:
The court examined whether the initiation of reassessment proceedings was barred by limitation under the proviso to Section 147 of the Act. The proviso bars reassessment after four years unless there is a failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. The court found that the mere disclosure of the identity of the investor did not constitute full and true disclosure. The fact that Gold Singapore was a dubious entity was not disclosed, and therefore, the second condition of the proviso was met. The court held that the reassessment proceedings were not barred by limitation.

(d) Proper Sanction Under Section 151 of the Act:
The court considered whether the proper sanction was obtained under Section 151 of the Act. The recorded reasons indicated that sanction was obtained from the Principal Commissioner of Income Tax. The court noted that the approval of the competent authority was obtained, and there was no requirement for elaborate reasoning by the sanctioning authority if it agreed with the AO's reasons. The court held that the necessary sanction was obtained as required under Section 151.

(e) Validity of Common Reassessment Notice Issued to the Amalgamated Company:
The court examined whether a common reassessment notice issued to the amalgamated company (EDPL) was valid. The petitioner argued that separate notices were required for EDPL in its individual capacity and as the successor-in-interest of EDIPL. The court noted that pursuant to the scheme of amalgamation, EDIPL merged with EDPL, and on the date of the reassessment notice, EDIPL no longer existed as a separate entity. The court held that there was no requirement for separate notices and that a common notice was valid.

Conclusion:
The court dismissed the petitions, holding that the AO had sufficient tangible material to justify the reassessment proceedings, which were not barred by limitation, and proper sanction was obtained. The common reassessment notice issued to the amalgamated company was also held to be valid. The court directed the AO to pass the assessment order on merits after considering all materials and submissions in accordance with law.