2022 (6) TMI 178 - AT - Income Tax

Reopening of assessment u/s 147 against assessee trust after cancellation of registration u/s 12A - jurisdiction of AO - As argued since assessee has surrendered its registration u/s 12A and 12AA therefore, it was no longer an entity that required exemption u/s 11 and consequently DIT (E) or ACIT (E) did not had jurisdiction at the time of issuance of notice u/s 148 - HELD THAT - The assessment for AY 2011-12 has been reopened in the period when statutorily the appellant was holding certificate of registration u/s 12A/12AA. Once company has been recognized as a charitable institution by grant of registration u/s 12A, then such registration can be cancelled only by an authority under the law and not by voluntary act of the assessee. The act of suo motto surrender of registration is neither permissible under the law nor is dependent upon the voluntary act of the assessee. Even if the assessee had filed letter surrendering its registration, it has no consequence till competent authority acts upon it and accepts the surrender letter and passes the order of cancellation. The order of cancellation of registration is a statutory order which is based on the foundation of certain facts coming on record during the breach of conditions for which registration was granted and such a breach cannot be reckoned from voluntary surrender of registration. The entire process has to be followed in accordance with the statute. Merely because the assessee had filed a letter on 21.03.2016 surrendering its registration u/s 12A or giving its benefit of section 11, does not mean that from the date of the letter, the jurisdiction of the AO automatically got changed. As stated above, at the time of issuance of notice u/s 148, the ACIT or DCIT, Circle Exemption, New Delhi had the valid jurisdiction not only to initiate the proceedings u/s 148 but also pass the assessment order. Insofar as the contention raised by the appellant that, since the assessee had challenged jurisdiction, it was incumbent upon the AO to refer it to the higher authorities in terms of section 124(4). Such a contention is not tenable on the present facts for the reason that the jurisdiction over the assessee lied with the AO, Exemption Circle by virtue of provisions contained u/s 120 of the Act, because here it is a case of jurisdiction assumed by granting registration by the Income-tax Department on the application filed by the assessee which falls within the definition of class of assessee and class of cases as defined under clauses (c) (d) of sub-section (3) of section 120. The appellant ostensibly falls into a specific category of cases and it is not open for the assessee on its own remove itself from specific category of cases and then contend that it should have been assessed by different Assessing Officer. The matter of jurisdiction is not by the choice of the assessee albeit it depends upon the specific provisions contained in sections 120 124. Thus, we do not find any merits in the contention raised in ground no.1 that Assessing Officer did not had jurisdiction either to issue notice or pass assessment order and the same is thus dismissed. Approval from the CIT (E) u/s 151 was obtained prior to the recording of reasons and therefore, it tantamount of rendering the entire proceedings u/s 147/148 bad in law - HELD THAT - After considering the satisfaction of the CIT (E) accompanied with the detailed reasons recorded by the AO as incorporated it cannot be held prima facie that there was no application of mind or that the approval has been given in a mechanical manner. Ld. CIT (E) has given his detailed reasons as to why he was satisfied with the proposal of the AO. Accordingly, the contention raised by the ld. Sr. Counsel is rejected. The judgments which have been relied upon by him clearly not applicable on the facts of the present case. Eligibility of reasons to believe - HELD THAT - From a bare perusal of AO s detailed reasons running into 24 pages, there is sufficient material to hold that AO had prima facie reasons to believe especially, the manner in which appellant has taken over the properties of AJL through whatever scheme and how the entity AICC, AJL and Young Indian had common control or management to device such alleged scheme and how the assessee has got benefit by getting the entire shareholding and underlying assets of AJL by merely paying paltry sum - This itself shows strong prima facie reasons to believe for any prudent person that there is definitely escapement of income. It is not a case that it was merely a pretext taken by the Assessing Officer for making roving and fishing enquiry without any basis or material on record. AO has duly applied his mind after incorporating various material and information coming on record and after independently examining the same, he has recorded the reasons. We do not find any infirmity or illegality either in the recording of the reasons or assuming jurisdiction or reopening the case u/s 147 or issuance of notice u/s 148 - No substantial merit in the contention raised by the appellant before us nor do any of the judgments cited and relied upon before us have any application on the present facts. We reiterate that the AO has to have only prima facie reasons to believe based on tangible material or information which, here in this case, there was sufficient material to entertain reasons to believe that entire transaction right from the incorporation of the appellant company till acquiring of 99.999% of shares of AJL and getting control of huge assets of AJL merely for a sum of Rs.50,00,000/-. At least, this factum itself is sufficient to clothe the AO in entertaining reasons to believe and acquiring the jurisdiction u/s 148. We further notice that very recently, Hon ble Supreme Court in the case of DCIT (Central Circle) Vs M/s M R Shah Logistics Pvt Ltd 2022 (4) TMI 46 - SUPREME COURT held that reopening of the assessment u/s 147 is valid if there is tangible material for the same and the sufficiency of such material cannot be subject to judicial review. Accordingly, ground no.2 raised by the appellant is dismissed. Violation of principles of natural justice - non admission of additional evidences filed by the appellant before the ld. CIT (A) and admission of additional evidences filed before this Tribunal - HELD THAT - Though we have permitted the parties for arguing on all the evidences filed before the authorities below as well as additional evidences filed before us which were most of them were also filed before the ld. CIT (A) but has been rejected by her. However, some of the additional evidences filed before us has either no relevance or had no material impact on the issues involved. For instances, documents pertaining to valuation report sought u/s 11UA which was only for the purpose of section 56 which is neither the case of the assessee nor the case of the Department, so documents mentioned at Sl.No.12 to 15, 21 22 as incorporated above in the list of additional evidences are not relevant. Secondly, newspaper reports appearing at sl.no.11 is also irrelevant as they are not admissible evidences. There is another evidence which is order of Election Commissioner appearing at sl.no.4 of the list, though has been referred before us may also not be relevant on the issues involved which is the order of Election Commissioner in the case of Indian National Congress. The other documents we shall try to deal in brief and take into consideration which are germane to the issues involved. Insofar as various objections and references filed with regard to valuation part, the appellant has filed specific objections before us which are based on and emanating from Registered Valuer s report, and the finding and observations of the AO and are otherwise relevant, we shall deal it comprehensively and then it may not be relevant to counter each and every part of valuer s report as same has been summarized by the appellant in the written submissions filed before us. So far as documents relating to Dotex, annual accounts of RPG Lifesciences Ltd. etc. mentioned at sl.no.1, 2, 3, 5, 6, 7, 8 10, the same will be discussed and considered for deciding the issue. The assessment order of AJL for AY 2011-12 appearing at Sl.No.9 technically cannot be reckoned as additional evidences therefore, the same is also taken into cognizance. In any case, both the parties have made the detailed submissions and also filed their written submissions on all the points which was raised and argued before us on various dates of hearing. Taxing of the fair market value of the properties owned by AJL u/s 28(iv) - whether the provisions of section 56(2)(viia) is applicable specifically dealing with the shares? - treatment of the transaction of assigning of loan by the AICC to appellant company, whether was a fraudulent transaction or not - As contented appellant has acquired the shares of AJL with the intention to use it as launch pad for achieving its objects - HELD THAT - As provisions of section 56(2)(viia), at the very outset, is not applicable, because the assessee being section 25 company which falls within the ambit and definition of a company in which public are specially interested in section 2(18)(iiaa). Even the ld. Sr. Counsel has agreed that this provision is not applicable but his case was that such transactions will fall u/s 56(2)(viia) and not section 28(iv). However, we have already held that how the entire transaction has led to benefit arising from adventure in the nature of trade so as to fall within section 28(iv) and section 56(2)(viia) has no applicability at all. Accordingly, the judgments which have been cited before us have no relevance. Assessee had also pointed out that now there is a specific provision brought into the statute to cover such nature of transaction u/s 56(2)(x) which has been brought in the statute w.e.f. 01.02.2017 and, therefore, if the legislature intended to cover such transaction u/s 28(iv), there is no requirement of bringing it within the taxable ambit under the deeming provisions of section 56(2)(x). We disagree with him because, the provisions of either section 56(2)(viia) or 56(2)(x) deal with the situation where transaction is made for no consideration or lower consideration and someone transferring the assets to the other. This is a case where the properties are being taken control of under a scheme and designed to acquire the shares of a company under a pre-planned scheme with the connivance of amendment of AJL and AICC. We have already noted above that the applicability of section 28(iv) and benefit derived thereon is due to peculiar facts and circumstances of this case and nature of transaction has been undertaken which has resulted into the benefit of the appellant company in the form of huge immovable properties held by the AJL. Coming to the last limb of the arguments that here it is not the case of real income albeit a notional income, therefore, the real income can be taxed. Here in this case, we have already held that the benefit which has arisen as a consequence of adventure in the nature of trade where benefit has been derived in the non-mandatory form i.e.,v in the form of immovable properties of AJL during the year which is taxable u/s 28(iv) and, therefore, it is an income, which has arisen to the assessee, taxable u/s 28(iv). Thus, in view of our discussion above, we hold that the Department has rightly taxed the amount during the year under section 28(iv) Valuation of property - FMV determination - reference to the Departmental Valuation Officer (DVO) stating that it is beyond the scope of section 142A - computing the Fair Market Value (FMV) beyond the value computed by the DVO - whether value computed by the DVO are erroneous? - HELD THAT - Herald House, Bahadurshah Zafar Marg, New Delhi - As we find that it is incorrect to suggest that there are any worthwhile restrictions on the use of the property. As discussed above, the nature of the property being commercial, situated in a highly commercial area of Delhi, the DVO has rightly applied the multiplying factor 3 to take into consideration these factors. In the absence of any effective restrictive clause, the cases relied upon by the Ld. Senior Counsel for the Appellant are not applicable and the plea deserves to be rejected and we do accordingly We hold that firstly, the circle rate which has been proposed by the appellant to be applied here in this case for valuing the property is not acceptable, because circle rate are not the right benchmark in all cases for determining the actual market value of property in Delhi especially where the property is located. Here it is found as a matter of fact that even in the sale instance of residential property at Tolstoy Marg, the sale rate was many times higher than the circle rate. In any case, Bahadurshah Zafar Marg and Tolstoy Marg fall in the same zone i.e., Zone A for the purpose of circle rate and if the property at Tolstoy Marg has been sold at a much higher price than the circle rate, then ostensibly the circle rate cannot be held to be applicable for the property at Bahadurshah Zafar Marg. Bahadurshah Zafar Marg also which is near to ITO and has big commercial establishments having high commercial value, therefore, the value of Bahadurshah Zafar Marg at any day would never be much lower than the Tolstoy Marg. Insofar as the appellant s objection to 21% of increase to the value from year to year applied by the DVO, we find that the DVO has taken this basis on the basis of CBDT Circular as cited by him in his report which states that monthly increase of 1.5% or 2% may be adopted which works out to be in the range of 18% to 24% of annual average, which DVO has taken at 21% which appears to be justified. The contention that DVO has erroneously made 21% increase per year by adopting the rate of sale of Tolstoy Marg property which was sold in the year 2008 for arriving at the value in the year 2011, we do not find any reason for such objection because, firstly, Bahadurshah Zafar Marg is a much better location having very high commercial value and in any case, DVO has given suitable discount of 5% for this reason. The DVO has also pointed out that this was the nearest sale instance available. Thus, considering the entire facts and material on record and in the absence of appellant itself giving any FMV, we do not find any infirmity in the valuation of the DVO which has been adopted by the AO and accordingly the valuation of Rs.201.84 crores for the Delhi property, i.e., 5A, Herald House, Bahadurshah Zafar Marg, New Delhi is confirmed. Patna property - Here in this case, property was allotted to the AJL for publication of newspaper which itself has a commercial purpose, however, the activity of the newspaper publication of the AJL was discontinued in April 2008 itself, therefore, the property was, in fact, not being used for the purpose for which it was allotted. Therefore, it is for this reason, commercial rate has been applied. However, insofar as the objection of the appellant that property was encroached and therefore, some deduction should have been given. Since it would be purely an estimate, therefore, we think it would be proper if 15% deduction is allowed on the rate determined at Rs.5,77,52.700/- for the encroachment as well as to take into account that it was leasehold land which though has been extended from time to time until this date the property is still under the ownership of AJL. Accordingly, the valuation of the property for Patna is determined at Rs.4,90,89,795/-. The appellant gets relief to that extent. Panchkula property - We find that insofar as circle rate of Rs.47,000/- per sq.mtr. for Sector 6, Panchkula, nowhere it has been pointed out by the appellant that it is for commercial establishments or for commercial purpose which, here in this case, is allotted for publication of newspaper which now has stopped its operations. Thus, the land was purely available for commercial usage and purposes and the DVO has applied circle rate for commercial purposes along with CPWD plinth area rate. Thus, we do not find any infirmity in the valuation done by the DVO and accordingly, we uphold the valuation of Rs.32,25,60,000/- in respect of Panchkula property. The contention with regard to restrictive use of the property is not tenable. Properties at Lucknow known as Nehru Bhawan and Nehru Manzil - We hold that instead of 22% deduction, a deduction of 30% should be given. Accordingly, the appellant would get relief of extra 8% on the value adopted by the DVO on the valuation adopted for Nehru Manzil. Allow proportionate deduction for shops which stood sold prior to the date of valuation - Instead of giving deduction of 22% as done by the DVO on partly constructed building, give deduction of 30%; and Depreciation should be allowed from AY 1986-87. Mumbai property - The valuation of Mumbai property instead of Rs.132,94,44,480/- is valued at Rs.120,44,44,480/- by reducing the cost of construction of a ground floor (as noted hereinabove) as rate applied by AO was for land plus ground floor shopping complex. Addition of sum received from Dotex as unexplained cash credit u/s 68 - HELD THAT - One of the contentions raised before us that Dotex belongs to RPG Group, therefore, it is genuine, does not ipso facto lead to an inference that the entire transaction is genuine and establishes the credentials of the company which was under scanner though preliminary enquiry of the Investigation Wing, which found that this company was managed and controlled by established entry operators and this company was used for providing accommodation entries. In the later time, during the relevant financial year, this company may have been taken over by the RPG Group, but that does not wash away the finding of the investigation wing. Be that as may be, what is required to be established here whether the company had creditworthiness to advance such a loan or the transaction of loan is genuine or not, especially in light of results of inquiry conducted by the Investigation wing. The documents which have been filed by the appellant company before us in the form of additional evidences need to be substantiated and corroborated by proper enquiry by the AO. All these documents which have been filed by the appellant are merely papers which need proper examination and substantiation by conducting proper enquiry from the lender company. Dotex should be inquired independently to establish its source of funds and the entire transaction of the loan given to the appellant. Assessing Officer should also provide all the information and material gathered and communicated by the Investigation wing including STR report to the appellant. Accordingly, in the interest of justice, we deem it proper that this matter should be restored back to the file of the Assessing Officer, with the following direction to Assessing Officer Firstly, to examine all the evidences filed by the assessee in the form of additional evidences before us, Secondly, to carry out necessary inquiries from Dotex and also summon himself or through a commission to the Directors or the Principal Officer of Dotex to explain the source and genuineness of the transaction;Thirdly, Assessing Officer should confront all the information and material gathered and communicated by the Investigation wing including STR report to the appellant; and; Lastly, the appellant is also directed to cooperate in such enquiry and lead all such evidence as they consider necessary to establish the credentials and the genuineness of the transaction in support of their explanation given before us. Accordingly, the matter is remanded back to the file of AO for making proper enquiry and adjudicate the issue in accordance with law after giving due opportunity of being heard to the appellant. Accordingly, ground no.10 is allowed for statistical purposes. Disallowance of sum paid for assigning of loan from AJL - HELD THAT - Since we have already upheld the action of the AO insofar as addition made u/s 28(iv), therefore, the claim for deduction of Rs.50,00,000/- for acquiring the aforesaid business assets and to be allowed as deduction is accepted. Accordingly, we direct AO to allow the deduction of Rs.50,00,000/- from the amount held to be taxable u/s 28(iv) Unexplained expenditure u/s 69C towards raising of loan from Dotex - HELD THAT - We find that it is a purely notional and hypothetical addition made on the hypothesis that assessee might have incurred expenditure as alleged payment of commission for accommodation entry for raising of loan from Dotex. We find that there is no basis at all for giving such hypothetical addition which is not based on any enquiry or any material on record and we concur with the contention of the appellant that such hypothetical addition made u/s 69C cannot be sustained and the same is directed to be deleted.

Summary

Issues Involved:
1. Taxability of benefits arising from the acquisition of shares under Section 28(iv) of the Income Tax Act.
2. Valuation of properties for determining the fair market value (FMV).
3. Addition of loan from Dotex Merchandise Pvt. Ltd. as unexplained cash credit under Section 68.
4. Disallowance of interest paid on the loan from Dotex.
5. Deduction of Rs. 50,00,000 paid for assigning the loan from AJL.
6. Addition of Rs. 1,00,000 as unexplained expenditure under Section 69C.
7. Denial of exemption under Section 11.
8. Levy of interest under Section 234B.

Detailed Analysis:

1. Taxability of Benefits Under Section 28(iv):
The court examined whether the benefits arising from the acquisition of shares of AJL by the appellant could be taxed under Section 28(iv) of the Income Tax Act. It was held that the appellant acquired the shares not for their intrinsic value but to gain control over the underlying assets of AJL, which included valuable properties. The court concluded that the benefit derived from this acquisition falls under the purview of Section 28(iv), as it constitutes an adventure in the nature of trade.

2. Valuation of Properties:
The court scrutinized the valuation of properties to determine the FMV of the benefits derived by the appellant. The properties in question included:
- Delhi Property: The court upheld the valuation of Rs. 201.84 crores, rejecting the appellant's contention to use circle rates instead of comparable sale instance methods.
- Patna Property: The FMV was adjusted to Rs. 4,90,89,795 after allowing a 15% deduction for encroachment and leasehold status.
- Panchkula Property: The valuation of Rs. 32,25,60,000 was upheld.
- Lucknow Property: The court directed adjustments for sold portions, increased the discount for unfinished construction to 30%, and allowed depreciation from 1986-87.
- Mumbai Property: The valuation was revised to Rs. 120,44,44,480 after deducting the cost of construction.

3. Addition of Loan from Dotex as Unexplained Cash Credit:
The court found that the appellant failed to substantiate the genuineness and creditworthiness of the loan from Dotex Merchandise Pvt. Ltd., which was alleged to be a shell company involved in providing accommodation entries. The matter was remanded back to the Assessing Officer (AO) for fresh examination and proper inquiry into the transaction, including confronting the appellant with the investigation reports and summoning the directors of Dotex.

4. Disallowance of Interest Paid on Loan from Dotex:
Since the issue of the loan from Dotex was remanded back for fresh examination, the disallowance of interest paid on the said loan was also set aside for reconsideration by the AO.

5. Deduction of Rs. 50,00,000 Paid for Assigning the Loan from AJL:
The court allowed the deduction of Rs. 50,00,000 paid by the appellant for acquiring the business assets, directing the AO to allow this deduction from the taxable amount under Section 28(iv).

6. Addition of Rs. 1,00,000 as Unexplained Expenditure Under Section 69C:
The court found that the addition of Rs. 1,00,000 as unexplained expenditure was hypothetical and not based on any material evidence. Therefore, this addition was deleted.

7. Denial of Exemption Under Section 11:
The court held that the denial of exemption under Section 11 was justified as the registration under Section 12AA had already been canceled with retrospective effect, rendering this ground infructuous.

8. Levy of Interest Under Section 234B:
The levy of interest under Section 234B was held to be consequential in nature and was dismissed accordingly.

Conclusion:
The appeal was partly allowed, with specific directions for fresh examination and adjustments in the valuation of properties, along with the deletion of certain additions and disallowances. The matter regarding the loan from Dotex was remanded back to the AO for a thorough inquiry.