2024 (8) TMI 125 - HC - Income Tax

Reopening of assessment - addition u/s 56(2)(x)(c) - in absence of the valuation given by the assessee, it was believed that the shares received by the assessee is below fair market value and therefore, provision of the said section gets attracted and therefore was an escapement of income - HELD THAT - The reasons assigned by the respondent-Assessing Officer for coming to the conclusion that it is a fit case to reopen the assessment for A.Y. 2019-2020 are totally at variance and contents of the observations in the impugned order are not at all referred to as there was no reference to section 56 (2) (x) (c) of the Act. We also fail to understand as to how the amount can be said to be an escapement of income more particularly, when the same is invested in the shares by the assessee and such transaction cannot be said to be unexplained in view of the detailed reply filed by the assessee. In such circumstances, we are of the opinion that the impugned notice u/s 148A (b) of the Act and the consequent order u/s 148A (d) and the notice u/s 148 of the Act are not tenable and are accordingly quashed and set aside. However, it is made clear that AO shall be at liberty to take necessary steps in accordance with law, if permissible.

Summary

Issues Involved:
1. Reopening of assessment under section 148A(b) of the Income Tax Act, 1961 for A.Y. 2019-20.
2. Application of section 56(2)(x)(c) of the Act in the case.
3. Validity of the order under section 148A(d) and notice under section 148 of the Act.

Analysis:

Reopening of Assessment under Section 148A(b):
The petitioner received a notice under section 148A(a) of the Income Tax Act, 1961, requiring submission of the source of a substantial investment in a subsidiary Indian Company. Despite providing relevant documents, the Assessing Officer issued a notice under section 148A(b) for reopening the assessment for A.Y. 2019-20. The reason cited was an alleged escapement of income due to failure to provide detailed sources of the investment. The petitioner contended that the investment was made from funds received from the parent entity, supported by bank statements, and other relevant documents. The High Court noted discrepancies in the Assessing Officer's reasoning and concluded that the notice and order for reopening the assessment were not tenable, ultimately quashing them.

Application of Section 56(2)(x)(c) of the Act:
In response to the petitioner's submissions, the Assessing Officer passed an order under section 148A(d) citing section 56(2)(x)(c) of the Act. The officer believed that the shares acquired by the petitioner were below fair market value, invoking the provision of section 56(2)(x)(c) for deemed income. The petitioner's failure to provide a Fair Market Valuation (FMV) report for the shares led to the conclusion that the investment was below fair market value, resulting in an alleged escapement of income. However, the High Court found discrepancies in the officer's application of section 56(2)(x)(c) and the reasoning behind deeming the investment as income. The court held that the transaction was adequately explained by the petitioner's detailed submissions and bank statements, rendering the application of section 56(2)(x)(c) invalid.

Validity of the Order under Section 148A(d) and Notice under Section 148:
Upon reviewing the Assessing Officer's order under section 148A(d) and the notice under section 148 of the Act, the High Court found inconsistencies in the reasoning provided for reopening the assessment. The court highlighted that the respondent's conclusions did not align with the facts presented by the petitioner, especially regarding the application of section 56(2)(x)(c) and the explanation provided for the investment in shares. Consequently, the High Court quashed the impugned notice and order, stating that they were not tenable. The court allowed the Assessing Officer to take necessary steps in accordance with the law, if permissible, while vacating the interim relief granted.

In conclusion, the High Court's judgment focused on the lack of proper reasoning and discrepancies in the Assessing Officer's decision to reopen the assessment and apply section 56(2)(x)(c) of the Act. The court emphasized the importance of providing detailed justifications for reopening assessments and ensuring that legal provisions are correctly applied based on the facts presented by the taxpayer.