2024 (8) TMI 565 - HC - Income Tax

Validity of reassessment proceedings - test of information within the meaning of Section 148/148A - addition of unexplained investment - Sufficiency of reasons to believe - funds remitted in India were used for subscription in securities - HELD THAT - A perusal of the record reveals that proceedings initiated u/s 148-A pertain to certain investments made in shares by the petitioner, which is an FPI, having received remittances in India for the purpose of subscribing to securities. The subscription of share capital in India would undoubtedly be a Capital Account Transaction . Since the funds remitted in India were used for subscription in securities, no income was earned in AY 2019-20 and therefore petitioner was under no requirement to file return of income in India. The fundamental premise of the Revenue that the investment made by the petitioner in shares amounted to income which has escaped assessment was flawed and therefore we are unable to sustain the impugned notices. Discrepancy noticed between the share prices as provided by the petitioner from the exchange rate (NSE) - Undoubtedly, this aspect of the matter was never taken up with the petitioner in the notice issued u/s 148A (b). The noticee or the assessee should not be prejudiced or be taken by surprise. The uncontroverted fact is that in the notice under Section 148A (b) of the Act, there is no mention of any discrepancy in the share price. foundational material alone would be relevant for the purposes of evaluating whether reassessment powers were justifiably invoked. Revenue cannot take a fresh ground while passing order under Section 148A (d) of the Act. We are clearly of the view that notice and the reasons given, therefore do not conform to the principles of natural justice as the assessee did not get a proper and adequate opportunity to reply to the allegations. For the above reasons, we hold that the reasons recorded for issuance of notice u/s 148 cannot be sustained. Accordingly, the impugned notices issued u/s 148A (b), order passed under Section 148A (d) and consequential notice under Section 148 issued by the respondent for the Assessment Year 2019-20 are quashed. Decided in favour of assessee.

Issues Involved:
1. Validity of the Impugned Notice under Section 148A(b) of the Income Tax Act.
2. Justification for issuance of the Impugned Order under Section 148A(d) of the Income Tax Act.
3. Allegation of income escapement and requirement to file a return of income in India.
4. Discrepancies in share prices and their impact on the assessment.
5. Adherence to principles of natural justice in the reassessment proceedings.

Issue-wise Detailed Analysis:

1. Validity of the Impugned Notice under Section 148A(b) of the Income Tax Act:
The petitioner, a foreign company registered as an FPI with SEBI, challenged the notice issued under Section 148A(b) of the Income Tax Act, alleging that it was based on erroneous and inflated transaction values. The petitioner argued that the notice incorrectly considered the purchase value of shares and total transaction value, leading to an unjustified initiation of assessment proceedings. The court found that the fundamental premise of the Revenue that the investment made by the petitioner in shares amounted to "income" which had escaped assessment was flawed. The court referenced a Co-ordinate Bench decision, reiterating that investments in shares are capital account transactions and do not give rise to income.

2. Justification for issuance of the Impugned Order under Section 148A(d) of the Income Tax Act:
The petitioner contended that the Impugned Order under Section 148A(d) was based on discrepancies in share prices, which were never addressed in the initial notice under Section 148A(b). The court held that the basis of the order dated 26.04.2023, which noted discrepancies in share prices, was not mentioned in the initial notice, thereby violating principles of natural justice. The court emphasized that the reasons for reassessment must be consistent and cannot be supplemented or altered post issuance of the notice.

3. Allegation of income escapement and requirement to file a return of income in India:
The petitioner argued that no income had accrued or was received in India during the relevant assessment year, and hence, there was no requirement to file a return of income. The court agreed, noting that the funds remitted to India were used solely for subscribing to securities, making it a capital account transaction. The court referenced previous judgments, including the case of M/s. Angelantoni Test Technologies SRL, which held that investments in shares do not constitute income.

4. Discrepancies in share prices and their impact on the assessment:
The respondent noted discrepancies in the share prices provided by the petitioner compared to the exchange rates, leading to the conclusion that the source of investment remained unexplained. However, the court found that these discrepancies were not initially communicated to the petitioner, thereby denying them an opportunity to address these concerns. The court ruled that such discrepancies could not form the basis for reassessment without proper notice and opportunity for the petitioner to respond.

5. Adherence to principles of natural justice in the reassessment proceedings:
The court emphasized the importance of adhering to principles of natural justice, stating that the petitioner should not be prejudiced or taken by surprise by new grounds or discrepancies introduced at a later stage. The court referenced its decision in Banyan Real Estate Fund Mauritius, highlighting that reassessment actions must be based on the original reasons provided in the notice and not on subsequently introduced grounds.

Conclusion:
The court quashed the impugned notices issued under Section 148A(b), the order dated 26.04.2023 under Section 148A(d), and the consequential notice under Section 148 of the Act for the Assessment Year 2019-20. The court held that the reasons recorded for issuance of the notice did not conform to principles of natural justice, and the petitioner was not given a proper and adequate opportunity to reply to the allegations. The writ petition was allowed with no orders as to costs.

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