2016 (1) TMI 992 - HC - Income Tax

Reopening of assessment - allotment of shares at high premium - reason to believe or tangible material to form an opinion - Held that - The assessee company had issued share capital of ₹ 2.66 crores (rounded off) during the Financial Year 2010-11. The assessee had issued 60,000/- shares at a face value of ₹ 10 per share with a premium of ₹ 990/- per share. The Assessing Officer, on the basis of assets and liabilities furnished by the assessee company in its balance sheet, after computing the net worth of the company, noted that the share valuation of the assessee company would come to ₹ 33/-, whereas shares have been allotted at ₹ 1,000/- per share, i.e. at a premium of ₹ 967/- per share. On the basis of such working out, he recorded his reason to believe that income to the extent of Rs. ₹ 5.80 crores had escaped assessment. We do not find that the reasons are perverse or so untenable as to terminate the assessment at this stage on the ground that the Assessing Officer cannot be stated to have any reason to believe or tangible material to form such an opinion that income chargeable to tax had escaped assessment. Prima facie, the facts appear to be glaring. Whether the assessee will be able to discharge the minimal burden of establishing identity, source and creditworthiness of the depositors is a question not possible to answer without scrutiny. Whether the assessee had started its manufacturing activity and consequently its business operations so as to earn income or not are the issues which cannot be gone into at this stage and must be made part of the reopened assessment to be judged on the basis of evidence which may be brought on record. It is always open for the assessee company to contend before the assessing authority that there has not been over valuation of the allotted shares or that for any legal reasons, in any case, addition cannot be made in the hands of the assessee, despite such glaring facts. These are the issues in the realm of assessment, once it is allowed to be reopened. We are not inclined to terminate the assessment proceedings at this stage on the grounds pressed in service by the petitioners. Decided against the assessee.

Issues Involved:
1. Legitimacy of reopening the assessment under Section 148 of the Income Tax Act.
2. Requirement of tangible material for reopening the assessment.
3. Application of the principle of "change of opinion".
4. Validity of the reasons recorded by the Assessing Officer for reopening the assessment.
5. Impact of non-commencement of business activities on the assessment.

Issue-wise Detailed Analysis:

1. Legitimacy of Reopening the Assessment under Section 148 of the Income Tax Act:
The petitioner, a company registered under the Companies Act, challenged the reopening of its assessment for the Assessment Year 2011-12. The original return, declaring nil income, was processed under Section 143(1) without scrutiny. The Assessing Officer issued a notice under Section 148 to reopen the assessment, citing reasons that the petitioner had issued shares at a significant premium, which seemed excessive compared to the company's net worth. The court noted that the reopening of an assessment, which was initially accepted under Section 143(1) without scrutiny, does not involve a change of opinion, as no opinion was formed initially. The court referenced the Supreme Court's decision in the case of Assistant Commissioner of Income Tax Vs. Rajesh Jhaveri Stock Brokers P. Ltd., which clarified that the Assessing Officer has the authority to reassess income if there is a reason to believe that income has escaped assessment.

2. Requirement of Tangible Material for Reopening the Assessment:
The petitioner argued that the notice for reopening lacked tangible material and was based on information already on record. The court, however, emphasized that for reopening an assessment accepted under Section 143(1), the Assessing Officer must have a reason to believe that income has escaped assessment, which does not necessarily require new material outside the original record. The court cited the case of Inductotherm (India) P. Ltd. Vs. M.Gopalan, Deputy Commissioner of Income Tax, which stated that the Assessing Officer could rely on the original assessment records to form such a belief.

3. Application of the Principle of "Change of Opinion":
The court reiterated that the principle of "change of opinion" does not apply to cases where the original assessment was accepted under Section 143(1) without scrutiny. It was noted that when the original return is not scrutinized, the Assessing Officer does not form any opinion on the aspects of the return. Therefore, reopening the assessment in such cases does not constitute a change of opinion. The court referred to the decision in Gujarat Power Corporation Ltd. Vs. Assistant Commissioner of Income Tax, which held that reopening within four years from the end of the relevant assessment year does not require material alien to the original record.

4. Validity of the Reasons Recorded by the Assessing Officer for Reopening the Assessment:
The reasons recorded by the Assessing Officer indicated that the petitioner had issued shares at a significant premium compared to the company's net worth, leading to a belief that income had escaped assessment. The court found these reasons to be neither perverse nor untenable. It was highlighted that the Assessing Officer's belief does not need to be a final opinion but should be based on relevant material. The court referenced the Supreme Court's decision in Raymond Woollen Mills Ltd. Vs. ITO, which emphasized that the formation of belief is within the realm of subjective satisfaction.

5. Impact of Non-Commencement of Business Activities on the Assessment:
The petitioner contended that since the company had not commenced its manufacturing activity, there could be no income till the business started. The court, however, noted that this issue could not be resolved at the stage of reopening the assessment and must be addressed during the reassessment process. The court stated that whether the company had started its business operations and the implications on the assessment are matters to be judged based on evidence during the reopened assessment.

Conclusion:
The court dismissed the petitions, upholding the Assessing Officer's decision to reopen the assessments. The court concluded that the Assessing Officer had valid reasons to believe that income chargeable to tax had escaped assessment and that the reopening was justified based on the material available on record. The court emphasized that the issues raised by the petitioner regarding the valuation of shares and the commencement of business activities should be addressed during the reassessment process.

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