2018 (9) TMI 720 - HC - Income Tax

Reopening of assessment - tangible evidence to reassessment - nondisclosure of the taxing event i.e. allotment of shares - assessee contests that the allegations with respect to transaction value being contrary to Section 56(2)(vii)(c) (ii) and in terms of Rule 11UA of the Income Tax Rules is plainly erroneous and cannot be the basis of a reassessment - Held that - The entire premise of the reassessment notices in this case is that the nondisclosure of the taxing event i.e. allotment of shares (and the absence of any declaration as to value) deprived the AO of the opportunity to look into the records. In the case of Mr. Rahul Gandhi no doubt the assessment originally completed was under Section 143 (3). Had he disclosed in his returns or any related documents about the event (share acquisition) the primary fact would have been on the record; the AO s subsequent action in pursuing that aspect or letting go of it after inquiry might well have justified the charge of a second and impermissible opinion on the same subject. However that is not the case. The TEP and investigation reports of subsequent vintage (after completion of Mr. Gandhi s assessment) therefore constituted tangible material which in terms of the ruling in Commissioner of Income Tax vs. Kelvinator of India Ltd 2010 (1) TMI 11 - SUPREME COURT OF INDIA justified reassessment. In the case of the other two assessees (Ms. Sonia Gandhi and Mr. Oscar Fernandes) the returns filed by them were processed under Section 143 (1). Such instances are not treated as assessments . Zuari Estate Development & Investment Co Ltd 2015 (8) TMI 480 - SUPREME COURT is an authority on the subject. Writ petitions have to fail.

Issues Involved:
1. Validity of the reassessment notice.
2. Whether the reassessment was barred by limitation.
3. Applicability of Section 56(2)(vii)(c)(ii) of the Income Tax Act.
4. Whether the reassessment notice was issued with mala fide intent.
5. Compliance with procedural requirements for issuing reassessment notices.
6. Disclosure obligations of directors/shareholders in not-for-profit companies.
7. Calculation of fair market value of shares.

Detailed Analysis:

Validity of the Reassessment Notice:
The court examined whether the reassessment notice was based on "reasons to believe" that income had escaped assessment. It was argued that the material relied upon (investigation reports and a tax evasion petition) was stale. However, the court held that the material was relevant and not acted upon promptly does not invalidate the reassessment notice. The court stated, "the AO must have reason to believe that income profits or gains chargeable to income tax have escaped assessment."

Whether the Reassessment was Barred by Limitation:
The assessees argued that the reassessment notice was issued at the eleventh hour and was thus barred by limitation. The court found that the notices were issued and served within the prescribed time limits through email, speed post, and digital transmission, fulfilling the requirements of Section 149 of the Act.

Applicability of Section 56(2)(vii)(c)(ii) of the Income Tax Act:
The assessees contended that Section 56(2)(vii)(c)(ii) did not apply to the acquisition of shares in a not-for-profit company. The court held that the provision creates a fiction that the differential between the fair market value and the cost of acquisition constitutes income. The court stated, "the differential between the fair market value and the cost of acquisition, constitutes income."

Whether the Reassessment Notice was Issued with Mala Fide Intent:
The assessees alleged that the reassessment notice was issued with mala fide intent, citing the timing of the notice. The court found no evidence of personal mala fides against any official and held that the mere circumstance of the notice being issued on 31.03.2018 does not vitiate the notice or the proceedings.

Compliance with Procedural Requirements for Issuing Reassessment Notices:
The assessees argued that the notices were not compliant with the Centralized Communication Scheme, 2018, and related notifications. The court held that the form of the notice or the channel through which it was issued is not relevant as long as the notices were issued and received within the prescribed time limits.

Disclosure Obligations of Directors/Shareholders in Not-for-Profit Companies:
The assessees argued that they were not under any obligation to disclose their interest in a not-for-profit company. The court held that the exemption from disclosure under Section 25(6) of the Companies Act does not relieve the assessees from their obligation to disclose under the Income Tax Act. The court stated, "the primary obligation to disclose about the acquisition of shares, was not relieved by virtue of the notification under Section 25 (6) of the (now repealed) Companies Act, 1956."

Calculation of Fair Market Value of Shares:
The assessees contended that the wrong version of Rule 11UA was applied. The court held that the fair market value was correctly calculated using the formula applicable at the time of the share allotment. The court stated, "the fair market value at which Mr. Rahul Gandhi, Ms. Sonia Gandhi, and Mr. Oscar Fernandes were allotted the shares (@ ?100/- each) exceeded that amount."

Conclusion:
The court dismissed the writ petitions, holding that the reassessment notices were valid, not barred by limitation, and issued in compliance with procedural requirements. The court also held that the assessees were under an obligation to disclose their acquisition of shares and that the fair market value was correctly calculated. The observations made were not conclusive, and the assessees' rights to urge their contentions in the income tax proceedings were reserved.

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