2019 (8) TMI 439 - AT - Income Tax

Reopening of assessment u/s 147 - Addition u/s 56(2)(viia) - investment in unquoted shares with difference of FMV and the actual consideration paid - no incriminating material was found during survey u/s 133A - HELD THAT - The said provision of Section 56(2)(viia) of the Act were applicable from 01/06/2010. It is evident from the annual report in Form No. 20B of M/s Bharatnet Technology Limited furnished to the Registrar of the Companies, copy of which is placed at page no. 42 to 55 of the assessee s compilation that 719681 shares were transferred to the assessee on 10/05/2010. Therefore the reasons recorded on the basis of application of provisions of Section 56(2)(viia) read with Rule 11UA were not applicable to the assessee s case. In the present case nothing is brought on record that any incriminating material was found during the course of search and survey to substantiate that any payment exceeding ₹ 1/- per share was made by the assessee. Therefore the reasons recorded by the A.O. were based as suspicion only. Reassessment proceedings was initiated by the A.O. on suspicion which cannot be a ground for reopening of the assessment. See KROWN AGRO FOODS PVT. LIMITED VERSUS ASSISTANT COMMISSIONER OF INCOME-TAX CIRCLE 5 (1) NEW DELHI 2015 (3) TMI 1030 - DELHI HIGH COURT Addition by invoking the provisions of Section 56(2)(viia) - Nothing is brought on record to substantiate that the shares were transferred in the month of November 2010 on the contrary the annual return filed by the Seller of the shares M/s Bharatnet Technology Limited clearly established that the transfer of the shares took place on 10/05/2010 and even the certificate issued by the practicing company secretary also confirmed that the shares were transferred on 10/05/2010 and not in the month of November 2010 as presumed by the A.O. therefore on merits also the addition made by the A.O, on the basis of presumption and by invoking the provisions of Section 56(2)(viia) of the Act which were applicable w.e.f 01/06/2010, was not justified. In view of the aforesaid discussion, we are of the view that on merits also the addition made by the A.O. and sustained by the Ld. CIT(A) was not justified. Therefore, by considering the totality of the facts, we are of the view that the reopening made by the A.O. on the basis of suspicion was not valid and the addition made by invoking the provisions of section 56(2)(viia) which were not applicable to the facts of the assessee s case, was not justified. Accordingly the same is deleted. - Decided in favour of assessee.

Issues Involved:
1. Validity of reassessment proceedings initiated under section 148 of the Income Tax Act, 1961.
2. Applicability of Section 56(2)(viia) of the Income Tax Act, 1961.
3. Date of transfer of shares and its impact on the applicability of Section 56(2)(viia).
4. Adequacy of the reasons to believe for reopening the assessment.
5. The correctness of the addition made by the Assessing Officer (A.O.) based on the fair market value (FMV) of shares.

Detailed Analysis:

1. Validity of Reassessment Proceedings Initiated Under Section 148:
The assessee argued that the notice issued under section 148 was not maintainable and against the law, facts, and jurisdiction. The A.O. issued the notice based on the information that the assessee had made an investment in unquoted shares at a price significantly lower than their fair market value. The assessee contended that the A.O. did not have any tangible material at the time of recording the reasons for reopening the case and acted on mere suspicion. The Tribunal found that the reasons recorded by the A.O. were based on suspicion and not on any incriminating material found during the search or survey. The Tribunal cited the Hon'ble Delhi High Court's judgment in Krown Agro Goods Pvt. Ltd. and other cases to support that reassessment proceedings require a reasonable belief based on tangible material, not mere suspicion.

2. Applicability of Section 56(2)(viia) of the Income Tax Act, 1961:
The assessee contended that the provisions of Section 56(2)(viia) were not applicable as they came into effect from 01/06/2010, whereas the shares were transferred on 10/05/2010. The A.O. argued that the transaction date was not genuine and actually took place in November 2010. The Tribunal found that the shares were indeed transferred on 10/05/2010, as evidenced by the annual return filed with the Registrar of Companies and the certificate issued by a practicing company secretary. Therefore, the provisions of Section 56(2)(viia) were not applicable.

3. Date of Transfer of Shares and Its Impact on the Applicability of Section 56(2)(viia):
The A.O. questioned the genuineness of the transaction date, arguing that the payment for the shares was made on 02/11/2010, and the annual return was filed on 10/11/2010. The assessee provided evidence, including a certificate from a company secretary and the annual return filed with the Registrar of Companies, confirming that the shares were transferred on 10/05/2010. The Tribunal accepted the assessee's evidence and concluded that the shares were transferred before the effective date of Section 56(2)(viia).

4. Adequacy of the Reasons to Believe for Reopening the Assessment:
The assessee argued that the A.O. did not have sufficient reasons to believe that income had escaped assessment and acted on suspicion. The Tribunal found that the A.O. relied on the appraisal report and the reply from M/s Bharatnet Technology Ltd. without any independent verification or tangible material. The Tribunal cited various judgments to support that reasons to believe must be based on reasonable grounds and not on suspicion. The Tribunal concluded that the reopening of the assessment was not valid.

5. The Correctness of the Addition Made by the A.O. Based on the FMV of Shares:
The A.O. added the difference between the fair market value of the shares and the actual consideration paid by the assessee, invoking Section 56(2)(viia). The Tribunal found that the provisions of Section 56(2)(viia) were not applicable as the shares were transferred before the effective date of the provision. The Tribunal also noted that the A.O.'s presumption about the transaction date was not supported by any evidence. Therefore, the addition made by the A.O. was not justified.

Conclusion:
The Tribunal allowed the appeal of the assessee, holding that the reassessment proceedings initiated under section 148 were not valid, and the addition made by the A.O. under Section 56(2)(viia) was not justified. The Tribunal emphasized that the reasons to believe must be based on tangible material and reasonable grounds, not on suspicion.

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