2024 (7) TMI 1371 - AT - Income Tax

Reopening of assessment - reason to believe - Notice after the expiry of period of four years - Disallowance u/s 14A - transaction of purchase of shares of HHML questioned - HELD THAT - The share agreement and reconciliation of investments capturing quantity and value of opening investment, investment purchased and sold during the year were provided to the AO during assessment and infact AO made a incorrect observation while disposing the objections to the reopening that agreement was not provided. There is also substance in the contention of ld. Sr. Counsel that when AO was examining disallowances for purpose of Section 14A of the Act, certainly AO had material before him to also examine the prices of acquisition of investments and any hidden cost or advantages. We further find that the Assistant Director of Income-tax (Investigations) had raised queries on the basis of reliable sources about 26% stake acquired by the assessee @ Rs. 739/- per share and this was replied by the assessee by letter dated 24.03.2011 informing that this matter is already under inquiry by International Taxation Division of the Income-tax Department by issuance of a notice u/s 133(6) of the Act and, therefore, request was made that to avoid multiplicity of proceedings, the proceedings be dropped by Assistant Director of Income-tax (Inv.), Unit-5(3), New Delhi. The instances of disclosures to various government and statutory authorities and tax authorities sufficiently establish that the assessee was not acting in any surreptitious manner in regard to the share purchase transaction. Rather, as it appears to be a case where an Indian enterprise was not selling its stake to a foreign enterprise, but, purchasing the stake of a foreign enterprise of the stature of Honda. Which certainly must be looked upon as a sign of growing and strengthening of India as a emerging economy, for which, Hero group must have been eager to take credit and thus the information was not kept close to heart but shared at large. So much so that based on media reports only a notice dated 09/03/2011 was issued to the assessee by Director of Income Tax (International Taxation)-1, New Delhi, to examine the purchase of 26% stake in Hero Honda Motors Ltd. by Hero Investment Pvt. Ltd. from Honda Moto Company Ltd., Japan, and information u/s 133(6). As we conclude that there was no failure on the part of the assessee to furnish full and true material facts at the time of assessment and the content and information in the return of income, annual report, books of accounts, specific queries raised, and replies filed etc., as discussed in detail above, were quite supposedly examined by AO while completing the assessment u/s 143(3) of the Act, thus making the same set of information as basis of recording of reasons u/s 148 of the Act, is merely change of opinion. Thus by merely mentioning in the reasons recorded that certain fresh information was received from the office of Pr. CIT regarding alleged benefit received by the appellant in transaction of purchase of shares of HHML from Honda, which was not disclosed by the appellant during the original assessment proceedings, the AO cannot come out of the rigour of law, which mandates that re-opening can only be on the basis of fresh tangible material. Whether the impugned discount on the transaction can be treated as benefit or perquisite of the business? - As considering the agreements and MOU executed between the Honda and Hero groups of companies, the acquisition of shares by Honda is only strategic investment to consolidate the holding in JV. Thus, we find substance in the submissions that provisions of section 28(iv) per se does not apply to the disputed transaction, as the assessee has held such shares in the capacity of promoter shareholder and not for the purpose of trading and has been consistently showing it as long term capital investment in the books of accounts and balance sheet. It is established that assessee has held the shares of HHML since inception for more than 25 years as long-term investments and not a single share has been sold by the assessee during those 25 years. The Circular No.6/2016 dated 29.02.2016, expressly lays down that where the taxpayer treats shares as investment in the books of accounts, then, profit on sale of listed shares held for more than twelve months should be taxed as long-term capital gains. Thus, any benefit, if there is any, may fall within capital field. Then, when we consider the order dated 29.01.2014 of the CIT(A), Ludhiana in appeal against original assessment order dated 29.01.2014 available at pages 204-229 of the paper book. We find that the CIT(A) has rejected AO s conclusion of assessment u/s 143(3) that assessee was earning business income from sale and purchase of shares, etc., and CIT(A) concluded that shares were held as investments giving rise to capital gains only. Infact by reopening vide notice u/s 148 AO has tried to undo the findings of CIT(A) order dated 29.1.2014 where in it was categorically held that income from sale and purchase of shares was to be treated as capital gains and not business income. Thus when there was no business income from the selling shares held as investments, certainly provision of section 28(iv) of the Act could not have been invoked. Thus bringing the difference in the price of acquisition of shares with market price as benefit arising from business u/s 28(4) of the Act was in a way again holding that sale and purchase of shares gives rise to business income - we are of firm view that AO had fallen in error to invoke provision of section 28(iv) of the Act. Decided in favour of the assessee.

Summary

Issues Involved:
1. Validity of the reassessment order dated 29.12.2018.
2. Applicability of Section 28(iv) of the Income Tax Act, 1961, concerning the alleged benefit accrued to the assessee from the acquisition of shares at a discount.

Issue-wise Detailed Analysis:

Issue No. 1: Validity of the Reassessment Order
Reason to Believe and Tangible Material:
The reassessment proceedings under Section 147 of the Act can only be initiated if the Assessing Officer (AO) has "reason to believe" that income has escaped assessment based on tangible and reliable information. The AO's belief must be honest and reasonable, not based on suspicion, gossip, or rumor. The AO's reasons for reopening should demonstrate a reasonable belief formed on some basis or foundation, not mere suspicion.

Facts and Allegations:
The AO alleged that the assessee acquired shares at a 50% discount, which was not disclosed fully and truly during the original assessment. The AO relied on the Share Purchase Agreement and the JV Agreement to argue that the shares should have been acquired at fair market value (FMV). The AO also noted that the assessee expedited the transaction, incurring interest costs, and concluded that the benefit by way of discount was in lieu of concessions granted to Honda.

Analysis and Conclusion:
The Tribunal found that the AO's reasons were based on his perception and not on any tangible material. The negotiated price of Rs. 739 per share was an off-market arrangement, and the comparison with the stock exchange price was inappropriate. The JV Agreement restricted the marketability of shares, making the negotiated price reasonable. The Tribunal also noted that the price of Rs. 739 per share was accepted by the Authority for Advance Ruling (AAR) in Honda's case. The Tribunal concluded that the AO's belief was based on conjectures and surmises, not on tangible material.

Disclosure of Material Facts:
The Tribunal noted that the transaction was disclosed at various stages, including public announcements, Share Transfer Agreement, payment to Honda, and during the original assessment proceedings. The AO had access to all relevant documents and information. The Tribunal concluded that there was no failure on the part of the assessee to fully and truly disclose all material facts.

Judicial Precedents:
The Tribunal relied on various judicial pronouncements, including the Supreme Court's judgment in Sheo Nath Singh vs. ACIT and the Delhi High Court's judgment in Krown Agro Foods (P) Ltd vs. ACIT, to emphasize that mere suspicion is not enough for reopening an assessment.

Final Decision:
The Tribunal held that the reassessment proceedings lacked valid "reason to believe" and were based on mere suspicion. The reassessment order was quashed.

Issue No. 2: Applicability of Section 28(iv) of the Act
Alleged Benefit and Discount:
The AO alleged that the assessee received a benefit by acquiring shares at a discount, which should be taxed under Section 28(iv) of the Act. The AO argued that the discount was in lieu of concessions granted to Honda.

Analysis and Conclusion:
The Tribunal found no evidence to support the AO's allegation that the license fee paid by HHML to Honda was in lieu of the alleged discount. The Tribunal noted that the license fee was for the right to use technology and was paid by HHML, a separate legal entity. The Tribunal also observed that the payment of license fee was examined and accepted by the Transfer Pricing Officer (TPO) as being at arm's length.

Nature of Shares and Investments:
The Tribunal emphasized that the shares of HHML were held as long-term investments and not as stock-in-trade. The acquisition of shares was for holding a controlling stake, not for trading. The Tribunal relied on various judicial precedents, including the Delhi High Court's judgment in Unitech Holdings Ltd. v. DCIT, to conclude that the provisions of Section 28(iv) do not apply to long-term investments.

Monetary Benefit and Real Income:
The Tribunal noted that Section 28(iv) applies only to benefits received in a form other than money. The alleged benefit in this case was monetary, and therefore, outside the purview of Section 28(iv). The Tribunal also emphasized that only real income, not notional income, can be taxed.

Final Decision:
The Tribunal held that the provisions of Section 28(iv) do not apply to the alleged benefit, as the shares were held as long-term investments, and the benefit was monetary. The addition under Section 28(iv) was deleted.

Conclusion:
The Tribunal quashed the reassessment order and deleted the addition under Section 28(iv) of the Act, deciding all relevant issues in favor of the assessee. The appeal was allowed.