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TMI Blog2019 (8) TMI 558X X X X Extracts X X X X X X X X Extracts X X X X ..... t in law in reopening the assessment, as he could not have entertained the belief about escapement of income on the basis of reasons recorded by him. Information received from the CBI, as spelt out by the AO in the reasons recorded and in the remand report, would show that the CBI has alleged that the investments have been made by the applicants as quid pro quo to the benefits received by them. This information cannot be the basis for reopening of assessment, since it is the assessing officer who has to apply his mind on the issue and take an independent view. It is not visible from the reasons recorded by the AO that he has taken any independent view on the matter. The question that would arise is Whether this information alone is sufficient to form the belief that there was escapement of income?. In our view, it will not lead to the belief that the income of the assessee has escaped the assessment. Addition u/s 68 - no fault in details submitted by assessee - HELD THAT:- From the assessment order as well as from the paper book furnished by the assessee, it can be noticed that the assessee has furnished all the details that were called for by the AO. AO has treated the sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, Sr. Counsel for Dept. ORDER Per B. R Baskaran, Accountant Member All these appeals preferred by the respective assessees are directed against the orders passed by Ld CIT(A)-11, Bangalore and they relate to the assessment years mentioned in the cause title against the name of each of the assessees. All these appeals were heard together and hence they are being disposed of by this common order, for the sake of convenience. 2. These assessees have filed an Additional Ground in all the years, wherein they have questioned the validity of approval granted u/s 151 of the Act for reopening of assessments. At the time of hearing, the Ld A. R did not press the said additional ground in all the appeals. Accordingly, the additional ground urged in all these appeals is dismissed as not pressed. The remaining grounds relate to the following issues:- ( a) Validity of reopening of assessment. ( b) Merits of addition relating to Share application money/ share capital and share premium receipts. Other ground relating to charging of interest u/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the method of allotment of shares was unusual, i. e. , It was seen that the share applicants have voluntarily applied for shares at huge share premium and the share premium so collected was not commensurate with the income earned by the assessees herein and also with their financial strength. Further there was no clarity on the basis of valuation of shares and determination of share premium. The assessee did not substantiate the quantum of share premium. The AO also noticed certain deficiencies in receipt of money, application forms, date of allotment of shares etc. Accordingly, the AO held that the transactions entered by these assessee on issue of shares are unusual and unreasonable. Accordingly, the AO held that the entire share premium remains unsubstantiated and also the share application money received also remain unsubstantiated. Accordingly, the AO assessed the share application money and share premium received by these companies as income of the assessees in the year of receipt. In the hands of Carmel Asia Holdings P Ltd, the par value of shares received from Shri Srinivasa Reddy was also added. The details of additions made by the AO are given below: - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the materials received from CBI were not confronted with the assessee. It was submitted that the AO has refused to furnish the materials by observing that the assessees may get the copies of those documents from the respective agencies. It was submitted that the assessee was not aware of the details of documents furnished to the assessing officer by CBI. 7. The Ld CIT(A), however, upheld the validity of reopening of assessment and his observations made in this regard are extracted below:- It is clear from the Reasons Recorded, reproduced above, that the AO has not relied upon the information about benefits received by various persons from the State Government of Andhra Pradesh to come to believe that income has escaped assessment. The AO on receipt of information has looked into the Returns filed by the appellant and noticed that it has received huge amounts of Share Premium which is not justifiable in the back ground of its actual activities and financial affairs and came to a belief that the amount received and labelled as Share Premium but income in the hands of the appellant which has escaped taxation. The AO is well justified ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R submitted that the reasons recorded by the AO would clearly show that it does not lead to the any belief that there was escapement of income. He submitted that the assessee has received share application money, share capital and share premium from reputed companies and the said fact is already available in the return of income filed by the assessee. No other material is available with the AO to form the belief that there was escapement of income except the information received from CBI. However, the Ld CIT(A) has taken the stand that the AO has not relied upon the said information. If that be the case, then the AO should have spelt out the details of other tangible materials, which led him to form the belief that the share application money/share premium constituted income in the hands of the assessee. Without tangible material, the AO could not have entertained belief about escapement of income and hence the reopening of assessment is not valid. In support of this proposition, the Ld A. R placed his reliance on the decision rendered by Hon ble Delhi High Court in the case of CIT vs. Orient Craft Ltd (354 ITR 536)(Delhi). The Ld A. R submitted that even if any material was availa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Smt. Sunita Dhadda vs. The DCIT (ITA No. 751/JP/2011) ( c) CIT vs. Smt. Sunita Dhadda (SLP (civil) Diary No. 9432/2018) The Ld A. R submitted that the Jaipur bench of ITAT had deleted the addition made in the case of Smt. Sunita Dhadda, since there was violation of Principles of Natural Justice in not supplying the sworn statement given by a person, which was relied upon by the AO for making addition and also in not providing opportunity of cross examination to the assessee. The Ld A. R submitted that the decision so rendered by the Tribunal has since been upheld by the Hon ble Supreme Court. 13. The Ld A. R further submitted that the assessing officer has accepted the genuineness of share capital received by the assessee to the extent of its par value. He has disbelieved the quantum of share premium on the reasoning that the assessee companies are having lesser income and their financial strength does not justify the quantum of share premium. He submitted that the above said observation of the AO would not lead to the belief that there was escapement of income. He further submitted that the AO has also mentioned that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of income. He submitted that the meaning of the word reason mentioned in sec. 147 of the Act has been explained by Hon ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers P Ltd (291 ITR 500) as under: - 16 . The word reason in the phrase reason to believe would mean cause or justification. If the assessing officer has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income has escaped assessment. The expression cannot be read to mean that the assessing officer should have finally ascertained the fact by legal evidence or conclusion. The function of the Assessing Officer is to administer the statute with solicitude for the public exchequer with an inbuilt idea of fairness to taxpayers. As observed by Delhi High Court in Central Provinces Manganese Ore Co Ltd v ITO (1991)(191 ITR 662), for initiation of action under section 147(a) (as the provision stood at the relevant time) fulfilment of the two requisite conditions in that regard is essential. At that stage, the final outcome of the proceeding is not relevant. In other words, at the initiation stage, what is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the high Share premium collected by the assessee was not commensurate with the income and financial strength of these assessees. Hence the AO was of the view that the amount so collected by the assessee was not in the nature of share premium. Accordingly, the AO could entertain belief that the that there was escapement of income. He submitted that the Hon ble Supreme Court has upheld the assessment of amount raised by issuing shares at a premium u/s 68 of the Act in the case of NRA Iron Steel P Ltd (412 ITR 161). It was held by Hon ble Apex Court that it is for the assessee to prove by cogent and credible evidence that the investments made in share capital are genuine borrowings, since facts are exclusively within the assessee s knowledge. The Hon ble Supreme Court has also observed that the practice of conversion of unaccounted money through the cloak of Share capital/premium must be subjected to careful scrutiny and this would be particularly so in the case of private placement of shares, where a higher onus is placed on the assessee since the information is within the personal knowledge of the assessee. It was further held that the assessee is under legal obligation to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee has also quoted various case laws relating to reopening of the assessment. The investigations by the CBI has revealed the nexus between the benefits conferred by the government of AP and premium receipts. After perusing the returns, the assessing office came to know that the company has not carried out any activity during the said years and opined that there is no justification for allotting shares at a huge premium especially when the shareholder have not received any stake commensurate with the amount invested by them. So the assessing officer has the reason to believe that the amount invested by the companies is gratuitous in nature and since the same has not been offered for taxation the assessments were reopened. 20. The Ld A. R, accordingly, contended that the assessing officer has formed the belief only on the basis of information received from CBI, but the said information was not supplied to the assessee. The Ld A. R invited our attention to the following observations made by Hon ble Supreme Court in the case of Suraj Mall Mohta and Co. vs. A. V. Viswanadha Sastry (supra): - 19. When an assessment on escap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... since the said decision has been rendered on the basis of facts prevailing in that case. 22. We heard rival contentions on the legal issue of validity of reopening of assessment and perused the record. Since the dispute revolves around the provisions of sec. 147 of the Act, we extract the same below: - Income escaping assessment 147. If the Assessing Officer3 has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year) 23. It can be noticed that the assessing officer should have reason to believe that any income chargeable to tax has escaped assessment for any assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2006-07 3 Beta Avenues P Ltd. 763, 358 76, 33, 580 19, 23, 66, 216 2006-07 4 Pioneer Infrastructure Holdings Ltd. 8, 77, 862 87, 78, 620 22, 12, 21, 224 2006-07 5 Jubilee Media Communications P Ltd. 3, 81, 676 38, 16, 760 9, 61, 82, 352 2006-07 6 India Cements Ltd. 1, 90, 839 19, 08, 390 4, 80, 91, 428 2006-07 Among the above compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... invested by the companies mentioned in the Table 1 above as income for the year. Thus, income of ₹ 60, 59, 51, 640/- has escaped assessment and the same needs to be taxed in the hands of M/s Carmel Asia Holdings Pvt Ltd. for AY 2007-08 24. It is the case of the assessees that the above said reasons recorded by the assessing officer do not lead to the belief that there was escapement of income. In order to better appreciate the contentions of the parties, we may dissect the reasons recorded by the AO as under:- ( a) A search was conducted by CBI in the case of Sri Jagan Mohan Reddy and his Group companies on 18. 089. 2011. During the course of search, certain documents were seized by the CBI and subsequently, the information was passed on to the Income tax Department. ( b) As per information available, the assessee company received capital and allotted shares at a premium. ( c) The investor companies did not receive any stake commensurate to their investment. ( d) Some of the companies namely, M/s Pioneer Infrastructure Hol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Assessing Officer. No substitution or deletion is permissible. No additions can be made to those reasons. No inference can be allowed to be drawn based on reasons not recorded. It is for the Assessing Officer to disclose and open his mind through reasons recorded by him. He has to speak through his reasons. It is for the Assessing Officer to reach the conclusion as to whether there was failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the concerned assessment year. It is for the Assessing Officer to form his opinion. It is for him to put his opinion on record in black and white. The reasons recorded should be clear and unambiguous and should not suffer from any vagueness. The reasons recorded must disclose his mind. The reasons are the manifestation of the mind of the Assessing Officer. The reasons recorded should be self-explanatory and should not keep the assessee guessing for the reasons. Reasons provide the link between conclusion and evidence. The reasons recorded must be based on evidence. The Assessing Officer, in the event of challenge to the reasons, must be able to justify the same based on material avai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18. In the present case, the reasons disclose that the assessing officer reached the belief that there was escapement of income on going through the return of income filed by the assessee after he accepted the return under section 143(1) without scrutiny, and nothing more. This is nothing but a review of the earlier proceedings and an abuse of power by the Assessing Officer, both strongly deprecated by the Supreme Court in CIT v. Kelvinator (supra). The reasons recorded by the Assessing Officer in the present case do confirm our apprehension about the harm that a less strict interpretation of the words reason to believe vis- -vis an intimation issued under section 143(1) can cause to the tax regime. There is no whisper in the reasons recorded, of any tangible material which came to the possession of the Assessing Officer subsequent to the issue of the intimation. It reflects arbitrary exercise of power conferred under section 147. 28. The Hon ble Delhi High Court, in the above said case, has extracted the law discussed by Hon ble Supreme Court in the case of LakhmaniMewal Das (1976)(103 ITR 437)(SC), wherein the principles as to what ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... formation referred in the last 4th paragraph is extracted below, at the cost of repetition: - It is reliably learnt on the basis of the investigations carried out by the CBI that the companies have received benefits from the State Government of Andhra Pradesh. In the paragraph recorded below the table also, the assessing officer has mentioned that some of the companies namely, M/s Pioneer Infrastructure Holdings Ltd and M/s India Cements Ltd received benefits from the State Government of Andhra Pradesh. 30. We have noticed earlier that the Ld CIT(A) has called for a remand report from the AO and the assessing officer has furnished certain confidential facts in the remand report. For the sake of convenience, we extract below the relevant portion of the remand report furnished by the AO:- 4(iii) Confidential facts: The FIR No. RC19(A)/2011 dated 17-8. 2011 registered by the CBI alleges that various public properties, Licenses/projects, SEZ s, Mining leases, Ports, real estate permissions and other benefits were allotted to persons picked by Shri V. S. Jaganmohan Red ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee are already available in the return of income filed by the assessees. The details of alleged benefits received by the share applicants from Government of Andhra Pradesh are not available in the return of income. We have noticed that the AO has referred to the search conducted by CBI in the case of Sri Jagan Mohan Reddy and his Group companies in the reasons and further referred to the fact that the share applicant companies have received benefits from the State Government of Andhra Pradesh. In the remand report also, the assessing officer has referred to confidential facts, wherein he has stated that the CBI has alleged that the benefits were given to share subscriber companies for quid-pro-quo. Accordingly, we are of the view that the source of information about the alleged connection between the investments made by the share applicants in these two assessee companies and the benefits received by them from Government of Andhra Pradesh is CBI only. The next question that would naturally arise is that whether the said information could trigger the AO to form the belief that there was escapement of income? In the reasons recorded by the AO for reopening of assessment, the AO h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ( a) the investor companies have not received any stake commensurate to their investments. Though the meaning of this sentence is not clear, yet the said observation shall not lead to the belief that there was escapement of income. ( b) some of the companies namely M/s Pioneer Infrastructure Holdings Ltd and M/s India Cements Ltd received benefits from the State Government of Andhra Pradesh . This observation of the AO only gives information that these two investor companies have received benefits from State Government. The details of nature of benefits, how the investments made by them are related to it and how it would result in escapement of income in the hands of the assessee were not spelt out by the AO. This observation, in our view, does not lead to the belief that there was escapement of income. ( c) The abovementioned investment made by the abovementioned entities was treated as income in the hands of M/s Jagati Publications P Ltd and M/s Bharathi Cement Corporation Ltd. This observation of the AO gives information about the action t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ir of a businessman and regulate the business activities. Hence the question Whether there was justification for collecting huge share premium or not cannot be a ground for forming belief that there was escapement of income leading to reopening of assessment. ( g) I have reason to believe that the amount invested by companies mentioned in Table 1 is gratuitous in nature. We notice that the meaning of the word gratuitous is given without receiving any return value . When a person makes investment in Shares of any company, he would get share certificate for the same and further the said share certificate is transferrable to other person for consideration. This is the mechanism prescribed under the Companies Act with respect to subscription of shares. Hence, it is not legally correct to categorise the share subscription as gratuitous in nature. Even, if it is considered as gratuitous payment, the AO has not shown as to how it can be considered as income in the hands of the assessees herein, as per the provisions of Income tax Act. 34. The above said analysis of the observations made by the assessing officer in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quid-pro-quo in receiving share capital. There should not be any doubt that it was only allegation at that point of time. Whether the said allegation could be the basis for forming belief that there was escapement of income is the moot question. In our view, the said allegation could trigger the investigation, but it alone cannot be the basis for arriving at the belief that there was escapement of income. The AO should bring some other material to show that the apparent was not real or it does not satisfy the conditions of sec. 68 of the Act. Nothing of that sort was brought on record by the AO while recording the reasons for reopening. Hence, we are of the view that the assessing officer was not right in law in reopening the assessment, as he could not have entertained the belief about escapement of income on the basis of reasons recorded by him. 38. We have noticed that the information received from the CBI, as spelt out by the AO in the reasons recorded and in the remand report, would show that the CBI has alleged that the investments have been made by the applicants as quid pro quo to the benefits received by them. This information cannot be the basis for reo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ening of assessment u/s 147 of the Act. Further, the said decision has been rendered on the basis of facts prevailing in that case, since the addition u/s 68 is made on factual basis. The other decision relied on by Ld D. R is the decision rendered by Hon ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers P Ltd and the said decision lays down legal propositions on which there cannot be any quarrel. 40. In view of the foregoing discussions, we are of the view that the reopening of assessment is bad in law. Accordingly we allow the legal ground urged by the assessees and quash the orders passed by the tax authorities. 41. Since the parties have agreed that the above said decision can be applied on three other appeals under consideration, we hold that the reopening of assessment in the case of three other appeals is also bad in law and accordingly quash the orders passed by the tax authorities. 42. The Ld. Senior Advocate, Shri Percy Pardiwala advanced his arguments on merits of the additions. The case of Carmel Asia Holdings P Ltd for assessment year 2007-08 was taken up first. The Ld AR submitted that the AO has assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd hence the share application money and share premium cannot be considered as unexplained credits within the meaning of sec. 68 of the Act. 44. The Ld A. R submitted that the AO has referred to the certain deficiencies in the share application forms furnished by the share applicants. The AO has also referred to non-compliance of Articles of Association. The ld AR submitted that these deficiencies, at the most, may result in violation of provisions of Companies Act, in which case the transactions may be voidable at the instance of shareholders. The same would not lead to the conclusion that the share application and share premium received by the assessee are unexplained credits. 45. The ld AR submitted that the AO was not right in observing that there was no basis for charging such high premium. Inviting our attention to copy of valuation report placed in page 125 to 134 of the paper book, the ld AR submitted that the assessee has obtained a valuation report from a firm of Chartered Accountants, which would support the share premium collected by the assessee. The ld AR submitted that the above said valuation report was furnished to the AO along w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitted that the subscribers to the share capital are leading companies and the assessee has downloaded their financial statements from the Registrar of Companies web site, viz. , www. mca. gov. in. Those financial statements are in public domain and they have been furnished before the Tribunal in the paper book. He submitted that all these companies have duly disclosed the investment made by them in the assessee companies. 49. The Ld A. R submitted that the decision rendered by Hon ble Supreme Court in the case of NRA Iron Steel (P) Ltd (supra) will not apply to the facts of the present case. Inviting our attention to the decision rendered by Hon ble Supreme Court in the above said case, the Ld A. R submitted that the assessee therein was called upon by the AO to furnish details of the amount received and provide evidence to establish identity of the investor companies, credit worthiness of the creditors and genuineness of transactions. The Assessee furnished copies of income tax returns of the investor companies and submitted that the money was received from banking channels. Accordingly the assessee contended that the onus placed upon it u/s 68 of the Act stan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Vodafone India Services P Ltd (368 ITR 1) and the same ratio has been reiterated in the case of Apeak Infotech (397 ITR 148) by Hon ble Bombay High Court. Accordingly, the Ld A. R contended that the addition made by the AO is not justified and is liable to be deleted. 52. The Ld A. R submitted that the AO has made similar additions in the case of Carmel Asia Holdings P Ltd in AY 2008-09 and Janani Infrastructure P Ltd in AY 2007-08 and 2008-09, subject to following modifications:- ( a) In the case of Carmel Asia Holdings P Ltd, the AO has added share capital amount also in AY 2008-09 in respect of amount received from Shri Srinivasa Naidu. ( b) In the case of Janani Infrastructure P Ltd, the said assessee has received share capital in AY 2008-09 from Carmel Asia Holdings P Ltd to the tune of ₹ 273. 21 lakhs. The AO has assessed the same on protective basis. The Ld A. R submitted that the arguments made by him shall apply to the above said appeals also. 53. The Ld D. R, on the contrary, submitted that the assessing officer has called the assessee to substantiate th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 696 697/Hyd/2014 dated 10-08-2018). He submitted that the Tribunal, has restored the issue to the file of AO for examining it afresh on the basis of facts prevailing in that case and arguments made. He submitted thatthough the said decision cannot be applied in the instant cases, yet thefollowing observations made by the Tribunal in the above said case would support the cases of the assessees herein:- 9 . . These shares were issued with huge share premium and share premiums were determined without any basis. But all the issue and allotment of shares are within the four corners of law. The AO/CIT(A) has not brought on record any issues with the issue and allotment of shares since they are issued and allotted as per the Companies Act and rules that existed at the time of issue and allotment of shares. The determination of share premium may not be as per industries norm or investor norms but these were fixed and accepted by the investing parties. 9. 1 . The arrangement and circumstances leading to issue and allotment of shares may draw some doubts that certain benefits may have passed on to the directors. But the question is whethe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls to the assessee and also did not confront them with the assessee. Hence, we are of the view that there is clear violation of Principles of Natural Justice. It is well settled proposition of law that the assessing officer is not entitled to rely upon the materials, which were not confronted with the assessee. The decision rendered by Jaipur bench of Tribunal in the case of Smt. Sunita dhadda (supra) supports the case of the assessee on the above said ground. We have already noticed that the above said decision of the Tribunal has since been upheld by the Hon ble Supreme Court in the very same case. Hence, on this ground alone, the additions made by the assessing officer in the hands of both the assessees in the years under consideration are liable to be deleted. 61. We noticed that the Ld CIT(A) has applied the theory of Human Probabilities. We also noticed that the Hyderabad bench of Tribunal has observed in the case of Bharati Cement Corporation (supra) that the test of human probabilities cannot be applied to business transactions, as they are based on cogent materials. In any case, the Ld D. R has agreed that the receipt of share premium has to be tested u/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bstantiate the share premium. We are of the view that there is no quarrel on the above said proposition. However, we agree with the contentions of Ld A. R that the above said decision was rendered by Hon ble Supreme Court on the basis of facts prevailing in that case, which were highlighted by Ld A. R during the course of his arguments, which have been recorded by us in the preceding paragraph. 66. The Ld D. R also placed his reliance on the decision rendered by co-ordinate bench in the case of Cornerstone Property Investments P Ltd (supra). We have gone through the said decision and we notice that it was a case of receipt of share capital through layering process through a chain of companies. The Tribunal has noticed that the revenue has given a finding that the there has been routing of money for illegal purposes through a chain of companies in which the assessee is a conduit in the layering process. The AO has carried out investigations and has given several adverse findings. Under those set of facts, the co-ordinate bench has held that the assessee has failed to prove the genuineness of the share premium and accordingly confirmed the addition. In our view, the facts of the pres ..... X X X X Extracts X X X X X X X X Extracts X X X X
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