Share application money received vastly in excess of the authorized capital was valid reasons to issue reassessment notice u/s 148 – High Court
ABCAUS Case Law Citation:
ABCAUS 2849 (2019) (03) HC
Important Case Laws Cited/relied upon by the parties
Sheo Nath Singh vs. ACIT, 82 ITR 148 (SC)
Income Tax Officer vs. Lakhmani Mewal Das, 103 ITR 437 (SC)
Ganga Saran & Sons (P) Ltd. vs. ITO, 130 ITR 1
Commissioner of Income Tax v. Kelvinator, (2010) 320 ITR 561 (SC)
M/s. Phool Chand Bajrang Lal and Anr. v. Income Tax Officer and Anr., (1993) 203 ITR 456 (SC).
In the instant case, the assessee had filed a Writ petition under Article 226 of the Constitution of India, challenging the reassessment notice issued under Sections 147/148 of the Income Tax Act, 1961 (the Act).
The petitioner was a private limited company incorporated in India under the provisions of the Companies Act, 1956. The assessee received share application large amount of share application money from its promoter/founder towards fresh allotment of equity shares.
Later, as a part of the exercise of reorganization of the group and consolidation of shareholding, the right to receive allotment of shares against the said share application money was transferred by the said promoter to his family trust through a gift. However, the shares were not allotted to the said trust and the amount of share application money stood as such in the books of the appellant assessee.
The assessee’s return was selected for scrutiny, because a substantial amount was received against unallotted shares. The Assessing Officer (AO) issued a questionnaire show causing the assessee why share application money received should not be added to its income.
The assessee replied that the allotment of equity shares by assessee to the trust would have resulted in change in ownership status of assessee from individual promoters to Trust which would then have triggered the requirement of Public Offer/Announcement finder SEBI Takeover Code, 2011.
The assessee also stated that trusts already sought an exemption from SEBI under the applicable provisions for allotment of shares against pending share application money, which clarified that it would issue equity shares to the trust, after obtaining necessary approvals from SEBI in accordance with statutory compliances.
Therefore, the assessee stated that the addition of income under Section 68 of the Act was not justified.
The AO however, added said outstanding amount of share application money to the declared income of the assessee as unexplained income in its hands, also holding that the benefit had been taken by the assessee till date and in future as shares were not allotted even after the expiry of 4 years.
It was also held that the family trust did not get any benefit having regard to the purpose it was created which showed that it is just shifting tax burden on deemed income of trust by this route.
The AO further held that the assessee had not taken any step to increase the authorized share capital to meet out the requirement of issue of shares as the present authorized share capital was much below against share application money pending for allotment. Further, the assessee had filed application to get exemption from SEBI only after questionnaire/notice was issued by the AO.
The assessee appealed to the CIT(A) who deleted the addition made by the AO, inter alia, on the ground that since the aforesaid share application money was not received in the relevant AY, the provisions of Section 68 of the Act were not applicable in that year.
Later, the AO issued a notice of reassessment, u/s 148 of the Act. The “reasons to believe” stated that on the basis of material available, it was clear that the transactions with respect to said share application money was not genuine and thus was a basis of reason-for formation of belief that the income had escaped assessment.
Before the Hon’ble High Court, the assessee contended when in an earlier scrutiny assessment the issue had been examined and the addition made, on the same ground, was deleted on appeal, the revenue could not resuscitate the same issue, without any new material.
It was submitted that if the “reasons to believe‟ are not valid or are mere pretense or lack due application of mind by the assessing officer, the re-assessment proceedings initiated under Section 147 of the Act would not be valid.
It was also submitted that the revenue’s argument that the CIT (A) had issued directions to re-examine the accounts, was an ill-founded submission, unsupported by any such observation in the Appellate Commissioner’s order.
On the other hand, the Revenue contended that contradictions were clearly noticed by the AO while reopening the case of assessee thereby doubting not only the identity of the share applicant but also the genuineness of the transactions.
It was stated that the assessee had unissued capital left with it was much below than that of dhare application money received meaning thereby that it might have issued the shares at a premium which worked out to be 457 times to the face value of shares. Even its Net Asset Value at the time of receipt of share application money as per Rule 11UA of the Income Tax Rule, 1962 was much below.
It was further argued by the Revenue that the assessee gave various contradictory evidences to prove the genuineness of the share application money during the course of assessment proceedings and also during the course of stay proceedings. It was argued that no evidence to prove the source of receipt of share application money was ever produced by the assessee.
The Hon’ble High Court noted the ruling laid by the Hon’ble Supreme Court on what are valid considerations that would justify issuance of a reassessment notice, u/s 147/148. Those are when full disclosure of material facts is not made during the original assessment (such as when essential documents are not produced or shown); etc. The Supreme Court had held that the AO has power to re-open the assessment if there is tangible material to conclude, prima facie that there has been escapement of income. However, the court cautioned that the power of reassessment is not one of review and that it does not admit of formation of a second opinion.
The Hon’ble High Court further noted that the scope of the phrase “reason to believe” was examined by the Supreme Court and held that where the transaction itself on the basis of subsequent information, is found to be a bogus transaction, the mere disclosure of that transaction at the time of original assessment proceedings, cannot be said to be disclosure of the “true” and “full” facts in the case and the ITO. would have the jurisdiction to reopen the concluded assessment in such a case.
The Hon’ble High Court opined that therefore, when the Revenue gets hold of information or material which tends to or has the potential of undermining its findings (previously made in the assessment proceedings) and have an important bearing, invocation of the power to reassessment is warranted.
The Hon’ble High Court observed that in the present case, the Revenue presses several such circumstancesas above:
(1) that the SEBI application was made after a questionnaire was issued by the AO;
(2) there was nothing to justify the premium of 457 per cent over the face value of the shares – even the market value of the share according to the Revenue on the date of issue of the shares was less.
(3) the SEBI approval was given much later;
(4) when the authorized capital of company was much lesser, the necessity for issuing shares in excess thereof remained unanswered.
The Hon’ble High Court opined that the reassessment notice was clearly warranted. The Hon’ble High Court clarified that though the identity of the promoter was known, other ingredients of Section 68 (i.e. genuineness of the transaction or credit and the credit worthiness of the individual providing the money) were apparently not established.
Accordingly, it was held that in the light of the circumstances and applying the law laid down by the Hon’ble Supreme Court, the Revenue was justified in issuing the impugned notice.
