Gujarat High Court
Sagun Construction Pvt Ltd vs Income Tax Officer - Ward 4(1)(1) on 13 October, 2016
Author: Akil Kureshi
Bench: Akil Kureshi, A.J. Shastri
C/SCA/13514/2015 ORDER
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
SPECIAL CIVIL APPLICATION NO. 13514 of 2015
[On note for speaking to minutes of order dated 14/06/2016 in
C/SCA/13514/2015 ]
With
SPECIAL CIVIL APPLICATION NO. 17084 of 2015
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SAGUN CONSTRUCTION PVT LTD....Petitioner(s)
Versus
INCOME TAX OFFICER - WARD 4(1)(1)....Respondent(s)
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Appearance:
MR KETAN H SHAH, ADVOCATE for the Petitioner(s) No. 1
MR NITIN K MEHTA, ADVOCATE for the Respondent(s) No. 1
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CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI
and
HONOURABLE MR.JUSTICE A.J. SHASTRI
Date : 13/10/2016
ORAL ORDER
(PER : HONOURABLE MR.JUSTICE AKIL KURESHI) Through this note, it is pointed out that in para 2 of the order dated 14.06.2016, the date of the impugned notice is wrongly mentioned as 23.02.2014 instead of 23.02.2015. Such typographical error shall be corrected. Note disposed of accordingly.
(AKIL KURESHI, J.) Page 1 of 2 HC-NIC Page 1 of 15 Created On Fri Oct 14 00:07:37 IST 2016 1 of 15 C/SCA/13514/2015 ORDER (A.J. SHASTRI, J.) ANKIT Page 2 of 2 HC-NIC Page 2 of 15 Created On Fri Oct 14 00:07:37 IST 2016 2 of 15 C/SCA/13514/2015 ORDER IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION NO. 13514 of 2015 With SPECIAL CIVIL APPLICATION NO. 17084 of 2015 SAGUN CONSTRUCTION PVT LTD....Petitioner(s) Versus INCOME TAX OFFICER - WARD 4(1)(1)....Respondent(s) Appearance:
MR KETAN H SHAH, ADVOCATE for the Petitioner(s) No. 1 MR NITIN K MEHTA, ADVOCATE for the Respondent(s) No. 1 CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI and HONOURABLE MR.JUSTICE A.J. SHASTRI Date : 14/06/2016 ORAL ORDER (PER : HONOURABLE MR.JUSTICE AKIL KURESHI)
1. Since facts are common in both these petitions, we may notice facts as emerging from Special Civil Application No. 13514 of 2015.
2. The petitioner has challenged the notice dated 23.02.2014 under which, the respondent-Assessing Officer desires to re-open the assessment of the petitioner for the assessment year 2009-10.Page 1 of 13
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3. Brief facts are as under:
The petitioner is a company registered under the Companies Act. For the assessment year 2009-10, the petitioner had filed return of income on 30.09.2009 declaring income of Rs. 2.51 lacs and showing book profit under Section 115JB of the Act of Rs. 3.19 lacs. Such assessment was accepted under Section 143(3) of the Act without scrutiny. To re-open such assessment, the Assessing Officer has issued the impugned notice. Reasons recorded by the Assessing Officer read as under:
"The assessee company has filed its return of income for A.Y. 2009-10 on 30/09/2009 declaring total income of Rs. 2,51,420/- and showing book profit u/s. 115JB of the I.T.Act of Rs. 3,19,898/-.
2. During the Survey proceedings u/s. 133A of the I.T.Act on 02/02/2015 and assessment proceedings u/s. 143(3) of the Act for A.Y. 2012-13, it is noticed that the assessee company has received following share capital and share premium during the F Y 2008-09 relevant to A Y 200-10.
Sr. Name of the Party Share Capital Share premium
No Rs. Rs.
1 Hiren Trivedi 1,50,000/- 28,50,000/-
2 Ness Nusil Wadia 11,60,000/- 2,78,40,000/-
3 Kajal Agro Farm Pvt. Ltd. 5,40,000/- 1,29,60,000/-
4 Pearl Plantation Pvt. Ltd. 3,88,000/- 93,12,000/-
5 Samrajya Agro Farm Pvt. 5,16,000/- 1,23,84,000/-
Ltd.
Total 27,54,000/- 6,53,46,000/-
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C/SCA/13514/2015 ORDER
During the Survey proceedings, the assessee company has failed to produce share application form details of shares allotted to the so called share holders and proof of attendance of Annual General Board Meeting of the said so called share holders. Further, it is worthwhile to mention here that during the Survey proceedings, Shri Kartik M Joshi, Director of the company, himself verified the identity of the so called share holders and found that these companies/persons are not existing at the addresses available with the company.
2.1 The assessee company has forfeited the above share capital and share premium during the F Y 2011-12 relevant to A Y 2012-13, however, during the Survey proceedings, the assessee company has failed to produce any details which prove the action taken by the assessee company regarding forfeited of the share capital and share premium. Considering the above facts, the undersigned has reason to believe that, the assessee company has introduced bogus share capital and share premium into books of account in the financial year 2008-09 relevant to A Y 2009-10.
3. In view of the above facts and circumstances of the case, I have reason to believe that the income to the tune of Rs. 6,81,00,000/- has escaped assessment within the meaning of section 147 of the I T Act. Accordingly, I initiate the proceedings u/s. 147 of the Act. The case of the assessee company is, therefore, reopened by issue of notice u/s. 148 of the I.T.Act."
4. The petitioner objected to the process of re-opening under communication dated 13.04.2015. Such objections were, however, rejected by the Assessing Officer by order dated 08.07.2015. Hence, this petition.
5. Learned counsel for the petitioner submitted that the Page 3 of 13 HC-NIC Page 5 of 15 Created On Fri Oct 14 00:07:37 IST 2016 5 of 15 C/SCA/13514/2015 ORDER Assessing Officer has recorded reasons which do not disclose any information to enable him to form a belief that income chargeable to tax has escaped assessment. He submitted that no incriminating material was found during the course of survey permitting the Assessing Officer to re-open the assessment. The second contention was that, in any case, the unaccounted investments in shares cannot be taxed in the hands of the company and it can be taxed only in the hands of the investors. In this respect, counsel placed heavy reliance on the decision of Supreme Court in case of Commissioner of Income Tax vs. Lovely Exports (P) Ltd. reported in 216 CTR 195. He submitted that the decision of Supreme Court in case of Commissioner of Income Tax vs. Lovely Exports (P) Ltd. was followed by this Court in case of Hindustan Inks and Resing Ltd. vs. Deputy Commissioner of Income Tax. reported in 60 DTR 18 (Guj.).
6. On the other hand, learned counsel for the Revenue opposed the petition contending that the original assessment was not framed after scrutiny. There is no question of change of opinion on part of the Assessing Officer. He has recorded proper reasons on the basis of which, he formed a belief that the income chargeable to tax has escaped assessment. Counsel would highlight that the details and whereabouts of the companies, which had made share investments in the assessee company, were not available and could not be provided by the assessee, clearly indicating that these were bogus investments.
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7. We must be conscious that the original assessment in the present case was not made after scrutiny. The question of change of opinion, therefore, would not arise since the Assessing Officer cannot be stated to have formed any opinion during the original assessment. This was held by the Supreme Court in case of Assistant Commissioner of Income Tax vs. Rajesh Jhaveri Stock Brokers P. Ltd. reported in 291 ITR 500, in which, it was held and observed as under:
"13. ... ... ... ... ...In the scheme of things, as noted above, the intimation under section 143(1)(a) cannot be treated to be an order of assessment. The distinction is also well brought out by the statutory provisions as they stood at different points of time. Under section 143(l)(a) as it stood prior to April 1, 1989, the Assessing Officer had to pass an assessment order if he decided to accept the return, but under the amended provision, the requirement of passing of an assessment order has been dispensed with and instead an intimation is required to be sent. Various circulars sent by the Central Board of Direct Taxes spell out the intent of the Legislature, i.e., to minimize the departmental work to scrutinize each and every return and to concentrate on selective scrutiny of returns. These aspects were highlighted by one of us (D. K. Jain J) in Apogee International Limited v. Union of India [(1996) 220 ITR 248]. It may be noted above that under the first proviso to the newly substituted section 143(1), with effect from June 1, 1999, except as provided in the provision itself, the acknowledgment of the return shall be deemed to be an intimation under section 143(1) where (a) either no sum is payable by the assessee, or (b) no refund is due to him. It is significant that the acknowledgment is not done by any Assessing Officer, but mostly by ministerial staff. Can it be said that any "assessment" is done by them? The reply is an emphatic "no". The intimation under section 143(1) Page 5 of 13 HC-NIC Page 7 of 15 Created On Fri Oct 14 00:07:37 IST 2016 7 of 15 C/SCA/13514/2015 ORDER
(a) was deemed to be a notice of demand under section 156, for the apparent purpose of making machinery provisions relating to recovery of tax applicable. By such application only recovery indicated to be payable in the intimation became permissible.
And nothing more can be inferred from the deeming provision. Therefore, there being no assessment under section 143(1)(a), the question of change of opinion, as contended, does not arise."
8. In case of Inductotherm (India) P. Ltd. vs. M. Gopalan, Deputy Commissioner of Income Tax reported in 356 ITR 481, the Division Bench of this Court, in the context of notice for re-opening when the return was accepted without scrutiny, observed that even in such a case, the requirement that the Assessing Officer has reason to believe that income chargeable to tax has escaped assessment would still survive. A reference was made to the decision of Supreme Court in case of Commissioner of Income Tax vs. Kelvinator of India Ltd. reported in 320 ITR 561, in which, it was held and observed that the Assessing Officer must have a tangible material to come to the conclusion that there was escapement of income from assessment and that the reason must have a live link with the formation of the belief.
9. Additionally, we may notice that the expression "reason to believe" came up for consideration before the Supreme Court in case of Assistant Commissioner of Income Tax vs. Rajesh Jhaveri Stock Brokers P. Ltd. (supra) in which, it was held that Page 6 of 13 HC-NIC Page 8 of 15 Created On Fri Oct 14 00:07:37 IST 2016 8 of 15 C/SCA/13514/2015 ORDER such expression cannot be read to mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion. The term "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. It was observed as under:
"16. Section 147 authorises and permits the Assessing Officer to assess or reassess income chargeable to tax if he has reason to believe that income for any assessment year has escaped assessment. 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 had 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 the Supreme 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) fulfillment 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 required is "reason to believe", but not the established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief. Whether the materials would conclusively prove the escapement is not the concern at that stage. This is so because the formation of belief by the Assessing Officer is within the realm of subjective satisfaction (see ITO v. Selected Dalurband Coal Co. Pvt. Ltd. [1996 (217) ITR 597 (SC)] ; Raymond Woollen Mills Ltd. v. ITO [ 1999 Page 7 of 13 HC-NIC Page 9 of 15 Created On Fri Oct 14 00:07:37 IST 2016
9 of 15 C/SCA/13514/2015 ORDER (236) ITR 34 (SC)]."
10. With this background, we may revert to the facts of the case. The Assessing Officer has recorded detailed reasons recording that during the survey proceedings, the company failed to produce share application forms, details of shares allotted to the share holders, proof of attendance of annual general meeting of the share holders etc. During such survey, the Director of company verified the identity of the so-called share holders and it was found that the company and its persons did not exist at the address available with the assessee- company. The assessee-company had forfeited the share capital and share premium but failed to produce any details to show the action taken by the company regarding forfeiture. It was on the basis of such reasons the Assessing Officer has recorded the reasons to believe that income chargeable to tax has escaped assessment. We do not find such reasons lacked validity or a live link with the material on record enabling the Assessing Officer to form such a belief. As held by the Supreme Court in case of Assistant Commissioner of Income Tax vs. Rajesh Jhaveri Stock Brokers P. Ltd. (supra) at this stage, it is not necessary for the Assessing Officer to conclusively establish that income would be invariably taxed. The inquiry of the Court while examining notices for re-opening, where original assessment is not framed after scrutiny is necessarily extremely narrow. The question whether said income can be taxed in the hands of the assessee or the department can proceed only against the investors would also depend on various facts and Page 8 of 13 HC-NIC Page 10 of 15 Created On Fri Oct 14 00:07:37 IST 2016 10 of 15 C/SCA/13514/2015 ORDER circumstances and only on such an assertion the reopening proceedings cannot be terminated. Undoubtedly, when share investment is made by the large number of persons, the company, in whose shares such investments are made, cannot be held responsible for unaccounted investments of such investors even if so found to have been made since it would be unaccounted investment of the investors not of the company. Nevertheless, if it is found that the entire transaction of the so called investment is wholly bogus, routing unaccounted income of the company itself through large scale allotment of shares to bogus entities and so-called investors, the question of taxing the company itself may arise.
11. In case of Riddhi Promoters P. Ltd. vs. Commissioner of Income Tax reported in 377 ITR 641, Delhi High Court observed as under:
"6. It is not sufficient that the identity of the share applicant or the creditor should be established for the assessee to discharge the initial onus, which is upon the assessee. Under the requirement of Section 68, the assessee has to further satisfy the Revenue as to the genuineness of the transaction and the creditworthiness of the share applicant or the individual who is advancing amounts. The assessee's reliance upon the CIT (Appeals) order to contend that the sources of the funds were in essence as Directors, is in this context of no avail. The assessee has contended that it was incorporated just before the end of the financial year. However, the assessee had to necessarily show that the amount which it indicated as borrowed from the six applicants in fact belonged to them. It is not sufficient for the assessee to just raise such contentions on the basis of certain Page 9 of 13 HC-NIC Page 11 of 15 Created On Fri Oct 14 00:07:37 IST 2016 11 of 15 C/SCA/13514/2015 ORDER observations of the Commissioner of Income Tax (Appeals) in this regard. The creditworthiness of the share applicants had to be seen in the context of the assertion made by them or the materials presented before the Assessing Officer at the relevant time. The materials on record disclosed that some information from at least two individuals indicated that the money had not been given by them. In view of the fact that concurrently the lower authorities held against the assessee and given the intensive factual nature of the evidence, no substantial question of law arises. The appeal is accordingly dismissed."
12. In case of Commissioner of Income Tax vs. Youth Construction Pvt. Ltd. reported in 357 ITR 197, Delhi High Court observed that:
"8. ... ... ...These affidavits are from the directors of the three companies. It was claimed before the CIT(Appeals) that by the time the affidavits were taken to the Assessing Officer (on 28th December, 2007), the assessment proceedings had been closed. If affidavits from the companies could be obtained, it is not known why the directors could not be produced before the AO as directed by him. These facts do not find any mention in the order of the Tribunal. The Tribunal did not refer to the observation of the Assessing Officer from a perusal of the bank accounts of the three companies which had applied for the shares. We have already referred to the inferences drawn by the AO. The Assessing Officer had examined the bank accounts and had deduced a pattern by which the bank accounts were used only as a conduit to receive the monies and pay them out on the same day. This pattern, coupled with the general admission made by Pradeep Kumar Jindal and the failure of the share applicants to produce the directors before the Assessing Officer, all taken cumulatively, should have excited suspicion in the mind of the Tribunal necessitating a deeper probe into the matter. The Tribunal, however, has chosen to rest its decision on the sole fact that the share applicants had established there identity by filing confirmation letters and copies of their income Page 10 of 13 HC-NIC Page 12 of 15 Created On Fri Oct 14 00:07:37 IST 2016 12 of 15 C/SCA/13514/2015 ORDER tax returns. This is hardly sufficient for the purpose of discharging the creditworthiness of the share applicants and the genuineness of the transactions. There can be no dispute that Section 68 applies equally to share application monies received by an assessee and, therefore, the burden is on the assessee to prove the nature and source thereof, to the satisfaction of the Assessing Officer. It involves three ingredients, namely, the proof regarding identity of the share applicants, their creditworthiness to purchase the shares and the genuineness of the transaction as a whole. The Tribunal failed to keep in mind these aspects of the matter and has chosen to dispose of the appeal on the limited question of the identity of the share holders. A Division Bench of this Court in the case of CIT vs. Nova Promoters and Finlease P. Ltd. (2012) 342 ITR 169 pointed out the circumstances in which the ratio of the judgment of the Supreme Court in Lovely Export can be applied and the circumstances where the ratio cannot be applied. The present case is one where there is enough material in the possession of the Assessing Officer which warrants explanation from the assessee regarding the nature and source of the share application monies. There is precious little which has been done by the assessee in discharging its burden under the section. The Tribunal has failed to keep in view the broader picture and has taken a rather simplistic view of the matter, ignoring the factual aspects and surrounding circumstances present in the case. It should have dealt with the case in a wholesome manner dealing with the entire evidence relied upon and having regard to the report of the investigation wing, the manner in which entries were made in the bank accounts of the three companies, the statement of Pradeep Kumar Jindal and denial thereof by A.K.Kaul, as also the other surrounding circumstances of the case."
13. Commissioner of Income Tax vs. Navodaya Castles Pvt. Ltd. reported in 367 ITR 306, Delhi High Court observed as under:
"13. As we perceive, there are two sets of judgments and cases, but these judgments and cases proceed on their own facts.Page 11 of 13
HC-NIC Page 13 of 15 Created On Fri Oct 14 00:07:37 IST 2016 13 of 15 C/SCA/13514/2015 ORDER In one set of cases, the assessee produced necessary documents/evidence to show and establish identity of the shareholders, bank account from which payment was made, the fact that payments were received thorough banking channels, filed necessary affidavits of the shareholders or confirmations of the directors of the shareholder companies, but thereafter no further inquiries were conducted. The second set of cases are those where there was evidence and material to show that the shareholder company was only a paper company having no source of income, but had made substantial and huge investments in the form of share application money. The assessing officer has referred to the bank statement, financial position of the recipient and beneficiary assessee and surrounding circumstances. The primary requirements, which should be satisfied in such cases is, identification of the creditors/shareholder, creditworthiness of creditors/shareholder and genuineness of the transaction. These three requirements have to be tested not superficially but in depth having regard to the human probabilities and normal course of human conduct.
18. Lovely Exports Pvt. Ltd. (supra) was also considered and distinguished in N.R. Portfolio Pvt. Ltd. (supra) and it was held that the entire evidence available on record has to be considered, after relying upon CIT Vs. Nipun Builders and Developers, [2013] 350 ITR 407 (Delhi), wherein it has been held that a reasonable approach has to be adopted and whether initial onus stands discharged would depend upon facts and circumstances of each case. In case of private limited companies, generally persons known to directors or shareholders, directly or indirectly, buy or subscribe to shares. Upon receipt of money, the share subscribers do not lose touch and become incommunicado. Call money, dividends, warrants, etc. have to be sent and the relationship remains a continuing one. Therefore, an assessee cannot simply furnish some details and remain quiet when summons issued to shareholders remain un-served and uncomplied. As a general proposition, it would be improper to universally hold that the assessee cannot plead that they had received money, but could do nothing more and it was for the Assessing Officer to enforce shareholders' Page 12 of 13 HC-NIC Page 14 of 15 Created On Fri Oct 14 00:07:37 IST 2016
14 of 15 C/SCA/13514/2015 ORDER attendance in spite of the fact that the shareholders were missing and not available. Their reluctance and hiding may reflect on the genuineness of the transaction and creditworthiness of the creditor. It would be also incorrect to universally state that an Inspector must be sent to verify the shareholders/subscribers at the available addresses, though this might be required in some cases. Similarly, it would be incorrect to state that the Assessing Officer should ascertain and get addresses from the Registrar of Companies' website or search for the addresses of shareholders themselves. Creditworthiness is not proved by showing issue and receipt of a cheque or by furnishing a copy of statement of bank account, when circumstances requires that there should be some more evidence of positive nature to show that the subscribers had made genuine investment or had, acted as angel investors after due diligence or for personal reasons. The final conclusion must be pragmatic and practical, which takes into account holistic view of the entire evidence including the difficulties, which the assessee may face to unimpeachably establish creditworthiness of the shareholders."
14. In case of Commissioner of Income Tax, Central-I vs. Maithan International reported in 375 ITR 123 also Calcutta High Court had examined similar issue.
15. In the result, both the petitions are dismissed.
(AKIL KURESHI, J.) (A.J. SHASTRI, J.) Jyoti Page 13 of 13 HC-NIC Page 15 of 15 Created On Fri Oct 14 00:07:37 IST 2016 15 of 15