Income Tax Appellate Tribunal - Mumbai
Acit 10(1), Mumbai vs Fiat India P.Ltd ( Now Known As New ... on 14 December, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL
"F" Bench, Mumbai
Before Shri Jason P. Boaz, Accountant Member
and Shri Sandeep Gosain , Judicial Member
ITA No. 5901/Mum/2012
(Assessment Year: 2004-05)
D C I T - 10(1) M/s. Fiat India P. Ltd.
Room No. 455, 4th Floor (Now New Holland (India) P. Ltd.)
Aayakar Bhavan, M.K. Road 303, Central Plaza, 166 CST
Vs.
Mumbai 400020 Road, Kalina, Santacruz (E)
Mumbai 400098
PAN - AAACI3922Q
Appellant Respondent
CO No. 256/Mum/2013
(Assessment Year: 2004-05)
M/s. Fiat India P. Ltd. D C I T - 10(1)
(Now New Holland (India) P. Ltd.) Room No. 455, 4th Floor
303, Central Plaza, 166 CST Vs. Aayakar Bhavan, M.K. Road
Road, Kalina, Santacruz (E) Mumbai 400020
Mumbai 400098
PAN - AAACI3922Q
Cross Objector Appellant in Appeal
Appellant by: Ms. S. Padmaja
Respondent by: S/s. Paras Salva & Harsh Kapadia
Date of Hearing: 30.11.2016
Date of Pronouncement: 14.12.2016
ORDER
Per Jason P. Boaz, A.M.
This appeal by the Revenue is directed against the order of the CIT(A)- 21, Mumbai dated 15.06.2012 for A.Y. 2004-05. The assessee has also preferred Cross Objections (CO) in respect of the aforesaid order of the CIT(A)-21, Mumbai.
2. The facts of the case, briefly, are as under: -
2.1 The assessee, a company engaged in the business of manufacture and selling of passenger cars and components, filed its return of income for 2 ITA 5901 & CO 256/Mum/2013 M/s. Fiat India P. Ltd.
A.Y. 2004-05 on 30.10.2004 declaring loss of (-) `184,80,692/-. The case was taken up for scrutiny and the assessment was completed under section 143(3) of the Income Tax Act, 1961 (in short 'the Act') vide order dated 29.12.2006, wherein the loss was assessed at (-) `162,94,69,692/-. Subsequently, proceedings were initiated under section 147 of the Act and thereafter notice under section 148 of the Act was issued to the assessee on 30.03.2009. The resultant assessment was completed under section 143(3) r.w.s. 147 of the Act vide order dated 10.08.2009.
2.2 For a second time, the Assessing Officer (AO) initiated reassessment proceedings for A.Y. 2004-05 and after recording reasons that income of the assessee liable to tax had escaped assessment and obtaining administrative approval, issued notice under section 148 of the Act on 31.03.2011. In response thereto, the assessee requested that the original return of income filed on 30.10.2004 be treated as filed in response to the notice under section 148 of the Act. The assessment was completed under section 143(3) r.w.s. 147 of the Act vide order dated 29.11.2011 wherein the assessee's income was determined at `1654,00,32,908/- in view of the following additions: -
(i) LTCG on cancellation of preference shares and Equity shares `1444,85,34,800/-
(ii) LTCG on conversion of loans `393,95,27,800/-
2.3 Aggrieved by the order of assessment for A.Y. 2004-05 passed under section 143(3) r.w.s. 147 of the Act vide order dated 29.11.2011, the assessee preferred an appeal before the CIT(A)-21, Mumbai. The learned CIT(A) disposed off the appeal allowing the assessee partial relief, inter alia:
(i) deleting the addition of LTCG on cancellation of preference shares and equity shares of `1444,85,34,800/-;
(ii) holding that the AO was not justified in assuming jurisdication under section 147 of the Act since there was no failure on the part of the assessee to disclose fully and truly all relevant material; and
(iii) in respect of the addition of LTCG on conversion of loans to share capital amounting to `393,95,27,800/-, admittedly as recorded in the
3 ITA 5901 & CO 256/Mum/2013 M/s. Fiat India P. Ltd.
impugned order, the AO in response to a rectification application by the assessee in this regard under section 154 of the Act vide order dated 22.03.2012, holding that such conversion of loans to equity shares was not capital gains in the hands of the assessee company.
Revenue's appeal for A.Y. 2004-05 in ITA No. 5901/Mum/2012
3. Revenue, being aggrieved by the order of the CIT(A)-21, Mumbai dated 15.06.2012 for A.Y. 2004-05 has preferred this appeal raising the following grounds: -
"1. On the facts and the circumstances of the case the Ld.CIT(A) erred in holding the view that the decision of reopening was beyond the jurisdiction u/s. 147 of the Act, without appreciating the fact that the decision of reopening u/s. 147 r.w.s. 148 of Act was on account of failure on the part of assessee to disclose fully and truly all relevant materials pertaining to cancellation of equity and preference shares.
2. On the facts and the circumstances of the case the Ld.CIT(A) erred in deleting the addition of Rs. 1444,85,34,800/- made by the Assessing Officer on account of cancellation of equity and preference shares resulting into long term capital gain, without appreciating the fact that the holding company M/s. Fiat India Automobiles Pvt. Ltd. has claimed long term capital loss on this cancellation of equity and preference shares, and provisions of sec. 45 of the Act was correctly applied by the Assessing Officer.
3. The appellant prays that the order of CIT(A) on the above ground be set aside and that of the assessing officer be restored.
4. The appellant craves leave to add, amend, vary, omit, or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of appeal."
4. Ground at S. Nos 3 & 4 4.1 These grounds are general in nature and therefore no adjudication is called for thereon.
5. Ground No. 1 - Validity of assumption of jurisdiction under section 147 of the Act.
5.1 In this ground (supra), Revenue assails order of the learned CIT(A) holding that the AO's the decision to reopen the assessment was beyond the jurisdiction under section 147 of the Act, without appreciating that the AO's decision was on account of the failure on the part of the assessee to 4 ITA 5901 & CO 256/Mum/2013 M/s. Fiat India P. Ltd.
disclose fully and truly all relevant material pertaining to cancellation of equity and preference shares. The learned D.R. supported the ground raised.
5.2 The learned A.R. of the assessee reiterated the submissions put forth before the CIT(A). It was contended that after the expiry of four years from the end of the relevant assessment year, the assessment can be reopened only if the assessee has failed to disclose fully and truly all material facts necessary for that assessment. In the case on hand, the assessee's assessment for A.Y. 2004-05 was reopened on the ground that the gain arising from cancellation of 11,68,01,390 equity shares and 1,23,80,000 preference shares held by M/s. Fiat India Automobile P. Ltd. and conversion of concerned loan into equity shares was not offered to tax by the assessee. The learned A.R. of the assessee submitted that the contention of Revenue in this ground (supra) that the reopening was on account of failure on the part of the assessee to disclose fully and truly all relevant material pertaining to cancellation of equity and preference shares was factually erroneous. In this regard, it was pointed out that in submissions placed before the learned CIT(A) his attention was invited to Note 12 of Schedule 14 and Note 15 of Schedule 14 of the Balance Sheet for the year under consideration wherein this matter has been explained in detail. In view of this disclosure in the assessee's Balance Sheet, it is contended that the assessee had fully and truly disclosed all relevant material/facts before the AO and on the basis of which the AO in earlier scrutiny assessments after examination of restructuring of share capital was of the view that this transaction did not give rise to any income. It is submitted that the then AO who had completed the earlier assessment orders, had correctly framed the orders taking into consideration material before him that the aforesaid transactions did not give rise to any capital gains taxable under section 45 of the Act and relied on the decision of the Idea Cellular Ltd. (250 ITR 1). Therefore, it is contended that on the basis of the disclosure of these two issues in the financial statements of the assessee and the earlier scrutiny assessment orders completed under section 143(3) on 29.12.2006 and under section 143(3) r.w.s. 147 of the Act vide order dated 10.08.2009, it is 5 ITA 5901 & CO 256/Mum/2013 M/s. Fiat India P. Ltd.
clear that the present reopening of assessment for A.Y. 2004-05 was on account of mere change of opinion, on the same set of facts available on record, which is not permissible in law as held by the Hon'ble Apex Court in the case of Kelvinator India Ltd. (320 ITR 561) and Hon'ble Bombay High Court in Asian Paints Ltd. (308 ITR 195 (Bom). To sum up, the learned A.R. of the assessee contended that there was no failure on the part of the assessee to disclose any facts in relation to capital reduction. Mere change of opinion on same set of facts already disclosed before the AO was not a valid ground for reopening the assessment since there was no income of the assessee liable to tax escaping assessment pursuant to capital reduction and conversion of loans. Therefore in the light of the above, it was contended that the AO had erred in assuming jurisdiction under section 147 of the Act without fulfilling the conditions precedent and therefore the assumption of jurisdiction is not valid.
5.3.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncements cited. The learned CIT(A) has dealt with this issue and held the AO's assumption of jurisdiction for reopening and assessment under section 147 of the Act was not justified and invalid as it was beyond jurisdiction since there was no failure on the part of the assessee to disclose fully and truly all relevant material before the AO. In the impugned order the learned CIT(A) has held as under at paras 2.3 to 2.3(c) thereof: -
"2.3 1 have considered the facts of the case.
2.3(a) As per provisions of sec. 147 of the Act, the assessment can be reopened if the A.O. has reason to believe that any income chargeable to tax has escaped assessment. Thus, for reopening of assessment, the A.O. should have reason and on the basis of such reasons a prima facie belief can be formed that any income chargeable to tax has escaped assessment.
In the case under consideration the A.O. reopened assessment by recording following reasons:
"Pursuant to the capital restructuring, the gain arising from the cancellation of 116,801,390 equity shares and 12,380,000 preference shares held by M/s. Fiat India Automobiles Put. Ltd. and the conversion of unsecured loans into equity shares was not offered to tax.
6 ITA 5901 & CO 256/Mum/2013 M/s. Fiat India P. Ltd.
In view of the above, I have reason to believe that income chargeable to tax has escaped assessment coming within the meaning of sec. 147 read with proviso thereto, by reason of failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. Therefore, notice u/s. 148 of the Income Tax Act has been issued.
The A.O. noticed that pursuant to capital restructuring, there was cancellation of 11.68,01,390 equity shares and 1,23,80,000 preference shares held by M/s. Fiat India and also that there was conversion of unsecured loans into equity shares. The A.O. has held that gain arising from these transactions were not offered to tax. The question for consideration is whether on the basis of these facts a belief could be formed that any income chargeable to tax had escaped assessment. For the purpose of generation of capital gain there should be transfer of capital asset. That means such capital asset should be property of the assessee and should be held by assessee and thereafter, it should have been transferred by the assessee to some other person for some consideration received or to be received. The capital asset has been defined in sec.2(14) of the Act means property of any kind held by an assessee whether or not connected with his business or profession but it is not included stock in trade and other things as mentioned in sec.2(14). Thus as per provisions of sec.45(1) r.w.s. 2(14), there should be (i) existence of capital asset (ii) such capital asset should be held by an assessee (iii) there should be transfer of such capital asset from the assessee to the other party. In the case under consideration, the appellant was continuously incurring losses and there were huge accumulated losses of Rs. 1,444.85 crores. Therefore, as per the scheme approved by the Hon'ble High Court, the loss to the tune of Rs. 1,444.85 crores was wiped out by reorganizing and reducing the share capital and conversion of certain loans into equity shares. On account of this share capital restructuring, no capital asset of the appellant was transferred and consequently no income or capital gain arose to the appellant company. The appellant company did not sell anything to any person. The share capital so reduced was belonging and pertaining to the shareholders and was assets of shareholders and not of the appellant company. Such share capital reduced was liability of appellant company. In the same way, the unsecured loans payable by appellant were not the assets of the appellant company but were liabilities of the appellant company. Such unsecured loans were assets in the hands of creditors. As per provisions of sec.45(1) r.w.s. 2(14), there should be a capital asset, such capital asset should be held by assessee and such capital asset should be transferred by assessee to other person for some consideration. In the case under consideration, all these factors were missing. The appellant was not holding these (share capital and loans) as capital assets. Thus nothing was sold by the appellant and no asset was transferred by the appellant. Consequently no consideration was received by appellant. In the facts and circumstances, there could not have been 7 ITA 5901 & CO 256/Mum/2013 M/s. Fiat India P. Ltd.
any income earned by the appellant or capital gain arose to the appellant. In the facts and circumstances, the reasons as recorded by A.O. for reopening assessment could not have given formation of even a prima facie belief that income /gains chargeable to tax had escaped assessment within the meaning of sec. 147 of the Act. In the facts and circumstances, the reasons recorded by A.O. were not proper for forming a belief u/s. 147 of the Act that income chargeable to tax had escaped assessment. On the basis of such improper reasons, the A.O. could not have assumed jurisdiction u/s.147 of the Act. On the basis of these reasons, no logical conclusion could have been drawn that capital gains chargeable to tax escaped assessment. The reasons so recorded were not sustaining the formation of belief 329 JTR 110 (Del) Sarthak Securities Co. The reasons so recorded were not leading to a belief that capital gains escaped assessment. There was no material available on record from which the requisite belief could be formed by A.O. There, was no "tangible material" to come to the conclusion that there was escapement of income. The belief formed by A.O. in the case under consideration was not that of an honest and reasonable person 336 ITR 451 (A.P.) G.V.K. Gautarni Power Ltd. The sufficiency of the evidence of material is not open to scrutiny by the Court but the existence of the belief sine qua non for a valid exercise of power. In the present case, it was impossible for any prudent person to form a reasonable belief that the income had escaped assessment. The reasons so recorded, could never have led a prudent person to form an opinion that the income had escaped assessment. There was absolutely no basis for the A.O. to form a belief that income chargeable to tax has escaped assessment 324 ITR 154 (Born) Prashant S. Joshi vs. ITO.
2.3(b) The appellant's argument and submissions are also have force that the present reopening was made only on the basis of change of opinion. The appellant disclosed all relevant facts pertaining to these issues in its accounts and balance sheet The appellant's return of income was scrutinized u/s.143(3) of the Act vide order dtd.29.12.2006. Thereafter the assessment was reopened and assessment order was passed u/s.143(3) r.w.s. 147 of the Act vide order dtd.10.08.2009. The facts pertaining to the issue on which present reopening has been made were also before the A.O. who completed the earlier assessment order. Therefore, it was presumed that the earlier A.0 had also considered these issue and formed opinion that there was no income/capital gains arising to the appellant on account of this arrangements. The present A.O. has reopened assessment on the basis of same facts which had already been, presumed to have been considered by the earlier A.O. There were no new facts which came into possession of A.O. after the completion of earlier assessment orders. In the facts and circumstances the appellant's argument has force that the present reopening has been made only on the basis of change of opinion which is not permissible under the law as held by Hon'ble Supreme Court in the case of M/s. Kelvinator India Ltd.
8 ITA 5901 & CO 256/Mum/2013 M/s. Fiat India P. Ltd.
2.3(c) In the case under consideration, the reopening was made after lapse of four years from the end of assessment year. As per proviso to sec. 147, where assessment had been completed u/s.143(3) of the Act, the assessment can be reopened after lapse of four years from the end of relevant assessment year only if there is failure on the part of assessee to disclose fully and truly all material facts relevant for assessment. In the case under consideration, admittedly the assessment was reopened after four years from the end of relevant assessment year. The appellant had disclosed relevant facts in note no.12 and 15 of schedule 14 of balance sheet. These were presumably considered by A.O's who framed earlier two assessment orders for this assessment year. Admittedly there was no failure on the part of the appellant to disclose fully and truly all material facts relevant for assessment. Being the facts so, the A.O. was not justified in assuming jurisdiction u/s.147 of the Act since there was no failure on the part of appellant to disclose fully and truly all relevant material."
5.3.2 From an appreciation of the facts on record, the submissions made and the relevant portions of the impugned order, it is imperative that if reopening the assessment was as per the provisions of section 147 of the Act, the AO should have prima facie reason to believe that income of the assessee chargeable to tax has escaped assessment. The question for consideration is, whether on the basis of the reasons recorded by the AO (extracted supra at para 5.3.1), a prima facie belief to that effect could have been formed in the facts and circumstances of the case; that there was capital gain arising to the assessee on cancellation of the aforesaid 11,68,01,390 equity shares and 1,23,80,000 preference shares held not by the assessee but by M/s. Fiat India Automobiles Ltd. For capital gain to arise there should be transfer of capital asset. The prerequisites in this regard as per the provisions of section 2(14) r.w.s. 45(1) of the Act are that:-
(i) there should be existence of a capital asset, (ii) such capital asset should be held by the assessee, and
(iii) there should be transfer of such capital asset from the assessee to the other party.
5.3.3 In the case on hand, the facts are that the assessee had accumulated losses of `1,444.85 crores. As per scheme approved by the 9 ITA 5901 & CO 256/Mum/2013 M/s. Fiat India P. Ltd.
Hon'ble Bombay High Court, this loss was to be wiped out by reorganizing and reducing the assessee's share capital and conversion of certain loans into equity shares. We concur with the view of the learned CIT(A) that in the factual matrix as laid out above, no capital asset of the assessee was sold/transferred and therefore no capital gain arose to the assessee company. The said share capital that was reduced belonged not to the assessee but to shareholders M/s. Fiat India Automobiles P. Ltd. In the case on hand, the assessee was not owning the said shares as capital asset; therefore evidently no asset was sold/transferred by the assessee and consequently no consideration/gain arose to the assessee and therefore the conditions precedent as per the provisions of section 2(14) r.w.s. 45(1) of the Act (supra) are all missing. In this factual/legal matrix of the case, we are of the considered view that the reasons recorded by the AO for reopening the assessment could not have given rise to formation of prima facie reason to believe that income of the assessee chargeable to tax under capital gains had escaped assessment. There was admittedly no failure on the part of the assessee to disclose fully and truly all material facts relevant for making the assessment, since, the relevant facts were disclosed in its financial statements in Notes 12 and 15 of Schedule 14 of the Balance Sheet for the period under consideration, which would have been before the AO for consideration in the earlier scrutiny assessment proceedings which culminated in orders of assessment under section 143(3) of the Act dated 29.12.2006 and under section 143(3) r.w.s. 147 of the Act dated 30.03.2009. In our view, in these third round of assessment proceedings, no new facts had come into the possession of the AO after completion of the earlier assessment orders and therefore the present initiation of reassessment proceedings initiated under section 147 of the Act has been made on the basis of change of opinion which is not permissible, as held by the Hon'ble Apex Court in the case of Kelvinator India Ltd. (supra). In this view of the matter, as discussed from para 5.3.1 of this order (supra), we uphold the finding of the learned CIT(A) that the AO was not justified in assuming jurisdiction under section 147 of the Act for reopening the assessment for A.Y. 2004-05 since there was no failure 10 ITA 5901 & CO 256/Mum/2013 M/s. Fiat India P. Ltd.
on the part of the assessee to disclose fully and truly all relevant material before the AO for making the assessment. Consequently, ground No.1 of the Revenue's appeal is dismissed.
6. Ground No. 26.1 In this ground, the assessee assails the decision of the learned CIT(A), in deleting the addition of `1444.85 crores made by the AO on account of reduction of share capital by way of cancellation of equity and preference shares resulting in LTCG, without appreciating that the holding company M/s. Fiat India Automobiles P. Ltd. had claimed LTCL thereon. The learned D.R. for Revenue was heard and placed support on the order of the AO on this issue.
6.2 The learned A.R. of the assessee reiterated its contentions before the authorities below that its accumulated losses had resulted in erosion of its net worth by more than 50% and therefore by a restructuring scheme approved by the Hon'ble Bombay High Court dated 28.04.2004, the assessee had reduced its share capital of equity shares and preference shares, which has been disclosed and explained in Notes 12 and 15 to Schedule 14 of the Balance Sheet. It is contended that the said shares have been wrongly construed as capital asset of the assessee by the AO when they were held by Fiat India Automobiles Ltd. and not by the assessee. Therefore, since there was no transfer of capital asset by the assessee, there was no question of LTCG arising in the hands of the assessee company. It was further contended that the view of the AO, that since the shareholders of M/s. Fiat India Automobiles Ltd. claimed LTCL, therefore the assessee should be charged LTCG is not sustainable as no capital asset of the assessee company has been sold/transferred to result in any LTCG.
6.3.1 We have heard the rival contentions and perused and carefully considered the material on record. The facts of this matter, as emanate from the record, are that the assessee had huge accumulated losses amounting to `1,444.85 crores. The assessee entered into an arrangement with its shareholders to wipe out such accumulated losses which was approved by 11 ITA 5901 & CO 256/Mum/2013 M/s. Fiat India P. Ltd.
the Hon'ble Bombay High Court on 28.04.2004 whereby its capital was to be restructured, inter alia, by which 11,68,01,390 equity shares and 1,23,80,000 preference shares held by M/s. Fiat India Automobiles P. Ltd. were cancelled. It has been clearly established that the aforesaid shares were not the property or capital assets of the assessee company.
6.3.2 As per the provisions of section 2(14) r.w.s. 45(1) of the Act (which were invoked by the AO to wrongly hold that the assessee is to be assessed to LTCG of `1,444.85 crores) the prerequisites are that there should be:
(i) there should be existence of a capital asset,
(ii) such capital asset should be held by the assessee, and
(iii) there should be transfer of such capital asset from the assessee to
the another person/party.
In the factual matrix of the case, as discussed above, since the cancelled equity and preference shares were capital assets belonged to M/s. Fiat India Automobiles Ltd. and not the assessee, there was no capital asset held by the company. Consequently, there could be not transfer of the aforesaid capital assets by the assessee and therefore, the provisions of section 2(14) r.w.s. 45(1) are not attracted. In this factual and legal matrix of the case, we uphold the finding of the learned CIT(A) that the provisions of section 2(14) r.w.s. 45(1) of the Act are not attracted and therefore since no capital gain arose to the assessee, the addition as capital gain of `1,444.85 crores in the hands of the assessee is unsustainable. Consequently, ground No. 2 of Revenue's appeal is dismissed.
7. In the result, Revenue's appeal for A.Y. 2004-05 is dismissed.
Assessee's Cross Objection in CO No. 256/Mum/2013 8.1 The cross objections raised by the assessee is as under: -
"1. On the facts and in the circumstances of the case and in law, the reopening of assessment is bad in law and liable to be quashed as the Commissioner of Income Tax has given his approval mechanically without following the due process of law as mandated in Section 151 of the Act and hence the order of the 12 ITA 5901 & CO 256/Mum/2013 M/s. Fiat India P. Ltd.
Ld. Commissioner of Income Tax (Appeal) be upheld on this ground also."
8.2 On a perusal of the cross objection raised by the assessee (supra), we find that it supports the impugned order of the learned CIT(A). In view of the fact that Revenue's appeal has been dismissed, the assessee now has no grievance to be addressed, thereby rendering the CO infructuous. In this view of the matter as the CO is rendered infructuous, we dismiss the CO raised by the assessee.
9. In the result, the assessee's CO for A.Y. 2004-05 is dismissed.
10. To sum up, both Revenue's appeal for A.Y. 2004-05 and the assessee's cross objection are dismissed.
Order pronounced in the open court on 14th December, 2016.
Sd/- Sd/-
(Sandeep Gosain) (Jason P. Boaz)
Judicial Member Accountant Member
Mumbai, Dated: 14th December, 2016
Copy to:
1. The Appellant
2. The Respondent
3. The CIT(A) -21, Mumbai
4. The CIT - 10, Mumbai
5. The DR, "F" Bench, ITAT, Mumbai
By Order
//True Copy//
Assistant Registrar
ITAT, Mumbai Benches, Mumbai
n.p.