If there is no failure to disclose fully and truly all material facts necessary for the purpose of the assessment, then the reopening of the assessment beyond four years from the end of the relevant assessment year is unsustainable

Nihilent Technologies Private Limited Vs DCIT & Anr. (Mumbai High Court)- A division bench of the Bombay high court has quashed the reopening of the income tax assessment of Nihilent Technologies Ltd after four years. The software company had shares held by Hatch Investments (Mauritius) Ltd. The shareholding was reduced from 99.85 percent to 76.63 percent. The assessment for 2003-04 was completed in 2006 wherein the carried forward loss incurred by the firm in the assessment year 2001-02 was allowed to be set off. Last year the assessment was sought to be reopened on the ground that the shareholding pattern has changed and losses could not be carried forward. The high court rejected this argument.

Nihilent Technologies Private Limited Vs DCIT & Anr.

Writ Petition No. 10104 of 2010

Mumbai High Court

Date: 18th July, 2011

ORAL JUDGMENT:

(Per J.P. Devadhar, J.)

1. Rule. Rule is made returnable forthwith. By consent of parties, the petition is taken up for final hearing.

2. This petition is filed to challenge the notice dated 29th March 2010 issued under Section 148 of the Income Tax Act, 1961 seeking to reopen the assessment for assessment year 2003-2004. The petitioner – assessee has also challenged the order dated 16th December, 2010 whereby the objections raised by the assessee for reopening of the assessment have been rejected.

3. The assessee is a private limited company engaged in the business of development of software. The shares of the assessee company were held in the initial three years, as follows.

The share-holding of Hatch Investments (Mauritius) Limited (‘Hatch Investments’ for short) at 99.85% on as on 31st March 2001 was reduced to 76.63% as on 31st March 2002 on account of additional shares issued by the assessee company to the remaining shareholders, thereby increasing the shareholding of other shareholders from 0.15% to 23.37%. It  may be noted that 0.15% shares as on 31st March 2001 were held by 11 shareholders. Neither, Hatch Investments nor other shareholders have sold their shares to any third parties, save and except that one shareholder, namely, Nimisha Singh had transferred her 100 shares in favour of another shareholder viz. L.C. Singh. Thus, as on 31st March 2002 the number of other shareholders of the assessee company was reduced from 11 to 10 shareholders. Even in the year ending on 31st March 2003, none of the shareholders of the assessee Company had sold or transferred their shares in the assessee Company.

4. The assessment for assessment year 2003-04 was completed under Section 143(3) of the Act on 31st March 2006, wherein the carried forward loss incurred by the assessee in assessment year 2001-02 was allowed to be set off.

5. By the impugned notice dated 29th March 2010 assessment for assessment year 2003-2004 is sought to be reopened by recording following reasons:

“In accordance with the provisions contained in section 79 of the I.T. Act, where a change in share holding has taken place in a previous year in the case of a company not being a company in which the Public are substantially interested, no loss incurred in any previous year shall be carried forward and set off against the income of the previous year unless on the last day of the previous year which the shares of the company carry in not less than fifty one percent of the voting power were beneficially held by persons, who beneficially held shares of the company carrying not less than 51% of the voting power on the last day of the year in which loss was incurred.

M/s. Nihilent Technologies P. Ltd. promoted by Shri L.C. Singh in May 2000 and as per share holders agreement out of the authorised capital of Rs. 20,00,00,000/-, the company has issued 15.1% shares to the promoters and stock management team as a sweat equity shares and 10% to EXOP trust for employees on approved stock plan. The balance 74.9% shares were brought by Nedcore group through Ned core bank Ltd. South Africa through Hatch Investment (Mauritius) as and by 31-03-2002 the same was increased to 76.25%. During the year 2002-03, Ned bank Ltd. has diverted its share in Hatch Investment (Mauritius) by selling off 50% of the above holding in the assessee company i.e. 38.125% to Dimension Data, PLC, UK. In other words, the effective share holding of Ned Bank Ltd in the assessee company which stood at 76.25% in the beginning was gone below 51% to 38.125%. As such the assessee company has barred from setting of the previous year losses and carry forward of the same.

In the assessment for the year 2003-04 completed under Section 143(3) the department has allowed set off of losses pertaining to A.Y. 2001-02 amounting to Rs. 5,25,42,452/- to arrive at NIL income and also allowed benefit of carry forward of Rs. 4,25,18,048/- for the unabsorbed portion. Therefore, in order to protect the interest of Revenue, the assessment of the case for the A.Y. 2003- 04 is reopened by issuing notice u/s.148.”

6. From the aforesaid reasons, it is seen that the only ground for reopening of the assessment is that in the assessment year in question, there is a change in the shareholding of the assessee Company of not less than 51% from the shareholding in the assessment year (AY 2001-02) in which the loss was incurred and, therefore, the loss incurred in the assessment year 2001-02 cannot be allowed to be set off in the assessment year in question.

7. The argument of the Revenue is that the assessee had failed to disclose that the shareholding of Hatch Investments in the assessment year 2001-02 was 99.85% and the same was reduced to 38.125% in assessment year 2003-04, because Hatch Investments, being a wholly owned subsidiary of Ned cor Bank Limited, South Africa, the Ned cor Bank Limited during assessment year 2003-04 had transferred 50% shares in Hatch Investments to Dimension Data PLC, UK (‘Dimension’ for short) thus the effective shareholding of Ned cor Bank Limited in the assessee Company stood reduced to 38.125% and, hence, Section 79 of the Act was attracted.

8. The argument on behalf of the assessee is that all the relevant facts were disclosed in the assessment proceedings for assessment year 2003-04 and, therefore, it cannot be said that there was any failure on the part of the assessee to disclose fully and truly all material facts and consequently, reopening of the assessment beyond four years from the end of the relevant assessment year is invalid. It is also contended that in the facts of the present case, Section 79 of the Act is not attracted.

9. From the notes to the financial statements annexed to the return of income for assessment year 2003-2004, it is seen that the assessee had disclosed as follows :

“1.1 Nihilent Technologies Private Limited (‘NTPL’ or the Company) is a company incorporated under the Companies Act, 1956 (‘The Act’) in India, Hatch Investments (Mauritius) limited owns 76.25% equity in the Company. Further, Ned-bank Limited (Ned bank’) and Dimension Data (‘Di-Data’) each own 50% equity stake in Hatch Investments (Mauritius) limited. The balance shares of NTPL are held by the employees and significant members of the Company.”

10. Moreover, during the course of assessment proceedings for assessment year 2003-04, the Assessing Officer by his letter dated 27th September 2005 specifically called upon the assessee to furnish the share holding pattern as on 31st March 2003. The assessee in its reply letter dated 17th November 2005 stated thus :

“Nihilent Technologies Private Limited (Company) is incorporated in India, and is in the area of Software services and its export. The Company was promoted by Mr. L.C. Singh towards the end of May 2000 along with a group of professionals and support of the Nedcor Group of South Africa. We would like to bring your kind attention that during the year 2002-03, Nedbank Limited has divested its stake in Hatch Investments (Mauritius) Limited by selling of 50% shares of Dimension Data, PLC, UK. In a view of above, effective shareholding of Nedbank in Nihilent Technologies Private Limited (NTPL) has been reduced from 76.25% to 38.125% as on 31st March 2003.”

11. Thus, it is evident that during the course of assessment proceedings for assessment year 2003-04 all material facts relating to the transfer of shares of Hatch Investments by Ned cor Bank Limited to Dimension, as well as the fact that the effective shareholding of Ned cor Bank Limited in the assessee Company has been reduced from 76.25% to 38.125% as on 31st March 2003 was disclosed to the assessing officer. Thus, the fact that the effective shareholding of Ned cor Bank Limited in the assessee company has gone down below 51% was specifically brought to the notice of the assessing officer by the assessee. In these circumstances, it cannot be said that there was any failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. If there is no failure to disclose fully and truly all material facts necessary for the purpose of assessment, then, as per the proviso to Section 147 of the Act reopening of the assessment beyond four years from the end of the relevant assessment year cannot be sustained.

12. In the present case, the assessment for assessment year 2003-04 is sought to be reopened beyond four years from the end of the relevant assessment year. Since there is no failure on the part of the assessee to disclose fully and truly all material facts, the reopening of the assessment beyond four years from the end of the relevant assessment year cannot be sustained.

13. In the result, the notice dated 29th March 2010 issued under Section 148 of the Act, as also the order dated 16th December 2010 rejecting the objections raised by the assessee for reopening of the assessment are quashed and set aside.

14. Rule is made absolute in the above terms with no order as to costs.

(A.A. Sayed, J.) (J.P. Devadhar, J.)

NF