M/s Janani Infrastructure Pvt. Ltd. Vs ACIT (ITAT Banglore)
We have held that the sole basis of reopening of the assessment is the information received from the CBI. It is an undisputed fact that AO did not supply those materials 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.
In the instant case, as noticed earlier, it is not the case of the assessing officer that the assessee did not furnish any of the details called for by him. Further, the assessing officer did not find any fault with the documents furnished by the assessee except some deficiencies in the application forms filed by the assessee, which are procedural mistakes. The AO also did not make any independent enquiry with the share applicants in order to find out the veracity of the submissions made by the assessee. Under these set of facts, it has to be presumed that the AO was satisfied with the details furnished by the assessee. Hence, we are of the view that the decision rendered by Hon’ble Supreme Court in the case of NRA Iron and Steel P Ltd shall not apply to the facts of the present case.
FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-
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/s 234B of the Act is consequential in nature and hence it does not require adjudication.
3. Since the underlying facts of all these cases are identical, the appeal filed by M/s Carmel Asia Holdings P Ltd for assessment year 2007-08 was taken up as lead case. Both parties agreed that the decision taken in the above said case can be conveniently applied to other appeals also. The facts relating to the case, as assimilated from the orders of tax authorities, are discussed in brief. Both the assessees herein belong to Shri Y.S. Jagan Mohan Reddy group. Shri Y.S. Jagan Mohan Reddy is son of Shri Rajasekara Reddy, former Chief Minister of state of Andhra Pradesh. A search was conducted by the Central Bureau of Investigation (CBI) in the hands of Shri Jagan Mohan Reddy and his group of companies on 18.08.2011. The information collected by CBI during the course of search was passed on to the Income tax department. These companies had received share application money and had also allotted shares to certain companies at a premium during the years under consideration. The allegation of the CBI was that the share applicant companies have been selected by Shri Y.S. Jaganmohan Reddy and they have received benefits from State Government of Andhra Pradesh during the tenure of Shri Rajasekar Reddy in the form of licences/projects, public properties, SEZs, Mining leases, ports, real estate permissions and other benefits. The case of CBI was that these share applicants, in turn, have given bribes to Shri Y.S. Jaganmohan Reddy under the guise of purchasing shares in companies controlled by him at high premium.
4. Based on the information so received, the assessing officer reopened the assessments of these two companies for the years under consideration by issuing notices u/s 148 of the Act on 29-03-20 14. It is pertinent to note that the original returns of income filed by these assessees for the years under consideration were accepted u/s 143(1) of the Act. In the reopened the assessment, the AO assessed the share application money and share premium received from these share applicants as income of the assessees herein. In respect of one subscriber of share named Shri Srinivasa Reddy, even the par value of shares was also assessed as income in AY 2008-09 in the case of Carmel Asia Holdigs P Ltd. The assessing officer was of the view that 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: –
(A) CARMEL ASIA HOLDINGS: –
Assessment year 2007-08 6059.79 lakhs
Assessment year 2008-09 1878.58 lakhs**
(B) JANANI INFRASTRUCTURE P LTD: –
Assessment year 2007-08 1210.17 lakhs
Assessment year 2008-09 769.55 lakhs
(** In this year, entire share capital received from Shri Srinivasa Naidu has been added).
5. Before Ld CIT(A), these assessees challenged the validity of reopening of assessment. It was contended that the observations made by the assessing officer with regard to flaws in allotment of shares are imaginary and divorced from facts, since the assessee had already given appropriate replies to the Registrar of Companies on the queries raised by him in this regard. It was contended that other observations made by the AO relating to collection of share capital and share premium are based on suspicions, surmises and conjectures. Accordingly, it was contended that the reopening of assessments was not valid. It was also submitted that the AO has reopened the assessment on the basis of information received from CBI, but the AO did not confront the same with the assessee, even though it was asked from him. Accordingly, it was contended that there was violation of principles of natural justice and hence the addition was not justified. It was further submitted that the assessee has furnished all the details of share applicants and hence addition is not warranted.
6. In view of the above said submissions, the Ld CIT(A) called for a remand report from the AO. In the remand report, the AO reiterated the observations made by him in the assessment order and also furnished confidential facts relating to proceedings before CBI, wherein it was alleged that the illegal payments by way of bribe have been given to these assessees under the cover of financial transactions, i.e, by way of equity participation in companies belonging to Shri Jagan Mohan Reddy. In reply thereto, the assessee reiterated its contentions 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 in assuming jurisdiction u/s 147 and the reopening is in order.
Further the fact that the Report from CRI and the copy of FIR not being provided to the Appellant is also not opposed to principles of natural justice as no addition is based on these documents. The additions are made only looking into the activities of the appellant, its back ground, its financial standing etc and not based on the reports from CRI. No information is used from the said reports to make the addition and therefore the AO is justified in not giving copies of the same…….“
8. On merits, the Ld CIT(A) observed that the assessee has miserably failed to justify the Premium received and also not filed confirmations from the investors on the said issue. Accordingly, the Ld CIT(A) held that the assessee has not discharged the onus cast on it to justify its stand that the amount received is actually Share Premium, not only in form but also in pith and substance. He also held that the decision of Hon’ble Supreme Court rendered in the case of CIT vs. SumatiDayal (82 ITR 540) squarely applies to the facts of this case and observed as under: –
“The Apex Court has held that it is trite Law that an Apparent must be considered as Real until it is shown that there are reasons to believe that Apparent is not real. The taxing authorities are not expected to put on blinkers while looking at what is Apparent but must look into surrounding circumstances to find out reality. In the present case amount received as Share Premium is Apparent, but the same is not Share premium is real. The surrounding circumstances definitely show that the same cannot be Share Premium.”
Accordingly, the Ld CIT(A) confirmed the addition made by the AO in all the cases under consideration.
9. The Ld A.R Shri C.P. Ramaswamy, Advocateadvanced his arguments on validity of reopening of assessment. He contended that the re-opening of assessment is bad in law. He submitted that the assessee has sought for the reasons for reopening after complying with the notice issued u/s 148 of the Act and the AO has also supplied the same, which is in the paper book. He submitted that the assessee filed its objections before the AO objecting to reopening of assessment and the same has been rejected by the AO.
10. The Ld A.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 available with the AO, it is mandatory to show that there was nexus between the said material and alleged escapement of income. Relying on the decision rendered by Hon’ble Supreme Court in the case of Pr. CIT vs. Nokia India P Ltd (2019)(413 ITR 146), the Ld A.R submitted that the reasons for reopening should satisfy the requirement of 148, viz., (a) it should contain the facts constituting “reasons to believe” and (b) it should furnish necessary details for assessing escaped income of the assessee.
11. The Ld A.R further submitted that the share premium and share application money are capital receipts in the hands of the assessee and hence there is no scope to entertain the belief that there was escapement of income. In this regard, the Ld A.R placed his reliance on the decision rendered by Hon’ble Supreme Court in the case of G.S. Homes & Hotels P Ltd (2016)(387 ITR 126), wherein it was held that the Share capital received by a housing company for allotment of sites cannot be considered as business income of the assessee. He further submitted that the AO did not consider the said receipts as unexplained cash credits in terms of sec.68 of the Act. He has only doubted the motive of the share applicant in making investments in the assessee companies. He was also of the view that the share premium collected by the assessee is high. These reasons cannot be a ground to treat share application money/share premium etc as income of the assessee. Hence the AO was not right in law in forming the belief that there was escapement of income in the hands of the assessee companies.
12. The Ld A.R reiterated his contention that the basis of reopening of assessment was only the information received from CBI. He submitted that the AO, however, did not supply those materials to the assessee, even though it was requested to him to supply copies of the same during the course of assessment proceedings. He submitted that this said action of the AO has violated the Principles of Natural justice. Hence the AO could not have made the impugned additions and accordingly, the additions so made are liable to be deleted on this ground. In this regard, the Ld A.R placed his reliance on the following decisions:-
(a) SurajmallMohta and Co. vs. A.V. Visvanatha Sastri (1954 Law suit(SC) 113)
(b) Sunita Dhadda vs. The DCIT (ITA No.751/JP/201 1)
(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 the share applicant companies have benefitted from the State Government of Andhra Pradesh. The income, if any, arising out of such benefits would accrue to the share applicant companies only and not to the assessees herein. He submitted that the AO has also mentioned that the share capital received by the assessee is gratuitous in nature. He submitted that any receipt, which may be gratuitous in nature would not give rise to any taxable income as per the provisions of Income tax Act. He submitted that the Hon’ble Supreme Court has held in the case of Parimisetty Seetharamamma (57 ITR 532) that the primary liability and onus is on the department to prove that a certain receipt is liable to be taxed. He submitted that the AO has, nowhere, mentioned in the reasons for reopening that share premium constitutes income of the assessee. He has only questioned the quantum of share premium. Accordingly, he submitted that there is no connection between the reasons recorded and the alleged escapement of income. Accordingly, he contended that the reopening of assessment is bad in law.
14. The Ld A.R reiterated that the AO has reopened the assessment on the basis of information received from CBI that there was quid pro quo, i.e., the share applicants have subscribed to the shares of assessee companies only because they received benefits from Government of Andhra Pradesh. However, the CBI, vide its Memo filed in RC 19(A)/201 1-CBI-HYD before the Hon’ble Court of Principal Special Judge for CBI, has submitted that it could not establish quid pro quo. Accordingly, he submitted that the very basis on which the reopening was done by the AO would fail. The Ld A.R submitted that the Memo submitted before the Hon’ble Principal Special Judge for CBI was collected by the assessee only recently and accordingly, the assessee has moved an application to admit the same as additional Accordingly, the Ld A.R contended that the reopening of assessment is bad in law and hence liable to be quashed.
15. The Ld Special Counsel Shri K.V. Aravind (Ld. DR), appearing on behalf of the revenue, submitted that the assessing officer has reopened the assessments by recording proper reasons. He submitted that the reasons so recorded should be read in its entirety in order to find out as to whether the AO had reason to believe that there was escapement 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 orjustification. 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 (1 991)(1 91 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 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 Daluband Coal Co. Pvt Ltd (1 996) (217 ITR 597) (SC); Raymond Woollen Mills Ltd v ITO (1 999) (236 ITR 34)(SC).
17 ..
18. So long as the ingredients of section 147 are fulfilled, the Assessing Officer is free to initiate proceeding under section 147 and failure to take steps under section 143(3) will not render the Assessing Officer powerless to initiate reassessment proceedings even when intimation u/s 143(1) had been issued.”
16. The Ld D.R submitted that the final outcome of the reopening of assessment is not relevant at the time of reopening of assessment. He submitted that the reasons recorded by the AO should be read as a whole and if it is read so, it would show that the assessing officer did not rely upon the information received from CBI for reopening of assessments. It has only triggered the AO to look into the return of income. Accordingly, the AO has looked into the Return of Income and found that the share premium collected by the assessees is very high and does not commensurate with the income and financial strength of the assessee companies. Accordingly, the assessing officer has formed the belief that there was escapement of income and accordingly he has reopened the assessments. The Ld D.R further submitted that there was no necessity for the AO to furnish copies of information received from CBI, since he has not relied upon them to form the belief. He submitted that the assessing officer has passed orders on 30-03-2015 and the Ld CIT(A) has passed orders on 12-02- 2018 in the instant cases. However, the assessee has sought for copies of information received from CBI on 18-07-20 18, i.e., after completion of present assessments and passing of orders by Ld CIT(A). Accordingly, he submitted that there was no violation of Principle of Natural Justice, as alleged by the assessee.
17. The Ld D.R submitted 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 un-accounted 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 prove the receipt of share capital/premium to the satisfaction of the AO, failure of which, would justify addition of the said amount to the income of the assessee. The Ld D.R submitted that the assessees herein have collected hefty share premiums which were not commensurate with the financial strength and income of the assessees. Further the information received from CBI about quid pro quo has triggered the assessing officer to form the belief that there was escapement of income. Accordingly, the ld D.R contended that the reopening of assessments has been done on sound reasons and hence valid.
18. In the rejoinder, the Ld A.R submitted that the assessing officer has reopened the assessment on the basis of information received from CBI only. The assessees have made this submission before the AO in the objections filed by them for reopening of assessment, vide their letter dated 09-02-2015. In the said letter, it was submitted before the AO that the Principles of Natural justice would be satisfied if the required material which was used against the assessee (Report of Investigation wing) is put to assessee and his comments are taken thereon and considered. Accordingly, the Ld A.R submitted that the assessee had sought for copies of information received from the CBI and investigation wing during the course of assessment proceedings itself. He further submitted that the assessing officer should have independently applied his mind on the information received from the CBI, since the reassessment should be based upon his independent reasoning only. However, the assessing officer has reopened the assessments on the basis of information passed on by the CBI to the Income tax Department, without forming opinion independently.
19. The Ld A.R submitted that the assessing officer has disposed of the objections raised by the assessees by his letter dated 10-02-2015, wherein he has observed as under:-
“….The assessee company has quoted various case laws in respect of disclosure of reasons recorded. The reasons recorded for reopening the cases have already been communicated to the assessee vide this office letter dated 09-10-2014. As per the said letter it is clearly stated in para 2 that CRI has passed on the information. This office only received the information but not any seized material.
The assessee has also quoted various case laws relating to reopening of the assessment. The investigations by the CRI 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. V. Viswanadha Sastry (supra): –
“19. When an assessment on escaped or evaded income is made under the provisions of S.34 of the Indian Income tax Act, all the provisions for arriving at the assessment provided under S. 23(3) come into operation and the assessment has to be made on all relevant materials and on evidence and the assessee ordinarily has the fullest right to inspect the record and all documents and materials that are to be used against him. Under the provisions of section 37 of the Indian Income tax Act the proceedings before the Income tax Officer are judicial proceedings and all the incidents of such judicial proceedings have to be observed before the result is arrived at.
In other words, the assessee would have a right to inspect the record and all relevant documents before he is called upon to lead evidence in rebuttal….”
He submitted that the Principles of Natural justice has been violated by the AO in not providing copies of information received from the CBI, which formed the basis for re-opening of assessment. If the AO had not relied upon the information received from CBI, then there was no tangible material available with the AO to form the belief that there was escapement of income.
21. The Ld A.R further submitted that the reasons recorded should provide link between the evidence and conclusion reached. In this regard, he placed his reliance on the decision rendered by Hon’ble Bombay High Court in the case of Hindustan Lever Ltd vs. R.B. Wadkar, ACIT (2004)(268 ITR 332) and submitted that the AO could not have entertained any belief on escapement of income, since the details of share capital and share premium received by the assessee were already available in the return of income filed by the assessee. Hence the information received from the CBI alone could be the basis for reopening of assessment. He further submitted that the AO has only questioned the valuation of shares and accordingly took the view that the amount invested by the applicants is gratuitous in nature. He has not stated in the reasons that the same constitutes income in the hands of the assessees TheLd A.R submitted that there is no quarrel with the principles enunciated by Hon’ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers P Ltd (supra). However, the revenue cannot take support of the decision rendered by Hon’ble Supreme Court in the case of NRA Iron & Steel P Ltd (supra), 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 Officer 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 year” before he proceeds to invoke the provisions of sec. 147 for making assessment of escaped income. The assessing officer shall issue a notice u/s 148 of the Act, when he forms the belief that the income has escaped assessment and decides to reopen the As per section 148(2) of the Act, the assessing officer shall record his reasons for doing so before issuing any notice u/s 148 of the Act. In the instant cases, the assessing officer has recorded the reasons for reopening. For the sake of convenience, we extract below the reasons recorded by the assessee for reopening of assessment, as communicated to the assessees by the AO in the case of Carmel Asia Holdings P Ltd: –
“A search was conducted by the CB1 in the case of Sri Jagan Mohan Reddy and his Group companies on 18.8.2011. During the course of search, certain documents were seized by the CB1 and subsequently, the information was passed on to the Income Tax Department.
MIs Carmel Asia Holdings Pvt. Ltd., filed its return of income for A.Y.2007-08 on 06.11.2007 which was processed on 13.10.2008. The company is engaged in investing in long term investments in equity shares and other securities of its group companies and subsidiaries.
As per the information available, the assessee company received capital and allotted shares to the following companies and invested it at a premium during the F.Y.2006-07, the details of which are encapsulated in the Table 1 below:
Table I
