No reassessment u/s 147 on account of receipt of significant share premium as it lacked tangible evidence

Godrej Projects Development Pvt Ltd. Vs ITO (Bombay High Court)

Conclusion: Reassessment notice issued under section 148 on the ground that how a newly incorporated company could command a significant share premium, was purely hypothetical and lacked tangible evidence and that could not be a tangible material for arriving at reason to believe escapement of income.

Held: Assessee was engaged in real estate development and assessed for Income Tax, had filed returns for AY 2009-10. Although the AO accepted the return with a declared loss, the issue of share premium remained unaddressed in the assessment order. Assessee received a notice under Section 148 to reopen the assessment on March 29, 2014, regarding share premium issues. Despite filing objections, the objections were rejected. In the impugned notice, AO recorded the reason for reopening the assessment that how can a newly corporate company with no proven track record command such a huge share premium in the open market, that too at 1284.2 times of the face value of a share. Assessee company argued that the reassessment lacked fresh material and amounted to impermissible review, as the return had been thoroughly scrutinized. The company also contended that the reopened issue was without jurisdiction, as share premium during a fresh share issuance didn’t constitute taxable income. The receipt of share premium on the issue of fresh shares was on capital account and constituted a capital receipt, which was not chargeable to tax under the Act. It was highlighted that the amendments to income definitions in sections 2(24)(xvi) and 56(2)(viib) that were applicable from April 1, 2013, for AY 2013-14 onward. Also, the amendment to Section 68, incorporating the first proviso, took effect from April 1, 2019, applicable for AY 2013-14 onward. As these amendments were not relevant to the assessment year in question (2009-10), the AO had no basis to believe that income had escaped assessment for that year. Moreover, AO simply said how a company with no proven track record incorporated command such a huge share premium. AO had not bothered to read the balance sheet or the valuation report. AO’s reason to believe, therefore, was purely hypothetical and a matter of conjecture. That could not be a tangible material for arriving at reason to believe escapement of income. In view thereof, the jurisdictional requirement of Section 147 also was not fulfilled and hence, the proposed reopening was without jurisdiction. The Bombay High Court quashed and set aside the reassessment notice, emphasising the lack of tangible material in the AO’s reasoning and reinforcing the importance of adhering to jurisdictional conditions in reopening assessments.

FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT

1. Petitioner is in the business of development of real estate and assessed to Income Tax. For A.Y 2009-10, petitioner, filed its return of income on 7^th September 2009. Petitioner’s return of income was scrutinized under Section 143 (3) of the Income Tax Act 1961 (the Act) by respondent no.1 and an assessment order dated 21^st December 2011 came to be passed. Prior to passing of assessment order, petitioner received two Communications dated 21^st January 2011 and 12^th August 2011 under Section 142(1) of the Act calling upon petitioner to provide certain documents and in particular, the details of shareholding pattern of the company. In the cash flow statement filed, petitioner had mentioned that it had received as share premium amount a sum of Rs.215,01 1,618/- which was used entirely for redemption of preference shares. In fact, in the communication dated 12^th August 2011, petitioner was called upon to furnish “in case of securities premium / share premium received, justify charging of the same with supporting documentary evidences”. Petitioner, in its reply dated 12^th September 2011, stated that petitioner had issued 16730 equity shares of the face value of Rs.10/- each at premium of Rs.12841.86 per equity share to an entity based in Mauritius and that it has taken all necessary permission under Foreign Exchange Management Act (FEMA). Copy of Foreign Inward Remittance Certificate (FIRC) was also filed along with the valuation report. The Assessing Officer (AO) passed the assessment order, in which, of course he has not dealt with the issue of share premium but has accepted the return that petitioner had filed declaring a loss of Rs.87,362/-.

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