2010 (8) TMI 451 - AT - Income Tax

Reopening of the assessment - Income escaping assessment - Search and seizure - The Hon ble Madras High Court referred to the decision of Hon ble Delhi High Court in the case of KLM Royal Dutch Airlines v. Asstt. DIT 2007 -TMI - 13420 - DELHI High Court - Held that reopening is valid and reasons have nexus with belief in respect of escapement of income - Decided in the favour of the revenue Addition - It is not the case of the revenue that the persons in whose names bank account were found were not existing or such persons have made deposits in the companies which provided share capital to the assessee-company - There is no material on record that entries in the books of account of such companies were incorrect or false - Hence in absence of any adverse material the Assessing Officer could not have made addition under section 68 of the Act - Decided in the favour of the assessee Regarding interest - Kerala High Court in the case of Kerala Chemicals & Proteins Ltd. 2010 -TMI - 76873 - KERALA HIGH COURT in which it has been held that interest under section 234D is to be charged from the period 1-6-2003 till the completion of regular assessment - Decided in the favour of the revenue - In the result the appeals of the assessee in both the assessment years are treated as partly allowed

Issues Involved:
1. Validity of reopening the assessment under Section 147 of the Income-tax Act.
2. Addition of Rs. 1.10 crores on account of share capital and share premium.
3. Charging of interest under various sections.
4. Disallowance of expenses under Section 14A for dividend income.

Detailed Analysis:

Issue 1: Validity of Reopening the Assessment under Section 147
The primary grievance of the assessee was the validity of the reopening of the assessment under Section 147. The assessee argued that the reopening was based on suspicion and lacked tangible material. The Assessing Officer (AO) issued notice under Section 148 based on information gathered during the search and seizure operation against M/s B.C. Purohit & Co., which revealed that the assessee received share capital and share premium from companies providing accommodation entries. The AO justified the reopening by citing the reasons recorded during the assessment of the assessee for AY 2005-06, which indicated that the share capital and share premium were bogus entries.

The Tribunal upheld the reopening, stating that the AO had sufficient cause to believe that income had escaped assessment. The reasons recorded were based on tangible material, including the investigation report and statements from individuals involved in M/s B.C. Purohit & Co. The Tribunal referenced several judicial precedents, including the Supreme Court's decision in Rajesh Jhaveri Stock Brokers (P.) Ltd., which clarified that intimation under Section 143(1) is not an assessment, and thus, there was no change of opinion. The Tribunal concluded that the AO was justified in reopening the assessment.

Issue 2: Addition of Rs. 1.10 Crores on Account of Share Capital and Share Premium
The AO added Rs. 1.10 crores to the assessee's income, treating the share capital and share premium received from various companies as non-genuine. The AO issued notices under Section 133(6) to the companies, which responded with details of the share applications. Despite the responses, the AO concluded that the entries were accommodation entries based on the connection to M/s B.C. Purohit & Co.

The Tribunal, however, found that the assessee had provided sufficient evidence to establish the identity, genuineness, and creditworthiness of the shareholders. The companies had substantial net worth, and there was no material evidence to prove that the share application money was bogus. The Tribunal referenced the Supreme Court's decision in Lovely Exports (P.) Ltd., which held that if the share application money is received from identifiable shareholders, the addition should not be made in the hands of the company. Consequently, the Tribunal deleted the addition of Rs. 1.10 crores.

Issue 3: Charging of Interest under Various Sections
The assessee contested the charging of interest under Sections 234A, 234B, and 234D. The Tribunal held that charging of interest is mandatory and directed the AO to provide consequential relief. Specifically, for interest under Section 234D, the Tribunal relied on the Kerala High Court's decision in Kerala Chemicals & Proteins Ltd., which mandated charging interest from 1-6-2003 till the completion of regular assessment.

Issue 4: Disallowance of Expenses under Section 14A for Dividend Income (AY 2004-05)
For AY 2004-05, the AO disallowed Rs. 4 lakhs of expenses under Section 14A, related to the earning of dividend income. The Tribunal referenced the Special Bench decision in Daga Capital Management (P.) Ltd., which held that Section 14A applies to dividend income earned on shares held as stock-in-trade. The Tribunal restored the issue to the AO for reconsideration in light of the pending decision of the Bombay High Court in Godrej & Boyce Mfg. Co. Ltd.

Conclusion:
The Tribunal upheld the validity of the reopening of the assessment under Section 147 but deleted the addition of Rs. 1.10 crores on account of share capital and share premium. The charging of interest was deemed mandatory, with specific directions for interest under Section 234D. The disallowance of expenses under Section 14A was remanded to the AO for reconsideration. The appeals were partly allowed.

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