2023 (12) TMI 283 - HC - Income Tax

Reopening of assessment - Exemption u/s 47 - conversion of the company into a Limited Liability Partnership Firm - whether Notice under Section 148A(b) can be issued for the purpose of re-assessment under Section 147? - HED THAT - There is no dispute that the notice that were issued were under the old regime. However the Hon ble Supreme Court in Union of India and others versus Ashish Agarwal 2022 (5) TMI 240 - SUPREME COURT as a result of which all notices issued under the old regime after 01.04.2021 were to be treated as a notice issued under section 148A of the Income Tax Act 1961. Thus the Notice Issued under Section 148 of the Income Tax Act 1961 to the petitioner on 30.06.2021 was to be decided in accordance with the newly inserted section 148A of the Income Tax Act 1961. Thus the Assessment was to be completed in accordance with the aforesaid provision. Prior to issuance of Notice Issued under Section 148 of the Income Tax Act 1961 to the petitioner on 30.06.2021 the Department had audited the accounts of the petitioner for the assessment year 2016- 17 after the Assessment was completed under Section 143(3) of the Income Tax Act 1961. The audit memo addressed to the Asst Commissioner of Income Tax dated 19.6.2019 indicates that the petitioner a Limited Liability Partnership Firm was earlier Private Limited Company. The 2 partners of the petitioner Firm were itsdirectors. The company was converted into petitioner firm only on 07.08.2015. As on 31.03.2015 one of the partner namely Ms Nina B. Kothari held 25, 07, 688 preference shares of Rs. 10/- each in the said company prior to its conversion into a Limited Liability Partnership Firm. After 31.03.2015 but before the conversion of the company into a Limited Liability Partnership Firm on 07.08.2015 the aforesaid preference shares were transferred to the other partner namely BHK Foundation (Discretionary Trust). Ms Nina B. Kothari thus merely held one equity share in the said company prior to conversion on 07.08.2015. The Trust thus had 1, 99, 999 equity shares of Rs 10 each and 25, 07, 688 preference shares of Rs. 10 each in the company. This aspect was not brought to the notice of the Income Tax Department prior to scrutiny assessment that came to be completed/passed on 27.11.2018. Prime facie it appears that income had escaped assessment. The exemption that was claimed under section 47 (xiv) of the Income Tax Act 1961 is available subject to the rider specified therein. The sales turnover or gross receipts from the business in the 3 preceding year prior to the previous year in which the conversion took place should not have been more than Rs. 60, 00, 000/-. The petitioner firm has not disclosed all the above information to the assessing officer prior to the assessment order that was passed on 27.11.2018 under Section 143 (3) of the Income Tax Act 1961. Therefore the respondents were prima facie justified in re-opening the assessment under Section 148 of the Income Tax Act 1961 for the Assessment year 2016-17. The limitation stood which was to expire stood protected in view of the orders passed by the Hon ble Supreme Court and in view of the Ordinance and the Act in the wake of out break of Covid-19 Pandemic. However in the light of the decision of the Hon ble Supreme Court in Union of India versus Ashish Agarwal notices issued after 01.04.2021 were to be treated as notice issued under section 148A of the Income Tax Act 1961. Therefore the challenge to the proceedings initiated in the light of the decision of the Hon ble Supreme Court cannot be countenanced. Whether the petitioner is indeed entitled to succeed eventually in the re-assessment proceedings or not is to be decided by the 1st respondent. Intervention of this Court against the proceedings initiated cannot be countenanced as prime facie there are indications that income had escaped assessment. The petitioner has also participated in the proceedings and has filed this writ petition only on 16.3.20 23. Therefore the challenge to the impugned proceedings and show cause notices cannot be countenanced at this stage. Consequently this writ petition is liable to be dismissed.

Summary

Issues Involved:
1. Validity of the Impugned Notice and Order under Section 148A of the Income Tax Act, 1961.
2. Alleged change of opinion and re-opening of completed assessment.
3. Compliance with Section 47(xiiib) and Section 47(xiv) of the Income Tax Act, 1961.
4. Jurisdiction and procedural aspects of the re-assessment proceedings.

Summary:

1. Validity of the Impugned Notice and Order under Section 148A of the Income Tax Act, 1961:
The petitioner challenged the Impugned Notice dated 19.05.2022 issued under Section 148A(b) and the order dated 30.06.2022 under Section 148A(d) of the Income Tax Act, 1961. The issuance of these notices was pursuant to the Supreme Court's decision in Union of India Vs. Ashish Agarwal [2022] SCC online SC 543.

2. Alleged change of opinion and re-opening of completed assessment:
The petitioner argued that the re-opening of the assessment for the year 2016-2017, which was completed under Section 143(3) on 27.11.2018, was without merit and inspired by a change of opinion. The petitioner had filed a detailed reply to the notice issued under Section 142(1) of the Income Tax Act, 1961, and claimed that the invocation of Section 148A was unjustified.

3. Compliance with Section 47(xiiib) and Section 47(xiv) of the Income Tax Act, 1961:
The petitioner contended that the income was offered as "income from trading" and claimed exemption on capital gains under Section 47(xiiib). The petitioner asserted that the notice alleging violation of Section 47(xiiib) with reference to proviso (e) and (ea) was unfounded, and the transaction was not chargeable to 'capital gains' under Section 45. The petitioner also argued that Section 47(xiv) was not applicable to the facts of the case.

4. Jurisdiction and procedural aspects of the re-assessment proceedings:
The respondent defended the impugned proceedings, stating they were inspired by audit objections and involved a huge transaction of money, allegedly camouflaged to evade tax. The respondent highlighted that the re-opening of the assessment was justified as the petitioner had not disclosed all relevant information before the assessment order passed on 27.11.2018 under Section 143(3). The limitation period for re-assessment was protected by the Supreme Court's orders and the Ordinance in the wake of the Covid-19 pandemic.

Court's Decision:
The Court acknowledged that the notices issued under the old regime after 01.04.2021 were to be treated as notices under Section 148A, following the Supreme Court's decision in Union of India Vs. Ashish Agarwal. The Court found that there were prima facie indications that income had escaped assessment, and thus, the re-opening of the assessment under Section 148 was justified. The Court dismissed the writ petition, directing the 1st respondent to complete the re-assessment proceedings within six months, ensuring that the order is passed on merits without being influenced by the Court's observations.