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2018 (11) TMI 468

O to form a belief that the income of the assessee chargeable to tax had escaped assessment - Held that:- We are persuaded to subscribe to the claim of the assessee, that the very basis on which the case of the assessee had been reopened viz. that in order to get deduction of ESOP expense, the shares should have been first purchased by the assessee company and subsequently transferred to its employees, is devoid of the necessary sanction of law. - As per Sec. 42(1) of the Companies Act, 1956 (as was then available on the statute), except for under certain cases provided in the said section, a body corporate cannot be a member of a company which is its holding company, and any allotment or transfer of shares in a company to its subsidiary shall be void. The only two exceptions to the aforesaid mandate are carved out in sub-section (2) of Sec. 42 viz. (a) where the subsidiary is concerned as the legal representative of a deceased member of the holding company; or (b) where the subsidiary is concerned as trustee, unless the holding company or subsidiary thereof is beneficially interested under the trust and is not so interested only by way of security for the purposes of transact .....

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The present cross appeals filed by the assessee and the revenue are directed against the order passed by the CIT(A)-22, Mumbai, dated. 07.12.2016, which in turn arises from the assessment order passed under Sec. 143(3) r.w.s 147 of the Income Tax Act, 1961 (for short Act ), dated. 31.03.2015. We shall first advert to the appeal of the assessee. The assessee has assailed the order of the CIT(A) by raising the following grounds of appeal before us: Grounds No. 1 - Invalid Re-assessment Proceedings 1. The Commissioner of Income tax (Appeal)-22, Mumbai - 400 021 ( the CIT(A) ) erred in confirming the reassessment proceedings initiated by the Assessing Officer mechanically without independent application of mind u/s 147 of the Income tax Act, 1961 ( the Act ). 2. He failed to appreciate and ought to have held that : a. the reasons mentioned in the reopening notice were merely a change of opinion and the facts and details were already submitted during the course of filing return of income and regular assessment proceedings. b. the regular assessment was completed on 30.09.2010, wherein all the information was available with the AO who passed the order after going through all the details .....

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ity of the reopening of its concluded assessment by the A.O on multiple grounds viz. (i) that there was no new and fresh material available with the A.O to form a belief that the income of the assessee chargeable to tax had escaped assessment; (ii) that the entire reassessment proceedings were based on details which were already available in the annual accounts of the assessee; (iii) that the assessment was reopened on the base of a query raised by the audit party; (iv) that the reopening of the concluded assessment was based on a mere change of opinion; and (v) that as the issue as regards the allowability of the ESOP expenses incurred by the assessee company was covered by an order of the jurisdictional Tribunal in the case of M/s Accenture Services Pvt. Ltd. Vs. DCIT, Circle-3(1),Mumbai [2010-TIOL-409](ITAT Mumbai); dated 23.03.2010, which was not assailed by the revenue before the Hon ble High Court of Bombay, hence the case of the assessee could not have been reopened by the A.O on the basis of a view which clearly militated against the aforesaid order of the Tribunal, which was available as on the date when the case was reopened. However, the CIT(A) not finding favour with th .....

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ards the allowability of the ESOP expense as a revenue expenditure had came up before a coordinate bench of the Tribunal i.e. ITAT A Bench, Mumbai in the assesses own case for A.Y. 2004-05 viz. Kotak Mahindra Asset Management Co. Ltd. Vs. DCIT-3(2), Mumbai [ITA No. 1416/Mum /2008; dated 07.04.2016], wherein after necessary deliberations the Tribunal had concluded that the same was allowable as a revenue expenditure. It was the contention of the Ld. A.R, that on merits the issue was squarely covered by the aforesaid order of the Tribunal in the assesses own case for A.Y. 2004-05. 6. Further, the Ld. A.R assailed the validity of the jurisdiction assumed by the A.O for reopening the concluded assessment of the assessee company under Sec. 147 of the Act. It was fairly submitted by the Ld. A.R, that the case of the assessee was reopened within a period of 4 years from the end of the relevant assessment year viz. A.Y. 2009-10, and a notice under Sec. 148, dated 13.03.2014 was issued by the A.O. The Ld. A.R drew our attention to the copy of the Reasons to believe ,on the basis of which the case of the assessee was reopened (Page 109) of the assesses Paper Book (for short APB ). The Ld. A. .....

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not assailed the aforesaid order by way of an appeal before the Hon ble High Court of Bombay, thus the same had attained finality. In the backdrop of the aforesaid facts, it was submitted by the Ld. A.R, that it was absolutely beyond comprehension that now when the jurisdictional Tribunal had held that ESOP expense was to be allowed as a revenue expenditure, then as to how by adopting a contrary view the concluded assessment in the case of the assessee could have been reopened. It was thus the contention of the Ld. A.R, that the very basis of the reopening of the case of the assessee was bereft of any force of law, and as such could not be sustained. Rather, the Ld. A.R averred that as a matter of fact the A.O had no reason to believe that any income of the assessee chargeable to tax had escaped assessment. It was the contention of the Ld. A.R, that now when the original assessment framed by the A.O vide his order passed under Sec. 143(3), dated 30.09.2010 was in conformity with the view taken by the Tribunal in the case of M/s Accenture Services Pvt. Ltd. Vs. DCIT, Circle-3(1),Mumbai [2010-TIOL- 409](ITAT Mumbai); dated 23.03.2010, thus there was no reason for the A.O to have dis .....

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. Ltd. Vs. DCIT, Circle-3(1), Mumbai [2010-TIOL-409](ITAT Mumbai); dated 23.03.2010 was not permissible, as the same clearly militated against the principal of judicial discipline. In support of his aforesaid contention, the Ld. A.R relied on the judgment of the Hon ble High Court of Bombay in the case of Bank of Baroda Vs. H.C. Shrivatsava and Anr. (2002) 256 ITR 385 (Bom) and the judgment of the Hon ble Supreme Court in the case of Union of India Vs. Kamlakshi Finance Corporation Ltd. [AIR 1992 Supreme Court 711]. The Ld. A.R taking us through the aforesaid orders submitted that the Hon ble Courts had observed that even if the lower authorities had some reservations on the correctness of the order of the appellate Tribunal, even then they remained under a statutory obligation to follow the same. 7. Per contra, the Learned Departmental Representative (for short D.R ) refuting the contention of the Ld. A.R that the A.O had wrongly assumed jurisdiction for reopening the case of the assessee, submitted that the same was well in order. The Ld. D.R relied on the order of the CIT(A), who as per him, after necessary deliberations had upheld the validity of jurisdiction assumed by the A.O .....

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re. From the perusal of the records, it is seen that the assessee company is a subsidiary of Kotak Mahindra Bank. The assessee company was allowed deduction of expenditure towards ESOP of ₹ 2,63,50,515/- as claimed. As per Schedule 13-II-J to Accounts, it is passed resolution to grant stock option to the eligible employees of the Bank and its subsidiary companies. The option discount, being excess of the market price of the shares over the exercise option of ₹ 2,63,50,515/- was reimbursed to the bank and charged to employees at cost under Schedule. It is seen that the ESOP shares were directly allotted to eligible employees by the Bank and were not purchased by the assessee company. However, in order to get deduction of ESOP, the shares should have been first purchased and subsequently transferred to its employees. This has not done. Hence the same has resulted in irregular allowance of deduction of ESOP by ₹ 2,63,50,515/-. In view of the above, I have reasons to believe that the income chargeable to tax has escaped assessment in the hands of the assessee for AY 2009-10 within the meaning of Sec. 147 of the I.T. Act, on account of failure on the part of the assess .....

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ment, confers jurisdiction to reopen the assessment. Therefore, post 1st April, 1989, power to reopen is much wider. However, one needs to give a schematic interpretation to the words "reason to believe" failing which, we are afraid, s. 147 would give arbitrary powers to the AO to reopen assessments on the basis of "mere change of opinion", which cannot be per se reason to reopen. We must also keep in mind the conceptual difference between power to review and power to reassess. The AO has no power to review; he has the power to reassess. But reassessment has to be based on fulfillment of certain pre-condition and if the concept of "change of opinion" is removed, as contended on behalf of the Department, then, in the garb of reopening the assessment, review would take place. One must treat the concept of "change of opinion" as an in-built test to check abuse of power by the AO. Hence, after 1st April, 1989, AO has power to reopen, provided there is "tangible material" to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief. Our view gets support from .....

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ped assessment. Though, in the notice respondent No. 1 has used the phrase "reason to believe", admittedly between the date of the order of assessment sought to be reopened and the date of forming of opinion by respondent No. 1, nothing new has happened and there is no change of law, no new material has come on record, no information has been received. It is merely a fresh application of mind by the same officer to the same set of facts. Thus, it is a case of mere change of opinion, which, in our opinion, does not provide jurisdiction to respondent No. 1 to initiate proceedings under s. 148 of the Act. It can now be taken as a settled law, because of a series of judgments of various High Courts and the Supreme Court, which have been referred to in the judgment of the Full Bench of the Delhi High Court in the case of Kelvinator of India Ltd. (supra) referred to above, that under s. 147 assessment cannot be reopened on a mere change of opinion. We further find, that the Hon ble High Court of Bombay in the case of Asian Paints Ltd. Vs. DCIT (2008) 308 ITR 195 (Bom), observing that as no new information/material was received by the A.O, therefore, the fresh application of min .....

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iew the order of assessment and a mere change of opinion would not justify a recourse to the power under s. 147. Unless the AO has tangible material to reopen an assessment, the power cannot be held to be validly exercised. The Supreme Court has held thus : "...Therefore, post-1st April, 1989, power to reopen is much wider. However, one needs to give a schematic interpretation to the words reason to believe failing which we are afraid s. 147 would give arbitrary powers to the AO to reopen assessments on the basis of mere change of opinion , which cannot be per se reason to reopen. We must also keep in mind the conceptual difference between power to review and power to reassess. The AO has no power to review; he has the power to reassess. But reassessment has to be based on fulfilment of certain precondition and if the concept of change of opinion is removed, as contended on behalf of the Department, then, in the garb of reopening the assessment, review would take place. One must treat the concept of change of opinion as an inbuilt test to check abuse of power by the AO. Hence, after 1st April, 1989, AO has power to reopen, provided there is tangible material to come to the con .....

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scaped assessment. The aforesaid contention of the Ld. A.R is duly supported by the judgments of the Hon ble High Court of Bombay viz. (i) NYK Lime (India) Ltd. Vs. DCIT (No.2) [2012] 346 ITR 361 (Bom); and (ii) Purity Tech Textile Pvt. Ltd. Vs. ACIT & Anr. [2010] 325 ITR 459 (Bom). In the backdrop of our aforesaid observations, we are of the considered view that as the reopening of the case of the assessee had been resorted to by the A.O merely on the basis of a change of opinion as regards the allowability of the ESOP expense of ₹ 2,63,50,515/-, on the same set of facts and material as were there before his predecessor who had allowed the said claim of expenditure of the assessee in the original assessment framed under Sec. 143(3), dated 30.09.2010, thus the same in light of the aforesaid settled position of law cannot be sustained, and on the said count itself is liable to be vacated. 11. We shall now advert to the contention of the Ld. A.R, that as the reasons to believe on the basis of which the case of the assessee had been reopened were totally vague, thus, no valid jurisdiction could have been assumed by the A.O for proceeding with and therein framing the reassess .....

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was barred as per the mandate of law. We thus, have no hesitation in observing that though the A.O had conveyed the reason for reopening the case of the assessee, but had withheld the very basis for so concluding. Rather, in our considered view, on the basis of our aforesaid deliberations, it can safely be concluded that as the reasons to believe are not only vague, but are found to militate against the mandate of law, thus, the same cannot be approved and for the said reason too are liable to be struck down. 12. Further, we have deliberated on the contention advanced by the Ld. A.R, that the reason that had weighed in the mind of the A.O while reopening the case of the assessee, was that in order to get deduction of ESOP expense, the shares should have been first purchased by the assessee, and subsequently transferred to its employees. As per the A.O, as the assessee had failed to do so, the same had thus resulted in irregular allowance of deduction of ESOP expense of ₹ 2,63,50,515/- . We find substantial force in the contention of the Ld. A.R, that as on 13.03.2014 when the case of the assessee was reopened for the aforesaid reasons, there was an order of the jurisdictional .....

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discernible from the orders of the lower authorities, nor brought to our notice by the Ld. D.R during the course of hearing of the appeal, which would have persuaded us to conclude that the A.O was justified in reopening the case by taking recourse to a contrary view. Further, the said mistake on the part of the A.O had been allowed by the CIT(A) to perpetuate. We find from a perusal of the order of the CIT(A), that he had fairly admitted that the facts involved in the case of Accenture Services Pvt. Ltd. (supra) were identical as in comparison to that of the case of the assessee company. It was observed by him, that in the case of Accenture Services Pvt. Ltd. (supra) also the shares of the parent/holding were issued to the employees of the subsidiary companies, and the subsidiary company had paid to the parent/holding company the difference in the market price and the exercise price of such shares by their employees, and had claimed the same as ESOP expenses. We find that the CIT(A) despite observing as hereinabove, and therein being well conversant with the fact that the A.O had reopened the case on the basis of a view which clearly militated against the view that was arrived at .....

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up the appeal of the revenue. The revenue assailing the order of the CIT(A) has raised before us the following grounds: 1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in not appreciating the fact that the Employee Stock Option Scheme (ESOP) are incurred in relation to issue or shares to employees are not relatable to profits and gains arising ore accruing from business/trade 2. The appellant craves leave to add, amend, vary omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of appeal. 3. The appellant prays that the order of the CIT(A) on the above grounds be set aside and that of the Assessing Officer be restored. 16. Briefly stated, the revenue has assailed the order of the CIT(A) on the ground that he had erred in failing to appreciate that as the ESOP expense of ₹ 2,63,50,515/- was incurred in relation to issue of shares to employees, and was not relatable to profit and gains arising or accruing from business/trade, thus the same was not allowable as a revenue expenditure in the hands of the assessee company. 17. We have heard the authorized representatives of both the parties in c .....

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