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TMI Blog2019 (8) TMI 558X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplication 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ort from CBI 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 CBI. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT vs. Nokia India P Ltd (2019)(413 ITR 146), the Ld A. R submitted that the reasons for reopening should satisfy the requirement of sec. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. 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)/2011-CBI-HYD before the Hon'ble Court of Principal Special Judge for CBI, has submitted that it could n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessing officer is within the realm of subjective satisfaction (see ITO v. Selected Daluband Coal Co. Pvt Ltd (1996)(217 ITR 597)(SC); Raymond Woollen Mills Ltd v ITO (1999)(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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here 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 infor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ldings P Ltd: - "A search was conducted by the CBI 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 CBI and subsequently, the information was passed on to the Income Tax Department. M/s 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 1 S N Name of Investor No. Of shares allotted Nominal Value Premium collected Year of Investment (FY) 1 Silver Oak Technologies Pvt. Ltd. , 95, 418 9, 54, 180 2, 40, 45, 336 2006-07 2 GR Intra Chem Ltd. 95, 417 9, 54, 170 2, 40, 45, 084 2006-07 3 Beta Avenues P Ltd. 763, 358 76, 33, 580 19, 23, 66, 216 2006-07 4 Pioneer Infrastructure Holdings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I have reason to believe that the amount invested by companies mentioned in Table 1 is gratuitous in nature, M/s Carmel Asia Holdings Pvt. Ltd has not offered the amounts invested by the companies mentioned in the Table 1 above as income for the year. Thus, income of Rs. 60, 59, 51, 640/- has escaped assessment and the same needs to be taxed in the hands of M/s Carmel Asia Holdings Pvt Ltd. for AY 2007-08" 24. It is the case of the assessees that the above said reasons recorded by the assessing officer do not lead to the belief that there was escapement of income. In order to better appreciate the contentions of the parties, we may dissect the reasons recorded by the AO as under:- (a) A search was conducted by CBI in the case of Sri Jagan Mohan Reddy and his Group companies on 18. 089. 2011. During the course of search, certain documents were seized by the CBI and subsequently, the information was passed on to the Income tax Department. (b) As per information available, the assessee company received capital and allotted shares at a premium. (c) The investor companies did not receive any stake commensurate to their investment. (d) Some of the companies namely, M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssing Officer to disclose and open his mind through reasons recorded by him. He has to speak through his reasons. It is for the Assessing Officer to reach the conclusion as to whether there was failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the concerned assessment year. It is for the Assessing Officer to form his opinion. It is for him to put his opinion on record in black and white. The reasons recorded should be clear and unambiguous and should not suffer from any vagueness. The reasons recorded must disclose his mind. The reasons are the manifestation of the mind of the Assessing Officer. The reasons recorded should be self-explanatory and should not keep the assessee guessing for the reasons. Reasons provide the link between conclusion and evidence. The reasons recorded must be based on evidence. The Assessing Officer, in the event of challenge to the reasons, must be able to justify the same based on material available on record. He must disclose in the reasons as to which fact or material was not disclosed by the assessee fully and truly necessary for assessment of that assessment year, so as to establish t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 143(1) without scrutiny, and nothing more. This is nothing but a review of the earlier proceedings and an abuse of power by the Assessing Officer, both strongly deprecated by the Supreme Court in CIT v. Kelvinator (supra). The reasons recorded by the Assessing Officer in the present case do confirm our apprehension about the harm that a less strict interpretation of the words "reason to believe" vis-à-vis an intimation issued under section 143(1) can cause to the tax regime. There is no whisper in the reasons recorded, of any tangible material which came to the possession of the Assessing Officer subsequent to the issue of the intimation. It reflects arbitrary exercise of power conferred under section 147. " 28. The Hon'ble Delhi High Court, in the above said case, has extracted the law discussed by Hon'ble Supreme Court in the case of LakhmaniMewal Das (1976)(103 ITR 437)(SC), wherein the principles as to what constitute "reason to believe" has been discussed as under:- "14. The entire law as to what would constitute "reason to believe" was summed up by H. R. Khanna J. , speaking for the Supreme Court in ITO v. LakhmaniMewal Das (1976)(103 ITR 437)(SC). The foll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enefits from the State Government of Andhra Pradesh. 30. We have noticed earlier that the Ld CIT(A) has called for a remand report from the AO and the assessing officer has furnished certain confidential facts in the remand report. For the sake of convenience, we extract below the relevant portion of the remand report furnished by the AO:- "4(iii) Confidential facts: The FIR No. RC19(A)/2011 dated 17-8. 2011 registered by the CBI alleges that various public properties, Licenses/projects, SEZ's, Mining leases, Ports, real estate permissions and other benefits were allotted to persons picked by Shri V. S. Jaganmohan Reddy violating established norms and procedures in the Government of Andhra Pradesh for quid pro quo. These beneficieries have in turn given bribes to Shri V. S. Jaganmohan Reddy under the guise of purchasing shares in companies controlled by him, at inflated share value which is done by artificially increasing the credit worthiness of M/s Carmel Asia Holdings P Ltd (shich is holding M/s Janani Infrastructure P Ltd) by fixing high premiums to receive these amounts, as illegal gratification at the cost of the public exchequer. It is alleged that these payments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... BI has alleged that the benefits were given to share subscriber companies for quid-pro-quo. Accordingly, we are of the view that the source of information about the alleged connection between the investments made by the share applicants in these two assessee companies and the benefits received by them from Government of Andhra Pradesh is CBI only. The next question that would naturally arise is that - whether the said information could trigger the AO to form the belief that there was escapement of income? In the reasons recorded by the AO for reopening of assessment, the AO has referred to the information received from CBI on benefits received by the share applicant companies and further questioning the high share premium collected by the assessee company. The AO, in our view, has raised query on the alleged high share premium only on the basis of allegation of the CBI that there was quid-pro-quo. Hence, on a cumulative consideration of facts, one can easily understand that the AO has also entertained the view, like that of CBI, that the high share premium could be quid-pro-quo for the benefits received. Without so forming the view, the AO could not have come to the conclusion that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apement of income in the hands of the assessee were not spelt out by the AO. This observation, in our view, does not lead to the belief that there was escapement of income. (c) The abovementioned investment made by the abovementioned entities was treated as income in the hands of M/s Jagati Publications P Ltd and M/s Bharathi Cement Corporation Ltd. This observation of the AO gives information about the action taken in the hands of other assessees. It is not celar as to whether the AO wished to follow the action taken in the hands of other assessees. If it is to be so, then the reopening is not valid, because it is not the belief of the AO, but borrowed belief which is not permitted u/s 147 of the Act as per the decision rendered by Hon'ble Bombay High Court in the case of Hindustan Lever Ltd (supra). (d) The premium of Rs. 60, 59, 51, 640/- collected from the investors is not commensurate with the income reflected by M/s Carmel Asia Holdings P Ltd in its return of income.... . There is no reason for the companies listed in Table 1 above to pay such a huge premium amounting to Rs. 60, 59, 51, 640/- except for the fact that the company belongs to Sri Jagan Mohan Reddy Group ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as not shown as to how it can be considered as "income" in the hands of the assessees herein, as per the provisions of Income tax Act. 34. The above said analysis of the observations made by the assessing officer in the reasons recorded for reopening of assessment would show that there was no other material available with the assessing officer to form the belief that there was escapement of income except the information received from CBI on alleged quid pro quo. Accordingly, we are of the view that the assessing officer has reopened the assessments only on the basis of information received from CBI. 35. We have noticed that the Hon'ble Delhi High Court has held in the case of Orient Craft Ltd (supra) that there should be some tangible material to support the re-opening of assessment, even if the return of income had been processed u/s 143(1) of the Act. We have noticed that, except the information received from CBI, there is no other tangible material available with the AO. 36. The Hon'ble Supreme Court has held in the case of LakhmaniMewal Das (supra) that the reasons to believe must have a rational connection with or relevant bearing on the formation of the belief. Rational ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o quo to the benefits received by them. This information cannot be the basis for reopening of assessment, since it is the assessing officer who has to apply his mind on the issue and take an independent view. It is not visible from the reasons recorded by the AO that he has taken any independent view on the matter. The question that would arise is Whether this information alone is sufficient to form the belief that there was escapement of income?. In our view, it will not lead to the belief that the income of the assessee has escaped the assessment. What was received by the assessee was Share capital/Share application money/Share premium. They are admittedly capital receipts. The only section available at that point of time to assess them as income of the assessee was sec. 68 of the Act. During the course of hearing, the Ld D. R accepted that the addition has been made u/s 68 of the Act. However, there was no material available with the assessing officer in order to tax them u/s 68 of the Act. He has only observed about high share premium, but it cannot be the basis for forming belief that there was escapement of income. The AO has further observed that the share premium/applicatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the AO has assessed the share application money and share premium only as income of the assessee in this year. He further submitted that the AO has not referred to any of the sections of the Income-tax Act for assessing the 'share application money and share premium amount' as income of the assessee. At this point of time, the Ld D. R was asked to clarify this point, to which the Ld D. R submitted that the assessing officer has stated in page 7 of the assessment order that the sum of Rs. 6059. 52 lakhs is brought to tax as "unexplained credits". Accordingly he submitted that the AO has invoked the provisions of sec. 68 only for making the above said addition. Hence, both the parties agreed to proceed on the basis that the addition was made by the AO u/s 68 of the Act as "unexplained credits". The Ld A. R submitted that the AO has accepted the genuineness of share capital to the extent of its par value and hence it can be concluded that the AO was satisfied with the three main ingredients required to be proved u/s 68 of the Act viz. identity of the shareholder, credit worthiness of the shareholder and genuineness of the transactions. Accordingly, the Ld A. R submitted that there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Accordingly he submitted that there was no scope for making any addition u/s 68 of the Act on the ground of high share premium. 46. The ld AR invited our attention to the letter dated 25. 2. 2015 placed at page No. 50-53 of the paper book addressed to the AO during the course of asst. proceedings. The ld AR submitted that the assessee has given detailed explanation as to why share premium cannot be assessed as income of the assessee. It was submitted that share capital and share premium receipts are capital account transactions. In this regard, the assessee took support of the decision rendered by Hon'ble Bombay High Court in the case of Vodafone services Pvt. Ltd. (368 ITR 1), wherein it has been held that share premium received is a capital receipt. The Hon'ble Court has specifically observed that the share premium was made taxable by a legal fiction inserted in u/s 56(2)(vii) w. e. f 1/4/2013. Accordingly the Ld A. R submitted that the share premium received by the assessee for the year under consideration shall constitute capital receipt and it cannot be brought to taxation. 47. The Ld. A. R submitted that the AO has reopened the assessments on the basis of information rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he AO, but replies were received by post. Hence the AO got field enquiries conducted independently and the result of enquiry was summarised by the AO in the assessment order, which showed that many companies did not exist at the given address or they lacked credit worthiness. Accordingly, under these set of facts, the Hon'ble Supreme Court has upheld the addition made u/s 68 of the Act. He submitted that the AO, in the instant case, has not conducted any enquiry independently nor did he point out any other deficiency. Accordingly he submitted that the decision rendered by Hon'ble Supreme Court in the above said case will not apply to the facts of the present case. 50. The Ld A. R invited our attention to the decision rendered by Hon'ble Bombay High Court in the case of Pr. CIT vs. M/s Aditya Birla Telecom Ltd (ITA No. 1502 of 2016 dated 26-03-2019). He submitted that the above said assessee had issued preference shares having face value of Rs. 10/- each at a premium of Rs. 10, 890/- per share to a Mauritius based company. The AO took the view that the premium charged to the subscriber is so adverse that no prudent businessman would ever agree to subscribe to it. The assessee furn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the assessee is required to prove the genuineness of the transactions relating to collection of share premium. He submitted that the Hon'ble Supreme Court has sustained the addition of Share premium in the above said case, since the assessee did not offer any explanation as to why the investor companies had applied for shares of the assessee company at a high premium. He submitted that the assessee, in the instant case also, did not substantiate the share premium received by it. 54. The Ld D. R submitted that the valuation report furnished by the assessee has been rejected by the AO on noticing that it did not provide the basis or the basic data for the valuation of shares of certain companies held by the assessee company. Accordingly, the Ld D. R submitted that the AO has properly analysed the details furnished by the assessee and accordingly held that the share premium amount has not been substantiated by the assessee. 55. The Ld D. R drew our attention to the decision rendered by the coordinate bench in the case of M/s Cornerstone Property Investments P Ltd vs. ITO (ITA No. 665/Bang/2017 dated 09-2-2018). He submitted that the issue before the Tribunal was related to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny incidences and alleged benefits which were enjoyed by the investors from the Govt. of AP. But, what is important is that the funds were invested in the company and the company has demonstrated that it has treated the investment as part of share capital fund and also the share premium as part of capital reserve within the company as per the provisions of Companies Act. Since the assessee is artificial person created by the Statute, we cannot trespass the legal entity. It cannot be trespassed provided the authority has evidence to prove that this legal person was used to pass on the benefit to interested shareholders by lifting the corporate veil. In this case, no such evidence was brought on record rather circumstantial evidence and test of human probabilities were applied to convert the capital transaction as per Companies Act into revenue transaction under the Income tax Act.... . 9. 3 Again, we also cannot presume or apply test of human probabilities, we are dealing with the business transaction, it has to be based on cogent material. Accordingly, the Ld A. R submitted that the Ld CIT(A) was not right in applying test of human probabilities to the instant case. The Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has unexplained cash credit only for the reason that the same was commensurate with the size of the income and financial strength of the assessee. We have noticed that the AO has reached to this conclusion without carrying out any further investigation and without bringing any material on record. The AO has not shown that the Share premium so collected by the assessee represents assessee's own money warranting an addition u/s 68 of the Act. 63. However, the fact remains that the share premium has been collected as per the understanding reached between both the parties. We notice that the AO has not mentioned in the assessment order that the assessee has failed to satisfy the three main ingredients in the context of sec. 68 of the Act. His only case was that the assessee did not substantiate the quantum of share premium collected. We have noticed that the assessee has furnished a valuation report in order to justify the share premium, even though the same has been rejected by the AO. However, the important point is that the doubt of the assessing officer on the quantum of share premium cannot be a ground for making addition u/s 68 of the Act. This view is supported by the decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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