Dismissed

M/s.Nexus Electro Steel Ltd., v. The Assistant Commissioner of

Madras HC16 Jun 2021WP/21327/2018

Case brief

AI extract

What is this about?

The High Court dismissed a writ petition challenging an income tax reopening notice. The court held that the reasons for reopening, based on new equity share conversions not previously taxed, were valid under Section 147 and did not amount to change of opinion or disclosure within the meaning of the proviso, even during pendency of a related appeal. Judgment date 16-06-2021.

What did the court decide?

Writ petition dismissed; consequential proceedings upheld. No order as to costs.

M/s.Nexus Electro Steel Ltd., Vs The Assistant… — Writ and Judicial Review | Madras HC (2021)

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IN THE HIGH COURT OF JUDICATURE AT MADRAS

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DATED : 16-06-2021

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CORAM

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THE HONOURABLE MR. JUSTICE S.M.SUBRAMANIAM

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WP No.21327 of 2018 And WMP Nos.25000 and 25001 of 2018 And WMP No.267 of 2020

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M/s.Nexus Electro Steel Ltd., Represented by its Managing Director, Mr.Ketan C.Bagadia, No.202, Sivalaya Block C, 16, Ethiraj Salai, Egmore, Chennai – 600 008. .. Petitioner vs.

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1.The Assistant Commissioner of Income Tax, Company Circle-4(2), 121, Mahatma Gandhi Road, Nungambakkam, Chennai – 600 034. 2.The Income Tax Officer, Corporate Ward – 4(2), 121, Mahatma Gandhi Road, Nungambakkam, Chennai – 600 034. .. Respondents Writ Petition is filed under Article 226 of the Constitution of India, praying for the issuance of a Writ of Certiorari, calling for the records on the file of the respondents in PAN.AABCN4224H and quash the impugned notice dated 10.08.2017 issued under Section 148 of the Income Tax Act, 1961 passed by the second respondent and the consequential proceedings in Corporate Circle – 4(2)/PAN:AABCN4224H/2018-19 dated 06.08.2018 passed by the first respondent as illegal and without jurisdiction.

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For Petitioner : Mr.R.Sivaraman For Respondents : Ms.Hema Muralikrishnan, Senior Standing Counsel for Income Tax.

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https://hcservices.ecourts.gov.in/hcservices/

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O R D E R

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The writ on hand is filed by the petitioner, challenging the notice issued under Section 148 of the Income Tax Act, 1961 [hereinafter referred to as the 'Act', in short] and the consequential proceedings dated 06.08.2018 issued disposing of the objections submitted by the petitioner.

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The petitioner-Company filed the Return of Income for the assessment year 2013-2014 on 31.03.2015. The Return was duly processed under Section 143(1) of the Act. The case was selected for scrutiny assessment by issue of notice under Section 143(2) of the Act and the assessment order was passed by the Competent Authority on 31.03.2016.

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The petitioner states that in the assessment order dated 31.03.2016, the Assessing Officer reassessed the total income at Rs.3,68,43,816/- and increased the net balance tax payable to Rs.96,15,940/-. Out of the total addition made, an amount of Rs.1,23,58,000/- was made according to Section 56(2) (viib) of the Income Tax Act, 1961 on the ground that the petitioner-Company has issued 6,00,000 equity shares of face value of Rs.10 at a premium of Rs.90/-. The Assessing Officer observed that as the petitioner-Company failed to obtain achievement targets as per the forecast the value of share should be recomputed and the excess share value received by the petitioner-Company over the market value has to be disallowed as per Section 56(2)(viib) of the Act.

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The petitioner states that over the entire additions made, the company has preferred an appeal before the Commissioner of Income Tax (Appeals) on all the additions/disallowances and the same is pending for disposal. In the meantime, on 10.08.2017, the petitioner received a notice under Section 148 of the Act, from the second respondent proposing to reopen the concluded assessment for the assessment year 20132014 on the premise that the Assessing Officer has reasons to believe that income liable to be taxed has escaped assessment within the meaning of Section 147 of the Act.

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The petitioner filed a letter dated 31.08.2017, seeking reasons for reopening. The second respondent, in letter dated 05.09.2017, furnished the reasons stating that the petitioner-Company has converted 50,01,514 preference shares into equity shares and Rs.5,00,00,000/- worth debentures into equity shares of Rs.10/- each at the premium of Rs.90/- per share which totals to 10,00,151 shares. Since, in the assessment order passed under Section 143(3) of the Act, dated 31.03.2016, the difference between the market value and the share value in respect of 10,00,151 shares to the tune of Rs.2,09,33,160 /- was

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not brought to tax under Section 56(2)(viib) of the Act, proceedings are claimed to have been initiated.

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The learned counsel appearing on behalf of the writ petitioner strenuously contended that there is no tangible material available to satisfy the requirement of Section 147 of the Act. Thus, the reopening of assessment by issuing notice under Section 148 of the Act, is nothing but change of opinion by the Assessing Officer.

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The petitioner submitted various documents, including Return of Income, Balance Sheet for the relevant assessment year, Auditor's Report etc., and the respondents without considering any of these documents reopened the concluded assessment which became final. Thus, the petitioner raised an objection for reopening by elaborating the reasons.

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It was contended before the respondents that there is no fresh material to substantiate the requirement of reasons to believe as contemplated under the provisions of the Act. Without considering any of these grounds, the respondents issued the impugned order, disposing of the objections filed by the petitioner in proceedings dated 06.08.2018, which is under challenge in the present writ petition.

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The learned counsel for the petitioner solicited the attention of this Court with reference to the findings made in the original assessment order dated 31.03.2016 and more specifically, with reference to the achievement of target of profit as per the projected financial and the said portion of the assessment order reads as under:-

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“The reply of the assessee is considered carefully. The assessee has not achieved the target of profit as per the projected financial. Since the projections made have been so exorbitant and unrealistic as compared to the actual realized in the subsequent years, these unrealistic projections are hereby rejected as a basis for the share premium received. Rules laid down in Act/Law cannot be misused or abused by projections estimates which are unrealistic. While there can be deviations on the projections so made, but these deviations as long as they are within a reasonable limit, such projections can be accepted. But in this case, the projections made are so unrealistic and hence the deviations thereon are not acceptable. Hence Valuation made at the Growth rate of 3% held as reasonable and accordingly the market value of share is taken

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at Rs.79.07. Here the entire projected financials are not rejected . Only Growth rate 3% is adopted. The excess of amount of Share value of Rs.100 over the market value of share Rs.79.07 (100-79.07), Rs.20.93 relating 600000 fresh issue of value of shares worksout to Rs.1,25,58,000/-. By invoking provisions of Section 56(2)(viib) of the Income Tax Act, 1961 Rs.1,25,58,000 is added to the total income. Additions made under Section 56(2)(viib) Rs.1,25,58,000

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Total Income admitted Rs.55,02,960 Add:(1)Additions made u/s 36(va Rs.14,67,297 (2)Additions made u/s 43B Rs.24,32,500 (3)Additions made u/s 40(ia) Rs.80,00,000 (4)Additions made u/s 40(ia) Rs.68,83,059 (5)Additions made u/s57(2)(viib) Rs.1,25,58,000

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Total Assessed Income Rs.3,68,43,816”

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It is contended even in the grounds of appeal filed by the petitioner before the Commissioner of Income Tax (Appeals), ground No.5 reveals that “The Learned Assessing Officer erred in adding the excess of share value over the market value of 6,00,000 fresh issue of equity shares amounting to Rs.1,25,58,000/- invoking Section 56(2)(viib) of the Act.“.

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The petitioner states that in view of the fact that the grounds taken before the Commissioner of Income Tax (Appeals) with reference to the reasons furnished for reopening of the assessment, it is improper on the part of the respondents for initiation of reopening proceedings under Section 147 of the Act.

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The learned counsel for the petitioner by citing the reasons furnished by respondents, contended that such reasons are the subject matter of appeal pending before the Commissioner of Income Tax (Appeals) and thus, respondents have committed an error in issuing a notice under Section 148 of the Act.

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The Auditor's Report is also relied on for the purpose of substantiating the grounds raised by the petitioner in the writ petition. For all these reasons, the petitioner submitted that the writ petition is to be allowed.

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The learned Senior Standing Counsel, appearing on behalf of the respondents, objected the contentions raised on

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behalf of the petitioner by stating that the reason for reopening of assessment is clearly stated in proceedings dated 05.09.2017.

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It is a case where Section 148 notice was issued before expiry of 4 years and further, the reason furnished for the purpose of reopening of assessment is no way connected with the subject matter of the issues pending before the Commissioner of Income Tax (Appeals). The issues pending subjudice before the Commissioner of Income Tax (Appeals) are entirely different one, which are unconnected with the reasons furnished for reopening of the assessment by initiating proceedings under Section 147 of the Act.

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The learned Senior Standing Counsel, appearing on behalf of the respondents, contended that the reasons to believe contemplated under Section 147 of the Act, squarely falls with reference to the facts of the present case. In this regard, Explanation 1 and Explanation 2 sub-clause (c)(i) is relied upon to establish that even in case where the income chargeable to tax has been underassessed, the reopening of assessment is permissible. Explanation 1 clarifies that production before the Assessing Officer of Account Books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the foregoing Proviso.

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Therefore, submission of Account Books or other evidence alone is not sufficient. Even a discovery of new material, the Assessing Officer is empowered to reopen the assessment. Mere production of Account Books or other evidences, including Auditor's Report and statements, in the present case, will not amount to disclosure within the meaning of the Proviso to Section 147 of the Act as stated in Explanation 1. Thus, the petitioner has to participate in the further proceedings in order to defend his case and the respondents may be permitted to pass assessment order by following the procedures and therefore, the writ petition is to be dismissed.

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This Court is of the considered opinion that the reasons furnished for reopening of assessment under Section 147 of the Act, is stated in proceedings dated 05.09.2017, which reads as under:-

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“The reason recorded for reopening the assessment for the AY 2013-14 is as under:-

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“During the year, the company has converted 50,01,514 preference shares into equity shares in the ratio of 10:1 i.e., 500151 equity shares and Rs.5,00,00,000/-

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worth debentures into equity shares of Rs.10/- each at the premium of Rs.90 per share i.e., 5,00,000 equity shares. The Total of preference shares and debentures converted into equity shares totals to 10,00,151 Nos. In the assessment order passed under Section 143(3) of the Income Tax Act dated 31.03.2016, the difference between the market value and share value in respect of 1000151 equity shares to the tune of Rs.2,09,33,160/(1000151*20.93) was not brought to tax under Section 56(2)(viib) of the Income Tax Act, 1961. Hence, I have reason to believe that the Income chargeable to tax has escaped assessment for the AY 2013-14.”

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The objections raised by the petitioner is that the reopening is based on change of opinion. The petitioner has contended that all Books of Accounts, Auditor's Report and the relevant documents were furnished even at the time of scrutiny and the final assessment order was passed after adjudicating all these records. Therefore, the reopening of assessment is nothing but change of opinion and there is no tangible material available on record that the Competent Authority have a reason to believe for reopening of assessment.

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In respect of the said contention raised by the petitioner, this Court is of the considered opinion that with reference to the reasons, the ingredients of Section 147 of the Act, have to be looked into. Section 147 of the Act, stipulates that if the Assessing Officer has a reason to believe that any income chargeable to tax has escaped for the assessment year. The phraseology of 'reason to believe' is to be considered with reference to the Proviso Clause and Explanations.

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Explanation 1 to Section 147 of the Act, states that “Production before the Assessing Officer of Account Books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the foregoing Proviso”.

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It is further contended that reasons furnished for reopening of the assessment is no way connected with the pending appeal before the Commissioner of Income Tax (Appeals). Even Explanation 2(c)(i) states that where an assessment has been made, but income chargeable to tax has been underassessed. Then also reopening of assessment is permissible. Thus, mere production of Account Books or other evidence, is insufficient to hold that the Authority has no power to reopen the

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assessment. Even in case of underassessment, the Authority may reopen the assessment.

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In the present case, the appeal filed by the petitioner before the Commissioner of Income Tax (Appeals) reveals that the Assessing Officer erred in adding the excess of share value over the market value of 6,00,000 fresh issue of equity shares amounting to Rs.1,25,58,000/- invoking Section 56 (2)(viib) of the Act. However, the reasons for reopening of the assessment furnished in proceedings dated 05.09.2017 states that during the year, the Company has converted 50,01,514 preference shares into equity shares in the ratio of 10:1 i.e., 500151 equity shares and Rs.5,00,00,000/- worth debentures into equity shares of Rs.10/- each at the premium of Rs.90 per share i.e., 5,00,000 equity shares. The Total of preference shares and debentures converted into equity shares totals to 10,00,151 Nos. In the assessment order passed under Section 143(3) of the Income Tax Act dated 31.03.2016, the difference between the market value and share value in respect of 1000151 equity shares to the tune of Rs.2,09,33,160/- (1000151*20.93) was not brought to tax under Section 56(2)(viib) of the Income Tax Act, 1961.

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Therefore grounds of appeal filed by the petitioner before the Commissioner of Income Tax (Appeals) cannot be a ground for the purpose of quashing the reopening of assessment proceedings issued on certain specific grounds.

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As far as the ground of change of opinion raised by the petitioner is concerned, this Court is of the considered opinion that reading of Explanation 1 and Explanation 2 (c)(i) of Section 147 is unambiguous that even in case of production of Books of Account or other evidence and also in the cases of underassessment, reopening of assessment is permissible.

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Therefore, the grounds raised in this writ petition are devoid of merits. Accordingly, the writ petition stands dismissed. However, there shall be no order as to costs. Consequently, connected miscellaneous petitions are also dismissed.

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Sd/-

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Assistant Registrar(CS-VIII)

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//True Copy//

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Sub Assistant Registrar

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Svn

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To 1.The Assistant Commissioner of Income Tax, Company Circle-4(2), 121, Mahatma Gandhi Road, Nungambakkam, Chennai – 600 034. 2.The Income Tax Officer, Corporate Ward – 4(2), 121, Mahatma Gandhi Road, Nungambakkam, Chennai – 600 034. +1cc to Mr.Hema Muralikrishnan, Advocate, S.R.No.28246 WP No.21327 of 2018 VG-II(CO) SB(22/07/2021)

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16-06-2021

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M/s.Nexus Electro Steel Ltd., v. The Assistant Commissioner of

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M/s.Nexus Electro Steel Ltd., v. The Assistant Commissioner of

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