M/S. CORNERSTONE PROPERTY INVESTMENTS PVT LTD V. THE INCOME TAX OFFICER

ITA/455/2018

AI Insights

The case revolves around an income tax appeal by M/s. Cornerstone Property Investments Pvt Ltd against the order of the Income Tax Appellate Tribunal (ITAT), which upheld the addition of Rs.49.50 crores to the appellant's income as unexplained cash credit under Section 68 of the Income Tax Act. The appellant contested the validity of the reassessment proceedings and the jurisdiction under which the ITAT and lower authorities operated. The primary legal contention was whether the conditions for reopening the assessment were met and whether the reasons recorded by the AO constituted valid grounds for such reopening. The court examined the procedural and substantive aspects of the reassessment, including the credibility of the reasons provided for reopening the assessment and the evidentiary basis for the addition made under Section 68.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 752658 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 19-04-2023
• Assessment Year: misc
• Other Referred Cases: Principal Commissioner of Income Tax (Central) Vs. NRA Iron & Steel Pvt. Ltd, Pragati Financial Management (P.) Ltd. Vs. Commissioner of Income-tax-II, Kumar Nirman & Nivesh (P.) Ltd. Vs. Assistant Commissioner of Income Tax, Bangalore, CIT Vs. Gagandeep Infrastructure Pvt Ltd
• Laws Referred To: Income Tax Act 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: E I SANMATHI
• Assessee Lawyers: A SHANKAR; M LAVA
• Keywords: Income tax appeal; Reassessment; Section 148; Section 68; Share premium; Unexplained cash credit
• Section: 147; 148; 143(3); 143(1); 68; 260-A; 56(1)(viib)

Judgement Text

" I.T.A No.455/2018 1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 19TH DAY OF APRIL, 2023 PRESENT THE HON’BLE MR. JUSTICE P.S. DINESH KUMAR AND THE HON’BLE MR. JUSTICE C.M. POONACHA INCOME TAX APPEAL NO. 455 OF 2018 BETWEEN: M/S. CORNERSTONE PROPERTY INVESTMENTS PVT LTD REP BY ITS DIRECTOR SHRI. B.P. KUMAR BABU NO.583, 9TH MAIN, OFF CMH ROAD INDIRANAGAR 1ST STAGE BENGALURU – 560 038 PAN: AACCC8744Q ...APPELLANT (BY SHRI. A. SHANKR, SENIOR ADVOCATE FOR SHRI. M. LAVA, ADVOCATE) AND: THE INCOME TAX OFFICER WARD-2(1)(2), BMTC BUILDING 80 FEET ROAD, 6TH BLOCK KORAMANGALA BENGALURU-560 095 …RESPONDENT (BY SHRI. E.I. SANMATHI, STANDING COUNSEL) THIS ITA IS FILED UNDER SEC.260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED: 09.02.2018 PASSED IN ITA NO. 665/BANG/2017, FOR THE ASSESSMENT YEAR: 2008-2009, VIDE ANNEXURE-A, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN AND ANSWER THE SAME IN I.T.A No.455/2018 2 FAVOUR OF THE APPELLANT, TO ALLOW THE APPEAL AND SET ASIDE THE FINDINGS THEREIN TO THE EXTENT AGAINST THE APPELLANT IN THE ORDER PASSED BY THE INCOME-TAX APPELLATE TRIBUNAL, BENGALURU BENCH ‘C’ IN ITA NO. 665/BANG/2017 DATED: 09.02.2018 FOR THE ASSESSMENT YEAR: 2008-2009 [VIDE ANNEXURE-A] AND ETC. THIS ITA, HAVING BEEN HEARD AND RESERVED FOR JUDGMENT ON 13.03.2023 COMING ON FOR PRONOUNCEMENT OF JUDGMENT, THIS DAY, P.S.DINESH KUMAR, J., PRONOUNCED THE FOLLOWING:- JUDGMENT This appeal by the assessee, directed against the order dated February 09, 2018 in ITA No. 665/Bang/2017 passed by the ITAT1 has been admitted to consider following questions of law: 1. Whether the authorities below were justified in law in holding that the mandatory conditions for reopening of assessment has been complied and consequently reopening is valid in law and the facts and circumstance of the case? 2. Whether the reasons recorded constitute reasons to believe to enable reopening of assessment on the facts and circumstance of the case? 3. Whether the Tribunal was justified in law in confirming the addition of Rs.49.50 crores under Section-68 of the Act made by the Assessing Officer towards amount 1 Income Tax Appellate Tribunal I.T.A No.455/2018 3 received as share premium by holding it as unexplained cash credit and passed a perverse order the facts and circumstance of the case? 4. Whether the provisions of Section 68 are attracted in law to the appellant when the appellant had provided all the details required to prove the credit and consequently passed a perverse order ignoring the material evidence placed before the revenue authorities on the facts and circumstance of the case? 5. Whether the Tribunal was justified in law in holding that the amount of Rs.49.50 crores is real income of the appellant when the case of the revenue authorities itself is that there has been only layering of amounts and consequently, no amount originated from the appellant or destinated with the appellant to warrant addition to its income under any provisions of the Income tax Act and consequently passed a perverse order on the facts circumstances of the case? 2. Heard Shri. A. Shankar, learned Senior Advocate for the Assessee and Shri E. I. Sanmathi, learned Standing Counsel for the Revenue. 3. Brief facts of the case are, Assessee is a Private Limited Company engaged in the business of real estate development. Assessee filed its returns for the I.T.A No.455/2018 4 A.Y.2 2008-09 declaring a loss of Rs.6,84,051/- on September 30, 2008 and a revised return declaring a loss of Rs.5,23,751/- on October 14, 2008. It was processed under Section 143(1) of the Income Tax Act, 19613. Subsequently, the AO4 initiated proceeding under Section 147 of the Act, and issued notice under Section 148 of the Act on April 18, 2012. In response to the notice, the assessee addressed a letter dated December 03, 2012 stating that the return filed earlier be treated as assessee’s return and sought the ‘reasons recorded’ for re-opening of the assessment. The AO furnished the reasons and the said reasons inter alia were that assessee had acted as a conduit and the investments made by one M/s. Walden Properties Investments Pvt Ltd (Hereinafter referred to as ‘M/s. Walden’) in the shares of assessee company were not genuine and the income chargeable to tax had escaped the assessment. Upon receipt of reasons, assessee filed its objections on 2 Assessment Year 3 ‘the Act’ for short 4 Assessing Officer I.T.A No.455/2018 5 February 14, 2013. Being satisfied, the AO dropped the re-assessment proceedings under Section 147 of the Act. 4. The AO again issued a fresh notice under Section 148 of the Act. In response to the said notice, assessee vide letter dated July 18, 2013 submitted that there was no income which had escaped the assessment, the notice issued was illegal and without jurisdiction; and requested the AO to treat the earlier return as one filed \"under protest\" in response to the notice under Section 148 of the Act. 5. An assessment order5 was passed under Section 143(3) read with Section 147 of the Act by making an addition of Rs.49.50 crores on account of share premium received from M/s. Walden Properties Investment Pvt Ltd. On appeal, the CIT(A)6 and the ITAT have dismissed assessee’s appeals and confirmed the addition made by the AO. Hence, this appeal. 5 dated March 20, 2015 6 Commissioner of Income Tax (Appeals) I.T.A No.455/2018 6 6. Shri. A. Shankar, learned Senior advocate for the assessee, praying to allow the appeal, submitted that:  the order of re-assessment is bad in law and void ab initio for want of requisite jurisdiction especially, the mandatory requirements to assume jurisdiction under Section 148 of the Act which did not exist in respect of second notice;  the CIT(A) and the ITAT have failed to appreciate that the AO had no reason to believe that any income of the assessee had escaped assessment. The formation of such a belief is a condition precedent and not a mere formality. Absence of valid reasons is not a mere irregularity but a serious illegality and renders the notice and all proceedings thereon as void in law;  the ITAT ought to have appreciated that the reasons recorded could be at best a reason to suspect and did not constitute any reason to believe that any income had escaped assessment I.T.A No.455/2018 7 which is a sine qua non for issuance of a notice under Section 148 of the Act;  the authorities failed to appreciate that the assessee has fully explained the nature of investment received from M/s. Walden and addition under Section 68 of the Act could not have been made in the facts and circumstances of this case and the reasons recorded for the second time is absolutely perverse and devoid of factual foundation;  the issuance of second notice is to enlarge the period of limitation and therefore, bad in law;  the addition made under Section 68 of the Act is without jurisdiction when all the essential requirements for proving the credit have been proved before the AO;  funds never originated from assessee and the funds received were investment from other I.T.A No.455/2018 8 company and hence no addition could be made under Section 68 of the Act;  the assessment of the investor M/s. Walden has been completed under Section 143(3) of the Act accepting the very transactions and therefore, not accepting the said transactions in assessee’s case is perverse;  the authorities below are not justified in invoking Section 68 of the Act in respect of share premium received which is a capital receipt and consequently cannot be taxed in law as it is not real income of the assessee;  the share premium could not have been taxed prior to A.Y. 2013-14 as Section 56(1)(viib) of the Act which deals with taxation of share premium as was inserted only in Finance Act, 2013 with prospective effect hence not applicable to A.Y. 2008-09; I.T.A No.455/2018 9  the authorities have taken evidence selectively and have not correctly examined the material evidence placed before them. 7. Shri. Sanmathi learned Standing Advocate for Revenue, supporting the ITAT’s order submitted that the assessee has failed to prove the creditworthiness of the investor. The ITAT has rightly held that the receipt of Rs. 49.50 Crores by assessee falls under the head ‘Income from Other Sources’. 8. In support of his contentions, Shri. Sanmathi has placed reliance on:  Principal Commissioner of Income Tax (Central) Vs. NRA Iron & Steel Pvt. Ltd7, wherein the Supreme Court has laid down principles which emerge where sums of money are credited as Share Capital/Premium; 7 (2019) Taxman 0074 (SC) I.T.A No.455/2018 10  Pragati Financial Management (P.) Ltd. Vs. Commissioner of Income-tax-II8. and prayed for dismissal of this appeal. 9. We have carefully considered the rival contentions and perused the records. 10. Undisputed facts of the case are, a notice dated 18.4.2012 under Section 148 of the Act was issued to assessee. After considering assessee’s reply, the AO dropped re-assessment proceedings. Subsequently, the AO issued another notice dated 10.06.2013 under Section 148 of the Act. Assessee replied to the said notice stating that there was no escapement of income and to treat the earlier return filed by assessee as filed ‘under protest’. The AO has made an addition of Rs.49.50 Crores on the ground that the nature of money received from M/s. Walden was not satisfactorily explained. In para 12 of his order, he has recorded following two reasons: 8 (2017) Taxmann.com 12 (Calcutta) I.T.A No.455/2018 11 “a) As could be seen from the above, CPIPL is only a loss making company with no activity at all except for holding land of 20 acres. The positive income shown therein being only interest income. The maximum value of its share at point in time is Rs.139.36 and if the share premium were to be treated as a loan, the maximum value per share would be Rs.9.23. The EPS for all the four years shown above is negative and there is no chance of any return on investment from such company. No prudent investor would buy the share of such a company at Rs.1000/- unless he has nothing to lose. b) It is interesting to note in this scenario that while 500,000 shares were allotted to WPPL at a premium of Rs.990/- per share, when around the same time 10,00,000 shares were issued to the assessee company's own director, Sri. B.P.Kumara Babu at Rs. 10/- per share which is a true reflection of the state of affairs of the company. This shows that the shares of the assessee company did not deserve any premium pricing.” and concluded that the transfer of funds from M/s. Walden was not for the purpose of investment and accordingly held, the amount received, as income of assessee Company. 11. The main reason recorded by the Revenue is that shares were issued to the Director of assessee I.T.A No.455/2018 12 Company at Rs.10 whereas, shares were allotted to M/s. Walden at a premium of Rs.990. 12. In various judicial pronouncements (See C. Kant & Co. Vs. CIT9, CIT Vs. Oasis Hospitalities Pvt. Ltd.10, CIT Vs. Youth Construction P Ltd11) it is held that in a case of this nature it is for the assessee to establish the genuineness of the sum found credited in the books of accounts and in order to discharge its onus, assessee must prove the following:  the identity of creditor;  the capacity of the creditor to advance money; and  the genuineness of transaction. 13. The AO has extracted the details of assessee’s investment in the property. According to assessee, assessee had held in all 30 acres of land worth Rs. 150.00 Crores. The AO has also evaluated the value 9 (1980) 126 ITR 63 (Cal) 10 (2011) 333 ITR 119 (Del) 11 (2013) 357 ITR 197 (Del) I.T.A No.455/2018 13 of shares in para 12 of his Order captioned as ‘valuation of shares of CPIPL’ as Rs.337.04 for F.Y.12 2007-08, Rs.336.44 for F.Y.2008-09 and Rs.335.04 for F.Y. 2009-10. Having so recorded he has held the maximum share value as Rs.139.36 in his analyses. 14. The mode of transfer of money from M/s. Walden to assessee through bank is not in dispute. It was argued by Shri. Shankar that before the ITAT, which is the last fact finding authority, assessee had annexed various documents including copies of relevant assessee’s bank statements, copies of share certificates, copy of annual return filed before the Registrar, copy of assessment order under Section 143 r/w Section 153C of the Act in case of M/s Walden. We have perused the copy of the paperbook filed before the ITAT and annexed to this appeal as Annexure-R20. In addition to the aforesaid documents, assessee has also annexed the balance sheet of M/s. Walden as on 31.03.2008 and ITAT’s order in the 12 Financial Year I.T.A No.455/2018 14 case of M/s. Alpha Vilas Pvt. Ltd as Annexure-R22. The said documents show that M/s. Walden had taken term loan of Rs.2,781,107,247/-. from Bank of India, IDBI Ltd, India Bulls Financial Ltd, IDFC ltd., Kotak Mahindra Bank. It had reserves and surpluses of Rs.351,214,199/-. its investments in various mutual funds, national savings scheme and equity shares including the investment with the assessee is Rs.3,022,931,312/-. 15. The first condition is to prove the identity of the investor. The assessee had placed the identity of the investor which is a private limited company on record. The second condition is to prove the capacity of the creditor. The details mentioned in the balance sheet recorded hereinabove prima facie establish that the M/s. Walden had capacity to invest. The third condition is genuineness of transaction. The transfer of funds has been made through bank transactions. Hence, all three aspects must also be held in favour of assessee. I.T.A No.455/2018 15 16. It was urged by Shri. Sanmathi that under Section 68 of the Act, if any sum is found credited in the books and assessee’s explanation is not satisfactory, the AO can add the said sum as income. Supporting Revenue’s case, he argued that assessee had admittedly issued shares at Rs.10 to its Director Mr. Kumar Babu, whereas in case of M/s. Walden it has collected huge premium though value of share was only Rs.10. Therefore, the AO was right in adding the sum credited towards the value of shares as income. 17. We may record that, so far as any sum credited consists of share application money, the same is dealt by proviso to Section 68 of the Act. Admittedly, the proviso had been inserted with effect from 01.04.2013. 18. Revenue has placed reliance on NRA Iron & Steel Pvt. Ltd. This Court in Kumar Nirman & Nivesh (P.) Ltd. Vs. Assistant Commissioner of Income Tax, I.T.A No.455/2018 16 Bangalore13, having considered the authority in NRA Iron & Steel Pvt. Ltd, has held thus: “8. So far as reliance placed by learned counsel for the revenue in case of NRA Iron & Steel (P) Ltd. (supra) is concerned, suffice to say that the aforesaid decision interprets amended section 68, by which a proviso has been added with effect from 1-4-2013. In para 11 of the aforesaid decision, the Supreme Court has culled out the principles where sums of money are credited as share capital/premium. The aforesaid decision has no application to the case of the assessee as the case of the assessee pertains to the assessment year 2005-06.” 19. Admittedly the Assessment year in this case is 2008-09. Therefore as held in Kumar Nirman, the authority in NRA Iron & Steel Pvt. Ltd has no application. 20. Revenue has also placed reliance on para 13 of Pragati Financial Management (P.) Ltd Vs. Commissioner of Income-tax and Others14 which reads thus: “13. We have already observed that the judgment in the case of Rajmandir Estates (P) Ltd (supra) was delivered considering the unamended provision of Section 68 of the Act. In the case of the assessees before us, there is no differing feature so far as applicability of the said statutory provision is concerned, even though the Tribunal 13 [2020] 121 taxmann.com 174 (Karnataka) 14 [2017] 394 ITR 27 (Cal) I.T.A No.455/2018 17 in Subhlakshmi Vanijya (P) Ltd. (supra) had held that the provisos to Section 68 of the Act are retrospective in their operation, and delivered the decision against the assessee in that case that reasoning. In the appeal of Rajmandir Estates (P) Ltd. (supra), the Coordinate Bench did not consider it necessary to examine the question of retroactivity of the aforesaid provision. The Coordinate Bench found the order of the C.I.T. to be valid examining the order applying the unamended provision of Section 68 of the Act only. We do not find any other distinguishing element in these appeals which would require addressing the question as to whether the amendment to Section 68 of the Act was retrospective in operation or not. Neither do we need to address the issue that if the inquiries, as directed, revealed that share capital infused were actually unaccounted money, whether the same could be taxed in accordance with Section 56(2) (vii b) or not. The ratio of the Constitution Bench decision of the Hon'ble Supreme Court in the case of Vatika Township (P) Ltd. (supra) does not apply in the legal context in which we are deciding these appeals. It is not necessary in these appeals to deal with the question of retroactivity of the aforesaid provisions, for which that authority was cited.” 21. We may record that in the above case the High Court of Calcutta has not decided as to whether Section 68 of the Act is retrospective in operation or not. I.T.A No.455/2018 18 22. In CIT Vs. Gagandeep Infrastructure Pvt Ltd (Bom)15, the High Court of Bombay has held as follows: “…………In any view of the matter the three essential tests while confirming the pre-proviso section 68 of the Act laid down by the courts namely the genuineness of the transaction, identity and the capacity of the investor have all been examined by the impugned order of the Tribunal and on facts it was found satisfied. Further it was a submission on behalf of the Revenue that such large amount of share premium gives rise to suspicion on the genuineness (identity) of the shareholders, i.e, they are bogus. The apex court in Lovely Exports (P.) Ltd. (supra) in the context to the preamended section 68 of the Act has held that where the Revenue urges that the amount of share application money has been received from bogus shareholders then it is for the Income-tax Officer to proceed by reopening the assessment of such shareholders and assessing them to taxin accordance with law. It does not entitle the Revenue to add the same to the assessee’s income as unexplained cash credit.” 23. We are in respectful agreement with the High Court of Bombay in Gagandeep and the judgment in Kumar Nirman delivered by this Court. 15 (2017) 394 ITR 680 (Bom) I.T.A No.455/2018 19 24. In view of above discussion, we are of the considered opinion that, the view taken by the AO affirmed by the CIT(A) and the ITAT is unsustainable in law. 25. Hence, the following: ORDER i) Appeal is allowed. ii) The order passed by the ITAT in ITA No. 665/Bang/2017 dated February 09, 2018 upholding the orders passed by the AO and the CIT(A) is set-aside. iii) The substantial questions of law are answered in the favour of assessee and against the Revenue. No costs. Sd/- JUDGE Sd/- JUDGE SPS "