GUPTA SYNTEX PVT. LTD. V. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 2(1)(1), AHMEDABAD

SCA/18887/2021

AI Insights

In this case, Gupta Syntex Pvt. Ltd. challenged a notice issued by the Deputy Commissioner of Income Tax under section 148 of the Income Tax Act, 1961, for reopening the assessment for the year 2013-2014. The notice was based on the grounds that the company had issued shares at a premium which was not in accordance with the valuation methods prescribed under the Income Tax Rules, 1962, as amended. The company argued that the issue had already been considered during the original assessment and reopening constituted a change of opinion. The court agreed with the petitioner, noting that the issue was previously addressed and there was no new tangible material to justify the reopening of the assessment.

• Counselvise Citation: [2022] 140 COUNSELVISE.COM (IT) 746902 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 20-09-2022
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income tax v. Kelvinator of India Ltd.
• Laws Referred To: Income Tax Act, 1961, Constitution of India
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: M R BHATT; KARAN SANGHANI
• Assessee Lawyers: S UDHIR M EHTA; SHAILEE MEHTA
• Keywords: Change of opinion; Escapement of income; Income tax reassessment; Valuation of shares
• Section: 147; 148; 143(3); 143(1); 56(2)(viib); 226

Judgement Text

"C/SCA/18887/2021 JUDGMENT DATED: 20/09/2022 IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/SPECIAL CIVIL APPLICATION NO. 18887 of 2021 FOR APPROVAL AND SIGNATURE: HONOURABLE MR. JUSTICE N.V.ANJARIA and HONOURABLE MR. JUSTICE BHARGAV D. KARIA ========================================================== 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India or any order made thereunder ? ========================================================== GUPTA SYNTEX PVT. LTD. Versus DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 2(1)(1), AHMEDABAD ========================================================== Appearance: MR SUDHIR M MEHTA(2058) for the Petitioner(s) No. 1 MS SHAILEE S MEHTA(5873) for the Petitioner(s) No. 1 for the Respondent(s) No. 1 MR BHATT, SENIOR COUNSEL WITH MR KARAN SANGHANI FOR M R BHATT & CO.(5953) for the Respondent(s) No. 1 ========================================================== CORAM:HONOURABLE MR. JUSTICE N.V.ANJARIA and HONOURABLE MR. JUSTICE BHARGAV D. KARIA Date : 20/09/2022 Page 1 of 17 C/SCA/18887/2021 JUDGMENT DATED: 20/09/2022 ORAL JUDGMENT (PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA) 1.Heard learned advocate Mr. Sudhir M. Mehta for the petitioner and learned Senior Advocate Mr. M.R. Bhatt with learned advocate Mr. Karan Sanghani for M.R. Bhatt and Co. for the respondent. 2.Having regard to the controversy involved in the present case which lies in a very narrow compass, with the consent of the learned advocates for the respective parties, the matter is taken up for final hearing. 3.Rule returnable forthwith. Learned advocate Mr. Karan Sanghani waives service of notice of rule on behalf of the respondent. 4.By this petition under Article 226 of the Constitution of India, the petitioner has challenged the notice dated 27.03.2021 issued Page 2 of 17 C/SCA/18887/2021 JUDGMENT DATED: 20/09/2022 under section 148 of the Income Tax Act, 1961 (For short “the Act, 1961”) for reopening of the assessment proceedings for the assessment year 2013-2014. 5.Brief facts of the case are as under : 5.1) The petitioner is engaged in fabric processing activities of different quality of Grey Fabrics. 5.2) For the assessment year 2013-2014, the petitioner-assessee filed its return of income on 27.08.2013 declaring total income of Rs. Nil. The return of income was processed under section 143(1) of the Act, 1961. Subsequently, the case of the petitioner was selected for scrutiny assessment. 5.3) Show cause notice dated 5.2.2016 was Page 3 of 17 C/SCA/18887/2021 JUDGMENT DATED: 20/09/2022 issued by the respondent asking for certain details from the petitioner regarding the valuation of shares. 5.4) The assessee vide reply dated 7.2.2016 furnished all the relevant details along with explanation of valuation of shares. 5.5) The Assessing Officer passed the order of assessment under section 143(3) dated 8.3.2016. 5.6) After a period of more than four years, the respondent issued notice under section 148 of the Act, 1961 dated 27.3.2021 to the assessee in relation to the Assessment Year 2013-2014 stating that he has reasons to believe that income chargeable to tax had escaped assessment. Page 4 of 17 C/SCA/18887/2021 JUDGMENT DATED: 20/09/2022 5.7) In response to such notice, the assessee filed its return of income for the Assessment Year 2013-2014 and addressed letter dated 9.4.2021 to the respondent for supply of reasons arrived at by the respondent for reopening the assessment. 5.8) The respondent vide letter dated 20.05.2021 supplied the reasons recorded for issuing the reopening notice under section 148 of the Act, 1961. Reasons recorded by the Assessing Officer read as under : “1. Brief details of the assessee: In this case, the assessee L.e. M/s. Gupta Syntex Pvt. Ltd. engaged in the business of processing and trading of fabrics filed its return of income for A.Y 2013- 14 on 27/08/2013 declaring total income at Nil and the same was processed u/s.143(1) of the Act and subsequently order u/s 143(3) of the Act was passed on 08/03/2016 determining total income at Nil 2. Brief details of Information collected/received by the AO: On perusal of the assessment records for the year Page 5 of 17 C/SCA/18887/2021 JUDGMENT DATED: 20/09/2022 under consideration, it is noticed that the assessee has issued 45456 shares on 11/09/2012 and 45634 shares on 26/11/2012 totaling 91090 shares at a premium of Rs. 100/- per share. The shares at a premium of Rs. 100/- was issued on the basis of valuation of report of Shri C. N. Somani, Accountant dated 31/077/2012 wherein the valuation of shares was priced at Rs. 110/- per shares using discounted cash follow method. 3. Analysis of information collected/received: From the Para-2 above and from the assessment records, it is noticed that the assessee has issued 91090 shares of face value of Rs. 10 at a premium of Rs. 100 and received share premium of Rs. 91,09,000/-. The premium was fixed by the assessee as per the valuation report of accountant dated 31/07/2012 wherein the accountant used the method of valuation of shares using discounted cash flow and as per his valuation the share was priced at Rs. 110/- per shares including face value. The amendment in Rule-11UA of IT Rules, whereby the discounted cash flow method was substituted by the IT (Fifth Amendment) Rules 2012 w.e.f. 29/11/2012 as the valuation report of the accountant is of 31/07/2012 prior to the amendment in Rule, the valuation of shares only as per the formula prescribed prior to 29/11/2012. As per this formula, fair market value of each issued shares comes to Rs. 33.83. As the assessee is issued the shares of face value of Rs. 10/- at a premium of Rs. 100/-, the shares are issued at excess Page 6 of 17 C/SCA/18887/2021 JUDGMENT DATED: 20/09/2022 value of Rs. 76.17. The assessee has issued 91090 shares, the excess amount comes to Rs 69,38,325/-. 4. Enquiries made by the AO as sequel to information collected/ received: The facts enumerated above have been found out on examination on the case records of the assesses and are self explanatory. Therefore, no further enquiry is required in this case. On the basis of the same there are reasons to believe that the income chargeable to tax has escaped assessment. 5. Findings of the AO: On examination of the assessment records, it is noticed it is noticed that the assessee has issued 91090 shares of face value of Rs. 10 at a premium of Rs. 100 and received share premium of Rs. 91.09,000/-. The premium was fixed by the assessee as per the valuation report of accountant dated 31/07/2012 wherein the accountant used the method of valuation of shares using discounted cash flow and as per his valuation the share was priced at Rs. 110/- per shares including face value. The amendment in Rule-11UA of IT Rules, whereby the discounted cash flow method was substituted by the IT (Fifth Amendment) Rules 2012 w.ef. 29/11/2012 as the valuation report of the accountant is of 31/07/2012 prior to the amendment in Rule, the valuation of shares only as per the formula prescribed prior to 29/11/2012. As per this formula, fair market value of each issued shares comes to Rs. 33.83. As the assessee is issued the shares of face Page 7 of 17 C/SCA/18887/2021 JUDGMENT DATED: 20/09/2022 value of Rs. 10/- at a premium of Rs. 100/-, the shares are issued at excess value of Rs. 76.17. The assessee has issued 91090 shares, the excess amount comes to Rs. 69,38,325/- which the assessee ought to have considered as income as required u/s. 56(2)(viib) of the Act. 6. Basis of forming reason to believe and details of escapement of income: From the preceding paras it is established that the assessee has issued 91090 shares at a premium of Rs. 100/-as against the fair market value of Rs. 33.83 per shares. Thus, the assessee has received excess share premium of Rs. 69,38,325/- which the assessee ought to have disclosed as income as required u/s. 56(2)(viib) of the Act. Failure on the part of the assessee to disclose fully and truly all the material facts necessary for the assessment, the income of the assessee exceeding Rs. 1 lakh has escaped assessment for the AY 2013-14. I have, therefore, reason to believe that income chargeable to tax has escaped assessment within the meaning of section 147 of the Act and it is a fit case to issue notice u/s. 148 of the Act.” 5.9) The assessee vide letter dated 22.5.2021 tendered objections to the respondent to the reopening notice under section 148. Page 8 of 17 C/SCA/18887/2021 JUDGMENT DATED: 20/09/2022 5.10) The respondent by communication dated 11.11.2021 disposed of the objections raised by the petitioner. 5.11) Being aggrieved by the action of the respondent, the petitioner has preferred this petition. 6.Learned advocate Mr. Sudhir Mehta for the petitioner submitted that on perusal of the reasons recorded by the Assessing Officer, it is apparent that though the issue with regard to the valuation of shares was considered by the Assessing Officer at the time of original assessment under section 143(3) of the Act, 1961, again the same issue is sought to be reconsidered in the reopening proceedings. It was therefore, submitted that the assumption of the jurisdiction by the Assessing Officer to reopen the assessment would amount to change of opinion. Page 9 of 17 C/SCA/18887/2021 JUDGMENT DATED: 20/09/2022 6.1) Learned advocate Mr. Mehta invited the attention of the Court to the queries raised by the Assessing Officer during the course of assessment under section 143(3) of the Act. It was further submitted that even office note placed on record clearly shows that the Assessing Officer obtained clarification regarding the valuation of shares for charging the share premium as per letter dated 22.2.2016 which was found satisfactory. 7.On the other hand learned Senior Advocate Mr. M.R. Bhatt for the Revenue submitted that the impugned notice under section 148 is legal and valid inasmuch as the concept of change of opinion would not be applicable as there was no conscious application of mind by the Assessing Officer on the issue under consideration. It was submitted that the Page 10 of 17 C/SCA/18887/2021 JUDGMENT DATED: 20/09/2022 petitioner did not furnish valuation of shares as per the formula provided under Rule 11UA of the Income Tax Rules, 1962 (For short “the Rules, 1962”) as it stood prior to 29.11.2012 and has followed the discounted cash flow method which was not applicable at the relevant time. It was therefore, submitted that there is escapement of income in view of the aforesaid facts which give jurisdiction to the Assessing Officer to reopen the assessment. 8.Considering the submissions made by the learned advocates on both the sides, it appears that the impugned notice under section 148 of the Act, 1961 is issued only on the ground that the petitioner has failed to comply with the provisions prior to amendment of Rule 11UA of the Rules,1962. It is not in dispute that during the course of assessment proceedings under section 143(3) Page 11 of 17 C/SCA/18887/2021 JUDGMENT DATED: 20/09/2022 of the Act, 1961, all the details were fully and truly disclosed by the petitioner and there is no escapement of income chargeable to tax on account of failure on part of the assessee to disclose fully and truly all material facts. 9.From the facts on record it appears that initially the assessee issued 91090 shares of face vale of Rs. 10/- at a premium of Rs. 100/- and the petitioner received share premium of Rs.91,09,000/- which was fixed and such premium was fixed by valuation of shares using discounted cash flow method. Therefore, though valuation was made prior to amendment in Rule 11UA of the Rules, 1962, the valuation of such shares would not change in view of section 56(2)(vii)(b) of the Act, 1961 which reads as under : “Income from other sources. 56. (1) Income of every kind which is Page 12 of 17 C/SCA/18887/2021 JUDGMENT DATED: 20/09/2022 not to be excluded from the total income under this Act shall be chargeable to income-tax under the head \"Income from other sources\", if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E. (2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head \"Income from other sources\", namely :—…… (vii) where an individual or a Hindu undivided family receives, in any previous year, from any person or persons on or after the 1st day of October, 2009 but before the 1st day of April, 2017,— (b) any immovable property,— (i) without consideration, the stamp duty value of which exceeds fifty thousand rupees, the stamp duty value of such property; (ii) for a consideration which is less than the stamp duty value of the property by an amount exceeding fifty thousand rupees, the stamp duty value of such property as exceeds such consideration:” 10. It is therefore, apparent that there is change of opinion by the Assessing Officer to Page 13 of 17 C/SCA/18887/2021 JUDGMENT DATED: 20/09/2022 reopen the assessment for the Assessment Year 2013-2014, more particularly, when the issue of valuation of shares is already considered during the assessment proceedings under section 143(3) of the Act, 1961. The Assessing Officer cannot have any jurisdiction to issue the notice under section 148 of the Act, 1961 for reopening the assessment for the year under consideration more particularly, when the assessment is sought to be reopened beyond a period of four years as held by the Supreme Court in case of Commissioner of Income tax v. Kelvinator of India Ltd. reported in 2010(2) SCC 723 as under: “2. A short question which arises for determination in this batch of civil appeals is, whether the concept of \"change of opinion\" stands obliterated with effect from 1st April, 1989, i.e., after substitution of Section 147 of the Income Tax Act, 1961 by Direct Tax Laws (Amendment) Act, 1987? xxxx 6. On going through the changes, quoted above, made to Section 147 of the Act, we find that, prior to Direct Tax Laws Page 14 of 17 C/SCA/18887/2021 JUDGMENT DATED: 20/09/2022 (Amendment) Act, 1987, re-opening could be done under above two conditions and fulfillment of the said conditions alone conferred jurisdiction on the Assessing Officer to make a back assessment, but in section 147 of the Act [with effect from 1st April, 1989], they are given a go-by and only one condition has remained, viz., that where the Assessing Officer has reason to believe that income has escaped assessment, confers jurisdiction to re- open the assessment. Therefore, post- 1st April, 1989, power to re-open is much wider. However, one needs to give a schematic interpretation to the words \"reason to believe\" failing which, we are afraid, Section 147 would give arbitrary powers to the Assessing Officer to re-open assessments on the basis of \"mere change of opinion\", which cannot be per se reason to re- open. We must also keep in mind the conceptual difference between power to review and power to re-assess. The Assessing Officer has no power to review; he has the power to re-assess. But re-assessment 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 re-opening 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 Assessing Officer. Hence, after 1st April, 1989, Assessing Officer has power to re-open, 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 Page 15 of 17 C/SCA/18887/2021 JUDGMENT DATED: 20/09/2022 the changes made to Section 147 of the Act, as quoted hereinabove. Under the Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words \"reason to believe\" but also inserted the word \"opinion\" in Section 147 of the Act. However, on receipt of representations from the Companies against omission of the words \"reason to believe\", Parliament re-introduced the said expression and deleted the word \"opinion\" on the ground that it would vest arbitrary powers in the Assessing Officer. We quote hereinbelow the relevant portion of Circular No.549 dated 31st October, 1989, which reads as follows: \"7.2 Amendment made by the Amending Act, 1989, to reintroduce the expression `reason to believe' in Section 147.--A number of representations were received against the omission of the words `reason to believe' from Section 147 and their substitution by the `opinion' of the Assessing Officer. It was pointed out that the meaning of the expression, `reason to believe' had been explained in a number of court rulings in the past and was well settled and its omission from section 147 would give arbitrary powers to the Assessing Officer to reopen past assessments on mere change of opinion. To allay these fears, the Amending Act, 1989, has again amended section 147 to reintroduce the expression `has reason to believe' in place of the words `for reasons to be recorded by him in writing, is of the opinion'. Other provisions of the Page 16 of 17 C/SCA/18887/2021 JUDGMENT DATED: 20/09/2022 new section 147, however, remain the same.\" 11. In view of foregoing reasons, considering the facts of the case impugned notice under section 148 of the Act, 1961 is not tenable in law and is accordingly quashed and set aside and consequentially order dated 11.11.2021 disposing of the objections raised by the petitioner is also quashed and set aside. 12. Rule is made absolute to the aforesaid extent. No order as to costs. (N.V.ANJARIA, J) (BHARGAV D. KARIA, J) RAGHUNATH R NAIR Page 17 of 17 "