NG REALITY PRIVATE LIMITED THROUGH NARSINHBHAI GANPATBHAI PATEL V. DY. COMMISSIONER OF INCOME TAX CIRCLE 3(1)(1)

SCA/13496/2018

AI Insights

The case involves NG Reality Private Limited, which challenged a notice issued by the Deputy Commissioner of Income Tax for reopening an assessment for the assessment year 2011-12. The notice was based on two grounds: the issuance of shares at a premium and the treatment of pre-operative expenses. The petitioner argued that the reasons for reopening were incorrect and that the issues had been previously considered during the original assessment. The respondent defended the reopening, asserting that the shares issued at a premium and the treatment of pre-operative expenses warranted a reassessment. The court found that the reasons for reopening were not based on new materials and amounted to a mere change of opinion, leading to the quashing of the notice.

• Counselvise Citation: [2019] 140 COUNSELVISE.COM (IT) 750834 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 25-03-2019
• Assessment Year: misc
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: MAUNA BHATT
• Assessee Lawyers: DARSHAN PATEL
• Keywords: Pre-operative expenses; Reopening of assessment; Scrutiny assessment; Share premium
• Section: 147; 148; 143(3); 143(2)

Judgement Text

"C/SCA/13496/2018 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/SPECIAL CIVIL APPLICATION NO. 13496 of 2018 FOR APPROVAL AND SIGNATURE: HONOURABLE MS.JUSTICE HARSHA DEVANI 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 ? ================================================================ NG REALITY PRIVATE LIMITED THROUGH NARSINHBHAI GANPATBHAI PATEL Versus DY. COMMISSIONER OF INCOME TAX CIRCLE 3(1)(1) ================================================================ Appearance: DARSHAN R PATEL(8486) for the Petitioner MRS MAUNA M BHATT(174) for the Respondent ================================================================ CORAM: HONOURABLE MS.JUSTICE HARSHA DEVANI and HONOURABLE MR. JUSTICE BHARGAV D. KARIA Date : 25/03/2019 ORAL JUDGMENT (PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA) Page 1 of 9 C/SCA/13496/2018 JUDGMENT 1. Rule. Mrs. Mauna Bhatt, learned senior standing counsel waives service of notice of rule on behalf of 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. The petitioner in this petition has challenged the impugned notice dated 30.3.2018 issued under section 148 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) seeking to reopen the assessment under section 147 of the Act for assessment year 2011-12. 4. The facts of the case stated briefly are that the petitioner-assessee filed its return of income for assessment year 2011-12 on 30.09.2011. Notice dated 28.06.2013 under section 143(2) of the Act was issued for scrutiny assessment. The petitioner filed submissions dated 21.08.2013,03.09.2013 and 13.03.2014 with necessary details supported by documents during original scrutiny assessment. Assessment order dated 14.03.2014 was framed under section 143(3) of the Act. The notice under section 148 of the Act was issued to the assessee on 30.3.2018, which is admittedly beyond a period of four years from the date of completion of assessment for assessment year 2011-12. Pursuant to notice under section 148 of the Act, on 25.4.2018, the petitioner filed return under protest and requested for reasons for reopening. On 04.07.2018, the respondent provided reasons for reopening. On 03.08.2018, the respondent also provided a copy of approval of the Commissioner sent along with letter. Page 2 of 9 C/SCA/13496/2018 JUDGMENT 5. The reasons recorded by the Assessing Officer for reopening the assessment under section 147 of the Act read as under: “REASONS FOR RE-OPENING ASSESSMENT U/s. 147 of the I.T. ACT, 1961 Reg: M/s N G Realty Pvt. Ltd. // PAN: AACCN2175N – A.Y. : 2011-12 [1.1] The Assessee company had filed its return of income for the A.Y. 2011-12 on 30/09/2011 declaring total loss at Rs.88,45,311/-. The scrutiny assessment u/s 143(3) was finalized on 14.03.2014 assessing total loss at Rs.83,45,311/-. [1.2] During the F.Y. 2010-11 relevant to assessment year 2011-12, the paid up share capital of assessee was increased from Rs.2,00,00,000 (20,00,000 shares of face value of Rs.10 each) to Rs.8,82,50,00,000 (88,25,000 shares of face value of Rs.10 each). Thus, during the year 68,25,000 shares of face value of Rs.10 each were issued. Out of 68,25,000 shares issued to 17 persons, 25,75,000 shares of face value of Rs.10 each were issued to Ebrahimbhai Umraji Dalal. Shri Dalal was an NRI. All these shares were issued on 29.05.2010 as evidenced from share allotment Form-2 submitted to Registrar of Companies. Out of total shares 25,75,000 issued to Shri Dalal on 29.05.2010, 10,00,000 shares were issued at par and remaining 15,75,000 shares were issued for premium @ Rs.161 per shares. The assessee got Rs.25,35,75,000 as share premium from Shri Dalal. Remaining 42,50,000 shares were issued at par on same day to 16 other persons. This meant that on 29.05.2010, 52,50,000 shares were issued at par and 15,75,000 shares on the same day issued to Shri Dalal for premium @ Rs.161 per shares. Shri Dalal was also issued 10,00,000 shares at par on the same day. [1.3] No details are on record giving reason for not charging premium on 42,50,000 shares issued on the same day to 16 other persons and even from Shri Dalal for issue of 10,00,000 shares on the same day. Therefore, it is established that allotment of 15,75,000 shares on 29.05.2010 to Shri Dalal @ face value of Rs.10 and premium @ Rs.161/- per shares was not genuine when on the same day he was also allotted Page 3 of 9 C/SCA/13496/2018 JUDGMENT other 10,00,000 shares at par and also on that very day, 16 other persons were allotted 42,50,000 share at par. Thus, the amount of Rs.26,93,25,000/- has escaped assessment. [2.] The assessee company was incorporated in 2005- 05 with an object of to promote and develop a sector specific SEZ and for this, it received formal approval for setting up an Engineering sector specific SEZ from Government of India on 23.05.2017. The assessee acquired land for that purpose at village Rajoda and Chanchravadi of Bavla and Sanand Taluka respectively. These acquired lands were notified by Government of India. A consortium of banks which included Bank of Baroda and Corporation Bank started funding for that project from June 2010. The project remained uncompleted till 31.03.2011 (i.e. till the end of AY 2011-12). The SEZ project was later de-notified on 15.01.2013. [2.1] As per the Notes on Accounts (Annexure K), A accounting policies 1. General mentions “As the company has not commenced any commercial activity during the year, no Profit and Loss account has been prepared during the year. All the expenses incurred during the year have been charged to Pre-operative expenses to be capitalized upon commencement of commercial leasing of plot as per SEZ policy”. [2.2] It is however noticed that profit and loss account was prepared and subsequent note on account under the head revenue recognition mentions that all administrative and incidental expenses has been debited to profit and loss account. [2.3] It was noticed from P/L and computation of income that assessee had only income from other sources of Rs.29,80,016/- as against which expenditure of Rs.1,03,37,505/- (Administrative and selling expenses : Rs.69,57,314, Employees cost : Rs.32,35,300 & Financial charges: 1,44,982 was adjusted. In computation of total income, after adding back donation of Rs.11,11,111 and depreciation debited to P/L of Rs.1,72,072, the assessee claimed business loss of Rs.62,46,379 and unabsorbed depreciation as per IT Act of Rs.25,98,932. Thus, the assessee claimed total loss to be carry forwarded at Rs.88,45,311. [2.4] As the assessee company was established for the Page 4 of 9 C/SCA/13496/2018 JUDGMENT object of to promote and develop a sector specific SEZ and it has not undertaken any work other than developing of SEZ and the project taken up by assessee remained under development, all expenditure of assessee was required to be treated as pre-operative expenses to be capitalized upon commencement of commercial leasing of plot as per SEZ policy as narrated in Notes on Accounts (Annexure K) A accounting Policies 1. General. [2.5] As such, income from other sources of Rs.29,80,016 was to be taxed without setting of any expenditure and loss of Rs.83,45,311 arisen due to allowance of expenditure and depreciation should not be allowed. Thus, the amount of Rs.1,13,25,327/- (2980016 + 8345311) has escaped assessment. [3] In view of the above, income to the tune of Rs.28,06,50,327/- (26,93,25,000 + 1,13,25,327) has escaped assessment within the meaning of section 147 of the I.T. Act, 1961. Therefore, I have reason to believe that income has escaped assessment for A.Y. 2011-12 to the tune of Rs.28,06,50,327/- and accordingly, assessment is required to be reopened u/s 147 of the I.T. Act, 1961. Date : 26.03.2018” 6. On receipt of above reasons, the petitioner on 12.07.2018, requested respondent for inspection of case records which was granted by the respondent on 24.07.2018. The petitioner thereafter, on 08.08.2018 filed objections to issuance of notice under section 148 of the Act for reopening of assessment for A,.Y. 2011-12, which was rejected by the respondent vide order dated 13.08.2018. The petitioner has therefore filed this petition challenging the impugned notice. 7. Heard Mr. Darshan Patel, learned advocate for the petitioner and Mrs. Mauna Bhatt, learned senior standing counsel for the respondent. Page 5 of 9 C/SCA/13496/2018 JUDGMENT 8. The learned advocate for the petitioner submitted that the reasons with regard to issuance of 25,75,000 shares to Shri Ebrahimbhai Umraji Dalal as recorded in the reasons for reopening the assessment are incorrect, as in fact only 15,75,000 shares at premium of Rs.161/- are issued to him . It was therefore submitted what is stated in the reasons, that Shri Dalal was issued 10,00,000 shares at par on the same day without charging any premium is incorrect fact. It was submitted that the assessee provided all the details pursuant to the notices issued under sections 142(1) and 143(2) of the Act at the time of scrutiny assessment under section 143 (3) of the Act. Referring to the documents submitted during the course of assessment which are produced on record, more particularly, Form-2 filed before the Registrar of Companies, it was pointed out that a total of 15,75,000 shares were issued to Shri Dalal and not 25,75,000 shares as mentioned by the Assessing Officer in the reasons for reopening the assessment. It was further submitted that the said Form-2 also contains details that the total number of 52,50,000 shares were allotted at par at face value of Rs.10/- each, whereas 15,75,000 shares were issued at a premium of Rs.161/- per share. It was submitted that the assessee received Rs.25,35,75,000 as share premium from Shri Dalal. It was therefore submitted that the Assessing Officer has, thus, without application of mind, issued impugned notice for reopening the assessment on the ground that the amount of Rs.26,93,25,000/- has escaped assessment though there is no failure on the part of the assessee to furnish fully and truly all material facts necessary for assessment. Page 6 of 9 C/SCA/13496/2018 JUDGMENT 9. With regard to the second ground for reopening the assessment, viz., pre-operative expenses, the learned advocate for the petitioner submitted that the pre-operative expenses are duly reflected in the profit and loss account. It was submitted that during the course of assessment, the petitioner filed reply dated 3.9.2013 and furnished details with regard to pre-operative expenditure as per requirement of point no.32 in the notice under section 143(2) of the Act to the effect that no pre-operative expenses were debited to the profit and loss account. Expenses related to pre-operative expenses have been transferred under the head “pre- operative Account (Assets)” at the end of the year on 31.03.2011. Thus, the assessee has disclosed truly and fully all particulars at the time of assessment and the Assessing Officer at the time of scrutiny assessment has considered this issue. It was further submitted that the Assessing Officer at the time of passing the assessment order, has also considered this issue and ROC expenses have been disallowed while framing assessment under section 143(3) of the Act. It was therefore submitted that reopening the assessment on issue of pre- operative expenses would amount to change of opinion. It was also submitted that the CIT (Appeals) has not issued sanction under section 151 of the Act on the date of issuance of notice. 10. On the other hand, the learned advocate for the respondent submitted that the Assessing Officer has rightly issued notice for reopening as it is evident from the reasons itself that the assessee has issued shares only to Shri Dalal at premium and no details are on record for not charging the premium on 42,50,000 shares issued at par on the same day Page 7 of 9 C/SCA/13496/2018 JUDGMENT to 16 other persons and even to Shri Dalal for another 10,00,000 shares on the same day; however, the learned advocate could not say as to on basis of what material on record, the Assessing Officer has recorded in the reasons that Shri Dalal was also issued the 10,00,000/- shares at par on the same day. 11. From the records, it emerges that Form-5 filed before the Registrar of Companies clearly shows that 52,50,000 shares are issued at par to 16 persons, wherein the name of Shri Dalal does not appear. Further, on 29.5.2010, only 15,75,000 shares are issued at premium to Shri Dalal. Therefore, on the face of it, the reasons recorded by the Assessing Officer are without application of mind and are not germane to the material on record. As far as the reasons recorded by the Assessing Officer regarding pre-operative expenses are concerned, the same is already considered by the Assessing Officer at the time of assessment proceedings and therefore, the same would amount to reopening of assessment on a mere change of opinion. 12. On perusal of documents produced on record and upon consideration of the submissions made by the learned advocates appearing on behalf of both the parties, it is evident that at the time of scrutiny assessment, details of both the issues on which reopening is sought to be made, have been considered by the Assessing Officer at the time of passing the assessment order under section 143(3) of the Act and therefore, there is no failure on the part of the assessee to furnish fully and truly all material facts necessary for Page 8 of 9 C/SCA/13496/2018 JUDGMENT assessment before the Assessing Officer. Moreover, from the records, it also appears that Shri Dalal is issued only 15,75,000 shares and not 10,00,000 shares as recorded in the reasons recorded by the Assessing Officer. Therefore, the reasons recorded by the Assessing Officer are not on the basis of any further materials or details which have come to the knowledge of the Assessing Officer after passing the assessment order, and it is only a guess work on part of the Assessing Officer while recording the reasons amounting to a fishing inquiry. 13. In view of above, impugned notice cannot be sustained as the same is issued after expiry of four years from the end of relevant assessment year as proviso to section 147 of the Act would be applicable in absence of any failure on the part of the petitioner to disclose fully and truly all material facts necessary for the assessment year 2011-12. 14. For the foregoing reasons, the petition succeeds and is, accordingly, allowed. The impugned notice dated 30.3.2018 issued under section 148 of the Income Tax Act, 1961 and all consequential action taken pursuant to such notice are hereby quashed. Rule is made absolute accordingly with no order as to costs. (HARSHA DEVANI, J) (BHARGAV D. KARIA, J) B.U. PARMAR Page 9 of 9 "