1
BEFORE THE HON’BLE SUPREME COURT OF INDIA
BETWEEN THE
COMMISSIONER OF INCOME TAX
VS.
M/s. ABC COMPANY PVT. LTD.
- FACTS OF THE CASE
The assessee company filed its income of income on 24.09.2008 declaring the total income of Rs. 1,406/-.The return of income was processed by the department u/s. 143(1). Later, it was found by the department that the assessee company had debited and claimed as deduction amortized preliminary expenses (which basically included fees paid to the Registrar of Companies for raising the authorised share capital of the company) during the relevant year, which is capital in nature and, as such, not allowable as deduction from the business profits. This led the Assessing Officer to reopen the assessment of the assessee-company u/s. 147and finally reassessment order was framed by the Assessing Officeru/s. 143(3)/147 by making an addition of Rs. 61,040/- on account of Preliminary expenses written off. At the time of reassessment proceedings, the Assessing Officer also found that in the instant year, the assessee company raised share capital by Rs. 12,20,50,000 including premium. The Assessing Officer asked for the details of such share capital. In reply, the assessee filed various details along with the supporting evidences in respect of such share capital. The Assessing Officer also verified the same by issuing letters u/s. 133(6) of the I T Act 1961 to the share subscribers.
Subsequently, Ld. Commissioner of Income Taxissued show cause notice to revise the said re-assessment order by exercising powers conferred u/s. 263 of the Act. The Ld. Commissioner of Income Tax noted that Assessing Officer had not verified the source of funds in respect of the investment made by the share applicants in the assessee company during the course of reassessment proceedings and inaction on the part of Assessing Officer rendered the re-assessment order erroneous and prejudicial to the interest of revenue. In reply to the said show cause notice, it was contended by the assessee-companybefore the Commissioner that the Assessing Officer made specific query in respect of such investment at the time of re-assessment. In reply there to, assessee-company duly filed the details of the share applicants along with the supporting evidences. Thereafter, the Assessing Officer issued notice u/s. 133(6) to the share applicants for cross verification and they duly replied accepting the contribution made by them into the assessee-company. However, the Commissioner of Income Taxdid not accept the contention of the assessee-company and passed an order u/s. 263 directing the Assessing Officer to do the assessment afresh.
2.Tribunal’s view
The assessee-company preferred an appeal before the Ld. Tribunal against the order u/s. 263 passed by the Ld. Commissioner of Income Tax, which was allowed by the Tribunal with the following observations–
“We find that CIT has given reasoning for revision in assessment framed by Assessing Officer u/s. 147/143(3) that mere issue of notices u/s. 133(6) of the Act does not absolve the Assessing Officer from his responsibility of verification of replies furnished by prospective shareholders rather this inaction on the part of Assessing Officer not to verify this information and accordingly renders the assessment order erroneous and prejudicial to the interest of revenue. The allegation of CIT for revising the assessment is that the Assessing Officer has not furnished requisite details in respect to increase in share capital for the relevant previous year relevant to assessment year under consideration. We are of the view that the assessee has filed complete details names, addresses, no. of shares applied for and allotted, cheque nos., name of bank on which cheques were issued to shareholders and even this was verified through notices u/s. 133(6) of the Act and in response to these notices, the prospective shareholders also replied to the assessee, and the confirmations are on record thus the same clearly reveals that complete information was available before the Assessing Officer at the time of framing of assessment and he has given this finding in his order passed u/s. 147/143(3) of the Act.
We, after going through provisions of section 263 of the Act, find that the order u/s. 263 can only be exercised if the circumstances specified therein exist. The circumstances must exist to enable the Commissioner to exercise the power of revision under this sub-sec. which (i) the order should be erroneous, (ii) by virtue of the order being erroneous, prejudice must have been caused to the interest of revenue.
If an Income Tax Officer acting in accordance with law makes certain assessment, the same cannot be held as erroneous by the Commissioner simply because, according to him, the order should have been written elaborately. This section does not visualize a case of substitution of the judgement of the Commissioner for that of the Income Tax Officer, who passed the order, unless the decision is held to be erroneous. We also observe that cases may be visualized where the Income Tax Officer while making an assessment examines the accounts, makes enquires, apply his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimate himself. The Commissioner on perusal of the record may be of the opinion that the assessment made by the Officer concerned was on the lower side and if the case would have left to the Commissioner, he would have assessed the income at a higher figure than the one determined by the Income Tax Officer. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. This is because the I.T.O. has exercised the quasi-judicial power vested on him in accordance with law and arrived at a conclusion and such conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion.
Further, if the order sought to be revised is not prejudicial to the interests of the revenue, Commissioner has no jurisdiction to revise it. For instance, an order of assessment passed by an Assessing Officer without complying with the procedure laid down in the pre 1989 section 144B of the Act is erroneous, but cannot be said to be prejudicial to the interests the revenue. Similarly, failure of the Assessing Officer to deal with the claim of the assessee in the assessment order may be an error, but an erroneous order by itself is not enough to give jurisdiction to Commissioner to revise it under section 263 of the Act. It must further be shown that the order was prejudicial to the interests of the revenue and it is not each and every order passed by the Assessing Officer which can be revised under section 263 of the Act. A bare reading of section 263(1) makes it clear that the pre-requisite to exercise of jurisdiction by the Commissioner suo motu under it is that the order of the AO is erroneous in so far as it is prejudicial to the interests of the Revenue. The Commissioner has to be satisfied with twin conditions, namely, (i) the order of the AO sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent—if the order of the AO is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue—recourse cannot be had to section 263(1). This view is taken by Hon’ble Apex Court in the case of Malabar Industrial Co. Ltd. v. CIT (2000) 243 ITR 83, 87 (SC). Under the similar circumstances, the Hon’ble Jurisdictional high court of Kolkata in the case of CIT vs. M/s. Lotus Capital Financial Service Ltd., ITAT 125 of 2012 vide order dated 16.07.2012 held the revisionary proceedings u/s. 263 as invalid following the case of Malabar Industrial (supra).
Accordingly, in the present case before us, the assessment framed by AO is neither erroneous nor prejudicial to the interest of revenue and this is clearly demonstrated by facts discussed by AO in his order and documents produced before us by assessee. Before parting, we further observe that the Assessing Officer re-opened the assessment on examination of the balance sheet of the assessee company and on finding that the assessee company had debited amortized preliminary expenses of Rs. 61,040/- during the financial year which was capital in nature , as such, the same was not an allowable expense. Thus, the issue for re-opening was only wrongful allowance of expense, which was capital in nature. Thus, the A.O, in law, was not supposed to make roving enquiries and add share capital u/s 68 of the Act. On this count also, there was no error in the order of the A.O.”
3.High Court’s view
The unsuccessful revenuepreferred an appeal before theHon’ble High Court at Calcutta u/s 260A of the Actraising the following foursubstantial questionsof law-
“1.Whether, on the facts and in the circumstances of the case, the Learned Tribunal was justified in setting aside the order of CIT passed u/s. 263 of the Act.
2.Whether, on the facts and in the circumstances of the case, the order passed by the Learned Tribunal is perverse and is liable to be quashed.
3.Whether the Learned Tribunal was justified in holding that the Assessing Officer in the re-opened assessment cannot make additions in respect of items other than the one for which re-opening proceedings u/s. 147 were initiated, when the law is now well-settled that, once reopened, the entire assessment is at large.
4.Whether a non-speaking order passed by the Assessing Officer u/s. 147 is a sufficient ground itself for the exercise of revisionary proceedings u/s. 263.”
Hon’ble High Court has dismissed the revenue’s appeal in liminie holding that no substantial questions of law arises from the order the learned Tribunal.
Revenue’s SLP before the Supreme Court
The revenue has now approached the Hon’ble Supreme Court by filing a special leave petitionagainst the judgment of the Hon’bleHigh Court of Calcutta.
Annexures
Annexure – I - Re-assessment Order u/s. 143(3)/147
INCOME TAX DEPARTMENT
1 / Name of the assessee / ABC Company Pvt. Ltd.2 / Address / XXXXXXXXXXXXXXXXXX
3 / P.A.N / AAAAA1111B
4 / District/Ward/Circle / ITO Ward-100(1), Kolkata
5 / Status / company
6 / Assessment Year / 2008-09
7 / Previous Year / 2007-08
8 / Residential Status / Resident
9 / Method Of Accounting / Mercantile
10 / Nature of Business/Source of income / Interest Income
11 / Dates of hearing / Various dates
12 / Date of order / 28.05.2010
13 / Section & Sub-section under which the assessment is made / 147/143(3) of the I. T Act, 1961.
ORDER U/S 147/143(3) OF THE INCOME TAX ACT, 1961
The assessee company filed its income on 24.09.2008 declaring total income of Rs. 1,406/-. Then, the case was selected for scrutiny by issuing notice u/s 148 for the A.Y- 2008-09. In response of notice u/s 148, Mr. X, the A/R of the assessee company appeared and stated to treat the original return as return u/s 148 and also thereafter complied with the notices u/s 143(2) and 142(1) time to time to produce details and books of A/c which were test checked. The case was discussed and heard.
During the relevant previous year assessee’s main source of income was from interest income and the assessee company raised share capital by Rs. 12,20,50,000 including premium which was test checked by issuing letter u/s. 133(6) of the I T Act 1961.
Considering the discussion with the A/R and facts of the case, the assessed income and tax thereon computed as under:
Income as per P & L a/c / Rs / 1406Add / Income from undisclosed sources estimated for share issue expenses including amortized Preliminary expenses written off of Rs. 61040 / Rs / 61040
Assessed Income / Rs / 62446
R/o / Rs / 62450
COMPUTATION OF TAX / Rs
Tax on Rs. 62450 @ 30 % / Rs / 18735
Add / E. Cess @ 3 % / Rs / 562
Rs / 19297
Add / Interest u/s 234B / Rs / 2509
Payable / Rs / 21806
Assessed u/s 147/143(3) as above. Issue copy of order and D.N to the assessee company.
Sd/-
Annexure – II - Revision Order u/s. 263
Office of the Commissioner Of Income Tax: Kolkata- XXXX: Kolkata
Aayakar Bhawan, 10th Floor, P-7, Chowringhee Square, Kolkata – 700069
1 / Name of assessee / ABC Company Pvt. Ltd.2 / Address / XXXXXXXXXXXXXXXXXX
3 / PAN/GIR / AAAAA1111B
4 / Status / Company
5 / Assessment Year / 2008-09
6 / Date Of Order / 28.03.2013
7 / Section and subsection under which the assessment is made / 147/143(3) of the Income Tax Act, 1961
8 / Designation of the A.O / ITO, Ward-100(1)
9 / Name of Authorized Representative / Written Submissions filed
Order u/s 263 of the Income Tax Act, 1961
Background: Before going into the merits of the instant case, it is necessary to highlight the background which led to it, so that the facts are viewed in correct perspective. Firstly, this particular case should not be viewed in isolation. In fact, on identical facts and under similar circumstances, in a very large number of cases, orders under section 148 of the IT Act were passed under different corporate CITs charges in Kolkata. In all these cases, completed assessments were re-opened at the request of the assessee. The assessee offered paltry amounts as income which had escaped assessment and requested the A.O to tax it by passing order under section 148 of the IT Act. However, manifestly the real motive was not the sudden awakening of the fiscal honesty of the assesses, but to get the stamp of scrutiny on the huge amount of share capital and share premium which all these assesses have brought in the books. Unfortunately, the Assessing Officer seems to have missed the wood for the trees. It is pertinent to mention here that in all these cases huge amount of share capital and surprisingly, unbelievably high amount of share premium have come in the books. It does not stand the test of reasoning and defies all principles of preponderance of probability that an unknown private limited company which apparently does nothing, sells its share of Rs. 10/- at a premium of Rs. 90/-. Anybody who has even a rudimentary knowledge of Capital Market knows that even blue chip companies do not command such premium on the bourse. It is also very intriguing that so many assesses (nearly 250 odd in my charge), all with huge share capital/ premium whose assessments were accepted summarily u/s 143(1) of the IT Act, suddenly realized that petty amounts has escaped assessments and all of them filed request for re-opening the assessment within a short span of time. All these circumstances clearly indicate that what is apparent is probably not real and it needs further examination. The Apex Court in the case of Sumati Dayal- Vs- CIt [214 ITR 801] held that the true nature of a transaction has to be ascertained in the light of surrounding circumstances. Thus, it is now well settled that tax authorities are entitled to look into surrounding circumstances to find out the reality of a transaction by applying the test of human probability. This order under section 263 in this case and in many other similar cases should be viewed in this background so that the larger picture is not lost in the nitty gritty of the individual case.
Modus Operandi: “There cannot be two opinions on the aspect that the pernicious practice of conversion of unaccounted money through the masquerade or channel of investment in the share capital of a company must be firmly excoriated by the Revenue”.
The aforementioned quote is the observation of Hon’ble Justice B N Kripal while delivering the judgement in the case of CIT vs. Divine Leasing 299 ITR 268 Delhi. The pernicious practice referred to by Justice Kripal, of late has acquired such enormous proportion that effort for excoriation is found wanting. There has been a mushrooming growth of professional entry operators who provide such share capital for a commission. The commission ranges from 2% to 10% of the capital given. Kolkata rates are reported to be cheapest in the country which is why a major portion of black money from throughout the country is routed via the paper companies of the Kolkata entry operators and are shown as genuine share capital in the beneficiary companies. These entry operators register a large number of companies with the ROC with their employees or acquaintances as directors. There are professional directors who are willing to sign as directors for a fee. These companies then issue nominal share capital with huge premium. The huge share premium is just to save on the fees charged by the ROC. The shares are subscribed by the own companies of the operator. The capital of the companies are raised artificially by circular transaction. For example, if one cheque of Rs. 25 Lakhs is rotated through a bank account 10 times it raises the capital to Rs. 2.5 crores. If there are 100 companies operated by the entry operators, the total artificial capital would be Rs. 250 crores. The balance sheet of such companies would typically show share capital and reserves (premium) on the liability side and fictitious assets like investment in unquoted shares on the asset side. The investments are also in the shares of the own companies of the operator. Once this basic ground work is over, the operator is ready to give entries. Anyone can approach with cash, which is deposited in a proprietorship account and then transferred through cheque to one of the companies of the operator. After that, the cheque is routed through a maze of own companies and finally given as share capital by cheque to the beneficiary company. This is a typical one time entry transaction. Alternatively, the beneficiary can buy a company in which case, the share holders change, the fictitious investments liquidated by cash provided by the buyer. The bank account of the company has proceeds from the liquidation of investments, which the buyer uses as white money, without payment of tax. The commission to be paid to the operator typically depends on the due diligence done by the operator in respect of his companies. The rate of a company in which scrutiny assessment has been done is higher than a company where the return has been merely accepted. Similarly, commission is higher for entry from a company in which order under section 148 has been passed.