DCIT vs. Kargwal Products P. Ltd (ITAT Mumbai)

COURT: ITAT Mumbai
CORAM:G. S. Pannu (AM), Pawan Singh (JM)
SECTION(S):147, 148, 68
GENRE:Domestic Tax
CATCH WORDS: bogus capital gains, Penny Stocks
COUNSEL: Pooja Swaroop
DATE: September 26, 2018 (Date of pronouncement)
DATE: January 29, 2019 (Date of publication)
AY:2009-10
FILE: Click here to download the file in pdf format
CITATION:
S. 147 Reopening for taxing Bogus share capital: Even in a s. 143(1) intimation, the AO is not entitled to reopen on the ground that the assessee has received “huge share premium” which was not “examined” by the AO. The AO cannot reopen in the absence of tangible material that shows income has escaped assessment

IN THE INCOME-TAX APPELLATE TRIBUNAL “H” BENCH MUMBAI
BEFORE SHRI G.S. PANNU, JUDICIAL MEMBER AND
SHRI PAWAN SINGH, ACCOUNTANT MEMBER
ITA No. 1462/Mum/2017 (Assessment Year 2009-10)
DCIT, CC- 4(3) Central
Range-4, Room No. 1921,
C-11, 19th Floor, Air India
Building, Nariman Point,
Mumbai-400021.
Vs.
M/s Kargwal Products P. Ltd.
Om Shiv Sai CHS, Off Eastern
Express Highway, Opp Sion
Chunabhati Signal, Sion,
Mumbai-400022.
PAN: AADCK3047P
Appellant Respondent
Cross Objection No.132/Mum/2018 (Assessment Year 2009-10)
M/s Kargwal Products P. Ltd.
Om Shiv Sai CHS, Off Eastern
Express Highway, Opp Sion
Chunabhati Signal, Sion,
Mumbai-400022.
PAN: AADCK3047P
Vs.
DCIT, CC- 4(3) Central
Range-4, Room No. 1921,
C-11, 19th Floor, Air India
Building, Nariman Point,
Mumbai-400021.
Appellant Respondent
Appellant by : Shri Dharmesh Shah (DR)
Respondent by : Ms. Pooja Swaroop (Sr. AR)
Date of Hearing : 11.07.2018
Date of Pronouncement : 26.09.2018
ORDER UNDER SECTION 254(1)OF INCOME TAX ACT
PER PAWAN SINGH, JUDICIAL MEMBER;

1. The instant appeal by the Revenue is directed against the order of Ld.
Commissioner (Appeals)- 12, Mumbai dated 16th December 2016 which in
turn arises from assessment order dated 30th March 2015 passed under
section 143(3) read with section 147 of the Act. On service of notice of
appeal the assessee has filed its cross objections. The revenue has raised
following grounds of appeal:
(i) Whether on facts and in the circumstances of the case and in law, the
learned Commissioner (Appeals) has erred in treating the notice under
section 148 of the Act is invalid and bad in law by holding that assessing
ITA No. 1462 Mum 17 & C.O. 132 Mum 18-M/s Kargwal Products P. Ltd. 2 officer does not have any tangible material either from assessment record
or from any other source.
(ii) Whether on the facts and in the circumstances of the case and in law, the
learned Commissioner appeal has erred in holding the order under
section 143(3) read with section 147 of the act is invalid, hence failed to
decide the issue to receipt of share application money/share capital/share
premium treated as cash credit by the assessing officer on merits.
(iii) The appellant prays to leave, to add, to amend and/or to alter any of the
grounds of appeal, if need be.

2. Brief facts of the case are that the assessee is engaged in the business of
manufacturing, processing and dealing in civil items and job works, filed
its return of income for Assessment Year 2009-10 on 31st March 2010
declaring taxable income at Rs.(-) 33230/-. The return of income was
processed under section 143(1) of the Act. The assessment was reopened
under section 147 on 29th March 2014. Accordingly, notice under section
148 was issued to the assessee on 29th March 2014. The assessee vide its
letter dated November 2014 furnish the copy of acknowledgement of
return filed earlier on 31st March 2010. The assessee requested for supply
of reasons recorded. The following reasons were recorded by the
Assessing Officer:
“From the records, it is seen that the assessee is in receipt of huge share
premium to Rs. 1,33,77,000/- during the financial year 2008-09 relevant
to assessment year 2009-10. As there was no scrutiny assessment and for
this year, the so-called share premium having been received by the
assessee was not examined. The assessee is an unlisted company and the
nature of share application received (the intrinsic value of the share in
comparison to the excess premium received) is not substantiated.”

3. The assessee vide its letter dated 15th July 2014 raised objection against
the reopening. The objection of assessee was disposed of by Assessing
Officer vide order dated 15th January 2014. After disposing the objection
filed by assessee, the Assessing Officer proceeded to make the reassessment.
On perusal of details furnished by assessee, the Assessing
Officer noted that during the relevant period the assessee company
introduced a sum of Rs. 1,36,50,000/- on account of share application
ITA No. 1462 Mum 17 & C.O. 132 Mum 18-M/s Kargwal Products P. Ltd.
3
money/share capital and share premium received on issue of 27300 equity
shares to the face value of Rs. 10/- each at a premium of Rs. 490/- per
share from the following four parties;
S.N Name of the
person
No of
shares
Face
value
Issue
price
Premiu
m per
share
Money Received towards
Share capital, share premium &
Total
(1) (2) (3) (4) (5) (6) (7)=(3)*(4) (8)=(3)*(6) (7)+(8)
1. K.R.C.
Trading Co.
Pvt. Ltd.
13,400 10 500 490 134000 65,66,000 67,00,000
2. Gyaneshwar
Trading &
Finance Co.
Ltd.
1000 10 500 490 10000 4,90,000 5,00,000
3. Oshin
Investment &
Finance P.
Ltd.
5300 10 500 490 53000 25,97,000 26,50,000
4. Doldrum
Investment &
Finance Pvt.
Ltd.
7600 10 500 490 76000 37,24,000 38,00,000
Total 27,300 2,73,000 1,33,77,000 1,36,50,00
0

4. The assessee was asked to furnish share valuation report to justify the
issue of share at a huge premium. In response to the notice of the
Assessing Officer, the assessee vide its reply dated 2nd March 2015
furnished the copy of share valuation report. The Assessing Officer issued
notice under section 133(6) dated 02.02.2015 to all four parties who have
acquired share on payment of premium for identification of parties,
business profile and performance, capacity to invest, credit worthiness and
source of funds. The notice sent to all the parties were return back. The
assessing officer issued show cause to the assessee as to why the entire
amount of Rs. 1.36 crore should not be treated as unexplained credit under
section 68 of the act. The assessee filed its reply and contended that
section 68 is not applicable in the present case. The assessee filed its detail
explanation with regard to source and nature of the proceed from the issue
of share and submitted various evidences. The contention of assessee was
not accepted by the assessing officer. The Assessing Officer made the
ITA No. 1462 Mum 17 & C.O. 132 Mum 18-M/s Kargwal Products P. Ltd.
4
addition of entire amount under section 68 of the Act. On appeal before
the Ld. Commissioner (Appeals), the reopening was held as invalid. The
Ld. Commissioner (Appeals) held that the basic requirement of reopening
of the assessment i.e “reason to believe” is not fulfilled at the time of
recording the reasons for reopening. Since reopening was held as invalid,
therefore the other grounds of appeal raised by assessee was not
adjudicated by Ld. Commissioner (Appeals). Thus, aggrieved by the order
of Ld. Commissioner (Appeals) the revenue has filed the present appeal
before us. On service of notice, the assessee has raised Cross Objection for
not adjudicating the grounds of appeal by Ld. Commissioner (Appeals).

5. We have heard the learned DR for the revenue and learned AR of the
assessee and perused the material available on record. We have also
deliberated on various case laws referred by lower authorities. The ld. DR
for the revenue supported the order of Assessing Officer. The ld. DR
further submits that the Assessing Officer supplied the reasons of
reopening. The objection of assessee was disposed of. The assessment was
completed under section 133(1) on 31.03.2010 and the Assessing Officer
has no occasion to examine the issue of share premium received by
assessee during the relevant period.

6. On the other hand, the ld. AR of the assessee supported the order of Ld.
Commissioner (Appeals). The ld. AR further submits that the reasons
recorded by the Assessing Officer were not valid to invoke section 148 of
the Act. The reopening is without tangible material available with
Assessing Officer for doubting the receipt of share application money.
There was no evidence before the Assessing Officer at the time of
recording the reasons which could prove that some income had escape
assessment. It was further submitted that in case the reasons recorded are
insufficient to establish any belief of Assessing Officer, such reason
cannot be said to be giving rise to the jurisdiction of the Assessing Officer
ITA No. 1462 Mum 17 & C.O. 132 Mum 18-M/s Kargwal Products P. Ltd.
5
to reassess the income. Unless any tangible evidence is referred and relied
upon while recording the reasons, the Assessing Officer have no
jurisdiction to reopen the assessment. The ld. AR further submits that the
shares were subscribed by the holding and associate company, whose
identities cannot be doubted and without group concern valuation cannot
be suspected. In support of his submission, the ld. AR of the assessee
relied upon the decisions of Hon’ble Bombay High Court in case of NIVI
Trading Ltd. vs. Union of India (278 CTR 219), CIT vs. Smt. Maniben
Valji Shah [283 ITR 453 (Bom)], Infrastructure and Energy Services Ltd.
Vs. ACIT [332 ITR 587(Bom)], Khubchandani Health parks Pvt. Ltd. vs.
ITO & Ors [384 ITR 322], Hon’ble Gujarat High Court in case of Krupesh
Ghanshyambhai Thakkar vs. DCIT [77 taxmann.com 293], Hon’ble Delhi
High Court in CIT vs. Batra Bhatia Company [321 ITR 526], CIT vs.
Orient Craft Ltd. [354 ITR 536], Decision of Hon’ble Supreme Court in
case of CIT vs. Kelvinator of India Ltd. [320 ITR 561(SC)] .

7. We have considered the rival submission of the parties and have gone
through the orders of authorities below. The assessee filed return of
income on 31.03.2010 for Assessment Year 2009-10. The assessment was
processed under section 143(1). The assessment was reopened on
29.03.2014 without four year from the end of relevant Assessment Year.
We have noted that the Assessing Officer nowhere mentioned in the
reasons recorded that any tangible material either from assessment record
or from other source has come in the notice of Assessing Officer for his
reason to believe that any income has escape assessment. Therefore, the
basic requirement of reopening of the assessee i.e. reason to believe was
not fulfilled at the time of recording the reasons of reopening.

8. The Hon’ble Bombay High Court in case of NIVI Trading Ltd. (supra)
held as under:
ITA No. 1462 Mum 17 & C.O. 132 Mum 18-M/s Kargwal Products P. Ltd.
6
“25. …….The principal condition for issuance of notice is to be found in section
147 of the Income Tax Act and that is on the reason to belief that any income
chargeable to tax has escaped assessment for any assessment year, then, the
Assessing Officer may, subject to the provisions of sections 148 to 153, assess
or reassess such income and also any other income chargeable to tax which has
escaped assessment and which comes to his notice subsequently in the course
of the proceedings under this section, or re-compute the loss or the depreciation
allowance or any other allowance, as the case may be. In the present case, the
Respondents do not state that any income chargeable to tax has escaped
assessment. All that the Revenue desires is verification of certain details and
pertaining to the gift. That is not founded on the belief that any income which
is chargeable to tax has escaped assessment and hence, such verification is
necessary. That belief is not recorded and which alone would enable the
Assessing Officer to proceed. Thus, the reasons must be founded on the
satisfaction of the Assessing Officer that income chargeable to tax has escaped
assessment. Once that is not to be found, then, we are not in a position to
sustain the impugned notice.”

9. Further, the Hon’ble jurisdictional High Court in case of
Khubchandani Health parks Pvt. Ltd. (supra) held that notice issued
under section 148 would be without jurisdiction for absence of reason
to believe that income had escaped assessment even in case where
assessment has been completed earlier by intimation under section
143(1).

10. The Hon’ble Gujarat High Court in Krupesh Ghanshyambhai Thakkar vs.
DCIT (supra) held as under:

“11. ……….as per the reasons recorded, the notice has been issued and
assessment is sought to be reopened for deep verification of the claims. Even in
the order disposing of the objections, it has been specifically stated that to
verify whether all the criteria are met by the said transaction of Rs. 50 lakhs
routed through the group and also to verify the claim of having recorded these
transactions in the regular books of account, notice under Section 148 has been
issued. Even with respect to investment in shares of M/s. Rushil Decor, it has
been submitted that whether the investment in shares of M/s. Rushil Decor
were acquired from the capital of the assessee and the same is duly recorded in
the books of account, needs to be verified and for that purpose, the assessment
for A.Y 2009-2010 is sought to be reopened.

12. In case of Inductotherm (India) (P.) Ltd. (supra), Division Bench of this
Court has observed that for a mere verification of the claim, the power of
reopening of assessment could not be exercised. It is further observed that the
Assessing Officer under the guise of power to reopen an assessment, cannot
seek to undertake a fishing or roving inquiry and seek to verify the claims, as if
it were a scrutiny assessment.
ITA No. 1462 Mum 17 & C.O. 132 Mum 18-M/s Kargwal Products P. Ltd.
7
12.1 Similar view has been expressed by the Division Bench in case of Deep
Recycling Industries (supra) wherein it has been held and observed that for
mere scrutiny, reopening of the assessment would not be permissible. It is
further observed that the reopening of the assessment could be made if the
Assessing Officer had formed a belief that income chargeable to tax had
escaped assessment. The Court has further observed that in order to do so, the
Assessing Officer must have some tangible material having live link with the
escapement of the income on the basis of which he can form a bona fide belief
of escapement of income chargeable to tax. It has also been observed that
reopening cannot be resorted to for fishing or roving inquiry on mere suspicion
that income chargeable to tax may have escaped assessment.

13. Applying the aforesaid two decisions to the facts of the present two cases
on hand and the reasons recorded to reopen the assessment, we are of the
opinion that under the guise of reopening of the assessment, the Assessing
Officer wants to have a roving inquiry; as observed hereinabove. Even as per
the Assessing Officer in the reasons recorded has specifically mentioned that
for the purpose of verification/deep verification of the claim, it is necessary to
reopen the assessment. Under the circumstances, it cannot be said that the
Assessing Officer had any tangible material to form an opinion that the income
chargeable to tax has escaped the assessment. Under the circumstances, the
impugned action of reopening of the assessment in exercise of power under
Section 148 of the I.T Act for the reasons recorded hereinabove cannot be
sustained”.
11. The Hon’ble Delhi High Court in CIT vs. Batra Bhatia Company (supra)
held as under:
“A reading of the reasons recorded did not disclose that the Assessing Officer,
in fact, had reasons to believe that any income had escaped assessment. It is not
just the belief of the Assessing Officer that is material, but such a belief must
be based on certain reasons. There was no indication as to on what information
or on what material the Assessing Officer had harboured the belief that the
claim of the assessee required deeper scrutiny. In fact, no new material was on
record after the filing of the return till the issuance of notice under section 147.
The proceedings under section 147 are not to be invoked at the mere whim and
fancy of the Assessing Officer. It has to be seen in every case as to whether the
invocation is arbitrary or reasonable one. Merely because the Assessing Officer
felt that the issue required ‘much deeper scrutiny’, it was not enough ground for
invoking section 147. It is not belief per se that is a pre-condition for invoking
section 147, but a belief founded on reasons. The expression used in section
147 is ‘If the Assessing Officer has reason to believe’ and not ‘If the Assessing
Officer believes’. There must be some basis upon which the belief can be built.
It does not matter whether that belief is ultimately proved right or wrong, but
there must be some material upon which such a belief can be founded.”
ITA No. 1462 Mum 17 & C.O. 132 Mum 18-M/s Kargwal Products P. Ltd.
8
12. Further, the Hon’ble Delhi High Court in CIT vs. Orient Craft Ltd. (supra)
held it is not permissible to adopt different standards while interpreting the
words ‘reason to believe’ vis-à-vis section 143(1) and section 143(3), the
Hon’ble Court had held as under:
“13. Having regard to the judicial interpretation placed upon the expression
“reason to believe”, and the continued use of that expression right from 1948
till date, we have to understand the meaning of the expression in exactly the
same manner in which it has been understood by the courts. The assumption of
the Revenue that somehow the words “reason to believe” have to be understood
in a liberal manner where the finality of an intimation under Section 143(1) is
sought to be disturbed is erroneous and misconceived. As pointed out earlier,
there is no warrant for such an assumption because of the language employed
in Section 147; it makes no distinction between an order passed under section
143(3) and the intimation issued under section 143(1). Therefore it is not
permissible to adopt different standards while interpreting the words “reason to
believe” vis-à-vis Section 143(1) and Section 143(3). We are unable to
appreciate what permits the Revenue to assume that somehow the same
rigorous standards which are applicable in the interpretation of the expression
when it is applied to the reopening of an assessment earlier made under Section
143(3) cannot apply where only an intimation was issued earlier under Section
143(1). It would in effect place an assessee in whose case the return was
processed under Section 143(1) in a more vulnerable position than an assessee
in whose case there was a full-fledged scrutiny assessment made under Section
143(3). Whether the return is put to scrutiny or is accepted without demur is
not a matter which is within the control of assessee; he has no choice in the
matter. The other consequence, which is somewhat graver, would be that the
entire rigorous procedure involved in reopening an assessment and the burden
of proving valid reasons to believe could be circumvented by first accepting the
return under Section 143(1) and thereafter issue notices to reopen the
assessment. An interpretation which makes a distinction between the meaning
and content of the expression “reason to believe” in cases where assessments
were framed earlier under Section 143(3) and cases where mere intimations
were issued earlier under Section 143(1) may well lead to such an unintended
mischief. It would be discriminatory too. An interpretation that leads to absurd
results or mischief is to be eschewed.

14. Certain observations made in the decision of Rajesh Jhaveri Stock Brokers
(P.) Ltd. (supra) are sought to be relied upon by the revenue to point out the
difference between an “assessment” and an “intimation”. The context in which
those observations were made has to be kept in mind. They were made to point
out that where an “intimation” is issued under section 143(1) there is no
opportunity to the assessing authority to form an opinion and therefore when its
finality is sought to be disturbed by issuing a notice under section 148, the
proceedings cannot be challenged on the ground of “change of opinion”. It was
not opined by the Supreme Court that the strict requirements of section 147 can
be compromised. On the contrary, from the observations (quoted by us earlier)
it would appear clear that the court reiterated that “so long as the ingredients of
section 147 are fulfilled” an intimation issued under section 143(1) can be
ITA No. 1462 Mum 17 & C.O. 132 Mum 18-M/s Kargwal Products P. Ltd.
9
subjected to proceedings for reopening. The court also emphasised that the
only requirement for disturbing the finality of an intimation is that the
assessing officer should have “reason to believe” that income chargeable to tax
has escaped assessment. In our opinion, the said expression should apply to an
intimation in the same manner and subject to the same interpretation as it
would have applied to an assessment made under section 143(3). The argument
of the revenue that an intimation cannot be equated to an assessment, relying
upon certain observations of the Supreme Court in Rajesh Jhaveri Stock
Brokers (P.) Ltd. (supra) would also appear to be self-defeating, because if an
“intimation” is not an “assessment” then it can never be subjected to section
147 proceedings, for, that section covers only an “assessment” and we wonder
if the revenue would be prepared to concede that position. It is nobody’s case
that an “intimation” cannot be subjected to section 147 proceedings; all that is
contended by the assessee, and quite rightly, is that if the revenue wants to
invoke section 147 it should play by the rules of that section and cannot bog
down. In other words, the expression “reason to believe” cannot have two
different standards or sets of meaning, one applicable where the assessment
was earlier made under section 143(3) and another applicable where an
intimation was earlier issued under section 143(1). It follows that it is open to
the assessee to contend that notwithstanding that the argument of “change of
opinion” is not available to him, it would still be open to him to contest the
reopening on the ground that there was either no reason to believe or that the
alleged reason to believe is not relevant for the formation of the belief that
income chargeable to tax has escaped assessment. In doing so, it is further open
to the assessee to challenge the reasons recorded under section 148(2) on the
ground that they do not meet the standards set in the various judicial
pronouncements.

15. In the present case the reasons disclose that the Assessing Officer reached
the belief that there was escapement of income “on going through the return of
income” filed by the assessee after he accepted the return under Section 143(1)
without scrutiny, and nothing more. This is nothing but a review of the earlier
proceedings and an abuse of power by the Assessing Officer, both strongly
deprecated by the Supreme Court in Kelvinator of India Ltd. (supra). The
reasons recorded by the Assessing Officer in the present case do confirm our
apprehension about the harm that a less strict interpretation of the words
“reason to believe” vis-à-vis intimation issued under section 143(1) can cause
to the tax regime. There is no whisper in the reasons recorded, of any tangible
material which came to the possession of the assessing officer subsequent to
the issue of the intimation. It reflects an arbitrary exercise of the power
conferred under section 147.”
13. Considering the above factual and legal discussion that in absence of
reason to believe that income had escape assessment. We do not find any
illegality or infirmity in the order passed by ld. Commissioner (Appeals)
in holding the reopening as invalid. Hence, the grounds of appeal raised by
revenue are dismissed.
ITA No. 1462 Mum 17 & C.O. 132 Mum 18-M/s Kargwal Products P. Ltd.
10
14. In the result, appeal of the Revenue is dismissed.
C.O. No. 132/Mum/2018
15. The assessee has raised the following grounds of appeal:
1. The ld. Commissioner of Income-tax (Appeals) has erred in law and facts
in not adjudicating the ground no.3 relating to addition on account of share
capital and share premium amounting to Rs. 1,36,50,000/-.
2. The ld. Commissioner of Income-tax (Appeals) has erred in law and facts
in not adjudicating that the addition on account of share capital and share
premium amounting to Rs. 1,36,50,000/- treating the same as unexplained
cash credit u/s. 68 of the Act was incorrect and unjustified.

16. Considering the fact that we have dismissed the appeal of the Revenue, the
grounds raised in Cross Objection by assessee have become infructuous.
17. In the result, the Cross Objection of assessee is dismissed as infructuous.
Order pronounced in the open court on 26/09/2018.
Sd/- Sd/-
G.S. PANNU PAWAN SINGH
ACCOUNTANT MEMBER JUDICIAL MEMBER
Mumbai, Date: 26.09.2018
SK
Copy of the Order forwarded to :
1. Assessee 2. Respondent
3. The concerned CIT(A) 4.The concerned CIT
5. DR “H” Bench, ITAT, Mumbai
6. Guard File
BY ORDER,
Dy./Asst. Registrar
ITAT, Mumbai

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