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IN THE HIGH COURT OF KERALA AT ERNAKULAM
S.V. BHATTI, BECHU KURIAN THOMAS, JJ.
Sahyadri Agencies Limited - Appellant
Versus
The Principal Commissioner of Income Tax, Thrissur - Respondent
ITA No. 1 of 2022
Decided On : 16-12-2022
Income Tax Act 1961 - Section 260A and 263 - Income Tax - Assessment - Order - Assessee, on, e-filed income tax return for Assessment Year 2014-15 - Under Section 143(1) of Act, return was processed, and a refund of Rs.6,92,550/- was generated - Return was selected for scrutiny under Computer Aided Scrutiny Selection (CASS) on (i) significant interest expenses relatable to exempt income (under Section 14A) and (ii) substantial interest paid which is not commensurate with loans raised and that assessee has returned less turnover - Such scrutiny in present scenario is known as limited scrutiny - A pre-assessment notice was issued, and for Court purpose, it is unnecessary to refer to all averments made by assessee and Revenue - Assessment was completed under Section 143(3) of Act determining total income of Rs.14,97,304/-. - Principal Commissioner of Income Tax Thrissur issued a notice - Whether, on facts and in circumstances of the case, Tribunal erred in law in holding that even in case of limited scrutiny assessment, AO is duty bound to make prima facie inquiry as to whether there is any other items (that is items which are not subject matter of limited scrutiny) which requires examination? - For limited purpose of examining whether assessment order has looked at computation obligated under Section 56(2)(viib), it is more than clear that effect of these entries is not at the first instance captured in CASS and prevented by Circulars while taking up scrutiny assessment. It is an error going by the literal meaning excerpted above. (Para 8.4)
Finding of the Court :
Mr. Joseph Markos invites our attention to consideration of these grounds by Tribunal - He argues that Tribunal has not examined reasons recorded by Commissioner on order of assessment being erroneous and prejudicial to interest of Revenue but has supplemented additional reasons for sustaining an order made under Section 263 of Act - Court are convinced that Tribunal’s order on twin requirements, whether assessment order is erroneous and prejudicial to Revenue's interest, needs to be re-examined - Argument that Tribunal either has substituted or expanded reasoning of Commissioner is not without merit - By relying on decisions relied on by assessee, finding of Tribunal warrants our interference - Findings recorded by Tribunal on this behalf need to be set aside, and matter remitted to Tribunal for reconsideration afresh - For statistical purposes, these questions are answered in favour of assessee and against Revenue Income Tax Appeal is allowed as indicated above and remitted to Tribunal for considering questions 4 and 5.
Result : Income Tax Appeal is allowed.
JUDGMENT :
S.V. Bhatti, J.
We have heard the learned Senior Advocates, Mr. Joseph Markos and Mr. P.K.R. Menon, for the parties.
2. Sahyadri Agencies Limited/assessee is the appellant. The Principal Commissioner of Income Tax, Thrissur/Revenue, is the respondent. The appeal filed under Section 260A of the Income Tax Act 1961 (for short, the Act) arises from the order dated 05.11.2019 in I.T.A. No.439/Coch/2019 of the Income Tax Appellate Tribunal, Cochin Bench (for short, the Tribunal). The controversy relates to the return filed by the assessee for the assessment year 2014-15.
3. The assessee, on 29.09.2014, e-filed the income tax return for the Assessment Year 2014-15. Under Section 143(1) of the Act, the return was processed, and a refund of Rs.6,92,550/- was generated. The return was selected for scrutiny under Computer Aided Scrutiny Selection (CASS) on (i) significant interest expenses relatable to exempt income (under Section 14A) and (ii) substantial interest paid which is not commensurate with the loans raised and that the assessee has returned less turnover. Such scrutiny in the present scenario is known as limited scrutiny. On 25.11.2016, a pre-assessment notice was issued, and for our purpose, it is unnecessary to refer to all averments made by the assessee and the Revenue. On 16.12.2016, the assessment was completed under Section 143(3) of the Act determining the total income of Rs.14,97,304/-. The Principal Commissioner of Income Tax Thrissur issued a notice under Section 263 of the Act for the following reasons :
4. The Commissioner received the assessee’s reply and called for ITMR from the Assessing Officer. Upon perusing the material on record, the Commissioner noticed that the assessee, during the financial year 2013-14 (AY 2014-15), planned to raise money (on a private placement basis to one of the promoters) in the form of borrowing and issue preference shares and invest such shares in the equity shares of M/s. Jyothy Laboratories Ltd (JLL) on a preferential allotment basis. JLL is a listed company in which one of the promoters of the assessee company (Mr. M.P. Ramachandran) had a substantial interest as a promoter. During the said year, the assessee company raised Rs.205 crores [Rupees Two hundred and Five crores only] through private placement of non-convertible debentures at a premium after two years, 11 months and 12 days from the date of allotment {i.e., November 14, 2013}. The above debentures are secured by first and exclusive charge on the equity share of M/s. Jyothy Laboratories Ltd was held as an investment by the assessee and personal guarantees of promoters. Mr. M.P. Ramachandran, Mrs. M.G. Shanthakumar and Mrs. M.R. Jyothy.
4.1 The Commissioner further noticed that due to the assessee’s non-cooperation during assessment proceedings, the Assessing Officer did not verify the details regarding the applicability of provisions of Section 56(2)(viib) and Section 68 of the Act and these transactions undertaken by the assessee company during the relevant Financial Year. Further, without relevant details, the Assessing Officer could not determine the fair market value of unquoted shares as per Rule 11UA of the Income Tax Rules 1962. The non-consideration of the effect of allotment of preference shares investment etc., is an omission under Sections 56(2)(viib) and 56(2). The consideration is triggered at the stage of computation of income itself when the share application money received from a resident by a Company in
Point of Law : Assessment order was passed without making inquiry / verification as regards potential escapement of income mentioned in Board Instructions for relevant period.
The main legal point established in the judgment is that the Assessing Officer's inquiry into the claims made by the assessee under Section 36(1)(vii) and Section 36(1)(iii) of the Income Tax Act, 19....
Section 263 of the Income-tax Act empowers revision only if an assessment order is both erroneous and prejudicial; mere disagreement with the order is insufficient.
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