Mark Foods vs. Revenue [Income Tax Appeal No.4102 & 4103 of 2024]

Background of the Case

The appellant filed appeal before ITAT Mumbai against reassessment orders for Assessment Years (AYs) 2015-16 and 2016-17. The Income Tax Department had initiated proceedings under Section 147 of the Income Tax Act, 1961, alleging that the company had engaged in bogus purchases and unexplained financial transactions. The Assessing Officer (AO) issued notices under Section 148, seeking to reopen previously concluded assessments. The appellant contested these notices on multiple grounds, including procedural irregularities, lack of proper approval, and violation of natural justice. The case gained significance due to its reliance on key judicial precedents, including the Supreme Court’s rulings in Union of India vs. Ashish Agarwal and Union of India vs. Rajeev Bansal, which dealt with the legality of reassessment proceedings under the amended tax regime.

Arguments by the Appellant

The appellant, raised several critical objections against the reassessment proceedings. For AY 2015-16, the appellant argued that the notice under Section 148, issued 15.07.2022, was time-barred, as the six-year limitation period had already expired on 31.03.2022. They relied on the Supreme Court’s decision in Rajeev Bansal, where the Revenue itself admitted that notices issued after 01.04.2021 for this assessment year were invalid. For AY 2016-17, the appellant contended that the sanction for reopening was granted by an unauthorized authority the Principal Commissioner of Income Tax instead of the higher-ranking Principal Chief Commissioner, as mandated under Section 151(ii) of the amended law.

Additionally, the appellant challenged the reassessment on grounds of violation of natural justice, arguing that they were denied the opportunity to cross-examine witnesses whose statements were relied upon by the AO. They also disputed the double taxation of the same amount, first as unexplained income under Section 68 and then as bogus purchases.

Respondent’s Response

The Revenue defended the reassessment proceedings, asserting that the notices were validly issued under the amended provisions of the Income Tax Act, read with the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (TOLA). The department argued that TOLA extended the timelines for initiating reassessment due to the COVID-19 pandemic, making the notices legally permissible. For AY 2016-17, the Revenue maintained that the approval granted by the Principal Commissioner was sufficient, as the new reassessment regime did not require a higher authority’s sanction in all cases. They further contended that the reassessment was based on credible evidence of bogus transactions and that the appellant’s objections were merely technical, lacking substantive merit.

The Revenue also emphasized that the denial of cross-examination did not vitiate the proceedings, as the AO had relied on independent material to form his belief about escaped income.

Court Findings and Decision

The ITAT bench of Mumbai ruled in favor of the appellant, quashing the reassessment proceedings for both AYs. For AY 2015-16, the Tribunal held that the notice under Section 148 was barred by limitation, following the Supreme Court’s decision in Rajeev Bansal, where the Revenue had conceded that notices issued after 01.04.2021 for this assessment year were invalid. The Tribunal emphasized that the six-year limitation period had expired before the notice was issued, rendering the reassessment void.

For AY 2016-17, the ITAT found that the sanction for reopening was invalid because it was granted by the Principal Commissioner instead of the Principal Chief Commissioner, as required under Section 151(ii) of the amended law. The Tribunal stressed that strict compliance with statutory procedures was mandatory, and the failure to obtain proper approval made the reassessment legally unsustainable.

Additionally, the ITAT noted that the AO had failed to provide the appellant with a fair opportunity to cross-examine witnesses, violating principles of natural justice. Consequently, the Tribunal allowed both appeals, setting aside the reassessment orders in their entirety.

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Vinod Nihalchand Jain vs. Revenue [ITA No. 6156 of 2024]

Background of the Case

The appellant, Vinod Nihalchand Jain, did not file his income tax return for the assessment year 2015-16, as his taxable income was below the basic exemption limit. However, the AO received information that the appellant had sold an immovable property during the year for Rs. 54 lakh, consequently, the AO initiated reassessment proceedings under Section 147 of the Income Tax Act, 1961.

The property was originally purchased on 23.06.2004 by the appellant’s brother, Babulal Nihalchand Jain, who paid the entire consideration. Out of natural love and affection, the appellant and his father were added as joint owners in the purchase deed. The property was sold on 19.09.2014, and the entire sale consideration was credited to the brother’s bank account.

Subsequently the appellant filed an appeal before CIT(A), where addition made by AO was upheld but directed the AO to consider the cost of acquisition and improvement while computing capital gains.

Arguments by the Appellant

The appellant argued that the property was purchased entirely by his brother, and the appellant’s name was added as a joint owner out of natural love and affection. The appellant had no beneficial interest in the property, as evidenced by the fact that the entire sale consideration was received by his brother. The brother had declared the sale consideration in his income tax return and claimed exemption under Section 54F for purchasing another property. Further the appellant also submitted supporting documents, including the purchase deed, bank statements, and an affidavit from his brother confirming that the appellant had no financial interest in the property.

Respondent’s Response

The respondent stated that the appellant was a joint owner of the property, and his name appeared in the sale deed. The respondent also highlighted that after the father’s demise, the appellant and his brother had equal shares in the property. Since the appellant had not relinquished his rights, 50% of the sale consideration was taxable in his hands as long-term capital gains. Even though the entire sale consideration was credited to the brother’s bank account, however the appellant was still legally entitled to 50% of the proceeds.

Court Findings and Decision

The ITAT bench of Mumbai acknowledged that merely having a name on a property document does not establish beneficial ownership. Since 100% of the purchase consideration was paid by the appellant’s brother, and the brother solely declared the capital gains in his ITR, the appellant had no real ownership interest in the property.

ITAT also referred to past judicial rulings, highlighting that income tax liability should be imposed based on real ownership and financial transactions, not just legal title.

Since the appellant was not the beneficial owner of the property, the addition of Rs. 27 lakh as long-term capital gains in his hands was unjustified. The ITAT deleted the addition and allowed the appellant’s appeal.

Joint Ownership and Capital Gain Taxation

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M/s. Top Class Capital Markets Private Limited vs. Revenue [ITA No. 974 of 2024]

Background of the Case

The Appellant, M/s. Top Class Capital Markets Private Limited, is engaged in trading shares and securities. The appellant filed its return for AY 2013-14 declaring a loss of Rs. 3,64,08,424/-. The case was selected for scrutiny, and the Assessing Officer passed an assessment order under Section 143(3) of the Income Tax Act, 1961, determining the loss at Rs. 2,37,66,572/- and making an addition of Rs. 1,26,41,851/- on account of disallowed losses from trading in securities.

Subsequently, a survey under Section 133A was conducted leading to the reopening of the assessment under Section 147. The AO alleged that the company had received bogus unsecured loans of Rs. 12,59,00,000/- from various entities, which were treated as unexplained cash credits under Section 68 of the Act. The AO also disallowed the interest paid on these loans, amounting to Rs. 46,90,849/-.

The CIT(A) partially allowed the appellant’s appeal, deleting the addition of Rs. 9,85,00,000/- related to seven parties but upheld the addition of Rs. 2,74,00,000/- for five other parties. Both the appellant and the Revenue filed appeals before the ITAT.

Arguments by the Appellant

The appellant argued that the AO erred in reopening the assessment under Section 147/148 without providing complete reasons for reopening, making the reassessment order void ab initio. The appellant had discharged its onus under Section 68 by providing confirmations, ITRs, bank statements, and other documents to prove the identity, creditworthiness, and genuineness of the transactions. The AO’s reliance on the investigation wing’s report was flawed, as the lenders were traceable and had sufficient assets to advance loans.

The CIT(A) correctly deleted the addition of Rs. 9,85,00,000/- for seven parties but erred in upholding the addition of Rs. 2,74,00,000/- for the remaining five parties.

Respondent’s Response

The respondent stated that the CIT(A) erred in deleting the addition of Rs. 9,85,00,000/- under Section 68, as the appellant failed to establish the identity, creditworthiness, and genuineness of the lenders. The investigation wing’s inquiry conclusively proved that the lenders were not operating from the addresses provided in their ITRs and were not engaged in genuine business activities. The CIT(A) relied on PAN, ITR, and confirmations, which are often prepared in bogus transactions, and physical verification is necessary to establish genuineness.

The disallowance of interest paid on unsecured loans of Rs. 37,03,671/- should be upheld as the appellant failed to prove the lenders’ creditworthiness.

Court Findings and Decision

The ITAT bench of Mumbai observed that the AO failed to provide complete reasons for reopening the assessment to the appellant, which is a mandatory requirement. Partial furnishing of reasons renders the reassessment order invalid. The reasons communicated to the appellant did not include crucial details, such as the AO’s belief that income had escaped assessment and the failure of the appellant to disclose material facts. This non-compliance with procedural requirements made the reassessment order bad in law.

Since the assessment order was quashed on legal grounds, the ITAT did not delve into the merits of the case. Consequently, the Revenue’s appeal was dismissed as infructuous.

ITAT Quashes Reassessment Order

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Revenue vs. M/s. Kissandhan Agri Financial Services Pvt. Ltd.  [ITA No. 8734 of 2019]

Background of the Case

M/s. Kissandhan Agri Financial Services Pvt. Ltd., the respondent, is a company engaged in financing agricultural commodities and advancing loans. During the assessment year 2016-17, the company issued shares to its holding company, M/s. Sohan Lal Commodities Management Pvt. Ltd., at FMV of Rs. 22.21 per share against the face value of Rs. 10. The company submitted a valuation report prepared by a Chartered Accountant (CA) using the Discounted Cash Flow (DCF) method to justify the premium.

The Assessing Officer (AO) rejected the DCF method, citing discrepancies between the projected figures used in the valuation and the company’s actual financial performance in subsequent years. Instead, the AO applied the Net Asset Value (NAV) method, determining the FMV at Rs. 11.54 per share. Consequently, the AO invoked Section 56(2)(viib) and made an addition of Rs. 36,03,10,674/- to the company’s income, representing the excess premium received over the FMV.

The Commissioner of Income Tax (Appeals) [CIT(A)] reversed the AO’s decision, ruling in favor of the assessee. The Revenue then appealed to the ITAT.

Arguments by the Appellant

The appellant argued that the The AO was justified in rejecting the DCF method because the projected figures used in the valuation did not align with the company’s actual performance in subsequent years. The NAV method, based on the book value of assets, is more reliable and should be used to determine the FMV of the shares. The CIT(A) erred in deleting the addition of Rs. 36,03,10,674/- made under Section 56(2)(viib), as the premium received by the assessee exceeded the FMV determined by the AO.

Respondent’s Response

The respondent stated that the DCF method is a recognized and prescribed method for valuation under Rule 11UA of the Income Tax Rules. The valuation report was prepared by an independent CA, and the AO had no authority to reject it without cogent reasons. Projections used in the DCF method are estimates and cannot be judged based on hindsight. Variations between projected and actual figures are inevitable due to market conditions and other factors.

The shares were issued to the assessee’s wholly owned holding company, and the funds were sourced through foreign direct investment (FDI). There was no evidence of unaccounted money being routed through the transaction.

Court Findings and Decision

The ITAT bench of Delhi dismissed the Revenue’s appeal, confirming that the valuation done by the respondent using the DCF method was in accordance with the law. The DCF method is a recognized and prescribed method for valuation under Rule 11UA. The AO cannot reject a valuation report prepared by an independent expert without substantial evidence of wrongdoing. Projections used in the DCF method are based on estimates and assumptions, and variations between projected and actual figures are inevitable. The AO’s reliance on hindsight to reject the DCF method was unjustified.

Section 56(2)(viib) is an anti-abuse provision and should not be applied mechanically to genuine transactions. The AO’s addition of Rs. 36,03,10,674/- under Section 56(2)(viib) was not justified.

AO’s Rejection of DCF Method

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