By TIOL News Service

KOLKATA, MAY 20, 2016: THE issue is - Whether assumption of power under Section 263 by the Commissioner is justified where the Commissioner had reasons to entertain the belief that it was or could be a case of money laundering which went unnoticed because the assessing officer did not hold requisite investigation except for calling for the records and the persons behind the assessee company and the persons behind the subscribing companies were not interrogated. YES is the answer.

Facts of the case

The share capital of the assessee as at 31st March, 2008 was Rs.55,15,000/-. During the relevant previous year share capital of the assessee rose to a sum of Rs.1,34,42,370/-. The reserve and surplus which as at 31st March, 2008 was a sum of Rs.77,398.31 paise rose to a sum of Rs.39,92,61,247.60 paise. The increase in the share capital and the reserve and surplus is consequent to the issuance of 7,92,737 shares of Rs.10/- each at a premium of Rs.390/-. The authorised share capital of the assessee during the relevant assessment year was Rs.1,36,00,000/-. The assessee originally filed a return showing a gross total income of Rs.24,658/-. The assessee thereafter wrote to the assessing officer that due to inadvertence it had not disclosed receipt of a sum of Rs.61,000/- on account of consultancy fees. The mistake, it was pointed out, was due to the fact that the sum of Rs.61,000/- had been spent in making donation to a club. Notice under Section 148 was issued. A notice under Section 142(1) was also issued, seeking amongst other the details of share application money received by the assessee, including the names of the applicants, their address, date of receipt and the total amount received. Assessment under Section 143(3) read with Section 147 was completed. A notice was issued under Section 263 alleging that the assessment under Section 143(3) / 147 was completed without application of mind and without requisite enquiry into the increase of the share capital including the premium received by the assessee. CIT passed order under Section 263 that this was or could be a case of money laundering which went undetected due to lack of requisite enquiry and non-application of mind. He entertained the belief "that unaccounted money is laundered as clean share capital by creating a façade of paper work, routing the money through several bank accounts and getting it the seal of statutory approval by getting the case reopened u/s. 147 suo motu. The order passed under Section 143(3)/ 147 was thus erroneous and prejudicial to the interest of the revenue. He, therefore, set aside the same and issued directions for a thorough enquiry. ITAT upheld the order of CIT.

Having heard the parties, the Court held that,

++ (a) The promoter/directors of the assessee and their close relatives and friends had united with the common object of creating at least 20 (19+1) companies apparently having a large capital base, but, in fact these are mere paper companies having no real worth. The transaction of sale and purchase of shares was nominal rather than real;

(b) The allegation, in response to the notice to show-cause u/s. 263 that "it bears importance to state here that the investor companies of shares were interested to subscribe shares of the assessee company as, according to them, the assessee company had prospect in future," is a plain lie;

(c) The blank share application forms etc. tabulated above go to show that the alleged application for shares and the alleged allotment were not in the usual course of the business;

(d) the three requirements: (A) identity of the share-holders; (B) genuineness of the transaction and (C) the creditworthiness of the share-holders have not been satisfied. Identity of the alleged share-holders is known but the transaction was not a genuine transaction. The transaction was nominal rather than real. The creditworthiness of the alleged share holders is also not established because they did not have any money of their own. Each one of them received from somebody and that somebody received from a third person. Therefore, prima facie, the share-holders are mere name lenders; (para 24)

++ the Commissioner had reasons to entertain the belief that this was or could be a case of money laundering which went unnoticed because the assessing officer did not hold requisite investigation except for calling for the records. The persons behind the assessee company and the persons behind the subscribing companies were not interrogated which was essential to unearth the truth. The question for consideration is whether in the presence of materials discussed above the Commissioner was justified in treating the assessment order erroneous and prejudicial to the interest of the revenue. That question in the facts and circumstances has to be answered in the affirmative. (para 28)

++ the assessee with an authorised share capital of Rs.1.36 crores raised nearly a sum of Rs.32 crores on account of premium and chose not to go in for increase of authorised share capital merely to avoid payment of statutory fees is an important pointer necessitating investigation. Money allegedly received on account of share application can be roped in under Section 68 of the Income Tax Act if the source of the receipt is not satisfactorily established by the assessee. The order passed by the Commissioner is by no means an act of substituting his own views to that of the assessing officer. It is true that the assessing officer had requisitioned the necessary details by his notice u/s.142(1) but he thereafter did not apply his mind thereto. (para 29)

(See 2016-TIOL-972-HC-KOL-IT)