Subject: M/s Terra Network SA, USA. The sale of shares of Terra Nova SA resulted in long term capital gain
Referred Sections:
Section 147/148 of the Income Tax Act,
Section 148
Section 143(l)(a) of the Act,
Section 94(7) of the Act.
Section 148(2) of the Act.
Section 154 of the Income Tax Act.
Section 154 of the Act
Referred Cases / Judgments
Haryana Acrylic Manufacturing Co. Vs. CIT
CIT vs. Ved
$~
* IN THE HIGH COURT OF DELHI AT NEW DELHI
% DATE OF JUDGMENT: 16.08.2018
+ W.P.(C) 8907/2008
PRABHAT AGARWAL ..... Petitioner
Through: Mr.C.S.Aggarwal, Sr. Adv. with Mr.
Prakash Kumar, Ms.Pushpa Sharma and Mr.Uma
Shankar, Advocates.
Versus
DEPUTY COMMISSIONER OF INCOME TAX ..... Respondent
Through: Mr.Ruchir Bhatia, Sr. Standing Counsel.
CORAM:
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
HON'BLE MR. JUSTICE A.K.CHAWLA
S.RAVINDRA BHAT, J.(ORAL)
1. The writ petitioner (hereafter"assessee" is aggrieved by a re-
assessment notice issued to him, under Section 147/148 of the Income
Tax Act, 1961, by the respondent (hereafter "revenue") on 25 th May
2007, for the assessment year (AY) 2004-05; he seeks directions for
the quashing of that notice.
2. Briefly, the case relates to assessment for AY 2004-05; the assessee
had filed his original return of income on 25/10/2004 declaring
`18,00,16,650/- including income of `60,00,000/- chargeable at
normal rates and the balance from long term capital gains. The
income from capital gain was further divided: into two parts, i.e., one
WP(C) 8907/2008 Page 1
from sale of units of various mutual funds-(36 in: number) and second
from sale of bonus shares' of M/s Terra Network SA, USA. The sale
of shares of Terra Nova SA resulted in long term capital gain of
`18,50,96,372/- but after claiming losses and B/F losses the net
income offered to tax was `6,84,31,075/-. The losses claimed were in
respect of two transactions; sale of shares of M/s Parsec Technology
and on account of sale of mutual fund units.
3. On 25th May, 2007, the AO issued the impugned notice, proposing to
reassess the petitioner's income. After repeated requests, the "reasons
to believe" recorded by the AO were furnished to the as sessee; they
inter alia, read as follows:
"2. In the original return filed by the assessee. Long term
capital gain of Rs.22,76,27,481/- have been shown. Short term
capital loss of Rs.5,36,59,621/- has also been shown inthe
return. From the annexures enclosed with the return ofincome.
It is seen that during the year the assessee hasshown capital
gains on sale of shares. Capital gains of Rs. 18,50,96,372/-
have been shown on the sale of shares of M/s Terra Networks
SA, USA. At the same time the assessee has also shown capital
loss of Rs.4,53,69,983/- on the sale of shares of M/s Parsec
Technologies Ltd. This loss has been adjusted against the
capital gains accruing on account of sale of shares of M/s
Terra Networks SA, USA. The assessee Sh. Prabhat Aggarwal,
is the Promoter and Director of M/s Parsec Technologies Ltd.
The address of M/s Parsec Technologies Ltd. is same as that of
Sh Prabhat Aggarwal.
3. The shares of M/s Parsec Technologies Ltd. have been sold
to Sh. Madan Mohan Aggarwal, the father of assessee. The
address of Sh. Madan Mohan Aggarwal is the same as that of
the assessee. As per the share transfer form, the sale has been
WP(C) 8907/2008 Page 2
carried out on 26.3.2004 which has been mentioned as
approved date in the share transfer form. The sale of shares
has not been carried out through a recognized stock exchange.
The following table provides the details relating to the sale of
shares of M/s Parsec Technologies Ltd."
The AO proceeded to record that the assessee had acquired `10/- face
value 3,84,500 shares of Parsec Technologies ("Parsec") at a premium of
` 130/- per share and later another 46500 shares for ` 10 (without any
premium) from one Ravi Sikka. He then sold (on 26.3.2004) 4,00,000
shares to his father M.M. Agarwal at ` 25/- per share and declared a loss.
This transaction, according to the AO was not genuine and was a device
to avoid tax, to claim loss that was not warranted. The AO also reasoned
that this share transaction was shown to offset other income. The AO also
pointed to another transaction of sale of mutual funds, which according
to him, could not result in legitimate capital gain, but other forms of
income, because those units were held for less than 3 months from the
record date.
The AO then proceeded to observe as follows:
"I have reason to believe that income chargeable to tax amounting to
Rs. 9,29,09,875/- (Rs. 4,53,69,983/- on account of in genuine capital
loss on shares of M/s Parsec Technologies Ltd as discussed above
and Rs 4,75,39,692/- on account of excessive claim of short terms
capital loss on mutual funds as discussed above)".
WP(C) 8907/2008 Page 3
The assessee/petitioner's objections to the reassessment notice, were
turned down; consequently, he approached this court for the reliefs
claimed.
4. The respondent revenue, in its counter affidavit, resists the claim in
these proceedings. It urges that the proceedings initiated by the
Assessing Officer under Section 148 is in accordance with law. There
was enough material before the AO on the basis of which, he could
form a belief that the income chargeable to tax had escaped
assessment in the assessee's case. It is stated that no assessment order
had been passed in the present case. It was only the intimation issued
under Section 143(l)(a) of the Act, regarding whatever was returned
by the assessee; that had been accepted by the Assessing Officer. It
was only on the perusal of documents annexed by the assessee along
with the return, it came to know that the transactions of sales of shares
of M/s Parsec entered into by the assessee were not genuine and that
the loss claimed on sale of mutual fund was excessive and was hit by
provisions of Section 94(7) of the Act. Accordingly, AO correctly
initiated proceedings under Section 147 of the Act. It is emphasized
that the proceeding had been initiated within 04 years from the end of
relevant assessment year and that the no infirmity could be found with
it.
5. Mr. C.S. Agarwal, learned senior counsel for the petitioner argued
that the revenue's argument that reasons been recorded on 28.5.2007
then there does not appear to be any reason, that why were those
alleged reasons recorded were not furnished to the petitioner till
WP(C) 8907/2008 Page 4
11.11.2008 despite the fact it had repeatedly been requesting the
revenue for supply of a copy of such reasons recorded. The first of
such request was made on 28.02.2008. The delay to furnish the
alleged reasons recorded is highly inordinate i.e. 18 months from the
date of initiation of proceedings under Section 147 of the Act and,
entirely unreasonable, which itself shows that no reasons to believe
were recorded as alleged when the notice under Section 148 of the
Act was issued. Reliance here is placed on the judgment of this Court
in the case of Haryana Acrylic Manufacturing Co. Vs. CIT(2009) 308
ITR 38. It is highlighted more seriously, that the learned AO before
initiating proceedings under section 147 of the Act on 28.05.2017 had
not recorded any reasons to believe prior to issue of the notice under
Section 148 of the Act, as is mandated under Section 148(2) of the
Act. Mr.Agarwal submits that in the reasons to believe (Pg. 187)
recorded by the learned AO states that as per share transfer form
(which is at Pg 120 of Writ Petition) the sale has been carried out on
26.03.2004, which was mentioned as approval date in the share
transfer form. Counsel submits that it is significant that share transfer
form had been furnished by the assessee only on 25.03.2008 and this
share transfer form was not available to anyone other than the
company and could not have been available to anyone and as such the
initiation of proceedings on the basis that reasons were recorded on
28.05.2007,being anti-dated are untenable. In fact, that share transfer
form was furnished by the petitioner in pursuance to a notice dated
10.01.2008 (Pg. 101). Counsel submits that it is evident that in the
absence of share transfer form before the AO. Till 25.03.2008, the
WP(C) 8907/2008 Page 5
assertion in the reasons to believe shows reasons to believe have been
anti-dated.
6. It is further stated that in the reasons recorded the date of purchase of
share has been mentioned as 27.02.2001 (page 187) whereas in the
return, date of purchase was incorrectly stated as 27.12.2001. This
date i.e. 27.02.2001 was provided by the petitioner only to the AO on
21.04.2008 (page 129 of the writ petition@ Pg. 127) and as such date
of purchase as 27.02.2001 was not available to the AO till 21.04.2008.
This fact further supports reasons to believe have been anti-dated.
Next, it is urged that the fact that shares were sold to Shri Madan
Mohan Aggarwal could alone be known from share transfer form
which had been filed by the petitioner only on 25.03.2008 (Pg. 120)
(On the official record @ Pg. 199) and as such on 28.05.2007, this
fact could not have been recorded, which corroborates that the reasons
to believe were ante dated. Counsel relied on CIT vs. Ved & Co302
ITR 328 that a clandestine or back door entry to section 148.Counsel
also relies on the orders of this court, made on 29 October, 2017,
requiring the revenue to file affidavit in respect of the petitioner's
argument with regard to ante dating of the reasons recorded, as well
as order of 17 January, 2018 specifically asking for an affidavit on the
subject.
7. The revenue had filed the digital record of the relevant assessment
file, to substantiate that the "reasons to believe" were recorded in th is
case, before issuance of the reassessment notice and that there was no
infirmity with the impugned notice.
WP(C) 8907/2008 Page 6
8. This court has considered the record. The reassessment notice is based
on reasons, which the revenue asserts, was recorded on 28 May, 2007.
The question is whether the assessee is correct in asserting as he
does in this case, that these reasons were inserted later and did not
exist, or were not reflected when the notice was issued. In other
words, the veracity of the revenue's position that reaso ns existed on
the file, before the notice was issued, is disputed.
9. A plain look at the documents and file notings produced by the
revenue in the digital form on 02.04.2018, it is discernable that the
reasons which it claims were to be recorded on 28.05.2007 do not
seem to have been so recorded on that date, i.e. 28.05.2007, but were
recorded subsequently, much later. This is evident from the ensuing
facts. The "reasons to believe" state, inter alia, as under:
"The return was processed u/s 143(1) of the Act on 31.03.2006.
Subsequently. Refunds of Rs. 91,41,462/- and of Rs. 3,26,480/-
were issued to the assessee after passing the orders under
Section 154 of the Income Tax Act."
10.The refund of `91,41,462/- and ` 3,26,4801- were issued on 3
1.05.2007 and 6.11.2007 and an order under Section 154 of the Act
dated 22.08.2007 (page 199/644 of original digital record) was
passed. This order undeniably was been made after 28.05.2007. A
copy of the order passed under Section 154 of the Act on 22.08.2007
is at page 644 of original record (also at page 199). Furthermore, in
terms of the order passed on 22.08.2007, a refund of ` 94,67.942/-
was been computed (by that order which includes a refund of
`91,41,4621/-. This refund cheque was apparently sent to the
WP(C) 8907/2008 Page 7
assessee/petitioner on 08.06.2007; and a cheque of ` 3,26,480/- was
sent on 08.11.2007. Thus the total amount was ` 94,67,9421-, as
referred to in the order under section 154 of the Act and is dated
22.08.2007. The petitioner/assessee has produced photocopies of
cheques dated 31.05.2007 and 06.11.2007.
11.These circumstances, in the opinion of the court, show that the
reasons had been recorded only after 22.08.2007 and not before. The
inescapable inference from the records made available is that but the
"reasons to believe" had not been recorded on28.05.2007 i.e. prior to
the issue of notice under Section 148 of the Act but were recorded
later. Therefore, this court is of the opinion that the official record
lends credence- rather proves the petitioner's allegations that no
reasons were recorded prior to the issue of the notice on 28.05.2007.
The AO should have recorded some reasons to justify such
reassessment notice, before it was issued, given that it is a mandatory
requirement under section 148(2) of the Act.
12.The petitioner also highlights that other similar documents placed in
the digital form show that new numbers were assigned to the old page
numbers in order to manipulate the placement of the documents. If
initial (old) numbers are reckoned, it would be seen that reasons had
not been recorded before the issue of the notice on 28.05.2007 and
were recorded only after 5 November 2008, when the same were
handed over to the petitioner on 11.11.2008 and not before despite
repeated request. The petitioner also highlights that the copy of
reasons recorded appears at pages 653 - 654 which is in "Aria1 Font"
(original pages were 213 -214); whereas the documents of the same
WP(C) 8907/2008 Page 8
date (see Pg. 655 and 657)is in "Times New Roman Font", which
shows "Aria1 Font" was not available. Also, the asssessee points out
that the pages/file notes prior to original page 213 are documents
which had been filed by the petitioner before the AO in the course of
proceedings initiated by him under section 148 of the Act and these
also establish that such reasons had not been recorded prior to the
issue of notice, because were they so then immediately after the return
of income was filed, such reasons would have been in the file and
numbered appropriately. These facts also corroborate the
circumstance that the reasons were not recorded as alleged on
28.05.2007.
13.It goes without saying that whilst the "reasons" shown to the court
and the petitioner may ipso facto not be faulted, yet the file tells a
different story; they were not recorded before the impugned notice
was issued. In fact, the revenue played a subterfuge, in trying to cover
up its omission, and in ante dating the record, in the attempt to
establish that such reasons existed, and this court's interference was
not called for. In these circumstances, this court hereby directs the
Chief Commissioner concerned to cause an inquiry to be conducted as
to the involvement of the officials or employee in the manipulation of
the record in this case, and take strict disciplinary action, according to
the concerned rules and regulations. This inquiry should be in regard
to the conduct of the concerned AO posted at the time, who issued the
notice under Section 147/148 as well as the officers who filed the
affidavits in these proceedings. The investigation and consequential
action shall be completed within four months.
WP(C) 8907/2008 Page 9
14.The writ petition is allowed in the above terms; the impugned
reassessment notice and all subsequent orders, made pursuant thereto
are hereby quashed. The matter shall be listed for the revenue to
report its action, to the court, in the form of an Action taken Report,
on or before second Tuesday of January, 2019. The matter shall be
listed before the court on 15 January, 2019 for considering the said
report. The writ petition is allowed, in the above terms and in terms of
the above directions. No costs.
S. RAVINDRA BHAT
(JUDGE)
A.K.CHAWLA
(JUDGE)
AUGUST 16 , 2018
WP(C) 8907/2008 Page 10
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