AO has not Bothered to Read Balance Sheet or Valuation Report: Bombay HC Quashes Reassessment Notice on Godrej [Read Order]

The Bombay High Court has invalidated the reassessment notice issued against Godrej Projects Development Pvt Ltd. The court observed that the Assessing Officer’s ( AO ) reason for reassessment, questioning how a newly incorporated company could command a significant share premium, was purely hypothetical and lacked tangible evidence. The bench, consisting of Justice Dr. Neela Gokhale and Justice K.R. Shriram, highlighted a breach in established legal principles, noting that the reopening notice should be based on the AO’s own satisfaction and not borrowed satisfaction.

The court emphasised that the AO had not applied independent judgment but relied on a communication from a superior officer. Godrej Projects Developments Pvt Ltd, engaged in real estate development and assessed for Income Tax, had filed returns for AY 2009-10. Although the AO accepted the return with a declared loss, the issue of share premium remained unaddressed in the assessment order. The petitioner received a notice under Section 148 to reopen the assessment on March 29, 2014, regarding share premium issues. Despite filing objections on July 22, 2014, the objections were rejected on February 2, 2015. In the impugned notice, the AO recorded the reason for reopening the assessment that “It is seen from the records that the assessee is a new company incorporated on 15.03.2007 only.

It is not clear how can a newly corporate company with no proven track record command such a huge share premium in the open market, that too at 1284.2 times of the face value of a share”. Godrej argued that the reassessment lacked fresh material and amounted to impermissible review, as the return had been thoroughly scrutinised. The company also contended that the reopened issue was without jurisdiction, as share premium during a fresh share issuance doesn’t constitute taxable income. “The receipt of share premium on the issue of fresh shares is on capital account and constitutes a capital receipt, which is not chargeable to tax under the Act.

There is no provision under the Act to tax the receipt of share premium for the assessment year under consideration” submitted Senior Advocate P.J. Pardiwalla, represented on behalf of Godrej. According to the court, “the AO is only questioning the excessive share premium but not doubting the transaction itself whereby the share premium had been received. On this ground alone, the impugned notice and order on objections have to be quashed and set aside.” The bench highlighted the amendments to income definitions in sections 2(24)(xvi) and 56(2)(viib) that were applicable from April 1, 2013, for AY 2013-14 onward. Also, the amendment to Section 68, incorporating the first proviso, took effect from April 1, 2019, applicable for AY 2013-14 onward. As these amendments were not relevant to the assessment year in question (2009-10), the AO had no basis to believe that income had escaped assessment for that year.

The bench stated that “if one considers the reasons recorded, the AO simply says how a company with no proven track record incorporated on 15th March 2007 command such a huge share premium. The AO has not bothered to read the balance sheet or the valuation report. AO’s reason to believe, therefore, is purely hypothetical and a matter of conjecture. That cannot be a tangible material for arriving at reason to believe escapement of income.” Considering the submissions, the Bombay High Court quashed and set aside the reassessment notice, emphasising the lack of tangible material in the AO’s reasoning and reinforcing the importance of adhering to jurisdictional conditions in reopening assessments.

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