w w w . L a w y e r S e r v i c e s . i n



DHFL Venture Capital Fund v/s Income Tax Officer 19(3)(1) & Others


Company & Directors' Information:- B B VENTURE PRIVATE LIMITED [Active] CIN = U52209CT2008PTC020645

Company & Directors' Information:- A TO Z VENTURE CAPITAL LIMITED [Active] CIN = U74899DL1995PLC074063

Company & Directors' Information:- S A R VENTURE PRIVATE LIMITED [Active] CIN = U70102DL2015PTC275704

Company & Directors' Information:- N J VENTURE PRIVATE LIMITED [Strike Off] CIN = U70101MH2008PTC186387

    Writ Petition (LODG.) No. 2966 of 2012

    Decided On, 14 June 2013

    At, High Court of Judicature at Bombay

    By, THE HONOURABLE DR. JUSTICE D.Y. CHANDRACHUD & THE HONOURABLE MR. JUSTICE A.A. SAYED

    For the Petitioner: Jehangir D. Mistry, Senior Advocate with Agarwal i/b Atul K. Jasani, Advocates. For the Respondents: P.C. Chhotaray, Advocate.



Judgment Text

Oral Judgment: (Dr. D.Y. Chandrachud, J.)

Rule, by consent made returnable forthwith. Counsel appearing on behalf of the Respondents waives service on behalf of the Respondents. By consent, the Petition is taken up for hearing and final disposal.

2. The Petition seeks to impugn the legality of a notice dated 18 May 2012 by which an assessment for Assessment Year 2008-09 is sought to be reopened under Section 148 of the Income Tax 1961.

3. The Petitioner is registered with the Securities and Exchange Board of India as a Venture Capital Fund under the SEBI (Venture Capital Fund) Regulations 1996. The Petitioner was constituted under a trust deed dated 19 August 2005 of Dewan Housing Financial Corporation Limited. The object of the trust is to carry on activity of a venture capital fund and to raise resources through schemes to make portfolio investments. The Petitioner floated the DHFL Real Estate Management Fund – 1 (Dream Fund - 1) which is a close ended fund with a focus in the Indian real estate and allied sectors. A private placement memorandum is circulated to target investors such as institutional investors and ultra high net worth individuals with whom separate contribution agreements are entered into in respect of the scheme. Clause 15.1 of the deed of trust provides as follows :

'15. Revocation of Contributions by 75% Majority Consent

15.1 Save as otherwise provided in the Contribution Agreement of the respective Scheme, the Contributors shall be entitled to revoke the Contributions to a Scheme, at any time during the term of that Scheme, in accordance with the terms and conditions set out in the Scheme Documents of that Scheme, for any reason, including but not limited to circumstances resulting from any adverse tax consequences (for either the Trust or the Contributors) or any direction of any statutory authority, provided that no such revocation shall take effect unless the consent of Contributors holding Units of that Scheme representing not less than 75% of the total Contributions to that Scheme, has been obtained, in this behalf pursuant to the other Scheme Document of that Scheme read with this Trust Deed.'

4. For Assessment Year 2007-08 the Petitioner filed a return of income claiming the status of an AOP. Exemption was claimed from income chargeable to tax under Section 10(23FB) on the ground that the income was of a Venture Capital Fund. The Assessing Officer in the order of assessment under Section 143(3) dated 29 December 2009 determined the total income of the Petitioner at Rs.110.76 Crores and denied the exemption under Section 10(23FB) on the ground that the Petitioner was in breach of the SEBI guidelines relating to investment conditions and restrictions on a Venture Capital Fund. The CIT (A) dismissed the appeal and proceedings are pending before the Tribunal.

5. For Assessment Year 2008-09, which is the Assessment Year under consideration the Petitioner had an income of Rs.32.83 Crores. In the computation of income the Petitioner claimed that the contributions by its investors in terms of the trust deed and contribution agreements constituted revocable transfers under the provisions of the Act and hence, the income accruing to the fund was not liable to tax in the hands of the Petitioner, but in the hands of the investors / contributors in proportion to their respective contributions. A similar note was appended in the notes to the accounts. On 27 December 2010 an order of assessment was passed under Section 143(3) by which the Assessing Officer held that the contributors to the scheme have practically no control over it and hence, the provisions of Sections 61 and 63 were not applicable. In the circumstances, the total income of Rs.32.83 Crores was held to be exigible to tax. In appeal, the Commissioner (Appeals) came to the conclusion that there was a revocable transfer within the meaning of Sections 61 to 63 and the income which arose to the trust was taxable in the hands of the contributors and not in the hands of the Petitioner. The order of the CIT (A) also took note of the fact that the Petitioner had substantiated its case that the beneficiaries of the trust had offered in their hands the income distributed from the fund and which had been assessed by the Revenue. Consequently, it was held that when the share of income received by the contributors from the fund had been included in the total income of the contributors and was offered to tax by the contributors, it was not open to the department to proceed to tax the same income again in the hands of the fund. Against the order of the CIT (A) for Assessment Year 2008-09, the Revenue is in appeal before the Tribunal.

6. In the meantime, the Assessing Officer passed an order on 29 December 2011 for Assessment Year 2009-10 treating the Petitioner as an AOP and brought to tax the income of that year.

7. On 18 May 2012 a notice had been issued by the Assessing Officer under Section 148 for Assessment Year 2008-09. The notice has been issued to 'the AOP of the contributors of M/s. DHFL Venture Capital Fund' at the address of the Petitioner. The reasons on the basis of which the assessment is sought to be reopened for Assessment Year 2008-09 are as follows:

'During the course of assessment proceedings of M/s DHFL Venture Capital Fund it was noticed that, as per the Trust deed dated 19.08.2005 furnished by the assessee, the body of contributors having minimum 75% of the units had the power to revoke the amount transferred by the contributors to DHFL Venture Capital Fund and not an individual contributor. Obviously, therefore, cumulative contributions made by body of contributors is 'revocable transfer' as envisaged in the provisions of section 61 to 63 of the Act and not that of individual contributors, in light of the stand taken by the DHFL Venture Capital Fund during its assessment proceedings that provisions of section 61 to 63 are attracted to the transactions between the contributors and DHFL Venture Capital Fund.

In view of the above, the income arising from the contributions made by the contributors to DHFL Venture Capital Fund is taxable in the hand of Body of contributors whose members being companies and individuals is 'Association of Persons of the contributors' if provisions of section 61 to 63 are attracted to the transactions between contributors and DHFL Venture Capital Fund as has been claimed by the DHFL Venture Capital Fund during the assessment proceedings for AY 2008-09 as per letter dated 25.12.2010.

Therefore, the income of Rs.32,83,77,906/- arising from investment of contributions of the contributors to DHFL, which has been claimed as exempt in the hands of the DHFL Venture Capital Fund, has to be assessed as income in the hands of the 'AOP of the contributors' of DHFL Venture Capital Fund. However, it is found that no return of income has been filed by such AOP of the contributors of DHFL Venture Capital Fund and therefore, an amount of Rs.32,83,77,906/- has escaped income of the 'AOP of the contributors of DHFL Venture Capital Fund'. Accordingly I have reason to believe that income of Rs.32,83,77,906/- chargeable to tax has escaped assessment within the meaning of the provisions of section 147 r.w.s. 148 of the Income Tax Act, 1961.

You are, therefore, required, as per the provisions of section 148 of the Act to furnish a return of income in respect of the 'AOP of the contributors of DHFL Venture Capital Fund' within the time specified in the notice u/s 148 which is enclosed along with this letter.'

8. The Petitioner submitted its objections on 20 June 2012 to the reopening of the assessment. The Assessing Officer by his order dated 9 November 2012 disposed of the objections and maintained the notice for the reopening of the assessment.

9. Learned senior counsel appearing on behalf of the Petitioner submitted that -

(i) Even though the reopening of the assessment for Assessment Year 2008- 09 is by a notice within four years of the end of the relevant Assessment Year, the jurisdictional condition for the reopening of an assessment is that there must be a reason to believe that income had escaped assessment. In the present case, ex facie, the reasons disclosed by the Assessing Officer would show that the reopening is contingent on a potential escapement of income in the event that the provisions of Sections 61 to 63 are attracted as has been claimed by the Petitioner during the course of the assessment proceedings for Assessment Year 2008-09. Whether or not the provisions of Sections 1 to 63 are attracted, is a matter which is pending determination before the Tribunal. Before the Tribunal the case of the Revenue is that the income is taxable in the hands of the Petitioner as an AOP. In the circumstances, the notice reopening the assessment on the ground that there is independently an AOP of the contributories of the trust is contingent on the Revenue failing in the appeal before the Tribunal. A reopening under Section 148 is impermissible on a contingency that would arise if the Revenue were to fail in appeal before the Tribunal, because the jurisdictional requirement is that there must be reason to believe that income has escaped assessment which is absent in this case;

(ii) There is no AOP of the contributories in existence and the inference of the Assessing Officer that there is such an AOP is based on a patent misreading of Clause 15 of the deed of trust. All that Clause 15 postulates is that the contribution of an investor cannot be withdrawn without the consent of 75% of the contributories, but by that itself is not sufficient to hold that the contributories have come together to form an AOP;

(iii) For Assessment Year 2009-10 and for Assessment Year 2010-11, the Assessing Officer has held that the trust itself is an AOP and the assessment order for Assessment Year 2010-11 is after the reopening of the assessment for Assessment Year 2008-09 which is the year in question. Even if the Petitioner is held to be an AOP, the provisions of Sections 61 to 63 would be attracted and in a situation where there is a revocable transfer of assets, all income arising to any person is chargeable to income tax as the income of the transferor under Section 61. Hence, even on the basis that the contention of the Revenue to the effect that the Petitioner is an AOP is correct, even so by virtue of the provisions of Section 61, the income would be brought to tax only in the hands of the contributories.

10. On the other hand, counsel appearing on behalf of the Revenue submits that :

(i) The notice reopening the assessment has not been issued to the Petitioner, but to the AOP formed by the contributories of the Petitioner and the Petitioner has no locus to institute these proceedings under Article 226;

(ii) Explanation 2(a) of Section 147 postulates that where no return of income had been furnished by the assessee, although his total income or the total income of any other person in respect of which he is assessable under the Act is taxable, that shall be deemed to be a case where income chargeable to tax has escaped assessment. Since the AOP of the contributories has not filed a return of income, explanation 2(a) would be attracted and the Assessing Officer would have reason to believe that income chargeable to tax has escaped assessment;

(iii) The Revenue in the present case is justified in making a protective assessment by taking recourse to the provisions of Section 148, in order to safeguard the interests of the Revenue, should the Tribunal come to the conclusion in the appeal pending for Assessment Year 2008-09 that the income cannot be brought to tax in the hands of the Petitioner. The modality of adopting a protective assessment is accepted in income tax law and a protective assessment can even be made by taking recourse to the provisions of Section 148;

(iv) The entire scheme constitutes a collective investment under which all the contributories have pooled their resources together thereby forming an AOP of the contributories to whom a notice has been issued under Section 148. A reading of the scheme and of the individual contributories' agreements would indicate that the contributories have come together in a collective venture and constituted an AOP.

The rival submissions now fall for consideration.

11. The maintainability of the Petition at the behest of the Petitioner is sought to be questioned on the ground that the notice under Section 148 has not been issued to the Petitioner, but to an AOP formed of the contributories of the Petitioner. In our view, it would not be possible to accede to this submission. The Petitioner is directly and vitally affected by the issuance of a notice under Section 148 ostensibly to an entity which is now termed as an AOP of the contributors of the DHFL venture capital fund. As the facts which would be unfolded in the course of the discussion hereinafter indicate, it is evident that the Petitioner has a direct and substantial interest in the issues which are raised in these proceedings and in the challenge to the legality of the notice which has been issued under Section 148.

12. During the course of the assessment proceedings for Assessment Year 2008-09 under Section 143(3) the Assessing Officer brought the income of the Petitioner to tax on the basis that the status of the Petitioner is that of an AOP. Though the Assessing Officer was of the view that the income arising to the AOP was by a revocable transfer, the Assessing Officer nonetheless came to the conclusion that the contributories have practically no control over the etitioner as a result of which the provisions of Sections 61 to 63 were held not to be attracted. In appeal, the Commissioner (Appeals) accepted the case of the Petitioner and came to the conclusion that the income arising to the trust was taxable in the hands of the contributors and not in the hands of the Petitioner since there was a revocable transfer within the meaning of Sections 61 to 63. The correctness of that determination is pending before the Tribunal here the Revenue is in appeal and we must clarify at the outset that we express no opinion on the correctness of the finding in the order of the appellate authority. The issue which falls for determination before this Court is whether the jurisdictional requirement for the reopening of an assessment even within a period of four years is fulfilled because before an Assessing Officer can take recourse to the provisions of Section 148, he must have reason to believe that any income chargeable to tax has escaped assessment. Again, whether the Assessing Officer has reason to believe that income chargeable to tax has escaped assessment must be determined with reference to the reasons which have been disclosed to the assessee. The recording of reasons and the disclosure of those reasons to the assessee is a valuable safeguard against an arbitrary exercise of power.

13. In the present case, the reasons which have been disclosed make it abundantly clear that the reopening of the assessment is contingent on the provisions of Sections 61 to 63 being attracted to the transactions between the contributors and the Petitioner as has been claimed by the Petitioner. At the cost of repetition, it would be appropriate to emphasize the following extract from the reasons which have been disclosed to the Petitioner :

'In view of the above, the income arising from the contributions made by the contributors to DHFL Venture Capital Fund is taxable in the hand of Body of contributors whose members being companies and individuals is 'Association of Persons of the contributors' if provisions of section 61 to 63 are attracted to the transactions between contributors and DHFL Venture Capital Fund as has been claimed by the DHFL Venture Capital Fund during the assessment proceedings for AY 2008-09 as per letter dated 25.12.2010.

Therefore, the income of Rs.32,83,77,906/- arising from investment of contributions of the contributors to DHFL, which has been claimed as exempt in the hands of the DHFL Venture Capital Fund, has to be assessed as income in the hands of the 'AOP of the contributors' of DHFL Venture Capital Fund.' (emphasis supplied)

14. The reasons for the reopening of the assessment clearly postulate that the reopening is based on the contingency that the provisions of Sections 61 to 63 are held to be attracted to the transactions between the contributors and the Petitioner 'as has been claimed' by the Petitioner. The formation of a reason to believe is 'if' the provisions of Sections 61 to 63 are attracted. It is on this hypothesis that the Assessing Officer proceeds to record that the income of Rs.32.83 Crores arising from the investment of contributions of the contributories 'which has been claimed as exempt in the hands of' the Petitioner has to be assessed as income in the hands of the AOP of the contributors of the Petitioner. Reading the reasons as they stand, it is evident that the Revenue as sought to reopen the assessment in exercise of powers conferred by Section 148 on the hypothesis that should the Tribunal accept the contention of the Petitioner and affirm the view of the Commissioner (Appeals), the income would be exempt in the hands of the Petitioner and in such an eventuality should be brought to tax in the hands of an AOP of the contributors of the Petitioner.

15. The jurisdictional requirement for reopening an assessment under Section 148 is the formation of a reason to believe by the Assessing Officer that income has escaped assessment. The formation of the reason to believe and the existence of that reason must be in the present. Recourse can be taken to the provisions of Section 148 where the Assessing Officer has a reason in present, meaning thereby, a reason which is present to his mind when he forms his reason to believe, that income has escaped assessment. Recourse to Section 148 cannot be founded in law on a hypothesis of what would be the position in future should an appeal before the appellate authority, being the Tribunal or the High Court, result in a particular outcome. The statute does not contemplate the reopening of an assessment under Section 148 on such a hypothesis or a contingency which may emerge in the future.

16. The basis on which the Assessing Officer has purported to reopen the assessment is placed beyond any doubt by the affidavit which has been filed in reply to the Petition. As we have noted, there is no ambiguity whatsoever in the reasons which have been communicated to the assessee in the order dated 18 May 2012, but in the affidavit in reply, it has been stated that the income of Rs.32.83 Crores arising from the investment of contributions of the contributors to the Venture Capital Fund which has been claimed as exempt in the hands of the Petitioner should be assessed as income in the hands of the AOP of the contributors of the Petitioner 'on a protective basis'. Again it has been stated that the issue of taxing the AOP of the contributors of the Petitioner 'has arisen from the submission of the Petitioner before the appellate authorities' where the Petitioner has contended that the transactions amount to a revocable transfer and that the income which would arise should be taxed in the hands of the individual contributors. The reopening of an assessment under section 148 on the basis of a submission which is raised before the appellate authority by the assessee is clearly impermissible because what Section 147 requires is a formation of a reason to believe by the Assessing Officer. In the present case, there is clearly a want of compliance with the jurisdictional condition. The Assessing Officer has not formed a reason to believe that income has escaped assessment since the reopening is based purely on a contingency that may arise upon a particular outcome before the appellate tribunal.

17. Undoubtedly as counsel appearing on behalf of the Revenue submits the concept of a protective assessment is well known to the law of income tax in India. The basis on which a protective assessment is carried out is summed up succinctly in Sampath Ayengar's Law of Income Tax (11th edition, Vol. VI, page 9724) :

'Protective assessment– The Assessing Officer may often have to assess the same income in more than one place. Sometimes they may be made by different officers as, for example, where an officer assessing A thinks that certain income belongs to him but another officer assessing Bis of the opinion that the income is his. Sometimes the same officer may find that an assessee before him is returning a particular income but is of the opinion that it should be assessed in the hands of a firm or a family and not in the hands of the person who returned it. It has been held that the officer may, when in doubt, (Not otherwise : CIT v. Shri Ramchandraji Maharaj Ka Bada Mandir (1988) 73 CTR (MP) 79)to safeguard the interests of the Revenue assess it in more than one hand (LaljiHaridas v. ITO (1961) 43 ITR 387 (SC).). But this procedure can be permitted only at the stage of the assessment as, at higher levels, it is possible for the appellate or revisional authority to give a clear finding as to the assessee who is liable to be so assessed leaving the one who is aggrieved to get redress by appropriate proceedings (See Dayabai v. CIT (1985) 154 ITR 248 (MP). In any event, if , at the stage of the Tribunal or High Court it is found that the same income is assessed in both places, the Department should provide relief suomotuto one of them (ITO v. Bachu Lal Kapoor (1966) 60 ITR 74 (SC).. There can be precautionary assessments but not protective recovery (CIT v. Cochin Co Pvt Ltd (1976) 104 ITR 655 (Ker.). But where an assessment is intended to be protective, it should be so expressed (CIT v. Khalid Mehdi (1987) 165 ITR 685 (AP)..'

18. A protective assessment as the learned author indicates (Vol. 1 page 272)is regarded as being protective because it is an assessment which is made ex abundant cautelawhere the department has a 'doubt as to the person who is or will be deemed to be in receipt of the income'. A departmental practice, which has gained judicial recognition, has emerged where it appears to the Assessing Officer that income has been received during the relevant Assessment Year, but where it is not clear or unambiguous as to who has received the income. Such a protective assessment is carried out in order to ensure that income may not escape taxation altogether particularly in cases where the Revenue has to be protected against the bar of limitation. But equally while a protective assessment is permissible a protective recovery is not allowed. However, such an exercise which is permissible in the case of a regular assessment must necessarily yield to the discipline of the statute where recourse is sought to be taken to the provisions of Section 148. Protective assessments have emerged as a matter of departmental practice which has found judicial recognition. Any practice has to necessarily yield to the rigour of a statutory provision. Hence, when recourse is sought to be taken to the provisions of Section 148, there has necessarily to be the fulfillment of the jurisdictional requirement that the Assessing Officer must have reason to believe that income has escaped assessment. To accept the contention of the Revenue in the present case would be to allow a reopening of an assessment under Section 148 on the ground that the Assessing Officer is o

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f the opinion that a contingency may arise in future resulting an escapement of income. That would, in our view, be wholly impermissible and would amount to a rewriting of the statutory provision. Moreover, the reliance which is sought to be placed on the provisions of Explanation 2(a) to Section 147 is misconceived. Explanation 2 provides a deeming definition of cases where income chargeable to tax has escaped assessment and clause (a) includes a case where no return of income has been furnished by the assessee although his income or the income of any other person in respect of which he is assessable exceeds the maximum amount which is not chargeable to tax. As the reasons which have been disclosed to the assessee would indicate, this is not a case where an assessee has not filed a return of income simplicitor. The whole basis of the reopening is on the hypothesis that if the provisions of Sections 61 to 63 are attracted as has been claimed by the assessee, and the income of Rs.32.83 Crores which has been claimed by the assessee to be exempt is treated as exempt, in that event an alternate basis for taxing the income in the hands of the AOP of the contributories is sought to be set up. For the reasons already indicated, the entire exercise is only contingent on a future event and a consequence that may ensure upon the decision of the Tribunal, that again if the Tribunal were to hold against the Revenue. A reopening of an assessment under Section 148 cannot be justified on such a basis. There has to be a reason to believe that income has escaped assessment. 'Has escaped assessment' indicates an event which has taken place. Tax legislation cannot be rewritten by the Revenue or the Court by substituting the words 'may escape assessment' in future. Writing legislation is a constitutional function entrusted to the legislature. 19. In the view which we have taken it has not been necessary for the Court nor is it appropriate for this Court to enter upon the merits of the other issues raised by the learned senior counsel appearing on behalf of the assessee. The appeal before the Tribunal is still pending and hence, it would not be proper for this Court to express any opinion thereon. We clarify that we are allowing this petition on the ground that the jurisdictional requirement for reopening an assessment under Section 147 for Assessment Year 2008-09 has not been fulfilled. 20. Rule is accordingly made absolute by quashing and setting aside the notice of reopening dated 18 May 2012 issued under Section 148 of the Income Tax Act 1961. There shall be no order as to costs.
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