SHREE NAVKAR REALINFRA PRIVATE LIMITED,BHILWARA vs. PCIT, UDAIPUR

This appeal is filed by assessee and is arising out of the order of the Principal Commissioner of Income Tax, Udaipur dated 10.02.2021 [here in after (ld. PCIT)] for assessment year 2017-18 passed under section 263 of the Act, which in turn arise from the order dated 30.03.2019 passed under section 143(3) of the Income Tax Act, by the ACIT CIR, Bhilwara.

Shree Navkar Realinfra Pvt. Ltd. 2. The assessee has marched this appeal on the following grounds:-

“1. On the facts and in the circumstances of the case, the Ld. PCIT, Udaipur has grossly erred in initiating revision proceeding u/s 263 of the Income-tax Act, 1961 in the case of Limited Scrutiny Order Passed u/s 143(3). Thus the whole proceeding u/s 263 deserves to be quashed. 2. That the appellant craves leave, to add, to amend, modify, rescind, supplement, or alter any of the Grounds stated here-in-above, either before or at the time of hearing of this appeal.”

3. At the outset of the hearing the bench noted that the appeal is filed delayed. The ld. AR of the assessee relied upon the affidavit for condonation of delay as reproduced here in below:

Shree Navkar Realinfra Pvt. Ltd. 3.1 The ld. DR fairly on account of the guideline of the apex court accepted the reasons advanced by the assessee.

3.2 A propose to this fact the bench noted the assessee has executed the reasons for delayed filling an appeal by filling an affidavit. The reason advanced was on account of Pandemic covid –

4. The fact as culled out from the records is that the assessee has filed return of income for A.Y 2017-18 electronically on 16.10.2017 declaring total income of Rs. Nil. The case was selected for Limited Scrutiny through CASS. Notice u/s 143(2) of the I.T. Act, 1961 was issued on 13.08.2018. The notice issued u/s 143(2) of the Act was duly served upon the assessee and the assessee was given opportunity to produce any evidence/information in support of return of income on or before 28.09.2018. Subsequently, notices u/s 142(1) along with query letter dated 20.03.2019 was issued and very limited details in respect of above mentioned issues have been called for.

Shree Navkar Realinfra Pvt. Ltd. The assessee has submitted his reply through e-proceedings, which is taken on record.

4.1 On perusal of details filed revealed that the assessee has existing share capital of Rs. 70,20,000/- as on 31.03.2016 and during the year under consideration, issued 1,00,000 nos. of shares at face value of Rs. 10/- per share and also at premium of Rs. 40/- per share.

Thus, the assessee, during the year under consideration, received share capital of Rs. 10,00,000/- and share premium of Rs.40,00,000/-.

To verify the issue Large share premium received during the year', the assessee was asked to furnish details of the person to whom shares were issued and justification for value of share and calculation of fair market value of the share issued. In response, the assessee furnished confirmation of accounts, ITRS, copy of bank account statement of the share holder for the source of share capital & share premium. With regard to the fair market value of of the share issued, assessee company shown the value of shares in accordance with Rule IIUA of the I.T. Rules, at Rs.54.35/- as on 31.03.2016. Based on this observation the return of income filed by the assessee company was accepted and finally the assessment was competed on 30.03.2019.

Shree Navkar Realinfra Pvt. Ltd. 5. On culmination of the assessment proceeding the ld. PCIT examined the assessment record. On such examination of records the PCIT observed that the assessee company the assessee company is a loss making company. During the year, the assessee company has issued 1,00,000 equity shares of face value of Rs. 10/- per share and premium of Rs. 40/- per share has been charged. The whole of the 1,00,000 shares have been issued to M/s Fashion Suiting Pvt. Ltd., Bhilwara and a sum of Rs. 50,00,000/- have been received by the assessee company on 22.06.2016. The AO obtained the certificate for working of the share premium under Rule 11UA of the I.T. Rules wherein the FMV have been computed at Rs. 54.35 as on 31.03.2016.

The AO has accepted the said allotment of share at Rs. 50/- per shares and the assessment order has been passed by accepting the income/loss declared in the return. However, the details obtained by the AO placed on record raise two important issues. The working of the FMV has been obtained as on 31.03.2016 whereas the shares have been allotted in the middle of the financial year 2016-17.

Accordingly, the AO should have considered the working of FMV on the date of allotment which evidently has not been done. The whole of the amount of Rs. 50,00,000/- has been obtained from the allottee M/s

Shree Navkar Realinfra Pvt. Ltd. Fashion Suiting Pvt. Ltd. on 22.06.2016 and a copy of the bank statement has been obtained. As per his bank statement the allottee has given the amount of Rs. 50,00,000/- from his OD account and there is a negative balance of Rs. 72,67,346/- in the said account. No one would invest in a loss making company after obtaining loan from the bank The AO could have examined this angle, however, the AO has conducted only the superficial enquiries without going into the depth of the issue due to which the assessment order in the case of the assessee for A.Y. 2017-18 is found to be erroneous in so far as it is prejudicial to the interest of revenue. As per copy of resolution passed by the board of directors of the assessee company on 22.06.2016, it is evident that the assessee company has resolved in pursuance of section 62(1)(a) of the Company Act to issue 1,00,000 right issue to Fashion Suiting Pvt. Ltd. on equity shares of Rs. 10/- each at premium of Rs. 40/- per shares. According to provisions of Sec. 62(1)(a) such shares shall be offered to a person who at the date of offer, are holders of equity shares of the company in their respective proportion. But that the right issue has not been made in accordance with the provisions of sec. 62(1)(a) of the company Act. It is thus obvious that Rishab Spinning Weaving Mills have renounced

Shree Navkar Realinfra Pvt. Ltd. its right to received the proportionate share i.e. 48,430 shares being right of 48.43%. Therefore, prima facie there is renouncement of right to receive/allot shares of 71,510 in numbers having face value of Rs. 7,15,100/- and further renouncement of right by RSWM of Rs. 28,60,000 (71510 x 40) on account of non subscription of share on account of premium of Rs. 40 per share. Thus, the AO has not gone through the examination of the issue under consideration w.r.t the above provisions of the Act and due to which the assessment order in the case of assessee for AY 2017-18 is found to be erroneous in so far as it is prejudicial to the interest of revenue.

5.1 Based on these observations the ld. PCIT noted that the AO has failed to make enquiry in respect of the various issues and these lack of enquiries have been rendered the assessment order passed u/s. 143(3) of the Act as passed by the AO in the case of the assessee erroneous in so far as it is prejudicial to the interest of the revenue and therefore, this assessment order is propose to be suitably modified / enhanced / cancelled by invoking the provisions of section 263 of the Act and therefore, a notice was issued on 29.12.2020 giving opportunity to the assessee. In compliance the assessee filed a Shree Navkar Realinfra Pvt. Ltd. detailed written submission on e-filling portal on 11.01.2021. The ld.

PCIT considered the contentions of the assessee but were not fully acceptable and therefore, he observed as under:

“10. I have carefully examined the written submission of the assessee. The contentions of the assessee have been considered but the same are not fully acceptable. The assessee company has failed to offer credible explanation / documentary evidences with respect to various issues mentioned in the notice of hearing issued by the undersigned on 29.12.2020. Further, no explanation has been offered as regard the point No. 2(b)(iii), 2(b)(iv) & 2(b)(v) as per this office notice for hearing dated 29.12.2020. Thus, it appears that the assessee has nothing to offer as regard the issue of disproportionate allotment of shares. Hence, necessary action is called for in view of the provisions of section 56(2)(vii) / 56(2)(viia).

Further, also no explanation has been offered as regard the point No. 5 as per this office notice for hearing dated 29.12.2020, regarding the fact that it could be a case of transfer of immovable properties to FSPL (Fashion Suiting Pvt. Ltd.) by evading the Stamp Duty on circle rate and valuation on circle rate. Hence, necessary verification and enquiry may be done by the AO on this aspect and accordingly necessary action may be taken as per the I.T. Act. Further, no explanation has been offered as to what happened to waiver of right by RSWM (Rishabh Spinning and Weaving Mill).

"Explanation 2. For the purpose of this section, it is hereby declared that an order passed by the Assessing officer shall be deemed to be erroneous in so far as it is prejudicial to the interest of the revenue, if, in the opinion of the Principal Commissioner of Commissioner, -

(a) the order is passed without making inquiries or verification which should have been made, -

(b) the order is passed allowing any relief without inquiring into the claim;

(c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119: or Shree Navkar Realinfra Pvt. Ltd. (d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdiction High Court or Supreme Court in the case of the assessee or any other person."

To, The Principal Commissioner of the Income Tax, Udaipur Shree Navkar Realinfra Pvt. Ltd. Respected Sir, Re: Shree Navkar Realinfra Pvt. Ltd. PANAANCS0836N Assessment Year-2017-18

Sub: Written Submission regarding Revision Proceedings u/s 263 of Income Tax Act, 1961

Ref: Notice no. ITBA/REV/REV1/2020-21/1029335962(1) dated 29.12.2020 received on 05.01.2020

With reference to above, your goodself required certain details, information etc. regarding the issuance of 100000 nos. of equity shares of face value Rs.10 at premium of Rs.40/- per share. Your goodself has raised certain issues wide above mentioned notice. In response to your queries we submit as under: -

6. Further your goodself has asked to take FMV of land plots in stock, in this regard we submit that the CBDT has, vide amended rule 11UA which is effective from 01-04-2018 ie. AY 2018-19. Hence value determined is as per Rule 11UA.

7. At para 6 of Notice your good self has mentioned that the Assessment Order passed by AO is erroneous as AO not examined depreciation and expenses etc. In this regard we mention that the case of assessee was selected for Limited Scrutiny through CASS. The Ld. AO has duly examined the subject matter in terms of reasonability, creditworthiness and reliability of subject matter hence it cannot be said the order passed is erroneous.

8. Copy of Bank Statement is enclosed herewith as Annexure"B". Hence we request you to accept the order passed by Ld. AO. We have submitted the above reply to best of your satisfaction, this is our brief submission in case your goodself require any further clarification on the above reply kindly let us know so that the same can be submitted at an early date.”

6.1 The ld. AR of the assessee in addition to the written submission argued that the case was selected for Limited Scrutiny through CASS and the issue for examination was “Large Share Premium received during the year ( Verify applicability of section 56(2)(viib) or any other relevant section). On this issue the ld. AO has called for the details and also found discussion in the order of the assessment at Shree Navkar Realinfra Pvt. Ltd. page 2 para 2 and 3 of the order of the assessment and therefore, the contention raised by the PCIT is totally illegal. The ld. AR of the assessee drawing our attention to the show cause notice dated 29.12.2020 not invoking explanation 2 to the provision of section 263 and therefore, he has not demonstrated that the order is how erroneous and prejudicial to the interest of the revenue.

“Perusal of details filed revealed that the assessee has existing share capital of Rs. 70,20,000/- as on 31.03.2016 and during the year under consideration, issued 1,00,000 nos. of shares at face value of Rs. 10/- per share and also at premium of Rs. 40/- per share. Thus, the assessee, during the year under consideration, received share capital of Rs. 10,00,000/- and share premium of Rs.40,00,000/-. To verify the issue Large share premium received during the year', the assessee was asked to furnish details of the person to whom shares were issued and justification for value of share and calculation of fair market value of the share issued. In response, the assessee furnished confirmation of accounts, ITRS, copy of bank account statement of the share holder for the source of share capital & share premium. With regard to the fair market value of of the share issued, assessee company shown the value of shares in accordance with Rule IIUA of the I.T. Rules, at Rs.54.35/- as on 31.03.2016.”

8.1 Thus, we see that the on the issue which the ld. PCIT is raising has duly been considered by the assessing officer, based on the material placed on record. The four issue that the PCIT raised and the facts of the case in this case is dealt with herein after. The first issue that the PCIT raised are that the FMV as on the date is not considered, whereas the ld. AO at para 3 page of the assessment order consciously accepted the fair marked value as on 31.03.2016 as Shree Navkar Realinfra Pvt. Ltd. rule 11UA and ld. PCIT did not find any flaw in accepting the version of the assessee. On the second issue ld. AO cannot see the business decision made by the investor by checking whether the investment is made from the borrowed fund or free reserve. Even the ld. AO is not suppose to see the Companies Act compliance that the whether the other shareholder was given a chance to apply or not. On the fourth issue the ld. PCIT noted the certificate for valuation of shares under rule 11UA placed on record and he did not find any fault in that valuation made. Thus, we see that the because the case of the assessee was subjected to limited scrutiny and the ld. AO has examined the aspect on the issue and recorded the finding in the order of the assessment. Thus, the provision of section 263 of the Act nowhere allow to challenge the judicial wisdom of the ld. AO or to replace the wisdom of the PCIT in the guise of revision unless the view taken by the ld. AO is not at all sustainable in the law and to invoke the provision the twin condition needs to be satisfied. The extent of the enquiry can be stretched to any level by forcing the AO to go through the assessment process again and again and that case there cannot be finality of the issue. The bench further note that the prerequisite exercise of jurisdiction by the learned PCIT under section 263 of the Shree Navkar Realinfra Pvt. Ltd. Act is that the order of the AO is established to be erroneous in so far as it is prejudicial to the interest of the Revenue. The ld. PCIT has to be satisfied of twin conditions, namely (i) the order of the AO sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If any one of them is absent i.e., if the assessment order is not erroneous but it is prejudicial to the Revenue, provision of section 263 cannot be invoked. This provision cannot be invoked to correct each and every type of mistake or error committed by the AO; it is only when an order is erroneous as also prejudicial to Revenue's interest, then the provision will be attracted. An incorrect assumption of the fact or an incorrect application of law will satisfy the requirement of the order being erroneous. The phrase 'prejudicial to the interest of the Revenue has to be read in conjunction with an erroneous order passed by the AO. Every loss of revenue as a consequence of the order of the AO cannot be treated as prejudicial to the interest of the Revenue. It is pertinent to mention that if the AO has adopted one of the two or more courses permissible in law and it has resulted in loss of revenue, or where two views are possible and AO has taken one view with which the PCIT does not agree, it cannot be treated as an erroneous order and it is prejudicial to the interest of the Revenue,

Shree Navkar Realinfra Pvt. Ltd. unless the view taken by the AO is totally unsustainable in law. In this process even the AO has no power to review his own order also. In this regard, we draw strength from the decision of the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. vs. CIT (2000) 159 CTR (SC) 1: (2000) 243 ITR 83 (SC). We also draw strength from the decision of the Hon'ble Supreme Court in the case of CIT vs. Max India Ltd. (2007) 213 CTR (SC) 266: (2007) 295 ITR 282 (SC) wherein it was held that:

"The phrase 'prejudicial to the interests of the Revenue' in s. 263 of the IT Act, 1961, has to be read in conjunction with the expression 'erroneous' order passed by the AO. Every loss of revenue as a consequence of an order of the AO cannot be treated as prejudicial to the interests of the Revenue. For example, when the AO adopts one of two courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the AO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the Revenue, unless the view taken by the AO is unsustainable in law."

8.2 Thus, based on this decision it is also noteworthy to mention that one of the pre-requisite before invoking S. 263 and the allegation of the Ld. PCIT is that there has been incorrect assumption of fact and law by the Assessing Officer. However, despite our deep and careful consideration of the material on record including the finding recorded in the subjected Assessment order and in the findings recorded in the order under challenge, we do not find any incorrectness and Shree Navkar Realinfra Pvt. Ltd. incompleteness in the appreciation of facts made by the AO even the ld. PCIT noted that valuation of shares under rule 11UA is placed on record and did not comment on it. The ld. AO has also satisfied that on the issue after calling the necessary information from the assessee and taken a plausible view on the matter after recording the finding in the order based on the information placed on record. In the light of these observations, we do not agree on the contentions of the ld. PCIT. Even on facts we have discussed that on the issues raised there is no error or prejudice caused to the revenue and does not attract the clause (a) or (b) to explanation 2 of section 263 of the Act. The bench also noted that in the show cause notice also ld. PCIT has not invoked that which clause of explanation 2 to section 263 is attracted in the case. The bench also noted that the jurisdiction Rajasthan high court in the case of CIT vs Ganpat Ram Vishnoi (2008) 296 ITR 292 (Raj) held that the jurisdiction under s. 263 is wide and is meant to ensure that due revenue ought to reach the public treasury and if it does not reach on account of some mistake of law or fact committed by the AO, the CIT can cancel that order and require the concerned AO to pass a fresh order in accordance with law after holding a detailed enquiry. But when enquiry in fact has been conducted and the AO has reached a Shree Navkar Realinfra Pvt. Ltd. particular conclusion, though reference to such enquiries has not been made in the order of the assessment, but the same is apparent from the record of the proceedings, in the present case, without anything to say how and why the enquiry conducted by the AO was not in accordance with law, the invocation of jurisdiction by the PCIT was unsustainable. Thus, it is seen that the views advanced by the PCIT is nothing but a change of opinion and ld. PCIT intend that the enquiry should have been done in the light of his view on the issue, which is not permitted in the eyes of the law. In the light of the aforesaid discussion, we hold that the order of the PCIT is not in accordance with the provisions of section 263 of the Act and thus the same is quashed.

In the result, appeal of the assessee is allowed.

Order pronounced under rule 34(4) of the Appellate Tribunal Rules, 1963, by placing the details on the notice board.