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

PER: RATHOD KAMLESH JAYANTBHAI, AM

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.

2 ITA No. 133/Jodh/2022 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.”

filed delayed. The ld. AR of the assessee relied upon the affidavit for

condonation of delay as reproduced here in below:

3 ITA No. 133/Jodh/2022 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 –

considering the ground for condonation of delay we admit the appeal

to be decided on merits.

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.

4 ITA No. 133/Jodh/2022 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.

5 ITA No. 133/Jodh/2022 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

6 ITA No. 133/Jodh/2022 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

7 ITA No. 133/Jodh/2022 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

8 ITA No. 133/Jodh/2022 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

9 ITA No. 133/Jodh/2022 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."

preferred the present appeal on the grounds as reiterated here in

above. Apropos to the grounds so raised by the assessee the ld. AR

appearing on behalf of the assessee has placed reliance on the

submission made before the PCIT and the same is reproduced here in

below for the sake of brevity:

To, The Principal Commissioner of the Income Tax, Udaipur

10 ITA No. 133/Jodh/2022 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: -

11 ITA No. 133/Jodh/2022 Shree Navkar Realinfra Pvt. Ltd. creditworthiness of the subscriber company. Subscriber company is among the top taxpayers of the jurisdiction of AO, hence there is no chance of doubt on creditworthiness of the subscriber company. This is also evident from ITR filed during the Assessment taxes paid for the current AY by subscriber company FSPL is Rs. 695.40 Lacs. Therefore Ld AO has duly examined the facts of the case and passed justified Assessment Order. 5. In para 7 of the notice your goodself has asked about personal allegations on directors of the company. In this regard we mention that both assessee company and director of the company are separate assessee and personal allegations on directors could not be basis for taking any action on the company or making any biased view. 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

12 ITA No. 133/Jodh/2022 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.

authorities and submitted that the ld. PCIT has raised four issues 1)

the working of the fair market value (FMV) is not adopted as on the

date of transaction, 2) The payment is received from the OD account

3) Right issue is not made in accordance with the law 4) valuation of

shares under rule 11 UA not placed on record. The investment made

by the share holder in a company and that too at premium where the

company is in loss and not doing any business. Based on these

observation ld. DR supported the findings of the PCIT recorded in the

order under challenge.

placed on record. Apropos to this selection criteria we note from the

13 ITA No. 133/Jodh/2022 Shree Navkar Realinfra Pvt. Ltd. order of the assessment that notice u/s. 142(1) dated 20.03.2019 was

issued to the assessee and the assessee submitted reply though e-

proceedings on the issue of selection criteria. After considering the

submission of the assessee, ld. AO recorded his satisfaction and the

relevant finding of the ld. AO is reproduced here in below

“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

14 ITA No. 133/Jodh/2022 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

15 ITA No. 133/Jodh/2022 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,

16 ITA No. 133/Jodh/2022 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

17 ITA No. 133/Jodh/2022 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

18 ITA No. 133/Jodh/2022 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.

Sd/- Sd/- (Dr. S. Seethalakshmi) (Rathod Kamlesh Jayantbhai) Judcial Member Accountant Member

Dated : /08/2023 *Ganesh Kumar, PS

19 ITA No. 133/Jodh/2022 Shree Navkar Realinfra Pvt. Ltd. Copy to: 1. The Appellant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR 6. Guard File

Assistant Registrar Jodhpur Bench