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IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH, “B”, CHANDIGARH BEFORE SHRI N.K. SAINI, VICE PRESIDENT & SHRI R.L NEGI, JUDICIAL MEMBER आयकरअपीलसं./ITA Nos. 658/CHD/2018 �नधा�रणवष� / Assessment Year : 2013-14 M/s S.R.M Portfolios Pvt. बनाम The PCIT(C) Ltd. Gurugram Plot No. 781, Industrial Area, Phase II, Chandigarh �थायीलेखासं./PAN NO: AAJCS1938B अपीलाथ�/Appellant ��यथ�/Respondent Hearing through video Conferencing �नधा�रतीक�ओरसे/Assessee by : Shri Ved Jain, Advocate & Shri Akshit Goyal, CA राज�वक�ओरसे/ Revenue by : Shri Sandip Dahiya, CIT सुनवाईक�तार�ख/Date of Hearing : 27/01/2021 उदघोषणाक�तार�ख/Date of Pronouncement : 24/02/2021 आदेश/Order Per R.L. Negi, Judicial Member:
The assessee has filed the present appeal against the order dated 23/03/2018 passed by the Principal Commissioner of Income Tax (Central), Gurugram [for short ’the PCIT’] for the assessment year 2013-14, whereby the Ld. PCIT has set aside the assessment order dt. 24/11/2015 passed under section 143(3) of the Income Tax Act, 1961 [for short ’the Act’]by exercising jurisdiction u/s 263 of the Act.
Brief facts of the case are that the assessee company filed its return of income for the assessment year under consideration declaring loss of Rs. 30,759/-. The case was selected for scrutiny and the A.O. passed assessment order under section 143(3) of the 2 Act making addition of Rs. 30,446/- under section 14A of the Act. Subsequently, the Ld. PCIT noticed that the assessee had received share application money amounting to Rs. 11,27,00,000/- for 22,54,000 shares during the FYs 2006-07 to 2013-14 having face value of Rs. 10 and premium of Rs. 40/- per share. Out of the said amount, Rs. 3,10,00,000/- was received during the FY 2012-13 and Rs. 2,08,10,000/- was received during the FY 2013-14. Ld. PCIT further noticed that the A.O. had computed the Fair Market Value (FMV) of the share as per the provisions of Rule 11UA(2)(a) of the Income Tax Rules, 1962 at Rs. 10.60/- whereas the same has been allotted to the shareholders @ Rs. 50/- per share. The Ld. PCIT exercising revisional jurisdiction u/s 263 of the Act, set aside the findings of the AO on this issue, holding that as per the provisions of section 56(2) (viib) of the Act, the aggregate consideration received for such shares as exceeds the fair market value shall be the income of the assessee and will be taxable in the year in which the consideration was received. The Ld. PCIT accordingly directed the A.O. to tax the amount which is in excess to the FMV, in accordance with the Section 56(2) (viib) r.w.s 2(24)(xvi) of the Act.
Aggrieved by the impugned order passed by the Ld. PCIT, assessee is in appeal before this Tribunal.
The Assessee has challenged the impugned order passed by the Ld. CIT(A) by raising the following grounds of appeal;
1. On the facts and circumstances of the case, the order passed by the learned Principal Commissioner of Income Tax (Central) {PCIT(C)} is bad both in the eye of law and on facts. 2 On the facts and circumstances of the case, the order passed by the learned PCIT cancelling the assessment order passed by the A O . is untenable in the absence of order of the A O . being erroneous as well as prejudicial to the interest of the Revenue.
3. On the facts and circumstances of the case, the learned PCIT(C) has erred both on facts and in law in ignoring the fact that all the issues raised by him in notice under Section 263 were before the A.O. and as such the jurisdiction on this issue under Section 263 cannot be assumed, 3 4, On the facts and circumstances of the case, the learned PCIT(C) has erred both on facts and in law in rejecting the contention of the appellant that the issue of receipt of share application money during the year was before the AO in proceedings under Section 143(3) and was allowed after application of mind by him as such the same cannot be the matter for reassessment under Section 263 of the Act. 5 On the facts and circumstances of the case, the learned PCIT(C)has erred both on facts and in law in ignoring the contention of the appellant that the proceeding under Section 263 cannot be used for substituting option of the A O by that of the PCIT(C).
6. On the facts and circumstances of the case, the learned PCIT(C)has erred both on facts and in law in invoking revisionary power under Section 263 of the Act despite the fact that even after thorough examination, no specific findings have been given on the issue of how the order is erroneous and prejudicial to the interest of Revenue. 7 On the facts and circumstances ot the case, the learned PCIT(C) has erred both on facts and in law in setting aside the matter to the file of the A O without giving a finding as to the error and prejudice caused to the revenue by the assessment order. On the facts and circumstances of the case, the learned PCIT has erred both 8 on facts and in law in ignoring the facts that the AO having taken one of the possible views, the power under section 263 of the Act cannot be invoked by CIT to substitute the alternative view.
That the appellant craves leave to add amend or alter any of the grounds of appeal
5. Before us, the Ld. Counsel for the Assessee submitted that since the case of the assessee does not fall under any of the clauses mentioned in Explanation 2 of Section 263 of the Act, the assessment order passed by the AO neither erroneous nor prejudicial to the interest of the Revenue. Ld. Counsel further pointed out that the issue raised by the Ld. PCIT in this case has already been decided in favour of the assessee by the Chandigarh Bench of the ITAT rendered in the case of ITO Vs. M/s Fred Enterprises Pvt. Ltd. wherein the Tribunal has held that the provisions of Section 56(2) (viib) are triggered in the year in which the shares are issued. Since the observations of the Ld. PCIT are contrary to the decision of the ITAT Chandigarh Bench in the aforesaid case, the impugned order is liable to be quashed.
6. On the other hand, the Ld. DR fairly admitted that the issue raised by the Ld. PCIT in this case is covered in favour of the 4 assessee by the order of the Tribunal. However, the Ld. DR supported the order passed by the PCIT.
We have heard the submissions of the parties and perused the material on record including the decision of the Coordinate Bench rendered in the case of ITO Vs. M/s Fred Enterprises Pvt. Ltd.(supra) relied upon by the ld. Counsel for the assessee. The only issue which requires adjudication in this case is whether the impugned order passed by the ld. PCIT is bad in law in the absence of order of the AO being erroneous as well as prejudicial to the interest of the revenue. As pointed out by the ld. Counsel, in the case of ITO Vs. M/s Fred Enterprises Pvt. Ltd.(supra), A.O. computed the FMV of shares in accordance with Rule 11(U)(b) of the Income Tax Rules, 1962 on the date of issue of shares holding that as per Explanation 2 of Section 56(2) (viib) the FMV of share shall be the value on the date of issue of share and added the same to the income of the assessee under the head income from other sources.
The assessee challenged the assessment order before the Ld. CIT(A) inter alia on the ground that the AO has invoked section 52(2) (viib) on the receipt of consideration against issue of shares since the assessee had not received amount in the impugned year but in the earlier year no addition could be.
9. Ld. CIT(A) after hearing the assessee deleted the addition made by the A.O. holding that the section 52(2) (viib) was invoked in the year of receipt of consideration and since the in the present case no consideration was received in the impugned year the addition is not sustainable. The Revenue challenged the findings of the Ld. CIT before the ITAT. The coordinate Bench vide order dt. 30/06/2020 set aside the findings of the Ld. CIT(A) holding as under:
On interpreting the term consideration received as being at the time of issue of share s as held by us above, the valuation date for determining FMV is the date of issue of shares. Thus, a comparison of the fair market value of shares and the consideration received, both relating to the issue of shares is made and the surplus if any is subjected to tax. This is a reasonably sound and logical interpretation since the sect ion, subjects to tax the excess consideration received by over pricing the value of shares issued. Overpricing or excess consideration can be determined when the actual pr ice and the market price relating to issue of shares is compared. If the trigger for the invocation of the section is in the year of receipt of amounts relating to shares prior to their being issued, the excess consideration received above the FMV of shares cannot be determined because, since the share s have not been issued, there cannot be FMV of anything which is not even in existence.
We, therefore, agree with the content ion of the ld. DR that the provisions of Section 56(2) (viib) are triggered in the year the shares are issued.
The arguments of the Ld. Counsel for the asses see are all based on laying emphasis solely on the word” received” used in the section, which hold no ground since as we have held above the words used in the sect ion are not to be read in isolation and the correct interpretation lies in the meaning of the phrase “consideration received on issue of shares”, which we have held re late s to the year of issue of shares and not before. As for the reliance placed by the ld. CIT(A) on the decision of the Kolkata Bench of the ITAT in the case of Diach Chemicals and Pigments(supra), we find that the same is distinguishable on facts since in the facts of the said case the shares were found to have been applied for in earlier year as per terms and conditions settled in that year and accordingly it was held that the provisions of sect ion 56(2) (viib) were invoked in that year and not in the year of allotment of share s. In the case before us the terms and conditions of issue of shares were not set t led in the year of application for shares but on the contrary in the year of allotment since while the application had been made at a premium of Rs.90/- the shares were al lot ted in the impugned year at a premium of Rs.590/- . The said decision therefore is of no assistance to the assessee. The decision of the ITAT Chandigarh Bench in the case of Luxmi Foodgrains(supra) is also distinguishable on facts since in that case the dispute about the invocation of section 56(2) (viib) arose on account of the fact that the consideration received by way of cheques had not been enchased by the assessee at all and therefore he disputed the applicability of these ct ion on the g round of receipt of consideration. There was no dispute about consideration having arisen in that case, which distinguishes it from the present case. Thus, reading the provisions of the Sect ion and the Rules pre scribed for determining the Fai r Market Value of shares, what is arrived i s that the provisions of Sect ion 56(2) (viib) are triggered in the year of issue/allotment of shares. In the present case, since the shares were issued in the impugned year, the provisions of Section, we hold, have been rightly applied by the AO in the impugned year and the order of the AO to that extent is upheld. Further since the Ld.CIT(A) allowed the assesses appeal on this ground alone and did not therefore adjudicate the issue of determination of Fair Market Value of the shares issued, the CIT(A) is directed to adjudicate this aspect.
As pointed out by the Ld. Counsel, the coordinate Bench has decided the issue raised by the ld. PCIT in the case of ITO Vs. M/s 6 Fred Enterprises Pvt. Ltd.(supra), holding that the provisions of section 56(2)(viib) of the Act are triggered in the year in which the shares are issued. Therefore, the impugned order passed by the Ld. PCIT, directing the AO to tax the amount which is in excess of its FMV as income from other sources on receipt basis, is contrary to the findings of the coordinate Bench. As per the settled law, the jurisdiction u/s 263 of the Act can be exercised on satisfaction of twin conditions that the order passed by the AO is erroneous and prejudicial to the interest of the Revenue. In the present case since the AO has passed the assessment order in accordance with the decision of the coordinate Bench rendered in the case discussed above, the same cannot be termed as erroneous within the meaning of section 263 of the Act. In our considered view since the order passed in the present case is in consonance with the findings of the coordinate Bench, the Ld. PCIT has wrongly exercised the revisionary powers u/s 263 and directed the AO to tax the amount excess of its fair market value under the head income from other sources on receipt basis. Hence, we hold that since the order passed by the A.O. is not erroneous, the Ld. PCIT has wrongly set aside the same by exercising jurisdiction u/263. We accordingly allow the appeal filed by the assessee and set aside the impugned order passed by the Ld. PCIT u/s 263 of the Act. In the result, appeal of the assessee is allowed. Order pronounced on 24/02/2021.