PRINCIPAL COMMISSIONER OF INCOME TAX 1 vs. L. K. SYNTHETICS PVT. LTD.

C/TAXAP/528/2022 ORDER DATED: 12/09/2022 IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/TAX APPEAL NO. 528 of 2022 ========================================================== PRINCIPAL COMMISSIONER OF INCOME TAX 1 Versus L. K. SYNTHETICS PVT. LTD. ========================================================== Appearance: MRS KALPANAK RAVAL(1046) for the Appellant(s) No. 1 for the Opponent(s) No. 1 ========================================================== CORAM:HONOURABLE MR. JUSTICE N.V.ANJARIA and HONOURABLE MR. JUSTICE BHARGAV D. KARIA

Date : 12/09/2022

ORAL ORDER (PER : HONOURABLE MR. JUSTICE N.V.ANJARIA) Heard learned advocate Mr. Nikunt K. Raval with learned advocate Mrs. Kalpana K. Raval for the appellant. 2. The present tax appeal preferred by the Revenue under section 260A of the Income Tax Act, 1961, arise out of order dated 29.11.2021 of the Income Tax Appellate Tribunal, Surat, in Income Tax Appeal No. 159 of 2020 in respect of Assessment Year 2015-16. 3. The facts are that the assessment under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') was completed against the assessee company on 31.12.2017. Total income was determined to be Rs. 13,23,850/-. The Revenue Page 1 of 8

C/TAXAP/528/2022 ORDER DATED: 12/09/2022 thereafter raised audit objection that the assessee had purchased share of M/s. Suruchi Processors Pvt. Ltd. at less than fair market value and the differential amount was required to be added in total income of the assessee under section 56(viia) of the Act. 3.1 Another objection was also raised regarding purchase of shares from Kreatifs Merchant Pvt. Ltd. which was a company struck off from the Registrar of Companies and the Assessing Officer was to verify the fair market value of the shares of the said company in relation to the order under consideration. 3.2 The aforesaid audit objections were accepted. As a remedial action, order under section 263 of the Act came to be passed on 23.03.2020 by the competent income tax authority. In the said proceedings, order passed under section 143(3) dated 31.12.2017 for the Assessment Year 2015-16 came to be set aside and fresh exercise to frame assessment was directed. 3.3 The aggrieved assessee preferred appeal before the Income Tax Appellate Tribunal. By order dated 29.11.2021, the Tribunal allowed the appeal and quashed the order passed by the Income Tax Authority under section 263 of the Act. It is against this order that the present appeal came to be filed. 4. Following questions are proposed by appellant claiming to be arisen as substantial questions of Page 2 of 8

C/TAXAP/528/2022 ORDER DATED: 12/09/2022 law, (i) Whether on the facts and circumstances of the case and in law, the Ld. Tribunal was justified in holding that the assessment order of the AO was neither erroneous nor prejudicial to the interest of the revenue even though the AO erred in not making addition of Rs. 10,15,663/- in respect of purchase of shares of M/s.Suruchi Processors Pvt. Ltd. at a price less than its fair market value? (ii) Whether on the facts and circumstances of the case and in law, the Ld. Tribunal was justified in holding that the assessment order of the AO was neither erroneous nor prejudicial to the interest of revenue even though the AO erred in not evaluating the fair market value of the share of Kreatifs Merchants Pvt. Ltd. (KMPL) at the time of investment in F.Y.2014-15 and ascertain the applicability of provisions of section 56(viia) of the Act despite the fact that KMPL was struck off from ROC records. (iii) Whether on the facts and circumstances of the case and in law, the Ld. Tribunal was justified in quashing the order passed u/s 263 even though the AO had passed the assessment order without making inquiries or verification which were warranted in the facts of this case and, therefore, the Ld. Pr. Commissioner was right in holding that such assessment was erroneous and prejudicial to the interest of the Revenue. iv) Whether on the facts and circumstances of the case and in law, the Ld. Tribunal was justified in holding that Explanation-2 (a) & (b) to section 263 was wrongly invoked by the ld. PCIT even though he had independently dealt with the objections and recorded his own satisfaction to prove that the order of AO is in Page 3 of 8

C/TAXAP/528/2022 ORDER DATED: 12/09/2022 fact erroneous and prejudicial to the interest of the Revenue? 4.1 It was submitted on behalf of the appellant that the Assessing Officer was required to ensure proper application of provisions of Section 56 of the Act and the valuation of the share was required to be done and that the Principal Commissioner of Income Tax was justified in invoking the powers under section 263 of the Act. It was submitted that the Assessing Officer had failed to conduct the inquiry in respect of making investment in shares in the said Company by the assessee. It was submitted that the Tribunal ought to have held that clause (a) and (b) of Explanation 2 of section 263 was applicable. 5. This Court has considered the facts, order passed by Principal Commissioner of Income Tax under section 263 of the Act as well as the order of the Income Tax Appellate Tribunal and the reasoning supplied by the Tribunal. It was observed against the assessee that it made investment in the shares of M/s. Suruchi Processors Pvt. Ltd. by purchasing 75000 shares in the year under consideration at the rate of Rs.13/- per share for total consideration of Rs.97,50,000/-. 5.1 As per the case of the authorities, for the year ended on 31.03.2014, the fair market value of the shares could be said to be Rs.14.35/- per share. Therefore, as per the view of the Principal Page 4 of 8

C/TAXAP/528/2022 ORDER DATED: 12/09/2022 Commissioner of Income Tax, the purchase price of the shares was required to be added in the total income of the assessee. In the same way, it was further observed that the assessee had purchased 46000 shares of Kreatifs Merchants Pvt. Ltd. at Rs.13/- per share for total consideration of Rs. 59,80,000/-. The name of the said company was struck off from the Registrar of Companies, stated the Principal Commissioner of Income Tax. It was reasoned that the said Kreatifs Merchants Pvt. Ltd. would have increased its authorised/issued share capital and therefore, the Assessing officer was expected to verify the fair market value to ascertain applicability of provisions of section 56(viia) of the Act. 5.2 It could be noticed that during the assessment stage, the Assessing Officer had issued notice under section 142(1) of the Act and in response to the said notice, the assessee had submitted necessary details and evidence in the nature of books of accounts before the Assessing Officer. On the basis of such relevant documents, Assessing Officer had made adequate inquiries and the assessment was framed. When the details were submitted along with documents, the Tribunal relied on the said aspect and findings recorded by the Principal Commissioner of Income Tax in his order under Section 263 of the Act. 5.3 The reply submitted by the asessee in the course of the assessment proceedings was before the Tribunal Page 5 of 8

C/TAXAP/528/2022 ORDER DATED: 12/09/2022 in form of paper book as recorded in paragraph 12 of the order. The details contained bank statement, books details of sale, details of investment along with the source of such investment. The assessee had also filed return of income along with computation of total income by submitting balance sheet, profit and loss account and complete audited financial statement. On examination of all those details and documents, a view was taken by the Tribunal that there was nothing which could be said to be prejudicial to the interest of the Revenue to justify the invocation of powers under section 263 of the Act. 5.4 The Tribunal was of the view that the Assessing Officer acted on the basis of the information and inquiry and verified the fair market value of the shares, observing in paragraph 15 as under,

"The ld. PCIT observed that assessee had also purchased 46000 shares of Kreatifs Merchants Pvt.Ltd.@ Rs.13/- per share for consideration of Rs. 59,80,000/-. On persual of MCA database, it is seen that the said company has been struck off from Registrar of Companies (ROC) records. Learned cousnel submits before us that at the time of purchasing shares, the company was active on MCA website. The assessing officer has verified the fair market value of the shares of Kreatifs Merchants Pvt. Ltd )KMPL) and allowed the claim of the assessee." Page 6 of 8

C/TAXAP/528/2022 ORDER DATED: 12/09/2022 5.5 It was a bare observation that though the material was before the Assessing Officer, the Assessing Officer did not make proper inquiries, "Besides the above, as rightly pointed out by the Learned Counsel for the assessee, that PCIT has not set out as to why Fair market value of shares need to be investigated, how to compute fair market value and as to what type of inquiry ought to have conducted by the Assessing Officer. We note that assessee has submitted during the assessment stage each and every documentincluding books of accounts and evidences, as required by the assessing officer. A mere observation that no proper details have been obtained, cannot be sufficient to come to a conclusion that the AO did not make proper and adequate inquiries which he ought to have made in the given facts and circumstances of this case. In the conclusion we are of the view that none of the reasons set out by the PCIT for invoking the jurisdiction u/s 263 of the Act are sustainable. The impugned order of the PCIT has to be quashed for the reason that order of the AO sought to be revised in the impugned order was neither erroneous nor prejudicial to the interest of the revenue for the reason of any lack of inquiry that the AO ought to have made in the given facts and circumstances of the case. We accordingly quash the order u/s 263 of the Act and allow the appeal of the assessee." 6. This Court is in complete agreement with the aforesaid order of the Appellate Tribunal and the reasoning supplied by the Tribunal. They are eminently just and proper and has reference to the facts and material before the Tribunal. 6.1 No question of law much less any of the Page 7 of 8

C/TAXAP/528/2022 ORDER DATED: 12/09/2022 substantial questions of law proposed, could be said to be arisen. No other substantial question of law arise. 7. Appeal is meritless and dismissed. (N.V.ANJARIA, J) (BHARGAV D. KARIA, J) BIJOY B. PILLAI Page 8 of 8