USHASREE BANDARU,HYDERABAD vs. DCIT., CIRCLE-5(1), HYDERABAD

The Hon.PCIT failed to appreciate the fact that all the shareholders of company before and after the allotment of equity shares of the company were all family members and close relatives and therefore failed to appreciate that was any real receipt of any property within the meaning of the section 56(2)(vii) of the Act.

For the purpose of recording the facts, appeal in is taken as a lead case. The assessee is an individual, filed her return of income for the year under consideration on 23.11.2016, declaring loss of Rs.2,86,311/-. Subsequently, the case was reopened by issue of notice u/s 148 of the Act on 31.03.2021 to assess the income escaped assessment on account of purchase of shares of M/s Kamineni Hospitals Pvt.Ltd and M/s Kamineni Health Services Ltd. from M/s United Steel Allied Industries Pvt.Ltd. u/s 56(2)(vii) of the Act. The Assessing Officer (“the AO”) completed the assessment u/s 147 r.w.s. 144B of the Act on 31.03.2022, whereby, additions were made on account of less consideration paid for purchase of the shares and deemed as income u/s 56(2)(vii) of the Act to the tune of Rs.18,08,65,688/-. Thereafter, on perusal of assessment record, the Ld.PCIT noted that during the previous year relevant to the assessment year under consideration, the assessee purchased shares of M/s Kamineni Hospitals Pvt.Ltd. from another share holder M/s United Steel Allied Industries Pvt.Ltd. for a consideration which is less than the fair market value of the shares and consequently the AO worked out the difference between the consideration and fair market value as deemed income u/s 56(2)(vii) of the Act and added to the income of the assessee. However, the AO has not considered the deemed income u/s 56(2)(vii) of the Act, in respect of the shares received by the assessee under fresh allotment from M/s Kamineni Hospitals Pvt.Ltd. and therefore, the differential amount of consideration and the fair market value of the shares was required to be treated as deemed income u/s 56(2)(vii) of the Act, but omitted to do so by the AO, which has resulted into under assessment of income to the tune of Rs.2,40,42,855/-. The Ld.PCIT issued show cause notices dated 08.02.2023, 15.02.2023 and 04.01.2024. The assessee filed replies to the show cause notices on 17.03.2023, 11.01.2024 and 19.03.2024 respectively. The Ld.PCIT was not impressed with the replies of the assessee and passed impugned order whereby, the order of the AO was held to be erroneous in so far as prejudicial to the interest of the revenue and accordingly set aside the same with the directions to the AO to verify the same and pass consequential order, after affording reasonable opportunity to the assessee.

Before the Tribunal, the learned AR of the assessee has submitted that the assessment was reopened only on the issue of deemed income u/s 56(2)(vii) of the Act, therefore, the question of omission on part of the AO does not arise. He has further submitted that during the course of assessment proceedings, the AO issued notices u/s 142(1) of the Act dated 29.11.2021 and 20.12.2021, whereby specific queries were raised by the AO, including the details of number of shares purchased and the date of purchase of the same as well as the details of the persons from whom the shares were purchased along with contract note, transfer certificate, market value of shares as on 31.03.2016. The AO also asked the assessee to furnish the balance sheet of M/s Kamineni Hospitals Pvt. Ltd. and M/s Kamineni Health Services Ltd. PAS-3 of ROC to show the allotment of shares. The assessee has duly complied with the above notices issued by the AO vide reply dated 27.12.2021, thereby, furnished copy of PAS-3 along with annexure of shares allotment and other details regarding purchase of shares as well as allotment of shares, placed at page No.15 to 17 of the paper book. Thus, the Ld.AR has submitted that while framing the assessment, the AO was aware about the transactions of purchase of shares as well as allotment of shares to the assessees. The AO made the addition in respect of the shares purchased by the assessees from M/s United Steel Allied Industries Pvt.Lt., but no addition was made in respect of allotment of shares by M/s Kamineni Hospitals Pvt.Ltd. under Right Issue, because the allotment of shares does not fall under the ambit of section 56(2)(vii) of the Act. Thus, the Ld.AR has submitted that when the AO has taken a plausible view, in respect of the Right Issue allotment of shares by M/s Kamineni Hospitals Pvt Ltd. to the assessee, then the Ld.Commissioner has no power to invoke the provisions of section 263 of the Act, merely because, he does not agree with the view of the AO. He has further contended that the Ld.PCIT has invoked the provisions of section 263 on the ground that the AO omitted to consider and made the addition u/s 56(2)(vii) in respect of the shares allotted by M/s Kamineni Hospitals Pvt. Ltd., which is contrary to the record, as the AO has duly conducted the enquiry and only after reply and details furnished by the assessee, he was satisfied that no deemed income can be assessed u/s 56(2)(vii) in respect of fresh allotment of shares by the company under Right Issue. The Ld.AR has also referred to the details of allotment of shares under Right Issue as placed at page No.1 of the paper book-II and then referred to the Explanatory Note, explaining the provisions of Finance Bill, 2009 and submitted that the amendments in the provisions of section 56(2)(vii) were introduced as a counter evasion mechanism to prevent laundering of unaccounted income under the garb of gifts, immovable and movable properties received without consideration or inadequate consideration. Thus, the Ld.AR has submitted that when the shares were allotted by the company to the existing shareholders under Right Issue, then the question of evasion of tax or involvement of money laundering does not arise. He has further submitted that the shares issued by the company are the fresh allotment and therefore, the same does not fall in the mischief of section 56(2)(vii)(c) of the Act. In support of his contentions, he has relied upon the judgement of Hon’ble Gujarat High Court in the case of PCIT Vs. Jigar Jashwant Lal Shah, reported in 460 ITR 628 (Guj) and submitted that the Hon’ble High Court while dealing with an identical issue has held that the shares had come into existence, only when the allotment is made by the company as Right issue shares and therefore, the same cannot be said to be received from any person, which is fundamental requirement for invoking section 56(2)(vii)(c) of the Act. Thus, the Ld.AR has contended that the Hon’ble High Court has held that for invoking the provisions of section 56(2)(vii)(c), the property must pre exist. He has also relied upon the following decisions :

On the other hand, Ld.DR has submitted that the assessment was reopened to assess income escaped on account of shares purchased by the assessee against inadequate consideration in comparison to the fair market value of the shares as per section 56(2)(vii)(c) of the Act. The AO has made additions of deemed income u/s 56(2)(vii)(c) in respect of transactions of purchase of shares of Kamineni Health Services Ltd. from United Steel Allied Industries Pvt. Ltd., but failed to cause inquiry in respect of shares allotted by the company to the assessees. He has referred to Explanation 2 to section 263 of the Act and submitted that the order of the AO shall be deemed to be erroneous, so far as prejudicial to the interest of the Revenue, if in the opinion of the Ld.PCIT, the order is passed without making enquiries or verification which should have been made. It is clear from the assessment order that the AO has not conducted any inquiry regarding shares allotted by the company to the assessees. The Ld.DR has further submitted that no record has been produced by the assessee during the assessment proceedings to show that the shares were allotted under Right Issue. He has referred to para 6.4 of the impugned order and submitted that the Ld.PCIT has duly considered the submissions of the assessee. However, the assessee did not furnish the details of existing shareholders of the company, details of the Right Issue of shares offered by the company, actual number of shares allotted to the shareholders in proportion to existing holding and fresh share issue to the existing shareholders and new shareholders, if any. Therefore, in the absence of relevant record as well as inquiry conducted by the AO to find out the actual nature of transactions the order passed by the AO is erroneous, so far as the same is prejudicial to the interest of the Revenue. He has relied upon the impugned order of the Ld.PCIT.

We have considered the rival submissions as well as the relevant material on record. The AO reopened the assessment for the year under consideration by issuing notices u/s 148 on 31.03.2021 recording the reasons for reopening of assessment reproduced in para No.2 as under :

Thus, it is clear that the AO reopened the assessment to assess the income assessable to tax in respect of the shares of M/s Kamineni Hospitals Pvt. Ltd. purchased by the assessee @12.31 per share as against the fair market value arrived by the AO at Rs.21.22 per share and consequential deemed income of Rs.1,50,83,000/- u/s 56(2)(vii) of the Act. The AO issued notice u/s 142(1) dated 29.11.2021, placed at page 11-14 of the paper book as under :

The assessee filed her reply dated 27.12.2021 placed at page No.15 to 17 of the paper book as under :

Thus, it is clear from the notices issued by the AO u/s 142(1) that the AO asked the assessee to furnish the details such as, proof of shares purchased along with date of purchase, amount per share, particulars of the persons from whom the shares were purchased along with contract note, transfer certificate and market value of the shares as on 31.12.2016. The AO also asked the assessee to furnish the balance sheet of M/s Kamineni Hospitals Private Ltd. and M/s Kamineni Health Services Ltd. as well as copy of PAS-3 of ROC showing the information uploaded by these companies regarding issuance / allotment of shares during the year. As the assessee explained that during the year, the assessee purchased the shares of M/s Kamineni Hospitals Pvt. Ltd. under Right Issue subscription for new shares of face value of Rs.10/- each, paid up value per share of Rs.6/- each at par. Another set of shares of M/s Kamineni Hospitals Pvt.Ltd. from another shareholder as well as M/s Kamineni Health Service Ltd. also purchased from another shareholder. The AO after considering the reply of the assessee has finally issued show cause notice dated 14.03.2022, proposed addition on account of deemed income u/s 56(2)(vii) of the Act amounting to Rs.8,08,65,688/- and then passed the assessment order dated 31.03.2022, making addition in para 3 to 5 as under :

Thus, the AO has again reproduced the queries raised in the show cause notice u/s 142(1) and referred to the replies and details/explanation filed by the assessee on various dates.

The Ld.PCIT observed that the assessee got fresh allotment of shares from M/s Kamineni Hospitals Private Ltd. @Rs.10/- per share, whereas the fair market value of the share of Rs.21.22 per share. It was further observed that during the assessment, the same was considered for calculating the deemed income u/s 56(2)(vii)(c) of the Act. In view of the omission on the part of the AO has resulted in under assessment of income to the tune of Rs.2,40,42,855/- and consequently initiated the proceedings u/s 263 of the Act. The assessee filed her reply dated 15.03.2023 to the show cause notice issued by the PCIT, which reads as under :

Thus the assessee has pointed out that it is a fresh allotment under Right issue by the company and there is no case of any evasion of tax. Further, the assessee also pointed out that the paid up value of the share at the time of issuance/allotment was Rs.6/- per share and therefore, the assessee paid Rs.1,28,57,142/- towards share application and share call money. It was stressed by the assessee in the reply that it was a transaction of allotment of shares to the existing shareholders and therefore, the same are genuine and there is no foul play and were never undertaken to convert any unaccounted money into white, as the object of introduction of provisions of section 56(2)(vii) of the Act. The Ld.PCIT was not impressed with the reply filed by the assessee and passed the impugned order holding the assessment as erroneous in so far as prejudicial to the interest of the revenue and consequently, the assessment order was set aside with the direction to verify the same and pass consequential order after affording reasonable opportunity to the assessee. There is no dispute that the additions made by the AO u/s 56(2)(vii) were challenged by the assessee in the appeal filed before the CIT(A) and pending adjudication and therefore, the fair market value adopted by the AO in respect of the shares purchased by the assessee from other shareholders was disputed and challenged by the assessee. The Ld.AR of the assessee has also filed the minutes of the meetings of Board of Directors of Kamineni Hospitals Private Ltd held on 30.03.2016 to show that the Right Issue of equity shares was decided to be issued by the company to the existing shareholders of the company and therefore, this fresh allotment of shares under Right Issue to the existing share holders does not fall in the ambit of section 56(2)(vii)(c) of the Act. The Ld.AR has relied upon the judgement of Hon’ble Gujarat High Court in the case of PCIT Vs. Jigar Jashwant Lal Shah (supra), wherein, Hon’ble High Court has considered an identical issue of applicability of provisions of section 56(2)(vii)(c) in respect of allotment of Right Issue to the existing shareholders. The Hon’ble High Court has also considered the explanatory notes explaining the provisions of Finance Bill in para 7 and 8 of the impugned order as under :

Thus, the Hon’ble High Court has observed that under the fresh allotment, the shares had come into existence only when the allotment is made by the company as Right Issue shares and therefore, the same cannot be said to be received from any person. It has been specifically observed that the shares which have been allotted to the assessee were received from any person, which is fundamental requirement for invoking provisions of section 56(2)(vii)(c) of the Act. For application of section 56(2)(vii)(c), there must be a property pre-exist as clear from the intention of the Legislature. The Hon’ble High Court has thus held in para 17 to 19 as under :

Therefore, when there is no dispute regarding the fact that the shares acquired by the assessee were allotted by the company under Right Issu does not fall in the ambit of the term receipts from any person, any property, other than the immovable property as employed in section 56(2)(vii)(c) of the Act. Thus, once the allotment of shares under Right Issue to the existing shareholders does not fall in the mischief of section 56(2)(vii)(c), then the question of any error in the assessment order as well as under assessment of income by the AO, while passing the assessment order does not arise. It is settled proposition of law that if the AO has taken one of the plausible view, then the commissioner is not permitted to invoke the provisions of section 263, merely because, he does not agree with the view taken by the AO. In the case on hand, the AO has not only taken one of the plausible view, but the view taken by the AO after consideration of the relevant details and facts is a mere logical and plausible view as fortified with the judgement of Hon’ble High Court as well as various decisions of this Tribunal relied upon by the Ld.AR of the assessee. We further note that once the AO has raised the specific queries about the shares purchased by the assessee during the year and the assessee produced all the relevant details including allotment of shares by the company to the assessee, then the case does not fall in the category of lack of enquiry on the part of the AO. Therefore, when the AO has adopted one of the courses permissible and available to him and the view taken by the AO is one of the possible and rather plausible view, then the said order cannot be treated as erroneous, prejudicial to the interest of the Revenue, unless the view taken by the AO is unsustainable in law. As we have already discussed that the Hon’ble Gujarat High Court has upheld the view that the provisions of section 56(2)(vii)(c) are not applicable in case of fresh allotment of shares under Right Issue, therefore, the view taken by the AO cannot be held as unsustainable in law. Even otherwise, when the entire relevant record was already available with the AO as well as the PCIT, then the impugned order passed by the PCIT without giving a conclusive finding and remanding back the AO for passing the fresh assessment order itself exhibit that the Ld.PCIT himself was not sure about the correctness of the claim of the assessee. As a result, the AO has conducted an enquiry and the order passed by the AO cannot be held as erroneous for lack of enquiry, then it is incumbent upon the PCIT to give conclusive finding as held by the Hon’ble Delhi High Court in the case of ITO Vs. DG Housing Projects Ltd. 343 ITR 329, that the order passed by the AO is not sustainable in law. Therefore, as a result, the issue itself is covered by the judgement of Hon’ble High Courts as well as by this Tribunal, then the order of AO cannot be held as erroneous and prejudicial to the interest of the Revenue. Accordingly, the impugned order passed by the Ld.PCIT is not sustainable in law and the same is liable to be quashed. We order accordingly.

In the result, appeals filed by the assessee are allowed.