CYGNUS VANIJYA PRIVATE LIMITED ,KOLKATA vs. I.T.O.,WARD-11(4), KOLKATA

Per Manish Borad, Accountant Member:- This appeal filed by the assessee is directed against the order of ld. Principal Commissioner of Income Tax-4, Kolkata dated 04.03.2020 for the assessment year 2015-16 passed under section 263 of the Income Tax Act, 1961.

Cygnus Vanijya Private Limited

(2) That on the facts and circumstances of the case and in law, the Ld. PCIT grossly erred in not appreciating that the twin conditions precedent for invoking Section 263, namely the impugned assessment order must be erroneous and that error must be prejudicial to the interest of the revenue, were not fulfilled in the appellant’s case. Further, that the AO either examined the issue at the original assessment stage or his view was one of the possible views and therefore there was no error in the impugned assessment order so as to justify action u/s 263 of the Act. Under the circumstances, the very assumption of power u/s 263 of the Act is unjustified and bad in law and the order passed in pursuance thereof is unjustified and bad in law and the same deserves to be quashed. (3) That on the facts and circumstances of the case and in law, the Ld. PCIT has erred in not appreciating the fact that the AO had passed the assessment order u/s 143(3) of the Act, after verifying, examining and critically & legally analyzing the facts of the appellant’s case and the written submissions filed by the appellant along with documentary evidences in support thereof. Thus, the act of the Ld. PCIT c considering the assessment order as erroneous and prejudicial to the interest of the revenue is nothing but the change of opinion on the same set of facts leading 1 unlawful revision of a lawfully concluded assessment u/s 143(3) of the Act. (4) For that the Ld. PCIT erred in reappraising the facts of the appellant vide proceeding initiated u/s 263 of the Act, which, however, were duly examined, discussed and scrutinized by the AO while framing the assessment order u/s 143(3) of the Act and whereas such reappraisal of the same facts is beyond the jurisdiction of Section 26 the Act. (5) For that the Ld. PCIT erred factually in holding the appellant’s case as the case of ‘lack of independent and adequate enquiry’ by the AO and that the order u/s 143(3) of the Act was passed by the AO without making inquiries and verifications which should have been made, contrary to the fact that a detailed questionnaire along with notice u/s 142(1) of the Act was issued by the AO and was duly replied by the appellant and the same was taken on record by the AO before passing the order under section 143(3) of the Act. (6) For that the Ld. PCIT erred on the facts of the case and in law in holding that the assessment order was passed by the AO without carrying out detailed investigation / verification / independent enquiry regarding creditworthiness of the shareholders and also the genuineness of the transactions relating to issue of share capital at premium whereas the fact remains that the necessary documentary evidences related to the transactions as requisitioned by AO were duly furnished by the appellant in the course of assessment proceedings and the same were duly considered by AO before passing the assessment order. (7) For that the Ld. PCIT erred on the facts of the case and in law in not appreciating that the notice under section 133(6) of the Act was duly issued by the AO to the subscribers of share capital, which was duly replied by the subscribers to the AO along with necessary documentary evidences and was duly taken on record by the AO before passing the order under section 143(3) of the Act.

Cygnus Vanijya Private Limited (8) That on the facts and circumstances of the case and in law, the Ld. PCIT has erred in setting aside the assessment order passed u/s 143(3) of the Act and further directing the AO to cause adequate and effective enquiry on the above specific issue which, however, has already been duly examined, discussed and scrutinized by the AO while framing the assessment order u/s 143(3) of the Act.

Cygnus Vanijya Private Limited

“2.1. “The A.O. passed the order without carrying out detailed investigation/ verification/ independent enquiry regarding identity, creditworthiness of the shareholders & also the genuineness of transactions relating to share capital amounting to Rs. 69,99,993/- (76923 X Rs. 91/-) that was intended to be carried out and merely accepted the submission of the assessee in this regard. 2.2. That A.O has also failed to carryout detailed investigation of the shareholders on the very issue that how they decided to invest in such a company which was never known for its line of business and also they invested at huge premium without verifying the financial position. 2.3. The A.O further failed to examine the rationale behind raising the said share premium and also did not verify the method adopted by assessee for determining such abnormally huge premium specially keeping in view that prima facie there was no material in the balance sheet of the assessee warranting/justifying such huge premium. 2.4. The A.O failed to collect the relevant evidences in order to reach a logical conclusion regarding the genuineness of the source of the Share capital. 2.5.The A.O failed to examine all the bank accounts for the entire period in the course of verification to find out the money trail of the share capital. 2.6. The A.O failed to adequately trace out the money trail to ascertain the genuineness of source of fund invested by share holders in the assessee company. 2.7. On the whole the impugned order dated 14-09-2017 passed u/s 143(3) of the Income Tax Act, 1961 prima facie suffers from lack of independent and adequate enquiry on the aforesaid issues. In view of the above facts and circumstances, order dated 14.09.2017 is prejudicial to the interest of revenue as per explanation-2 of the Section 263(1) of the Act as the order is passed without making inquiries or verifications which should have been made on these issues of short term loans and advances."

Cygnus Vanijya Private Limited

“8. I have carefully considered and perused the material available on record and submission made during this proceedings and found that the issue pointed out in the show-cause needs verification as merely accepting submission without calling for logically relevant material/evidences in order to have an overview of totality of facts and circumstances during the course of assessment proceedings, the A.O. failed to examine the above referred issue, rendering the assessment order erroneous on the ground of lack of enquiry. After having considered the position of law and facts and circumstances of the instant case, I am of the considered opinion that the assessment order passed by the A.O. is erroneous in so far as it is prejudicial to the interest of revenue in accordance with the Explanation 2 of section 263 (1) of the Act on the ground of lack of enquiry. Accordingly, the assessment dated 14.09.2017 passed u/s 143(3) is set aside de- novo on specific issue as outlined in above para with a direction to Assessing Officer to cause adequate and effective enquiry. The A.O. is further directed to provide reasonable opportunity to the assessee company to produce documents & evidences which it may choose to rely upon for substantiating its claim and pass a fresh assessment order”.

7. Aggrieved, assessee is now in appeal before this Tribunal.

8. Ld. Counsel for the assessee stated that the issue raised in the show-cause notice has been examined in detail by the ld. Assessing Officer and has also made an addition on this issue. Ld. PCIT erred in stating that detailed inquiry was not conducted. However, during the course of assessment proceedings, specific information was called from the assessee, inquiry was also conducted by the Assessing Officer by issuing notice under section 133(6) of the Act to the shareholders, copy of certificate issued by the Chartered Accountant computing fair market value of shares under Rule 11UA of the Income Tax Rules was filed. Detailed reply was also filed on 28.08.2017. It was further stated that for all the facts attached to the issue in question a detailed inquiry has been conducted and thus ld. PCIT erred in holding that there was lack of Cygnus Vanijya Private Limited inquiry and the same is factually incorrect. Reliance as placed on the following decisions:-

(i) CIT Vs. Max India Ltd., 295 ITR 282 (S.C.); (ii) CIT Vs. Sunbeam Auto Ltd. 332 ITR 167 (Del.); (iii) CIT Vs. Anil Kumar Sharma, 335 ITR 83 (Del); (iv) CIT Vs. Vikas Polymers, 236 CTR 476/194 Taxman 57; (v) Hari Iron Trading Co. Vs. CIT, 263 ITR 437 (P&H); (vi) Malabar Industrial Co, Ltd. Vs. CIT, 243 ITR 83 (S.C.); (vii) CIT Vs, Hindustan Coca Cola Beverages (P) Ltd. 331 ITR 192(Del.); (viii) CIT Vs. International Travel House Ltd., 194 Taxman 324; (ix) CIT Vs. DLF Power Ltd., 329 ITR 289(Del.); (x) CIT Vs. Eicher Ltd., 294 ITR 310 (De!.); (xi) CIT Vs. Ashish Rajpal, 320 ITR 674 (Del.); (xii) CIT Vs. Rohit Anand, 327 ITR 445 (Del); (xiii)CIT Vs. Gopal Purohit, 228 CTR 582(Bom.); (xiv) CIT Vs. PNB Finance & Industries Ltd, 236 CTR 1 (Delhi)”.

"263(1) The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interest of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment. Explanation- For the removal of doubts, it is hereby declared that, for the purposes of this sub- section,- (a) an order passed on or before or after the 1st day of June, 1988 by the Assessing Officer shall include- (i) an order of assessment made by the Assistant Commissioner or Deputy Commissioner or the Income-tax Officer on the basis of the directions issued by the Joint Commissioner under section 144A; (ii) an order made by the Joint Commissioner in exercise of the powers or in the performance of the functions of an Assessing Officer conferred on, or assigned to, him under the orders or directions issued by the Board or by the Chief Commissioner or Director General or Commissioner authorized by the Board in this behalf under section 120; (b) record shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the Commissioner; (c) where any order referred to in this sub-section and passed by the Assessing Officer had been the subject matter of any appeal filed on or before or after the 1st day of June, 1988, the powers of the Commissioner under this sub-section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal. (2) No order shall be made under sub-section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed. (3) Notwithstanding anything contained in sub-section (2), an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, National Tax Tribunal, the High Court or the Supreme Court.

Cygnus Vanijya Private Limited Explanation- In computing the period of limitation for the purposes of sub-section (2), the time taken in giving an opportunity to the assessee to be reheard under the proviso to section 129 and any period during which any proceeding under this section is stayed by an order or injunction of any court shall be excluded."

3. Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. vs. CIT (2000) 243 ITR 83 (SC) has laid down following ratio with regard to provisions of section 263 of the Act:

Cygnus Vanijya Private Limited

“There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer; it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. The phrase 'prejudicial to the interests of the revenue’ has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the revenue, for example, when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the ITO has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue unless the view taken by the ITO is unsustainable in law. It has been held by this Court that where a sum not earned by a person is assessed as income in his hands on his so offering, the order passed by the Assessing Officer accepting the same as such will be erroneous and prejudicial to the interests of the revenue - Rampyari Devi Saraogi v. CIT [1968] 67 ITR 84 (SC) and in Smt. Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC)”.[Emphasis Supplied]

4. Hon’ble Apex Court in the case of CIT vs. Max India Limited as reported in 295 ITR 0282 has held that:

“ 2. At this stage we may clarify that under para 10 of the judgment in the case of Malabar Industrial Co. Ltd. (supra) this Court has taken the view that the phrase "prejudicial to the interest of the Revenue" under s. 263 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 interest of the Revenue. For example, when the ITO adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the ITO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the Revenue, unless the view taken by the ITO is unsustainable in law.”

5. Hon'ble Madhya Pradesh High court in the case of CIT vs. Associated Food Products (P) Ltd as reported in 280 ITR 0377 has held that:

10. In view of the aforesaid pronouncement of law and taking into consideration the language employed under s. 263 of the Act, it is clear as crystal that before exercise of powers two requisites are imperative to be present. In the absence of such foundation exercise of a suomoto power is impermissible. It should not be presumed that initiation of power under suomoto revision is merely an administrative act. It is an act of a quasi-judicial authority and based on formation of an opinion with regard to existence of adequate material to satisfy that the decision taken by the AO is erroneous as well as prejudicial to the interests of the Revenue. The concept of "prejudicial to the interests of the Revenue" has to be correctly and soundly understood. It precisely means an order which has not been passed in consonance with the principles of law which has in ultimate eventuate affected realization of lawful revenue either by the State has not been realized or it has gone beyond realization. These two basic ingredients have to be satisfied as sine qua non for exercise of such power. On a perusal of the material brought on record and the order passed by the CIT it is perceptible that the said authority has not kept in view the requirement of s. 263 of the Act inasmuch as the order does not reflect any kind of satisfaction. As is manifest the said authority has been governed by a Cygnus Vanijya Private Limited

singular factor that the order of the AO is wrong. That may be so but that is not enough. What was the sequitur or consequence of such order qua prejudicial to the interest of the Revenue should have been focused upon. That having not been done, in our considered opinion, exercise of jurisdiction under s. 263 of the Act is totally erroneous and cannot withstand scrutiny. Hence, the Tribunal has correctly unsettled and dislodged the order of the CIT. [Emphasis supplied] 6. In the light of the provisions of section 263 of the Act and a settled position of law, powers u/s 263 of the Act can be exercised by the Pr. Commissioner/Commissioner on satisfaction of twin conditions, i.e., the assessment order should be erroneous and also prejudicial to the interest of the Revenue. By 'erroneous' is meant contrary to law. Thus, this power cannot be exercised unless the Commissioner is able to establish that the order of the Assessing Officer is erroneous and prejudicial to the interest of the Revenue. Thus, where there are two possible views and the Assessing Officer has taken one of the possible views, no action to exercise powers of revision can arise, nor can revisional power be exercised for directing a fuller enquiry to find out if the view taken is erroneous. This power of revision can be exercised only where no enquiry, as required under the law, is done. It is not open to enquire in case of inadequate inquiry. Our view is fortified by the judgment of Hon'ble High Court of Bombay in the case of CIT vs. Nirav Modi, [2016] 71 taxmann.com 272 (Bombay).

Whether the Tribunal is right in law and on facts in upholding the order passed by the CIT under section 263 of the Act on merits and still storing the issue of allowability of deduction under section 54 of the Act to the file of Assessing Officer even though the working of allowability of deduction under section 54F is available in the order under section 263 which is not disputed by the assessee before ITAT.

Cygnus Vanijya Private Limited

"63. We find the Hon'ble Delhi High Court in the case of Vikas Polymer reported in 341 ITR 537 has held as under:

“We are thus of the opinion that the provisions of s. 263 of the Act, when read as a composite whole make it incumbent upon the CIT before exercising revisional powers to: (i) call for and examine the record, and (ii) give the assessee an opportunity of being heard and thereafter to make or cause to be made such enquiry as he deems necessary. It is only on fulfillment of these twin conditions that the CIT may pass an order exercising his power of revision. Minutely examined, the provisions of the section envisage that the CIT may call for the records and if he prima facie considers that any order passed therein by the AO is erroneous insofar as it is prejudicial to the interest of the Revenue, he may after giving the assessee an opportunity of being heard and after making or causing to be made such enquiry as he deems necessary, pass such order thereon as the circumstances of the case justify. The twin requirements of the section are manifestly for a purpose. Merely because the CIT considers on examination of the record that the order has been erroneously passed so as to prejudice the interest of the Revenue will not suffice. The assessee must be called, his explanation sought for and examined by the CIT and thereafter if the CIT still feels that the order is erroneous and prejudicial to the interest of the Revenue, the CIT may pass revisional orders. If, on the other hand, the CIT is satisfied, after hearing the assessee, that the orders are not erroneous and prejudicial to the interest of the Revenue, he may choose not to exercise his power of revision. This is for the reason that if a query is raised during the course of scrutiny by the AO, which was answered to the satisfaction of the AO, but neither the query nor the answer were reflected in the assessment order, this would not by itself lead to the conclusion that the order of the AO called for interference and revision. In the instant case, for example, the CIT has observed in the order passed by him that the assessee has not filed certain documents on the record at the time of assessment. Assuming it to be so, in our opinion, this does not justify the conclusion arrived at by the CIT that the AO had shirked his responsibility of examining and investigating the case. More so, in view of the fact that the assessee explained that the capital investment made by the partners, which had been called into question by the CIT was duly reflected in the respective assessments of the partners who were I.T. assessees and the unsecured loan taken from M/s Stutee Chit & Finance (P) Ltd. was duly reflected in the assessment order of the said chit fund which was also an assessee.”

9. The ITAT in the case of Mrs. Khatiza S. Oomerbhoy vs. ITO, Mumbai, 101 TTJ 1095, analyzed in detail various authoritative pronouncements including the decision of Hon'ble Supreme Court in the case of Malabar Industries 243 Cygnus Vanijya Private Limited

ITR 83 and has propounded the following broader principle to judge the action of CIT taken under section 263:

“(i) The CIT must record satisfaction that the order of the AO is erroneous and prejudicial to the interest of the Revenue. Both the conditions must be fulfilled. (ii) Sec. 263 cannot be invoked to correct each and every type of mistake or error committed by the AO and it was only when an order is erroneous that the section will be attracted. (iii) An incorrect assumption of facts or an incorrect application of law will suffice the requirement of order being erroneous. (iv) If the order is passed without application of mind, such order will fall under the category of erroneous order. (v) Every loss of revenue cannot be treated as prejudicial to the interests of the Revenue and if the AO has adopted one of the courses permissible under law or where two views are possible and the AO has taken one view with which the CIT does not agree. If cannot be treated as an erroneous order, unless the view taken by the AO is unsustainable under law (vi) If while making the assessment, the AO examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determine the income, the CIT, while exercising his power under s 263 is not permitted to substitute his estimate of income in place of the income estimated by the AO. (vii) The AO exercises quasi-judicial power vested in his and if he exercises such power in accordance with law and arrive at a conclusion, such conclusion cannot be termed to be erroneous simply because the CIT does not fee stratified with the conclusion. (viii) The CIT, before exercising his jurisdiction under s. 263 must have material on record to arrive at a satisfaction. (ix) If the AO has made enquiries during the course of assessment proceedings on the relevant issues and the assessee has given detailed explanation by a letter in writing and the AO allows the claim on being satisfied with the explanation of the assessee, the decision of the AO cannot be held to be erroneous simply because in his order he does not make an elaborate discussion in that regard.”

10. Apart from above stated broader principles, one more principle needs to be added in view of the judgment of Hon’ble Delhi High Court in the case of ITO vs. D.G. Housing Projects Ltd. [2012] 343 ITR 329 (Delhi) that the ld. CIT has to examine and verify the issue himself and give a finding on merits and form an opinion on merits that the order passed by the AO is erroneous and prejudicial to the interest of the Revenue. Relevant extract is reproduced below:

“In the present case, the findings recorded by the Tribunal are correct as the CIT has not gone into and has not given any reason for observing that the order passed by the Assessing Officer 12 Cygnus Vanijya Private Limited was erroneous. The finding recorded by the CIT is that "order passed by the Assessing Officer may be erroneous". The CIT had doubts about the valuation and sale consideration received but the CIT should have examined the said aspect himself and given a finding that the order passed by the Assessing Officer was erroneous. He came to the conclusion and finding that the Assessing Officer had examined the said aspect and accepted the respondent’s computation figures but he had reservations. The CIT in the order has recorded that the consideration receivable was examined by the Assessing Officer but was not properly examined and therefore the assessment order is "erroneous". The said finding will be correct, if the CIT had examined and verified the said transaction himself and given a finding on merits. As held above, a distinction must be drawn in the cases where the Assessing Officer does not conduct an enquiry; as lack of enquiry by itself renders the order being erroneous and prejudicial to the interest of the Revenue and cases where the Assessing Officer conducts enquiry but finding recorded is erroneous and which is also prejudicial to the interest of the Revenue. In latter cases, the CIT has to examine the order of the Assessing Officer on merits or the decision taken by the Assessing Officer on merits and then hold and form an opinion on merits that the order passed by the Assessing Officer is erroneous and prejudicial to the interest of the Revenue. In the second set of cases, CIT cannot direct the Assessing Officer to conduct further enquiry to verify and find out whether the order passed is erroneous or not.”

(a) On selection of the assessee’s case for scrutiny, notice under section 142(1) dated 04.08.2017 issued and through Point No. 4, the assessee was specifically required to file financial statement, details of receiving large share premium during the year and to furnish party-wise details of share premium providing details of names, addresses, PAN, income- tax Ward where shareholders are assessed, number of shares subscribed, face-value, share premium and full particulars of receipts.

(b) In the notice under section 142(1) of the Act, the Assessing Officer also asked the assessee to prove the identity, creditworthiness and genuineness of the shareholders and also to furnish market value of the shares applying the method as Cygnus Vanijya Private Limited

per the provisions of Rules 11UA of the Income Tax Rules, 1962.

(c) Assessing Officer also issued notice under section 133(6) of the Act to the alleged shareholder companies on 23.08.2017 and the same were replied by few shareholders through letter dated 05.09.2017 directly to the Assessing Officer.

(d) On 22.08.2017, the assessee filed the reply to the Assessing Officer as called for in the notice issued under section 142(1) of the Act. Specific reply was given to Question No. 4 with complete details of number of equity shares issued, share premium charged, details of shareholders, income tax return and PAN details of the shareholders, which are namely Zigzag Vanijya Private Limited and Ganadipati Estate Private Limited. A certificate of Chartered Accountant was also filed in support of the fair market value of the equity shares issued by the assessee-company.

“During the F.Y. 2014-15, the assessee company (not being a company in which public are substantially interested) has issued 76,923 numbers equity shares of Rs.10/- each at a consolidated price of Rs.91/- including a premium of Rs. 81/- a share. The assessee has been asked to explain the justification for issue of shares at such a price. In this context, the assessee furnished a certificate which is certified by a Chartered Accountant containing Cygnus Vanijya Private Limited detailed calculation of fair market value of share of the assessee company applying provision of Rule 11UA of the I.T. Rule, 1962 where fair market value is determined at Rs.90.34/- per share. Since the consideration received for a share of Rs. 91/- exceeds the fare market value of such share by Rs.(91-90.34) or, Rs. .66/-, it attracts the provision of Sec. 56(2)(viib) of the I.T. Act, 1961. The assessee was asked to explain as to why the excess issue price of Rs..66/- per share totaling to Rs.(76923 x .66) or Rs. 50,769/- would not be added to the total income under the head ‘Income from Other Sources’ . In response, the assessee stated that they have taken fare market value of its share at rounded price i.e. Rs.91/- instead of Rs. 90.34 which is ignorable. But the excess issue price is not ignorable for determining the value of unquoted equity shares as per provision of Sec. 56(2)(viib)of the I.T. Act read with Rule 11UA and hence excess issue price of the shares would be the income of the assessee. Therefore, Rs. 50,769/- being the excess issue price over the fair market value of shares is treated as income of the assessee and added to the total income under the head ‘Income from Other Sources’ as per provision of Sec. 56(2)(viib) of the I.T. Act, 1961”.