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Facts
The assessee company increased its share capital significantly by issuing new shares at a premium. The PCIT initiated revision proceedings under Section 263, alleging that the AO failed to properly verify the genuineness of the share capital increase and premium.
Held
The Tribunal held that the PCIT's action of raising a new issue regarding share premium without proper notice and opportunity to the assessee was not permissible. The issue of share count discrepancy was based on a misunderstanding and was clarified by the assessee.
Key Issues
Whether the PCIT can introduce new issues in revision proceedings under Section 263 without providing a proper show-cause notice and opportunity to the assessee? Whether the share count discrepancy was a genuine error or a basis for revision?
Sections Cited
263, 143(3), 56(2)(viib)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, CHANDIGARH BENCH “A”,
Before: SHRI. RAJPAL YADAV, VP &SHRI. KRINWANT SAHAY, AM
सुनवाईकीतारीख/Date of Hearing : 20/01/2025 उदघोषणाकीतारीख/Date of Pronouncement : 11/04/2025 आदेश/Order PER KRINWANT SAHAY, AM:
This is an appeal filed by the Assesseeagainst the order dated 30/03/2022 passed by the Principal Commissioner of Income Tax, Ludhiana-1 under Section 263 of the Income Tax Act, 1961, pertaining to the Assessment Year 2017-18. The PCIT set aside the assessment order dated 28/12/2019, passed by the Income Tax Officer, Ward-7(1), Ludhiana under Section 143(3) of the Act, on the grounds that it was erroneous and prejudicial to the interests of the revenue. The assessee challenges the validity of the revision order, contending that the PCIT’s action is unjustified and beyond the scope of Section 263.
Briefly the facts of the case are that the assessee company, engaged in the business of hosiery, increased its share capital from Rs. 15,00,000 to Rs. 75,00,000 during the financial year relevant to Assessment Year 2017-18 by issuing 5,20,840 shares at a face value of Rs. 10 each with a premium of Rs. 10 per share, aggregating to Rs. 1,04,16,800 as share application money. The assessment was completed under Section 143(3) on 28/12/2019, wherein the AO accepted the returned income of the assessee. Subsequently, the PCIT, upon review of the assessment records, issued a show-cause notice under Section 263(1) on 10/03/2022, alleging that the AO failed to verify the genuineness of the share capital increase and the share premium, rendering the assessment order erroneous and prejudicial to the revenue’s interest. After considering the assessee’s reply dated 21st March 2022, the PCIT set aside the assessment order and directed the AO to conduct a fresh assessment.
During the course of hearing the Ld. AR submitted that the issue raised pertains to the allotment of share capital. In response to the initial show cause notice given by the PCIT u/s 263, the assessee stated that it had submitted detailed documentation before the Ld. AO, including a shareholder list indicating the number of shares allotted to each individual and the corresponding amounts received. It was also clarified that shares with a face value of Rs. 10 were issued at a premium of Rs. 10, i.e., at Rs. 20 per share. Subsequently, the CIT issued a show cause notice under Section 263, observing that the number of shares reflected in the shareholder list did not match the figures disclosed in the balance sheet. The Ld. CIT noted a discrepancy between the two records, questioning the correctness of the submissions and proposing revision under Section 263. In response, the assessee filed a detailed explanation, clearly stating that the figures in the balance sheet were accurate and that the discrepancy in the shareholder list was merely a clerical/typographical error. It was further submitted that if the totals in the shareholder list were recalculated correctly, they would be in alignment with the balance sheet, and no adverse inference should be drawn. Upon passing the order, the Ld. CIT acknowledged that this matter warranted verification at the level of the AO and directed the AO to examine it accordingly. However, in the same order, the Ld. CIT also directed the AO to examine a fresh issue pertaining to the premium charged on shares (Rs. 10 face value shares being issued at Rs. 20). 3.1 It is respectfully submitted that this new issue was neither mentioned in the original show cause notice nor was any opportunity given to the assessee to respond on this point. Thus, the assessee was denied a proper opportunity of being heard on this newly introduced issue and the introduction of new issue directly in the order u/s 263 without its mention in the SCN or in the order sheet entry of proceedings u/s 263. In the reassessment proceedings that followed, the assessee provided a comprehensive reply to the AO. On examining the matter, the AO accepted the assessee’s explanation regarding the mismatch between the shareholder list and the balance sheet, and acknowledged that it was a clerical error, not warranting any addition. This clearly indicates that the addition contemplated in the original show cause notice issued by the CIT under Section 263 does not survive, as the AO, after due verification, did not find any merit in that ground. However, the AO proceeded to make addition on the entirely new ground related to the share premium (Rs. 10 to Rs. 20), which was not part of the original show cause notice issued by the CIT. In light of the above, the addition made on such a new and uncommunicated ground is not sustainable in law and deserves to be deleted.
We have heard the rival contention and carefully considered the documents, including the assessment order originally passed u/s 263, the PCIT’s revision order, the assessment order passed consequent to order u/s 263 and the detailed submissions of the assessee. The PCIT’s main issues are that there is a mismatch in the number of shares reported in different documents. The Ld CIT submitted that the assessee has issued share to the share holders numbering 294590 whereas at the time of assessment the assessee has filed list of share holders intimating number of share allotted to assessee numbering 631000/-. Ld. CIT stated that the AO didn’t check if the share capital was genuine or if the share premium follows the rules under Section 56(2)(viib). The PCIT believes the AO’s lack of inquiry made the order incorrect.
4.1 Regarding the share count discrepancy, we find the PCIT's concern is based on a misunderstanding. The assesseeexplained that the 2,94,590 shares mentioned in the response were for the current year, while the 6,31,000 shares include shares from previous years. This explanation is supported by the company’s financial records, and the PCIT didn’t dispute these documents. Therefore, the AO didn’t need to investigate further.
4.2 On verifying the shareholders identity and the legitimacy of transactions, the assessee provided detailed information about the nine shareholders, including their PANs, addresses, share application details, and sources of funds. These were all supported by bank statements and other documents. On appreciating all these facts and documents, when the assessment order that followed the revisionary order, the Ld. AO having not made any addition on this issue, this has rendered this issue as academic and therefore, the PCIT’s order to that extent can no longer survive.
4.3 As regards the issue of Share premium of Rs. 10 per share charged by the appellant company from its shareholders during the year, we are in agreement with the argument of Ld. Counsel of the assessee that this issue does not find mention in the SCN issued u/s 263 by PCIT and further that this issue was not even raised in proceedings conducted u/s 263 and this issue came for the first time directly in the order that the Ld. PCIT passed u/s 263. This is not permissible as held in case of CIT, Mumbai Vs. Amitabh Bachchan (2016) 69 taxmann.com 170(SC) where it was held as under :
Section 263 of the Income-tax Act, 1961 - Revision - Of orders prejudicial to interest of revenue (Scope of provision) - Assessment year 2001-02 - Whether there is nothing in section 263 to raise a prior notice detailing specific grounds on which revision of assessment order is tentatively being proposed to status of a mandatory show- cause notice, affecting initiation of exercise in absence thereof or to require Commissioner to confine himself to terms of notice and foreclosing consideration of any other issue or question of fact - Held, yes - Whether Commissioner is free to exercise his jurisdiction on consideration of all relevant facts but a full opportunity to controvert same and to explain circumstances surrounding such facts, as may be considered relevant by assessee, must be afforded to him by Commissioner prior to finalization of decision - Held, yes 4.4 We have considered the findings given by the Ld. PCIT in his order passed under section 263 and the arguments made by the Ld. DR therein proceedings before us. We have also considered the written submissions filed by the Ld. Counsel for the Assessee and his arguments made before us. We find that the Ld. CIT while issuing the notice under section 263 to the assessee had mentioned only the numerical mismatch of share issued by the assessee company. There was no mention of charging of premium on the issue of shares. Since this matter was not raised even during the proceedings under section 263 by the Ld. PCIT and in his final order he mentioned it without giving any opportunity to the assessee or without issuing notice on this issue during the proceedings under section 263. Therefore as per the Hon’ble Supreme Court decision in case of CIT, Mumbai Vs. Amitabh Bachchan (supra) the action of the Ld. PCIT cannot be sustained. Accordingly, the assessee’s appeal on this issue is allowed.
In the result, appeal of the Assessee is allowed.
Order pronounced in the open Court on 11/04/2025.