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Facts
The assessee's original assessment was for share premium and was completed under Section 143(3). The PCIT initiated revisional proceedings under Section 263, deeming the assessment order erroneous and prejudicial to revenue because the assessee's valuation report cited Section 56(2)(viia) for quoted shares instead of Section 56(2)(viib) for unquoted shares, despite applying the correct valuation method. The assessee contended that the Assessing Officer had conducted a thorough inquiry, and the error was a mere inadvertent clerical mistake in the sub-section reference.
Held
The Tribunal found that the Assessing Officer had conducted a detailed inquiry, raising specific queries and receiving comprehensive replies and a valuation report from the assessee. It was noted that the valuation report, while incorrectly citing Section 56(2)(viia), had applied the correct method for determining the fair market value of unquoted shares. The Tribunal concluded that the assessment order could not be termed erroneous or prejudicial to the revenue merely due to an inadvertent error in citing a sub-section when a thorough inquiry had been conducted.
Key Issues
Whether the PCIT was justified in invoking Section 263 to revise an assessment order when the AO conducted a detailed inquiry regarding share premium valuation; and whether an inadvertent clerical error in citing a sub-section of Section 56(2) in a valuation report, while applying the correct valuation method, renders the assessment order erroneous and prejudicial to the revenue.
Sections Cited
263, 143(3), 142(1), 56(2)(b), 56(2)(viia), 56(2)(viib)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH “B”: NEW DELHI
Before: SHRI G.S. PANNU & SHRI ANUBHAV SHARMA
PER ANUBHAV SHARMA, JM: The assessee has come in appeal against the order dated 30.03.2023 passed
by the Principal Commissioner of Income Tax, Noida (hereinafter referred as
2 ITA no. 1601/Del/2023 ‘Revisional Authority’) u/s 263 of the Income-tax Act, 1961 (hereinafter referred
as the “Act”), pertaining to the assessment year 2018-19.
The assessee’s case was selected for scrutiny assessment on the issue of
share premium and the assessment order was passed on the returned income.
However, Principal Commissioner of Income Tax, Noida, was not satisfied and on
the basis of examination of the assessment record concluded that as the assessee
furnished valuation report of an Auditor, which was accepted by the Assessing
Officer without examining it, the order is erroneous insofar as it is prejudicial to
the interests of Revenue. Revisional Authority was of the view that the valuation
report furnished by the Auditor revealed that it was based on the valuation of
quoted shares provided under Rule 11UA(1)(c), whereas this is case of valuation of
unquoted shares under Rule 11UA(1)(b), which attracted provision of Section
56(2)(b) of the Act and Assessing Officer has failed to examine the issue during
the course of assessment proceedings and passed a cryptic order. Assessee has
challenged the same raising following grounds:
“1. On the facts and circumstances of the case and in law, the order passed by the learned PCIT, Noida u/s 263 of the Income Tax Act, 1961 ('the Ac') dated 31.03.2023 setting aside the assessment framed w/s 143(3) of the Act and holding the same as erroneous and prejudicial to the interest of the revenue, is unlawful, without jurisdiction and void-ab-initio.
On the facts and circumstances of the case and in law, the Ld. PCIT erred in exercising jurisdiction u/s 263 by setting aside the assessment order even though the issue involved has been discussed and scrutinized by the Ld.
3 ITA no. 1601/Del/2023 AO in detail while framing the assessment u/s 143(3) of the Act and after due consideration of assessee's submissions and legal position arrived at his independent opinion which can not be termed as erroneous.
On the facts and circumstances of the case and in law, the Ld. PCIT erred in holding the assessment order passed by Ld. AO u/s 143(3) even when the Ld. AO is not required to give detail reasons in respect of issue under assessment when he has called for explanation regarding the issue and has dealt with the issue and adopted one of the possible views and the assessment order passed by the Ld. AO could not be branded as erroneous and pre-judicial to the interest of revenue.
On the facts and circumstances of the case and in law, the Ld. PCIT erred in law by assuming jurisdiction u/s 263 of the Act when the Ld. AO after considering the submissions made by the assessee has already taken a possible view which is not in agreement with the opinion of Ld. PCIT and the Ld. PCIT wants the matter to be investigated in a particular manner as held by the Honb'le Income Tax Appellant Tribunal - Delhi in the Sunray Cotspin (P) Ltd, Gurgaon vs Pr.CIT.
Without prejudice to the above, Ld. PCIT erred in the facts and in the circumstances of the case by not appreciating the fact that discrepancies pointed out by Ld PCIT were nothing more than the inadvertent clerical error committed by clerk of the Valuer which has no bearing on the fair market value of shares and when such discrepancies cannot form basis and reasons for invoking the provisions of section 263 of the Act when such an error was never prejudicial to the interest of revenue.
Without prejudice to the above grounds of appeal the appellant reserves right to make addition /alteration to the above ground of appeal and also reserves the right to bring on additional grounds of appeal, before and during the course of hearing of this appeal, as consider fit and necessary.”
On hearing rival sides it comes up that primarily the case of the assessee is
that in the assessment proceedings u/s 143(3) of the Act, and before passing the
4 ITA no. 1601/Del/2023 assessment order dated 11.03.2021, the Assessing Officer had specifically raised
queries about shares issued by the assessee and the premium charged vide notice
u/s 142(1) dated 10.02.2020, made available at page 45 of the paper book and the
assessee was able to establish the identity, creditworthiness and genuineness of the
investors and also file valuation report of expert.
Learned AR has submitted that Assessing Officer was satisfied with the
reply and accepted the returned income. It is submitted that there was inadvertent
error in the valuation report, where Section 56(2)(viia) of the Act was mentioned
instead of Section 56(2)(viib). It was pointed out that in proceedings before the
PCIT, even the valuer issued a report correcting the inadvertent mistake along with
undertaking to that effect that the fair value and the share value being same,
however, the impugned order was still passed, holding that there was no inquiry
and the assessment is cryptic.
Learned DR, on the contrary, defended the order of PCIT and submitted that
there was no justification in the valuation report and the assessment order is
ambiguous and cryptic.
5 ITA no. 1601/Del/2023 6. After taking into consideration the factual circumstances cited and
submissions made, it comes up that during the assessment proceedings u/s 143(3)
of the Act, a specific query was raised by way of notice u/s 142(1) of the Act
whereby the assessee was asked to respond on following aspects:
“1) With respect to the fresh issue of share during the FY 2017-18 (AY 2018-19), kindly submit the below specified details:
a) Name and address of the shareholders. b) PAN of the shareholders. c) Face Value and premium on each share. d) Number of shares allotted to each shareholder. e) Total value of the shares allotted to each shareholder. f) Payment received from each shareholder during the financial year.
2) Provide documentary evidence to substantiate the identity and ITR of last 3 years of shareholders to substantiate creditworthiness the shareholders as well as the proof of genuineness of transaction in respect of fresh credit of the share capital/premium account.
3) The valuation report with respect to the working of EPS and justification for the quantum of premium.
4) The comparison of the working of EPS and share premium with the immediately prior instance, wherein the shares were allotted with premium.
5) The year wise details of dividend declared during the year and three earlier years.”
The assessee has responded to same by providing following information to
the aforesaid five queries by reply dated 25.02.2020, a copy of which is available
at pages 52-53 of the paper book. The relevant extract being as follows:
6 ITA no. 1601/Del/2023
“We are writing on behalf of our client M/s Ecotech Builders Private Limited, regarding your Notice u/s 142(1) of the Income Tax Act, 1961 issued to them for the assessment year 2018-19.
Under the instructions from our client, as required by your goodself, find enclosed the following details / documents and information for your kind reference and record:
Copy of complete set of financial statements (including Balance Sheet, Profit & Loss account, schedules, notes etc.) including auditor's report thereon, for the Assessment Year 2018-19 is given in Annexure-1 enclosed herewith for your kind reference and record.
Copy of Income Tax Return for the Assessment year 2018-19 along with acknowledgement is given in Annexure-2 enclosed herewith for your kind reference and record.
Details of shareholder to whom shares were allotted by the assessee during the Assessment Year 2018-19 is given in Annexure 3 enclosed herewith for your kind reference and record.
Copy of acknowledgement of income tax return filed by the shareholder for the 3 Assessment Years i.e 2016-17, 201-18 and 2018- 19 along with the copy of the financial statements of the shareholder is given in Annexure 4 enclosed - herewith for your kind reference and record.
Copy of valuation report as obtained by the assessee for the purpose of issue of shares is given in Annexure 5 enclosed herewith for your kind reference and record.
It is humbly submitted that the assessee has not declared any dividend in last three years including the year under consideration i.e 2018-19.”
7 ITA no. 1601/Del/2023 8. We have also gone through the valuation report of independent valuer, made
available at page 168 of the paper book, which was field before the Assessing
Officer and we find that the valuer had mentioned about the method of valuation as
follows;
“Accordingly, we have assessed the fair value of equity shares of the Company as on the date of issuing this report based on the Fair Market Value (FMV) Method in terms of the rules 11U & 11UA of the Income Tax Rules, 1962, specified under section 56(2) (viia) of the Income Tax Act, 1961.”
8.1 But when we go thoroughly to the report and computation it comes up that
the computation is arrived by applying the following formula;
Assets-Liabilities Fair Market value (FMV)= Total Amount of x Paid up value of Paid up Equity Equity shares Share Capital as Per balance sheet
8.2 The said formula is applicable in case of determination of fair market value
in case of unquoted shares only.
Thus, there appears to be substance in the contention of learned AR that
during assessment proceedings the Assessing Officer had raised all the relevant
queries to which assessee had duly replied with all evidences. The valuation report
is based on the correct method of valuation except for error in mentioning a wrong
sub-section. It also comes up that in fact the investor is none other than the parent
8 ITA no. 1601/Del/2023 company M/s Home & Soul Infratech Private Limited. Thus, for the reason of lack
of inquiry or that the assessment order is not elaborate and does not indicate all the
facets of the inquiries made and the conclusion drawn, the assessment order cannot
be termed as erroneous insofar as prejudicial to the interests of Revenue.
We are inclined to sustain the grounds raised. Accordingly, the appeal is
allowed. The impugned order u/s 263 of the Act is quashed.
Order pronounced in open court on 13.06.2024.
Sd/- Sd/- (G.S. PANNU) (ANUBHAV SHARMA) VICE PRESIDENT JUDICIAL MEMBER *MP* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI