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Facts
For A.Y. 2015-16, the assessee issued equity shares at a premium. The AO, in the Section 143(3) assessment, accepted the assessee's valuation report for the Fair Market Value (FMV). Subsequently, the Pr.CIT invoked Section 263, alleging the AO failed to properly examine the FMV under Rules 11U/11UA concerning Section 56(2)(viib), thus rendering the assessment erroneous and prejudicial to the revenue.
Held
The Tribunal found the Pr.CIT's revisional order unjustified. It held that the deeming fiction of Section 56(2)(viib) does not apply to shares issued primarily to existing shareholders, and thus the AO's order was not erroneous. The jurisdictional requirements for invoking Section 263 were not met.
Key Issues
Whether the Pr.CIT could invoke Section 263 to revise an assessment concerning the valuation of shares issued at a premium under Section 56(2)(viib), especially when shares were largely allotted to existing shareholders.
Sections Cited
263, 143(3), 56(2)(viib)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH “B” DELHI
Before: SHRI KUL BHARAT & SHRI PRADIP KUMAR KEDIA
PER PRADIP KUMAR KEDIA-AM:
The captioned appeal has been filed at the instance of the assessee against the revisional order of the Principal Commissioner of Income Tax-2, New Delhi [‘Pr.CIT’ in short] dated 27.03.2019 passed under Section 263 of the Income Tax, 1961 (‘the Act’ in short) whereby the assessment order passed by the Assessing Officer (AO) dated 21.12.2017 under Section 143(3) of the Act concerning A.Y. 2015-16 was sought to be set aside for reframing the assessment order in terms of supervisory directions.
As per its grounds of appeal, the assessee has challenged the revisional action of the Pr.CIT whereby the AO was directed to pass
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the assessment order de novo after conducting proper inquiries on the points set out in paragraph 4.2 of the revisional order. As per paragraph 4.2 of the order passed under Section 263 of the Act, the Pr.CIT has alleged that the AO has passed the assessment order without examining the requirement laid down in Rule 11U / Rule 11UA of the Income Tax Rules, 1962 for the determination of Fair Market Value (FMV) of shares issued by the assessee. The AO has simply accepted the valuation report without applying its mind to all perspective with reference to object of Section 56(2)(viib) of the Act.
The relevant facts in brief are that the assessee filed return of income declaring total income at Rs.80,24,070/-. The return filed by the assessee was subjected to scrutiny assessment under Section 143(3) of the Act. The returned income was accordingly assessed at Rs.1,12,25,930/- after making some disallowances. Subsequently, the revisional authority, i.e., Pr.CIT called the assessment records and opined that assessment orders so passed under Section 143(3) of the Act suffers from the vice of the being erroneous insofar as prejudicial to the interest of the revenue. Consequently, a Show Cause Notice (SCN) dated 06.02.2019 was issued under Section 263 of the Act for A.Y. 2015-16 in question. In terms of Show Cause Notice, it was alleged that the AO has failed to make inquiries and verifications that should have been made to ascertain the FMV of equity shares issued at premium for the purposes of deemed income taxability with reference to Section 56(2)(viib) of the Act.
The show cause notice issued in this regard is reproduced hereunder:
“The assessment of M/s. Chemi Tech Engineers Pvt. Ltd. for the AY 2015-16 was completed u/s 143(3) in December, 2017 at an
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income of Rs. 1,12,25,930/-. During the year, the assessee has allotted 1,46,000 equity shares of Rs. 10/- each, @ Rs.50/- per share. During assessment proceedings, the company vide its submission dated 20.12.2017 furnished detailed working of assets & liabilities as on/no. of 20.01.2015, wherein FMV of shares was drawn at Rs.48.75. 2. The method for determining fair market value has been prescribed in Rule 11U and 11UA of the Income Tax Rules 1962. As per Rule 11UA, for computing the Fair Market Value, total book value of assets and liabilities in the Balance Sheet has to be taken. Further, as per Rule 11U, the Balance Sheet in relation to any company means balance-sheet as drawn up on the valuation date which has been audited by the auditor of the company and where the balance-sheet on the valuation date is not drawn up, the balance-sheet drawn up as on a date immediately preceding the valuation date which has been approved and adopted in the annual general meeting of the shareholders of the company. 2.1 It is seen that in the present case, for the purpose of valuation of shares, the company has not submitted any balance sheet which has been audited by the Auditor. In support of the fair market value of the shares, the assessee company vide letter dated 05.12.2017 has furnished copy of valuation report issued by M/s Dinesh Kamla & Associates, Chartered Accountants, wherein the accountant has shown the value of Asset & Liabilities as on 20.01.2015 at Rs.37,52,23,071/- and Rs. 28,43,75,740/- respectively and valued the fair market value of shares on 20.01.2015 at Rs. 48.75/-. 2.2 Since there was no audited balance sheet ending on 20.01.2015, as per the provisions of Rule 11U of the Income Tax Rules, to obtain the fair market value of shares, balance sheet as on 31.03.2014, i.e. immediately preceding the valuation date which has been approved and adopted in the annual general meeting of the shareholders of the company, has to be considered. 2.3 As on 31.03.2014, book value of assets and liabilities was Rs.28,09,45,354/- and Rs.22,18,44,880/- respectively. Hence, as per the provisions of Rule 11UA, the fair market value of shares is to be taken as Rs. 36/- as against Rs. 48.75/- as on 20.01.2015. 2.4 In view of the above, the order passed by the AO on 21.12.2017 u/s 143(3) of the Act is erroneous in so far as it is prejudicial to the interest of the revenue, causing loss of Rs. 20,44,000/- 3. For the above purpose, your case is fixed for hearing before the undersigned on 12.02.2019 at 02:30 pm. You may appear either in person or through your authorized representative at my office to show cause in writing as to why the assessment order passed u/s.
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143(3) dated 21.12.2017 not be set aside u/s. 263 of the IT Act, 1961 on the lines indicted above. In case, no response to this show cause notice is received by the said date, it will be construed that you have no objection to the proposed action and order u/s. 263 of the IT Act, 1961 shall be passed. Pr. Commissioner of Income Tax-2, Delhi”
The assessee filed its counter to the Show Cause Notice which is reproduced in paragraph 3 of the revisional order. On consideration thereof, the Pr.CIT passed the order under Section 263 of the Act whereby the assessment order was set aside with a direction to the AO to make fresh assessment de novo after making suitable inquiries towards determination of Fair Market Value (FMV) of shares issued and consequent taxability under Section 52(2)(viib) of the Act.
Aggrieved by the aforesaid action of the Pr.CIT, the assessee is in appeal before the Tribunal.
Assailing the supervisory jurisdiction usurped by the Pr.CIT under Section 263 of the Act, the ld. counsel for the assessee broadly submitted that the allegation of Pr.CIT that the AO has failed to consider Rule 11U and Rule 11UA of the IT Rules 1962 for determination of FMV of 1,46,000 equity shares issued during the year on 20.01.2015 and summary acceptance of valuation report issued by Chartered Accountant wherein the FMV of shares were calculated at Rs.48.75 per equity share by adopting the Net Asset Value (NAV) as on 20.01.2015 in contravention of Rule 11UA, is wholly unjustified.
In support of the action of AO, the ld. counsel pointed out that 1,37,300 equity shares were allotted to existing shareholder of the
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assessee-company by adjusting respective unsecured loans appearing in the books of the assessee-company and the assessee only received a meager sum of Rs.4,35,000/- against such allotment of shares from one shareholder for allotment of 8700 equity shares. All the allotments to either existing shareholders or to other shareholders were issued at the same price of Rs.50 per share. The ld. counsel submitted that the shares having been issued mainly to the existing shareholders, the deeming fiction of Section 56(2)(viib) does not apply at the first instance as the purpose for which the deeming fiction was created is not achieved. The ld. counsel thus submitted that neither assessment order is erroneous nor prejudicial to the interest of the revenue on such factual matrix.
The ld. DR for the Revenue, on the other hand, referred to and relied upon the revisional order.
We have carefully considered the rival submissions and perused the material available on record.
From the facts borne out from records, it appears that substantial shares have been allotted to the existing shareholders and only few shares have been allotted to the new subscribers. Shares were allotted at the premium of Rs.40 per share based on valuation report filed by the independent valuer.
In the factual backdrop, we refer to the decision rendered by the Co-ordinate Bench in the case of BLP Vayu (Projects-I) (P.) Ltd. vs. Pr.CIT, (2023) 151 taxmann.com 47 (Del) wherein it was observed that object of treating excessive premium received on issue of shares as taxable income of revenue character under Section 56(2)(viib), is wholly inapplicable to issuance of shares to existing shareholders where no resultant income could be said to accrue to
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ultimate beneficiary, i.e., existing shareholders. The action of the AO in such facts cannot be branded as ‘erroneous’ per se.
No prejudice could possibly result to the interest of the revenue by charging purportedly excessive premium on fresh issue of shares to the existing shareholders either. In the absence of order being erroneous and also prejudicial to the interest of revenue, the revisional action of Pr.CIT in the context of the facts of the case does not meet the jurisdictional requirement of Section 263.
A revisional action of the Pr.CIT in the context of facts of the case thus appears to be wholly unjustified and without meeting the jurisdictional requirements of Section 263 of the Act. We thus find wholesome merit in the plea of the assessee for cancellation of revisional order and restoration of the order of the AO. We do so accordingly.
In the result, the appeal of the assessee is allowed. . Order pronounced in the open Court on 12/06/2024
Sd/- Sd/- [KUL BHARAT] [PRADIP KUMAR KEDIA] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: /06/2024 Prabhat