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Facts
The assessee filed a return of income which was selected for limited scrutiny regarding the issue of share premium. The PCIT initiated proceedings under Section 263 of the Income-tax Act, believing the assessment order was erroneous and prejudicial to revenue interests. The PCIT contended that the assessee overvalued its goodwill, leading to an overvaluation of shares, and that an excess amount received for shares should have been disallowed and added to the total income under Section 56(2)viib of the Act.
Held
The Tribunal found that the Assessing Officer (AO) had conducted inquiries during the original assessment by issuing a questionnaire and receiving detailed replies from the assessee regarding share valuation and goodwill. Citing various High Court and Supreme Court judgments, the Tribunal emphasized the distinction between 'lack of inquiry' and 'inadequate inquiry', stating that the PCIT cannot assume jurisdiction under Section 263 merely because of a different opinion or if there was an inquiry, even if inadequate. Therefore, the Tribunal set aside the PCIT's order and restored the AO's original assessment order.
Key Issues
Whether the PCIT was justified in assuming jurisdiction under Section 263 of the Income-tax Act to revise an assessment order on the grounds that the Assessing Officer failed to examine the valuation of goodwill and share premium, thus rendering the order erroneous and prejudicial to the interest of the revenue, when the AO had already conducted inquiries.
Sections Cited
Section 263 of the Income-tax Act, 1961, Section 143(3) of the Income-tax Act, 1961, Section 56(2)viib of the Income-tax Act, 1961, Section 142(1) of the Income-tax Act, 1961, Section 143(2) of the Income-tax Act, 1961, Rule 11UA(1)(c)(b) of Income Tax Rules
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Income Tax Appellate Tribunal, DELHI ‘E’ BENCH,
Before: SHRI SAKTIJIT DEY, & SHRI N.K. BILLAIYA
PER N.K. BILLAIYA, ACCOUNTANT MEMBER:-
This appeal by the assessee is preferred against the order of the ld. PCIT, Ghaziabad dated 21.03.2023 pertaining to A.Y. 2018-19.
The sum and substance of the grievance of the assessee is that the PCIT erred in assuming jurisdiction u/s 263 of the Income-tax Act, 1961 [the Act, for short], and holding that the assessment order dated 18.03.2021 framed u/s 143(3) of the Act is not only erroneous but also prejudicial to the interest of the revenue.
Representatives of both the sides were heard at length. Case records carefully perused. Relevant documentary evidence brought on record duly considered in light of Rule 18(6) of the ITAT Rules.
Briefly stated, the facts of the case are that the assessee filed its return of income electronically on 29.09.2018, declaring total income of Rs. 73,88,620/–. Return was selected for limited scrutiny and, accordingly, statutory notices were issued and served upon the assessee. Reason for scrutiny selection was issue of share premium.
Returned income was assessed as such vide order dated 18.03.2021. Assuming jurisdiction conferred upon him, the PCIT issued notice dated 14.02.2023. Notice is exhibited at pgs 20 to 24 of the PB.
The sum and substance of the notice assuming jurisdiction u/s 263 of the Act relates to the valuation of goodwill worked out by the assessee by taking net profit for the A.Ys 2015–16, 2016–17 and 2017–18 and estimated net profit for the future year, i.e, 2018–19 and 2019–20.
The ld. PCIT was of the strong belief that the assessee has over valued its goodwill, thereby over valuing the fair market value of shares in view of Explanation 2(a) to section 56(2)viib of the Act. The PCIT was further of the strong belief that excess amount received for 3000 shares should have been disallowed and added to the total income of the assessee u/s 56(2)viib of the Act.
The assessee filed detailed reply to the observations made by the PCIT, which were dismissed by the PCIT, who treated the assessment order dated 18.03.2021 as prejudicial to the interest of the revenue, holding that the Assessing Officer failed to examine the case on account of valuation of goodwill to arrive at fair market value of existing equity shares.
We have given thoughtful consideration to the orders of the ld. PCIT. We find that the return of income was selected for limited scrutiny for issue of share premium. Notice u/s 142(1) of the Act served upon the assessee during the course of original assessment proceedings was accompanied by a questionnaire, which reads as under:
The assessee filed a detailed reply which is exhibited at pages 7 to 17 of the paper book. We find that the assessee has given complete detail of valuation of share premium.
Calculation of fair market value of equity shares was furnished as under:
12. The Goodwill was valued as under:
Certificate of the Chartered Accountant reads as under:
Thus, it can be seen that to the specific queries raised during assessment proceedings, the assessee has filed point-wise reply supported by documentary evidences.
A perusal of the assessment order, when considered with the statutory notice issued u/s 142(1) and 143(2) of the Act, along with the questionnaire clearly shows that the Assessing Officer has made enquiry in respect of issue of shares.
In the light of the afore-stated facts the Hon'ble Supreme Court in Malabar Industrial Co. Ltd., 243 ITR 83, has laid down the following ratio:
A bare reading of section 263 of the Income-tax Act, 1961, makes it clear that the prerequisite for the exercise of jurisdiction by the Commissioner suo motu under it, is that the order of the Income-tax Officer is erroneous in so far as it is prejudicial to the interests of the Revenue. The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent--if the order of the Income-tax Officer is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue-- recourse cannot be had to section 263(1) of the Act. 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 7 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
The Hon'ble Bombay High Court in the case of Gabriel India Ltd 203 ITR 108 has held as under:
“The power of suo motu revision under subsection (1) is in the nature of supervisory jurisdiction and the same can be exercised only if the circumstances specified therein exist. Two circumstances must exist to enable the Commissioner to exercise power of revision under this sub-section, viz., (i) the order is erroneous; (ii) by virtue of the order being erroneous prejudice has been caused to the interests of the Revenue. It has, therefore, to be considered firstly as to when an order can be said to be erroneous. We find that the expressions "erroneous", "erroneous assessment" and "erroneous judgment" have been defined in Black's Law Dictionary. According to the definition, "erroneous" means "involving error; deviating from the law". "Erroneous assessment" refers to an assessment that deviates from the law and is, therefore, invalid, and is a defect that is jurisdictional in its nature, and does not refer to the judgment of the Assessing Officer in fixing the amount of valuation of the property. Similarly, "erroneous judgment" means "one rendered according to course and 8 practice of court, but contrary to law, upon mistaken view of law; or upon erroneous application of legal principles".
From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an Income-tax Officer acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately This section does not visualise a case of substitution of the judgment of the Commissioner for that of the Income-tax Officer, who passed the order unless the decision is held to be erroneous. Cases may be visualised where the Income-tax Officer while making an assessment examines the accounts, makes enquiries,
applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimate himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a figure higher than the one determined by the Income-tax Officer. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. It is because the Income-tax Officer has exercised the quasi-judicial power vested in him in accordance with law and arrived at conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not 9 feel satisfied with the conclusion. It may be said in such a case that in the opinion of the Commissioner the order in question is prejudicial to the interests of the Revenue. But that by itself will not be enough to vest the Commissioner with the power of suo motu revision because the first requirement, viz., that the order is erroneous, is absent. Similarly, if an order is erroneous but not prejudicial to the interests of the Revenue, then also the power of suo motu revision cannot be exercised. Any and every erroneous order cannot be the subject-matter of revision because the second requirement also must be fulfilled. There must be some prima facie material on record to show that tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was just has been imposed. We, therefore, hold that in order to exercise power under sub-section (1) of section 263 of the Act there must be material before the Commissioner to consider that the order passed by the Income-tax Officer was erroneous in so far as it is prejudicial to the interests of the Revenue. We have already held what is erroneous. It must be an order which is not in accordance with the law or which has been passed by the Income-tax Officer without making any enquiry in undue haste. We have also held as to what is prejudicial to the interests of the Revenue. An order can be said to be prejudicial to the interests of the Revenue if it is not in accordance with the law in consequence whereof the lawful revenue due to the State has not been realised or cannot be realised. There must be material available on the 10 record called for by the Commissioner to satisfy him prima facie that the aforesaid two requisites are present. If not, he has no authority to initiate proceedings for revision. Exercise of power of suo motu revision under such circumstances will amount to arbitrary exercise of power. It is well-settled that when exercise of statutory power is dependent upon the existence of certain objective facts, the authority before exercising such power must have materials on record to satisfy it in that regard. If the action of the authority is challenged before the court it would be open to the courts to examine whether the relevant objective factors were available from the records called for and examined by such authority. The Income-tax Officer in this case had made enquiries in regard to the nature of the expenditure incurred by the assessee. The assessee had given detailed explanation in that regard by a letter in writing. All these are part of the record of the case. Evidently, the claim was allowed by the Income-tax Officer on being satisfied with the explanation of the assessee. Such decision of the Income tax Officer cannot be held to be "erroneous" simply because in his order he did not make an elaborate discussion in that regard. Moreover, in the instant case, the Commissioner himself, even after initiating proceedings for revision and hearing the assessee, could not say that the allowance of the claim of the assessee was erroneous and that the expenditure was not revenue expenditure but an expenditure of capital nature. He simply asked the Income- 11 tax Officer to re- examine the matter. That, in our opinion, is not permissible. Hence the provisions of section 263 of the Act were not applicable to the instant case and, therefore, the commissioner was not justified in setting aside the assessment order.”
It is a settled position of law that powers u/s 263 of the Act can be exercised by the Commissioner on satisfaction of twin conditions, i.e., the assessment order should be erroneous and 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 decision of Hon'ble High Court of Bombay in the case of CIT vs. Nirav Modi, [2016] 71 Taxmann.com 272 (Bombay)".
The Hon'ble High Court of Gujarat in the case of CIT vs. Nirma Chemical Works Ltd. 309 ITR 67 has observed as under:
“if assessment order were to incorporate the reasons for upholding the claim made by an assessee, the result would be an epitome and not an assessment order. In this case, during the assessment proceedings for both the Assessment Years, the Assessing . A.Y. 2009-10 Officer issued a query memo to the assessee, calling upon him to justify the genuineness of the gifts. The Respondent Assessee responded to the same by giving evidence of the communications received from his father and his sister i.e. the donors of the gifts along with the statement of their Bank accounts. On perusal, the Assessing Officer was satisfied about the creditworthiness/capacity of the donors, the source from where these funds have come and also the creditworthiness/ capacity of the donor. Once the Assessing Officer was satisfied with regard to the same, there was no further requirement on the part of the Assessing Officer to disclose his satisfaction in the Assessment Order passed thereon. Thus, this objection on the part of the Revenue cannot be accepted.”
We find that the Hon'ble Delhi High Court in the case of CIT Vs Sunbeam Auto reported in 332 ITR 167 has held as held as under:
“12. We have considered the rival submissions of the counsel on the other side and have gone through the records. The first issue that arises for our consideration is about the exercise of power by the CIT under s. 263 of the IT Act. As noted above, the submission of learned counsel for the Revenue was that while passing the assessment order, the AO did not consider this aspect specifically whether the expenditure in question was revenue or capital expenditure. This argument predicates on the assessment order, which apparently does not give any reasons while allowing the entire expenditure as revenue expenditure. However, that by itself would not be indicative of the fact that the AO had not applied his mind on the issue. There are judgments galore laying down the principle that the AO in the assessing order is not required to give detailed reason in respect of each and every item of deduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. Learned counsel for the assessee is right in his submission 14 that one has to keep in mind the distinction between "lack of inquiry" and "inadequate inquiry". If there was any inquiry, even inadequate that would not by itself give occasion to the CIT to pass orders under s. 263 of the Act, merely because he has different opinion in the matter. It is only in cases of "lack of inquiry" that such a course of action would be open”.
Considering the facts of the case in totality, in light of the judicial decisions discussed hereinabove, we do not find any error or infirmity in the assessment order which could make it erroneous and prejudicial to the interest of the revenue. Therefore, we set aside the order of the PCIT dated 21.03.2023, and restore that of the Assessing Officer dated 18.03.2021.
In the result, the appeal of the assessee in is allowed.
The order is pronounced in the open court on 05.02.2024.