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2009 (8) TMI 840 - AT - Income TaxAssessment framed u/s 143(3) - Additions to income - transfer of shares - Taxability of IRC Fees. Assessment framed u/s 143(3) - Additions to income - transfer of shares - income as Short Term Capital Gain - erroneous and prejudicial to the interest of the revenue - HELD THAT - In the present case, there is no dispute about the fact that the assessee has received sum and it is also not the case of the Department that over and above the sum, the assessee has received any amount, and hence, as the full value of the consideration as against the value of the shares, the capital gain worked out to be Nil under section 48 of the Act. Therefore, it cannot be said that Short-term Capital Gain as held by the ld. CIT in the order passed u/s 263 has escaped assessment. Moreover, the case of the assessee is supported by the interpretation given by the Hon ble Supreme Court to the expression Full Value of Consideration in the case of George Henderson Co. Ltd. 1967 (4) TMI 18 - SUPREME COURT . Section 2(47) defines the word transfer which is inclusive. The Legislature has kept the identity in respect of the sale , exchange , relinquishment of asset or the extinguishment of any right therein . Section 2(47) only defines the word transfer but as per section 45, there must be some gain on the extinguishment of any right. Moreover, the term sale is different than expression extinguishment of any right. In our opinion, the said observation of the ld. CIT is erroneous itself and contrary to the scheme of the capital gain as envisaged the Act. On this issue, the ld. CIT(A) has observed that the assessee had admitted that since the shares were transferred from Demat Account of the Company to the Demat Account of Mr. Mukesh D. Ambani, the true nature of the transaction was apparently sale of the shares by the Company to Mr. Mukesh D. Ambani and the reference of assessee s letter is given. We have perused the letter addressed to the ld. CIT, which is a reply to the notice issued under section 263 and the copy of the said letter is placed, the assessee, had made the summary of what is stated in the notice and nowhere it is admitted that there was a transfer of the shares. Hence, in our opinion, the said statement of the ld. CIT is totally contrary to the fact. There is no mistake of law in the assessment order passed under section 143(3) by the Assessing Officer and hence, said order is not erroneous nor it is prejudicial to the interest of the Revenue, within the meaning of section 263 of the Act. Taxability of IRC Fees - whether the entire IRC Fees received from RIL for grant of right to use nationwide network is to be treated as income for the assessee in the assessment year 2004-05 - HELD THAT - In our opinion, there is no absolute right to the assessee to treat the entire License fees of the 20 years as an income accrued during the financial year 2003-04. Moreover, on the theory of that matching principles, if the entire IRC Fees which is undisputedly received for the period of 20 years for use of the communication network is to be treated as an income of the assessment year 2004-05, then it will be given the distorted picture of the profit - Assessee has recognized the income from IRC Fees as per Rule 40 of AS 19 and in our opinion, the method followed by the assessee-company for recognizing the income is in accordance with the Accounting Standards as formulated by ICAI - Hence, in our considered opinion, the view taken and conclusion drawn by the Ld. CIT on this issue is also not sustainable. We, therefore, hold that the assessment order passed by the AO u/s 143(3) is not erroneous and also it is prejudicial to the interest of the revenue within the meaning of section 263 of the Act. We, therefore, cancel the order of the CIT passed u/s 263. In the result, assessee s appeal is allowed.
Issues Involved:
1. Erroneous and prejudicial assessment order under section 143(3) of the Income-tax Act, 1961. 2. Pledging of shares and its classification as a transfer under section 2(47) of the Act. 3. Assessment of Indefeasible Right of Connectivity (IRC) fees as income for the assessment year 2004-05. 4. Limiting the Assessing Officer's power to pass a fresh assessment order. Detailed Analysis: Issue 1: Erroneous and Prejudicial Assessment Order The assessee-company challenged the order of the Commissioner of Income-Tax (CIT) under section 263 of the Income-tax Act, 1961, which held that the assessment order for the year 2004-05 was erroneous and prejudicial to the interest of the revenue. The CIT invoked section 263, directing the revision of the assessment order. Issue 2: Pledging of Shares as Transfer The CIT contended that the pledging of 50 crore shares of Reliance Infocom Limited (RIL) at face value to Mr. Mukesh D. Ambani amounted to a transfer under section 2(47) of the Act. The CIT argued that the fair market value of the shares should be considered as the "consideration" for the transfer, resulting in a significant short-term capital gain. The assessee argued that the transaction was a pledge and not a transfer, supported by the audited statements showing the amount as a loan. The Tribunal noted that the CIT did not consider the audited statements and annual reports, which showed the transaction as a loan. The Tribunal held that even if it were a transfer, the full value of consideration should be the actual amount received, not the market value, resulting in no capital gain. Issue 3: Assessment of IRC Fees The CIT directed the Assessing Officer to assess the entire IRC fees of Rs. 3,037.79 crores as income for the assessment year 2004-05, arguing that the income accrued in that year as the assessee follows the Mercantile System of Accounting. The assessee contended that the IRC fees were for a period of 20 years and should be spread over the lease term, as per Accounting Standard AS-19. The Tribunal agreed, stating that recognizing the entire amount in one year would distort the income picture and violate the matching principle. The Tribunal held that the assessee correctly spread the income over the lease term. Issue 4: Limiting Assessing Officer's Power The CIT's order limited the Assessing Officer's power to pass a fresh assessment order by directing adherence to the CIT's directions. The Tribunal found that the CIT's directions were based on an incorrect understanding of the facts and law. Conclusion: The Tribunal concluded that the assessment order was not erroneous or prejudicial to the interest of the revenue. The Tribunal quashed the CIT's order under section 263, allowing the assessee's appeal. The Tribunal emphasized the importance of considering audited statements and adhering to accounting standards, particularly the matching principle, in recognizing income.
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