2019 (11) TMI 1823 - AT - Income Tax

Revision u/s 263 by CIT - unexplained cash credits u/s. 68 - swapping of shares - second round of revision proceedings - as per CIT AO had not verified genuineness of the investments made in the assessee s shares as well as its purchases of unquoted shares in various private limited companies alongwith loans and advances - HELD THAT - We find that the assessee as well as all the six parties had swapped their shares than passing any cash credits in the respective accounts of all the six parties. They had not exchanged any consideration since the parties transferred their shareholdings to each other. This clinching fact has nowhere been rebutted at the Revenue s behest. CIT-DR s strongly contended that this issue cannot be raised in the instant second round of revision proceedings. We find no force in the Revenue s instant plea since the assessee had objected to the CIT s former revision proceedings qua the instant legal aspect as it is evident from a perusal of said order. The question as to whether such a swapping of shares invites unexplained cash credits addition u/s. 68 or not stands answered in assessee s favour in ITO Ward-5(3) Kolkata vs. M/s Bhagwat Marcom Pvt. Ltd 2019 (8) TMI 649 - ITAT KOLKATA wherein as held when the cash did not pass at any stage and since the respective parties did not receive cash nor did pay any cash, there was no real credit of cash in the cash book and the question of inclusion of the amount of the entry as unexplained cash credit could not arise. We are of the view that even if the latter assessment accepting assessee s share applications / premium is held erroneous the same does not cause any prejudicial to the interest of the Revenue therefore. Hon'ble apex court s landmark decision in Malabar Industrial Co. Ltd. 2000 (2) TMI 10 - SUPREME COURT settled the law long back that the CIT must satisfy himself that the assessment forming the subject-matter of revision simultaneously satisfies both limbs of erroneous as well as causing prejudice to interest of the revenue. We therefore accept assessee s arguments and restore the Assessing Officer s latter assessment order - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of PCIT’s assumption of revision jurisdiction under Section 263 of the Income Tax Act, 1961.
2. Adequacy of the Assessing Officer's enquiry into the share capital/premium transactions.
3. Applicability of Section 68 of the Income Tax Act to the share transactions involving swapping of shares.

Issue-wise Detailed Analysis:

1. Validity of PCIT’s Assumption of Revision Jurisdiction under Section 263 of the Income Tax Act, 1961:
The PCIT initiated Section 263 revision proceedings, asserting that the Assessing Officer (AO) had not adequately verified the genuineness of the investments made in the assessee’s shares and other financial transactions. The PCIT’s order emphasized that the AO failed to conduct thorough enquiries into the financial capabilities of the investor companies, the rationale behind the high share premium, and the authenticity of the transactions. The judgment highlighted that the PCIT’s revision jurisdiction is valid when the AO’s order is erroneous and prejudicial to the interest of the revenue, as established in the Supreme Court’s decision in Malabar Industrial Co. Ltd. vs. CIT.

2. Adequacy of the Assessing Officer's Enquiry into the Share Capital/Premium Transactions:
The AO had accepted the assessee’s share application/premium transactions after obtaining documentary evidence and statements from the directors of the investor entities. However, the PCIT contended that the AO’s enquiry was insufficient, lacking deeper investigation into the financials of the investor companies and the genuineness of the share premium. The judgment noted that the AO’s failure to conduct extensive enquiries rendered the assessment order erroneous and prejudicial to the revenue’s interest. The PCIT’s order directed the AO to re-examine the transactions, considering various documents and details to ensure the genuineness of the share capital and premium.

3. Applicability of Section 68 of the Income Tax Act to the Share Transactions Involving Swapping of Shares:
The assessee argued that the share transactions involved swapping of shares without any cash inflow, and thus, Section 68 was not applicable. The judgment referenced the Calcutta High Court’s decision in Jatia Investment Co. and the ITAT’s decision in ITO Ward-5(3) Kolkata vs. M/s Bhagwat Marcom Pvt. Ltd., which held that Section 68 does not apply to transactions involving non-cash credits. The tribunal concluded that since the transactions were mere swaps of shares without cash exchange, Section 68 was not attracted. Consequently, the PCIT’s revision order assuming Section 263 jurisdiction was deemed unsustainable.

Conclusion:
The tribunal held that the AO’s latter assessment accepting the assessee’s share application/premium was neither erroneous nor prejudicial to the interest of the revenue. The PCIT’s order dated 15.03.2019 was reversed, and the AO’s assessment order dated 20.12.2016 was restored. The appeal was allowed in favor of the assessee.