2017 (3) TMI 138 - AT - Income Tax

Revision u/s 263 - genuineness of the transaction of the receipt of share capital and the capacity and identity of the persons who were investors in the share capital of the assessee not checked by AO - Held that - From a reading of the entire of the CIT it is clear that the main plank of the case of CIT is that mere sending notices u/s 133(6) of the Act to the various share applicants and getting their replies was not sufficient, in the given facts and circumstances of the case, namely the receipt of huge premium by a company which was a newly formed company. It is for this reason of lack of proper inquiry that proceedings u/s 263 of the Act had been invoked by the CIT. The absence of the word erroneous order is not very fatal as reading of the entire order of the CIT would go to show that he was of the view that order of the AO was erroneous because the AO failed to make proper enquiries which were warranted in the facts and circumstances of the case. Apart from the above, we also find from para-16 of the impugned order that the CIT has clearly observed that order of the AO was erroneous and prejudicial to the interest of the revenue. The reference in the impugned order regarding existence of nine share holders when in fact there are only six share holders, in our view is not very material. What is material is the quality of enquiry that was made by the AO. This enquiry was not proper and had not been carried to its logical conclusion. The fact that proceedings initiated in the case of the share applicants u/s 263 of the Act were dropped is not very material and that fact ipso facto cannot be the basis to conclude that proceedings u/s 263 ought not to have been invoked by the CIT in the case of the case of the assessee. Reference made by the ld. Counsel for the assessee to Instruction No.2 of 2015 of CBDT dated 29.01.2015 is thoroughly misplaced as those instructions of CBDT was given in the context of transfer pricing provisions u/s 92 of the Act and has no relevance to the present case. We therefore hold that jurisdiction u/s 263 was properly exercised by the CIT and his action does not call for any interference. - Decided against assessee.

Summary

Issues Involved:
1. Validity of the order under Section 263 of the Income Tax Act, 1961.
2. Adequacy of the Assessing Officer's (AO) inquiry into the share capital and share premium received by the assessee.
3. The relevance of the CIT's observations about the share applicants and the directors of the assessee company.
4. The applicability of the Tribunal's decision in Subhlakshmi Vanijya Pvt. Ltd. vs. CIT to the present case.
5. The significance of the CIT's reference to the number of share applicants and the subsequent proceedings under Section 263 against those applicants.

Detailed Analysis:

1. Validity of the order under Section 263 of the Income Tax Act, 1961:
The CIT exercised powers under Section 263, deeming the AO's order erroneous and prejudicial to the interest of the revenue due to inadequate inquiry into the genuineness of the share capital transactions and the identity and creditworthiness of the investors. The Tribunal upheld the CIT's decision, emphasizing that the AO's failure to conduct a thorough investigation justified the revision under Section 263.

2. Adequacy of the AO's inquiry into the share capital and share premium received by the assessee:
The AO's inquiry was deemed insufficient as it merely involved issuing notices under Section 133(6) and verifying replies from the share applicants. The CIT highlighted the need for a more detailed investigation, especially considering the substantial share premium received by a newly formed company. The Tribunal supported this view, stating that the AO did not carry the inquiry to its logical conclusion, thus rendering the assessment order erroneous.

3. The relevance of the CIT's observations about the share applicants and the directors of the assessee company:
The CIT noted several debit and credit entries in the assessee's bank statement, indicating significant transactions that warranted scrutiny. The CIT criticized the AO for not examining the directors of the subscriber companies and failing to verify the genuineness of the transactions. The Tribunal found these observations relevant, emphasizing the necessity of a comprehensive inquiry into the share capital and premium.

4. The applicability of the Tribunal's decision in Subhlakshmi Vanijya Pvt. Ltd. vs. CIT to the present case:
The Tribunal referred to its decision in Subhlakshmi Vanijya Pvt. Ltd. vs. CIT, where it was held that inadequate inquiry by the AO could justify revision under Section 263. The Tribunal reiterated that the CIT could direct the AO to conduct a thorough inquiry, even if the AO had jurisdiction to make inquiries under Sections 142(1) and 143(2). The Tribunal found the principles from the Subhlakshmi Vanijya case applicable to the present case, supporting the CIT's exercise of jurisdiction under Section 263.

5. The significance of the CIT's reference to the number of share applicants and the subsequent proceedings under Section 263 against those applicants:
The CIT erroneously referred to nine share applicants instead of six. However, the Tribunal deemed this discrepancy immaterial, focusing on the quality of the AO's inquiry. The Tribunal also noted that the dropping of Section 263 proceedings against the share applicants did not automatically preclude the CIT from invoking Section 263 against the assessee. The Tribunal concluded that the CIT's order was justified, regardless of the number of share applicants.

Conclusion:
The Tribunal dismissed the assessee's appeal, upholding the CIT's order under Section 263. The Tribunal emphasized the necessity of a thorough inquiry into the share capital and premium transactions, supporting the CIT's view that the AO's inadequate inquiry rendered the assessment order erroneous and prejudicial to the interest of the revenue. The Tribunal's decision in Subhlakshmi Vanijya Pvt. Ltd. vs. CIT was deemed applicable, reinforcing the CIT's jurisdiction to revise the AO's order.