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2018 (2) TMI 100 - AT - Income TaxRevision u/s 263 - gift chargeable to tax in the hands of HUF - scope of the term relative u/s 56(2)(vii) - Held that - The above information was provided with respect to the computation of cost of acquisition to be determined in case of the assessee when it is sold, as the Act provides for cost acquisition of the previous owner substituted in case of certain types of acquisition, such as gift etc. The copy of the gift deed, which is submitted by the assessee before AO was with respect to the cost of acquisition to be determined at the time of sale of those shares for working capital gain in the hands of the assessee. AO has not at all looked at those documents from the perspective of section 56 (2) of the Act. No other evidence was adduced before us which even remotely suggest that the ld AO has enquired about the taxability of impugned gift and its taxability in the hands of assessee. From the above facts, it is apparent that the ld assessing officer did not enquire during the course of assessment proceedings about the taxability of the shares received as gift by the appellant. Further , it is apparent that assessment order was passed on 18/3/2016 and order under section 263 was passed on 1/5/2017, both after 1/6/2015, therefore explanation (2) introduced w.e.f. 1/6/2015 squarely applies. Therefore, it is apparent that AO has not made any enquiry with respect to the taxability of gift received by the assessee from the mother of the Karta of assessee. Furthermore, merely notice has been issued under section 154 on the same issue but later on, no rectification order has been passed by the Ld. assessing officer does not help the case of the assessee. The provisions of section 154 operate when there is an apparent mistake from the records. - Decided against assessee. Whether the gift of 75,000 equity shares of a private limited company received by assessee HUF from Mrs. Sneh Gupta is chargeable to tax under section 56 (2) (vii)? - Held that - In the present case, the assessee is a HUF who received the gift from a non-relative. The ld-authorized representative also could not show us any commentary on Hindu law or any other authoritative material, which says that mother of Karta of assessee HUF, is member of his HUF. Therefore, we reject the arguments of the assessee that the gift of 75,000 equity shares received by the assessee is not chargeable to tax under section 56 (2) (vii) of the act. Hence, we do not find any infirmity in the order of the Ld. PCIT in holding that gift of 75,000 equity shares received by the assessee received from Mrs. Sneh Gupta is chargeable to tax under section 56 (2) (vii) of the act. Valuation of the equity shares received by the assessee as gift from Mrs. Sneh Gupta - Held that - When the specific rule for determination of fair market value for section 56 has been notified, same shall be applied and not as defined under section 2 (22B)of the act. Furthermore, the notification issued by the Central government also speaks that determination of fair market value under rule 11 UA shall be applied for the purposes of section 56 of the act. Therefore, we reject the valuation adopted by the Ld. PCIT applying provisions of section 2 (22B) of the act. According to the assessee such computation u/r 11UA of Income tax Rules, 1962 works out at ₹ 234.82 per share. However, neither the Ld. PCIT nor the assessing officer has verified this computation of the fair market value of the shares. Therefore, we set aside the issue t of computation of the fair market value of the shares back to the file of the Ld. assessing officer. We direct assessee to produce the valuation before the ld AO as per rule 11UA of IT Rules.
Issues Involved:
1. Jurisdiction under Section 263 of the Income Tax Act. 2. Taxability of gift received under Section 56(2)(vii). 3. Valuation of shares under Rule 11UA vs. Section 2(22B). Detailed Analysis: 1. Jurisdiction under Section 263 of the Income Tax Act: The Principal Commissioner of Income Tax (PCIT) assumed jurisdiction under Section 263, stating that the assessment order dated 18-03-2016 was erroneous and prejudicial to the interest of revenue. The PCIT found that the Assessing Officer (AO) did not make requisite inquiries about the taxability of the gift received by the assessee from the mother of the Karta of the HUF. The PCIT issued a show-cause notice and concluded that the AO's failure to examine the applicability of Section 56(2)(vii) resulted in an erroneous order. The Tribunal upheld the PCIT’s jurisdiction under Section 263, emphasizing that the AO did not make necessary inquiries or verification, which is deemed erroneous and prejudicial to the interests of the revenue under Explanation 2 to Section 263. 2. Taxability of Gift Received under Section 56(2)(vii): The assessee, an HUF, received 75,000 equity shares as a gift from the mother of the Karta. The PCIT argued that the gift was taxable under Section 56(2)(vii) as the mother was not a member of the HUF. The assessee contended that the gift from the mother should be exempt as she is a relative. However, the Tribunal held that the definition of "relative" in the context of HUF under Section 56(2)(vii) includes only members of the HUF. Since the mother of the Karta is not a member of the HUF, the gift was taxable. The Tribunal rejected the assessee's reliance on judicial precedents and clarified that the law distinctly defines relatives for individuals and HUFs. 3. Valuation of Shares under Rule 11UA vs. Section 2(22B): The PCIT adopted the fair market value of the shares as per Section 2(22B), which was the sale price of the shares shortly after the gift. However, the assessee argued that the valuation should be as per Rule 11UA, which prescribed a specific method for determining the fair market value for the purposes of Section 56. The Tribunal agreed with the assessee, stating that when a specific rule (Rule 11UA) is prescribed for valuation under Section 56, it should be applied instead of the general definition under Section 2(22B). The Tribunal directed the AO to verify the computation of the fair market value as per Rule 11UA and determine the taxable amount accordingly. Conclusion: The Tribunal upheld the PCIT's jurisdiction under Section 263, confirmed the taxability of the gift under Section 56(2)(vii), and directed the AO to re-compute the fair market value of the shares as per Rule 11UA. The appeal was partly allowed.
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