2018 (10) TMI 1293 - AT - Income Tax

Validity of revision u/s 263 - addition invoking provisions of section 56(2)(viib) - assessee submitted that provisions of section 56(2)(viib) were not applicable to the assessee as the company was to be treated as a company in which public it was substantially interested - Held that - The provisions of section 56(2)(viib) invoked in the notice u/s. 263 by CIT is not applicable to the assessee company. As the assessee company was falling under section 2(18) being a company in which public are substantially interested. This fact has subsequently been duly accepted by the learned CIT- himself in the aforesaid order. Despite that he has held that assessing officer has not made detailed enquiry on the valuation of shares and he had set aside the matter to the file of assessing officer. We find that learned CIT is passing contradictory order when learned CIT - accepts that provisions of section 56(2)(viib) are not applicable to the assesses as this section provides for addition as income from other sources of share premium not properly explained in the hands of companies in which Public are not substantially interested. When the addition itself is not permissible what point will be served by the assessing officer s enquiries in this regard is beyond comprehension. A.O. has dealt with the issue. He has been provided with the valuation report. In these circumstances further enquiry as directed by the learned CIT will not only be a futile exercise, it would serve no purpose whatsoever. We also note that the proviso to section 68 in this regard is also not applicable to company in which public are substantially interested. This proviso mandates that the companies to whom inter alia shares at premium are issued should also satisfy the A.O. - Directions of the ld. CIT(A) can neither remove any error from the A.O. s order nor cure any prejudice or loss to revenue. - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of revision under section 263.
2. Direction to the Assessing Officer to make enquiry and verification in respect of valuation of premium on the shares issued by the appellant.

Issue-wise Detailed Analysis:

1. Validity of revision under section 263:
The appellant challenged the revision under section 263 of the Income Tax Act, 1961, arguing that the Commissioner of Income-tax erred in setting aside the assessment order dated 31 March 2016 passed under section 143(3) of the Act. The appellant contended that the assessment order was not erroneous or prejudicial to the interests of the revenue. The Commissioner of Income-tax had held that the assessment order was erroneous because it did not adequately address the valuation of the premium on shares issued by the appellant. However, the appellant argued that the provisions of section 56(2)(viib) of the Act were not applicable as the company was one in which the public was substantially interested, citing section 2(18) of the Act. The Commissioner accepted this argument but still directed further enquiry, which the appellant deemed unnecessary.

2. Direction to the Assessing Officer to make enquiry and verification in respect of valuation of premium on the shares issued by the appellant:
The Commissioner of Income-tax directed the Assessing Officer to make further enquiries and verification regarding the valuation of the premium on shares issued by the appellant. The Commissioner noted that the valuation report was not based on dependable facts and seemed to be a device to introduce monies. The appellant argued that the valuation was justified based on the business transferred from Mukand Limited, which had been operational since 1990, and that the shares were issued to non-residents, making section 56(2)(viib) inapplicable. The Commissioner acknowledged that section 56(2)(viib) did not apply but insisted on further investigation into the valuation process.

Judgment:
The Tribunal found that the provisions of section 56(2)(viib) were indeed not applicable to the appellant, as it was a company in which the public was substantially interested. The Tribunal held that the Commissioner’s directive for further enquiry was contradictory and unnecessary, as the Assessing Officer had already dealt with the issue and received the valuation report. The Tribunal concluded that further enquiry would be a futile exercise and would not serve any purpose. Consequently, the Tribunal quashed the order passed under section 263 by the Commissioner of Income-tax and allowed the appeal in favor of the appellant.

Conclusion:
The Tribunal ruled that the revision under section 263 was invalid as the provisions of section 56(2)(viib) were not applicable to the appellant. The directive for further enquiry into the valuation of the premium on shares was deemed unnecessary and the order under section 263 was quashed. The appellant's appeal was allowed.