2020 (2) TMI 484 - AT - Income Tax

Revision u/s 263 - CIT finds fault with the action of AO while calculating the fair market value of shares applying Rule 11U and 11UA, the price of share is only ₹ 27 and therefore, there is revenue loss of ₹ 123 per share, therefore, the order of the AO is erroneous - HELD THAT - The certificate of Chartered Accountant of assessee is found placed and the calculation sheet as to how the value of shares has been arrived at ₹ 150/- is reproduced at page (4) (supra). So, it can be seen that AO during assessment proceedings had in fact enquired about the fair market value of shares issued by the assessee at ₹ 150/- per share and assessee had submitted the aforesaid documents before the AO to substantiate the fair market value of shares to the satisfaction of AO, so he accepted the same. We do not countenance this action of the Ld. Pr. CIT for the simple reason that the view taken by the AO after enquiry on the issue is a plausible view and cannot be held to be unsustainable in law. As per sec. 56(2)(viib) of the Act, fair market value can be computed by two ways. (i) By Rule 11U and 11UA of Income Tax Rules 1962. (ii) By assessee company to the satisfaction of the AO. And as per the said provision, the value whichever is higher can be adopted. So, in this case when Rule 11U and 11UA is applied, the fair market value of shares is at ₹ 27 and the fair market value according to assessee company is at ₹ 150/-, so the higher value has been adopted, which is a plausible view. However, if the Ld. Pr. CIT has to hold the view of the AO to be erroneous as well as prejudicial to revenue he has to conduct enquiries and record a finding that assessee's calculation of fair market value of ₹ 150/- is unsustainable in law, which the Ld. Pr. CIT has not done in this case, though all facts were furnished before him. The action of AO, who has conducted enquiry on the issue and called for documents and after examination has not drawn any adverse view against the assessee, cannot be held to be erroneous as well as prejudicial to the revenue since the assessment order cannot be found to be erroneous as well as prejudicial on the fair market value of shares, the condition precedent to invoke revisional jurisdiction u/s. 263 is absent and, therefore, the usurpation of jurisdiction by Ld. Pr. CIT is bad in law and so quashed. - Decided in favour of assessee.

Summary

Issues Involved:
1. Invocation of revisional jurisdiction under Section 263 of the Income-tax Act, 1961.
2. Determination of fair market value of shares as per Section 56(2)(viib) of the Income-tax Act, 1961 and Rules 11U and 11UA of the Income Tax Rules, 1962.
3. Adequacy of the Assessing Officer's (AO) enquiry into the valuation of shares.

Issue-Wise Detailed Analysis:

1. Invocation of Revisional Jurisdiction under Section 263 of the Income-tax Act, 1961:
The primary grievance of the assessee was against the Principal Commissioner of Income Tax (Pr. CIT) invoking his revisional jurisdiction under Section 263 without satisfying the necessary conditions for exercising such jurisdiction. The Pr. CIT issued a show-cause notice indicating that the assessment order dated 28.03.2016 was erroneous and prejudicial to the interests of the revenue because the AO did not properly enquire into the valuation of shares issued by the assessee.

2. Determination of Fair Market Value of Shares as per Section 56(2)(viib) and Rules 11U and 11UA:
The Pr. CIT argued that the fair market value of shares should be determined based on the formula stipulated under Rules 11U and 11UA, which calculated the value at approximately ?23 per share. The shares were issued at ?150 per share (?10 face value plus ?140 premium), resulting in an excess value of ?127 per share. The Pr. CIT contended that this excess amount should be added back to the total income of the assessee.

The assessee, however, substantiated the valuation of shares at ?150 per share with a Chartered Accountant’s certificate. According to Section 56(2)(viib), the fair market value of shares can be determined either as per the prescribed method (Rules 11U and 11UA) or as substantiated by the company to the satisfaction of the AO, based on the value of its assets. The AO accepted the assessee's valuation, which was higher than the value calculated under the prescribed rules.

3. Adequacy of the Assessing Officer's Enquiry into the Valuation of Shares:
The assessee argued that the AO had indeed made adequate enquiries regarding the valuation of shares during the assessment proceedings. The AO issued notices and sought detailed information about the share applicants, the applicability of Section 56(2)(viib), and other relevant details. The assessee provided a valuation certificate from a Chartered Accountant and detailed calculations showing the fair market value of shares based on the value of investments in group companies.

The Tribunal noted that the AO had conducted a thorough enquiry and was satisfied with the valuation provided by the assessee. The AO’s acceptance of the valuation was deemed a plausible view. The Pr. CIT, however, failed to conduct further enquiries or record a finding that the AO’s conclusion was unsustainable in law. The Tribunal emphasized that if two views are possible, the Pr. CIT cannot impose his view if the AO’s view is plausible.

Conclusion:
The Tribunal found that the AO had made sufficient enquiries and accepted the valuation of shares based on the Chartered Accountant’s certificate, which was a plausible view. The Pr. CIT’s invocation of revisional jurisdiction under Section 263 was deemed unsustainable as the assessment order was neither erroneous nor prejudicial to the revenue. Consequently, the Tribunal quashed the revision order and allowed the appeal of the assessee.

Result:
The appeal of the assessee was allowed, and the order of the Pr. CIT invoking revisional jurisdiction under Section 263 was quashed.

Order Pronouncement:
The order was pronounced in the open court on 20th November 2019.