2021 (4) TMI 436 - AT - Income Tax

Revision u/s 263 - CIT directing the AO to tax the amount which is in excess of its FMV as income from other sources on receipt basis - A.O. computed the FMV of shares in accordance with Rule 11(U)(b) of the Income Tax Rules, 1962 on the date of issue of shares holding that as per Explanation 2 of Section 56(2) (viib) the FMV of share shall be the value on the date of issue of share and added the same to the income of the assessee under the head income from other sources - assessee challenged the assessment order before the Ld. CIT(A) inter alia on the ground that the AO has invoked section 52(2) (viib) on the receipt of consideration against issue of shares since the assessee had not received amount in the impugned year but in the earlier year no addition could be - HELD THAT - The coordinate Bench in M/S FRED ENTERPRISES PVT. LTD., 2020 (6) TMI 745 - ITAT CHANDIGARH holding that the provisions of section 56(2)(viib) of the Act are triggered in the year in which the shares are issued. Therefore, the impugned order passed by the Ld. PCIT, directing the AO to tax the amount which is in excess of its FMV as income from other sources on receipt basis, is contrary to the findings of the coordinate Bench. As per the settled law, the jurisdiction u/s 263 of the Act can be exercised on satisfaction of twin conditions that the order passed by the AO is erroneous and prejudicial to the interest of the Revenue. In the present case since the AO has passed the assessment order in accordance with the decision of the coordinate Bench rendered in the case discussed above, the same cannot be termed as erroneous within the meaning of section 263 of the Act. In our considered view since the order passed in the present case is in consonance with the findings of the coordinate Bench, the Ld. PCIT has wrongly exercised the revision powers u/s 263 and directed the AO to tax the amount excess of its fair market value under the head income from other sources on receipt basis. Hence, we hold that since the order passed by the A.O. is not erroneous, the Ld. PCIT has wrongly set aside the same by exercising jurisdiction u/s 263. Appeal of the assessee is allowed.

Summary

Issues:
1. Jurisdiction of PCIT under section 263 of the Income Tax Act, 1961.
2. Interpretation of Section 56(2)(viib) regarding taxation of excess consideration for shares.
3. Adjudication of Fair Market Value of shares issued.

Jurisdiction of PCIT under section 263:
The case involved an appeal against the order passed by the Principal Commissioner of Income Tax (Central) for the assessment year 2013-14. The PCIT set aside the assessment order passed by the AO under section 143(3) of the Income Tax Act, 1961, exercising jurisdiction under section 263. The PCIT directed the AO to tax the amount exceeding the Fair Market Value (FMV) of shares under Section 56(2)(viib) of the Act. The assessee challenged the PCIT's order on various grounds, questioning the jurisdiction of the PCIT to assume authority under section 263.

Interpretation of Section 56(2)(viib):
The crux of the issue was the correct interpretation of Section 56(2)(viib) regarding the taxation of excess consideration received for shares over their FMV. The PCIT contended that the excess consideration should be taxable in the year of receipt, as per the provisions of the Act. However, the ITAT Chandigarh Bench had previously held that Section 56(2)(viib) is triggered in the year in which the shares are issued. The Tribunal emphasized that the FMV should be determined at the time of the issue of shares, not at the time of receipt of consideration. The decision highlighted the importance of the timing of share issuance in determining the applicability of Section 56(2)(viib).

Adjudication of Fair Market Value of shares issued:
The ITAT analyzed previous decisions, distinguishing cases where the invocation of Section 56(2)(viib) was based on the year of application for shares versus the year of allotment. The Tribunal concluded that the provisions of Section 56(2)(viib) are triggered in the year of issue or allotment of shares. Therefore, in the present case, where shares were issued in the impugned year, the AO's application of Section 56(2)(viib) was deemed appropriate. The ITAT directed the CIT(A) to adjudicate on the determination of Fair Market Value of the shares issued. The decision emphasized the importance of the timing of share issuance in applying the relevant tax provisions.

In conclusion, the ITAT allowed the appeal filed by the assessee, setting aside the PCIT's order under section 263. The Tribunal held that since the AO's assessment order was in line with the ITAT's previous decision, it was not erroneous. Therefore, the PCIT had wrongly exercised revisionary powers under section 263. The judgment underscored the significance of consistent interpretation and application of tax provisions, especially concerning the timing of share issuance in relation to the taxation of excess consideration.