2021 (12) TMI 1133 - AT - Income Tax

Revision u/s 263 by CIT - receipt of share premium - As per CIT AO had failed to enquire into the veracity of the valuation report of shares furnished by the Chartered Accountant. It is a case of total lack of enquiry on the part of AO - distinction between lack of enquiry and inadequate enquiry - HELD THAT - As specifically brought to the notice of the Assessing Officer that the appellant company issued 47850 preference shares of face value of ₹ 10 per share at premium to M/s. Kumar Sinew Developers Pvt. Ltd., a sister concern of the appellant and received a share premium - The appellant company also issued 1120 equity shares of face value of ₹ 10 per share to ICICI Asset Management Company Ltd. at a premium of ₹ 24,140/- per share and received share premium of ₹ 2,70,36,800/- and report of valuation of shares given by the Chartered Accountant was also furnished. In these circumstances, we do not agree with the ld. CIT-DR that no enquiry was made into the issue of receipt of share premium and the very fact that the Assessing Officer had called for report of valuation of shares given by Chartered Accountant goes to show that Assessing Officer had enquired and had gone into issues of applicability of provisions of section 56(2)(viib) . In the present case, from the observation made by the ld. PCIT in 263 order, it is clear that had the ld. PCIT appraised the report of valuation of shares placed before the Assessing Officer, he would not have accepted the valuation report. This observation, in our considered opinion, cannot be accepted in view of the fact that the power of revision u/s 263 does not allow for supplanting or substituting the view of the Assessing Officer. The appreciation of material placed before the Assessing Officer is exclusively within his domain which cannot be interdicted by a superior officer while exercising powers u/s 263 of the Act on the ground that if he had appraised the said material, he would have come to a different conclusion in view of the law laid down by the Hon ble Supreme Court in the case of Parashuram Pottery Works Co. Ltd. 1976 (11) TMI 1 - SUPREME COURT . valuation of shares is a technical, complex problem, which should be left to the consideration of expert in the field and is surrounded by a number of myths and is not an exact science and is driven, inter-alia, by the purpose of valuation, statutory requirements, business factors, etc.. Valuation, in practice, is guided by a number of approaches as suitably adjusted for subjective circumstances. The report of an expert can be found fault by another expert in the field. Neither the Assessing Officer nor the Commissioner is competent to examine the veracity or the completeness of the valuation report given by an expert. The ld. PCIT cannot come to the conclusion that the report of valuation of shares is unacceptable in the absence of report from another expert. The material on record does not suggest any error in the methodology adopted in the report. The power of revision cannot be exercised to set-aside the assessment order to enable Assessing Officer to conduct another fruitless enquiry to reach the same result which was arrived at earlier, even if the enquiries held that it would be empty formatting as the shares were also issued to unrelated parties i.e. 1120 equity shares of face value of ₹ 10 per share to ICICI Asset Management Company Ltd. at a premium of ₹ 24,140/- as held in the case of CIT vs. Sakthi Charities 2000 (2) TMI 75 - MADRAS HIGH COURT - Assessee appeal allowed.

Summary

Issues Involved:
1. Validity of the revision order passed by the Principal Commissioner of Income Tax (PCIT) under section 263 of the Income Tax Act, 1961.
2. Taxability of share premium received by the assessee company.
3. Allowability of expenditure claimed by the assessee.

Detailed Analysis:

1. Validity of the Revision Order under Section 263:

The appeal was filed against the order of the PCIT dated 27.03.2018 for the assessment year 2013-14. The PCIT had revised the assessment order passed by the Assessing Officer (AO) under section 143(3) of the Income Tax Act, 1961, dated 30.03.2016. The PCIT considered the assessment order erroneous and prejudicial to the interest of the revenue, primarily because the AO allegedly did not make proper inquiries regarding the receipt of share premium and the claim of expenditure.

The Tribunal held that for the PCIT to invoke the power of revision under section 263, the assessment order must be both erroneous and prejudicial to the interests of the revenue, as established by the Supreme Court in Malabar Industrial Co. Ltd. vs. CIT and CIT vs. Max India Ltd. The Tribunal found that the AO had indeed made inquiries regarding the receipt of share premium and had examined the valuation report submitted by the Chartered Accountant. The Tribunal emphasized the distinction between "lack of inquiry" and "inadequate inquiry," noting that even if the inquiry was inadequate, it would not justify the exercise of revision powers under section 263.

2. Taxability of Share Premium:

The PCIT had observed that the share premium received by the assessee was in excess of the Fair Market Value (FMV) and that the AO had failed to make proper inquiries regarding this during the assessment proceedings. The assessee argued that the AO had called for and reviewed the relevant documents, including the valuation report prepared by a Chartered Accountant, which followed the Discounted Cash Flow Method. The Tribunal noted that the AO had made inquiries and accepted the valuation method adopted by the assessee, which was one of the prescribed methods under the Income Tax Rules. The Tribunal concluded that the PCIT could not substitute his own method of valuation in place of the method adopted by the assessee and accepted by the AO.

The Tribunal also highlighted that valuation of shares is a technical and complex issue best left to experts. The Tribunal cited the Supreme Court's decision in Parashuram Pottery Works Co. Ltd. vs. ITO, emphasizing that the power of revision cannot be exercised to supplant the AO's view with that of the PCIT.

3. Allowability of Expenditure:

The PCIT had set aside the assessment order regarding the claim of expenditure of ?1,74,46,083/- on the ground that the AO allowed it without proper verification. The assessee argued that the AO had allowed the expenditure after due application of mind and that the business had already commenced, making the expenditure allowable.

During the hearing, the grounds of appeal relating to the revision of allowability of expenditure were not pressed by the assessee. Consequently, the Tribunal dismissed these grounds as not pressed.

Conclusion:

The Tribunal concluded that the PCIT was not justified in exercising the power of revision under section 263 in respect of the issue of receipt of share premium. The Tribunal allowed the grounds of appeal related to this issue in favor of the assessee. The grounds of appeal related to the allowability of expenditure were dismissed as not pressed. Thus, the appeal filed by the assessee was partly allowed.