2022 (1) TMI 684 - AT - Income Tax

Revision u/s 263 by CIT- Taxability of shares received by way of Gift - Assessee claims that it is not chargeable to tax under section 56(2) (viia) - PCIT held that there is a lack of enquiry by the assessing officer - HELD THAT - Provisions of section 56 (2) (viia) itself provides about taxability of receipts of assets without consideration or with inadequate consideration in the hands of certain companies. Therefore, the finding of the ld PCIT that a company cannot make gift is devoid of any merit and we are not shown that it is supported with any provisions of law. In view of overwhelming judicial precedents cited before us, we are of the view that there is no bar against the company giving its properties as Gift. The provisions of section 56(2)(viia) specifically deals with receipt by a firm or a private company of any property being shares of a company in which the public are not substantially interested . No doubt, in case the recipient is a partnership firm of the property, but the property involved is a share of Wokhardt Ltd, which is a listed company in which the public are substantially interested. We find that the provisions of section 263 gives power to the revisionary authority to revise the order after giving the assessee an opportunity of being heard and after making or causing to be made such enquiries as he deems necessary. Therefore, the law clearly mandates that the issue of revision could only be decided after the assessee is heard on the matter. In the present case, we do not find that the issue of taxability of above gift u/s 68 of the act was at any time put to the notice of the assessee - provisions of section 68 applies where any sum is found credited in the books of the assessee. In the present case, these are the shares, which are received by the assessee - PCIT in whole of his order did not mention and deal with the applicability of section 68, but in the finding mentioned merely a line without giving assessee an opportunity for putting its case before him, directed the assessing officer to apply the provisions of section 68 of the Act. Ld PCIT has also not held that how the provision of section 68 applies in the facts of the case. This is not correct in view of several judicial precedents cited before us. Argument of the learned DR that letter dated 07th December, 2017 could not have been examined by the assessing officer as he has already passed the order on 06/12/2017 - On careful examination of that letter, it shows that assessee submitted by that letter details of the partners of the assessee firm and the details of the dividend received. The content of the letter as such do not make any difference with respect to the examination of taxability of gift of shares in the hands of the assessee. Order - a) the learned assessing officer has passed the order under section 143(3) of the Act after carrying out necessary and relevant enquiries as warranted by the facts of the case and b) the learned PCIT could not show that what further enquiry should have been made, c) Order of the learned assessing officer cannot be deemed erroneous as well as prejudicial to the interest of the revenue with respect to Explanation 2 to section 263 of the Act. d) The order of ld AO is not erroneous as Gift of shares of the Wockhardt Limited are not chargeable to tax in the hands of the assessee firm u/s 56 (2) (viia) of the Act , as assessee has received gift of shares of a company in which public are substantially interested which could not have been taxed under section 56(2)(viia) of the Act, We allow grounds against revisionary order passed u/s 263 - Decided in favour of assessee.

Issues Involved:
1. Revision under Section 263 of the Income-tax Act, 1961.
2. Taxability of shares received by way of gift under Section 56(2)(viia) of the Income-tax Act, 1961.
3. Applicability of Section 68 of the Income-tax Act, 1961.

Detailed Analysis:

1. Revision under Section 263 of the Income-tax Act, 1961
The Principal Commissioner of Income Tax (PCIT) invoked Section 263, deeming the assessment order passed under Section 143(3) as erroneous and prejudicial to the interest of the revenue. The PCIT argued that the Assessing Officer (AO) failed to carry out necessary inquiries regarding the receipt of shares as a gift and their taxability. The PCIT directed the AO to re-examine the issue, including the applicability of Section 68 if the transaction was found invalid.

The Tribunal found that the AO had made adequate inquiries during the assessment proceedings. The AO had examined the nature of the business, details of partners, property transferred, income arising from the property, facts of the gift, confirmations from donors, transfer of shares in the demat account, and the taxability of the gift under Section 56(2)(viia). The Tribunal held that the AO's order was neither erroneous nor prejudicial to the revenue's interest, as the AO had made all relevant and due inquiries.

2. Taxability of Shares Received by Way of Gift under Section 56(2)(viia) of the Income-tax Act, 1961
The assessee received 6,58,97,757 shares of Wockhardt Limited as a gift from three companies. The assessee claimed that these shares were not taxable under Section 56(2)(viia) as Wockhardt Limited is a listed company in which the public are substantially interested. The AO accepted this claim during the assessment proceedings.

The Tribunal upheld the AO's view, stating that the provisions of Section 56(2)(viia) do not apply to shares of a company in which the public are substantially interested. The Tribunal noted that Wockhardt Limited is a listed company, and the shares were transferred through a demat account, fulfilling all legal requirements. Therefore, the gift was a capital receipt and not taxable under Section 56(2)(viia).

3. Applicability of Section 68 of the Income-tax Act, 1961
The PCIT also directed the AO to examine the applicability of Section 68 if the transaction was not found to be a valid gift. The Tribunal found that the PCIT had not provided the assessee with an opportunity to address the applicability of Section 68 during the revisionary proceedings. Moreover, the Tribunal held that Section 68, which deals with unexplained cash credits, was not applicable as the transaction involved shares, not cash.

Conclusion
The Tribunal quashed the order passed by the PCIT under Section 263, holding that the AO had made all necessary inquiries, and the assessment order was neither erroneous nor prejudicial to the revenue's interest. The Tribunal also held that the shares received as a gift were not taxable under Section 56(2)(viia) and that Section 68 was not applicable to the transaction. The appeal filed by the assessee was allowed, and the stay application was dismissed as infructuous.

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