2022 (8) TMI 1139 - HC - Income Tax

Revision u/s 263 - as per CIT AO has not examined the applicability of Section 56(2)(viib) read with Rule 11(U) and Rule 11UA - Commissioner held that with respect to fair market value of unquoted equity shares, the valuation provided under Rule 11UA (c)(b) has to be adopted and the valuation to be accordingly worked out and also opined that the assessing officer has not verified the computation of fair market value of the shares since relevant and tangible material was not placed before the assessing officer by the assessee during the course of assessment proceedings under Section 143(3) - HELD THAT - What weighed in the mind of the AO appears to be as to whether the case of the assessee was a case of artificially rising of the capital by circular transactional. There was no such allegation when the Assessing Officer issued the questionnaire. If such is the case, we find that the note is of no consequence with regard to the fact in issue and therefore, the note requires to be ignored. The note also cannot be construed to be a rectification of the assessment order as the Assessing Officer does not state that he has invoked his power under Section 154 of the Act. Therefore, we are of the view that the learned Tribunal committed a serious error in reversing the order passed by the Principle Commissioner of Income Tax, II Kolkata in exercise of his powers under Section 263 of the Act. It was submitted on behalf of the respondent assessee that the Income Tax Department cannot sit in the arm chair of a businessman and commercial expediency has to be seen from the view point of the businessman. Such issue does not arise for consideration in this appeal nor it was the case of the assessee before the Commissioner that the Commissioner is purporting to take business decisions on behalf of the assessee. It is no longer res integra that reasons provide a live link between conclusion and evidence. This vital link is the safeguard against arbitrariness and prejudice to the interests, is a manifestation of the mind of a quasi-judicial authorities, Tribunal or a Court and it is a tool for judging validity of an order and, therefore giving reasons is an essential element of administration of justice. Thus, in the absence of any reasons given by the Assessing Officer by recording satisfaction as mandated under Section 56 (2)(viib) of the Act, the order passed by the Tribunal calls for interference. Accordingly, the appeal filed by the revenue is allowed and the order passed by the Tribunal is set aside and the order passed by the Principal Commissioner of Income Tax-II Kolkata is restored and the Assessing Officer is directed to comply with the directions contained in paragraph 6 of the said order by passing a reasoned and speaking order after offering an opportunity of hearing to the assessee or their authorized representative either through virtual hearing or physical hearing as expeditiously as possible but not later than sixty days from the date of receipt of the server copy of this judgment

Summary

Issues Involved:
1. Whether the assessment order was erroneous and prejudicial to the interest of revenue due to non-application of Rule 11U and Rule 11UA for determining the fair market value of shares.
2. Whether the Income Tax Appellate Tribunal (ITAT) erred in allowing the appeal of the assessee by failing to appreciate the lack of proper enquiry by the Assessing Officer (AO).
3. Whether the Principal Commissioner of Income Tax (PCIT) was justified in invoking Section 263 of the Income Tax Act, 1961.

Detailed Analysis:

Issue 1: Erroneous and Prejudicial Assessment Order
The revenue argued that the AO failed to apply Rule 11U and Rule 11UA of the Income Tax Rules, 1962, in determining the fair market value of shares. The AO accepted the valuation furnished by the assessee without proper verification, resulting in an erroneous assessment order. The PCIT, upon reviewing the assessment records, found that the fair market value of the shares should have been recalculated at Rs. 23 per share instead of Rs. 150 per share as claimed by the assessee. Consequently, the PCIT issued a show cause notice under Section 263, proposing an addition of Rs. 10,16,00,000 to the total income of the assessee.

Issue 2: ITAT's Alleged Error in Allowing Assessee's Appeal
The ITAT allowed the assessee's appeal, holding that the AO had conducted a detailed enquiry and accepted the valuation of Rs. 150 per share based on the Chartered Accountant's certificate and other documents. The ITAT opined that the PCIT could not substitute his view for that of the AO without conducting an independent enquiry. The ITAT concluded that the assessment order was not prejudicial to the interest of revenue as the AO had accepted the fair market value substantiated by the assessee.

Issue 3: Justification of PCIT's Invocation of Section 263
The PCIT held that the AO did not examine the applicability of Section 56(2)(viib) read with Rule 11U and Rule 11UA, and thus, the assessment was erroneous and prejudicial to the interest of revenue. The PCIT directed the AO to re-examine the valuation and conduct a fresh assessment. The revenue contended that the AO failed to record his satisfaction regarding the fair market value of shares, which is a statutory requirement under Section 56(2)(viib).

Court's Findings:
The court emphasized the statutory mandate that the AO must record his satisfaction regarding the fair market value of shares as per Section 56(2)(viib). The court noted that the AO's assessment order did not reflect any such satisfaction or proper enquiry into the valuation method adopted by the assessee. The court held that the absence of recorded satisfaction rendered the assessment order erroneous and prejudicial to the interest of revenue.

The court found that the ITAT erred in reversing the PCIT's order under Section 263. The court reinstated the PCIT's order, directing the AO to conduct a fresh assessment by recording reasons and satisfaction as mandated under the law.

Conclusion:
The appeal filed by the revenue was allowed, the ITAT's order was set aside, and the PCIT's order was restored. The AO was directed to pass a reasoned and speaking order after offering an opportunity of hearing to the assessee, ensuring compliance with the statutory requirements under Section 56(2)(viib) and Rule 11U and Rule 11UA.