2023 (1) TMI 179 - HC - Income Tax

Revision u/s 263 by CIT - sale of shares held by the respective appellants in Sri Solaiandavar Textile Mills Limited was sold to their father for a sum of Rs.4/- per share as against the nominal value of share at Rs.10/- per share was against the market value of Rs.19.33 per share - HELD THAT - We are of the view that the order passed by the Assessing Officer while finalising the assessment under Section 143(3) of the Income Tax Act, 1961 has indeed resulted in erroneous order which were prejudicial to the interest of the revenue. The Supreme Court in the case of Malabar Industrial Co. Ltd 2000 (2) TMI 10 - SUPREME COURT held that an order can be said to be erroneous, if no inquiries or verification are made by the AO before passing an order; or if an order is passed without application of mind i.e. non application of mind to relevant material; or if an order is not in accordance with fact or law i.e. if there is an incorrect assumption of facts or an incorrect application of law. The facts of the present case reveal that the invocation of power under Section 263(3) was justified. Though the said company viz., M/s.Sri Solaiandaver Textile Mills Limited had closed down its business in the year 2002, it was endowed with sufficient valuable assets in the form of land. Therefore, the value of the shares ought to have been properly determined by the appellant and the Assessing Officer. The value of the share has been under valued by making it seem that the transfer to their father was only at Rs.4/- per share without any records. When the records were culled out by the Commissioner, the value of the share was re-determined at Rs.19.33 per share as against the nominal value of Rs.10/- per share. We therefore, find no reason to differ with the views expressed by the Tribunal the value of the shares were undervalued. We therefore answer the substantial questions of law against the appellant and in favour of the Income Tax Department. Appeal dismissed.

Issues Involved:
1. Whether the Tribunal was right in sustaining the order of revision passed by the Commissioner of Income Tax by invoking the provisions of Section 263 of the Income Tax Act, 1961.
2. Whether the valuation of shares sold by the appellants to their father was correctly assessed.
3. Whether the transactions involving the sale of shares were genuine or a sham.
4. Whether the orders passed by the Assessing Officer were erroneous and prejudicial to the interest of the revenue.

Issue-wise Detailed Analysis:

1. Sustaining the Order of Revision under Section 263:
The Tribunal upheld the Commissioner of Income Tax's invocation of Section 263, which allows for the revision of assessment orders if they are found to be erroneous and prejudicial to the interest of the revenue. The appellants contended that the Assessing Officer had taken a plausible view and accepted the valuation declared by them. However, the Tribunal found that the Assessing Officer did not make proper inquiries or reach a logical conclusion about the genuineness of the loss claimed on the sale of shares. The Tribunal agreed with the Commissioner that the assessment order was erroneous and prejudicial to the revenue, justifying the revision under Section 263.

2. Valuation of Shares:
The Tribunal noted that the shares of Sri Solaiandavar Textile Mills Limited were sold by the appellants to their father at Rs.4 per share, significantly lower than the break-up value of Rs.19.33 per share. The Assessing Officer failed to compute the break-up value and verify the intrinsic value of the shares. The Tribunal agreed with the Commissioner that the shares were undervalued, which reduced the taxable income of the appellants by setting off the loss against positive business income. This undervaluation was seen as prejudicial to the interests of the revenue.

3. Genuineness of the Transactions:
The Tribunal found that the transactions involving the sale of shares were a sham. The shares were sold at a value less than their face value and break-up value, and the transaction was between closely related parties (father and son). The Tribunal noted that the company had stopped its business, and there was no attraction for anyone to purchase the shares. The Tribunal upheld the Commissioner's view that the transaction was a make-believe arrangement to claim a huge capital loss, which was not genuine.

4. Erroneous and Prejudicial Orders:
The Tribunal concluded that the orders passed by the Assessing Officer were indeed erroneous and prejudicial to the interest of the revenue. The Supreme Court's decision in Malabar Industrial Co. Ltd. v CIT was cited, which stated that an order is erroneous if no inquiries or verification are made, or if it is passed without application of mind. The Tribunal found that the Assessing Officer did not make necessary inquiries or verify the value of the shares, leading to an incorrect assumption of facts and an erroneous order.

Conclusion:
The Tribunal upheld the Commissioner's orders under Section 263, finding that the assessment orders were erroneous and prejudicial to the revenue. The appeals were dismissed, and the substantial questions of law were answered against the appellants and in favor of the Income Tax Department. The Tribunal emphasized the need for proper valuation and genuine transactions to avoid prejudicing the revenue's interests.

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