2024 (4) TMI 580 - AT - Income Tax

Revision u/s 263 - Disallowance of STCG - FMV determination of shares - assessee and eight investment companies are not directly related by virtue of shareholding - as per CIT AO has failed to verify the issue of short term capital loss declared by the assessee from sale of unquoted equity shares pertaining to eight investment companies in right perspective of law, even though, the assessee has escalated the price of the shares to derive artificial short term capital loss HELD THAT - When Fair Market Value of the shares when allotted was not on par with face value of shares, in our considered view, no prudent businessman will venture into subscribe to said shares. Further, the analysis financial statements of eight companies as explained by the PCIT clearly reveals that the valuation has been done to arrive at Fair Market Value of shares, is not in accordance with Rule 11UA of the Income Tax Rules, 1962. Although, the assessee claims that it has agreed to subscribe to shares of eight companies at face value to recover unpaid/ unsecured loans from said companies, but said claim was unsubstantiated. From the above and also from the reasons given by the PCIT in their order u/s. 263 it is abundantly clear that although, the assessee and eight investment companies are not directly related by virtue of shareholding, but because of control and management, they can be considered as related parties. Since, the transactions between the assessee and eight companies were not at arm s length price the resultant loss declared by the assessee from transfer of equity shares can at best be treated as structured transactions to derive undue benefit of short term capital loss . Although, the assessee has claimed excessive loss from sale of equity shares of eight companies and allowed to carry forward to subsequent years, the AO has failed to carry out required enquiries he ought to have been carried out in light of Explanation-2 to Sec. 263 of the Act, and thus, in our considered view, the assessment order passed by the AO u/s. 143(3) definitely becomes prejudicial to the interest of the Revenue. Therefore, no error in the findings recorded by the PCIT to set aside the assessment order passed by the AO as erroneous in so far as it is prejudicial to the interest of the Revenue and thus, we are inclined to uphold the findings of the PCIT and dismiss the appeal filed by the assessee.

Issues Involved:
1. Validity of the order passed under Sec. 263 of the I.T. Act.
2. Violation of principles of natural justice by PCIT.
3. Compliance with Sec. 53 of the Companies Act.
4. Justification of revision by PCIT.
5. Fair market value computation as per Rule 11UA(1)(c) of the IT Rules.
6. Treatment of transactions between related enterprises.
7. Condonation of delay in filing the appeal.

Summary:

Condonation of Delay:
The Tribunal condoned the delay in filing the appeal, accepting the reasons provided by the assessee as reasonable.

Validity of Sec. 263 Order:
The assessee argued that the order passed by the Principal Commissioner of Income Tax (PCIT) under Sec. 263 was wrong and contrary to law. The Tribunal found that the assessment order passed by the Assessing Officer (AO) was erroneous and prejudicial to the interest of the Revenue because the AO failed to verify the short-term capital loss declared by the assessee from the sale of unquoted equity shares.

Violation of Natural Justice:
The assessee contended that the PCIT issued the notice on one ground and passed the order on a different ground, violating the principles of natural justice. The Tribunal noted that the PCIT's order was based on the failure of the AO to examine the issue in light of relevant details, which rendered the assessment order erroneous.

Compliance with Companies Act Sec. 53:
The assessee argued that the provisions of Sec. 53 of the Companies Act prohibit the issue of shares at a discount, and any contravention is punishable. The Tribunal observed that the assessee's explanation for not issuing shares at a discount due to restrictions under Sec. 53 was not substantiated.

Justification of Revision:
The PCIT concluded that the amounts due by the eight companies were in default for more than a decade, and the companies were not creditworthy. The Tribunal upheld the PCIT's findings that the transactions were structured to derive an undue benefit of short-term capital loss.

Fair Market Value Computation:
The assessee claimed that the fair market value of the shares was computed as per Rule 11UA(1)(c) of the IT Rules. The Tribunal found that the valuation was not in accordance with Rule 11UA and that the AO failed to carry out necessary enquiries.

Transactions Between Related Enterprises:
The PCIT treated the transactions as between related enterprises. The Tribunal agreed with the PCIT's view that the transactions were not at arm's length and were structured to create an artificial short-term capital loss.

Conclusion:
The Tribunal upheld the PCIT's order, setting aside the assessment order passed by the AO as erroneous and prejudicial to the interest of the Revenue. The appeal filed by the assessee was dismissed.

Order Pronouncement:
The order was pronounced on the 14th day of February, 2024, in Chennai.

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