2024 (6) TMI 597 - AT - Income Tax

Revision u/s 263 - direction to the AO to make fresh assessment de novo after making suitable inquiries towards determination of Fair Market Value (FMV) of shares issued and consequent taxability u/s 56(2)(viib) - HELD THAT - Substantial shares have been allotted to the existing shareholders and only few shares have been allotted to the new subscribers. Shares were allotted at the premium of Rs. 40 per share based on valuation report filed by the independent valuer. In the factual backdrop, we refer to the decision rendered in the case of BLP Vayu (Projects-I) (P.) Ltd. vs. . 2023 (6) TMI 209 - ITAT DELHI wherein it was observed that object of treating excessive premium received on issue of shares as taxable income of revenue character under Section 56(2)(viib), is wholly inapplicable to issuance of shares to existing shareholders where no resultant income could be said to accrue to ultimate beneficiary, i.e., existing shareholders. The action of the AO in such facts cannot be branded as erroneous per se. No prejudice could possibly result to the interest of the revenue by charging purportedly excessive premium on fresh issue of shares to the existing shareholders either. In the absence of order being erroneous and also prejudicial to the interest of revenue, the revisional action of Pr.CIT in the context of the facts of the case does not meet the jurisdictional requirement of Section 263. A revisional action of the Pr.CIT in the context of facts of the case thus appears to be wholly unjustified and without meeting the jurisdictional requirements of Section 263 of the Act. We thus find wholesome merit in the plea of the assessee for cancellation of revisional order and restoration of the order of the AO. Appeal of the assessee is allowed.

Summary

Issues involved:
The appeal was filed against the revisional order of the Principal Commissioner of Income Tax-2, New Delhi under Section 263 of the Income Tax Act, 1961, regarding the assessment order passed by the Assessing Officer (AO) for A.Y. 2015-16.

Details of the Judgment:

1. Issue 1 - Challenge to Revisional Action:
The assessee challenged the revisional action of the Principal Commissioner, alleging that the AO did not properly examine the Fair Market Value (FMV) of shares issued, as required by Rule 11U / Rule 11UA of the Income Tax Rules, 1962. The revisional order alleged that the AO accepted the valuation report without considering all perspectives related to Section 56(2)(viib) of the Act.

2. Issue 2 - Show Cause Notice and Assessment:
The assessment order under Section 143(3) for A.Y. 2015-16 was deemed erroneous by the Principal Commissioner, who issued a Show Cause Notice (SCN) under Section 263. The notice highlighted the failure to determine the FMV of shares issued at a premium, as required by Rule 11U and Rule 11UA of the IT Rules, 1962.

3. Issue 3 - Counter to Show Cause Notice:
The assessee filed a counter to the Show Cause Notice, challenging the allegation that the AO did not consider the rules for determining FMV. The AO had allotted shares at a premium based on a valuation report, and the revisional action was deemed unjustified.

4. Issue 4 - Tribunal's Decision:
The Tribunal considered the facts and observed that most shares were allotted to existing shareholders, making the application of Section 56(2)(viib) irrelevant in this case. Referring to a previous decision, the Tribunal concluded that the AO's actions were not erroneous or prejudicial to revenue. The revisional action was deemed unjustified, and the appeal of the assessee was allowed.

In conclusion, the Tribunal found merit in the plea of the assessee, canceled the revisional order, and restored the order of the AO.