2025 (1) TMI 35 - AT - Income Tax

Revision u/s 263 - valuation of shares and the premium charged - PCIT noted that AO while passing the scrutiny assessment order rejected the valuation report submitted by the merchant banker and adopted fair value of shares at face value of Rs. 10 per share thereby brought excess share premium to tax - HELD THAT - While making an assessment, the assessing officer has varied role to play. He is the investigator, prosecutor as well as adjudicator. As an adjudicator he is an arbitrator between the revenue and the taxpayer and he has to be fair to both. His duty to act fairly requires that when he enquires into a substantial matter like the present one, he must record a finding on the relevant issue giving, his reasons therefore, which is absent in the present facts of the case. Merely by passing an order sheet entry, the Ld.AO accepted the value as per the valuation report to be the market value and admits that no further enquiry has been made. It is settled law that while making assessment on assessee, the ITO acts in a quasi-judicial capacity. An assessment order is amenable to appeal by the assessee and to revision by the Commissioner under Sections 263 and 264. Therefore, a reasoned order on a substantial issue is legally necessary. In the present facts of the case, the order passed by the Ld.AO, therefore becomes erroneous because enquiry has not been made regarding the share valuation report based on which the assessee determined the share value at premium. It was incumbent on him to verify by making necessary enquiries, more so when in the immediately preceeding assessment year in assessee s own case the valuation report by the merchant banker was rejected on similar facts. Thus, we hold that provision of section 263 has been rightly invoked - Decided against assessee.

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment include:

Whether the order passed by the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income Tax Act, 1961, was erroneous and prejudicial to the interest of the revenue.
Whether the Assessing Officer (AO) conducted sufficient inquiries regarding the valuation of shares and the premium charged, and whether the AO's acceptance of the valuation report was justified.
Whether the PCIT was correct in exercising revisionary jurisdiction under Section 263 of the Income Tax Act, 1961, based on the AO's alleged failure to conduct proper inquiries or verification.
Whether the principles of res judicata apply to the assessment years under consideration, given the differing factual circumstances between the years.
Whether the PCIT's directions to bring the share premium to taxation were appropriate and whether the AO should conduct a fresh assessment with proper verification.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of PCIT's Order under Section 263

Legal Framework and Precedents: Section 263 of the Income Tax Act allows the PCIT to revise an order if it is erroneous and prejudicial to the interest of the revenue. The explanation to Section 263 deems an order erroneous if it is passed without making necessary inquiries.
Court's Interpretation and Reasoning: The court held that the AO's order was erroneous because it lacked sufficient inquiry into the valuation of shares and the premium charged. The PCIT was justified in invoking Section 263.
Key Evidence and Findings: The AO accepted the valuation report without further verification, despite discrepancies in financial projections and actual financials.
Application of Law to Facts: The court found that the AO's failure to verify the valuation report constituted an erroneous order, justifying the PCIT's intervention under Section 263.
Treatment of Competing Arguments: The court rejected the assessee's argument that the AO had adopted a plausible view, emphasizing the lack of inquiry.
Conclusions: The PCIT's order under Section 263 was upheld as the AO's order was deemed erroneous and prejudicial to the revenue.

Issue 2: Sufficiency of AO's Inquiry

Legal Framework and Precedents: The AO is required to conduct inquiries and verify claims during assessment proceedings, especially when discrepancies are evident.
Court's Interpretation and Reasoning: The court noted that the AO's acceptance of the valuation report without inquiry was inadequate, given the financial discrepancies.
Key Evidence and Findings: The AO's order sheet entries indicated acceptance of the valuation without further investigation.
Application of Law to Facts: The court determined that the AO's lack of inquiry rendered the order erroneous, supporting the PCIT's revisionary action.
Treatment of Competing Arguments: The court dismissed the assessee's claim that the AO's view was plausible, focusing on the absence of inquiry.
Conclusions: The AO's failure to conduct sufficient inquiry justified the PCIT's revision under Section 263.

Issue 3: Applicability of Res Judicata

Legal Framework and Precedents: Each assessment year is separate, and principles of res judicata do not apply to tax assessments.
Court's Interpretation and Reasoning: The court emphasized that the facts of each assessment year must be considered independently.
Key Evidence and Findings: The court noted differences in the factual circumstances between the years under consideration.
Application of Law to Facts: The court concluded that the PCIT's action was justified based on the specific facts of the assessment year in question.
Treatment of Competing Arguments: The court rejected the assessee's reliance on previous assessments, highlighting the distinct facts of each year.
Conclusions: The PCIT's revisionary action was valid, as each assessment year stands on its own facts.

Issue 4: Directions for Fresh Assessment

Legal Framework and Precedents: The PCIT can direct the AO to conduct a fresh assessment with proper verification under Section 263.
Court's Interpretation and Reasoning: The court found that the PCIT's directions for a fresh assessment were appropriate, given the lack of inquiry by the AO.
Key Evidence and Findings: The court noted that the AO's acceptance of the valuation report was not based on proper verification.
Application of Law to Facts: The court directed the AO to conduct a fresh assessment with adequate verification of the valuation report.
Treatment of Competing Arguments: The court emphasized the need for a thorough investigation, dismissing the assessee's objections to the PCIT's directions.
Conclusions: The court upheld the PCIT's directions for a fresh assessment, ensuring proper verification of the valuation report.

3. SIGNIFICANT HOLDINGS

Verbatim Quotes of Crucial Legal Reasoning: "The order under section 143(3) r.w.s 144B of the Act dated 25.9.2021 is erroneous in so far it is prejudicial to the interest of the revenue."
Core Principles Established: The necessity of conducting adequate inquiries during assessment proceedings, especially when discrepancies are apparent, and the justification for invoking Section 263 when such inquiries are lacking.
Final Determinations on Each Issue: The PCIT's order under Section 263 was upheld, the AO's lack of inquiry was deemed erroneous, the principles of res judicata were inapplicable, and the directions for a fresh assessment were validated.

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