2016 (12) TMI 620 - HC - Income Tax

Validity of the order passed under section 263 - method of valuation of unlisted shares unquestioned - non-enquiry or inadequate enquiry - Held that - AO after having asked a pertinent question of the method of valuing unlisted shares in his letter dated 12th January 2000 did not pursue that line of enquiry. The required information was not furnished by the Appellant nor any explanation offered for not furnishing the same. It is also not a case where the Assessing Officer was satisfied with regard to his query by some other explanation offered by the Appellant. In fact merely asking a question which goes to the root of the matter and not carrying it further is a case of nonenquiry if the query is not otherwise satisfied while responding to another query. In the present facts the question raised has not been responded to by some explanation which would render the enquiry commenced futile. In fact the CIT in his order dated 20th March 2002 specifically exercised powers under Section 263 of the Act on the basis that the necessary information was not furnished by the Appellant in support of its claim nor the Assessing Officer enquired into the same. Thus this is a case of nonenquiry and not inadequate enquiry. Therefore the order of the Assessing Officer is certainly erroneous. There is no dispute that the order of the Assessing Officer is prejudicial to the Revenue. Thus no enquiry was conducted to find out the method of valuation of shares at 50/per share when purchased on 1st April 1996 and sold at 10/per share on 1st April 1996 substantial question of law admitted for our consideration is answered in the negative i.e. in favour of the Revenue

Summary

Issues:
Challenge to order under Section 263 of the Income Tax Act for Assessment Year 1997-98.

Analysis:
The appeal challenged the order passed by the Income Tax Appellate Tribunal (the Tribunal) for the Assessment Year 1997-98. The substantial question of law was whether the Tribunal erred in upholding the validity of the order passed under section 263 of the Act. The Appellant declared a loss of ?27.46 lakhs on dealing in shares for the said assessment year. The Assessing Officer accepted the loss and assessed the Appellant to 'Nil Income'. However, the Commissioner of Income Tax issued a show cause notice under Section 263, questioning the allowance of a loss of ?1.20 Crores arising from the purchase and sale of shares in a particular company. The Commissioner held that the transaction was a sham and directed the Assessing Officer to reframe the assessment.

The Tribunal dismissed the Appellant's appeal, stating that the Assessing Officer did not adequately investigate the basis of valuation of shares, making the original Assessment Order erroneous and prejudicial to the Revenue. The Appellant argued that the CIT's exercise of power under Section 263 was without jurisdiction, as the Assessing Officer had already examined the issue. However, the Court found that the Assessing Officer's enquiry was incomplete, as the Appellant did not provide the necessary information regarding the method of valuation of unlisted shares. The Court held that this was a case of non-enquiry, not inadequate enquiry, and therefore, the original order was erroneous and prejudicial to the Revenue.

The Court distinguished the present case from a previous judgment where inadequate enquiry was the issue, emphasizing that in this case, no enquiry was conducted regarding the valuation of shares. Consequently, the impugned order of the Tribunal was upheld, and the substantial question of law was answered in favor of the Revenue and against the Appellant. The appeal was dismissed with no order as to costs.