2018 (12) TMI 525 - AT - Income Tax

Revision u/s 263 - audit objection basis for taking up the revision - transfer of shares physically, in the event of family arrangements - excess share premium for the transactions between the relatives which required to be taxed u/s 56(2)(vii)(b) - Held that - As gone through the provisions of 56(2)(vii)(c) and this provision was brought as an anti-abuse measure, seeks to tax the understatement in consideration as the income in the hands of the recipient (of the corresponding asset) as against the donor in the case of Gift Tax Act. The transactions between close the relatives are outside the scope of application of 56(2)(vii)(c). The legislature in its wisdom excluded the transaction of close relatives for the purpose of taxation under the income from other sources. Even the gifts received from the close relatives u/s 56(2)(v) are outside the scope of 56(2). Though the shares are allotted to the assessee, the entire shareholding of the company is retained by the family and no share was allotted to the outsiders. In this case, though the assessee had received the excess shares, renouncement was from the close relatives and the assessee is at liberty to transfer the shares to other relatives or shareholders at any point of time without attracting the taxation u/s 56(2)(vii)(c). Therefore, surrender of the rights of the close relatives in favour of the another close relative is covered for exemption u/s 56(2)(vii)(c) of the Act. In the basis of audit objection in the instant case, it is evident from the order u/s 263 that the case was taken up for revision on the basis of audit objection. The Revenue did not bring any other decision of Hon ble Apex Court or the jurisdictional High Court to support their view. Therefore, respectfully following the decisions cited supra, we hold that the audit objection is not the basis for taking up the revision under section 263 and the Pr.CIT is not permitted to take up the case for revision only on the basis of audit objection. Respectfully following the view taken in SOHANA WOOLLEN MILLS. 2006 (9) TMI 157 - PUNJAB AND HARYANA HIGH COURT and the Coordinate Bench of ITAT Chandigarh, we are unable to sustain the order of the Ld. Pr. CIT and accordingly, we set aside the order of the Ld.Pr. CIT and allow the appeal of the assessee. Since we have decided the appeal in favour of the assessee on application of section 56(2)(vii)(c) of the Act in case of close relatives and on audit objection, we consider it is not necessary to adjudicate the remaining grounds/ propositions put forth by the Ld.AR during the appeal hearing. Accordingly, the appeal of the assessee is allowed.

Summary

Issues Involved:
1. Application of Section 56(2)(vii)(c) of the Income Tax Act, 1961.
2. Validity of revision under Section 263 based on audit objection.
3. Relationship between shareholders and the applicability of the proviso to Section 56(2)(vii)(c).

Detailed Analysis:

Application of Section 56(2)(vii)(c) of the Income Tax Act, 1961:
The assessee received 1,50,000 shares from M/s Jai Maakali Poultry Products at ?100 per share, while the fair market value was ?416.38 per share. The Principal Commissioner of Income Tax (Pr. CIT) observed that the income was undercomputed by ?4,74,57,000 (?316.38 x 1,50,000 shares). The Pr. CIT held that the provisions of Section 56(2)(vii)(c) were clearly attracted as the assessee received tangible property (shares) for less than the fair market value, increasing his shareholding from 76% to 91%. The assessee argued that only the excess shares (36,150) should be considered for taxation, not the entire 1,50,000 shares, and that Section 56(2)(vii)(c) should not apply as the other shareholders had renounced their rights.

Validity of Revision Under Section 263 Based on Audit Objection:
The assessee contended that the revision under Section 263 was based on an audit objection, which cannot lead to an inference that the order of the Assessing Officer (AO) was erroneous or prejudicial to the interest of the revenue. The Pr. CIT justified the revision, stating that the AO had not examined the issue during the assessment proceedings, and the assessment was made without proper inquiry or verification. The Tribunal, however, observed that the revision was indeed initiated based on an audit objection, and as per legal precedents, the Pr. CIT cannot take up the case for revision solely on this basis.

Relationship Between Shareholders and Applicability of the Proviso to Section 56(2)(vii)(c):
The assessee argued that all shareholders were close relatives, and transactions between close relatives are exempt under Section 56(2)(vii)(c). The Tribunal noted that the company was closely held, with all shareholders being legal ascendants or descendants, and hence, the transaction fell within the exemption provided for close relatives. The Tribunal concluded that the provisions of Section 56(2)(vii)(c) did not apply as the renouncement of shares was from close relatives, and the entire shareholding remained within the family.

Conclusion:
The Tribunal allowed the appeal of the assessee, setting aside the order of the Pr. CIT. It held that Section 56(2)(vii)(c) did not apply to the transaction as it was between close relatives, and the revision under Section 263 based on audit objection was not permissible. Consequently, the entire addition of ?4,74,57,000 was deleted. The appeal was decided in favor of the assessee, and the Tribunal did not find it necessary to adjudicate the remaining grounds.