2020 (2) TMI 649 - AT - Income Tax

Revision u/s 263 - underassessment of long term capital gain - shares sold to a fellow director were highly undervalued, and the Long term capital gains on the sale of 3025 shares to Amit Indubhushan Bakshi was under stated - HELD THAT - Since sale of shares at face value was by mutual understanding and by consent of all directors because Amit Indubhushan Bakshi was instrumental in getting the investor who contributed allot for benefit of company. We do not find any illegality in transfer of shares at face value i.e. ₹ 10 per share. As relying on GILLANDERS ARBUTHNOT AND CO. 1972 (9) TMI 13 - SUPREME COURT , S GAURANGINIBEN S. SHODHAN INDL. 2014 (2) TMI 78 - GUJARAT HIGH COURT and M/S. MORARJEE TEXTILES LTD. 2017 (2) TMI 122 - BOMBAY HIGH COURT we allow appeal of the assessee and cancel order passed by the ld. Pr. CIT u/s. 263.

Issues Involved:
1. Invocation of Section 263 by the CIT.
2. Setting aside of scrutiny assessment for fresh assessment.
3. Valuation of shares sold at a lower price.
4. Fulfillment of conditions under Section 54F for claiming deductions.
5. Verification of deposits in the Capital Gains account.
6. Non-discussion of verified issues by AO.
7. Entitlement to deduction under Section 54F on merits.

Detailed Analysis:

1. Invocation of Section 263 by the CIT:
The CIT invoked Section 263 of the Income Tax Act, holding the scrutiny assessment order under Section 143(3) as erroneous and prejudicial to the interest of revenue. The CIT directed the Assessing Officer (AO) to frame a fresh order, which the assessee challenged as unjust and against the principles of natural justice.

2. Setting Aside of Scrutiny Assessment:
The CIT set aside the scrutiny assessment for framing a fresh assessment after proper inquiries and verification of issues already examined by the AO and the audit party. The CIT failed to appreciate that the AO had passed the order after a thorough scrutiny of documents.

3. Valuation of Shares Sold at a Lower Price:
The CIT held that the sale of shares to the Managing Director at a substantially lower price resulted in non-reporting of capital gains. The AO failed to consider the valuation report valuing shares at ?79,020 per share or the price of ?87,217.75 charged per share to a foreign buyer. The assessee argued that the sale at face value was by mutual understanding and consent of all directors, as the Managing Director was instrumental in getting the investor.

4. Fulfillment of Conditions Under Section 54F:
The CIT held the order as erroneous due to the AO's failure to inquire whether the appellant fulfilled all the conditions of Section 54F for claiming the deduction, despite the submission of all relevant documents during the assessment proceedings.

5. Verification of Deposits in the Capital Gains Account:
The CIT directed the AO to verify deposits in the Capital Gains account, which had already been examined by the AO and the audit party. The assessee contended that non-discussion of verified issues does not mean the order is erroneous or prejudicial to the interest of revenue.

6. Non-Discussion of Verified Issues by AO:
The assessee argued that the non-discussion of issues verified and accepted by the AO and subsequently by the audit party after proper scrutiny does not render the order erroneous or prejudicial to the interest of revenue.

7. Entitlement to Deduction Under Section 54F on Merits:
The assessee contended that even on merits, having fulfilled all the conditions of Section 54F of the Act, they were entitled to the deduction of the cost of a new residential house from the resultant capital gain.

Conclusion:
The Tribunal considered the detailed submissions and evidence presented by the assessee. It noted that the sale of shares at face value was by mutual understanding and consent of all directors, as the Managing Director was instrumental in getting the investor. The Tribunal found no illegality in the transfer of shares at face value. Respectfully following the judgments of the High Court and Supreme Court cited by the assessee, the Tribunal allowed the appeal and canceled the order passed by the CIT under Section 263. The appeal filed by the assessee was allowed, and the order was pronounced in open court on 31-12-2019.

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