2022 (1) TMI 116 - AT - Income Tax

Revision u/s 263 by CIT - As per CIT AO has failed to carry out proper investigation of the premium money as well as the debentures/shares - assessment was selected under CASS - As per CIT since the debenture carries zero percent interest and premium has been received, which does not need to be repaid, hence, the same represents income which is to be taxed in the year of receipt itself - HELD THAT - Merely because the assessee issued the CCD, which is hybrid instrument to arrange corporate funding thru group concerns, it does not mean that it has indulged in generation of unaccounted money. In this case, there is no finding by any authorities that the assessee has indulged in such activities except that they received premium in issue of CCDs and recorded the same under the head Reserves and Surplus. As discussed above, the assessee cannot utilize the premium other than the manner specified in section 52 of Companies Act, 2013. There is proper safety and binding specified in the Companies Act to monitor the funds generated by the companies. The tax authorities should apply the provisions selectively rather than on general terms without analyzing the real impact on management of funds and taxability. As discussed assessment was selected under CASS, main object of verification of issue of debentures on premium and low income in comparison to high investment in unlisted equities. In relation to above selection of the case, the Assessing Officer has issued several notices and the assessee has submitted relevant information as called for. The Ld. Pr. CIT considered the above verification and the information submitted by the assessee as improper and non-verification of share premium by the Assessing Officer to assume jurisdiction under section 263 of the Act. The Explanation 2 to section 263 of the Act was invoked by the Ld. Pr. CIT to come to the conclusion that the assessment order is passed without making enquiries or verification. After considering the above facts, in our considered view, the Assessing Officer has made enquiries and carried on with the verification even though passed non-speaking order. The Explanation 2 to section 263 of the Act can be invoked only when no enquiries or verification is carried on otherwise it cannot be invoked. In the given case, the Assessing Officer has carried on the enquiries and verification to his satisfaction which may not be to the satisfaction to the ld. Pr. CIT. Therefore, assumption of jurisdiction fails. See M/S. BRAHMA CENTRE DEVELOPMENT PVT. LTD. 2021 (7) TMI 347 - DELHI HIGH COURT - Decided in favour of assessee.

Summary

Issues Involved:
1. Jurisdiction under Section 263 of the Income Tax Act, 1961.
2. Examination of the valuation of share premium.
3. Applicability of Section 56(2)(viib) of the Income Tax Act.
4. Classification and treatment of Compulsorily Convertible Debentures (CCDs) and securities premium.
5. Adequacy of enquiry conducted by the Assessing Officer (AO).

Detailed Analysis:

1. Jurisdiction under Section 263 of the Income Tax Act, 1961:
The Principal Commissioner of Income Tax (Pr. CIT) assumed jurisdiction under Section 263, holding that the assessment order dated 15.12.2016, passed under Section 143(3), was erroneous and prejudicial to the interest of the revenue. The Pr. CIT observed that the AO failed to carry out proper investigation regarding the valuation of the share premium received during the year and issued a notice under Section 263.

2. Examination of the Valuation of Share Premium:
The Pr. CIT noted that the assessee issued and allotted zero percent CCDs at a face value of ?10 each with a premium of ?90 per CCD to Edisons Utility Works Pvt. Ltd., resulting in a securities premium of ?605.70 crore. The AO did not examine the valuation of such a huge share premium received during the year. The Pr. CIT held that the AO failed to verify the valuation report and the debenture deed, which was necessary to assess the genuineness of the transaction.

3. Applicability of Section 56(2)(viib) of the Income Tax Act:
The Pr. CIT argued that the receipt of securities premium of ?605.70 crore is taxable under Section 56(2)(viib) of the Act, which stipulates the determination of market value of shares, including both equity and preference shares. The Pr. CIT concluded that the assessee failed to justify the share premium received, thus infringing the aforementioned section of the Act.

4. Classification and Treatment of CCDs and Securities Premium:
The Pr. CIT treated the CCDs issued by the assessee as equivalent to the issue of equity shares, arguing that the premium received should be classified as income. The assessee contended that the premium on CCDs is a capital receipt and should be classified under reserves and surplus, as per the provisions of the Companies Act, 1956. The Pr. CIT's view was that the premium received on CCDs should be treated as a debt and reported as loans and advances in the Balance Sheet.

5. Adequacy of Enquiry Conducted by the AO:
The Pr. CIT held that the AO did not conduct a proper enquiry regarding the receipt of share premium and the valuation of CCDs, making the assessment order erroneous and prejudicial to the interests of the revenue. The assessee argued that all relevant information was submitted during the assessment proceedings, and the AO made full enquiries into the issue of CCDs, including the receipt of premium.

Judgment:
The Tribunal considered the submissions and material on record, noting that the assessee issued and allotted zero percent CCDs at a face value of ?10 each with a premium of ?90 per CCD to Edisons Utility Works Pvt. Ltd. The funds raised were utilized for investment in equity shares of Essel Publishers Pvt. Ltd. The Tribunal observed that the assessment was selected for scrutiny under CASS for reasons including "Large share premium received" and "Low income in comparison to high investment in unlisted equities."

The Tribunal found that the AO issued several notices and the assessee provided relevant information, including details of the issue of CCDs, financial statements, bank statements, and justification for the premium. The Tribunal held that the AO made enquiries and carried out verification, even though the assessment order was non-speaking.

The Tribunal concluded that the Pr. CIT's assumption of jurisdiction under Section 263 was not justified, as the AO conducted enquiries and verification to his satisfaction. The Tribunal set aside the impugned order passed by the Pr. CIT, allowing the grounds of appeal raised by the assessee.

Conclusion:
The Tribunal allowed the assessee's appeal, holding that the Pr. CIT's assumption of jurisdiction under Section 263 was not justified, as the AO conducted adequate enquiries and verification regarding the issue of CCDs and the receipt of share premium.