2023 (1) TMI 1016 - AT - Income Tax

Revision u/s 263 - absence of valid certificate under Rule 11U of the IT. Rule for the share premium received during the year was liable to be treated as income from the other sources under the provisions of section 56(2)(viib) - Assessee company issuing shares at a premium rate and company has adopted fair market value/book value of shares and premium on the basis the certificate issued under Rule 11UA of the IT and further noticed that Shri Chetan Joshi is the same CA who was appointed by the company as an auditor under section 44AB of the Act, which is a violation of the sub-Rule (a)(i) of the Rule 11UA of the I.T. Rule - HELD THAT - We have also gone through the order passed by the Ld. PCIT and noted that no inquiry was made by the Assessing Officer. We have gone through the assessment order passed by the Assessing Officer u/s 143(3) and noted that assessing officer has not discussed the issue raised by ld PCIT. It is a case of no inquiry on the part of Assessing Officer, therefore Ld. PCIT has rightly exercised his jurisdiction under section 263 of the Act. We note that company has adopted fair market value/book value of shares and premium on the basis the certificate issued under Rule 11UA of the I.T. Rule dated 01.03.2016 by the Chartered Accountant Shri Chetan Joshi (M. No. 132207). It was further noticed that Shri Chetan Joshi is the same CA who was appointed by the company as an auditor under section 44AB of the Act, which is a violation of the sub-Rule (a)(i) of the Rule 11UA of the I.T. Rules. Thus, in absence of valid certificate under Rule 11U of the I.T. Rules for the share premium of Rs.1,49,60,000/- received during the year should be liable to be treated as income from the other sources under the provisions of section 56(2)(viib) - Assessing Officer has not examined this issue. The expression prejudicial to the interest of the revenue is of wide import and is not confined to merely loss of tax. The term erroneous means a wrong/incorrect decision deviating from law. This expression postulates an error which makes an order unsustainable in law. Therefore, we hold that order passed by the Assessing Officer is erroneous and prejudicial to the interest of Revenue, hence we confirm the findings of ld PCIT. Appeal filed by the assessee is dismissed.

Summary

Issues Involved:
1. Validity of the order passed by the Principal Commissioner of Income Tax (Pr. CIT) under section 263 of the Income Tax Act, 1961.
2. Whether the Assessing Officer's (AO) order was erroneous and prejudicial to the interest of the revenue.
3. Compliance with Rule 11UA of the Income Tax Rules regarding the valuation of shares issued at a premium.

Detailed Analysis:

1. Validity of the Pr. CIT's Order under Section 263:
The assessee challenged the correctness of the order passed by the Pr. CIT under section 263 of the Income Tax Act, 1961. The Pr. CIT exercised jurisdiction under section 263, observing that the AO's order was erroneous and prejudicial to the interest of the revenue. The Pr. CIT noted that the valuation certificate for shares issued at a premium was obtained from the statutory auditor, which violated sub-Rule (a)(i) of Rule 11UA of the Income Tax Rules. The Pr. CIT initiated proceedings by issuing a show-cause notice, to which the assessee responded, admitting a clerical lapse and submitting a valuation certificate from an independent CA. However, the Pr. CIT rejected this contention, stating the genuineness of the certificate needed verification by the AO.

2. Erroneous and Prejudicial Nature of the AO's Order:
The Pr. CIT held that the AO's order dated 13.11.2019 was erroneous and prejudicial to the interest of the revenue because the AO accepted the valuation of shares without proper inquiry or verification. The Pr. CIT emphasized that the AO failed to investigate the facts required to compute the taxable income accurately. This lack of inquiry rendered the AO's order unsustainable in law. The Pr. CIT relied on judicial precedents, including the Delhi High Court's decision in CIT Vs. Nagesh Knitwears P. Ltd, which stated that an order is erroneous if the AO fails to conduct necessary inquiries or verifications.

3. Compliance with Rule 11UA of the Income Tax Rules:
The Pr. CIT observed that the company issued shares at a premium based on a valuation certificate from its statutory auditor, violating Rule 11UA of the Income Tax Rules. This rule mandates that the valuation certificate must be obtained from an accountant who is not the company's statutory auditor. The Pr. CIT noted that the AO accepted the valuation without questioning its validity, thus failing to comply with the prescribed rules. The Pr. CIT directed the AO to pass a fresh assessment order after considering all relevant issues, including the compliance with Rule 11UA.

Conclusion:
The Tribunal upheld the Pr. CIT's order, confirming that the AO's order was erroneous and prejudicial to the interest of the revenue. The Tribunal noted that the AO did not make necessary inquiries regarding the valuation of shares issued at a premium. The Tribunal dismissed the assessee's appeal, affirming the Pr. CIT's exercise of jurisdiction under section 263 of the Income Tax Act, 1961. The order was pronounced on 23/01/2023.