2023 (2) TMI 49 - AT - Income Tax

Unexplained expenditure - payment of interest in cash which has not been recorded in the books of accounts - AR submitted that this enhancement of the assessment by the Ld. CIT (A) was made without providing any proper opportunity to the assessee - HELD THAT - In this case, we find that no such opportunity was provided to the assessee. Therefore, following the principles of natural justice, we are of the considered view that the assessee shall be provided a reasonable opportunity with respect to enhancement of disallowance of interest - Accordingly, in order to provide a reasonable opportunity, we remit the issue back to the Ld. CIT(A) for deciding the issue afresh - Ground raised by the assessee is allowed for statistical purposes. Addition u/s 56(2) - allotment of shares - allegation that, appellant had received shares for a sum less than the FMV - HELD THAT - In the instant case it is established that the assessee is holding 99.68% of the equity shares in the subsidiary company viz., M/s. UTPL. The assessee company being the holding company fully controls the management and affairs of M/s. UTPL. It is also noted that the entire assets and liabilities of the subsidiary company also belong to the assessee company as being a major shareholder and also the holding company. Considering the relationship between the assessee company and M/s. UTPL the allotment of the further equity shares in M/s. UTPL (subsidiary company) to the assessee company (holding company) does not alter neither the share holding pattern nor the ownership of the assets by the holding company. Section 56(2)(viia) is being introduced as an anti-abuse measure pursuant to abolition of Gift Tax Act. In the instant case, the assessee has made payments towards share application money in the earlier years to the subsidiary company which was not disputed by the Ld. Revenue Authorities. It was also submitted that only the allotment was made during the impugned assessment year at face value based on the share application money already made by the assessee company being the holding company. It is noted that the share application money, share capital and reserves and surplus are ownership funds and belong to the share holders. Merely by converting the share application money by allotting shares at a subsequent date cannot attract the provisions of section 56(2)(viia) as there is no change in the shareholding pattern subsequent to the allotment of shares by the subsidiary company. We are of the considered view that the provisions of section 56(2)(viia) cannot be invoked in the instant case considering the peculiar circumstances and hence we delete the addition made by the Ld. Revenue Authorities. - Decided in favour of assessee.

Issues:
1. Validity of assessment under section 153A based on search warrant.
2. Existence of incriminating material during search.
3. Legality of assessment under section 153A.
4. Disallowance of unexplained expenditure.
5. Addition of shares value under section 56(2)(viia).

Analysis:

1. Validity of assessment under section 153A based on search warrant:
The appeal challenged the assessment under section 153A, questioning the legality of the search warrant. However, the appellant withdrew this ground during the proceedings, leading to its dismissal.

2. Existence of incriminating material during search:
The appellant contested the assessment, arguing that no incriminating material was found during the search. This ground was also withdrawn by the appellant and dismissed accordingly.

3. Legality of assessment under section 153A:
The appellant raised concerns about the assessment under section 153A, claiming it was legally flawed. The Tribunal found merit in the argument that the enhancement of the assessment without providing a proper opportunity to the assessee violated principles of natural justice. Consequently, the issue was remitted back to the CIT(A) for a fresh decision after affording a reasonable opportunity to the assessee.

4. Disallowance of unexplained expenditure:
The appellant challenged the disallowance of interest payment not recorded in the books of accounts. The Tribunal acknowledged the lack of opportunity provided to the assessee in this regard and directed the CIT(A) to re-examine the issue after affording a reasonable opportunity to the assessee.

5. Addition of shares value under section 56(2)(viia):
The dispute centered on the addition made by the AO regarding the allotment of shares to the appellant company. The Tribunal considered the relationship between the appellant and the subsidiary company, noting the significant shareholding by the appellant. It concluded that the provisions of section 56(2)(viia) could not be invoked due to the holding-subsidiary relationship, and the addition made by the Revenue Authorities was deleted.

In conclusion, the Tribunal partly allowed the appeal, addressing various grounds raised by the appellant and providing detailed reasoning for each issue. The decision highlighted the importance of procedural fairness and legal interpretation in tax assessments.

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