2023 (3) TMI 553 - AT - Income Tax

Revision u/s 263 - PCIT observed that, AO had failed to examine and verify the issues related to share premium received and interest earned, which issues had remained unaddressed - justification behind rejecting the declared value of the shares - HELD THAT - We are of the considered opinion that Assessee followed the DCF Method for valuing the shares, whereas the Ld. PCIT utilised the NAV Method to do so.This action of the Ld. PCIT is in direct contravention of the provisions of Explanation (a)(i) to section 56(2)(vii) of the I.T. Act read with rule 11UA(2)(b) of the I.T. Rules. AO could not have changed the method of valuation opted by the Assessee, in view of the statutory mandate of rule 11UA(2) of the Rules.The above is in keeping with the caselaws discussed hereinabove. Therefore, there was no error in the Assessing Officer's Order calling for revision under section 263 of the I.T. Act. Whether or not the AO inquired into the interest income earned by the Assessee on which, TDS was claimed, whereas as per the Ld. PCIT, no interest income was offered to tax by the Assessee? - In the present case, the Assessee's hotel was under construction - Had the fixed deposits not been made, the Assessee would not have been able to obtain bank guarantee against the EPCG licenses availed while importing machinery for its hotel, which was under construction. The fixed deposits, as such, were made to facilitate the construction of the Assessee's hotel, i.e., its fixed asset. The Assessee's arrangement with regard to the interest received on the fixed deposits was an arrangement intrinsically connected with the construction of the Assessee's hotel. Assessee adjusted the interest received, reducing it from the cost of construction of its hotel. The interest was set off against the total cost of capitalization during the construction period. The interest receipt, therefore, went to reduce the cost of construction. The fixed deposits and the interest received by the Assessee thereon were directly linked with the activity of setting up the hotel of the Assessee. The interest is linked inextricably with the process of setting up of the capital structure of the Assessee-company. It must, hence, in respectful conformity with 'Bokaro Steel' 1998 (12) TMI 4 - SUPREME COURT be viewed as a capital receipt going to reduce the cost of construction. Evidently, therefore, the view taken by the AO was a possible view and the order passed by the AO in this regard was not erroneous, much less prejudicial to the interests of the Revenue. This, though, the Ld. PCIT failed to take into consideration while passing the impugned order. Accordingly, on this issue also, the order of the Ld. PCIT is reversed and the assessment order is revived. To conclude, qua both the issues, the order of the Ld. PCIT is set aside and reversed and the assessment order is revived. The grievance of the Assessee allowed.

Summary

Issues Involved:
1. Jurisdiction of PCIT under section 263 of the Income Tax Act, 1961.
2. Valuation of share premium received.
3. Treatment of interest income earned during the construction period.

Issue-wise Detailed Analysis:

1. Jurisdiction of PCIT under section 263 of the Income Tax Act, 1961:
The Assessee challenged the jurisdiction of the Principal Commissioner of Income Tax (PCIT) in issuing a notice under section 263 of the Income Tax Act, 1961. The Assessee argued that the PCIT failed to show how the assessment order passed by the Assessing Officer (AO) under section 143(3) was erroneous and prejudicial to the interest of the Revenue. The Tribunal found that the PCIT had wrongly assumed jurisdiction by not considering the detailed enquiries and verifications already conducted by the AO during the assessment proceedings. The Tribunal held that the AO had made a conscious decision based on the information and documents provided by the Assessee, and therefore, the assessment order was not erroneous or prejudicial to the interest of the Revenue.

2. Valuation of share premium received:
The PCIT contended that the AO failed to assess the share premium received by the Assessee over and above Rs. 450 per share, as per the fair market value computed under rules 11U and 11UA of the Income Tax Rules, 1962. The Assessee argued that the valuation of shares was done using the Discounted Free Cash Flow (DCF) method, which is permitted under rule 11UA(2)(b), and the AO had accepted this valuation. The Tribunal noted that the PCIT had erroneously substituted his own valuation method (Net Asset Value or NAV method) over the DCF method without confronting the Assessee. The Tribunal held that the Assessee has the option to choose the valuation method under rule 11UA(2), and the AO cannot change this method. The Tribunal cited various judicial precedents supporting the Assessee's right to choose the DCF method and concluded that the AO's acceptance of the Assessee's valuation was correct and did not warrant revision under section 263.

3. Treatment of interest income earned during the construction period:
The PCIT observed that the Assessee had earned interest income of Rs. 9,48,784 on fixed deposits made for obtaining bank guarantees against EPCG licenses but had not offered this income for taxation. The Assessee explained that the interest income was set off against the total cost of capitalization during the construction period of its hotel. The Tribunal referred to the Supreme Court decisions in "CIT vs. Bokaro Steel Ltd." and "Commissioner of Income Tax vs. Karnal Co-operative Sugar Mills Ltd." to support the treatment of such interest income as a capital receipt, which reduces the cost of construction. The Tribunal found that the AO had taken a possible view in treating the interest income as a capital receipt, and therefore, the assessment order was not erroneous or prejudicial to the Revenue's interest. The Tribunal reversed the PCIT's order on this issue as well.

Conclusion:
The Tribunal set aside and reversed the order of the PCIT on both issues, reinstating the original assessment order. The Tribunal found that the AO had conducted proper enquiries and verifications regarding the valuation of share premium and the treatment of interest income, and the assessment order was neither erroneous nor prejudicial to the interest of the Revenue. The appeal filed by the Assessee was allowed.