2024 (1) TMI 1183 - AT - Income Tax

Revision u/s 263 - large share premium received during the year under consideration - valuation of shares and the applicability of Section 56(2)(viib) - PCIT held that the assessment records reflect complete lack of enquiry on the issue of fair market value of the shares issued during the year , as the order revolves only around the transaction of EPF/ESI Contribution and the assessment order is cryptic and non-speaking - HELD THAT - For the purpose of determination of fair value, the Assessee produced Valuation Report prepared under Rule 11UA of Income Tax Rule 1962. The said valuation has been prepared by the Chartered Accountant based on the books of account, financial statements and other records of the Company drawn up to 26/02/2015. Assessee produced audited balance sheet before the A.O. as on 31/03/2015 and furnished balance sheet as on 02/03/2015, but the audited balance sheet has been disbelieved by the PCIT on the ground that the balance sheet as on 02/03/2015 has not been approved by the Annual General Meeting the same cannot be considered for the purpose of Rule 11UA of the Rules. The said observation of the Ld. PCIT is not supported by any of the provisions of law. On the contrary, the Rule 11UA of the Rules does not mentions the pre-condition of approval of the balance sheet by the Annual General Meeting. Therefore, the above finding of the Ld. PCIT is found to be perverse. As assessee has already produced all the details in respect of the issue of large share premium received during the year under consideration at the time of original assessment proceedings itself which has been already dealt by the A.O. and decided in favour of the Assessee CIT(A) has committed error in exercising the power conferred u/s 263 - Decided in favour of assessee.

Summary

Issues involved:
The issues involved in the judgment are:
1. Validity of the order passed by the Principal Commissioner of Income Tax under section 263 of the Income Tax Act, 1961.
2. Application of Section 56(2)(viib) of the Act regarding valuation of shares.
3. Compliance with mandatory procedures and principles under the provisions of the Act.

Issue 1: Validity of the order under section 263:
The appeal was filed by the assessee against the order of the Principal Commissioner of Income Tax, Delhi-7, dated 30/03/2021 for Assessment Year 2015-16. The grounds of appeal included contentions that the order was erroneous, arbitrary, and against the principles of natural justice. The assessee argued that there was a lack of proper opportunity to be heard and that the order was based on a mere change of opinion without satisfying the necessary conditions. The Tribunal found that the assessment order was not erroneous, and thus, the order passed under section 263 of the Act was set aside.

Issue 2: Application of Section 56(2)(viib) regarding valuation of shares:
The case involved scrutiny of the large share premium received during the year and the valuation of shares issued by the assessee company. The Principal Commissioner observed a lack of enquiry on the fair market value of the shares during the assessment proceedings. The PCIT cancelled the assessment order and directed a fresh assessment. The Tribunal noted that the assessee had provided detailed documents regarding the share allotment and creditworthiness of the share applicant during the original assessment proceedings. The PCIT's decision to disregard the audited balance sheet and valuation report prepared by a Chartered Accountant was found to be erroneous, as there was no legal requirement for approval by the Annual General Meeting. Consequently, the Tribunal allowed the grounds of appeal related to this issue.

Issue 3: Compliance with mandatory procedures and principles:
The PCIT was criticized for not obtaining a separate valuation certificate for calculating the fair market value of shares and disregarding the valuation certificate issued by a Chartered Accountant. The Tribunal noted that the fair market valuation of shares should have been done by an expert under section 142A of the Act. However, the PCIT's decision to cancel the assessment order was based on incorrect grounds. Therefore, the Tribunal set aside the order passed under section 263 of the Act.

Separate Judgment:
The Tribunal, comprising Dr. B.R.R. Kumar, Accountant Member, and Shri Yogesh Kumar U.S., Judicial Member, pronounced the judgment on 24th January, 2024.