2025 (4) TMI 720 - AT - Income Tax

Validity of the approval granted u/s 153D - Post search assessment u/s 153A - Additions u/s 56(2)(vii) - HELD THAT - As on the very same day i.e. 27-12-2019 the draft assessment order was placed/submitted before the Ld. Addl. Commissioner and on the very same day i.e. 27-12-2019 the approval u/s 153D of the Act was granted and eventually on the very same day of granting the approval on 27.12.2019 the AO passed the assessment order under consideration. It is also a fact that the Addl. Commissioner/Approving Authority has also granted the same approval u/s 153D of the Act on the very same day in other 12 cases. Admittedly from the approval it is nowhere appearing that what evidence/document/statement/material/ proposed addition(s) etc. were examined by the Approving Authority before granting the approval. It is also not clear whether the approving authority has applied its mind and on what basis or material the approval was accorded. The aforesaid facts create the suspicion about the validity of the approval. It is the bounden duty of the AO to submit the draft assessment order well in advance/time so that approving authority will not face any immense pressure due to paucity of time. Though the statute has not provided any format for granting an approval but the approval must reflect the basis of the material and reasons on which the approval is granted. In the instant case the approval under consideration in not based on examining of any relevant documents and provisions of the Act in the context of the proposed addition and has been accorded in haste and time constrained pressure and therefore lacks application of mind and hence in cumulative effects the same suffers from perversity and impropriety and consequently un-sustainable. Thus the approval is declared as invalid in the eyes of law which would entail the assessment order as invalid being void ab-initio. Addition u/s 56(2)(viia) - shares kept as stock in trade in regular/ normal course of business for trading purposes - purchase of such shares of and the differential amount of the fair market value and purchase value - Assessee contented that Assessee company is in the business of trading of shares and the alleged shares have been purchased for the trading purposes only - HELD THAT - From the definition of capital asset as defined u/s 2(14) of the Act it is clear that any stock in trade other than any securities referred to in clause b above consumable stores or raw materials held for the purposes of his business or profession is not included in the definition of capital asset and the CBDT vide Finance (No.2) Act 2009 has introduced the provisions of sections 56(2)(vii) as a counter tax evasion mechanism to prevent laundering of unaccounted income but not to transaction made in regular course of business and made applicable only if an individual or HUF is the recipient but not to a firm or a company and therefore introducing new provision i.e. sub clause (viia) in section 56(2) of the Act vide Finance Act 2010 firm or a company (not being a company in which the public are substantially interested) were also brought into within its ambit for making the transactions undertaken in shares of a company (not being a company in which the public are substantially interested) either for inadequate consideration or without consideration. We are in agreement with Mr. Shah that the stock in trade would not be subjected to rigour provisions of section 56(2)(viia) of the Act and/or the shares held as stock in trade in regular course of business for trading purposes cannot be subjected to addition with the aid of the provisions of section 56(2)(viia) of the Act. As the Assessee has treated and disclosed the aforesaid shares of the companies as stock in trade in its financial and it is also a fact that the authorities below neither doubted the financials nor rejected the books of accounts of the Assessee in any of the provisions of the Act. The Assessee out of three stocks has sold shares of one scrip namely M/s Mecons Commotrade Ltd. Pvt. and therefore this fact also supports the claim of the Assessee qua share trading etc .It is also a fact that the Assessee has treated some of the shares as investment and some of the shares as stock in trade which also goes to show that the Assessee has given reasonable treatment to the respective shares. Further the provisions of section 56(2)(vii) and 56(2)(viia) of the Act were introduced as tax evasion mechanism to prevent the laundering of unaccounted money but not to tax the transactions entered into in the normal course of business or treat the profits of which are taxable under specific head of income and it is not the case here of the Department that the Assessee has made the transactions as a tax evasion mechanism and laundered unaccounted income. Assessee appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment include:

• Whether the provisions of Section 56(2)(viia) of the Income Tax Act, 1961, apply to shares held as "stock in trade" for trading purposes.
• The validity of the approval granted under Section 153D of the Income Tax Act, 1961, for the assessment order.
• The applicability of Section 56(2)(viia) to transactions carried out in the normal course of business.
• Whether the assessment order was validly issued without a Document Identification Number (DIN).

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Applicability of Section 56(2)(viia) to Shares Held as "Stock in Trade"

• Relevant Legal Framework and Precedents: Section 56(2)(viia) was introduced to prevent tax evasion by taxing the transfer of unlisted shares at prices below fair market value. The definition of "property" under Section 56(2)(vii) excludes "stock in trade," implying that Section 56(2)(viia) should not apply to shares held as stock in trade.
• Court's Interpretation and Reasoning: The Tribunal held that Section 56(2)(viia) should not apply to shares held as stock in trade, as these are not capital assets. The Tribunal relied on the legislative intent and explanatory notes that emphasize the provision's applicability to capital assets, not trading stock.
• Key Evidence and Findings: The assessee demonstrated that the shares were held as stock in trade, supported by entries in the financial statements and the Memorandum of Association, which indicated business in trading shares.
• Application of Law to Facts: The Tribunal applied the definition of "property" from Section 56(2)(vii) to Section 56(2)(viia), concluding that shares held as stock in trade are not subject to the provisions of Section 56(2)(viia).
• Treatment of Competing Arguments: The Tribunal considered and rejected the Revenue's argument that Section 56(2)(viia) applied to all shares, regardless of their classification as stock in trade.
• Conclusions: The Tribunal concluded that Section 56(2)(viia) does not apply to shares held as stock in trade, and the addition made under this section was deleted.

Issue 2: Validity of Approval under Section 153D

• Relevant Legal Framework and Precedents: Section 153D requires prior approval from a higher authority for assessments in search cases. The approval must be substantive and not mechanical.
• Court's Interpretation and Reasoning: The Tribunal found that the approval was granted mechanically and in haste, without sufficient time for the approving authority to apply its mind, rendering it invalid.
• Key Evidence and Findings: The approval was granted on the same day the draft order was submitted, along with approvals for multiple other cases, indicating a lack of due consideration.
• Application of Law to Facts: The Tribunal applied precedents that emphasize the need for a thorough and reasoned approval process, which was lacking in this case.
• Treatment of Competing Arguments: The Tribunal dismissed the Revenue's argument that discussions occurred prior to the draft order submission, as the approval itself showed no evidence of such consideration.
• Conclusions: The Tribunal concluded that the approval under Section 153D was invalid, rendering the assessment order void.

Issue 3: Applicability of Section 56(2)(viia) to Normal Business Transactions

• Relevant Legal Framework and Precedents: Section 56(2)(viia) is intended to prevent tax evasion, not to tax normal business transactions.
• Court's Interpretation and Reasoning: The Tribunal emphasized that Section 56(2)(viia) should not apply to transactions conducted in the ordinary course of business, where profits are taxable under specific income heads.
• Key Evidence and Findings: The assessee's business activities, as reflected in financial statements and the Memorandum of Association, supported the classification of shares as stock in trade.
• Application of Law to Facts: The Tribunal applied the legislative intent and explanatory notes to conclude that the provision does not apply to normal business transactions.
• Treatment of Competing Arguments: The Tribunal rejected the Revenue's broad interpretation of Section 56(2)(viia) as inconsistent with legislative intent.
• Conclusions: The Tribunal held that Section 56(2)(viia) does not apply to shares held for trading in the normal course of business.

3. SIGNIFICANT HOLDINGS

• Core Principles Established: Section 56(2)(viia) does not apply to shares held as stock in trade, as these are not capital assets. The provision is intended to prevent tax evasion, not to tax normal business transactions.
• Final Determinations on Each Issue: The Tribunal deleted the addition under Section 56(2)(viia), declared the assessment order void due to invalid approval under Section 153D, and upheld the classification of shares as stock in trade.
• Verbatim Quotes of Crucial Legal Reasoning: "The intent is not to tax the transactions entered into in the normal course of business or trade, the profits of which are taxable under specific head of income."