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TMI Blog2022 (8) TMI 1139X X X X Extracts X X X X X X X X Extracts X X X X ..... construed to be a rectification of the assessment order as the Assessing Officer does not state that he has invoked his power under Section 154 of the Act. Therefore, we are of the view that the learned Tribunal committed a serious error in reversing the order passed by the Principle Commissioner of Income Tax, II Kolkata in exercise of his powers under Section 263 of the Act. It was submitted on behalf of the respondent assessee that the Income Tax Department cannot sit in the arm chair of a businessman and commercial expediency has to be seen from the view point of the businessman. Such issue does not arise for consideration in this appeal nor it was the case of the assessee before the Commissioner that the Commissioner is purporting to take business decisions on behalf of the assessee. It is no longer res integra that reasons provide a live link between conclusion and evidence. This vital link is the safeguard against arbitrariness and prejudice to the interests, is a manifestation of the mind of a quasi-judicial authorities, Tribunal or a Court and it is a tool for judging validity of an order and, therefore giving reasons is an essential element of administration of justice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs.23) per share escaped assessment thereby in respect of 8,00,000 shares amount to Rs, 10,16,00,000/- is aggregate escaped assessment. (ii) According to the Income Tax Appellate Tribunal, the Assessee had furnished the details to Assessing Officer in order to substantiate the fair market value of shares by filing several documents. However, the Appellate Tribunal failed to consider that the Assessing Officer did not consider the fair market value of the shares by applying rule 11U 11UA and passed the order of Assessment and thereby caused was loss of Revenue to the tune of Rs. 123/- per share amounting to Rs. 10,16,00,000/- which make the Assessment order erroneous and prejudicial to the interest of revenue. As such the Income Tax Appellate Tribunal erred in allowing the appeal of the Assessee. (iii) The Income Tax Appellate Tribunal failed to appreciate the fact that the assessment was erroneous and prejudicial to the interest of revenue as the Assessing Officer did not determine the fair market value of the share by applying Rule 11A and 11U and curative action of Principal Commissioner of Income Tax-2 in its revisional jurisdiction u/s. 263 of the Act is well within ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ets. The basis of the valuation was explained by the assessee by stating that the assessee holds 12,90,000 equity shares of M/s. Shiv Edibles which is equal to 36.35% equity capital of the said company and similarly the company holds 3,50,000 equity shares of M/s. Shiv Agrevo Limited which is equal to 19.96 % equity shares of that company. It was stated that both the companies are the group companies/associates in which the assessee holds significant control and while arriving at the fair market value of the shares, the cost of these investments has been substituted that fair value of the same and accordingly, the fair value of the shares has been arrived at Rs. 150/- per share. Further the assessee stated that during the course of the scrutiny assessment under Section 143(3) of the Act, certificate was furnished before the assessing officer justifying the valuation of shares. Therefore, it was contended that revising the assessment order under Section 263 of the Act does not arise. 3. The Commissioner held that the assessing officer has not examined the applicability of Section 56(2)(viib) read with Rule 11(U) and Rule 11UA. After referring to the said provision, the Commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opy of the paper book has also been placed before us which includes the copy of the Chartered Accountant Certificate, the calculation of fair value, the relevant forms issued by the Registrar of Companies, the copies of the audited balance sheet for the year ended 31.03.2013 and the copies of the order sheet entries to show that detailed enquiry was conducted by the assessing officer. It was further contended that a specific query was raised by the assessing officer as regards the applicability of Section 56(2)(viib) of the Act for which the assessee has submitted reply stating that shares have been issued by the company at fair value and to substantiate the same, the valuation certificate obtained from the chartered accountant was enclosed. The assessee also referred to the manner in which the fair market value was calculated. Hence, it was contended that the Commissioner was wrong in concluding that the assessing officer did not make any enquiries and such conclusion was unsustainable in law. Further it was contended that two methods are envisaged for calculating the fair value of the shares and as per Rule 11U and Rule 11UA once such exercise is done, out of the two values thus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Principal Commissioner of Income Tax II Versus Shri Brahma Deb Gupta 2018 SCC Online (Del) 9946, Toyota Motor Corporation Versus Commissioner of Income Tax (2008) 17 SCC 535 and Nagal Garment Industries Private Limited Versus Commissioner of Income Tax-I and Another 2018 (2) MPLJ 494 (MP). 6. Mr. Avra Majumdar, learned advocate appearing for the respondent assessee submitted that there is no provision in the Act which requires the assessing officer to record reasons while accepting the claims of the assessee and reasons are required only when an issue is decided against the assessee. To support such contention reliance was placed on the decision in the case of Commissioner of Income Tax Versus Gabriel India Limited (1993) 203 ITR 108 (Bom), Commissioner of Income Tax Central 1 Kolkata Versus J.L. Morrison (India) Ltd. (2014) 366 ITR 593 (Cal) and Commissioner of Income Tax, Mumbai Versus Chandan Magaraj (2022) 135 taxmann.com 55 (Bom). Further it is contended that neither before the tribunal nor before this Court, the revenue has suggested any question that the assessment order was bad because it did not disclose reasons. Further it is submitted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lwal Hossain and Mr. Binayak Gupta, advocates for the respondent. 8. To answer the substantial question of law suggested by the revenue, we have to first take note of the statutory provisions. Section 56 deals with income from other sources. Sub-Section 1 of Section 56 states that income of every kind which is not to be excluded from total income under the Act shall be chargeable to income tax under the head income from other sources if it is not chargeable to income tax, under any of the heads specified in items A to E. Sub-Section 2 states that in particular and without prejudice to the generality of the provisions of Sub-Section 1, the income mentioned in clauses (i) to (ix) shall be chargeable to income tax under head income from other sources . Sub-Section 2 of Section 56 would be relevant for our case. Clause (viib) of Section 56(2) together with explanation are quoted hereunder: Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income tax under the head Income from other sources , if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E. In particular, and wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons used in determination of fair market value for the purposes of Rule 11U and Rule 11UA. Clause (a) of Rule 11U defines accountant (i) for the purposes of Sub-rule (2) of Rule 11UA to mean a Indian Institute of Chartered Accountants of India within the meaning of the Chartered Accountants Act, 1949 which is not appointed by the company as an auditor under Section 44 AB of the Act or under Section 224 of the Companies Act, 1956. Clause (i) of Rule 11U defines unquoted shares and securities to mean in relation to shares and securities which are not quoted shares or securities. Rule 11UA deals with determination of fair market value. In terms of Sub-Rule (1) of Rule 11UA, for the purposes of Section 56 of the Act a fair market value of the property, other than immovable property, shall be determined in the manner stipulated therein. Clause (c) in Rule 11UA (1) would be relevant for our case which is quoted hereunder: R. 11UA. Determination of fair market value.- [(1)] For the purposes of section 56 of the Act, the fair market value of a property, other than immovable property, shall be determined in the following manner, namely,- (a) .. (b) .. (c) valua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... um fixed and also produced minutes books and other books of accounts of investor companies along with their directors. After mentioning so, the Assessing Officer states that considering the facts, question of artificially rising of capital by circular transaction does not arise in the case and hence, question of any credit from so-called paper, shell companies does arise. After making such an observation, the characteristics of the investor companies were given in a tabulated form. The assessment records were perused by the Commissioner who exercised his power under Section 263 of the Act. The reason being that the fair market value of the shares have not been arrived at in terms of Rule 11U and Rule 11UA of the Act, in the opinion of the Commissioner, the fair market value of the assessee is approximately Rs. 23/- and accordingly, it was held that excess of fair market value of the share premium along with the share capital is Rs. 127/- for 8,00,000 shares amounting to Rs. 10,16,00,000/- which was to be added back to the total income of the assessee company. In the opinion of the Commissioner, no documents or records were verified by the Assessing Officer who did not apply his min ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... antiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of the issuance of shares, of its assets, including tangible assets, being goodwill, knowhow, patent, copy right, trade market, license, franchise or any other business or commercial rights of similar nature whichever is higher. Thus, the key word occurring in Explanation A (a)(ii) is the satisfaction of the Assessing Officer. The satisfaction of the Assessing Officer becomes paramount because for the purposes of arriving at the fair market value of the shares one of the two options provided in sub-Clauses (i) and (ii) have to be taken into account and whichever is higher has to be adopted. In the instant case, the assessee is stated to have substantiated the value based upon the Chartered Accountant Certificate and other documents which according to the assessee was placed before the Assessing Officer and also before the Tribunal. As noted, the crucial word occurring in the said provision is the satisfaction of the Assessing Officer. 13. Rule 11UA deals with determination of fair market value, under Clause (c) of Sub-Rule (1) of Rule 11UA valuation of shares and securities ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g that it would give a free hand to the Assessing Officer just to pass an order without reasoning and to spell out reasons only in a situation where finding needs to be against the assessee or any claim to be verified by the assessee is denied. Reference was also made to the decision of the Hon ble Supreme Court in S.N. Mukherjee Versus Union of India AIR 1990 SC 1984 wherein it was held that except in cases where the requirement has been dispensed with expressly or by necessary implication an administrative authority exercising judicial or quasi-judicial function is required to record the reasons for its position. The Court also noted the decision in S.S. Gadgil Versus Lal and Co. (1964) 53 ITR 231 (SC) wherein it was held the Income Tax authorities who have power and assess and recovery tax are not acting as judges deciding a litigation between a citizen and the State, they are administrative authorities whose proceedings are regulated by statutes, whose function is to estimate the income of the tax payers and to assess the tax on the basis of that estimate. Ultimately, the Court in JL Morrison (India) Ltd. held that the view taken by the Tribunal was not perverse and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration. In fact, in Gabriel India Ltd. the Hon ble Division Bench of this Court refers to the decision cited by the revenue in the case of S.S. Gadgil wherein the Hon ble Supreme Court has pointed out that the Income Tax Authorities are administrative authorities whose proceedings are regulated by statutes. If such is the position, the Assessing Officer is bound by the statutory mandate. The Assessing Officer cannot be heard to say that by inference it has to be taken that he has applied his mind to the valuation submitted by the assessee. He has to record his satisfaction or in other words he has to spell out as to how he was satisfied with the valuation as adopted by the assessee. If the statute has not used the words to the satisfaction of the Assessing Officer things could have been otherwise. Satisfaction of an administrative or a quasi-judicial authority should be manifest and vivid on the face of the order or proceedings. There can be no inference as regards satisfaction, nor can the provision of law be read to cannote deemed satisfaction. If such interpretation is to be accepted then it would tantamount to rewriting Section 56 (2)(viib) Explanation (e). There is a slight ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t point of time, the duty of the Assessing Officer commences to conduct enquiry as he is required to be satisfied that the market value of the share stated to be a fair market value by the assessee is correct, has the computation been done in terms of Rule 11UA of the Rules and it is thereafter, he has to accept the value whichever is higher. Thus, merely by conducting enquiry, calling for documents and materials discussing the case with the assessee are not sufficient to comply with the mandate in Section 56 (2)(viib). As mentioned earlier, satisfaction cannot be inferred and the statute does not provide for any deemed satisfaction. On a reading of the assessment order dated 28.03.2016 it is evidently clear that no satisfaction was recorded by the Assessing Officer, in fact, three issues which were discussed by the Assessing Officer are under Section 40AI; Employees benefit expenses and expenditure incurred in relation to income not includable in total income. Curiously enough after the Assessing Officer has affixed his signature and seal, a note has been mentioned in the assessment order and the note is not for the assessee. If that is not for the assessee for what purpose the no ..... X X X X Extracts X X X X X X X X Extracts X X X X
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