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TMI Blog2024 (10) TMI 648X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act will be applicable. From a reading of section 56, it can be understood that where the legislature has intended to tax the capital transactions, the same have been specifically enumerated under specific clauses of section 56(2) of the Act, and if any entry is not to be found in section 56, the same would be covered by section 56(1) of the Act. It, therefore, goes without saying that unless a receipt is in the nature of Revenue receipt, it does not fall in the ambit of section 56(1) of the Act to be taxed as income. Since the issuance of shares is in the realm of capital transaction, the receipt being a capital receipt, the cancellation of shares and transfer of any amount in relation to that transaction to the capital reserve account as required by the Generally Accepted Accounting Principles will also assume the character of capital receipt, and on that score does not fall in the ambit of section 56 of the Act. We, therefore, agree with the submissions of AR that the assessment order cannot be said to be bad, being prejudicial to the interest of Revenue. Viewing from any angle, we find it difficult to agree with the learned Principal Commissioner of Income Tax that the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led and extinguished 506 Class 1 Compulsory Convertible Cumulative Preference Share (CCCPS) having a face value of Rs. 6,43,137/- by paying Rs. 1,54,410/- per share which is Fair value as per valuation report to the shareholders, namely, Rs. 7.82 crores in total. Balance amount i.e., Rs. 24.72 crores, namely, the difference between Rs. 32.54 crores and Rs. 7.82 crores was transferred to the capital reserves account. The scheme of capital reduction was approved by the Hon ble Andhra Pradesh High Court on 03/12/2014. 4. According to the learned Principal Commissioner of Income Tax, learned Assessing Officer failed to examine the issue of capital reduction and therefore, after initiating proceedings under section 263 of the Act, set aside the original assessment order passed under section 143(3) of the Act by passing an order under section 263 of the Act dated 30/03/2021 holding that the assessment order is erroneous and prejudicial to the interest of the revenue and directed the learned Assessing Officer to examine the said issue in detail and pass a consequential order as per law. Aggrieved by such an order, Assessee preferred this appeal. 5. Learned AR submitted that, during the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the documents and explanation submitted by the assessee. 8. His next argument is that the learned Principal Commissioner of Income Tax had invoked the proceedings stating that the fair market value of the shares is different from the value mentioned in the valuation report submitted by the Assessee, but in this process, he did not refer the matter to the Departmental Valuation Officer for valuation of such shares or obtaining clarifications from the Assessee, and therefore, without establishing that the view of the learned Assessing Officer is unsustainable in law, learned Principal Commissioner of Income Tax ought not to have invoked revision under Section 263 of the Act. 9. While drawing our attention to the show cause notice dated 4/3/2020, wherein it was stated that if the DCF method is wrong and the FMV is equal to the par value, then the assessee stands to a gain of Rs. 24,72,45,262/- under section 56(2)(viia) of the Act which the learned Assessing Officer failed to examine while passing the Assessment Order. Learned AR submitted that the learned Principal Commissioner of Income Tax failed to substantiate as to how there is failure of inquiry by learned Assessing Officer and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to reserve is the gain of the assessee and liable to be brought to tax, but the learned Assessing Officer failed to examine this issue in the light of 56(2)(viia)(2) of the Act. According to the learned DR, the reason for reduction of share capital was in view of the excess funds available with the assessee and as per the orders of the Hon'ble High Court, the same was approved, but instead of paying the shareholders at the par market value of Rs. 6,43,137/-, the assessee resorted to DCF method to arrive at a value of Rs. 1,54,510/- and thereby paid a sum of Rs. 7,81,82,060/- to the shareholders and diverted the balance of Rs. 24,72,45,262/- to capital reserve of the balance sheet and this amount is nothing but the gain of the assessee in the share transfer transaction and therefore, it was properly directed to be brought to tax by the learned Principal Commissioner of Income Tax. According to the learned DR, the twin conditions of erroneous insofar as prejudicial to the interest of the Revenue are satisfied in this case, for non-examination of the issue by the learned Assessing Officer, and therefore, there are no merits in the case of the assessee. 12. We have gone through th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee has no role to play and is not the author of the assessment order and hence the manner and contents of the assessment order as framed is not determinative whether or not it is a case of change of opinion. Since we hold that there was adequate enquiry in this matter on the score of adequate enquiry, the assessment order does not suffer any infirmity. 14. Turning to the prejudicial nature of the assessment order to the interest of revenue is concerned, undisputed facts are that during the year under consideration, as a part of restructuring of the existing capital structure and pursuant to the Scheme of Capital Reduction, as approved by the Hon'ble Jurisdictional High Court, the assessee cancelled and extinguished 506 Class 1 Compulsory Convertible Cumulative Preference Share (CCCPS) having a face value of Rs. 6,43,137/- by paying Rs. 1,54,410/- per share by determining the Fair value by adopting the DCF method, as per valuation report to the shareholders. Assessee, therefore, paid a sum of Rs. 7.82 crores to the shareholders and the balance amount of Rs. 24.72 crores being the difference between Rs. 32.54 crores and Rs. 7.82 crores was transferred to the capital re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng of section 56, it can be understood that where the legislature has intended to tax the capital transactions, the same have been specifically enumerated under specific clauses of section 56(2) of the Act, and if any entry is not to be found in section 56, the same would be covered by section 56(1) of the Act. It, therefore, goes without saying that unless a receipt is in the nature of Revenue receipt, it does not fall in the ambit of section 56(1) of the Act to be taxed as income. Since the issuance of shares is in the realm of capital transaction, the receipt being a capital receipt, the cancellation of shares and transfer of any amount in relation to that transaction to the capital reserve account as required by the Generally Accepted Accounting Principles will also assume the character of capital receipt, and on that score does not fall in the ambit of section 56 of the Act. We, therefore, agree with the submissions of the Learned AR that the assessment order cannot be said to be bad, being prejudicial to the interest of Revenue. 19. Viewing from any angle, we find it difficult to agree with the learned Principal Commissioner of Income Tax that the assessment order is erroneou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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