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TMI Blog2025 (1) TMI 35X X X X Extracts X X X X X X X X Extracts X X X X ..... aw that while making assessment on assessee, the ITO acts in a quasi-judicial capacity. An assessment order is amenable to appeal by the assessee and to revision by the Commissioner under Sections 263 and 264. Therefore, a reasoned order on a substantial issue is legally necessary. In the present facts of the case, the order passed by the Ld.AO, therefore becomes erroneous because enquiry has not been made regarding the share valuation report based on which the assessee determined the share value at premium. It was incumbent on him to verify by making necessary enquiries, more so when in the immediately preceeding assessment year in assessee s own case the valuation report by the merchant banker was rejected on similar facts. Thus, we hold that provision of section 263 has been rightly invoked - Decided against assessee. - Smt. Beena Pillai, Judicial Member And Smt Renu Jauhri, Accountant Member For the Assessee : Shri Dr. K. Shivaram a/w Shri Rahul K. Hakani For the Revenue : Ms. Sanyogia Nagpal (CIT-DR) ORDER PER BEENA PILLAI, JM: Present appeal arises out of order u/s. 263 of the act dated 27.03.2024 passed by PCIT, Mumbai- 3 for assessment year 2018-19 on following grounds of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Without prejudice to above, the learned PCIT has no jurisdiction to decide the issue on merit in revision jurisdiction by applying the wrong principle of law and relying on the case laws which are not applicable to the facts of the appellant particularly when according to him the Assessing Officer has not made verification/inquiry hence the revision order may be set aside 6. Without prejudice to above, the learned PCIT failed to appreciate that on the issue of valuation of shares/charging of premium the Assessing Officer had adopted a possible view which view was not unsustainable in law and thus the assessment order cannot be termed as erroneous and prejudicial to the interest of the revenue and hence the order of revision is bad in law. 7. The appellant craves leave to add, amend, alter or delete any of the above grounds of appeal. Brief facts of the case are as under: 2. The assessee filed its original return of income on 27.10.2018 declaring loss of Rs. 6,02,39,098/- assessment order u/s. 143(3) r.w.s. 144B of the act was passed on 07/06/2021, determining total loss of Rs. 3,31,36,890/- after making addition of depreciation on intangible assets at Rs. 2,63,67,188/- and disall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Income Tax Act, 1961 on 07.06.2021 determining total loss at Rs. 3,31,36,890/-, after making addition of Depreciation on intangible Assets of Rs. 2,63,67,188/- and Rs. 7,35,020/- on account of 'Disallowance u/s 14A of the Act. 3. On perusal of the assessment records, it is seen that the assessee Company has issued and allotted 50,50,506 equity shares of Rs. 10/- each at a premium of Rs. 29.60/- per share to its holding company namely Radiant Life Care Private Limited. The shares were allotted on a valuation of Rs. 39.60/- per share i. e. Equity Share of Rs. 10/- each at a premium of Rs. 29.60/- per share. Shares were issued on the basis of valuation done by Category | Merchant Banker Spa Capital Advisors Limited. The SPA Capital Advisors Pvt. Ltd. had vide its valuation report dated 13/10/2017 certified the fair value of the shares of the Company as on October 11, 2017 at Rs. 39.58/- per equity share. The Merchant Banker adopted Discounted Cash Flow (DCF) method to value the shares of the company. Total Share premium of Rs. 14,94,94,978/- was received during the A.Y.2018-19. 4. Perusal of the assessment records of previous assessment year i.e. A.Y. 2017-18 revealed that du ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e conclusion that inflated profits were adopted for computing the value of the share by following DCF method as the company did not meet the projected profit before/after tax for years even till 31.03.2019. The actual audited financials of the assessee as per the return of income filed for AY 2017-18, . 2018-19 and 2019-20 are as under: AY 2017-18 AY 2018-19 AY 2019-20 Profit Before Tax (3,59,48,434) (4,66,00,307) (5,12,97,005) Profit After Tax (3,59,48,434) (4,66,00,307) (5,12,51,837) Accordingly, the Assessing Officer held that the projections on which the premium was based has not only been proved wrong but also is very far from the actual position as is evident from the books of accounts of succeeding years and does not support the actual financials of the assessee company. 7. During the year under consideration i.e. AY 2018-19, the financials of the company were not changed much from the previous AY 2017-18. Further, the assessee company issued and allotted 50,50,506 equity shares of Rs. 10 each at a premium of Rs. 29.60 per share. The financials of the company for the AY 2018-19 does not justify charging of shares at premium of Rs. 29.60 per share. The assessee company has sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rence to the above and under instructions from our above-named client we hereby state that our client is in receipt of notice dated 01.03.2024/08.03.2024 requiring the assessee to show cause as to why the remedial action under section 263 be not taken with respect to assessment order dated 07.06.2021 passed by the assessing officer under section 143(3) r.w.s. 144B of the Income-tax Act, 1961, being erroneous in so far as it is prejudicial to the interest of revenue. We hereby submit our reply to various points raised in the above mentioned notice as under: 1. On perusal of the assessment records, it is seen that the assessee Company has issued and allotted 50,50,506 equity shares of Rs. 10/- each at a premium of Rs. 29.60/- per share to its holding company namely Radiant Life Care Private Limited. The shares were allotted on a valuation of Rs. 39.60/- per share i. e. Equity Share of Rs. 10/- each at a premium of Rs. 29.60/- per share. Shares were issued on the basis of valuation done by Category I Merchant Banker Spa Capital Advisors Limited. The SPA Capital Advisors Pvt. Ltd. had vide its valuation report dated 13/10/2017 certified the fair value of the shares of the Company as on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e A.O. analysed the annual accounts of the assessee company till 31/03/2019 and pointed out that the assessee company was making huge losses since the year of inception. Further, the A.O. compared the valuation report with the actual financials and concluded that the assessee's profits before tax and/or after tax as projected for the years had not been met even upto 31.03.2019, which clearly indicated that the inflated profits were adopted for computing the value of the share by mentioned following DCF method. Therefore, the A.O. mentioned in the order that the projections on which the premium was based had not only been proved wrong but very far from the actual position as was evident from the books of accounts of said years and did not support the actual financials of the assessee company. Based on the above grounds, the A.O. rejected the Valuation Report in AY 2017-18 and made additions accordingly. Our submission The assessee has issued shares at premium in the AY 2017-18 on the basis of Merchant Banker's report. In the assessment procedure the assessee provided all the necessary information including the valuation report of the valuer, however the Ld. AO misinterpreted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the premium was based has not only been proved wrong but also is very far from the actual position as is evident from the books of accounts of succeeding years and does not support the actual financials of the assessee company. 5. During the year under consideration i.e. AY 2018-19, the financials of the company were not changed much from the previous AY 2017-18. Further, the assessee company issued and allotted 50,50,506 equity shares of Rs. 10 each at a premium of Rs. 29.60 per share. The financials of the company for the AY 2018-19 does not justify charging of shares at premium of Rs. 29.60 per share. The assessee company has shown Revenue from Operations at Rs. 82,209/- and Other Income of Rs. 81,11,792/- and has suffered huge losses in the year under consideration also. Therefore, it can be safely concluded that inflated profits have been adopted for computing the value of the share. Also, considering the facts of the case for AY 2017-18 (wherein the Assessing Officer analysed the financials of the assessee till 31.03.2019), the share premium of Rs. 29.60 per share received during the year under consideration should have been taxed u/s 56(2)(viib) of the Act. Our submission W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares: Provided that this clause shall not apply where the consideration for issue of shares is received- (i) by a venture capital undertaking from a venture capital company or a venture capital fund; or (ii) by a company from a class or classes of persons as may be notified by the Central Government in this behalf. Explanation. For the purposes of this clause, (a) the fair market value of the shares shall be the value- (1) as may be determined in accordance with such method as may be prescribed; or (ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, whichever is higher; From the provisions of section 56(2)(viib) as reproduced above, the provisions are applicable only if the consideration for issue of shares as received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee replied for the same with facts and documentary proofs and the Ld. AO accepted the facts of the assessee. It is further reiterated that the aforesaid issues raised by your Honor was considered and/ allowed by the assessing officer after due application of mind. Therefore, this case is not prejudicial to the interest of Revenue. 2.5. After considering the above submissions by the assessee, the Ld.PCIT observed and held as under: 7. The reply of the assessee was carefully perused and is not acceptable. From perusal of the assessment records of the AY 2017-18, it is seen that the Assessing Officer after considering the financial position of the assessee company till 31.03.2019 as well as the valuation report, arrived at the conclusion, that inflated profits were adopted for computing the value of the share by following DCF method as the company did not meet the projected profit before/after tax for years even till 31.03.2019. The actual audited financials of the assessee as per the return of income filed for AY 2017-18, . 2018-19 and 2019-20 are as under. AY 2017-18 AY 2018-19 AY 2019-20 Profit before Tax (3,59,48,434) (4,66,00,307) (5,12,97,005) Profit after Tax (3,59,48, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ersive of the administration of revenue. There must be some grievous error in the order passed by the Income-tax Officer, which might set a bad trend or pattem for similar assessments, which on a broad reckoning, the Commissioner might think to be prejudicial to the interests of Revenue Administration. 11. It has to be noted that for the AY 2017-18, addition was done by the Assessing Officer under section 56(2)(viib) of the Act. Therefore, applying the ratio of the decision of the Hon'ble High Court of Madras in the Venkatakrishna Rice Co(supra), the order under section 143(3) r.w.s 144B sets a bad trend or pattern for the same issue for the subsequent years. Therefore, the order u/s 143(3) r.w.s 1448 dated 25.9.2021 is erroneous so far as it is prejudicial to the interests of revenue.. 12. It is pertinent to mention that the Hon'ble SC in the case of CIT Vs Paville Projects P Ltd(2023) 149 taxmann 115(SC) held that the scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. It is further observed that if due to an erroneous order of the Income-tax Officer, the Revenue is losing tax lawfully payabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Drespect to the share premium the invocation of revisionary jurisdiction u/s 263 for the same issue is bad in law. In CIT v. Development Credit Bank Ltd. (2010) 323 ITR 206 /(2011) 196 Taxman 329 (Bom.)(HC) P. (210) para 7 8 it was held that since the enquiry was specifically held with reference to the issue of capital gain by the AO in original asst. therefore invoking revisionary jurisdiction u/s. 263 on the issue of capital gains was not justified. [Pg.No-254-257 PBⅢ] E. It is respectfully submitted that as A.O. has verified the issue of share premium in the course of original Assessment proceedings and adopted one possible view, the exercise of Jurisdiction u/s 263 of the Income Tax Act by the Commissioner is not sustainable. 3.1. The Ld.AR placed reliance on the following decisions to support the argument that, once enquiry was specifically held with reference to the issue consider under revisionary proceedings, invoking provision of section 263 on the same issue is not justified: 1. Decision of Hon'ble Supreme Court in case of CIT vs. Paville Projects Pvt. Ltd. reported in (2023) 453 ITR 447 2. Decision of Hon'ble Supreme Court in case of CIT vs. Max India Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollowing: 1. Decision of Bombay High Court in case of Ld.PCIT vs. Shiv Sahay Punarvasan Prakalp Ltd. reported in (2023) 456 ITR 336 2. Decision of Bombay High Court Grasim Industries Ltd. vs CIT reported in (2010) 321 ITR 92. 3.6. The Ld.AR thus submitted that, the Ld.AO verified all the details furnished by the assessee in response to notice issued referred to herein above placed at pages of the paper book mentioned therein. He specifically referred to notice issue on 28/10/2019 calling for the assessment orders passed in point no 9 and details of share capital received at point no. 10. The Ld.AR thus submitted that, there is no evidence on behalf of the revenue to justify the proceedings initiated u/s. 263 of the act, as all the relevant details/ information regarding the share premium received are on record. 3.7. He placed reliance on the decision of Coordinate bench of this Tribunal in assessee s own case for A.Y. 2015-16 and 2016-17 dated wherein on identical issue the revisionary proceedings, with respect to valuation of shares/charging of premium was upheld. The Ld.AR argued that, the facts prevailed in A.Y. 2015-16 and 2016-17 were different, vis-a-vis the year under consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as under; 3.10. The Ld.DR thus supported the orders passed u/s. 263 of the act on the issue which has not been verified by the Ld.AO during the original scrutiny proceedings. He submitted that, it is very clear from the above order sheet noting that Ld.AO did not verify the issue regarding valuation by the merchant banker and merely proceeded on the premise that the assessee issued shares on fair market value, by holding that, it is as per the method prescribed as per Rule 11 UA of the act. The Ld.DR argued that based presumption, no verification/enquiries were conducted by the Ld.AO on the issue. 3.11. The Ld.DR referring to the decisions relied by the Ld.AR submitted that all are distinguishable on facts. He submitted that, the decision of Hon'ble Delhi Tribunal in case of Vaaan Infra Ltd. Vs. PCIT reported in (2024) 205 ITD 331 pertains to assessment year prior to the insertion of Explanation on (2) to section 263. He submitted that, after insertion of Explanation 2, Hon'ble Supreme Court considered proceedings initiated u/s. 263 of the Act in case of CIT vs. Amitabh Bacchan reported in (2016) 69 taxmann.com 170. Hon'ble Supreme Court upheld revisionary proceeding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her verification in order to ascertain the basis of valuation of shares at the premium determined by the merchant banker. Therefore though it could treated as one of the possible view, is not based on any enquires or verification carried out by the Ld.AO. It is noted that the Ld. PCIT after going through the assessment records came to such conclusion of necessary verification/enquires having not conducted by the Ld.AO and accept the submissions of the assessee on the face of it. This lead to the conclusion that the assessment order to that extent would by erroneous in the light of Explanation (2) to section 263 of the act. 4.5. At this juncture, it is relevant to extract Explanation 2 to section 263 that reads as under:- Explanation 2- For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer [for the Transfer Pricing Officer, as the case may be], shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal [Chief Commissioner or Chief Commissioner or Principal] Commissioner or Commissioner,- (a) the order is passed without making inquiries or verification which should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olving error, deviating from the law'. 4.10. At page 650 of Law Lexicon, the scope of Error, Mistake, Blunder, and Hallucination has been explained as under: An error is any deviation from the standard or course of right, truth, justice or accuracy, which is not intentional. A mistake is an error committed under a misapprehension of misconception of the nature of a case. An error may be from the absence of knowledge, a mistake is from insufficient or false observation. Blunder is a practical error of a peculiarly gross or awkward kind, committed through glaring ignorance, heedlessness, or awkwardness. An error may be overlooked or atoned for, a mistake may be rectified, but the shame or ridicule which is occasioned by a blunder, who can counteract. Strictly speaking, Hallucination is an illusion of the perception, a phantasm of the imagination. The one comes of disordered vision, the other of discarded imagination. It is extended in medical science to matters of sensation, whether there is no corresponding cause to produce it. In its ordinary use it denotes an unaccountable error in judgement or fact, especially in one remarkable otherwise for accurate information and right dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. The Assessing Officer is required to act fairly while accepting or rejecting the claim of the assessee in cases of scrutiny assessments. He should be fair not only to the assessee but also to the Public Exchequer. The Assessing Officer has got to protect, on one hand, the interest of the assessee in the sense that, the assessee is not subjected to any amount of tax in excess of what is legitimately due, and on the other hand, he has a duty to protect the interests of the revenue and to see that no one dodges the revenue and escapes without paying legitimate tax. The Assessing Officer is not expected to put blinkers on his eyes and mechanically accept what the assessee claims. It is the duty of the Ld.AO to ascertain the truth of the facts stated by the assessee and the genuineness of the claims made in the return when the circumstances of the case are such as to provoke an inquiry. Arbitrariness in either accepting or rejecting the claim has no place. Hon ble Supreme Court in many cases have taken such view. To name a few, Hon'ble Supreme Court in case of Rampyari Devi Saraogi v. CIT reported in 67 ITR 84, Smt. Tara Devi Aggarwal v. CIT reported in 88 ITR 323, and Malabar In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or as well as adjudicator. As an adjudicator he is an arbitrator between the revenue and the taxpayer and he has to be fair to both. His duty to act fairly requires that when he enquires into a substantial matter like the present one, he must record a finding on the relevant issue giving, his reasons therefore, which is absent in the present facts of the case. Merely by passing an order sheet entry, the Ld.AO accepted the value as per the valuation report to be the market value and admits that no further enquiry has been made. It is settled law that while making assessment on assessee, the ITO acts in a quasi-judicial capacity. An assessment order is amenable to appeal by the assessee and to revision by the Commissioner under Sections 263 and 264. Therefore, a reasoned order on a substantial issue is legally necessary. 4.17. The decisions relied by the Ld.AR referred to in the preceding paragraphs also points to the same direction. They have all held that orders which are subversive of the administration of revenue, must be regarded as erroneous and prejudicial to the interests of the revenue. If the Assessing Officers are allowed to make assessments without application of mind and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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