2018 (9) TMI 2020 - AT - Income Tax

Tribunal overturns tax authority's decision, finds assessment order valid under tax rules

Smiti Holding & Trading Co. Pvt. Ltd. Versus Principal CIT, Mumbai

The Tribunal set aside the Principal Commissioner of Income Tax's order under section 263, ruling that the original assessment order was not erroneous or ... Revision u/s 263 - PCIT was not convinced with the above explanation of the assessee and referring to Computation of FMV as per the assessee, FMV as on 31.03.2012 of Omega Properties Pvt. Ltd. and Dakshina Properties Pvt. Ltd. and computation of FMV of shares as done by the DCIT-4(1)(1), Mumbai, found that there was considerable variation in valuation of shares as done by the AO as per the proposal and as submitted by the assessee in the course of proceedings before him. The assessment order passed does not reveal that a detailed examination of acquisition of assets and applicability of section 56(viia) and Rule 11UA was undertaken in acquisition of shares of Suprasad Investments & Trading Co. Pvt. Ltd. - HELD THAT:- We find that the assessee had not acquired any shares in Geetanjali Trading & Investment Pvt. Ltd. during the impugned assessment year and therefore, the question of furnishing details of the said shares does not arise. It is stated in Note No. 8(3) of the Balance Sheet that “during the period following investments of Asian Paints Ltd. have been transferred from the holding company at cost”. The assessee had received 52,86,062 equity shares of Asian Paints Ltd. from its holding company i.e. Geetanjali Trading & Investment Pvt. Ltd. and since the said holding company holds 100% shares of the assessee-company, the said transfer is exempt u/s 47(iv) of the Act. Further, section 56(2)(viia) does not apply to shares of a quoted company (Asian Paints Ltd.) received by the assessee. Therefore, the question of valuation of these shares at market price does not arise. We find that the assessee had submitted computation of value per share under Rule 11UA of M/s Suprasad Investment & Trading Co. Pvt. Ltd. along with balance sheet as on 31.03.2012 vide letter dated 28.01.2016. It is evident from the official seal dated 28.01.2016 of the office of Asstt./Dy. CIT-8(2)(1) Mumbai, indicating the receipt. Rule 11UA as in force in AY 2013-14 does not provide to replace fair value of quoted shares to book value and therefore, the value derived by the DCIT 4(1)(1) cannot be substituted to the value as derived under Rule 11UA. Rule 11UA, during the relevant period, provides for valuation of unquoted equity shares by adopting the amount as per ‘book value’. In Malabar Industrial Co. Ltd. v. CIT [2000 (2) TMI 10 - SUPREME COURT], the Hon’ble Supreme Court has held that the Commissioner has to be satisfied with the twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the revenue. If one of the conditions is absent-if the order of the AO is erroneous but is not prejudicial to the revenue or if it is not erroneous but is prejudicial to the revenue-recourse cannot be held to section 263(1) of the Act. The factual scenario depicted hereinabove is to be examined on the anvil of the above enunciation of law. As stated earlier, Rule UA as in force in the impugned assessment year, does not provide and require to replace fair value of quoted shares to book value and therefore, the value derived by the DCIT-4(1)(1) cannot be substituted to the value as derived under Rule 11UA. Rule 11UA provides for valuation of unquoted equity shares by adopting the amount as per ‘book value’. In view of the above reasons, we set aside the order u/s 263 passed by the PCIT. - Decided in favour of assessee. Issues Involved:1. Legality of the order passed under section 263 of the Income Tax Act, 1961.2. Examination of acquisition and valuation of unquoted shares under Rule 11UA.3. Applicability of section 56(2)(viia) regarding the valuation of shares.4. Determination of whether the assessment order was erroneous and prejudicial to the interest of the revenue.Detailed Analysis:1. Legality of the Order Passed Under Section 263:The assessee contested the Principal Commissioner of Income Tax (PCIT)'s order under section 263, which set aside the original assessment order under section 143(3). The PCIT argued that the assessment was completed without proper examination of the fair market value (FMV) of unquoted shares of Suprasad Investments & Trading Co. Pvt. Ltd. and Geetanjali Trading & Investment Pvt. Ltd. The assessee contended that the Assessing Officer (AO) had conducted thorough inquiries and verifications, thus the assessment was neither erroneous nor prejudicial to the revenue's interest.2. Examination of Acquisition and Valuation of Unquoted Shares Under Rule 11UA:The PCIT observed that the AO did not examine the FMV of the unquoted shares of Suprasad Investments & Trading Co. Pvt. Ltd. and Geetanjali Trading & Investment Pvt. Ltd. The assessee argued that the shares of Suprasad were acquired at a fair market value of Rs. 7,262 per share, based on a professional valuation report, whereas the book value was Rs. 1,490 per share. The PCIT found discrepancies in the valuation and concluded that the AO did not conduct a detailed examination as required by section 56(viia) and Rule 11UA.3. Applicability of Section 56(2)(viia) Regarding the Valuation of Shares:The assessee argued that section 56(2)(viia) and Rule 11UA did not apply to the shares of Geetanjali Trading & Investment Pvt. Ltd. as they were not acquired during the assessment year. Furthermore, the shares of Asian Paints Ltd. received from the holding company were exempt under section 47(iv) and did not require valuation at market price. The PCIT, however, insisted on the necessity of valuing the subsidiaries' shares, which held substantial investments in Asian Paints Ltd.4. Determination of Whether the Assessment Order Was Erroneous and Prejudicial to the Interest of the Revenue:The Tribunal found that the AO had received and considered the valuation of Suprasad shares under Rule 11UA. Rule 11UA, as in force during the assessment year 2013-14, required the valuation of unquoted equity shares based on book value, not FMV. The Tribunal referenced similar cases, including M/s Minda SM Technocast Pvt. Ltd., where it was held that the book value should be used for valuation under Rule 11UA. The Tribunal concluded that the AO's assessment was neither erroneous nor prejudicial to the revenue's interest since the valuation complied with the applicable rules.Conclusion:The Tribunal set aside the PCIT's order under section 263, finding that the AO's assessment was conducted in accordance with the provisions of Rule 11UA and section 56(2)(viia). The appeal was allowed, and the original assessment order was upheld.