Appeal dismissed, order under section 263 upheld. Assessment to be redone, valuation of shares to be examined.

The appeal was dismissed, upholding the Principal Commissioner of Income Tax's order under section 263 as correct. The Assessing Officer was directed to re-do the assessment after examining the valuation of optionally convertible cumulative preference shares and verifying the applicability of provisions under section 56(2)(viib) and section 68, providing the assessee with an opportunity to be heard.

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Issues Involved:
1. Jurisdiction of the Principal Commissioner of Income Tax (PCIT) under section 263.
2. Scope of limited scrutiny assessment and its conversion to complete scrutiny.
3. Applicability of section 56(2)(viib) and section 68 of the Income Tax Act.
4. Requirement of prima facie examination by the Assessing Officer (AO).
5. Validity of the PCIT's order setting aside the assessment.

Detailed Analysis:

1. Jurisdiction of the Principal Commissioner of Income Tax (PCIT) under section 263:
The assessee challenged the jurisdiction of the PCIT under section 263, arguing that the order setting aside the assessment framed under section 143(3) was without jurisdiction, bad in law, and void ab initio. The PCIT exercised jurisdiction under section 263, citing that the AO did not examine the issuance of 30,00,000 optionally convertible cumulative preference shares (OPCCPS) and the associated securities premium of Rs.57,00,00,000, which may have to be brought to tax under section 56(2)(viib) or section 68.

2. Scope of limited scrutiny assessment and its conversion to complete scrutiny:
The assessee contended that in a limited scrutiny assessment, the AO must restrict himself to the issues raised and cannot make additions on other issues without prior administrative approval. The CBDT Instructions No.7/2014 and subsequent modifications via Instruction No.20/2015 and Instruction No.5/2016 were cited, which allow conversion of limited scrutiny to complete scrutiny with the approval of the Pr.CIT/DIT if potential escapement of income exceeds Rs.10 lakh. The AO failed to convert the limited scrutiny to complete scrutiny despite potential tax escapement far exceeding Rs.10 lakh.

3. Applicability of section 56(2)(viib) and section 68 of the Income Tax Act:
Section 56(2)(viib) was inserted by the Finance Act, 2012 to include share premium received by a company in excess of its fair market value as income chargeable under the head 'income from other sources'. The Hon’ble High Court of Kerala in the case of Sunrise Academy of Medical Specialities (India) (P) Ltd. v. ITO had held that any premium received by a closely held company on sale of shares in excess of its face value would be treated as income from other sources under section 56(2)(viib). The AO did not verify the details regarding the applicability of these sections during the assessment.

4. Requirement of prima facie examination by the Assessing Officer (AO):
The AO mentioned that there was no response to the notices issued under section 142, leading to the initiation of penalty proceedings under section 271B. The AO failed to make a prima facie examination to determine if there was potential escapement of income exceeding the prescribed amount, which would necessitate converting the limited scrutiny to complete scrutiny. This failure rendered the assessment order erroneous and prejudicial to the interest of revenue.

5. Validity of the PCIT's order setting aside the assessment:
The PCIT's order was challenged on the grounds that it did not provide a positive finding on how the assessment order was erroneous and prejudicial to the interest of revenue. However, the Explanation 2(a) to section 263 states that an assessment order shall be deemed erroneous and prejudicial to the interest of revenue if it was passed without making necessary inquiries or verification. The PCIT's order was found to be justified as the AO failed to examine the applicability of section 56(2)(viib) and section 68, and the potential tax escapement was significant.

Conclusion:
The appeal filed by the assessee was dismissed, and the PCIT's order passed under section 263 was upheld as correct and in accordance with law. The AO was directed to examine the valuation of OPCCPS and verify the applicability of provisions of section 56(2)(viib) / 68, and re-do the assessment de novo after giving the assessee an opportunity to be heard.

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