2019 (11) TMI 1786 - AT - Income Tax

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 ... Revision u/s 263 - examination of impact of section 56(2)(viib) or section 68 - Issue of Optionally Convertible Cumulative Preference Share (OPCCPS) - concept of limited scrutiny and complete scrutiny assessment - whether the Assessing Officer having failed to convert the limited scrutiny to a complete scrutiny, the assessment order would be rendered erroneous and prejudicial to the interest of revenue for the Pr.CIT to invoke his jurisdiction u/s 263 ? - HELD THAT:- In this case, the A.O. failed to examine the applicability of provision of section 56(2)(viib) and section 68 of the I.T.Act for the issue / allotment of OPCCPS would have a potential tax escapement of income far exceeding the amount prescribed in the CBDT Instructions. Therefore, we are of the view that this is a fit case for invoking the revisionary jurisdiction u/s 263 of the I.T.Act, especially in the light of the judgment of case of Sunrise Academy of Medical Specialities (India) (P) Ltd. [2018 (8) TMI 203 - KERALA HIGH COURT]. Even in case of limited scrutiny assessment, the A.O. is duty bound to make a prima facie inquiry as to whether there is any other items which requires examination and in the event, the potential escapement of income would have exceeded Rs.10 lakh and he ought to have sought the permission of the CIT / DIT to convert a `limited scrutiny assessment’ to a `complete scrutiny assessment’. Having failed to do so, the CIT, who was the authority to have granted permission for converting a `limited scrutiny assessment’ to a `complete scrutiny assessment’ is fully justified in invoking his revisionary jurisdiction u/s 263. CIT in his 263 order has categorically found that the A.O. is erroneous and prejudicial to the interests of revenue on account of failure of the A.O. to examine the applicability of section 56(2)(viia) or section 68 of the I.T.Act for the issue / allotment of OPCCPS. CIT had only set aside the assessment and directed the AO, to examine the valuation of OPCCPS. CIT need not in view of Explanation 2(a) to section 263 of the I.T.Act, come to a categorical finding that the valuation of OPCCPS is far exceeding the fair market value of shares. The A.O. has to examine these issues whether issue price of OPCCPS is exceeding FMV of shares, since he did had occasion to examine the valuation of OPCCPS. For the aforesaid reasoning, we uphold the CIT’s order passed u/s 263 of the I.T.Act as correct and in accordance with law. Decided against assessee. 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.