2021 (3) TMI 1193 - AT - Income Tax

Non-resident companies exempt from tax on share issuance consideration under Income Tax Act Section 56(2)(viib)

M/s. Ruchi J Oil Pvt. Ltd, C/o P.D. Nagar & Co, Chartered Accountants, Indore Versus PCIT, Ujjain

The Tribunal held that Section 56(2)(viib) of the Income Tax Act does not apply to non-resident companies for consideration received from the issuance of ... Revision u/s 263 - addition u/s 56(2)(viib) - transaction of excess premium received from Non Resident companies - HELD THAT:- In the show cause notice issued, Ld. PCIT has only referred to the provisions of Section 56(2) stating that the excess amount received from two non resident companies on allotment of shares should be treated as income of the assessee u/s 56(2)(viib) of the I.T. Act: So the finding of Ld. PCIT is only to the effect that Ld. A.O should have examined the transaction of excess premium received from Non Resident companies which needs to be brought to tax u/s 56(2)(viib) - this finding of Ld. PCIT is factually incorrect and is not sustainable in law since the provisions of Section 56(2)(viib) of the Act are not applicable to the consideration received from Non Residents for issuing of shares. DR was fair enough to accept this fact that Section 56(2)(viib) of the Act s only applicable to residents and not to Non Residents. Therefore since the very basis of issue of show cause notice u/s 263 of the Act is factually incorrect and the provisions of Section 56(2)(viib) of the Act has been wrongly interpreted by Ld. PCIT by directing the Ld. A.O to tax an amount under a section namely 56(2)(viib) for the consideration received for issue of equity shares which is not applicable to the Non Residents, the proceedings u/s 263 of the Act deserves to be quashed. Whether the Ld. A.O has made sufficient enquiry with regard to the alleged transaction of allotment of equity shares to resident and non resident companies? - There was a specific enquiry from the Ld. A.O to which the specific reply along with supporting documents were submitted by the assessee during the course of scrutiny assessment proceedings itself. It can be safely concluded that the Ld. A.O had raised queries which were complied by the assessee. Considering these facts in totality, it can be safely concluded that the Assessing Officer made complete enquiry regarding share capital and share premium received from Non resident companies and also called for a report from Ld. TPO on the arms length price of this international transaction. It is a settled position of law that the powers under section 263 of the Act can be exercised by the Commissioner on satisfaction of twin conditions, i. e., the assessment order should be erroneous and prejudicial to the interests of the Revenue. By 'erroneous' is meant contrary to law. Thus, this power cannot be exercised unless the Commissioner is able to establish that the order of the Assessing Officer is erroneous and prejudicial to the interests of the Revenue. Thus, where there are two possible views and the Assessing Officer has taken one of the possible views, no action to exercise powers of revision can arise, nor can revisional power be exercised for directing a fuller enquiry to find out if the view taken is erroneous. This power of revision can be exercised only where no enquiry, as required under the law, is done. It is not open to enquire in case of inadequate inquiry. Our view is fortified by the decision of the hon'ble High Court of Bombay in the case of CIT v. Nirav Modi [2016 (6) TMI 1004 - BOMBAY HIGH COURT] In the instant case also Ld. A.O had considered various submissions of the assessee and taken a possible view. Therefore merely because Ld. PCIT did not agree to the opinion/information of the Ld. A.O who has conducted sufficient enquiry regarding the issue raised in this show cause notice issued by Ld. PCIT, provisions of Section 263 of the Act cannot be invoked in order to substitute his own information. It has been held in several decisions (few of them have been relied by the Ld. Counsel also) that if the Ld. A.O has made enquiry to his satisfaction and it is not a case of no enquiry then Ld. PCIT cannot assume the jurisdiction u/s 263 of the Act to again investigate or approach in a particular manner. - Decided in favour of assessee. Issues Involved:1. Applicability of Section 56(2)(viib) of the Income Tax Act to non-resident companies.2. Adequacy of the Assessing Officer's (AO) enquiry regarding the issuance of shares at a premium.3. Whether the AO's order was 'erroneous' and 'prejudicial to the interest of Revenue' under Section 263 of the Income Tax Act.4. Fulfillment of twin conditions under Section 263 of the Income Tax Act for the Principal Commissioner of Income Tax (PCIT) to assume jurisdiction.Issue-wise Detailed Analysis:1. Applicability of Section 56(2)(viib) of the Income Tax Act to Non-Resident Companies:The Tribunal examined whether Section 56(2)(viib) of the Act applies to the consideration received from non-resident companies for the issue of shares. The section states that it applies to any consideration received from 'any person being a resident.' Since the shares were issued to non-resident companies, the Tribunal concluded that Section 56(2)(viib) is not applicable. This finding was supported by the Departmental Representative who also agreed that Section 56(2)(viib) applies only to residents. Therefore, the PCIT's direction to tax the excess premium under Section 56(2)(viib) was factually incorrect and legally unsustainable.2. Adequacy of the AO's Enquiry Regarding the Issuance of Shares at a Premium:The Tribunal reviewed the AO's actions during the assessment proceedings. The AO had issued notices under Section 142(1) of the Act, specifically asking for details about the share premium received. The assessee provided comprehensive responses, including details of foreign remittances, certificates from banks, and compliance with Foreign Direct Investment (FDI) regulations. Furthermore, the AO referred the matter to the Transfer Pricing Officer (TPO) for determining the arm's length price of the transactions, which the TPO accepted without adjustments. The Tribunal found that the AO conducted a detailed enquiry and thoroughly discussed the issue in the assessment order, thus negating the PCIT's claim of inadequate enquiry.3. Whether the AO's Order was 'Erroneous' and 'Prejudicial to the Interest of Revenue' under Section 263 of the Income Tax Act:The Tribunal noted that for an order to be revised under Section 263, it must be both erroneous and prejudicial to the interests of the Revenue. Since Section 56(2)(viib) does not apply to non-resident companies, the AO's decision not to tax the excess premium was not erroneous. Additionally, the AO had conducted a detailed enquiry, making the order neither erroneous nor prejudicial to the interests of the Revenue. The Tribunal cited various judicial precedents to support this conclusion, including decisions from the Bombay High Court and the Gujarat High Court.4. Fulfillment of Twin Conditions under Section 263 of the Income Tax Act for the PCIT to Assume Jurisdiction:The Tribunal emphasized that both conditions—error and prejudice to Revenue—must be satisfied for the PCIT to invoke Section 263. In this case, neither condition was met. The AO's order was based on a permissible view after thorough enquiry, and the PCIT's differing opinion did not justify revision. The Tribunal referenced several judicial decisions to reinforce that the PCIT cannot assume jurisdiction under Section 263 merely to substitute his own opinion for that of the AO.Conclusion:The Tribunal quashed the PCIT's order under Section 263 and restored the AO's original assessment order. The appeal of the assessee was allowed, and it was concluded that the AO's order was neither erroneous nor prejudicial to the interests of the Revenue. The Tribunal's decision was pronounced in the open court on 25.03.2021.