ITAT sets aside CIT revision order applying section 56(2)(viib) to rights issue shares below fair market value

The ITAT Ahmedabad set aside the CIT's revision order under section 263 that had deemed the original assessment erroneous. The CIT had invoked section 56(2)(viib) for right issue shares, claiming they were issued below fair market value. However, the ITAT relied on the precedent in Chhatisgarh Metaliks case, which held that section 56(2)(viib) cannot be applied to rights issues. The ITAT found the CIT's revision exercise failed on identical facts, as the provision was not applicable to rights issues, thereby allowing the assessee's appeal.

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Issues Involved:
1. Condonation of Delay
2. Validity of the Revisionary Order under Section 263 of the Income Tax Act
3. Applicability of Section 56(2)(viib) to Rights Issue

Condonation of Delay:
The appeal filed by the assessee was delayed by 262 days. The assessee attributed the delay to the preoccupation of its Finance Department with financial reporting and statutory compliances, alongside the top management's involvement in negotiations for a joint venture agreement. The Tribunal, referencing Section 5 of the Limitation Act and Section 253(5) of the Income Tax Act, noted that the delay was unintentional and justified by sufficient cause. Citing the Supreme Court's liberal approach in the case of Collector, Land Acquisition Vs. Mst. Katiji & Others, the Tribunal condoned the delay, emphasizing that substantial justice should prevail over technicalities.

Validity of the Revisionary Order under Section 263:
The Pr. CIT set aside the assessment order under Section 143(3), deeming it erroneous and prejudicial to the Revenue's interest due to the AO's failure to properly inquire into the fair market value (FMV) of shares issued at a premium. The Pr. CIT calculated the FMV at Rs. 47.07 per share, whereas the assessee issued shares at Rs. 60 per share, resulting in an excess premium of Rs. 12.93 per share. The Tribunal noted that the assessee did not dispute the Pr. CIT's calculation but argued that the Pr. CIT did not consider its contentions and case laws. The Tribunal found that the Pr. CIT had addressed the assessee's arguments and distinguished the cited case laws, thus validating the Pr. CIT's order.

Applicability of Section 56(2)(viib) to Rights Issue:
The assessee contended that Section 56(2)(viib) was not applicable to the Rights Issue, as the shares were issued to existing shareholders in proportion to their shareholding, without introducing new shareholders or cash consideration. The Tribunal referenced the ITAT Raipur Bench's decision in Chhatisgarh Metaliks and Alloys P. Ltd., which held that Section 56(2)(viib) does not apply to Rights Issues. Consequently, the Tribunal concluded that the revisionary order under Section 263 could not survive, as the foundational error identified by the Pr. CIT was not sustainable.

Conclusion:
The Tribunal set aside the Pr. CIT's order under Section 263 and allowed the assessee's appeal, emphasizing that Section 56(2)(viib) does not apply to Rights Issues and that the assessee's delay in filing the appeal was justified and condoned.

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