Madras HC sets aside tax assessment order for ignoring directions on Section 56(2)(viib) share premium valuation

The Madras HC set aside an assessment order for non-compliance with its previous directions. The assessing authority had imposed tax on share premium as income from other sources under Section 56(2)(viib) without determining the fair market value of shares as specifically directed by the HC. The court held that any order disregarding HC directions lacks jurisdiction and is invalid, citing SC precedent that authorities must follow law declared by higher courts. The matter was remanded for fresh assessment in compliance with court directions.

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Issues involved:
The judgment involves a challenge to the impugned orders of assessment on the ground of non-compliance with the directions issued by the Court regarding determining the fair market value of shares under Section 56(2)(viib) of the Income Tax Act, 1961.

Summary:

Issue 1 - Challenge to Assessment Orders:
The Company's assessment order treated the share premium as "Income from Other Sources" under Section 56(2)(viib) of the Act. The order was challenged before the Commissioner Appeals and later before the Tribunal, which held that the provision cannot be invoked in the case of a transfer from a mother to her daughter.

Issue 2 - Compliance with Court Directions:
Following an appeal by the Revenue, the Court directed the assessing authority to determine the fair market value of the shares. The petitioner sought clarification from the Central Board of Direct Taxes (CBDT) while the assessment proceedings were ongoing. The CBDT rejected the request, stating that individual cases cannot be clarified under Section 119 of the Act.

Issue 3 - Non-Compliance with Court Directions:
The assessing officer did not complete the exercise of finding the fair market value of shares as directed by the Court. The petitioner raised concerns about non-compliance, lack of consideration for adjournment requests, and possession of a valuation report by Merchant Bankers that could impact the issue.

Issue 4 - Legal Compliance and Jurisdiction:
The Respondent argued that the assessment order provided adequate opportunity to the petitioner. However, it was evident that the direction of the Court had not been complied with, rendering the order unsustainable for want of jurisdiction, citing the decision in East India Commercial Co. Ltd. v. Collector of Customs.

Conclusion:
The Court set aside the impugned order, directing the assessing officer to complete the assessment in compliance with the Court's directions. The petitioner was to be provided with a reasonable opportunity during the process, and connected miscellaneous petitions were closed without costs.

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