2024 (10) TMI 356 - AT - Income Tax

PCIT's revision rejected where preference shares issued at minimal 0.65% above fair market value under Rule 11UA

ITAT Chennai held that PCIT's revision u/s 263 was unjustified where assessee issued compulsory convertible preference shares at Rs. 416.69 per share ... Revision u/s 263 - no addition u/s 56(2)(viib) - PCIT has held that the A.O has not made complete verification and inquiry in respect of consideration received by the assessee in excess of fair market value to be charged as income from other sources u/s. 56(2) (viib) and passed order without application of mind - HELD THAT:- The assessee has issued compulsory convertible preference shares at a price of Rs. 416.69 per share as against the fair market value of Rs. 414 determined as per Rule 11UA. There is difference of 0.65% only in the issue price and FMV. The A.O during the course of assessment proceedings has issued notice u/s. 142(1) and in question No.9 has asked for a detailed note on determination of the fair market value of the issued share as per section 56(2)(viib) and the assessee has submitted the details after which the A.O has not made any addition. ITAT, Delhi Bench in the case of Sakshi Fincap Pvt. Ltd. [2024 (5) TMI 1232 - ITAT DELHI] has held that the amendment brought in Rule 11UA was introduced to mitigate hardship faced by taxpayers by the unintended invocation of section 56(2)(viib) r/w Rule 11UA and therefore, the same is a curative amendment. The difference in the fair market value and the issue price of compulsory convertible preference shares is only 0.65%, therefore as per Rule 11UA issue price is deemed to be fair market value and hence no scope for addition required to be made u/s. 56(2)(viib) of the Act. In order to invoke Section 263 of the Act the twin condition of erroneous and prejudicial to the interest of Revenue are to be satisfied. In the present case, the second condition that order is prejudicial to interest of revenue is not being satisfied. We, therefore do not agree with the Ld PCIT that order the order passed by AO is prejudicial to the interest of revenue. We, therefore set aside the order passed by Ld. PCIT. Assessee appeal allowed. Issues:1. Validity of order u/s 263 of the Income-tax Act, 1961.2. Application of Rule 11UA in valuation of compulsory convertible preference shares.3. Interpretation of Section 56(2)(viib) regarding fair market value and issue price.4. Justification for setting aside the assessment order by the Principal Commissioner of Income Tax.Analysis:1. The appeal challenged the order passed by the Principal Commissioner of Income Tax (PCIT) under section 263 of the Income-tax Act, 1961, for the Assessment Year 2018-19. The appellant contended that the PCIT erred in not specifying the grounds for initiating action under section 263, violating principles of natural justice. The appellant also argued that the PCIT did not pass a speaking order against all submissions, and the order was merely a 'change in opinion,' which was unreasonable and bad in law.2. The case involved the issuance of compulsory convertible preference shares by a private limited company at a price higher than the fair market value. The Assessing Officer (AO) did not make any addition under section 56(2)(viib) after verification during assessment. The PCIT set aside the assessment order, stating that the AO did not conduct complete verification and inquiry, leading to an erroneous order. The appellant argued that the AO had raised questions regarding the share valuation under Rule 11UA, and the difference between issue price and fair market value was within the permissible tolerance limit of 10%.3. The appellant contended that the investment in the company was made by a venture capital company, exempting it from additional tax liability as per Notification GSR 685(E). The appellant also relied on the retrospective application of Rule 11UA, introduced to address unintended consequences of section 56(2)(viib). The ITAT, Delhi Bench's decision in a similar case supported the appellant's argument that the difference in valuation did not warrant an addition under section 56(2)(viib).4. The ITAT, Chennai, held that the amendment to Rule 11UA was a curative measure to prevent undue tax implications for taxpayers. The minor difference in valuation did not meet the threshold for being prejudicial to the revenue's interest. Therefore, the ITAT set aside the PCIT's order, ruling in favor of the appellant and allowing the appeal for statistical purposes.This detailed analysis highlights the key legal arguments and the reasoning behind the ITAT's decision to overturn the PCIT's order under section 263 of the Income-tax Act, 1961.