ITAT quashes revision proceedings under section 263 where shares allotted at face value without premium

The ITAT Ahmedabad quashed revision proceedings under section 263 initiated by PCIT against an assessee company. The AO had accepted the company's returned loss after proper inquiry regarding share allotment at face value of Rs. 10 without premium between holding and subsidiary companies. PCIT incorrectly invoked section 56(2)(viib) provisions, which apply when consideration received exceeds face value of shares issued. Since shares were allotted only at face value without premium, and the company was not a public company, section 56(2)(viib) was inapplicable. ITAT found no inadequate inquiry by AO and allowed the assessee's appeal.

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Issues:
Delay in filing appeal due to Covid-19 pandemic, validity of revision order under section 263 of the Income Tax Act, 1961, applicability of section 56(2)(viib) of the Act, adequacy of inquiry by the Assessing Officer, grounds of appeal raised by the assessee.

Analysis:
The appeal was filed by the assessee against an ex-parte revision order dated 08-03-2021 passed by the Principal Commissioner of Income Tax, Ahmedabad-1, related to the assessment year 2015-16. The delay in filing the appeal was condoned due to the Covid-19 pandemic, following a judgment by the Hon'ble Supreme Court extending the limitation period. The delay was reduced to 44 days, and the appeal was accepted for hearing.

The facts of the case involved the issuance of shares by the assessee company to another entity, where the consideration received exceeded the face value of the shares. This triggered the application of section 56(2)(viib) of the Act, which imposes tax on the difference between the consideration received and the fair market value of the shares. The Assessing Officer failed to examine the fair market value of the shares as required by the IT Rules, leading to an erroneous assessment order.

The assessee challenged the revision order on various grounds, including the validity of the order under section 263 of the Act, adequacy of inquiry by the Assessing Officer, and applicability of section 56(2)(viib) in the case of share issuance between related companies. The assessee argued that the subsidiary company of a public listed company should not be considered privately held, and the provisions of section 56(2)(viib) did not apply in this context.

The Tribunal considered the submissions of both parties and examined the materials on record, including the notices issued by the Assessing Officer and the replies provided by the assessee. It was noted that the Assessing Officer had made necessary inquiries before accepting the returned loss claimed by the assessee. The Tribunal found that the invocation of revision proceedings under section 263 was not justified, as the provisions of section 56(2)(viib) did not apply to the transaction between the holding and subsidiary companies.

Ultimately, the Tribunal allowed the appeal filed by the assessee, quashing the revision order and holding that the grounds raised by the assessee were valid. The appeal was allowed, and the order was pronounced in open court on 01-10-2024.

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