TaxTMI 
TaxTMI 
2022 (8) TMI 1139
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....as it is prejudicial to the interest of revenue. Since as per section 56(viib) of the Act, the value of the shares has to be calculated based on the formula stipulated under Rule 11U and 11UA of the Income Tax Rule 1962 which has not been carried out by the Assessing Officer while passing order u/s 143(3). The Assessing Officer simply accepted the valuation furnished by the Assessee and thereby made the Assessment order erroneous. Upon applying the formula under Rule 11U and 11UA of the Rules, the valuation of the shares come to only Rs. 23/- approx. Therefore, if the section 56(2)(viib) is applied and amount of Rs. 127/- (Rs. 150-Rs.23) per share escaped assessment thereby in respect of 8,00,000 shares amount to Rs, 10,16,00,000/- is aggregate escaped assessment. (ii) According to the Income Tax Appellate Tribunal, the Assessee had furnished the details to Assessing Officer in order to substantiate the fair market value of shares by filing several documents. However, the Appellate Tribunal failed to consider that the Assessing Officer did not consider the fair market value of the shares by applying rule 11U & 11UA and passed the order of Assessment and thereby caused was ....
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....Rs. 127/- on 8,00,000 shares amounting to Rs. 10,16,00,000/- should not be added back to the total income of the assessee company. This notice was issued under Section 263 of the Act. The assessee submitted their reply contending that the value of Rs. 150/- per share is the fair value of shares of the company which has been worked out by obtaining certificate from Chartered Accountant. The assessee referred to the Explanation 1 to Clause 7(b) of Section 56 of the Act and submitted that the fair market value of the shares has been arrived at by substituting the cost price of the assets of the company with the fair market value of those assets. The basis of the valuation was explained by the assessee by stating that the assessee holds 12,90,000 equity shares of M/s. Shiv Edibles which is equal to 36.35% equity capital of the said company and similarly the company holds 3,50,000 equity shares of M/s. Shiv Agrevo Limited which is equal to 19.96 % equity shares of that company. It was stated that both the companies are the group companies/associates in which the assessee holds significant control and while arriving at the fair market value of the shares, the cost of these investments ha....
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....and verify the computation determining the fair market value of the equity shares at Rs. 150/- per share. Thus, the assessing officer was directed to initiate fresh assessment proceedings and carry out necessary verification and take action accordingly after verification of the correctness of the claim of the assessee. 4. The assessee filed an appeal before the tribunal contending that the assessing officer had conducted detailed enquiry, several questions were asked to the assessee during the assessment proceedings and in this regard, filed a paper book containing all the documents which were placed before the assessing officer. The copy of the paper book has also been placed before us which includes the copy of the Chartered Accountant Certificate, the calculation of fair value, the relevant forms issued by the Registrar of Companies, the copies of the audited balance sheet for the year ended 31.03.2013 and the copies of the order sheet entries to show that detailed enquiry was conducted by the assessing officer. It was further contended that a specific query was raised by the assessing officer as regards the applicability of Section 56(2)(viib) of the Act for which the assess....
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....volved in the assessment and therefore, it is clear that the assessing officer failed to apply his mind. Further, since the assessing officer did not conduct proper enquiry either to reach the satisfaction or to determine the fair market value in terms of the rules, the Commissioner was right in holding that proper enquiry was not held and therefore the assessment was erroneous and prejudicial to the interest of revenue. Further it is submitted that the satisfaction which is required was not reached by the assessing officer which he was duty bound in terms of the rules. In support of his contention, reliance was placed on the decision in the case of Principal Commissioner of Income Tax - II Versus Shri Brahma Deb Gupta 2018 SCC Online (Del) 9946, Toyota Motor Corporation Versus Commissioner of Income Tax (2008) 17 SCC 535 and Nagal Garment Industries Private Limited Versus Commissioner of Income Tax-I and Another 2018 (2) MPLJ 494 (MP). 6. Mr. Avra Majumdar, learned advocate appearing for the respondent assessee submitted that there is no provision in the Act which requires the assessing officer to record reasons while accepting the claims of the assessee and reasons are require....
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....dopted a recognized method for valuation and the revenue is unable to show that the assessee adopted a demonstratively wrong approach or that the method of valuation was made on a wholly erroneous basis or that it committed mistake which goes to the root of the valuation process. In support of such contention, reliance was placed on the decision in the case of Principal Commissioner of Income Tax - 2 Versus M/s. Cinestaan Entertainment Private Limited 2021 (3) TMI 239 (Del.). 7. We have heard Mr. Om Narayan Rai, learned Advocate for the appellant and Mr. Avra Majumder, learned Advocate assisted by Sk. Md. Bilwal Hossain and Mr. Binayak Gupta, advocates for the respondent. 8. To answer the substantial question of law suggested by the revenue, we have to first take note of the statutory provisions. Section 56 deals with income from other sources. Sub-Section 1 of Section 56 states that income of every kind which is not to be excluded from total income under the Act shall be chargeable to income tax under the head "income from other sources" if it is not chargeable to income tax, under any of the heads specified in items A to E. Sub-Section 2 states that in particular and withou....
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.... (i) as may be determined in accordance with such method as may be prescribed; or (ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, whichever is higher; 9. Determination of fair market value of the property other than immovable property is contained in Chapter H occurring in Part II of the Income Tax Rules. Rule 11U deals with the meaning of the expressions used in determination of fair market value for the purposes of Rule 11U and Rule 11UA. Clause (a) of Rule 11U defines "accountant" (i) for the purposes of Sub-rule (2) of Rule 11UA to mean a Indian Institute of Chartered Accountants of India within the meaning of the Chartered Accountants Act, 1949 which is not appointed by the company as an auditor under Section 44 AB of the Act or under Section 224 of the Companies Act, 1956. Clause (i) of Rule 11U defines unquoted shares and securities to mean in relation to shares and securities which....
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..... It is not clear as to whether the said note has to be read as part and parcel of the assessment order as it has been mentioned that it is a note not for the assessee. Then the question would be as to for what purpose the note was appended by the Assessing Officer after completing the assessment and affixing his signature and seal. Be that as it may in the note the Assessing Officer states that during the year the assessee issued 8,00,000 equity shares of Rs. 10/- with a premium of Rs. 140/- per share amounting to Rs. 12,00,00,000/- to five companies. The Assessing Officer further states that the assessee company produced minutes book about fixation of share premium to justify the premium fixed and also produced minutes books and other books of accounts of investor companies along with their directors. After mentioning so, the Assessing Officer states that considering the facts, question of artificially rising of capital by circular transaction does not arise in the case and hence, question of any credit from so-called paper, shell companies does arise. After making such an observation, the characteristics of the investor companies were given in a tabulated form. The assessment re....
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.... face value of such shares, the aggregate consideration received for such shares as exceeds fair market value of shares shall be deemed to be the income of that company chargeable to income tax for the previous year in which such failure has taken place and it shall also be deemed that the company has under reported the said income in the consequence of misreporting, referred to in Sub-Section (8) and Sub-Section (9) of Section 270A for the said previous year. Explanation under Clause 7B states that for the purpose of the said clause, the fair market value of the shares shall be the value (i) as may be determined in accordance with such method as may be prescribed or (ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of the issuance of shares, of its assets, including tangible assets, being goodwill, knowhow, patent, copy right, trade market, license, franchise or any other business or commercial rights of similar nature whichever is higher. Thus, the key word occurring in Explanation A (a)(ii) is the "satisfaction" of the Assessing Officer. The satisfaction of the Assessing Officer becomes paramount because for....
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.... the reason to exercise such power. In J.L. Morrison (India) Ltd. this Court noted a decision of the Tribunal wherein it was observed that the Assessing Officer is expected to record his own reasons for the conclusion reached therein and unless such reasons are recorded, the purpose of providing revisional/ appellate jurisdiction in the Income Tax Act would be defeated. Reliance was placed on the decision in CIT Versus M/s. Infosys Technologies Ltd. (2012) 341 ITR 293 (Karnataka) wherein an argument was advanced as done before us that there is no need for the Assessing Officer to spell out reasons while accepting the claim of the assessee. Such argument was rejected by holding that it would give a free hand to the Assessing Officer just to pass an order without reasoning and to spell out reasons only in a situation where finding needs to be against the assessee or any claim to be verified by the assessee is denied. Reference was also made to the decision of the Hon'ble Supreme Court in S.N. Mukherjee Versus Union of India AIR 1990 SC 1984 wherein it was held that except in cases where the requirement has been dispensed with expressly or by necessary implication an administrative au....
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....whether the Assessing Officer had complied with the statutory requirement and if he had done so whether the Commissioner was right in invoking his power under Section 263 of the Act. As noted above, there are two methods to arrive at a fair market value of the shares. One being determined in accordance with such method as may be prescribed and the other as may be substantiated by the assessee to the satisfaction of the Assessing Officer and the higher of those figures has to be adopted. As rightly pointed out by the learned Standing Counsel for the revenue in none of the cases referred to by the learned Advocate for the assessee such an issue arose for consideration. In fact, in Gabriel India Ltd. the Hon'ble Division Bench of this Court refers to the decision cited by the revenue in the case of S.S. Gadgil wherein the Hon'ble Supreme Court has pointed out that the Income Tax Authorities are administrative authorities whose proceedings are regulated by statutes. If such is the position, the Assessing Officer is bound by the statutory mandate. The Assessing Officer cannot be heard to say that by inference it has to be taken that he has applied his mind to the valuation submitted by ....
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....s of the case, it may be true that the Assessing Officer issued a questionnaire to the assessee, containing a question with regard to the applicability of Section 56 (2)(viib) of the Act. The assessee submitted an explanation stating that the shares have been issued by the assessee at fair value based on the valuation certificate obtained by the chartered accountant. The assessee also enclosed the methodology of calculation as adopted and certified by the chartered accountant. Thus, the question would be whether the Assessing Officer has nothing else to do in the matter. The said question has to be answered in the negative to hold that it is at that point of time, the duty of the Assessing Officer commences to conduct enquiry as he is required to be satisfied that the market value of the share stated to be a fair market value by the assessee is correct, has the computation been done in terms of Rule 11UA of the Rules and it is thereafter, he has to accept the value whichever is higher. Thus, merely by conducting enquiry, calling for documents and materials discussing the case with the assessee are not sufficient to comply with the mandate in Section 56 (2)(viib). As mentioned earli....