M/s Majju Image & Brand Consultants Pvt Ltd , Bangalore V. The Principal Commissioner of Income Tax , Bangalore

ITA 2015/BANG/2018

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 7519 (ITAT-BANGALORE)
• Duration Of Justice: 4 year(s) 1 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-07-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2014-2015
• Appeal Filed On: 12-06-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SUMER SINGH MEENA
• Keywords: Period of limitation; Fair market value; Valuation report; Prejudicial to interest; Set aside; Capital Gains
• Section: 263; 143(3); 142(1); 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL ‘A’ BENCH : BANGALORE BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER ITA No. 2015/Bang/2018 Assessment Year : 2014-15 M/s. Majju Image & Brand Consultants Pvt. Ltd., No. G1, Accolade Apartments, Millers Road, 2 nd Cross, Benson Town, Bangalore – 560 046. PAN: AAICM6586E Vs. The Pr. Commissioner of Income tax, Bangalore – 4, Bangalore. APPELLANT RESPONDENT Assessee by : Shri B.S. Balachandran, Advocate Revenue by : Shri Sumer Singh Meena, CIT-DR Date of Hearing : 14-07-2022 Date of Pronouncement : 14-07-2022 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal is filed by assessee against order u/s. 263 dated 25/01/2018 passed by Ld.Pr.CIT, Bangalore – 4 for A.Y. 2014-15 on following grounds of appeal: “1. The impugned revisionary order passed by the Learned Principal Commissioner of Income-tax (PCIT) u/s.263 dated; 25-01-2018 is opposed to the facts of the case and the law and therefore, it is liable to be set-aside. Page 2 of 15 ITA No. 2015/Bang/2018 REVISION U/S.263. 2.1. The Learned PCIT failed to appreciate that the assessment order u/s.143 (3) dated; 20-06-2016, was neither erroneous nor prejudicial to the interest of the revenue and issue of show cause notice u/s.263 dated; 14-11-2017, was unwarranted and unjustified. 2.2. The Learned PCIT failed to appreciate that the assessment order u/s.143 (3) dated; 20-06-2016 was passed after conducting inquiry and verification with regard to the valuation of shares and premium charged, and therefore, invoking of revisionary jurisdiction u/s.263 was unsupportable in the fact and circumstances of the case. 2.3. The learned PCIT failed to draw a distinction between a case of lack of enquiry and inadequate enquiry for the purpose of revision u/s.263 and consequently, misdirected herself in concluding that the assessment order was erroneous and prejudicial to the interest of the Revenue, justifying revision by her under the said section. 2.4 The Learned PCIT ought not to have failed to appreciate that an assessment order cannot be set aside u/s.263 on the ground that it was erroneous by merely taking a different view, stating that the AO had not made adequate enquiries, when all the material facts were on record and the Learned AO had taken a view on the basis of the statutory report of the auditor under Rule 11UA. 3. The Grounds are taken without prejudice to one another and the Appellant craves leave to add or delete or modify or revise any ground at the time of hearing before the Hon'ble ITAT. For these and other grounds that may be urged at the time of hearing, it is prayed that the Hon'ble ITAT may be pleased to allow the appeal in the interest of the equity and justice.” 2. Brief facts of the case are as under: 2.1 Assessee is a company and filed its return of income for year under consideration on 29/09/2014 declaring income of Rs.1,26,580/-. The Ld.AO observed that the assessee is engaged in the business of providing training in the field of personality Page 3 of 15 ITA No. 2015/Bang/2018 development, etiquette training and communication skill of private individuals and corporate in India as well as abroad. The case was selected for limited scrutiny to verify large share premium received during the year. Assessee was issued notice u/s. 142(1) in respect of the same. On 20/06/2016, the Ld.AO passed the order u/s. 143(3) accepting the returned income filed by the assessee. Subsequently the Ld.Pr.CIT issued notice u/s. 263 of the Act that reads as under: Page 4 of 15 ITA No. 2015/Bang/2018 Page 5 of 15 ITA No. 2015/Bang/2018 2.2 The Ld.Pr.CIT alleged that, the assessing officer failed to conduct adequate enquiries regarding the issues and failed to bring to tax the correct amount while completing assessment u/s. 143(3). In response to the notice u/s. 263, the assessee filed submissions on 28/12/2017. After considering the submissions, the Ld.Pr.CIT passed impugned order by observing as under: “4. The averments made by the ld. Counsel for the assesses arc carefully examined in the light of facts of the case, material placed on record and the provisions of sec. 263 of the Act. During the assessment proceedings, the AO has accepted the valuation report without any verification. In the Valuation report the auditor clearly stated that he has solely relied on the information provided by the company and he has not carried out any tests to establish the accuracy of such statements and information provided by the management. The statement of Auditor clearly shows that the AO should have conducted adequate enquiries regarding the basis on which the share value was arrived at Rs.1,662, as the Auditor has admittedly not conducted any tests/ verification on the information provided by the company. The Assessing Officer did not make requisite enquiry on the issue as to "what prompted the subscribers" to subscribe Shares at a high premium, issued by a closely held company. 5. The fair market value can be book value or value as per discounted cash flow method. In this regard, a report of valuation dated 01.03.2014 was submitted by the assessee during assessment proceedings. On going through this report, it is seen that accountant has taken Page 6 of 15 ITA No. 2015/Bang/2018 future cash flow as certified by the management. No verification of projections and assumptions adopted by management was made by the auditor. In DCF method, future free cash flow is the most relevant variable which can change the value to any extent. The revenues are estimated at high values without any basis. Such exorbitant estimated free cash flow was used in valuing shares by DCF method. Therefore, it is clear that valuation made on the basis of unverified exorbitant FCF given by management has given unjustifiable value of shares @ Rs. 1,662/-. This is not as per recognized DCF method but an arbitrary method to arrive at higher value to issue shares at huge premium. Considering this the valuation of shares done by auditor as per DCF method is not reliable and should have been enquired into by the A.O, which was not done. 6. On the facts of the case it appears that no enquiry was conducted by the AO which renders the order erroneous and prejudicial to the interest of revenue. It can only be concluded that there was non application of mind by the AO and hence proceedings u/s 263 of the 1961 Act are warranted. 7. In view of the above, the assessment order passed u/s. 143(3) by the ITO, Ward-4(1)(3), Bangalore on 20.06.2016 is erroneous and prejudicial to the interest of Revenue. 8. In its contentions that the section 263 cannot be invoked in the facts and circumstances of the case, the assessee company has relied on various judicial precedents in its written submissions. All these legal propositions canvassed are not relevant to the facts of the present case. In the present case, as evident from the record, the claim of the assessed accepted by the Assessing Officer in a mechanical manner. It is incumbent on the AO to make requisite verification before allowing a claim made by the assessee. The AO cannot remain passive when the issues in the return of income provoke further inquiries. Thus, the assessment in question was made without making proper inquiries or verification which should have been made on the facts of the case. Further in view of clause (a) of Explanation-2 to sec. 263 as inserted in the statute from 01.06.2015, if there is failure on part of the AO to make proper enquiries, the assessment will be deemed to be erroneous and prejudicial to revenue. The case laws relied upon by the assessee company on the scope of expressions `erroneous' and 'prejudicial to the interests of the revenue' were all rendered prior to the insertion of Page 7 of 15 ITA No. 2015/Bang/2018 Explanation-2 to sec. 263 and therefore the said decisions are of no avail to the assessee after the insertion of Explanation-2 to sec. 263. Further reliance was placed on the following case laws where in the Commissioner of Incometax was justified in treating assessment order erroneous and prejudicial to interest of revenue where the AO has no not made proper enquiries of issues which he should have been done while completing assessment. (a) Rajmandir Estates (P.) Ltd. v. Pr. CIT (2016) 386 ITR 162 (Cal. HC). In this case SLP filed by the assessee was dismissed by the Hon'ble Supreme Court vide citation (2017) (77 taxmann.com 285) (SC). (b) Subhalakshmi Vanijya (P.) Ltd. v. CIT, (2015) (155 ITD 171)(Kol-trib.). (c) Pragathi Financial Management (P) Ltd vs CIT (82 Taxmann.com 12) (Calcutta) 9. From the foregoing discussion, it is manifestly clear that the assessment order dated 20.06.2016 passed by the Assessing Officer in the case of the assessee for A.Y. 2014-15 is not only erroneous but also prejudicial to the interests of revenue and the twin conditions as contemplated in sec. 263 are satisfied in the present ease. Consequently, the assessment is set aside to the file of the AO with a direction to the Assessing Officer to examine the aforesaid issues and redo the assessment afresh as per law after affording reasonable opportunity of being heard to the assessee.” 2.3 Aggrieved by the order of Ld.Pr.CIT, assessee filed the present appeal before this Tribunal. 3. The Ld.AR at the outset submitted that, there is a delay of approximately 52 days in filing the present appeal before this Tribunal. He submitted that, the assessee received the impugned order on 21/02/2018 and the appeal was to be filed on or before 20/04/2018, whereas, the appeal is filed by the assessee on 13/06/2018 thereby causing the delay. The Ld.AR submitted that, the issue went out of sight and representative of assessee could not take necessary steps to file the present appeal within the period of limitation. It is submitted that, the inadvertence led Page 8 of 15 ITA No. 2015/Bang/2018 to delay of approximately 51 days and he prayed for the same to be condoned. It is also submitted by the Ld.AR that there is no malafide intention on behalf of assessee in not filing the present appeal within time. 3.1 The Ld.DR on the contrary opposed the delay to be condoned. 3.2 Considering the circumstances under which the delay was caused in filing the present appeal before this Tribunal and that nothing contrary could be established by the revenue before us. We place reliance on following observations by Hon’ble Supreme Court in case of Collector Land Acquisition Vs. Mst. Katiji & Ors., reported in (1987) 167 ITR 471 wherein, Hon’ble Court observed as under:- “The Legislature has conferred the power to condone delay by enacting section 51 of the Limitation Act of 1963 in order to enable the courts to do substantial justice to parties by disposing of matters on de merits ". The expression “sufficient cause” employed by the Legislature is adequately elastic to enable the courts to apply the law in a meaningful manner which subserves the ends of justice that being the life-purpose of the existence of the institution of courts. It is common knowledge that this court has been making a justifiably liberal approach in matters instituted in this court. But the message does not appear to have percolated down to all the other courts in the hierarchy. And such a liberal approach is adopted on principle as it is realized that : 1. Ordinarily, a litigant does not stand to benefit by lodging an appeal late. 2. Refusing to condone delay can result in a meritorious matter being thrown out at the very threshold and cause of justice being defeated. As against this, when delay is condoned, the highest that can happen is that a cause would be decided on merits after hearing the parties. ......................................................1.Any appeal or any application, other than an application under any of the provisions of Order XXI of the Code of Civil Procedure, 1908, may be admitted after the prescribed period if the appellant or the applicant satisfies the court that he had sufficient cause for not preferring the appeal or making the application within such period.” 3.3 Considering the submissions by both sides and respectfully following the observation by Hon’ble Supreme Court, we find it fit to condone the delay caused in filing the present appeal as it is Page 9 of 15 ITA No. 2015/Bang/2018 not attributable to the assessee. Accordingly, we allow the application seeking condonation of delay. 4. The Ld.AR submitted that, all the issues alleged by assessee in the present appeal is against invoking the revisionary jurisdiction u/s. 263 of the Act. He submitted that, the assessment order dated 20/06/2016 cannot be held to be erroneous and prejudicial to the interest of revenue, as the Ld.AO specifically called for the details in respect of the issues for which the case of assessee was selected for limited scrutiny. The Ld.AR placed reliance on notice issued u/s. 142(1) which has been filed before us that reads as under: Page 10 of 15 ITA No. 2015/Bang/2018 Page 11 of 15 ITA No. 2015/Bang/2018 5. The Ld.AR submitted that copy of share valuation certificate issued by Chartered Accountant was filed before the Ld.AO during the original assessment proceedings, copy of absolute sale deed in respect of sale of flat at Benson Cross Road, copy of Note on purchase of immovable property by the assessee were filed vide letters dated 01/03/2014, 10/03/2014 and 30/05/2016. The Ld.AR thus submitted that, the materials relevant for verifying the huge share premium received by assessee during the year was made available to the Ld.AO during the original assessment proceedings and therefore the assessment order cannot be held to be erroneous and prejudicial to the interest of revenue. The Ld.AR submitted that, the share premium is supported by the valuation report, which was not been found fault with by the Ld.AO. He submitted that, the valuation certificate was as per Rule Page 12 of 15 ITA No. 2015/Bang/2018 11UA(2)(b) and the basis of adopting the fair market value of the shares and charge of premium for each share stands explained in the valuation report. 6. The Ld.AR submitted that the assessee also furnished return of income of Shri. Samir Prasad for A.Y. 2014-15, wherein the capital gain accrued to Shri. Samir Prasad was disclosed, and the entire value of consideration that represented value of the shares allotted at premium, was taxed in his hands in the return of income. The Ld.AR thus submitted that, no prejudices is caused to the revenue, as the tax has been paid against the value of consideration, that represented the value of shares paid by assessee to Shri. Samir Prasad against the sale of flat at Benson Cross Road. He thus prayed that the revisionary proceedings initiated u/s. 263 of the Act may be held to be bad in law. 7. On the contrary, the Ld.DR submitted that, the assessee is a newly incorporated company, without any net worth, and therefore, the valuation report at such an early stage cannot be prepared. He submitted that, the shares were issued to two persons at different value, which was questioned by the Ld.Pr.CIT, for not having verified by the Ld.AO. The Ld.DR thus submitted that the assessing officer passed the order, assuming incorrect facts, and therefore the order dated 20/06/2016 is erroneous and prejudicial to the interest of revenue. 8. We have perused the submissions advanced by both sides in the light of records placed before us. 9. From the financials filed by the assessee in the paper book, placed at pages 17-30 of paper book, we note that the initial paid up capital of assessee was Rs.1,00,000/-, which was later on increased to Rs. 6 Lakhs comprising of 60,000 shares of face value Page 13 of 15 ITA No. 2015/Bang/2018 of Rs. 10/-. We note that out of the 60,000 shares, 55,047 shares were allotted to Ms. Manjusha Prasad having face value of Rs. 10/- each. Subsequently, Mr. Samir Prasad expressed his desire to participate in the equity of the company and agreed to contribute his flat situated at Accolade apartment being Flat No. S4, Benson Cross Road, Bangalore towards his share capital. 10. It has been submitted that Mr. Samir Prasad is nephew of Ms. Manjusha Prasad. We note that the value of the house contributed by Mr. Samir Prasad towards the share capital was arrived at Rs.80,25,600/- and the assessee company allotted 4,752 equity shares having face value of Rs. 10/- each, at a premium of Rs.1,662/- per share to him as sale consideration for the immovable property contributed by him towards the share capital. 11. To this extent, there is a sale deed executed on 10/03/2014 which is a registered document placed at pages 35-46 of the paper book. 12. It is the contention of the revenue that, the assessee do not have any revenue except for professional service fee received amounting to Rs.7,95,425/- during the year under consideration and there is an inadequate enquiry by the Ld.AO on this issue. We note that the Ld.AO has already passed order giving effect to the order u/s. 263 on 12/12/2018. Further we note that the Ld.Pr.CIT has questioned the DCF method of valuation, holding it to be an arbitrary method, as it is based on the projections given by the management. We note that the Ld.AO while passing the order giving to order u/s. 263 rejected the DCF method and applied the provisions of section 56(2)(viib) for making disallowance of the difference being the excess fair market value by computing as under: Page 14 of 15 ITA No. 2015/Bang/2018 Consideration received for issue of 4,752/- share at a premium of Rs.1,662/- each Rs. 78,97,824/- Less: Face value of Rs. 10/- per share for 4,752 shares is treated as fair market value in absence of any suitable documentary evidence from the assessee Rs. 47,520/- Consideration in excess of fair market value to be charged to tax under 56(2)(viib) Rs. 78,50,304/- 13. Admittedly Mr. Samir Prasad has paid taxes against valuation of the shares at premium as capital gains for the year under consideration. Further, the credit worthiness of the investor / share applicant being Shri Samir Prasad stands explained as he has other capital gains to tax. He cannot be held to be unexplained creditor as the disallowance by the Ld.AO has not been made u/s. 68 of the Act but the disallowance is made by applying provisions of section 56(2)(viib) which cannot be applicable to the present facts of the case. In our view, based on such peculiar facts, 263 proceedings cannot be upheld in the present case. We therefore quash and set aside the impugned order passed by the Ld.Pr.CIT u/s. 263 of the Act. In the result, the appeal filed by the assessee stands allowed. Order pronounced in open court on 14 th July, 2022. Sd/- Sd/- (CHANDRA POOJARI) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 14 th July, 2022. /MS / Page 15 of 15 ITA No. 2015/Bang/2018 Copy to: 1. Appellant 4. CIT(A) 2. Respondent 5. DR, ITAT, Bangalore 3. CIT 6. Guard file By order Assistant Registrar, ITAT, Bangalore