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2018 (12) TMI 525

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..... e assessee had received the excess shares, renouncement was from the close relatives and the assessee is at liberty to transfer the shares to other relatives or shareholders at any point of time without attracting the taxation u/s 56(2)(vii)(c). Therefore, surrender of the rights of the close relatives in favour of the another close relative is covered for exemption u/s 56(2)(vii)(c) of the Act. In the basis of audit objection in the instant case, it is evident from the order u/s 263 that the case was taken up for revision on the basis of audit objection. The Revenue did not bring any other decision of Hon’ble Apex Court or the jurisdictional High Court to support their view. Therefore, respectfully following the decisions cited supra, we hold that the audit objection is not the basis for taking up the revision under section 263 and the Pr.CIT is not permitted to take up the case for revision only on the basis of audit objection. Respectfully following the view taken in SOHANA WOOLLEN MILLS. [2006 (9) TMI 157 - PUNJAB AND HARYANA HIGH COURT] and the Coordinate Bench of ITAT Chandigarh, we are unable to sustain the order of the Ld. Pr. CIT and accordingly, we set aside the order .....

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..... e, the assessee filed explanation objecting for the proposed revision u/s 263. The Ld. Pr. CIT in his show cause notice taken the support of the Apex court s decision in the case of M/s Khoday Distilleries Ltd., in civil appeal No.6654 and the assessee argued before the Ld. Pr. CIT that the decision of the Hon ble High Court in the case of M/s Khoday Distilleries is not applicable in the assessee s case and submitted that the facts of the case are different and distinguishable to the assessee s case. The assessee argued before the Ld. Pr. CIT without conceding, even if the Hon ble Apex court s decision supra is accepted, the shares allotted in excess of the proportionate ratio is to be considered for taxation, but not the entire allotment. According to the assessee only the difference shares allotted in excess of the eligible ratio (i.e.36,150) to be taken into consideration for taxation but not the entire 1,50,000 shares. The assessee submitted section 56(2)(vii)(c) of the Act is not applicable in the assessee s case even for excess shares, since other share holders have denounced for applying the rights issue thus there is no case for application of section 56(2)(vii)(c) of th .....

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..... the existing 24%. Hence, the Ld. Pr. CIT held that the ratio of the decision relied upon by the assessee has no application in the assessee s case. 3. In respect of allotment of shares as a condition of financing bank to convert part of the unsecured loan into equity, the Ld. Pr. CIT was of the view that still the provisions of section 56(2)(vii)(c) are attracted once there is difference in consideration paid and the market value of the shares received by the assessee from the company. 4. The other contention of the assessee raised before the Ld. Pr. CIT is that without conceding, even if it is presumed that section 56(2)(vii)(c) is applicable in the assessee s case, tax should be levied on what was lost by the existing shareholders and gained by the assessee as under: Particulars Before allotment After allotment Net worth 416.38 lakhs 566.38 lakhs No. of shares 1,00,000 2,50,000 Book value per share 416.38 226.55 Value diminished per sha .....

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..... her observed that the AO has not examined the issue and the assessment was made in a perfunctory manner without making any inquiry or verification about the taxability of difference in the value of shares allotted to the assessee and accordingly rejected the contention of the assessee. In the light of the above and in view of the Explanation 2 to sec.263 inserted by the Finance Act, 2015 w.e.f. 01.06.2015, the Ld. Pr. CIT, held that the decision of Hon ble Punjab and Haryana High Court in the case of Sohana Woollen Mills (296 ITR 238) relied upon by the assessee has no application and accordingly held that the assessment made by the AO is erroneous and prejudicial to the interest of the revenue and directed the AO to add the difference between the fair market value and the actual consideration of shares amounting to ₹ 4,74,57,000/- as income of the assessee u/s 56(2)(vii)(c) of the Act. 6. Aggrieved by the order of the Ld. Pr. CIT, the assessee filed appeal before this Tribunal. Along with appeal memo, the assessee filed as many as seven grounds in appeal. Subsequently, the assessee filed two additional grounds challenging the validity of revision on the basis of audit .....

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..... ccordingly, in the present case, seven of the existing shareholders did not subscribe for shares except the assessee Mr. Kumar Pappu Singh. The assessee received 1,13,850 shares on pro-rata basis according to his shareholding of 75,900 shares and was allotted 36,150 shares in excess of his entitlement which was denounced or not subscribed by other shareholders. The Ld.AR submitted that in the rights issue, the shareholders do not get any extra benefit or any amount other than the interest of the shareholder already had, since, all the shareholders of the company are having the interest over the entire assets i.e. reserves and surpluses. In the instant case, the assessee submitted that there was a compulsion for increase of capital of the company because of the pressure of banks. The assessee had advanced large sums to the company to meet the financial requirements and the banks have insisted the company to increase the capital base by converting the unsecured loans as share capital. The Ld.AR also argued that the issue of allotment of right shares does not increase the assets of the company and do not attract sub section 56(2)(vii)(c) of the Act. Therefore, requested to quash th .....

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..... notice dated 29.07.2016. The assessee filed reply on 09.08.2016 opposing the proposed addition u/s 154 of the Act. Thereafter there was no reply from the AO and meanwhile the proceedings u/s 263 were initiated and completed. Thus argued that the AO has considered the reply and after due verification accepted the reply submitted by the assessee, thus there is no case for revision u/s 263. The Ld.AR further submitted that the assessment was taken up for revision u/s 263 because of the audit objection which was accepted by the Ld. Pr. CIT in the revision order, hence there is no application of mind by the Ld. Pr. CIT and without application of mind, the Ld. Pr. CIT is not permitted to take up the case for revision u/s 263. The Ld.AR relied on the decision of Jaswinder Singh Vs. CIT [150 TTJ 33], wherein Hon ble ITAT held that audit objection under no circumstances can be called as record empowering the Commissioner to exercise the jurisdiction 263 of the Act. The Ld.AR also relied on the decision of CIT Vs. Sohana Wollen Mills [296 ITR 238], wherein Hon ble Punjab Haryana High Court held that the CIT has no jurisdiction to revise an order u/s 263 on the basis of audit objection. .....

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..... .2015 as per Explanation 2 of section 263 of the Act, the Pr.CIT is empowered to take up the case for revision if in the opinion of the Ld. Pr. CIT, the order passed by the AO is without making enquiries or verification which should have been made. Therefore, this case squarely falls under Explanation 2 of section 263 and the Ld. Pr. CIT has rightly taken up the case for revision and there is no interference called for in the order. The Ld.DR submitted that the transaction was between the company and the assessee, but not between the relatives and the assessee. Therefore, there is no application of the proviso of non application of section 56(2) in the assessee s case. In respect of audit objection, the Ld.DR argued that even audit objection can become a source of information and there was a substance in the audit objection and the fact is that the assessee has received the shares for lesser value than the fair market value, therefore cannot escape from the records of section 56 of the Act. With regard to the allotment of shares over and above the shareholding of the assessee, the Ld.DR supported the order of the Ld. Pr. CIT. In addition, the Ld.DR relied on the orders of the Ld. P .....

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..... . S. No. Name Address No.of Shares Share Value as on 01.04.2012 Total Amount in Rs. Relationship 1. Kumar Pappu Singh D.No.23-3-26, Sundar Ramnagar, Sajjapuram, Tanuku-534211 75900 100 7,590,000 2. Rama Devi D.No.23-3-26, Sundar Ramnagar, Sajjapuram, Tanuku-534211 3600 100 360,000 Wife 3. Divya Sree D.No.23-3-26, Sundar Ramnagar, Sajjapuram, Tanuku-534211 5510 100 551,000 Daughter 4. Devendra Chowhan D.No.23-3-26, Sundar Ramnagar, Sajjapuram, Tanuku-534211 5000 100 500,000 Son 5. Kapil Deo Singh D.No.134, South Samaj, Lower Bazar, Ranchi .....

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..... er the head income from other sources u/s 56(2) of the Act and hence, the section 56(2)(vii)(c) has no application. We have gone through the provisions of 56(2)(vii)(c) and this provision was brought as an anti-abuse measure, seeks to tax the understatement in consideration as the income in the hands of the recipient (of the corresponding asset) as against the donor in the case of Gift Tax Act. The transactions between close the relatives are outside the scope of application of 56(2)(vii)(c). The legislature in its wisdom excluded the transaction of close relatives for the purpose of taxation under the income from other sources. Even the gifts received from the close relatives u/s 56(2)(v) are outside the scope of 56(2). Though the shares are allotted to the assessee, the entire shareholding of the company is retained by the family and no share was allotted to the outsiders. In this case, though the assessee had received the excess shares, renouncement was from the close relatives and the assessee is at liberty to transfer the shares to other relatives or shareholders at any point of time without attracting the taxation u/s 56(2)(vii)(c). Therefore, surrender of the rights of the .....

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..... 7; 4,74,57,000 under Rule 11U/11UA of the IT Rules for which the assessee submitted explanation opposing the proposed rectification on 09.08.2016. The AO has not communicated the decision after receipt of the rely, to assessee with regard to the dropping/otherwise of the proceedings initiated u/s 154 of the Act. Pending finalization of 154 proceedings, the Pr.CIT has initiated the proceedings u/s 263 by issue of notice dated 19.05.2017. In this case, the assessment was completed u/s 143(3). The entire material was placed before the AO in the balance sheet, profit and loss account. The initiation of proceedings u/s 263 was due to the audit objection as evident from the order u/s 263. The Ld. Pr. CIT did not dispute the fact that the revision was taken on audit objection he has emphatically stated that there is substance in the audit objection. With regard to taking up the case for revision on the basis of audit objection, the assessee relied on the decision of Jaswinder Singh Vs. CIT (Chandigarh Bench), [2013] 31 taxmann.com 80 (Chandigarh - Trib.)wherein, the coordinate bench held as under : 21. The Hon'bleGauhati High Court in B A Plantation Industries Ltd. (supra) has .....

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..... (supra) that notice issued by the CIT at the suggestion of the Audit Department without applying his mind could not be sustained in law. 23. In the backdrop of the above said settled legal precedents, we find that the CIT in the present case had also initiated the proceedings under s. 263 of the Act on the basis of the audit objections. Show-cause notice was issued in the present case for non-deduction of tax at source, out of certain expenses incurred by the assessee and order passed by the CIT under s. 263 of the Act directing the AO to redetermine the income of the assessee by applying a rate other than the rate applied by the AO, being without jurisdiction, is not tenable in law. We find no merit in the plea of the learned Departmental Representative for the Revenue that the source of information in the present case was audit objection, but there was independent application of mind by the CIT. The provisions of s. 263 of the Act are clear and absolute that the power is to be exercised by the CIT from the examination of the records of the proceedings under the Act. The Explanation under s. 263 of the Act defines 'records' as all records relating to any proceedings .....

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