TMI Blog2023 (6) TMI 805X X X X Extracts X X X X X X X X Extracts X X X X ..... its return of income filed in India. It is a settled position of law that powers u/s 263 can be exercised by the Commissioner on satisfaction of twin conditions, i.e., the assessment order should be erroneous and prejudicial to the interest of the Revenue. By 'erroneous' is meant contrary to law. Thus, this power cannot be exercised unless the Commissioner is able to establish that the order of the AO is erroneous and prejudicial to the interest of the Revenue. Thus, where there are two possible views and the Assessing Officer has taken one of the possible views, no action to exercise powers of revision can arise, nor can revisional power be exercised for directing a fuller enquiry to find out if the view taken is erroneous. This power of revision can be exercised only where no enquiry, as required under the law, is done. It is not open to enquire in case of inadequate inquiry. Appeal under consideration, the ld. CIT called for valuation report in revisionary proceedings. However, when the valuation reports were filed by the assessee, CIT chose to set aside the entire matter back to the file of the AO without appreciating that it was incumbent upon CIT to himself e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 Total Taxable Income under head Long Term Capital Gains / Loss - Unlisted Long Term Capital Gains on sale of shares of Youngmonk Technologies Pvt. Ltd. (unlisted shares) (Refer Note to Computation) Less; Exempt under provisions of India-Mauritius Tax Treaty Long Term Capital Loss on sale of shares of A2 Media Private Limited (unlisted shares) 40,056,781 (40,056,781) (219,865,449) 2 Total Taxable Loss under the head Long Term Capital Gains Total Taxable Income under head Short Term Capital Gains - Unlisted Short Term Capital Gains/ (Loss) on sale of shares of Youngmonk Technologies Pvt. (unlisted shares) (Refer Note to Computation) (219,546,516) 3 Total Taxable Loss under the head Short Term Capital Gains - Total Taxable Income under head Long Term Capital Gains (Exempt) - Listed Long Term Capital Gains/ (Loss) on sale of shares exempt under section 10(38) of the Act (Refer Note to Computation) (229,185,105) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anually (if e-mail is not available) e) In cases where order has to be passed under section 153A/153C of the Income Tax Act, 1961 read with section 143(3), assessment proceedings; would be conducted manually. Yours faithfully Sd/- Mikesh Kumar Sinha Circle Intl. Tax 3(1)(2)Del 9. The assessee filed detailed reply which reads as under: 15 November 2019 By email Assistant Commissioner of income Tax Circle Int. Tax (1)(2) Civic Centre, Minto Road New Delhi-110002 India Dear Sir Re: SAIF Partners India IV Limited (hereinafter referred to as the Company or the Assessee ) Permanent Account Number : AAOCS8595D Assessment Year : 2017-18 Financial Year : 2016-17 Subject: Notice dated 8 November 2019 issued under Section 142(1) of the Income-tax Act, 1961 (the Act ) This is in connection with notice under section 142(1) of the Act issued by your office dated 8 November 2019 (enclosed as Annexure 1) seeking information and details of the Assessee. In this regard, we respectfully submit the following: In response to query No.1, No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Form are enclosed as Annexure 4. 2. In response to query No. 12 The Company has received no orders under section 195(2) of the Act from the payers during the relevant AY. 3. In response to No. 23 and No. 24 The Company maintains no bank accounts in India. 4. In response to No. 28 The copy of Form 26AS for AY 2017-18 is enclosed as Annexure 5. 5. In response to No. 35 The assessment proceedings under the Act are initiated for the first time during the relevant AY for the Company. 6. In response to No. 10, No. 25, No. 37 7. As stated above, the Company has no business operations in India and holds no bank account in India. During the relevant AY, the Company received (i) payment with respect to share transfer and (ii) dividend income from India. Since the Company has no bank account in India, the aforesaid payments were remitted to foreign bank account of the Company through normal banking channels. Further, request you to refer the notes to computation for details. We request you to take the above on record and oblige. In case your office requires any clarification with respect to the above, the Company will furnish th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eration received or accrued as result of transfer; over (b) Cost of acquisition of shares and (c) Expenses incurred in connection with such transfer. As per section 2(42A) of the Act, in case, shares of unlisted company are held for more than 24 months from the date of transfer, they are categorized as Long term Capital Assets ( LTCA ), else Short term Capital Assets ( STCA ). Period of 24 months shall be substituted by 12 months where the subject shares are listed on recognized stock exchange. Where shares being sold are - (a) equity shares; (b) listed on recognized stock exchange; and (c) chargeable to securities transaction tax ( STT ), then any income arising from the same shall be exempt under the provisions of section 10(38) of the Act. The Company is a tax resident of Mauritius and is entitled to be governed by the beneficial provisions of Indian-Mauritius Tax Treaty ( Tax Treaty ). As per Article 13 of the Tax Treaty, any gains arising from the transfer of shares of Indian entity shall be taxable in Mauritius. It is submitted that the Company has chosen to opt for the beneficial provisions of the Tax Treaty. In the above background, details of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In absence of specific columns to represent such short term capital loss in the ITR Form, no disclosures for such loss transaction was provided. Note that the long term capital gain of INR40,056,781 has been shown in schedule CG of ITR out of abundant caution. Income from dividend - INR22,300,518 During the year under consideration, the Company has received dividend from Senco Gold Limited and Manpasand Beverages amounting to INR22,300,518. Such dividend shall be exempt in the hands of the Company under section 10(34) read with section 115-0 of the Act. Notwithstanding the above, the Company reserves its right to make additional submissions/claims (including carry forward of losses) in case your office do not concur with the positions taken by the Company. Yours faithfully, Sd/- Shafiq-Ur-Rahmaan Soyfoo 11. From the perusal of notes to computation of income [supra] it can be seen how the loss was computed with a specific mention that on transfer of such shares, though the company has incurred loss, but has opted not to carry forward the said loss. 12. Specific reply of the assessee alongwith notes to computation of in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to support its claim. However, AO had not carried out any inquiry to ascertain whether there existed any commercial substance in Mauritius and whether any tax avoidance arrangement was made where in the form of a conduit company with an objective to obtain tax benefits under the India- Mauritius DTAA. The AO should have verified the details of key personnel who manage the investments decisions of the fund. No details were called for in this regard. This is essential to ascertain whether the fund manager creates a PE for the assessee or in case assessee s activity is controlled and managed in India, then the assessee may be treated as a resident for tax purposes in India leading to different tax consequences in India. On the basis of above observation, it is clear that the aforesaid Assessment order passed under section 143(3) was passed without making necessary factual verification and application of correct legal provisions to ascertain the tax liability of the receipts in the hands of the assessee. Therefore, the order is erroneous and therefore prejudicial to the interest of the revenue. In view of the above, you are requested to show cause as to why necessary ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to ascertain the veracity of the capital loss/gain arrived, the assessee was asked to furnish the basis of cost of acquisition and sale price. In order to ascertain the correctness of the fair market value at the time of acquisition and also at the time of sale adopted by the assessee company. 11.6 For unlisted companies, Income-tax Rule under 11UA provides the methodology of computation of fair market value. Rule 11UA (1) prescribes the manner to find out the fair market value of the various properties. Fair market value of unquoted Equity shares is required to be computed as per the formulae given there in. However, for finding out fair market value of the unquoted equity shares in case of shares issued by the company at premium, there are two options provided under Rule 11 UA(2) at the choice of the assessee. One option is to calculate the fair market value of unquoted equity shares as per formula given. The other one is the fair market value of unquoted equity shares determined by Discounted Free Cash Flow (DCF) Method. However under Rule 11UA(2), if an assessee choose the valuation of unquoted equity shares as per the Discounted Free Cash Flow Method, then he has to o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent--if the order of the Income-tax Officer is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue-- recourse cannot be had to section 263(1) of the Act. The provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer, it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous . 18. The Hon'ble Bombay High Court in the case of Gabriel India Ltd 203 ITR 108 has held as under: The power of suo-motu revision under subsection (1) is in the nature of supervisory jurisdiction and the same can be exercised only if the circumstances specified therein exist. Two circumstances must exist to enable the Commissioner to exercise power of revision under this sub-section, viz., (i) the order is erroneous; (ii) by virtue of the order being erroneous prejudice has been caused to the interests of the Revenue. It has, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sts of the Revenue. But that by itself will not be enough to vest the Commissioner with the power of suo-motu revision because the first requirement, viz., that the order is erroneous, is absent. Similarly, if an order is erroneous but not prejudicial to the interests of the Revenue, then also the power of suo-motu revision cannot be exercised. Any and every erroneous order cannot be the subject-matter of revision because the second requirement also must be fulfilled. There must be some prima facie material on record to show that tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was just has been imposed. We, therefore, hold that in order to exercise power under sub-section (1) of section 263 of the Act there must be material before the Commissioner to consider that the order passed by the Income tax Officer was erroneous in so far as it is prejudicial to the interests of the Revenue. We have already held what is erroneous. It must be an order which is not in accordance with the law or which has been passed by the Income-tax Officer without making any enquiry in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al to the interest of the Revenue. By 'erroneous' is meant contrary to law. Thus, this power cannot be exercised unless the Commissioner is able to establish that the order of the Assessing Officer is erroneous and prejudicial to the interest of the Revenue. Thus, where there are two possible views and the Assessing Officer has taken one of the possible views, no action to exercise powers of revision can arise, nor can revisional power be exercised for directing a fuller enquiry to find out if the view taken is erroneous. This power of revision can be exercised only where no enquiry, as required under the law, is done. It is not open to enquire in case of inadequate inquiry. Our view is fortified by the decision of Hon'ble High Court of Bombay in the case of CIT vs. Nirav Modi, [2016] 71 Taxmann.com 272 (Bombay). 20. The Hon'ble High Court of Gujarat in the case of CIT vs. Nirma Chemical Works Ltd. 309 ITR 67 has observed as under: if assessment order were to incorporate the reasons for upholding the claim made by an assessee, the result would be an epitome and not an assessment order. In this case, during the assessment proceedings for both the Assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inquiry that such a course of action would be open . Considering the facts of the case in totality from all possible angles, we failed to persuade ourselves to accept the contention of the ld. DR who had strongly supported the findings of the PCIT. We are of the considered view that the order framed u/s 263 of the Act deserves to be set aside and that of the Assessing Officer deserves to be restored. We order accordingly. 22. The Hon'ble Delhi High Court in the case of Delhi Airport metro Express [P] Ltd 398 ITR 8 had the occasion to consider a similar issue and the Hon'ble High Court held as under: 9. It is seen, in the order dated March 30, 2016, the Principal Commissioner of Income-tax has proceeded by setting out the contents of the show-cause notice and the contents of the reply given by the assessee. It appears that no inquiry, as such, was undertaken by the Principal Commissioner of Income- tax to come to the conclusion that the original assessment order was erroneous and prejudicial to the interests of the Revenue. 10. For the purposes of exercising jurisdiction under section 263 of the Act, the conclusion that the order of the Assessi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 23. If we consider the aforementioned judgment of the Hon'ble Jurisdictional High Court on the facts of the case in hand, we find that in the appeal under consideration, the ld. CIT called for valuation report in revisionary proceedings. However, when the valuation reports were filed by the assessee, the ld. CIT chose to set aside the entire matter back to the file of the Assessing Officer without appreciating that it was incumbent upon the ld. CIT to himself examine the valuation reports and verify as to how the case of the assessee was erroneous and prejudicial to the interest of the Revenue following the ration laid down by the Hon'ble Jurisdiction High Court in the case of the Delhi Airport Metro Express [P] Ltd [supra]. 24. Similar view was taken by the Hon'ble Delhi High Court in the case of Jyoti Foundation 357 ITR 388 wherein the Hon'ble High Court has observed as under: In the present case, inquiries were certainly conducted but the Assessing Officer. It is not a case of no inquiry. The order under Section 263 itself records that the Director felt that the inquiries were not sufficient and further inquiries or details should have been called ..... 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