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I-T - When company with poor financial performance is able to issues shares at premium and AO does not investigate nature and justification of premium then it is a valid case to pass order u/s 263: ITAT

 

By TIOL News Service

MUMBAI, JULY 27, 2018: THE ISSUE IS - Whether when company with nil EPS issues shares at premium and AO does not investigate nature and justification of the premium then it is a valid case to pass order u/s 263 of Act. YES IS THE VERDICT.

Facts of the case

The assessee company had filed return for relevant AY. The assessment was completed u/s 143(3) of Act. During relevant year assessee company raised funds through issue of shares at premium. The Percentage of share holding by each shareholder prior to issue of share premium on the one hand and subsequent to the event on the other hand had remained unchanged. The CIT noted that issue of share capital was analyzed by AO, investigated the source of the amount received but not at all dwelve into the nature of the receipts. Thereafter, the CIT passed order u/s 263 of the Act, thereby holding that the order passed by the AO was erroneous and was prejudicial to the interest of the revenue. The premium amount received having no justification should have been charged to tax as income of assessee or should have been treated unexplained cash credit u/s 68 of the Act. The assessment order was set aside with the direction to the AO to frame the assessment afresh. Aggrieved assessee filed appeal before the Tribunal.

Tribunal held that,

++ the records revealed that during the course of original assessment, AO had looked into the source of share capital but did not at all analyze the fact of 'Premium' and the 'Nature of that premium'. The book value of assessee company was negative, therefore prima facie there was no rationale for receipts of premium on issue of fresh shares. Therefore a show cause notice u/s 263 of the I.T. Act was issued proposing to revise the assessment;

++ the assessee had issued share capital at a premium of Rs. 170 per share and had thus obtained 90 lakh as aggregate amount of premium and in this respect, the issue of share capital was analyzed by the AO while passing the original order of assessment, but the AO had admittedly failed to realize that share premium falls into an altogether different territories. The AO had analyzed the issue of share in terms of Section 68 of the Income Tax Act, but he had totally ignored to look at the entire issue from the angle of 'justification of the premium.'The AO had totally missed the fact that section 68 required 'nature' also to be looked into for establishing genuineness of the transaction. The "nature" of receipt therefore could not have been ignored by AO and on the perusal of records, it reveals that while the AO investigated the source of the amount, thus received and he did not at all dwelve into the nature of the receipts of premium as envisaged in section 68 of I.T. Act. It was also pointed out by CIT that there was no rationale for receipts of huge premium when the EPS of assessee is 'Nil'. Therefore, it was held by CIT that the order of assessment under consideration was erroneous and prejudicial to the interest of revenue. The CIT had correctly exercised the power u/s 263 of the Act. Resultantly, these ground raised by the assessee stands dismissed.

(See 2018-TIOL-1151-ITAT-MUM)


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