I. Direct & International Taxation
A. Corporate Tax
1. Hon'ble Himachal Pradesh High Court1: Addition under Section 56(2)(viib) of the Act is not maintainable where no consideration is received on issue of shares and mere loan is converted to share capital
Background
During the AY 2018-19, I. A. Hydro Energy (P) Ltd ('the Assessee') was converted from partnership firm in to a Company. The Assessee also converted outstanding unsecured loan received from erstwhile partners into equity shares having face value of INR 10 per share at a share premium of INR 90 per share based on Discounted Cash Flow ('DCF') Method as prescribed in Rule 11UA of the Rules.
However, the AO made an addition under Section 56(2)(viib) of the Act of INR 202.50 crore based on fair market value of unquoted shares as per the NAV method and rejected DCF method used by the Assessee on the ground that the valuation was done with fictitious figures having no correlation with actual affairs of the Assessee. The Assessee filed an appeal before the Ld. CIT(A).
The Ld. CIT(A) observed that no money/consideration was received by the Assessee on issue of shares. Further, the shares were allotted on account of conversion of outstanding loans received in earlier years. Also, the source of issue of shares was accepted to be satisfactorily explained. Therefore, the Ld. CIT(A) held that Section 56(2)(viib) of the Act is not applicable in the absence of receipt of consideration. Also, the Ld. CIT(A) held that the valuation was done by the Assessee as per the DCF method, which is an internationally accepted method of valuation of shares and is a permissible methodology as per Rule 11UA(2)(d) of the Rules. Accordingly, the AO had acted completely beyond his jurisdiction by substituting his own method of valuation.
The tax authorities challenged the order of Ld. CIT(A) before the Hon'ble Chandigarh ITAT. The Hon'ble Chandigarh ITAT confirmed the finding that the Assessee didn't receive any consideration for allotment of shares. It also observed that the AO is not authorised to pick and choose a particular method of valuation of shares, since the option for choosing a valuation method is specifically given to the Assessee as per rules 11UA(2) of the Rules. The AO can only verify the method of valuation adopted by the Assessee. Hence, the Hon'ble Chandigarh ITAT upheld the order of the Ld. CIT(A).
However, aggrieved by the order of the Hon'ble Chandigarh ITAT, the tax authorities filed an appeal before the Hon'ble Himachal Pradesh High Court.
Judgement of the Hon'ble Himachal Pradesh High Court
The Hon'ble Himachal Pradesh High Court agreed with the reasoning adopted by the Ld. CIT(A) and the Hon'ble ITAT and held that since no consideration was received by the Assessee for allotment of the shares, Section 56(2)(viib) of the Act would not apply and that it would have applied only if consideration was received for such a transaction.
Also, it concurred with the view of the Ld. CIT(A) and the Hon'ble ITAT that the AO had no jurisdiction to substitute the NAV method for the valuation of shares, once the Assessee had exercised option of a DCF valuation method as per Rule 11UA(2) of the Rules. Accordingly, the Hon'ble Himachal Pradesh High Court dismissed the appeal filed by the tax authorities.
2. Hon'ble Punjab and Haryana High Court2 : Proceedings under Section 153Aof the Act is invalid without conducting search operations on the Assessee
Background
Search and seizure operations were conducted against Misty Meadows Pvt. Ltd. ('the Assessee') under Section 132 of the Act on 30.06.2011. Pursuant to search proceedings, assessment order under Section 153A of the Act dated 28.02.2014 was passed for the period from AY 2006-07 to AY 2012-13.
Subsequently during 2016, a search and seizure operation was conducted against M3M India Ltd. However, while preparing panchnama, name of the Assessee was also added even though neither any authorization for search and seizure under Section 132 of the Act was issued in the name of the Assessee nor any search was conducted at the premises or registered office of the Assessee. On the basis of panchnama, a notice under Section 153A of the Act was issued for AY 2011-12 on 05.01.2018. Thereafter, the AO concluded the assessment proceedings by issuing order under Section 153A read with Section 153D of the Act dated 07.02.2024.
Aggrieved by the said assessment order, the Assessee filed a writ petition before the Hon'ble Punjab and Haryana High Court.
Judgment of the Hon'ble Punjab and Haryana High Court
During the course of hearing before the Hon'ble Punjab and Haryana High Court, the tax authorities argued that as an alternative remedy is available and the Assessee having preferred an appeal, the Assessee should be relegated to the appellate forum.
However, relying on the judgement of Hon'ble Supreme Court in case of Godrej Sara Lee Ltd3, the Hon'ble Punjab and Haryana High Court held that under Article 226 of the Constitution of India, it would be well within its jurisdiction to entertain the petitions where it has to examine whether the power for conducting search and seizure is exercised by a duly competent authority. Also, it held that even if a final order has been passed and provisions of appeal is available, writ petitions should still lie and the Assessee cannot be ousted merely because of the same.
Thereafter, the Hon'ble High Court evaluated the definition of panchnama and concluded that panchnama is a document which has to be prepared recording articles, material and objects which may be seized as incriminating documents at the time of conducting search of the premises. Mentioning of the name of any company in the panchnama would reflect that the documents relating to that
company were found during the search at the premises. A panchnama, therefore, cannot be treated to mean an authorization issued to the authorities under Section 132 of the Act. Thus, the Hon'ble High Court held that mere name mentioned in the panchnama alone cannot be a conclusion that there was authorisation to conduct search against the Assessee under Section 132 of the Act. Accordingly, it held that when there was no search conducted under Section 132 and 132A of the Act against the Assessee, passing the assessment order on 07.02.2024 on the basis of notice under Section 153A dated 05.01.2018 is unjustified and without jurisdiction. Therefore, allowing the writ petition, the Hon'ble High Court quashed the entire proceedings under Section 153A of the Act including notice issued on 05.01.2018.
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Footnotes
1. PCIT vs. M/s. I. A. Hydro Energy (P) Ltd. [TS-395-HC-2024 (HP)]
2. Misty Meadows Pvt Ltd. vs. Union of India and others [TS-344-HC-2024 (P&H)]
3. Godrej Sara Lee Ltd. vs. Excise and Taxation Officer-cum-Assessing Authority [2023 AIR (SC) 781]
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