In a recent ruling, the Madras High Court has quashed an Income Tax assessment order for failing to comply with prior court directions. The court emphasized that any order issued contrary to or in disregard of its direction cannot be sustained, as it is deemed jurisdictionally defective.
Vaani Estates Private Limited was initially owned by B.G. Raghupathy and his wife, Sasikala Raghupathy. Following Raghupathy’s death, his shares were transferred to their daughter, Vaani Raghupathy (Petitioner).
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Sasikala Raghupathy infused Rs. 23.32 crores through banking channels, which led to her receiving 10,100 shares at a premium of Rs. 23,086 per share. The Income Tax Department classified the share premium as “Income from Other Sources” under Section 56(2)(viib) of the Income Tax Act, 1961.
On appeal, the Commissioner of Income Tax (Appeals) upheld the assessment order in favor of the Income Tax Department. However, the ITAT ruled in favor of Vaani Estates, stating that Section 56(2)(viib) didn’t apply to family transactions, such as those between mother and daughter.
Aggrieved, the Income Tax Department appealed to the High Court, which ordered the assessing officer to determine the fair market value of the shares. The AO completed the assessment without complying with the court’s direction.
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The petitioner filed a writ petition before the Madras High Court arguing the assessment order failed to comply with the High Court’s previous directive to determine the shares’ fair market value. The petitioner’s counsel claimed that the infusion of funds was meant to be a gift from mother to daughter, which should exempt it from Section 56(2)(viib) of the Income Tax Act.
A single bench led by Justice Mohammed Shaffiq noted that the Income Tax Department did not adequately address whether the assessment complied with its previous directions regarding fair market valuation.
The court emphasized the need for lower tribunals and administrative authorities to adhere to judicial orders, referencing a Supreme Court ruling in East India Commercial Co. Ltd. v. Collector of Customs which held that non-compliance with a court order constitutes a jurisdictional error.
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Therefore, the court set aside the impugned assessment order, directing the assessing officer to reassess the matter in strict compliance with the previous instructions. The assessing officer was instructed to determine the shares’ fair market value as per Section 56 of the income tax guidelines and to provide reasonable opportunity to the petitioner.
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