Section 56(2)(vii)(b) of Income Tax Act Applies to "Individual" and "HUF" and not Company: ITAT quashes Revision Order [Read Order]

The Delhi Bench of Income Tax Appellate Tribunal (ITAT) held that the provision of section 56(2)(vii)(b) of the Income Tax Act and submitted that it applies to “individual” and “HUF” and not to a company and thus the direction of the Principal Commisioner of Income Tax (PCIT) was not sustainable, being not in accordance with law.

The assessee company Rhythm Polymers Pvt. Ltd e-filed its return for Assesment Year (AY) 2015-16  declaring income of Rs. 10,94,410/-. The case was processed under Section 143(1) of the Income Tax Act. Subsequently, it was selected for limited scrutiny under Computer Aided Scrutiny Selection (CASS).

The Assessing Officer (AO) accepted the income returned by the assessee and completed the assessment under section 143(3) of the Income Tax Act.

The PCIT examined the record of the assessment proceedings and noticed that the details of investment in property are not placed on record the large increase in sundry creditors in the year as compared to immediate preceding year and genuineness thereof is not ascertained from assessment record; and that the genuineness of Fair Market Value (“FMV”) of property purchased is not ascertainable from the assessment records.

The assessee submitted its reply. The PCIT accepted the explanation of the assessee on the issue of investment in the property and large increase in sundry creditors and their genuineness

The  PCIT therefore, applying Explanation 2 to section 263 of the Income Tax Act held the impugned assessment as erroneous and prejudicial to the interest of Revenue; set it aside and directed the AO to refer the matter to District Valuation Officer (“DVO”) to examine the FMV of the property as on the date of purchase/registration and examine the issue of purchase of property for a consideration lower than the stamp duty value in the light of the provisions of section 56(2)(vii)(b) of the Income Tax Act.

Aggrieved thereby, the assessee is in appeal before the Tribunal

The Authorised Representative of the assessee (AR) drew our attention to the provision of section 56(2)(vii)(b) of the Act and submitted that it applies to “individual” and “HUF” and not to a company. The assessee being a company it is inapplicable to it. Therefore, it cannot be said that the assessment order is erroneous not being inconformity with section 56(2)(vii)(b) as held by the PCIT.

The AR further pointed out that section 56(2)(x) which may be applicable in case of companies was introduced w.e.f. AY 2018-19 but in assessee company’s case AY involved is 2015-16. Therefore, provisions of section 56(2)(x) also cannot be made applicable to the assessee company.

The Departmental Representative (DR) supported the order of the Ld. PCIT and submitted that the order of the AO is cryptic.

The Bench comprising of DR. BRR Kumar, Accountant Member and Ms. Astha Chandra, Judicial Member observed that the provision of Section 56(2)(vii)(b) of the Income Tax Act was not applicable to case of a company and that Section 56(2)(x) of the Income Tax Act which may apply to case of a company has been inserted by the Finance Act, 2017 w.e.f. 01.04.2017 and is accordingly applicable to AY 2018-19 and onwards whereas the case of the assessee company pertains to AY 2015-16.

The Tribunal held that the direction of the PCIT is not sustainable, being not in accordance with law.

Further the Bench held that a mere nondiscussion or non-mention thereof in the assessment order could not lead to assumption that the Ld. AO did not apply his mind or that he had not made inquiry on the issue.

The Tribunal therefore in view of the facts and in the circumstances of the assessee’s case held that the assumption of jurisdiction under Section 263 of the Income Tax Act by the PCIT was not justified and accordingly vacated the order.

Hence, appeal of the assessee was allowed.

To Read the full text of the Order CLICK HERE

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