Humuza Consultants v. PCIT

Case snapshot

Sections / provisions: 263

Questions before the Court / Tribunal

• S. 263 : Commissioner-Revision of orders prejudicial to revenue-AO examined the issue-PCIT cannot demonstrate the error or lack of enquiry-Cannot be deemed to be erroneous-S. 56(2)(viia) not applicable to gifting of shares of a listed company. [S. 56(2)(viia)] Where the assessee is a partnership firm wherein a Trust held 97 per cent partnership share and 1 per cent share each is held by three different LLPs in assessee firm. Trustee of the Trust is a private limited company. In the trustee company, Dr. Habil Khorakiwala and Nafisa Khorakiwala were the directors. In view of group restructuring shares of a listed company were gifted to the partnership Firm. The AO accepted the gift of shares and dividend thereof. The PCIT revised the order under section 263 of the Act on account of lack of enquiry by the AO. It was held that the AO had carried out necessary enquiries, the PCIT could not…
• Which factual, statutory and procedural conditions controlled the requested relief?
• How did the forum apply the governing provisions to the evidence and procedural history recorded in this case?

Material facts and procedural background

Humuza Consultants 6th Floor, Wokhardt Towers Bandra Kurla Complex Bandra East Mumbai-400 01 PAN : AAHFH9240E vs The Principal Commissioner of Income-tax-19, Mumbai Room no. 228, 2nd Floor, Matru Mandir Tardeo Road, Mumbai-400 007 APPELLANT RESPONDENT

Date of hearing 07-12-2021 Date of pronouncement 07-01-2022 O R D E R Per Prashant Maharishi (AM): 01. This appeal is filed by Humuza Consultants ( the assessee / appellant) against the order (impugned order) passed by Principal Commissioner of Income tax , Mumbai -19 ( The Learned PCIT) under section 263 of the Income -tax Act, 1961 ( The Act) dated 09/03/2021. By this order , ld PCIT held that assessment order passed under section 143(3) of the Act on 06/12/2017 by the Assistant Commissioner of Income tax 23(1), Mumbai (The Learned AO) is erroneous and prejudicial to the interest of the revenue. Assessee is aggrieved and therefore in appeal before us. 02. Assessee has raised following grounds of appeal:-

The appellant objects to the order dated 9 March 2021, passed by the learned principal Commissioner of income tax ² 90, Mumbai (principal CIT) u/s 263 of the contract act, 1961 (the act) on the following grounds of appeal On the facts and in circumstances of t he case and in law, the learned principal CIT:- Revision U/S 263 of the Act 1) erred in holding that the assessment order dated 6 December 2017 passed u/s 143 (3) of the act by the learned assessing officer is erroneous as well as prejudicial to the interest of the revenue in passing the order u/s 263 of the act. 2) erred in holding that the learned AO failed to carry out necessary enquiries is warranted by the facts and circumstances of the case during the course of assessment proceedings u/s 143 (3) of the act and therefore the assessment order is erroneous insofar as it is prejudicial to the interest of revenue.

3) erred in not appreciating that the learned AO has adopted one of the possible views regarding taxability of the receipt of shares and therefore the assessment order of the learned AO cannot be regarded as erroneous insofar as it is prejudicial to the interest of the revenue 4) erred in setting aside the assessment order and directing the learned AO for assessment order after examining the issue of receipt of gift and taxability thereof 5) erred in directing the AO to examine the taxability u/s 68 of the act when the issue was never raised during the course of proceedings u/s 263 of the act and therefore no opportunity provided to the appellant in respect of the same

6) erred in directing the AO to examine taxability u/s 68 of the act in case the transaction is not found to be a valid gift without appreciating that the same has no implication on the taxability of receipt of shares in the hands of the appellate as the same is not taxable u/s 56 (2)(viia) of the act 7) erred in not appreciating that whether the transaction is considered receipt of shares by way of gift or receipt of shares without consideration, the same is not taxable u/s 56 (2)(viia) of the act in the hence of the appellant and therefore the assessment order is neither erroneous nor prejudicial to interest of revenue 8) erred in relying on explanation 2 to Section 263 of the act when the same is not applicable Taxability of shares received by way of Gift

Appellant / petitioner / assessee submissions

05. Assessee submitted replies on 10/10/2019, 26/02/2020 and 05/03/2020. The main contention of the assessee was that there is no indication in the notice that how the order passed by the learned assessing officer is erroneous so far as it is prejudicial to the interest of the revenue. It was also submitted that during assessment proceedings, assessee has contended that the share of Wokhardt Ltd were not taxable under section 56(2 ) (viia) of the Act as it is a share of a listed company i.e. company in which public are substantially i nterested. It was further submitted that the issue has been examined in the assessment proceedings wherein assessee submitted information vide letter s dated 11/08/2017, 26/09/2017, 17/11/2017 and 07/12/2017.

Vide these letters; the assessee has submitted (i) details of equity shares received from group companies as gift, (ii) Minutes of the meeting of the Board of Directors of the donor companies. (iii) Legal arguments on non-taxability of the gift received from the above companies. (iv) Proof of dividend received and name of the trustee company in whose name the shares were held as the assessee being a partnership firm , it cannot be registered as shareholder in shareholder register of Wokhardt Ltd. It was, therefore, stated that during assessment proceedings learned assessing officer has raised specific queries on these issues and assessment order has been passed after considering arguments of the assessee, and therefore, it cannot be held to be erroneous.

make the order erroneous. Assessee further submitted that the company can give gift and assessee being a partnership firm can receive the gift. It also referred to the provisions of section 122 of the Transfer of Property Act and relied upon several judicial precedents wherein the gift of shares by a company has been held to be a valid gift and transactions are held to be non taxable. Assessee further referred the provisions of section 56(2) (viia) of the Act and submitted that Wokhardt Ltd whose shares are received as a gift is a company in which public is substantially interested. Therefore, the provision of this section does not cover the transaction.

Assessee furt her stated that as assessee is a partnership firm, it cannot be entered into register of share of the company and, therefore, those shares are held in the name of Thermisto Trustee Company on behalf of Hab il khorakiwala Trust which is a partner in the assessee firm and, therefore, the dividend, etc. have been received in the name of that company which has been offered by the assessee in its profit and loss account and the dividend has been received in the bank account of the assessee. Therefore, assessee submitted that the order passed by the assessing officer was after making due enquiries and even otherwise it is neither erroneous nor prejudicial to the interest of the revenue.

Revenue / respondent submissions

The judgment does not separately label the respondent’s submissions in an independently extractable passage. No contention is inferred; read the full record.

Court / Tribunal analysis and reasoning

examination of the details and considering the submissions of the assessee, the total income of the assessee was assessed at returned income of Rs. 1,15,06,850/- by order under section 143(3) of the Act passed on 06/23/3027. 04. The learned PCIT examined the case records wherein he found that the ass essee has received 6,58,97,757 shares of Wockhardt Limited of face value of Rs. 5/- each amounting to Rs. 32,94,88,785/- as gift from three different companies . Assessee claims that it is not chargeable to tax under section 56(2) (viia) of the Income-tax Act, 1961. On these shares, assessee has disclosed dividend income of Rs. 131,79,55,140/-. He noted that (i) demat account evidencing transfer of shares of the donors is not available on record. (ii) there is no evidence on record that shares were actually transferred to the assessee. (iii) there is no evidence of acceptance of the gift by the recipient and transfer of shares from donor. (iv) as company is not a living person , whether it can give gift and assessee being a firm can receive the gift, was not examined by the assessing officer. Therefore, according to him, the learned assessing officer has accepted the gift of Rs. 32,94,88,785/- and dividend income of Rs. 1,31,79,55,140/- without proper verification. Thus, he was of the view that the order passed by the assessing officer is prima facie erroneous insofar as it is prejudicial to the interest of the revenue. Accordingly, he issued notice under section 263 of the Act on 30/08/2019.

notice issued under section 263 of the Act and thus failure on the part of the assessing officer to conduct necessary enquiries m akes the assessment order erroneous and prejudicial to the interest of the revenue. The Ld. PCIT further referred to sub clause (a) to Explanation (2) of section 263 introduced with effect from 01/06/2015 that the assessment order passed without making enquiries or verification which should have been made into the claim of the assessee, is deemed to be erroneous and prejudicial to the interest of the revenue. Though the assessment year involved in this appeal is 2015 -16, he relying upon decision of the co - ordinate bench in Crompton Greaves Ltd vs CIT TS 66 ITAT -20, held that the above amendment is declaratory and clarificatory in nature, and therefore, applies to the impugned assessment year.

08. On merits of the case, he held that the claim of gift of shares should have been assessed in accordance with (i) willingness of the owner; (ii) acceptance of gift; (iii) transfer of assets. He held that in the present case, the third condition of the proper transfer of assets from donor to donee is not fulfilled. He further held that the distribution of assets by the company by way of gift is in t he nature of distribution through dividend and, therefore, these transactions are clearly colourable device for avoidance of tax. He WKHUHDIWHU UHIHUUHG WR WKH SURYLVLRQV RI WKH &RPSDQLHV· $FW  and held that the requisite conditions of the transfers have not been fulfilled.

Authority for Advance Ruling in case of Orient Power P te Ltd. He further held that the WD[SD\HU·V DUWLFOHV RI DVVRFLDWLRQ GR DOVR QRW support the transaction . He further noted that the shares are transferred in the name of Thermisto Trustee Company Pvt Ltd on behalf of Hab il Khorakiwala trust, which is a partner in the assessee firm. Therefore, why the assessee firm has taken exemption of the above gift received and instead Thermisto Trustee Company Pvt Ltd should offer it as income for respective financial year. Therefore, according t o him, it is clearly a pass through transaction intended to benefit the directors and promoters of Wokhardt Ltd.

He further held that a ssessee has also not provided evidence of registration of gift deeds and further no agreements were executed showing that it is part of arrangement between group entities. Thus, he held that the order passed by the assessing officer is erroneous and prejudicial to the interest of the revenue. Therefore, he set aside the assessment order and directed the learned assessing o fficer to pass fresh assessment order after examining the issue of receipt of gift and the claim of the same being exempt with respect to various issues raised in the notice issued under section 263 of the Act. He further directed ld AO to consider applic ability of section 68 of the Act , if the transaction is not found to be a valid gift.

Therefore, he directed the assessing officer to make a fresh assessment after giving an opportunity to the assessee and examination of the evidence submitted in the clai m. Thus, order under section 263 of the Act was passed on 09/03/2021. The assessee is aggrieved with that and has preferred this appeal raising 11 grounds of appeal. 09. Learned authorized representative drew our attention to the paper book filed by the assessee containing 123 pages. Stating the facts of the case, he submitted that the assessee has shown a

Operative decision and relief

In view of this, he submitted that the order passed by the learned PCIT deserves to be quashed. 21. We have carefully considered the rival contentions, order passed by the learned PCIT under section 263 of the Act , order passed by the assessing officer under section 143(3) of the Act as well as the various correspondences and judicial precedents placed before u s by the rival parties. Facts of the case show that assessee is a partnership firm wherein Habil Khorakiwala Trust holds 97% partnership share and 1% share each is held by three different LLPs in assessee firm. Trustee of Habil Khorakiwala Trust is Thermisto Trustee Company Pvt Ltd.

No doubt, the transaction results into increase in holding by the SURPRWHUV· TXRWD RI WKH VKDUHV EXW KRZ WKDW LPSDFWV WKH DERYH transaction as taxable income in the hands of the assessee is not shown. The breach has to be shown by the revenue with respect to the chargeability of any income in the hands of the impugned assessee and not with respect to any benefit to others, 30. Vide para no 5 , the learned PCIT has set aside the order and the assessing officer is directed to pass the fresh assessment order after examining the issue of receipt of gift and the claim of the same being exempt considering the issue raised in the notice under section 263 of the Act.

Accordingly, for the above reasons, we allow ground s against revisionary order passed u/s 263 of the act vide serial no 1 to 8 and against taxability of shares received as gift vide ground no 9 to 11 of the appeal of the assesse e and quash the order passed by the Ld PCIT dated 09th March 2021 passed u/s 263 of the Act. 35. Accordingly, appeal filed by the assessee is allowed. S.A. no. 162/Mum/2021 36. In view our decision in the appeal filed by the assessee, the stay application no. 162/Mum/2021 becomes infructuous and hence, dismissed.

37. In the result, appeal filed by the assessee is allowed and the stay application filed by the assessee is dismissed. Order pronounced in open court on 07/01/2022 Sd/- Sd/- (PAVAN KUMAR GADALE ) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, Date : 07/01/2022 Pavanan Copy to : 1. Appellant 2. Respondent 3. The CIT concerned 4. The CIT(A) By Order 5. The DR, ITAT, Mumbai 6. Guard File /True copy/ Asstt. Registrar, ITAT, Mumbai

Ratio and legal principle

The narrow proposition associated with Humuza Consultants v. PCIT concerns s. 263 : commissioner-revision of orders prejudicial to revenue-ao examined the issue-pcit cannot demonstrate the error or lack of enquiry-cannot be deemed to be erroneous-s. 56(2)(viia) not applicable to gifting of shares of a listed company. [s. 56(2)(viia)] where the assessee is a partnership firm wherein a trust held 97 per cent partnership share and 1 per cent share each is held by three different llps in assessee firm. trustee of the trust is a private limited company. in the trustee company, dr. habil khorakiwala and nafisa khorakiwala were the directors. in view of group restructuring shares of a listed company were gifted to the partnership firm. the ao accepted the gift of shares and dividend thereof. the pcit revised the order under section 263 of the act on account of lack of enquiry by the ao. it was held that the ao had carried out necessary enquiries, the pcit could not… The proposition cannot be separated from the judgment’s facts, the governing statutory version, the forum’s jurisdiction, and the exact relief recorded in ITA No. 726/Mum/2021.

For working-paper purposes, the decision should be cited only after matching the material facts and reading the passages under the judgment-grounded record above. The editorial outcome label “Quashed / set aside” is a navigation aid; it does not replace the operative order or explain every issue in a multi-issue case.

Why this judgment matters

This decision is relevant when a file raises the same central question identified in the source headnote: S. 263 : Commissioner-Revision of orders prejudicial to revenue-AO examined the issue-PCIT cannot demonstrate the error or lack of enquiry-Cannot be deemed to be erroneous-S. 56(2)(viia) not applicable to gifting of shares of a listed company. [S. 56(2)(viia)] Where the assessee is a partnership firm wherein a Trust held 97 per cent partnership share and 1 per cent share each is held by three different LLPs in assessee firm. Trustee of the Trust is a private limited company. In the trustee company, Dr. Habil Khorakiwala and Nafisa Khorakiwala were the directors. In view of group restructuring shares of a listed company were gifted to the partnership Firm. The AO accepted the gift of shares and dividend thereof. The PCIT revised the order under section 263 of the Act on account of lack of enquiry by the AO. It was held that the AO had carried out necessary enquiries, the PCIT could not… Its practical value lies in the way the ITAT Mumbai connected the governing provisions—263—to the procedural posture and evidence before it.

The authority level is ITAT / Tribunal. That affects persuasive or binding weight, but authority level alone is never enough. Territorial jurisdiction, statutory period, the identity of the challenged order, and later appellate treatment must all be checked before the case is used in advice, a submission, or litigation strategy.

Practitioner action points

• Begin with the complete judgment and mark the paragraphs supporting the exact proposition relied upon.
• Match the statutory version of 263 and the decision date 2022-01-07; do not assume the current text is identical.
• Compare the notice, assessment, appeal or other procedural sequence with the chronology recorded in this case.
• Verify the stated later-history status and any review, appeal, SLP, curative or rectification proceedings before citation.
• Record why the client’s evidence is materially similar, and also record any fact capable of distinguishing the result.

Does this case match your facts?

Detailed reliance and distinction analysis

Identity check. Confirm that the cited cause title is Humuza Consultants v. PCIT, the proceeding is ITA No. 726/Mum/2021, and the decision is dated 2022-01-07. These fields are taken from the judgment record and should appear exactly in the citation note.

Bench check. The judgment identifies the coram as SHRI PRASHANT MAHARISHI (ACCOUNTANT MEMBER) AND SHRI PAVAN KUMAR GADALE (JUDICIAL MEMBER). A later order by another bench, a larger bench, or a higher forum may alter the weight or interpretation of the proposition.

Provision check. The source associates the dispute with 263. The practitioner should place the historical statutory text next to the current text and identify every amendment, proviso, explanation, rule or notification that could change the analysis.

Fact check. The source issue is not a free-standing abstract rule. It arises from the concrete record summarized above. A reliable application note should list the common facts, the different facts, and whether each difference affects jurisdiction, admissibility, limitation, burden, computation or relief.

Remedy check. The recorded result is Quashed / set aside. Where a matter is remanded, set aside, partly allowed, or disposed with directions, the exact operative language is more important than a binary winner/loser label.

History check. The current closure state is RECTIFICATION_HIGH_COURT_APPEAL_SLP_CHECK_PENDING. If that state is pending, the page does not assert that no later case exists. It means the check remains open and must be completed at the point of professional reliance.

Section / provision impact

• 263 — apply the exact version considered in the judgment.

Case network

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• OERLIKON BALZERS COATING INDIA PRIVATE LIMITED VS. UNION OF INDIA & ANR — Court / Tribunal to be verified · Quashed / set aside
• UCB India Pvt. Ltd. vs. ACIT — Supreme Court of India · Quashed / set aside
• Amrita Jhaveri (Ms.) v. Dy. CIT — ITAT Mumbai · Quashed / set aside

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