AO Cannot Apply Post-2018 “Look-Through” Valuation Retrospectively – ITAT Deletes Massive Section 56 Additions

ACIT Vs Kanchan Markhedkar (ITAT Mumbai)

The Mumbai ITAT upheld deletion of additions exceeding ₹10.57 crore made under section 56(2)(vii)(c), holding that for AYs 2015-16 and 2016-17, the Assessing Officer could not adopt a “look-through” approach by valuing underlying subsidiary companies instead of the shares actually purchased by the assessee.

The Revenue alleged that the assessee and family members had acquired control of companies having huge share premium and assets through intermediary holding companies at nominal value, thereby indirectly acquiring underlying shares far below fair market value. Based on this theory, additions of ₹6.97 crore and ₹3.59 crore were made by valuing the underlying companies under Rule 11UA.

However, the Tribunal held that under the unamended Rule 11UA applicable to the relevant years, valuation of unquoted shares had to be based strictly on the book value of assets of the shares actually purchased, namely the holding companies, and not on fair market value of underlying subsidiaries. The “look-through” valuation mechanism considering underlying assets and investments was introduced only from 01.04.2018 and could not be retrospectively applied.

The ITAT further observed that once the Revenue invoked section 56(2)(vii)(c), it implicitly accepted the genuineness of the transaction and therefore could not simultaneously sustain additions merely on allegations of sham or colourable device without invoking provisions like sections 68 or 69.

Relying on earlier coordinate bench decisions in family members’ cases and the Delhi High Court ruling in PCIT vs. Minda SM Technocast Pvt. Ltd., the Tribunal held that the AO had wrongly applied the amended Rule 11UA retrospectively and deleted the additions in entirety.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

These appeals are filed by the Revenue against the separate orders passed by the Commissioner of Income Tax (Appeals), Pune-11 [hereinafter referred to as “the CIT(A)”] under section 250 of the Income-tax Act, 1961 [hereinafter referred to as “the Act”] for A.Ys. 2015–16 and 2016–17, both dated 08.11.2024, arising out of the assessment orders passed by the Assessing Officer under section 143(3) read with section 153A of the Act dated 31.03.2022.Since the issues involved in both the appeals are identical and arise out of common set of facts, these appeals were heard together and are being disposed of by way of this consolidated order for the sake of convenience and brevity.

Common Facts of the Case

2. The assessee is an individual and Managing Director of Vikran Group, which is engaged in the business of procuring and setting up of power transmission and distribution lines on contract basis. The assessee had filed original returns of income for the respective assessment years declaring income under the heads business, house property and other sources.

3. A search and seizure action under section 132 of the Act was carried out in the case of Vikran Group on 24.03.2021 and concluded on 05.04.2021. Consequent thereto, proceedings under section 153A were initiated and notices were issued, in response to which the assessee filed returns of income declaring the same income as originally returned.

4. During the course of assessment proceedings, the Assessing Officer examined the material gathered during the search and investigation and noticed that the assessee along with her family members had acquired certain companies through intermediary holding companies at a value allegedly lower than their fair market value. The Assessing Officer observed that the underlying companies had raised substantial share capital and premium without any commensurate business activity and that such capital was introduced through entities allegedly controlled by entry operators.

5. The Assessing Officer further noted that the assessee had acquired shares of holding companies at nominal value, which resulted in indirect acquisition of shares of the underlying companies at a value significantly lower than their fair market value as determined under Rule 11UA of the Income-tax Rules, 1962. Accordingly, the Assessing Officer issued show cause notices proposing addition under section 56(2)(vii)(c) of the Act.

6. In response to the show cause notices, the assessee submitted that she had not directly purchased shares of the underlying companies but had purchased shares of the holding companies. It was contended that valuation under Rule 11UA applicable for the relevant assessment years requires determination of fair market value based on book value of assets and liabilities of the shares actually purchased and not on the basis of underlying assets of subsidiary companies. The assessee further submitted that the shares of the holding companies were purchased at face value of Rs. 10/- per share, which was higher than the fair market value determined under Rule 11UA, and therefore no addition under section 56(2)(vii)(c) could be made. The assessee also furnished valuation reports supporting the fair market value of the shares of the holding companies.

7. The Assessing Officer, however, rejected the submissions of the assessee by placing reliance on the findings of the investigation wing and held that the entire arrangement was a colourable device to acquire shares of the underlying companies at a value much lower than their fair market value. The Assessing Officer held that the valuation of shares should be determined with reference to the fair market value of the underlying companies and not merely the holding companies. It was further observed that the companies through which the transactions were routed were paper entities controlled by entry operators and that the assessee along with her family members had effectively acquired control of the underlying companies at a negligible consideration. Accordingly, additions were made under section 56(2)(vii)(c) of the Act in both the assessment years by adopting the fair market value of shares of the underlying companies as per Rule 11UA and treating the difference as income of the assessee.

8. Year-wise material facts are tabulated below:

9. During the appellate proceedings before CIT(A), for both the assessment years under consideration, the assessee reiterated the submissions made before the Assessing Officer and also filed detailed written submissions, as recorded by the CIT(A). The core contention of the assessee was that the Assessing Officer erred in invoking the provisions of section 56(2)(vii)(c) by adopting the fair market value of the shares of the underlying companies instead of the shares actually purchased by the assessee, namely, the shares of the respective holding companies. It was submitted that the assessee had purchased shares of the holding companies at face value of Rs. 10/- per share and not the shares of the underlying companies. The assessee contended that as per Rule 11UA applicable for the relevant assessment years, the fair market value of unquoted shares was required to be determined on the basis of book value of assets and not on the basis of fair market value of underlying assets. Accordingly, it was argued that the Assessing Officer had incorrectly applied the amended provisions of Rule 11UA applicable from A.Y. 2018–19 and thereby adopted an erroneous valuation methodology.

10. The assessee further submitted that the purchase price of shares of the holding companies was higher than their fair market value as determined under Rule 11UA and, therefore, no addition under section 56(2)(vii)(c) was warranted. In support of this contention, valuation reports obtained from a Chartered Accountant were furnished.

11. The assessee also challenged the finding of the Assessing Officer that the transactions were sham or colourable devices. It was submitted that such conclusions were drawn without any cogent evidence and merely on the basis of statements of third parties, namely the alleged entry operators, without affording opportunity of cross-examination, thereby violating the principles of natural justice.

12. Further, by way of additional grounds raised before the CIT(A), the assessee contended that no incriminating material was found during the course of search in relation to the impugned transactions and, therefore, the additions made under section 153A were not sustainable in law. It was also contended that the Assessing Officer had effectively invoked the principles akin to GAAR in a backdoor manner, which was impermissible for the relevant assessment years. The assessee relied upon judicial precedents, including the decision in the case of Vodafone India Services Pvt Ltd vs Union of India, in support of its contentions.

13. The CIT(A), after considering the assessment order, material placed on record and submissions of the assessee, examined the issue of addition made under section 56(2)(vii)(c) in both the assessment years in the light of the factual matrix and applicable legal provisions.

14. For A.Y. 2015–16, the CIT(A) noted that the Assessing Officer had proceeded on the basis that the assessee, along with her family members, had indirectly acquired shares of M/s Ratnagiri Financial Advisory Pvt Ltd by purchasing shares of its holding companies at a consideration substantially lower than the fair market value. The CIT(A) examined the shareholding pattern, the manner of acquisition of holding companies, and the valuation aspects as recorded in the assessment order. It was observed that the Assessing Officer had treated the entire arrangement as a device to acquire control over the underlying company at a value lower than its fair market value by lifting the corporate veil and applying the principle of substance over form.

15. After considering the submissions of the assessee, the CIT(A) accepted the contention that the provisions of section 56(2)(vii)(c) are required to be applied with reference to the property actually received by the assessee and not on the basis of indirect acquisition of underlying assets. The CIT(A) held that the assessee had purchased shares of the holding companies and not of M/s Ratnagiri Financial Advisory Pvt Ltd and, therefore, the fair market value of the shares actually purchased was required to be considered in accordance with Rule 11UA applicable for the relevant year. It was further observed that the Assessing Officer had erred in adopting valuation based on the fair market value of underlying assets and in applying the amended provisions of Rule 11UA applicable from A.Y. 2018–19.

16. The CIT(A) thus held that since the shares of the holding companies were purchased at a value which was not lower than their fair market value as per Rule 11UA applicable for the relevant year, the provisions of section 56(2)(vii)(c) were not attracted. Accordingly, the addition of Rs. 6,97,84,787/- made by the Assessing Officer was deleted.

17. For A.Y. 2016–17, the CIT(A) followed similar reasoning. The CIT(A) observed that the Assessing Officer had made addition on the premise that the assessee had indirectly acquired shares of M/s Bahar Vintrade Pvt Ltd through purchase of shares of its holding companies at a value lower than the fair market value. After examining the facts, the CIT(A) held that the assessee had purchased shares of the holding companies and not the shares of the underlying company and, therefore, valuation for the purpose of section 56(2)(vii)(c) had to be restricted to the shares actually purchased.

18. The CIT(A) further held that the Assessing Officer had erred in adopting the fair market value of shares of the underlying company and in not applying the valuation mechanism prescribed under Rule 11UA applicable for the relevant year. It was held that the purchase consideration paid by the assessee for shares of the holding companies was not less than their fair market value and hence the provisions of section 56(2)(vii)(c) were not attracted. Accordingly, the CIT(A) deleted the addition of Rs. 3,59,67,310/- made by the Assessing Officer.

19. Thus, in both the assessment years, the CIT(A) held that the addition made under section 56(2)(vii)(c) by adopting the fair market value of shares of the underlying companies was not sustainable in law and deleted the additions in entirety.

20. Aggrieved by the orders of CIT(A), the Revenue is in appeal before us raising following grounds of appeal:

In ITA No. 713/Mum/2025 for A.Y. 2015–16

1. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) has erred deleting the addition of Rs. 6,97,84,787/-made u/s 56(2)(vii)(c) on account of purchasing the shares of a company at a price less than its fair market value, without appreciating the fact that M/s Farista Financial Consultant Pvt. Ltd. & M/s Deb Suppliers and Traders Pvt. Ltd. (the holding companies of M/s Ratnagiri Financial Advisory Pvt. Ltd.) were only paper companies and were involved in sham transactions and all shares of these companies were acquired by the assessee along with her family members and hence, the assessee was one of the ultimate beneficiary of the transaction.

2. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) has erred in not appreciating the fact that at the same time, Shri Rakesh Markhedkar (family member of the assessee), had directly purchased 1000 shares of M/s Ratnagiri Financial Advisory Pvt. Ltd. @ Rs. 500/- per share and by purchasing shares of M/s Farista Financial Consultant Pvt. Ltd. @ Rs. 10/- & M/s Deb Suppliers and Traders Pvt. Ltd. @10/-, the assessee ultimately had got 1,44,689 shares of M/s Ratnagiri Financial Advisory Pvt. Ltd. wherein assessee‘s family members had became director just before the transactions and all this arrangement was done to acquire the shares of M/s Ratnagiri Financial Advisory Pvt. Ltd. company at price much lower than the FMV.

3. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) has erred in not considering the facts that assessee had used a colorable device to avoid legitimate tax liability and failed to appreciate the unveiling of corporate veil done by AO which is very well covered by the landmark judgment of Hon‘ble Supreme Court in the case of ^„McDowell and Company Ltd. Vs. Commercial Tax Officer (154 ITR 148)‘.

4. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) has erred in holding that the AO had considered the fair market value of the assets and liabilities of M/s Ratnagiri Financial Advisory Pvt. Ltd. as per rule 11UA effective from 01.04.2018, without appreciating the facts that the AO had calculated the fair market value of the shares of M/s Ratnagiri Financial Advisory Pvt. Ltd. on the basis of book value of assets and liability, as per rule 11UA applicable for A.Y 2015-16.

5. The appellant craves leave to add, amend, modify or alter any of the grounds of appeal.

In ITA No. 713/Mum/2025 for A.Y. 2016–17

1. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) has erred deleting the addition of Rs. 3,59,67,310/-made u/s 56(2)(vii)(c) on account of purchasing the shares of a company at a price less than its fair market value, without appreciating the fact that M/s Florence Multimedia Pvt. Ltd. (the holding company of M/s Bahar Vintrade Pvt. Ltd.) was only paper company and was involved in sham transactions and all shares of this company were acquired by the assessee along with her family members and hence, the assessee was one of the ultimate beneficiary of the transaction.

2. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) has erred in not appreciating the fact that at the same time, Shri Rakesh Markhedkar (family member of the assessee) had directly purchased 1700 shares of M/s Bahar Vintrade Pvt. Ltd. @ Rs500/- per share and by purchasing shares of M/s Florence Multimedia Pvt. Ltd. @ Rs.10/-, the assessee ultimately had got 74570 shares of Bahar Vintrade Pvt. Ltd. wherein assessee‘s family members had became director just before the transactions and all this arrangement was done to acquire the shares of Bahar Vintrade Pvt. Ltd. company at price much lower than the FMV.

3. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) has erred in not considering the facts that assessee had used a colorable device to avoid legitimate tax liability and failed to appreciate the unveiling of corporate veil done by AO which is very well covered by the landmark judgment of Hon‘ble Supreme Court in the case of ^„McDowell and Company Ltd. Vs. Commercial Tax Officer (154 ITR 148)‘

4. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) has erred in holding that the AO had considered the fair market value of the assets and liabilities of M/s Bahar Vintrade Pvt. Ltd. as per rule 11UA effective from 01.04.2018, without appreciating the facts that the AO had calculated the fair market value of the shares of M/s Bahar Vintrade Pvt. Ltd. on the basis of book value of assets and liability, as per rule 11UA applicable for A.Y 2016-17.

5. The appellant craves leave to add, amend, modify or alter any of the grounds of appeal.

21. The learned Departmental Representative (DR) reiterated the facts as recorded in the assessment orders. The DR submitted that the Assessing Officer had elaborately analysed the entire chain of transactions, beginning from the incorporation of the underlying companies, the raising of substantial share capital and premium without any commensurate business activity, the routing of such shareholding through intermediary entities, and finally the acquisition of such entities by the assessee and her family members. It was submitted that the Assessing Officer had brought on record detailed findings based on material gathered during the course of search and investigation, which clearly demonstrated that the assessee, along with her family members, had indirectly acquired shares of the underlying companies at a consideration substantially lower than their fair market value. It was contended that the assessee had effectively acquired control over the underlying companies having substantial share capital and premium by paying a negligible amount through acquisition of holding companies and therefore the provisions of section 56(2)(vii)(c) were rightly invoked.

22. Pursuant to the directions of the Bench, the learned Authorised Representative (AR) furnished further details clarifying the factual aspects of the transactions. It was submitted that the shares of M/s Farishta Financial Consultants Private Limited and M/s Deb Suppliers and Traders Private Limited were acquired on 12.12.2014 and 05.12.2014 respectively. It was further submitted that for the purpose of valuation under Rule 11UA, the balance sheets of the said companies as on 31.03.2014, being the balance sheet immediately preceding the valuation date, were considered. The assessee clarified that the investments in M/s Ratnagiri Financial Advisory Private Limited were duly reflected as part of non-current assets in the books of the holding companies and supporting documents such as balance sheets and ledger accounts were furnished. The assessee also relied upon valuation reports of the holding companies to contend that the shares were acquired at a value not less than their fair market value as determined in accordance with Rule 11UA.Further, a chronology of events was placed on record to demonstrate the incorporation of the holding companies, acquisition of shares by the assessee and her family members at face value, and the earlier shareholding pattern of M/s Ratnagiri Financial Advisory Private Limited. It was thus contended that the transactions were carried out through acquisition of shares of holding companies and the valuation adopted was in accordance with the prescribed statutory provisions.

23. On merits, the learned AR submitted that the addition made under section 56(2)(vii)(c) amounting to Rs. 6.97 crore was required to be examined strictly in accordance with the said provision read with Rule 11UA as applicable for the relevant assessment year. It was contended that, as per Rule 11UA prevailing during A.Y. 2015–16, the fair market value of shares was to be determined based on the book value of assets and not on the basis of valuation of the underlying investee company.

24. It was further submitted that the provisions of Rule 11UA were amended only with effect from A.Y. 2018–19, whereby valuation of shares could be linked to the assets and liabilities of the ultimate investee company. The learned AR contended that the Assessing Officer had erroneously applied the amended provisions retrospectively to the year under consideration, which was not permissible in law.

25. The learned Authorised Representative also submitted that on identical facts in the case of another family member, namely Shri Nakul Markhedkar (ITA No. 785 & 786/Mum/2025), the Co-ordinate Bench held that the Assessing Officer was not justified in applying the amended rules retrospectively and had decided the issue in favour of the assessee. It was thus contended that the issue was squarely covered in favour of the assessee.

26. With regard to the allegation of colourable or sham transaction, it was submitted that similar allegations made in the case of the said family member had not been upheld by the Co-ordinate Bench. It was further contended that the Assessing Officer had relied upon events pertaining to earlier financial years, which were not relevant for the year under consideration and, therefore, no addition could be made on that basis.

27. The learned AR further submitted that the addition had not been made by treating the transaction as non-genuine but by treating it as undervalued under section 56(2)(vii)(c), thereby implicitly accepting the genuineness of the transaction. It was thus contended that once the transaction is accepted as genuine, the allegation of sham or colourable device could not be sustained.

28. It was also submitted that the allegations regarding capital build-up in the holding companies and their investor entities were not relevant for determining the fair market value under Rule 11UA and no independent material had been brought on record by the Assessing Officer to substantiate such allegations. Accordingly, it was contended that the addition made by the Assessing Officer was unsustainable both on facts and in law.

29. We have carefully considered the rival submissions and perused the material available on record, including the assessment orders, orders of the CIT(A) and the judicial precedents relied upon by the parties. The sole issue for adjudication in the present appeals relates to the addition made under section 56(2)(vii)(c) of the Act by invoking Rule 11UA of the Income-tax Rules, 1962.

30. At the outset, we find that the issue arising in the present appeals is no longer res integra and stands squarely covered by the decisions of the Co-ordinate Benches in the cases of family members of the assessee on identical facts. In particular, we note that in the case of Shri Nakul Markhedkar, the Co-ordinate Bench has considered an identical factual matrix and dismissed the appeals of the Revenue.

31. For the sake of clarity and completeness, the relevant findings of the Co-ordinate Bench are reproduced herein below:

“From the plain reading of the above rule which is applicable for the year under consideration it is clear that for the purpose of determining the FMV of the unquoted shares, the underlying asset including assets in the form of shares are to be valued at book value as appearing in the Balance Sheet. This provision of considering the value of underlying asset being shares is amended w.e.f. 01.04.2018 to provide that the value of the underlying asset being shares need to be considered at FMV… and not the book value as per Balance Sheet.” (para 7)

“In assessee’s case… the AO for the purpose of making addition under section 56(2)(vii)(c) has considered the FMV of the RFAPL shares thereby valuing the underlying assets… at FMV which is applicable only from 01.04.2018.” (para 8)

“The AO ought to have arrived at the FMV of the shares of M/s Farista Financial Consultants Pvt Ltd by applying Rule 11UA for the relevant AY… The difference between the FMV of the shares RFAPL and the purchase consideration… does not fall within any method prescribed under the Act.” (para 10)

“In view of these discussions… we see no infirmity in the order of the CIT(A) in deleting the addition made under section 56(2)(vii)(c).” (para 11)

Similarly, in the case of Shri Vipul Markhedkar (ITA No. 788/Mum/2025), the Co-ordinate Bench has followed the above decision and dismissed the appeal of the Revenue.

32. Before proceeding further, it is necessary to examine the statutory framework of Rule 11UA as applicable to the year under consideration. For A.Ys. under consideration, Rule 11UA prescribed that the fair market value of unquoted equity shares is to be determined by the formula:

FMV = (A – L) × (PV) / (PE)

where A represents the book value of assets and not the fair market value of underlying assets.

33. Thus, under the unamended Rule, the legislature has consciously adopted the book value method, and there is no provision to substitute such book value with fair market value of underlying assets or investments. The Rule was amended w.e.f. 01.04.2018 whereby the valuation mechanism was expanded to include:

– Fair market value of shares and securities

– Stamp duty value of immovable property

34. Thus, the amended Rule specifically mandates look-through valuation, which was absent in the earlier Rule. In this regard, the Hon’ble Delhi High Court in the case of PCIT vs. Minda SM Technocast Pvt. Ltd. [2023] 155 com548 has held that for the relevant assessment year, the fair market value of unquoted shares is required to be determined strictly in accordance with Rule 11UA as it stood during that year, which mandated adoption of the book value of assets as per the balance sheet. The Hon’ble Court further held that the Assessing Officer committed an error in applying the amended valuation mechanism, which came into effect from 01.04.2018, to an earlier assessment year and, therefore, such application was impermissible in law.

35. Applying the above legal position to the facts of the present case, we find as under:

(i) The assessee has acquired shares of the holding companies and not the shares of the underlying company.

(ii) For the purpose of section 56(2)(vii)(c), the property received is the shares of the holding companies and therefore valuation must be confined to such shares alone.

(iii) The Assessing Officer, however, has disregarded the statutory mechanism under Rule 11UA and has:

a. Adopted the fair market value of shares of the underlying company

b. Assumed indirect acquisition of shares

c. Applied a look-through approach which is not provided in the Rule for the relevant year

(iv) The Assessing Officer has thus effectively applied the amended Rule 11UA retrospectively, which is impermissible in law.

(v) Further, even the computation mechanism adopted by the Assessing Officer is contrary to the prescribed formula under Rule 11UA, as the addition has been made by substituting the value of underlying shares instead of computing FMV of shares actually acquired.

36. The Revenue has strongly relied upon the allegation that the transaction is a sham or colourable device. However, we find that:

(i) The addition has been made under section 56(2)(vii)(c), which presupposes a valid and real transaction, albeit at undervalue.

(ii) The Assessing Officer has not invoked provisions such as section 68 or 69 to treat the transaction as non-genuine.

(iii) Once the statutory provision invoked is section 56(2)(vii)(c), the valuation must strictly conform to Rule 11UA.

37. Further, the Co-ordinate Bench in identical facts has not accepted the allegation of sham transaction for the purpose of sustaining addition under section 56(2)(vii)(c).

38. Accordingly, we find no infirmity in the orders of the CIT(A) deleting the additions made under section 56(2)(vii)(c) for both the assessment years.

39. In the result, the appeals filed by the Revenue for both the assessment years are dismissed.

Order pronounced in the open court on 15.05.2026.