DCIT Vs Harsha Rajeshbhai Jhaveri (ITAT Ahmedabad)
ICDS Cannot Ignore a Demerger: ₹4.30 Crore Stock Valuation Addition Deleted
Adjusted Cost Must Reflect the Corporate Restructuring
The Ahmedabad Tribunal has upheld deletion of a ₹4.30 crore addition for alleged undervaluation of unlisted shares held as stock-in-trade, holding that the Assessing Officer had failed to account for an NCLT-approved demerger.
The Revenue insisted upon retaining the original acquisition cost by invoking ICDS VIII. The Tribunal, however, accepted that part of the original cost had shifted to securities received pursuant to the restructuring. The retained holding therefore required an adjusted cost, rather than mechanical continuation of the pre-demerger figure.
The Tribunal also upheld deletion of two additions relating to share-trading transactions and dismissed the Revenue’s appeal.
Reopening Based on Alleged Accommodation Entries
The assessee was a resident individual engaged in share trading and investment activities.
Reassessment proceedings arose from Investigation Wing information alleging that syndicates and entry operators provided accommodation entries and fictitious profits or losses in securities trading.
The information referred to transactions in Kushal Ltd. and Padmanabh Industries Ltd., together with an alleged ₹90 lakh accommodation loan transaction involving Shri Jignesh Shah.
The assessee denied having entered into any such loan transaction. She explained that the ₹90 lakh figure represented the aggregate purchase and sale turnover of Padmanabh Industries shares on the recognised stock exchange.
The Assessing Officer nevertheless completed reassessment, making additions of ₹1,000, ₹54,734 and ₹4.30 crore. The CIT(A) quashed the reassessment and also deleted the additions on merits.
Trading in Over 100 Scrips Supported the Assessee
The Revenue challenged deletion of the additions concerning Padmanabh Industries and Kushal Ltd., relying on investigation findings and the test of human probabilities.
The assessee explained that she was a regular securities trader who had dealt in more than 100 scrips during the year, earning both profits and losses in the ordinary course of business.
The transactions were supported by broker contract notes, demat statements, STT payment and banking records, and were executed through SEBI-registered brokers on recognised stock exchanges.
The Tribunal found that these submissions were supported by the record. The CIT(A)’s finding that there was no material establishing the assessee as a beneficiary of accommodation entries remained uncontroverted.
A Profit Was Mistaken for a Loss
The Tribunal identified a basic factual error in the Padmanabh Industries addition.
The Assessing Officer had proceeded on the understanding that the assessee claimed a ₹1,000 loss. In fact, she had earned a ₹1,000 profit and offered it to tax.
The Tribunal held that an addition resting on this incorrect understanding could not stand. It also upheld deletion of the ₹54,734 Kushal Ltd. trading-loss disallowance, finding that the surrounding circumstances and probabilities supported the assessee’s explanation.
Revenue Applied Original Cost to Unlisted Shares
The principal dispute concerned 2,15,000 unlisted shares of Safal Realty Pvt. Ltd., held as stock-in-trade.
The assessee used a closing-stock figure of ₹1,800 per share, compared with the pre-restructuring figure of ₹2,000, resulting in the disputed reduction of ₹4.30 crore.
The Revenue argued that paragraph 12 of Part A of ICDS VIII required unlisted securities to be valued at their initially recognised actual cost. It therefore treated the reduction as an impermissible write-down.
The assessee explained that the change arose from a scheme of arrangement, demerger and amalgamation, rather than an ordinary decline in market value.
Demerger Required Allocation of the Original Cost
Under the NCLT-approved scheme, effective from 1 April 2017, the project division and associated assets moved to resulting companies. The Tribunal recorded that the assessee received optionally convertible debentures in those companies.
The assessee furnished the scheme, NCLT order, financial statements and demat records. These demonstrated that the asset structure underlying the original holding had changed.
The Tribunal accepted that the original acquisition cost was apportioned between the retained holding and the resulting securities. Continuing to carry the retained shares at their entire pre-demerger cost would disregard that allocation and distort their valuation.
It also referred to ICDS VIII’s provision concerning securities acquired in exchange for another security or asset, under which actual cost is linked to the fair value of the acquired security.
Accordingly, it upheld the adjusted figure of ₹1,800 per share and deletion of the addition.
Reopening Issue Left Undecided
Having upheld deletion of all additions on merits, the Tribunal treated the Revenue’s challenge to the quashing of reassessment as academic and infructuous.
It therefore did not independently adjudicate the validity of reopening.
Author’s Comments
The distinction between a market-value write-down and a restructuring-related allocation of cost is central to this decision. The Tribunal accepted the latter on the documentary record; it did not grant a general option to value unlisted securities below cost merely because their market value declined.
The order contains inconsistencies in its description of the resulting instruments and certain figures. Its operative reasoning nevertheless clearly rests on demerger-related cost allocation.
Practitioners should document the scheme, securities received and reconciliation of the original cost across the resulting holdings.
ICDS requires proper valuation. Applying an old cost figure while ignoring the transaction that changed its allocation does not achieve that purpose.
Cases Discussed
- Sumati Dayal v. CIT, 214 ITR 801 (Supreme Court)
- CIT v. Durga Prasad More, 82 ITR 540 (Supreme Court)
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT AHMEDABAD
1. The present appeal has been preferred by the Revenue against the Order, dated 24/02/2025, passed by the Commissioner Of Income Tax, (Appeals)-11 Ahmedabad[hereinafter referred to as the ‘CIT(A)’] whereby the Learned CIT(A) had partly allowedthe appeal against the Assessment Order, dated 28/03/2023, passed under Section 147of the Income Act, 1961 [hereinafter referred to as ‘the Act’] for the Assessment Year 2018-2019.
2. The Revenue has raised following grounds of appeal:
1. The Ld. CIT(A) has erred in law and on facts by quashing the assessment order passed u/s147, ignoring the fact that notice under section 148 of the Act has been issued on the basis of information that the assessee was a beneficiary of accommodation entries, following due procedure by passing order u/s. 148A(d) of the Act after giving opportunity u/s.148A(b) of the Act, and that the additions made were based on incriminating seized digital data found during the search and survey proceedings.
2. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the disallowance of loss of Rs. 1000/- in trading of shares of Padmanabh Industries Limited without considering the incriminating documents found & seized during survey and without appreciating the meticulous findings of the AO
3. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the disallowance of loss of Rs. 54,734/- in trading of shares of Kushal Limited without considering the incriminating documents found and seized during search and survey and also accepted in the statement of AshishPanalal and without appreciating the meticulous findings of the AO.
4. In the facts and on the circumstances of the case and in law, the ld. CIT(A) has erred in deleting the addition of Rs.4,30,00,000/- for undervaluation of closing stock without considering the ICDS notification dated 29.09.2016.
3. The relevant facts as emanating from the record are that the Assessee is an resident individual engaged in share trading and investment activities. For the Assessment Year 2017-2018 reassessment proceedings were initiated in the case of the Assessee on the strength of information received from the Investigation Wing alleging that certain syndicates and entry operators were providing accommodation entries and fictitious profits/losses in equity/derivative trading. The report specifically alleged that the Assessee had (i) traded in scrips of Kushal Ltd involving transactions of INR.8,53,217/-, & Padmanabh Industries Ltd involving purchase/sale transactions of INR.90,00,000/-, and (ii) allegedly entered into bogus accommodation loan transactions amounting to INR.90,00,000/- with Shri Jignesh Shah. In response to the notice issued under Section 148A(b), the Assessee submitted detailed objections vide letter dated 23/03/2022, pointing out that the allegations and figures mentioned in the notice were factually erroneous. The Assessee categorically stated that it had never entered into any loan or accommodation transaction with Shri Jignesh Shah or his group entities, and that the figure of INR.90,00,000/- represented the aggregate turnover of purchase and sale of shares of Padmanabh Industries Ltd executed on the recognized stock exchange platform. The Assessing Officer rejected the objections and passed an order under Section 148A(d) of the Act on 29/03/2022, which was followed by issuance of notice under Section 148 of the Act. Subsequently, the Assessing Officer completed the reassessment under Section 143(3) r.w.s. 147 of the Act vide Assessment Order dated 28/03/2023, after making the following additions:
(i) Addition of INR.1,000/- being disallowance of trading loss incurred in shares of Padmanabh Industries Ltd, holding the same to be a bogus accommodation loss.
(ii) Addition of INR.54,734/- being disallowance of trading loss incurred in shares of Kushal Ltd, holding the transaction to be part of an accommodation entry scheme to convert black money into white.
(iii) Addition of INR.4,30,00,000/- on account of alleged undervaluation of closing stock of 2,15,000 unlisted shares of Safal Realty Pvt. Ltd. by invoking the provisions of Income Computation and Disclosure Standards (ICDS-VIII) notified vide CBDT Notification dated 29/09/2016.
4. Being aggrieved, the Assessee preferred an appeal before the Learned CIT(A). Vide, order dated 25/05/2024, the Learned CIT(A) allowed the appeal preferred by the Assessee on jurisdictional grounds by quashing the assessment order passed under Section 147 of the Act observing that the Assessing Officer had failed to establish any material connecting the Assessee to accommodation entries from Shri Jignesh Shah. Furthermore, for completeness of record, the Learned CIT(A) adjudicated the issues on merits and deleted all three additions made by the Assessing Officer.
5. Being aggrieved by the order of the Learned CIT(A), the Revenue has preferred the present appeal before the Tribunal on the grounds reproduced in paragraph 2 above.
6. We have heard the rival submissions, perused the material available on record, and carefully considered the statutory provisions as well as judicial precedents relied upon by both sides.
Ground Nos. 2 and 3
7. We would first take up Ground Nos. 2 and 3 raised in the present appeal.
8. The Revenue has challenged the order of the Learned CIT(A) allowing Assessee’s claim for deduction for trading loss of INR.1,000/- and INR.54,734/- in respect of trading in shares of Padmanabh Industries Ltd and Kushal Ltd., respectively. During the course of hearing the Learned Departmental Representative has relied upon the findings of the Assessing Officer and argued the Assessing Officer had correctly applied the doctrine of human probability laid down by the Hon’ble Supreme Court in Sumati Dayal v. CIT (214 ITR 801) and CIT v. Durga Prasad More (82 ITR 540) to hold that the trading losses were non-genuine undisclosed income.
9. Per Contra, the Learned Authorised Representative for the Assessee submitted that the Assessee was a regular trader in securities who traded in over 100 scripts during the relevant previous year in the ordinary course of business. All purchases and sales of shares were carried out on the automated screen-based trading platform of recognized stock exchanges through SEBI-registered stockbrokers. The transactions were fully supported by broker contract notes, Demat account statements showing delivery of shares, payment of Securities Transaction Tax (STT), and banking channel transactions. It was contended that generic findings against third-party were applied to disallow genuine trading losses incurred by regular traders on stock exchanges. It was further submitted the Assessee had also booked loss on account of valuation of closing stock of shares of Kushal Ltd. as at the end of relevant previous year amounting to INR.22,91,960/-. The addition made by the Assessee is limited to loss of INR.54,734/- suffered on purchase/sale of shares of Kushal Ltd. As regards, disallowance of INR.1000/- in respect of trading in shares of Padmanabh Industries Ltd is concerned, the Assessee has earned profits of INR.1,000/- which were offered to tax.
10. We have considered the rival submissions and perused the material on record. We find that the averments made by the Learned Authorised Representative for the Assessee are supported by material on record. We note that the Learned CIT(A) has returned factual finding that there was no material before the Assessing Officer to show that the Assessee was a beneficiary of accommodation entry. The aforesaid findings of the Learned CIT(A) have gone uncontroverted during the appellate proceedings before us. It is an admitted position that the Assessee is engaged in the business of share trading and has executed transactions in more than 100 scripts during the year resulting in both profits and losses in ordinary course of business. On perusal of computation of income we find that the Assessee has disclosed ‘Income from Business & Profession’ and Capital Gains. In the present case the preponderance of probabilities support the stand of the Assessee. Further, The Assessing Officer has chosen to disallow net loss of in case of one script (Kushal Ltd). While in case of trading in shares of Padmanabh Industries Ltd, the Assessing Officer has moved on incorrect understanding that the Assessee has claimed loss of INR.1,000/- whereas the Assessee has earned profit of INR.1,000/-. Given the aforesaid facts, the approach adopted by the Assessing Officer is not tenable as the same in based upon incorrect understanding of facts. In view of the aforesaid, we find no reason to interfere with the order of the Learned CIT(A) deleting the disallowances of trading loss of INR.1,000/- and INR.54,734/-. Thus, Ground Nos. 2 and 3 raised by the Revenue are dismissed.
Ground No. 4
11. Ground No. 4 raised by the Revenue challenges the deletion of addition of INR.4,30,00,000/- made by the Assessing Officer on account of alleged undervaluation of closing stock of unlisted shares of Safal Realty Pvt. Ltd.
12. The Learned Departmental Representative, inviting our attention to the findings in the Assessment Order, submitted that the Assessee held 2,15,000 unlisted shares of Safal Realty Pvt. Ltd. as stock-in-trade, purchased at an actual cost of INR.43,00,00,000/- (INR.2,000/- per share). In the closing stock computation, the Assessee valued these shares at INR.1,800/- per share (totaling INR.38,70,00,000/-), thereby reducing closing stock and net profit by INR.4,30,00,000/-. The Learned Departmental Representative submitted that pursuant to CBDT Notification dated 29/09/2016 issued under Section 145(2) of the Act, Income Computation and Disclosure Standards (ICDS-VIII) relating to securities became mandatory from Assessment Year 2017-18 onwards. Paragraph 12 of Part-A of ICDS-VIII unequivocally mandates that unlisted securities held as stock-in-trade shall be valued at actual cost initially recognized. Unlike listed securities, ICDS-VIII does not grant the option to value unlisted securities at lower of cost or market value. Therefore, the Assessing Officer correctly revalued the stock at cost and added INR.4,30,00,000/- under Section 28 of the Act.
13. Opposing the submission of the Learned Departmental Representative, the Learned Authorised Representative for the Assessee submitted that the reduction in the valuation of shares of Safal Realty Pvt. Ltd. from INR.2,000/- to INR.1,800/- per share was necessitated by Scheme of Demerger sanctioned by the National Company Law Tribunal (NCLT) which came into effect from 01/04/2017. As per approval granted by NCLT, the core Project Division along with substantial real estate assets of Safal Realty Pvt. Ltd. was demerged into resulting companies. As consideration for the demerger, the Assessee was allotted 0.1% Optionally Convertible Debentures (OCDs) in the resulting companies, as evidenced by Demat statements submitted on record. Consequently, the intrinsic value and asset base of the original shares of Safal Realty Pvt. Ltd. substantially diminished due to the hiving off of its Project Division. The Learned Authorised Representative for the Assessee submitted that ICDS-VIII cannot be interpreted in a manner suggested by the Revenue to completely disregard the order passed by the NCLT. The reduction of INR.200/- per share represented the allocation of cost to the demerged assets/OCDs received, and therefore, the valuation at INR.1,800/- per share correctly reflected the reduced cost/value attributable to the retained entity.
14. We have given thoughtful consideration to the rival submissions and perused the underlying documents, including the NCLT demerger order and Scheme.
15. We note that by way of Reply Letter, dated 27/03/2023, filed by the Assessee before the Assessing Officer the Assessing Officer had placed before the Assessing Officer the following facts and supporting documents:
“Ref.: DIN & Letter No. ITBA/AST/F/147(SCN)/2022-23/1051180290(1) dated 23/03/2023 for A.Y.2018-19 Date of compliance fixed on 27/03/2023
Sub: Submission and Explanation in response to above SCN.
xx xx
8. In response to above mentioned SCN dated 23/03/2023 as to why the under valuation of shares amounting to Rs.4,30,00,000/- should not be added to total income, we have to state and submit the following important facts:
(a) It is submitted that as per the scheme of Amalgamation / Arrangement and Demerger, one division of the company viz. Safal Realty Pvt. Ltd. was demerged and resulted into Safal Infra Developers Pvt. Ltd. The name of the said company was then changed to HN Safal Infra Developers Pvt. Ltd.
(b) The remaining division of Safal Realty Pvt. Ltd. was amalgamated with HN Safal Facilities Management Pvt. Ltd. now known as HN Safal Infra Space Pvt. Ltd.
(c) The assessee company on account of this scheme of Amalgamation/Arrangement and Demerger received 107500 [0.01%] preference shares of each company viz. HN Safal Infra Developers Pvt. Ltd. and HN Safal Infra Space Pvt. Ltd.
(d) The assessee has invested in the equity shares of Safal Realty Pvt. Ltd. and thus being an equity shareholder had rights in the property / assets of the said company and therefore the shares of the said company were valued at the net worth of Safal Realty Pvt. Ltd.
(e) The assessee however in exchange of such equity shares as per the scheme of Amalgamation / Arrangement and Demerger received the preference shares of the sald company viz. Safal Realty Pvt. Ltd. which had limited rights as preference shareholder as compared to equity shareholder.
(f) Thus, the assessee had reduced the cost of purchase of shares of the said company by Rs.200/- as per the oral discussion with the directors of the said companies, which according to your honour has resulted in alleged undervaluation of the shares of the said company to that extent i.e. Rs.4,30,00,000/-
(g) It may be pertinent to note here that if the preference shares are separately valued as per the Balance Sheet of the said companies, the same would be far less than the value at which the shares have been valued i.e. Rs.1800/- by the assessee. This is to bring home and emphasize the fact that contrary to your honour’s allegation of undervaluation, the assessee has shown higher value of the shares. The valuation report for the same is under collection and will be furnished within 2 days.
(h) It is submitted that the SCN has been issued relying upon ICDS-VIII, the Para 12 of which provides that securities listed but not quoted on a recognized stock exchange with regularity from time to time shall be valued at cost initially recognized. However, the expression “not quoted on a recognized stock exchange with regularity from time to time” has not been defined.
(I) It is thus contended that, if the value of unquoted equity shares reduces drastically as compared to the cost due to various circumstances and events beyond the control of the shareholders like the assessee and the value of the shares are not valued accordingly to cover the said circumstances, it will result into a distorted value of shares and not the real value of the shares and consequentially hypothetical income, which is not the intention of the legislature.
9. In support of the above facts, following documents are being enclosed herewith:
(a) Scheme of Amalgamation / Arrangement and Demerger. [Annexure-2]
(b) Order of NCLT approving such scheme of Amalgamation / Arrangement and Demerger. [Annexure-3]
(c) Copy of Audited Accounts of HN Safal Infra Developers Pvt. Ltd. erstwhile known as Safal Infra Developers Pvt. Ltd. [Annexure-4]
(d) Copy of Audited Accounts of HN Safal Infra Developers Pvt. Ltd. erstwhile known as Safal Infra Developers Pvt. Ltd. [Annexure-5]
(e) Copy of Audited Accounts of HN Safal Infra Space Pvt. Ltd. erstwhile known as HN Safal Facilities Management Pvt. Ltd. [Annexure-6]
(f) Demat transaction statement for F.Y.2018-19 showing receipt of preference shares of the above companies in lieu of equity shares of Safal Realty Pvt. Ltd. [Annexure-7]”
16. After taking into consideration the above documents and submission, the Learned CIT(A) concluded as under:
“8.3 I have considered the relevant facts as also the finding of AO and arguments advanced. There is no denial of fact that pursuant to scheme of demerger of project division of Safa lw.e.f the appointed date being 1st April 2017 the appellant was allotted OCD in resulting companies. The appellant has placed on record the scheme of demerger/amalgamation, the order of NCLT as also the demat statement for receipt of shares in demerged company. These facts are also demat statement for receipt of shares in demerged company. These facts are also not denied by the AO. However, it appears that the AO has not considered the issue of the effect of demerger and resultant valuation of the shares. The AO, it appears was guided solely by the notification of the CBDT on ICDS as mentioned in para-8.4 of the assessment order and not taken into account the detailed submissions of the appellant, especially the documentary evidences submitted in support of her claim as (a to f) supra. The appellant, on the other hand, demonstrated in course of the appeal proceedings that due to demerger, the company Safal lost its value as it had originally and the said assets are now part of the demerged company, the OCD issued by same are available to the appellant. In view of same, if the value of Safal as originally stand when the appellant purchased the gas has undergone phenomenal change required to be considered appropriately. The project division of Safal has many assets which now no longer remain with it and hence its valuation will obviously change. Since the appellant has discounted such factors appropriately and since the effect thereof is not given by the AO, the appellant has rightly valued the same at Rs. 1800 per shares. Consequently, the addition of Rs. 4,30,00,000 is required to be deleted and is accordingly deleted. The ground no.4 of appeal raised in this regard is allowed.”
17. We do not find any infirmity in the order passed by the Learned CIT(A) on account of the following. It is admitted position that that pursuant to the Scheme of Demerger approved by the NCLT w.e.f. 01/04/2017, the Project Division of Safal Realty Pvt. Ltd. was transferred to resulting companies, and the Assessee was allotted OCDs in the resulting companies. As a consequence, the original cost of acquisition of shares in the demerged company was apportioned between the original company and the resulting company/securities issued pursuant to the demerger scheme. The Assessee recognized the fact that a portion of the value of the original shares shifted to the OCDs allotted in the resulting companies. In our view, the Assessing Officer failed to consider the documentary evidence submitted by the Assessee demonstrating the demerger and allocation of assets. The Ld. CIT(A) correctly appreciated that since the Project Division’s assets were no longer with Safal Realty Pvt. Ltd., holding the original shares at the pre-demerger cost of INR.2,000/- without accounting for the demerger would result distorted valuation. The adjustment to INR.1,800/- per share correctly reflected the adjusted cost of the retained shares post-demerger. We note that ICDS VIII – Securities provides that if security is acquired in exchange of any other security or asset, the actual cost shall be the fair value of the security which has been acquired. The aforesaid supports the stand taken by the Assessee and the order passed by the Learned CIT(A) accepting Assessees’s contention. Accordingly, finding no legal or factual infirmity in the order passed by the Learned CIT(A) on this issue, we dismiss Ground No. 4 raised by the Revenue.
Ground No. 1
18. Since we have confirmed the order passed by the Learned CIT(A) on merits by dismissing Ground No. 2 to 4 raised by the Assessee, Ground No.1 raised by the Revenue has been rendered academic and therefore, dismissed as having been rendered infructuous.
19. In result, present appeal preferred by the Revenue is dismissed.
Order pronounced on 30.09.2026
