ITO Vs S D N Company (ITAT Mumbai)
The Income Tax Appellate Tribunal (ITAT) Mumbai heard an appeal by the Income Tax Officer (ITO) against the order of the National Faceless Appeal Centre (NFAC), Delhi, which had deleted an addition of ₹126,98,69,717 made by the Assessing Officer (AO) under Section 56(2)(viia) of the Income-tax Act, 1961, for the Assessment Year 2016-17 in the case of ITO vs S D N Company. The core issue revolved around the introduction of shares of Unitel Finance and Investments P. Ltd. (UFIPL) as capital contribution by the partners into the assessee firm. These shares were initially valued at ₹92.88 per share based on a Chartered Accountant’s report as per Rule 11UA of the Income-tax Rules, 1962. Subsequently, another valuation by a SEBI registered merchant banker, M/s. V B Desai Financial Services Limited (VBDFSL), assessed the intrinsic value of these shares significantly higher at ₹4786.53 per share. The AO, focusing on this later valuation, invoked Section 56(2)(viia), alleging that the difference in value represented income chargeable to tax.
The assessee argued that the introduction of shares was a capital contribution by the partners and was linked to a family settlement executed to give effect to the will of the deceased promoter of the companies. The ITAT considered the provisions of Section 56(2)(viia), which generally applies to the receipt of shares without adequate consideration. However, the Tribunal noted that this section does not apply to capital contributions by partners to a firm. Furthermore, the ITAT relied on several judicial precedents, including the Supreme Court’s ruling in Ram Charan Das vs Girjanandini Devi And Ors, which held that property transfers within a family to ensure harmony do not constitute a transfer in the conventional sense. The Tribunal also cited cases under the Gift-tax Act where bonafide family settlements were held not to attract gift tax. The ITAT concluded that the transfer of shares in this case was an integral part of a family settlement aimed at implementing the deceased’s wishes and maintaining family harmony, thus falling outside the purview of Section 56(2)(viia).
Moreover, the ITAT observed that the partners had initially determined the fair market value of the shares as per Rule 11UA at the time of capital contribution. The AO’s reliance on the subsequent valuation report by VBDFSL, which explicitly stated that the “intrinsic value” was not intended to reflect the fair market value for transaction pricing, was deemed inappropriate. The Tribunal emphasized that the valuation as per Rule 11UA at the time of capital introduction should be considered. Consequently, the ITAT held that the AO erred in making the addition, as the provisions of Section 56(2)(viia) were not applicable to capital contributions, especially within the context of a bonafide family settlement. The ITAT upheld the order of the ld. CIT(A) and dismissed the revenue’s appeal.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
