Case Law Details
ITO Vs Bipin Babubhai Panchal (ITAT Ahmedabad)
The Income Tax Appellate Tribunal (ITAT) in Ahmedabad recently adjudicated a significant case involving ITO Vs Bipin Babubhai Panchal. This appeal was filed by the Revenue against the order dated March 11, 2019, from the Commissioner of Income Tax (Appeals)-10, Ahmedabad, concerning the Assessment Year 2012-13. The case primarily centered around the computation of Long-Term Capital Gains (LTCG) and the valuation of shares of a Private Limited Company that was under liquidation.
Background of the Case
The Revenue raised several grounds in the appeal, claiming that the CIT(A) had erroneously deleted an addition made by the Assessing Officer (AO) without fully appreciating the facts surrounding the case. Specifically, the Revenue argued that the assessee had earned an artificial LTCG from the sale of shares and incorrectly claimed a deduction of ₹37,54,273 under Section 54F of the Income Tax Act.
The appeal was predicated on the assessment order dated December 26, 2017, where the AO had made substantial additions to the assessee’s declared income. This included a ₹1,05,65,905 addition attributed to the sale of shares of Machinery & Equipment Manufacturers Pvt. Ltd., which were unquoted shares.
Proceedings Before the Assessing Officer
The assessee filed a return declaring total income of ₹11,77,540 on July 31, 2012. The return underwent scrutiny under Section 143(2) of the Income Tax Act, 1961. During the assessment, the AO observed certain expenses claimed by the assessee, such as depreciation and other operational costs, and disallowed portions of these expenses.
In the subsequent assessment, the AO made a significant addition due to the LTCG arising from the sale of shares. The Revenue contended that the shares were sold for a price that did not reflect their true market value, thus implying the existence of an artificial LTCG.
Appeal to the CIT(A)
Aggrieved by the AO’s order, the assessee appealed to the CIT(A), who partly allowed the appeal. The CIT(A) concluded that the AO had misdirected himself regarding the valuation of shares, particularly failing to recognize that the valuation should consider the intrinsic value of the shares based on market realities.
The CIT(A) noted that the actual transaction price of ₹2,85,770 per share was justified, especially considering the context in which the shares were sold. The CIT(A) emphasized that the purchaser, a rival group, was willing to pay a premium for control over the company and its assets.
Contentions Before the ITAT
The Ld. Departmental Representative (DR) argued that the CIT(A) erred by accepting the sale price without addressing the proper valuation method as prescribed by Rule 11UA of the Income Tax Rules. The DR insisted that the CIT(A) should have upheld the AO’s order, given the discrepancies in the share valuation.
Conversely, the Ld. Authorized Representative (AR) for the assessee contended that the sale of shares should be considered independently of the company’s net worth. The AR argued that the CIT(A) correctly identified the intrinsic value of the shares and upheld the genuineness of the transactions. Furthermore, the AR highlighted that the deduction claimed under Section 54F was appropriate given the circumstances.
ITAT’s Decision
After hearing both parties and reviewing the relevant materials, the ITAT dismissed the Revenue’s appeal, upholding the findings of the CIT(A). The Tribunal agreed with the assessment that the intrinsic value of the shares had been accurately represented, taking into account the circumstances of the sale, the willingness of the purchaser to pay a premium, and the market context.
The ITAT emphasized that the Assessing Officer’s inquiry into the valuation and sale of the shares was satisfactory. The Tribunal confirmed that the sale price reflected the true value of the shares, especially as the purchaser sought to gain control over the company. Additionally, the Tribunal upheld the deduction under Section 54F, recognizing the legitimacy of the expenses claimed by the assessee.
Conclusion
The ITAT Ahmedabad’s ruling in ITO Vs Bipin Babubhai Panchal reinforces the importance of understanding intrinsic value in assessing capital gains from share transactions. The decision highlights that proper consideration of market dynamics and buyer motivations is crucial in evaluating share sales, especially for unquoted shares. This case serves as a pertinent reminder for both taxpayers and tax authorities regarding the complexities involved in share valuation and capital gains assessments.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
This appeal is filed by the Revenue against order dated 11.03.2019 passed by the CIT(A)-10, Ahmedabad for the Assessment Year 2012-13.
2. The Revenue has raised the following grounds of appeal :-
“(1) The ld. CIT(A) has erred in law and/or on facts in deleting the addition without appreciating the facts that the assessee has earned artificial LTCG from the sales of the shares of a Private Limited Company under liquidation, having inadequate net worth and allowing excess deduction of Rs.37,54,273/- under Section 54F of the Act.
(2) The ld. CIT(A) has erred in law and/or on facts in accepting the sale price of share/unit at Rs.2,85,770/- against value of share/unit at Rs.2,04,180/- adopted by the AO based on the net worth of Private Limited Company under liquidation.
(3) On the facts and circumstances of the case, the ld. CIT(A) ought to have upheld the order of the Assessing Officer.
(4) It is, therefore, prayed that the order of ld. CIT(A) may be set aside and that of the Assessing Officer be restored.”
3. Return of income declaring total income at Rs.11,77,540/- was filed by the assessee on 31.07.2012. The return was processed under Section 143(1) of the Income Tax Act, 1961 and notice under Section 143(2) of the Act was issued on 12.08.2013 as well as notices under Section 142(1) of the Act were issued on 06.03.2014 & 24.11.2014 alongwith detailed questionnaire. In response to the said notice, the assessee filed details/evidences as well as the submissions. The assessee derives income from trading and commission business as well as income from other sources. The Assessing Officer observed that the assessee has debited expenses on the head of Depreciation Expenses, Petrol & Diesel expenses and Tea & Refreshment Expenses. The same was disallowed to the extent of 1/5th thereby making addition of Rs.31,424/- by the Assessing Officer. The Assessing Officer further made addition of Rs.1,190/- towards the Telephone Expenses. Thus, the Assessing Officer passed Assessment Order dated 23.03.2015 which was subsequently set aside by the PCIT under Section 263 of the Act. Subsequently, the Assessing Officer vide order dated 26.12.2017 passed under Section 143(3) read with Section 263 of the Act observed that the assessee has sold shares of M/s. Machinery & Equipments Manufacturers Pvt. Ltd. and earned Long Term Capital Gain (LTCG) from these unquoted shares. After taking cognisance of the submissions of the assessee, the Assessing Officer made addition of Rs.1,05,65,905/-.
4. Being aggrieved by the Assessment Order dated 26.12.2017, the assessee filed appeal before the CIT(A). The CIT(A) partly allowed the appeal of the assessee.
5. The Ld. DR submitted that the CIT(A) erred in deleting the addition without appreciating the fact that the assessee has earned artificial LTCG from the sales of shares of a Private Limited Company which was not liquidated and was not a listed Company. In fact, the CIT(A) is silent on Rule 11UA(c)(b) regarding the manner of valuation and in fact the Assessing Officer was right in invoking the valuation as envisaged in the Assessment Order thereby demonstrating that the assessee is showing excess LTCG and is claiming 54F deduction. In fact, the Assessing Officer became obliged as per the direction of Section 263 and PCIT’s invocation and, therefore, the CIT(A) should have taken cognisance of the same. Ld. DR further submitted that as relates to ground no.2, the CIT(A) erred in accepting the sale price of share/unit at Rs.2,85,770/- against value of share/unit at Rs.2,04,180/- adopted by the Assessing Officer based on the net worth of Private Limited Company under liquidation. Thus, the ld. DR prayed that the addition made by the Assessing Officer be confirmed.
6. The ld. AR submitted that the CIT(A) has categorically taken a view that the Assessing Officer has misdirected while observing that the company namely M/s. Machinery & Equipment Manufacturers Private Limited and its market valuation of the land thereby to ascertain value of share in the company for the simple reason that what is sold by the assessee in the instant case if not the company or its assets but the shares held by the said company under Section 50CA inserted by Finance Act, 2017 w.e.f. 01.04.2018 clearly set out that it is only where the consideration received or accruing as a result of transfer of unquoted share of a company is less than the fair market value, then value as determined in the prescribed manner shall be deemed to be full value of consideration. The CIT(A) further observed that the purchaser of the shares are the rival Cambatta Group who wanted to take steps earlier to remove the assessee group from management and they have assumed full control over the company after having purchased the shares of the assessee. Thus, the purchaser group not only considered all the facts including future value of the assets of the company but also the fact that after purchasing the shares of the assessee, they had uninterrupted and hindrance-free control of running or managing the company. The CIT(A), therefore, has given finding that the explanation offered by the assessee clearly indicate that the assessee derived capital gain and, therefore, restricted the said consideration to Rs.2,64,41,310/- as against actual sale consideration received of Rs.3,70,07,215/-. As regards to ground no.2 of Revenue’s appeal, the ld. AR submitted that the actual investment was rightly considered by the CIT(A) after deduction under Section 54AF of the Act and, therefore, the same is allowable. So, the disallowance of Rs.37,54,273/- was rightly deleted.
7. We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that the computation of fair market value of shares relating to land value alongwith factory building by the Assessing Officer in respect of paid up share capital of M/s. Machinery & Equipments Manufacturers Pvt. Ltd., the component of status of the company under liquidation as well as the interest of the Cambatta Group of the same company has been clearly and categorically demonstrated in the observation made by the CIT(A) in paragraph no. 4.4 of the order of the CIT(A). In fact, the CIT(A) categorically observed that the Assessing Officer made direct enquiry by issuing notices under Section 133(6) of the Act on the purchasers (Members of Cambatta Group) and the said reply clearly indicates that the purchased shares was agreed at the rate of Rs.2,85,770/- per share which included intrinsic value of the land as also by doing such purchase they have been able to take 100% control over the company and, therefore, the sale of those shares of the ongoing company was justifiable and cost of Rs.2,85,770/- per share was rightly paid by the assessee in respect of intrinsic value of the share. There is no need to interfere with the finding of the CIT(A). Hence, ground no.1 of the Revenues appeal is dismissed. As regards to ground no.2, the genuineness of the expenses was rightly proved by the assessee thereby giving the details related to brokerage paid, legal fees, as well as the other components and the claim of exemption by investment in new residential house was justified by the assessee. Thus, the disallowance was rightly deleted by the CIT(A). There is no need to interfere with the finding of the CIT(A). Hence, ground no.2 of the Revenue’s appeal is also dismissed.
8. In the result, appeal of the Revenue is dismissed.
Order pronounced in the open Court on this 27th August, 2024.
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