2025 (2) TMI 1201 - AT - Income Tax

Addition u/s 56(2)(x) and u/s 50CA - addition on account of difference between the transaction value fair market value of shares - CIT(A) deleted addition - HELD THAT - CIT (A) has considered various factors such as different rules for valuation of Industrial NA plots based on criteria like open area amenity area parking area. Further he has also given a finding that the land situated at Survey No. 79 82 83 86 of Yerur village was an undeveloped industrial NA Land the said land was a barren Land. Even as per the Stamp Duty Authority Rules the said land is not demarcated as usable land. Also found by Ld. CIT (A) that while preparing the valuation report Stamp Duty Authority Rules were followed for assessing the value of immovable property. Accordingly Ld. CIT (A) has accepted the valuation furnished by the valuer of the assessee of land situated at Yerur village. A perusal of the order shows that Ld. CIT (A) has passed a detailed and speaking order wherein he has also provided the reasons for allowing 15% discount in the value calculated as per Rule 11UA of the IT Rules. No contrary material has been brought on record by Ld. DR against the detailed reasonings of the CIT (A) on this issue. Therefore in absence of any distinguishable feature brought on record we do not find any infirmity in the order passed by Ld. CIT (A) on this issue. Decided against revenue. Addition on account of receipt of on-money on sale of immovable property which was added on the basis of seized material - addition on the basis of some jotting on seized documents - CIT(A) deleted addition - HELD THAT - We find that while deleting the above addition CIT (A) has considered the reply furnished by the assessee and after analyzing seized documents which has also been made part of the order of Ld. CIT (A) the addition has been deleted. Therefore in absence of any contrary material brought to our notice against the reasoned order of Ld. CIT (A) we do not find any infirmity in the same. Accordingly the same is confirmed. Thus ground raised by the Revenue is dismissed. Unexplained investments in construction of bungalow - CIT(A) deleted addition - HELD THAT - CIT (A) has considered the fact that other family members are also earning members and they have also contributed towards household expenses. CIT (A) has also found that a list of the expenditure outstanding as payable for the house construction was produced along with names of the parties before the AO. CIT (A) has also found that the list of expenditure incurred along with names of the parties and the amount of outstanding to be paid on 31.03.2022 was also reflected in the statement of affairs submitted during the course of assessment proceedings. We therefore do not find any infirmity in the order of Ld. CIT (A) in deleting the addition. Unexplained cash expenditure u/s 69C which was admitted in the statement recorded u/s 132(4) - CIT(A) deleted addition accepting the contention of the assessee that the amount was paid by the appellant s wife i.e. Smt. Urmila Soni out of her income and cash withdrawal from bank from time to time - HELD THAT - As cash summary of Smt. Urmila Soni was also submitted before the Assessing Officer. Considering the totality of the facts of the case we are of the considered opinion that Ld. CIT (A) has rightly deleted the addition because the same was incurred by wife of the assessee and the cash flow statement of wife of the assessee was also produced before the Assessing Officer as well as before Ld. CIT(A). Accordingly ground no. 10 raised by the Revenue is dismissed. Disallowance of agricultural income disclosed by the assessee - CIT(A) deleted addition - HELD THAT - CIT (A) correctly deleted the addition pertaining to agricultural income after considering the fact that appellant has furnished 7/12 extract wherein notings of the crop cultivated during the year has been mentioned and also considered the fact that the assessee holds sufficient agricultural land i.e. more than 4 hectares and a reasonable sum of only Rs. 2, 49, 910/- was shown as net agricultural income which comes to Rs. 61, 555/- per hectare only. Accordingly we do not find any error in the order passed by Ld. CIT (A) on this ground. Appeal filed by the Revenue stands dismissed.

Summary

The core legal questions considered in this appeal revolve around the correctness of additions made by the Assessing Officer (AO) under various provisions of the Income Tax Act, 1961, specifically sections 50CA, 56(2)(x), 69, 69A, and related valuation rules under the Income Tax Rules, 1962. The issues include the determination of fair market value (FMV) of unquoted shares, valuation of immovable property, treatment of provisions such as gratuity in valuation, acceptance of valuation reports, treatment of unexplained cash receipts and investments, and the evidentiary value of statements recorded during search proceedings.

1. Whether the deletion of additions under section 56(2)(x) and restriction of addition under section 50CA relating to FMV of unquoted shares was justified, considering the prescribed valuation methods under Rule 11U and 11UA of the Income Tax Rules, 1962.

2. Whether the CIT(A) erred in considering valuation standards under the Companies Act, 2013, ICAI valuation standards, and factors such as discount on marketability, availability of willing buyers, and margin of safety, which the Revenue contended are not applicable for FMV determination under the Income Tax Rules.

3. Whether the acceptance of the second valuation report for certain immovable properties by the CIT(A), which valued the land lower than the AO's valuation based on Stamp Duty Act rules, was appropriate.

4. Whether the acceptance of deduction for provision of gratuity as a liability in valuation of unquoted shares was legally permissible.

5. Whether the concept of tolerance limit and safe harbor applied by the CIT(A) in determining FMV under Rule 11U and 11UA was justified.

6. Whether deletion of addition on account of receipt of on-money on sale of immovable property, despite seized documents indicating cash receipt, was justified.

7. Whether deletion of additions relating to unexplained investments in bungalow construction and unexplained cash expenditure was proper, given the assessee's cash flow statements and evidentiary material.

8. Whether deletion of addition relating to unexplained agricultural income was justified in absence of documentary evidence supporting agricultural activities.

Issue-wise detailed analysis:

Issues 1 to 6: Valuation of Unquoted Shares and Related Additions

The legal framework involves sections 50CA and 56(2)(x) of the Income Tax Act, 1961, which deal with deemed income arising from undervaluation of shares and receipt of shares without consideration or inadequate consideration, respectively. The valuation of unquoted shares is governed by Rule 11U and 11UA of the Income Tax Rules, 1962, prescribing methods for determining FMV. The Revenue contended that FMV must be strictly determined as per these rules, and the CIT(A) erred in considering valuation standards under the Companies Act, ICAI valuation standards, and factors such as discount on marketability and availability of willing buyers, which are not prescribed under the Income Tax Rules.

The CIT(A), however, undertook a detailed examination of the valuation reports submitted by the assessee, including the second valuation report, which considered various factors such as the nature of the land (undeveloped industrial NA land), lack of marketability, purpose of valuation, and realisability of immovable properties. The CIT(A) noted that the land in question was barren and not demarcated as usable land under Stamp Duty Authority Rules, and thus the valuation by the assessee's valuer was reasonable. The CIT(A) also accepted the deduction of provision for gratuity as a liability, observing that it was a certain liability payable to employees who had completed requisite service, supported by accounting standards and scientific estimation.

The CIT(A) further recognized the practical difficulties and uncertainties in arriving at FMV, acknowledging the dynamic nature of fair valuation and the relevance of concepts like safe harbor and tolerance limits, which address valuation uncertainties. The CIT(A) accepted the weighted average valuation method adopted by the assessee, involving Discounted Cash Flow (DCF), Net Asset Value (NAV), and NAV based on market price of immovable property, as appropriate and in line with international valuation standards and amendments notified by the CBDT introducing multiple valuation methods.

The CIT(A) restricted the addition under section 50CA to Rs. 1,42,000/- from the AO's addition of Rs. 12,92,000/- and deleted the addition under section 56(2)(x) of Rs. 3,32,79,840/-, holding the assessee's valuation at Rs. 540 per share as reasonable after applying a 15% discount for lack of marketability.

The Tribunal upheld the CIT(A)'s order, noting the detailed and reasoned nature of the valuation analysis, acceptance of valuation reports based on Stamp Duty Authority Rules, and the absence of any contrary material from the Revenue challenging these findings. The Tribunal confirmed the deletion and restriction of additions under sections 50CA and 56(2)(x).

Issue 7: Addition on Receipt of On-Money on Sale of Immovable Property

The AO made an addition of Rs. 20,00,000/- on the basis of seized documents indicating receipt of on-money (cash) in a property sale transaction. The Revenue argued that the seized documents clearly demonstrated payment in cash and cheque, and the addition was justified.

The CIT(A) deleted the addition, observing that the seized documents referred to a property in Viman Nagar, Pune, whereas the property sold by the assessee was in Jalna, with differing area descriptions. The CIT(A) concluded that the seized documents were "dumb documents" and did not establish receipt of on-money for the Jalna property. The addition was thus held to be based on mere presumption and probability, lacking evidentiary support.

The Tribunal affirmed the CIT(A)'s deletion, noting the lack of any contradictory material from the Revenue and the reasoned analysis rejecting the addition.

Issues 8 and 9: Additions on Unexplained Investment in Bungalow and Payables

The AO made additions totaling Rs. 23,10,817/- on account of unexplained investments in bungalow construction and Rs. 13,36,073/- as payables not substantiated by documentary evidence. The AO recalculated cash flow statements arbitrarily, reduced declared incomes such as commission and agricultural income, and increased household drawings without corroborative evidence.

The CIT(A) deleted the additions, holding that the AO's reworking was based on assumptions and guesswork without valid grounds. The CIT(A) accepted the cash flow statements submitted by the assessee, noting contributions from other family members and the presence of payables supported by a list of parties and amounts. The CIT(A) observed that the AO's addition of Rs. 1,00,000/- under section 69A amounted to double addition of the same income and deleted it accordingly.

The Tribunal upheld the CIT(A)'s order, emphasizing the lack of valid reasons for AO's arbitrary recalculations and acceptance of supporting evidence by the CIT(A).

Issue 10: Addition on Account of Unexplained Cash Expenditure under Section 69C

The AO added Rs. 1,00,000/- under section 69C based on the assessee's statement recorded under section 132(4) admitting payment of this amount for house-related purchases. The Revenue contended that the statement had evidentiary value and deletion was erroneous.

The CIT(A) deleted the addition after considering the appellant's submission that the amount was advanced to a contractor and was recorded in the books of the assessee's wife, supported by cash withdrawal summaries. The CIT(A) found the addition unsustainable.

The Tribunal concurred with the CIT(A), noting the supporting evidence and the fact that the expenditure was incurred by the assessee's wife, thereby dismissing the Revenue's ground.

Issue 11: Addition on Agricultural Income

The AO disallowed Rs. 1,49,910/- of agricultural income declared by the assessee due to lack of documentary evidence of agricultural activities, adding it to income from other sources.

The CIT(A) deleted the addition after considering the 7/12 land record extract produced by the assessee showing sufficient land holding (4 hectares and 6 R) and noting crops cultivated during the year. The CIT(A) found the declared agricultural income reasonable and meager (Rs. 61,555/- per hectare).

The Tribunal upheld the CIT(A)'s deletion, finding no error in accepting the documentary evidence and the modest quantum of agricultural income.

Significant holdings:

On valuation of unquoted shares under sections 50CA and 56(2)(x), the Tribunal affirmed the acceptance of valuation methods aligned with Companies Act standards, ICAI valuation standards, and international valuation practices, including consideration of discounts for lack of marketability and practical difficulties in selling assets. The Tribunal held:

"The estimated addition under section 50CA or 56(2)(x) of the Act needs to be restricted... The appellant has taken the valuation report from the certified valuer by adopting this method and the valuer has considered the challenge and uncertainties to determine the fair valuation as the concept of fair valuation is very dynamic in nature."

Regarding immovable property valuation, the Tribunal confirmed the CIT(A)'s acceptance of valuation based on Stamp Duty Authority Rules and rejected the AO's higher valuation without uniform basis.

On receipt of on-money addition, the Tribunal emphasized the need for concrete evidence rather than presumptions based on seized documents, stating:

"Addition made on probability and presumption on the basis of dumb documents is not sustainable... The AO has not been able to prove that the appellant has received on money on sale of residential house."

In relation to unexplained investments and cash expenditures, the Tribunal underscored that arbitrary recalculations by the AO without corroborative evidence do not justify additions. It recognized the validity of cash flow statements and supporting documents submitted by the assessee.

On agricultural income, the Tribunal recognized that possession of agricultural land and evidence of cultivation suffice to accept declared agricultural income, even if modest.

Overall, the Tribunal dismissed all grounds raised by the Revenue, confirming the CIT(A)'s order deleting or restricting additions and holding that the AO's assessments were based on assumptions, lacked evidentiary support, or failed to consider relevant valuation standards and practical realities.