2025 (6) TMI 1541 - AT - Income Tax

Addition u/s 56(2)(x) - as per AO valuation for the purpose of section 56(2)(x) is the Fair Market Value FMV which is derived as prescribed method of valuation in accordance with the Rule 11U 11UA of Income Tax Rule 1962 with respect to the unquoted shares - CIT(A) deleted addition - HELD THAT - Since the facts of the instant case are identical to the facts of the case already decided by the Tribunal in the case of ACIT vs. Dwarkaprasad Bhikulal Soni 2025 (2) TMI 1201 - ITAT PUNE wherein as 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. It was 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 Ld. CIT(A) on this issue. Decided against revenue. Addition on account of amount advanced on Hundi - amounts are advanced in cash - CIT(A) deleted the addition - HELD THAT - Although the assessee had filed the copy of affidavit of M/s. Vikas Industries and the bank statement substantiating the loan of Rs. 25 lakh paid through banking channel and also the affidavit from Shri Murlidhar Mundada proprietor of M/s Vikas Industries stating that as against the said unsecured loan he had issued two postdated cheques of Rs. 13 lakh each which includes the proposed interest of Rs. 1 lakh we find the Assessing Officer rejected the same and made the addition merely on the basis of word cash written in the promissory note. There is no evidence with the Assessing Officer that the loan of Rs. 26.00 lakh is over and above the amount of Rs. 25.00 lakh paid by cheque or that the amount of Rs. 25.00 lakh has been refunded by cheque or cash. Therefore under these circumstances the order of the Ld. CIT(A) deleting the addition in our opinion cannot be faulted with. Addition being the interest receivable on advances given in cash on Hundi - Since the assessee had not offered the same for taxation the AO made the addition - CIT(A) deleted the addition - HELD THAT - Since the assessee has admitted that he has given an amount of Rs. 25 lakh as loan to M/s. Vikas Industries therefore interest accrued on the same has to be added to the total income of the assessee. We therefore set aside the order of the Ld. CIT(A) and restore the order of the Assessing Officer on this issue. The ground No.9 raised by the Revenue is accordingly allowed. Addition treating the agricultural income as Income from other sources - as per AO assessee has not provided the details in support of agricultural income - CIT(A) deleted addition - HELD THAT -The order of the CIT(A) that the agricultural income per hectare is worked out to Rs. 43, 353/- only which is very negligible agricultural income cannot be accepted in absence of proof of cultivation nature of products produced names of persons to whom sold amount of expenditure incurred for raising the agricultural products etc. Therefore the order of the CIT(A) deleting the entire addition cannot be accepted. However since the assessee is holding 4 hectare 6 R of agricultural land and 7/12 extract shows the crop cultivation therefore considering the totality of the facts of the case and in the interest of justice and to put a quietus to the litigation we are of the considered opinion that an amount of Rs. 75, 000/- may be considered as reasonable from agricultural activity. Therefore the balance amount of Rs. 1, 01, 015/- has to be treated as Income from other sources . The order of the Ld. CIT(A) is modified accordingly. Appeal filed by the Revenue is partly allowed.

Summary

The core legal questions considered by the Tribunal in this appeal filed by the Revenue against the order of the Ld. CIT(A) relate to the following issues:

1. Whether the deletion of addition of Rs. 1,44,42,560/- made under section 56(2)(x) of the Income Tax Act, 1961, based on valuation of unquoted shares, was justified, including the applicability of valuation standards, methods, and the acceptance of the assessee's valuation reports vis-`a-vis the Assessing Officer's (AO) valuation under Rule 11U and 11UA of the Income Tax Rules, 1962.

2. Whether the Ld. CIT(A) erred in considering various valuation aspects such as Companies Act standards, ICAI valuation standards, discount for lack of marketability, purpose of valuation, availability of willing buyers, realizability of immovable property, and margin of safety, which the Revenue contended are not applicable for FMV determination under section 56(2)(x) and Rules 11U & 11UA.

3. Whether the acceptance of the second valuation report for immovable properties at Survey Nos. 79, 82, 83 & 86 Yerur Village and Survey No. 159/1, 2 Kochi Bhadravati Chandrapur by the Ld. CIT(A), instead of the AO's valuation based on Stamp Duty Act Rule 16(c), was correct.

4. Whether the deduction of provision for gratuity while determining FMV of unquoted shares was permissible, given the nature of gratuity as a non-current, contingent liability.

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

6. Whether the deletion of addition of Rs. 26,00,000/- on account of cash advances given on Hundi to M/s. Vikas Industries was justified, despite seized promissory notes indicating cash transactions.

7. Whether the deletion of addition of Rs. 1,28,700/- being interest receivable on advances given in cash on Hundi was correct.

8. Whether the deletion of addition of Rs. 1,76,015/- treated as agricultural income without documentary evidence was appropriate.

Issue-wise Detailed Analysis:

1. Valuation of Unquoted Shares and Addition under Section 56(2)(x)

Legal Framework and Precedents: Section 56(2)(x) of the Income Tax Act imposes tax on receipt of unquoted shares at a price less than their fair market value (FMV). The FMV is to be determined as per Rule 11U and 11UA of the Income Tax Rules, which prescribe valuation methods including Net Asset Value (NAV), Discounted Cash Flow (DCF), and Market Value methods. The Revenue contended that the AO correctly applied Rule 11UA and determined FMV at Rs. 661 per share, leading to an addition of Rs. 1,44,42,560/-.

Court's Interpretation and Reasoning: The Ld. CIT(A) accepted the assessee's contention that valuation must consider various factors such as valuation standards under the Companies Act, ICAI valuation standards aligned with international norms, discount for lack of marketability, purpose of valuation, availability of willing buyers, realizability of immovable property, and margin of safety. The CIT(A) noted that the shares were transferred among promoters within the group, restricting transfer to third parties, which justified applying a discount for lack of marketability.

The CIT(A) also accepted the second valuation report submitted by the assessee, valuing shares at Rs. 540 per share after applying a 15% discount on the AO's valuation of Rs. 640 per share, considering practical difficulties in selling immovable properties, legal issues, and time required for plant removal.

Key Evidence and Findings: The valuation reports by two Chartered Accountants were considered. The first report valued shares at Rs. 752.50, while the second valued them at Rs. 640, with differences arising mainly due to valuation of immovable properties. The AO rejected the second report's lower valuation of immovable properties and the deduction of gratuity provision.

Application of Law to Facts: The Tribunal upheld the CIT(A)'s approach, noting that the valuation standards recognized under the Companies Act and ICAI, which incorporate practical business realities, are relevant for FMV determination. The Tribunal also referred to a precedent ITAT order in a similar case, which dismissed the Revenue's appeal on this issue.

Treatment of Competing Arguments: The Revenue argued strict adherence to Rule 11U/11UA without considering discounts or other valuation standards. The CIT(A) and Tribunal found the Revenue's approach rigid and not reflective of commercial realities. The Revenue's reliance on stamp duty valuations was also rejected in favor of the valuation report following accepted valuation norms.

Conclusion: The Tribunal confirmed the deletion of the addition of Rs. 1,44,42,560/-, holding that the CIT(A) rightly considered various valuation aspects and accepted the assessee's valuation methodology and discount for lack of marketability.

2. Acceptance of Valuation of Immovable Properties

Legal Framework: Valuation of immovable properties for share valuation is critical. The AO relied on Stamp Duty Act Rule 16(c) and Ready Reckoner rates, valuing land at Survey Nos. 79, 82, 83 & 86 Yerur Village at Rs. 9.84 crores and Survey No. 159/1, 2 at Rs. 74.29 lakhs. The assessee's valuer applied Stamp Duty Authority Rules and considered the land as undeveloped barren industrial NA land, valuing it lower.

Court's Reasoning: The CIT(A) found the assessee's valuation reasonable, noting the land was not demarcated as usable land per NA order and that the valuer followed Stamp Duty Authority Rules. The Tribunal agreed, emphasizing no uniform valuation rate applies to the entire land and that the CIT(A)'s detailed and reasoned order was unchallenged by the Revenue.

Conclusion: The Tribunal upheld the acceptance of the assessee's valuation of immovable properties and rejected the AO's higher valuation.

3. Deduction of Provision for Gratuity

Legal Framework: The AO disallowed deduction of Rs. 1,45,28,805/- towards long-term gratuity provision as it was a non-current, contingent liability, not payable immediately.

Reasoning: The CIT(A) accepted the deduction, noting that most employees had completed requisite service and were eligible for gratuity, making the provision a certain liability. The provision was made following accounting standards and based on scientific analysis of past data. The Tribunal agreed with this reasoning.

Conclusion: Deduction of gratuity provision was rightly allowed in valuation.

4. Application of Tolerance Limit and Safe Harbor Concept

Legal Framework: The Revenue contended that tolerance limits and safe harbor concepts are not applicable under Rule 11U/11UA. The CIT(A) observed that such concepts address practical difficulties and uncertainties in valuation and are recognized in other provisions like section 50C.

Reasoning: The CIT(A) noted that valuation methods have evolved, and the CBDT has introduced additional methods and allowed discounts for lack of marketability. The Tribunal endorsed this flexible approach, recognizing the dynamic nature of fair valuation.

Conclusion: The acceptance of tolerance limits and safe harbor principles in valuation was justified.

5. Addition of Rs. 26,00,000/- on Account of Cash Advances on Hundi

Facts: Two Hundis of Rs. 13 lakh each were seized, indicating cash advances to M/s Vikas Industries. The AO added Rs. 26 lakh as unexplained cash income under section 69A.

Assessee's Defense: The assessee produced bank statements showing Rs. 25 lakh advanced by cheque on 24.08.2020 and affidavits from the proprietor of Vikas Industries stating that the promissory notes and postdated cheques were security for the loan. The promissory notes were dated after the cheque payment and included interest.

Court's Reasoning: The CIT(A) accepted the assessee's explanation, finding the seized documents and promissory notes used "cash" as a term but the actual transaction was by cheque. The AO did not prove any amount over and above Rs. 25 lakh was advanced in cash nor that the Rs. 25 lakh was refunded. The Tribunal upheld the CIT(A)'s order, finding no infirmity.

Conclusion: Addition of Rs. 26 lakh was rightly deleted.

6. Addition of Rs. 1,28,700/- Being Interest Receivable on Advances

Facts and Reasoning: The AO added Rs. 1,28,700/- as interest income receivable from Vikas Industries. The CIT(A) deleted the addition, noting the interest was not received during the year and was only receivable. The Tribunal held that since the loan was admitted and interest accrued, the interest income should be taxed, restoring the AO's order.

Conclusion: Addition of interest income was restored.

7. Addition of Rs. 1,76,015/- on Agricultural Income

Facts: The AO treated agricultural income of Rs. 1,76,015/- as income from other sources due to lack of supporting evidence.

Reasoning: The CIT(A) deleted the addition relying on landholding documents and noting crop cultivation. The Tribunal found the evidence insufficient to substantiate the income fully but acknowledged some agricultural activity. To balance, it allowed Rs. 75,000/- as reasonable agricultural income and treated the balance as income from other sources.

Conclusion: Addition was partly allowed, modifying the CIT(A) order.

Significant Holdings:

"Fair Market Value of Unquoted Equity Shares (Rounded Off) ... It is seen that the valuation of shares purchased by the assessee comes to Rs. 661/- per share as per valuation method prescribed under rule 11UA(1(c)(b) of IT Rules. This value requires to be adopted for the purpose of provisions of section 56(2)(x) of the Income Tax Act. It is seen that the assessee has adopted fair market value of Rs. 540/- per share which is not acceptable... Thus, considering the fair market value of Rs. 661/- per share the differential amount of Rs. 1,44,42,560/- is added to the income of the assessee u/s 56(2)(x) of the Income Tax Act." (AO's order)

"The appellant has submitted that while estimating the FMV of equity shares, various aspects need to be considered as per the valuation standards accepted under the Companies Act, valuation standards issued by the ICAI which are in line with international valuation standards, factors like- lack of discount on marketability, purpose of valuation and availability of willing buyers, realizability of immovable properties margin of safety, WDV of depreciable assets as per the Income Tax Act etc... Based on the various aspects and considering the practical difficulties and uncertainties the value of share at Rs. 540 is found to be reasonable as the Fair value of equity shares of MIPL... Thus, the estimated addition under section 50CA or 56 (2)(x) of the Act deserves to be deleted." (Ld. CIT(A) order)

"The promissory notes are dated 15.11.2020. It is submitted by the appellant that the original loan period was of 3 months which was extended by entering into the promissory notes and taking the postdated cheques as security. Further it is submitted that the excess amount of Rs. 1,00,000/- is on account of interest to be receivable from M/s Vikas Industries at the rate of 1.5% per month and therefore, the cheques amounting to Rs. 26,00,000/- were taken as a security from M/s Vikas Industries... The Ld. AO has simply stated that satisfactory reply has not been given by the appellant. Thus, the contention of the Ld. AO is not correct." (Ld. CIT(A) order)

"Since the assessee has admitted that he has given an amount of Rs. 25 lakh as loan to M/s. Vikas Industries, therefore, interest accrued on the same has to be added to the total income of the assessee." (Tribunal order)

"Merely because the assessee is holding certain land i.e. 4 hectare 6 R and 7/12 extract shows some cultivation of crop, the same cannot give rise to huge agricultural income to the extent of Rs. 1,76,015/-. ... considering the totality of the facts of the case and in the interest of justice and to put a quietus to the litigation, we are of the considered opinion that an amount of Rs. 75,000/- may be considered as reasonable from agricultural activity. Therefore, the balance amount of Rs. 1,01,015/- has to be treated as 'Income from other sources'." (Tribunal order)

The Tribunal affirmed the principle that valuation of unquoted shares must be based on accepted valuation standards, considering practical business realities including discounts for lack of marketability and purpose of transfer. It recognized the dynamic nature of valuation and the applicability of ICAI and Companies Act standards alongside Income Tax Rules.

The Tribunal also emphasized that additions based solely on seized documents must be corroborated by evidence, and where the assessee provides credible explanations and supporting documents, additions should not be sustained.

On agricultural income, the Tribunal balanced the absence of detailed proof with the existence of landholding and some cultivation, allowing a reasonable income figure to avoid undue hardship.