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2016 (11) TMI 1148 - ITAT MUMBAI

2016 (11) TMI 1148 - ITAT MUMBAI - TMI - Capital gains computation by adopting NAV @ ₹ 202 per share - balance amount taxable under unexplained income under the head ‘income from other sources’ - Held that:- On perusal of share purchase agreement dated 06-03- 2007 and 07-04-2007 will reveal that persuant to these agreement, the assessee and his family members have agreed to shift the offices of their companies and concerns from IBI house by 30-4-2007 , clause 4.6 of the agreement dated 06- .....

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tish Amritlal Shah wherein the said Mr. Satish Amritlal Shah also sold 1665 equity shares of BEC Industrial Investment Company Private Limited to BAT Enterprises Limited @ ₹ 1195 per share vide share purchase agreement dated 06-03- 2007 . The Revenue has also accepted the purchase of equity shares of BEC Industrial Investment Company Private Limited @ ₹ 1195/- per share from the assessee and his family members vide share purchase agreement dated 06-03-2007 in the hands of BAT Enterpr .....

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full value of consideration as contemplated u/s. 48 of the Act. As such we set aside the orders of the ld. CIT(A) and the AO computing capital gains by adopting NAV @ ₹ 202 per share and bringing to tax balance amount of ₹ 20,25,720/- as unexplained income under the head ‘income from other sources’ which in our considered view cannot be sustained in the eyes of law. - Decided in favour of assessee - I.T.A. No.766/Mum/2012 - Dated:- 22-9-2016 - SHRI MAHAVIR SINGH, JUDICIAL MEMBER AND .....

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der dated 20th December, 2010 passed by the learned Assessing Officer (hereinafter called the AO ) u/s 143(3) of the Income Tax Act,1961 (Hereinafter called the Act ). 2. The grounds of appeal raised by the assessee in the memo of appeal filed with the Income Tax Appellate Tribunal, Mumbai (hereinafter called the Tribunal ) read as under:- 1. The learned CIT(A) erred in upholding the action of the AO who valued the sale consideration of shares at ₹ 202/- as against ₹ 1195/- per share .....

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wed and benefit u/s. 54EC of the Act may also be allowed. 3. The brief facts of the case are that assessee is an individual deriving income from salary, income from house property, capital gains and income from other sources. During the course of assessment proceedings u/s. 143(3) read with Section 143(2) of the Act, it was observed by the A.O. that the assessee has sold 2040 equity shares of face value of ₹ 100/- per share in BEC Industrial Investment Company Pvt. Ltd. to another company .....

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pital gain at Rs. Nil. The A.O. observed that it was necessary to verify whether this exorbitant high sale price of share at ₹ 1195/- per share was justified and based on same working or was it arbitrary , and the assessee wanted to avoid tax which he otherwise was required to pay. The A.O. observed that the transaction of sale of shares related to a Private Limited Company which is not a listed company in any stock exchange therefore the generally valuation adopted is based on Net asset V .....

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plus General reserve ₹ 8,50,000/- P&L account ₹ 27,21,831/- Total net assets ₹ 70,71,831/- NAV per share = Net assets of the company = ₹ 70,71,831 =Rs.202 per share No. of shares 35,000 Thus assessee was asked to explain the justification and working of the valuation of shares of BEC Industrial Investment Company Private Limited taken by the assessee at ₹ 1195/- per share which are sold to BAT Enterprises Ltd. The assessee in reply submitted that BEC Industrial .....

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till date is not considered book value comes to ₹ 1406/- per share as on 31st March, 2007 , and apart from the above goodwill valuation is also to be considered as well necessity of the buyer is to be taken into account while negotiating price of the share. It was also submitted that when valuation of shares of principal company is derived, valuation of subsidiary is also taken into account. The A.O. considered the submission of the assessee but rejected the same. The A.O. observed that th .....

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increased to net loss of ₹ 31,43,652/- for the year ended March, 2008 and moreover the company has not declared any dividend also. Thus, It was observed that the subsidiary company which is loss making and not paying any dividend cannot add value to the holding company and hence the AO rejected the contentions of the assessee. The AO also observed that the said BEC Chemicals Private Ltd. has issued 15000 new shares @ ₹ 100/- each at par during the year ended 31-03-2008 which itself i .....

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es are same which proves that both the companies are under same management and the assessee was in a position to influence both the companies. Hence, the buyer of shares cannot be said to be genuine and it contradicts assessee s claim that the valuation also depend upon necessity of buyer. Thus, it was held by the AO that the assessee was interested in both the companies namely BEC Industrial Investment Company Private Limited whose shares were sold and BAT Enterprises Limited , who purchased th .....

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e above facts, worked out the income under the head capital gains as under:- Total consideration on sale of 2040 shares @ ₹ 202/- per share ₹ 4,12,080/- Less: Indexed cost of 2040 shares ₹ 8,17,928/- Long term capital loss(allowed to be carry forward)(-) Rs.4,05,848/- and the difference between the sale proceed shown by the assessee and the sale proceed based on NAV of shares @ ₹ 202/- per share was worked out by the AO at ₹ 20,25,720/- which was taxed in the hands .....

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t the sale of shares to its promoters by BEC Chemicals Pvt. Ltd. at par is for subsequent period and hence not relevant. It was submitted that the rate of ₹ 1195/- per share of BEC Industrial Investment Company Private Limited was fixed in pursuance to mutual agreement and there is no provision under the Act whereby to reduce the value of share sold. The ld. CIT(A) rejected the contentions of the assessee and agreed with the finding of the A.O. that there was no basis for taking an exorbit .....

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hat there was no basis for the same. The A.O. adopted the scientific formula being NAV method for valuing the shares. The A.O. is duty bound to check the valuation and to tax correct income. The ld. CIT(A) accordingly held that the A.O. has rightly taxed the income of ₹ 20,25,720/- under the head Income from other sources as unexplained income and the learned CIT(A) upheld the assessment order dated 20-12- 2010 passed by the AO u/s. 143(3) of the Act, vide appellate order dated 16.12.2011 .....

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balance income has been treated as unexplained income under the head Income from other sources and brought to tax as such. The ld. Counsel took us through the orders of the ld. CIT(A) and submitted that the ld.CIT(A) has not considered the arguments raised by the assessee in proper perspective. The ld. Counsel contended that it is mutual agreement between the buyer and the seller and the price was fixed at ₹ 1195/- per share of BEC Industrial Investment Company Private Limited. The ld. Cou .....

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ubmitted that the above valuation does not include increased valuation of land and building held by the said BEC Chemicals Private Limited as also goodwill of the said company. The ld. Counsel drew our attention to paper book page No. 5 filed with the Tribunal whereby a letter dated 29th October, 2010 addressed by the assessee to the A.O. wherein detail explanations was given by the assessee to justify the valuation of shares . The ld. Counsel also took us through the audited accounts of BEC Ind .....

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red. It was also submitted that the assessee has entered into share purchase agreement dated 6th March, 2007 whereby the sellers have agreed to sell their equity shares at an agreed price of ₹ 1195/- per share, which is placed at paper book page 57 to 79. The ld. Counsel also drew our attention to the share transfer form which is placed at paper book page 80 & 81 wherein the assessee has transferred 2040 shares of BEC Industrial Investment Company Pvt. Limited to BAT Enterprises Limite .....

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f BEC Industrial Investment Company Private Limited. The ld. Counsel submitted that there is no provision under the Act to substitute full value of consideration. Section 48 of the Act clearly defines that the full value of the consideration i.e. actual sales consideration should be taken for the purpose of computation of capital gain. It was further submitted that assessment has been framed in the case of Mr. Satish Amritlal Shah for the assessment year 2007-08 wherein he also sold 1665 equity .....

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k page 96 to 101. Similarly, it was submitted that assessment has been framed in the case of BAT Enterprises Ltd. for the assessment year 2007-08 u/s 143(3) of the Act whereby no additions have been made by the Revenue. 8. The ld. D.R., on the other hand, relied upon the orders of the authorities below. 9. We have considered the rival contentions and also perused the material available on record. We have observed that the assessee is a shareholder of the company namely BEC Industrial Investment .....

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hares issued by BEC Industrial Investment Company Private Limited. Out of the shareholding consisting of 5000 equity shares of BEC Industrial Investment Company Private Limited , the assessee holds 2040 equity shares jointly with Mrs. Shantaben Amritlal Shah , Mrs Shantaben Amritlal Shah holds 1295 equity shares jointly with Mr. Amritlal T. Shah i.e. the assessee , while Mr Satish Amritlal Shah holds 1665 equity shares jointly with Mr. Amritlal T. Shah i.e. the assessee in BEC Industrial Investm .....

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declared in the return of income was at Rs. Nil. The assessee along with his family members namely Mrs Shantiben Amritlal Shah and Mr Satish Amritlal Shah entered into two share purchase agreements dated 06-03-2007 and 07-04-2007 with BAT Enterprises Limited and others which are placed in the paper book page 57-79 whereby the assessee and his above family members agreed to sell the equity shares of BEC Industrial Investment Company Private Limited at ₹ 1195/-per share to BAT Enterprises Li .....

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of share of the former depends on the valuation of the shares of later which value of shares of BEC Chemicals Private Limited has necessarily to be included for computing value of share of BEC Industrial Investment Company Private Limited which is 100% holding of BEC Chemicals Private Limited who was having a manufacturing unit at Roha and is an EOU unit , whereby the book value of the share of BEC Chemicals Private Limited , as per the books was ₹ 562/- per share as on 31st March, 2007 an .....

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ch is computed from the audited financial statements being NAV of BEC Chemicals Private Limited with or without depreciation. The copies of audited financial statements of BEC Chemicals Private Limited is filed by the assessee for the financial year 2006-07 which shows that share capital of BEC Chemicals Private Limited is ₹ 70 lacs and reserves and surplus is ₹ 323.07 lacs as at 31-03-2007 as per audited financial statements of BEC Chemicals Private Limited The said valuation is not .....

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afore-stated and he resigned from directorship of these companies persuant to sale of 5000 equity shares held by himself and his family members held in BEC Industrial Investment Company Private Limited which were sold to BAT Enterprises Limited which is borne out from clause 2.3(iv) of the share purchase agreement dated 06-03-2007 whereby Resolutions were also obtained from these companies accepting the resignation of the assessee as Director of these companies. The said share purchase agreement .....

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Limited @ ₹ 1195 per shares by the assessee( out of total 5000 equity shares sold, the assessee selling 2040 equity shares) and his family members is a genuine and bonafide transaction which is to enable restructuring and re-aligning the shareholding pattern of these companies whereby the one shareholders group consisting of the assessee and his family members holding 5000 equity shares in BEC Industrial Investment Company Private Limited have sold and exited from the shareholding held by .....

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V as first of all the valuation of the subsidiary would get embedded in the price of share of BEC Industrial Investment company Private Limited and that valuation has to be done based on present value of enterprise and not necessarily the book value as represented by financial statements and also controlling premium is embedded in the price for the shares paid by acquiring shareholders to the selling shareholder group to vest/strengthen their control in the BEC Industrial Investment Private Limi .....

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mbers in BEC Industrial Investment Company Private Limited to BAT Enterprises Limited and the assessee has rightly computed the capital gain in the return of income filed with the Revenue by taking actual sale consideration of 2040 equity shares @ ₹ 1195/- per share as full value of consideration as contemplated u/s. 48 of the Act. The issue of shares by BEC Chemicals Private Limited to the promoters subsequently at face value at ₹ 100 per shares is all irrelevant consideration havin .....

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In-fact on perusal of share purchase agreement dated 06-03- 2007 and 07-04-2007 will reveal that persuant to these agreement, the assessee and his family members have agreed to shift the offices of their companies and concerns from IBI house by 30-4-2007 , clause 4.6 of the agreement dated 06-3-2007(page 65/paper book). Nothing incriminating has been brought on record by the Revenue and conjectures and surmises has no place while computing and bringing to tax income of the tax-payer within the c .....

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