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TMI Blog2025 (5) TMI 813X X X X Extracts X X X X X X X X Extracts X X X X ..... etting up power transmission and distribution lines on contract basis and assessee is included in the search operation. The Assessing Officer (AO) issued a notice under section 153A of the Act and in response the assessee filed the return for AY 2015-16 on 11.12.2021 declaring a total income of Rs. 1,25,000/-. During the proceedings the AO held that the assessee has indirectly acquired the shares of M/s Ratangiri Financial Advisory Pvt. Ltd (RFAPL) by purchasing shares of the holding companies of RFAPL Viz., M/s Farista Financial Consultants Pvt Limited and M/s Deb Suppliers & Traders Pvt Limited. The AO was of the view that the by acquiring the shares of the M/s Farista Financial Consultants Pvt Limited for a consideration the assessee has acquired the shares of RFAPL at a price which is lower than the Fair Market Value (FMV) of the shares of RFAPL. The allegations of the AO as summarised by the CIT(A) is extracted below - "6.1 Shares of M/s Ratnagiri Financial Advisory Pvt Limited (now known as M/s Vikran Engineering & Exim Pvt Limited) was acquired by M/s Vikran Group by purchasing shares of its holding companies through the assessee and other family members. 6.2 M/s Ratnagi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es Person selling the shares No. of shares Consideration paid (Rs.) Farista Financial Consultants Pvt Limited 7.67 12.12.2014 Nakul Markhedkar Abhinash Sharma 5000 50,000 Kanchan Markhedkar Suresh Sharma 5000 50,000 Total 10000 1,00,000 Deb Suppliers & Traders Pvt Limited 8.15 05.12.2014 Vipul Markhedkar Amita Joshi 5000 50,000 Kanchan Markhedkar Sunaina Agarwal 5000 50,000 Total 10000 1,00,000 Ratangiri Financial Advisory Pvt Ltd 482.98 05.12.2014 Rakesh Markhedkar Naina Devi Commerce Pvt Ltd 1000 5,00,000 Total Consideration Paid 7,00,000 6.7 The assessing officer, therefore, observed that the Vikran Group acquired the company RFAPL by paying only Rs. 7,00,000/- although the said company had share capital including share premium of Rs. 14.02 crores. The assessing officer noticed that on the date of transfer, the FMV of the shares of M/s RFAPL as per Rule 11UA was Rs. 482.98 and the assessee by purchasing shares of M/s Farista Financial Consultants, had indirectly acquired 72,215 shares of RFAPL by paying only a sum of Rs. 50,000/-. Therefore, a show-cause notice was issued to the assessee asking her to explain as to why an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as Annexure-1. On the analysis of the same, it was found that the holding companies did not have any business and the sole purpose of acquiring the holding companies was to acquire M/s. Ratangiri Financial Advisory Pvt Ltd. 2. It is pertinent to note that Shri Rakesh Markhedkar has acquired 1000 shares of M/s. Ratangiri Financial Advisory Pvt at Rs. 500/- per share, whereas while acquiring the same shares through the holding companies, the assessee wants to consider the FMV of shares of holding companies. It is like when you purchase a single gold coin you are paying Rs. 500/- but when you are purchasing the entire Pot of Gold coins you are paying price of the Pot only, ignoring the value and price of the Gold coins. Hence, it is clear that the shares of holding companies have been purchased by assessee at Face Value in exchange of cash equivalent to share capital of Ratangiri Financial Advisory Pvt Ltd. 3. Also, the fact that Shri Nakul Rakesh Markhedkar and Smt. Kanchan Rakesh Markhedkar of M/s. Vikran Group were made directors in M/s. Ratangiri Financial Advisory Pvt Ltd on 18.11.2014 prior to acquisition and Shri Rakesh Ashok Markehdkar and Shri Avinash Ashok Markhedkar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch the first one checks whether the transaction has any economic interest other than availing tax benefit, which is actually the "objective test" and second one checks whether the transaction has any business purpose other than availing a tax benefit, which is the "subjective test". 1. The assessee's transaction failed in both the tests. The assessee's transaction does not have either any economic interest or any business purpose. Thus, assessee used "colorable devise such as sham transaction to avoid the taxes. This is clearly treated as tax evasion. 2. These are the transactions which do not have any substantial commercial purpose other than obtaining tax benefit or tax evasion. The basic criteria for determining whether an arrangement lacks commercial substance or not are the period or time for which the arrangement exists, the fact that an exit route is provided by the arrangement etc. 3. On perusal of this, the transactions entered by the assessee clearly lack commercial substance. Hence, it is a sham transaction. 6.12 While reaching to the above conclusion, the assessing officer relied on following case-laws: McDowell and Company Ltd., vs. Commercial Tax Off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le completing the assessment under section 143(3) r.w.s 153A. On further appeal, the CIT(A) deleted the addition made by the AO on the ground that the AO while applying Rule 11UA for arriving at the FMV of shares of M/s Farista Financial Consultants Pvt Limited has considered the FMV of the underlying asset i.e. the FMV of RFAPL shares at Rs. 483 whereas the Rule 11UA as applicable for AY 2015-16 the value of underlying asset should be considered at book value. Accordingly the CIT(A) held that the addition made by the AO is to be deleted. The CIT(A) has also given a detailed finding with regard to each of AO's allegations that the entire transaction is sham. The revenue is in appeal against the order of the CIT(A). 4. The ld. DR placed heavy reliance on the findings of the AO with regard to how the entire transaction of acquisition of shares in M/s Farista Financial Consultants Pvt Limited by the assessee at nominal value of Rs. 10 is a colourable device to acquire the shares of RFAPL whose shares as per FMV is worth Rs. 483/- per share. The ld. DR in this regard submitted that since the impugned transaction is a sham, the CIT(A) is not correct in deleting the addition merely ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idered while arriving at the FMV of the shares of M/s Farista Financial Consultants Pvt Limited as per Rule 11UA of the Rules. The relevant rules applicable for AY 2015-16 is extracted below - Determination of fair market value. 11UA. (1) For the purposes of section 56 of the Act, the fair market value of a property, other than immovable property, shall be determined in the following manner, namely,- (a) & (b) ****** (c) valuation of shares and securities,- (a) ***** [(b) the fair market value of unquoted equity shares shall be the value, on the valuation date, of such unquoted equity shares as determined in the following manner, namely:- the fair market value of unquoted equity shares = (A - L) x (PV)/(PE), where, A = book value of the assets in the balance-sheet as reduced by any amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act and any amount shown in the balance-sheet as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset; L = book value of liabilities shown in the balance-sheet, but not including ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idering the applicability of amended provisions of Rule 11UA has held that "6.1 It is also not in dispute that the respondent/assessee had submitted the valuation report of a Chartered Accountant (CA), which had pegged the value of the subject shares at Rs. 4.96 per share. 7. Concededly, the CA, in arriving at the value of the subject shares, which, as indicated above was pegged as Rs. 5/- per share by the respondent/assessee, had taken recourse to Rule 11UA of the Income-tax Rules, 1962 [in short, "1962 Rules") as applicable in the period in issue, le., AY 2014-15 8. The AO had valued the subject shares at Rs. 45.72 per share, albeit, by taking into account Rule 11UA of 1962 Rules, which was operable on the date when the order was passed. 9. The difference in the value arrived at by the AO and that which the respondent/assessee had fixed qua the said shares, was the amount which was added to the income of the respondent/assessee. The difference per share was Rs. 40.72 [Le. Rs. 45.72 per share - Rs. 5/- per share). 10. It is this difference that led to the addition of Rs. 11,84,46,336/- to the income of the respondent/assessee. 11. The record shows, and something which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ispute that the formula prescribed in Rule 11UA of the 1962 Rules underwent a change, which resulted in the fair market value of unquoted shares being calculated by, inter alia, taking into account, inter alia, the value of assets such as immovable property, which was adopted by "any authority of the government" for the purposes of payment of stamp duty. After the said change became effective, i.e., from 1-4-2018, Rule 11UA read as follows: "Determination of fair market value. 11UA. (1)] For the purposes of section 56 of the Act, the fair market value of a property, other than immovable property, shall be determined in the following manner, namely,- (a) & (b) ** ** (c) valuation of shares and securities,- (a)** [(b) the fair market value of unquoted equity shares shall be the value, on the valuation date, of such unquoted equity shares as determined in the following manner, namely:- the fair market value of unquoted equity shares (A+B+C+D-L)x (PV)/(PE), where, A = book value of all the assets (other than jewellery, artistic work, shares, securities and immovable property) in the balance-sheet as reduced by.- (1) any amount of income-tax paid, if any, less the amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue arose in Minda SM Technocast (P.) Ltd. (supra). The AY is 2014-15. The facts are that the assessee had acquired shares of M/s. Tuff Engineering Pvt. Ltd. (in short TEPL') at Rs. 5 per share. The shares were acquired by the assessee from three companies. The assessee claimed to have valued the shares of TEPL as per the provisions of Rule 11UA and filed a copy of the report prepared by the Chartered Accountants in support of its claim to justify the price of shares at which these were required. However, the AO was of the view that the assets declared by TEPL in its balance sheet should have been valued as per the circle rate while determining the value of shares acquired by the assessee. Accordingly, the AO determined the value of shares at Rs. 45.72 per share of TEPL and treated the difference of Rs. 40.72 as income from other sources under section 56(2)(viia) of the Act. The view taken by the AD was subsequently confirmed by the Id. CIT (A). In appeal, the Tribunal vide order dated 07.03.2018 held: "6.4 On the plain reading of above Rule, it is revealed that while valuing the shares the book value of the assets and liabilities declared by the TEPL should be taken into cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribed under the Act. It is also relevant to mention here that the AO while examining share value of RAFPL which is alleged to be purchased by paper companies at a premium of Rs. 490 has held that the premium is not substantiated since RAPFL is not carrying on any business and that the AO has recorded a detailed finding with respect each of the 22 companies who have purchased the shares of RAFPL. However the AO for the purpose of making addition under section 56(2)(vii)(c) in the hands of the assessee has arrived the FMV of RAFPL at Rs. 483 by considering the alleged bogus premium into consideration as has been pointed out in the order of the CIT(A). 11. In view of these discussions and considering the facts unique in assessee's case we see no infirmity in the order of the CIT(A) in deleting the addition made under section 56(2)(vii)(c). 12. For AY 2016-17 the AO has made addition under section 56(2)(vii)(c) towards the shares purchased by the assessee in M/s. SarvapalikaVanikjya Pvt Ltd where the AO alleged that the assessee has indirectly obtained the shares in M/s. Bahar Vintrade Pvt Ltd the FMV value of which is at Rs. 483. Similar to AY 2015- 16, though the AO himself has ..... X X X X Extracts X X X X X X X X Extracts X X X X
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