2023 (9) TMI 794 - AT - Income Tax

Tribunal upholds decision on share purchase value, confirms additional tax liability under Income Tax Act

Shri Brijesh Kumar Anand Versus The ACIT, Central Circle, Panaji

The Tribunal upheld the CIT(A)'s decision, dismissing the appellant's appeal regarding the assessment for the year 2011-12 under the Income Tax Act, 1961. ... Addition u/s 56(2)(vii) - shares of the company were purchased for a consideration which is less than the fair market value of the shares - year of purchases of the shares - facade to convert unaccounted money by way of shell companies and putting them into a series of transactions to give a legitimate colour of converting of unaccounted cash available with the individuals - HELD THAT:- Appellant had nowhere contested the applicability of the provisions of sec.56(2)(vii)(b) of the Act to the transactions Challenge for year of transaction was rightly dislodged by the Ld. CIT(A) as well as the Assessing Officer by bringing the cogent material on record to show that the assessee-appellant had purchased the shares during the year under consideration. The assessee also had failed to controvert the findings of the lower authorities that it is a device adopted to bring into books the unaccounted money of the assessee-appellant. Thus, we do not see any reason to interfere with the orders of the lower authorities. Decided against assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether the differential between consideration paid for acquisition of shares and the shares' fair market value attracts taxation under section 56(2)(vii) of the Income Tax Act when the shares were purchased for cash at face value but the NAV indicates a substantially higher FMV. 2. Whether the year of purchase of shares as alleged by the assessee affects the applicability of section 56(2)(vii) where the revenue contends purchase occurred in the year under assessment and the assessee failed to controvert that finding. 3. Whether the series of share allotments/transactions constitutes a façade or device to convert unaccounted money into recorded capital and whether such characterization justifies invoking section 56(2)(vii). 4. Evidentiary burden and standard: what material is required to rebut the revenue's prima facie finding that shares were acquired at less than FMV and that transactions were a device to introduce unaccounted cash. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Applicability of section 56(2)(vii) when shares acquired below FMV Legal framework: Section 56(2)(vii) taxes the recipient where property (including shares) is received for consideration which is less than the fair market value and the difference exceeds the monetary threshold; statutory focus is on real receipt of benefit measured by FMV less consideration. Precedent treatment: The lower authority applied established tests (referred to as tests of 'human probability') from higher court authority to discern sham transactions and to determine whether the transactions fall within the ambit of section 56(2)(vii). Interpretation and reasoning: The authorities computed NAV/FMV of the subject company's shares (figures provided in assessment order) and compared with the cash face-value consideration paid. The excess of FMV over consideration exceeded the statutory threshold and therefore prima facie attracted section 56(2)(vii). No substantive factual challenge was made by the assessee to the computation or applicability of section 56(2)(vii). Ratio vs. obiter: Ratio - where shares are acquired for cash at consideration substantially below FMV and the assessee does not rebut the FMV computation or provide acceptable explanation, section 56(2)(vii) applies to tax the difference as income. Conclusion: Section 56(2)(vii) was correctly invoked by the revenue and sustained by the appellate authorities. Issue 2 - Year of purchase and its impact on chargeability Legal framework: Income-tax consequences depend on the year in which the transaction(s) resulting in receipt of income (or deemed income) occur; assessment in a particular year requires proof that the events giving rise to taxability took place in that year. Precedent treatment: The CIT(A) and Assessing Officer relied on documentary and investigative material (details set out in lower orders) to establish timing of purchase within the year under consideration; higher court tests on credibility and probability were applied to evaluate contemporaneous evidence. Interpretation and reasoning: The assessee did not effectively contest the finding that the purchases occurred in the assessment year; the lower authorities produced cogent material showing acquisition during the year. Given absence of rebuttal, the timing finding stood unchallenged. Ratio vs. obiter: Ratio - where the taxpayer fails to controvert cogent evidence on timing of transactions, the year found by the revenue stands for assessment purposes. Conclusion: The Tribunal upheld the finding that the purchases occurred in the year under assessment; this did not preclude levy under section 56(2)(vii). Issue 3 - Whether transactions were a façade/device to convert unaccounted money and effect on taxability Legal framework: Transactions which are artificial, colourable or part of a device to convert unaccounted money into recorded assets can be disregarded; such characterization supports application of taxing provisions and justifies imputing income under relevant statutory provisions. Precedent treatment: The CIT(A) applied the 'human probability' test drawn from higher authority jurisprudence to infer the transactions were orchestrated to give legitimate colour to conversion of unaccounted cash; the Tribunal considered the same reasoning and the factual matrix presented by the revenue. Interpretation and reasoning: The pattern of cash acquisitions at nominal face value, involvement of family members, and investigative material pointed to a constructed arrangement rather than genuine arms-length commercial investment. The assessee did not rebut the inference of a device to bring unaccounted money into books. Consequently, the lower authorities' conclusion that the arrangement was a façade was accepted. Ratio vs. obiter: Ratio - where the factual matrix demonstrates the transaction is a device to introduce unaccounted funds, the transaction may be treated as within the charge of section 56(2)(vii) and not recognized as bona fide capital infusion. Conclusion: The characterization of the transactions as a façade/device was upheld and supports the imposition of tax under section 56(2)(vii). Issue 4 - Evidentiary burden and standard to rebut revenue's finding Legal framework: The revenue bears initial onus to produce material supporting its findings; the assessee must produce countervailing evidence to discharge burden of proof for contrary factual assertions. Credibility assessments employ tests of probability and contemporaneous documentation. Precedent treatment: The authorities relied on documentary calculations of NAV/FMV and investigative records from search proceedings; higher-court reasoning on evaluating probability and inference of device was followed. Interpretation and reasoning: The assessee neither appeared at the Tribunal hearing nor presented evidence to rebut the revenue's computation or explanations. The Tribunal noted absence of contest on both applicability of section 56(2)(vii) and the device-characterization. Given uncontroverted material, the factual findings and consequent tax treatment were sustained. Ratio vs. obiter: Ratio - in assessment appeals, uncontroverted cogent material produced by revenue that establishes both timing and nature of transaction permits sustaining taxability; lack of credible rebuttal by assessee is fatal to their case. Conclusion: The assessee failed to meet evidentiary burden; the Tribunal affirmed the lower authorities' findings and confirmed the tax assessment under section 56(2)(vii). Disposition The Tribunal affirmed the assessment based on section 56(2)(vii), holding that (i) shares were acquired in the year under assessment, (ii) the consideration was substantially below FMV as per NAV computations, and (iii) the scheme constituted a device to convert unaccounted cash - thereby dismissing the appeal.