2025 (7) TMI 1372 - AT - Income Tax

ITAT allows additional evidence under Rule 29 for share valuation in off-market transaction under Section 56(2)(x)

The ITAT Mumbai allowed the assessee's application to admit additional evidence under Rule 29 concerning the valuation of shares acquired in an off-market ... Deemed income u/s.56(2)(x) - difference in the aggregate FMV of the shares acquired by the assessee and the consideration paid -Additional evidence filed under Rule 29 of the ITAT Rules HELD THAT:- As undisputed fact that the assessee purchased 1,53,05,270 number of equity shares of PSCL on 29.04.2021, through 'off-market' transaction, under an agreement entered into with FIH, Mauritius. The purchase price of these shares was Rs. 653.29 per share which was lower than the lowest price of shares of PSCL at NSE on 29.04.2021 which was Rs. 873 per share. AO accordingly applied the provisions of section 56(2)(x) of the Act and made addition of Rs. 336,27,20,872/-. AR has taken various contentions to argue that the provisions of section 56(2)(x) should not be made applicable to the present case. AR submitted that, the assessee seeks to adduce additional evidence under Rule 29 to substantiate the price agreed between the parties to the agreement dated 22/04/2021, and that it was a bonafide transaction. As noted that evidence plays an important role in decision- making and adjudicating proceedings. Assessee should not suffer for the non-filing of material information. It is submitted that the identical issue is pending before the Ld.CIT(A) in case of other promoters in respect of the same transaction. As the issue revolves around the price to be considered for valuation of the shares, and applicability of provisions of section 56(2)(x), which is an anti-abuse provision: under such circumstances it is necessary to verify the additional evidence filed by the assessee. We therefore allow the application under Rule 29 filed by the assessee dated 26/04/2025 under Rule 29 of ITAT Rules. Accordingly, to meet the ends of justice, the disputed issue, along with the additional evidence, is remanded to the file of the Ld.CIT(A) to decide afresh on merit. ISSUES: Whether the Assessing Officer (AO) and Commissioner of Income Tax (Appeals) [CIT(A)] were justified in making an addition under section 56(2)(x) of the Income-tax Act, 1961 by treating the difference between acquisition price and fair market value (FMV) of shares as income.Whether the provisions of section 56(2)(x) read with Rules 11U/11UA of the Income Tax Rules, 1962 apply to genuine off-market share transactions entered into by the assessee.Whether the authorities failed to consider the legislative intent behind section 56(2)(x), which targets unaccounted money and bogus transactions, in applying the provision to the present case.Whether the difference between acquisition price and quoted market price can be treated as 'income from other sources' under section 56(2)(x) and Rule 11UA.Whether the valuation report and fairness opinion obtained from reputed valuers, and the share entitlement ratio approved by the National Company Law Tribunal (NCLT) in a composite scheme of arrangements and amalgamations, were properly considered by the authorities.Whether the AO and CIT(A) failed to consider the transaction in its entirety and the bona fide nature of the deal.Whether additional evidence filed under Rule 29 of the ITAT Rules can be admitted to substantiate the agreed price and genuineness of the transaction. RULINGS / HOLDINGS: The AO and CIT(A) were justified in making an addition of Rs. 336,27,20,872 under section 56(2)(x) by treating the difference between the FMV of shares and the consideration paid as 'income from other sources,' since the purchase price was lower than the FMV determined by a registered valuer and the lowest quoted price on the stock exchange on the valuation date.The provisions of section 56(2)(x) read with Rules 11U/11UA are applicable to off-market share transactions where consideration is less than FMV, regardless of the genuineness claimed by the assessee, as the legislative intent is to curb unaccounted income and bogus transactions.The authorities did not err in applying section 56(2)(x) despite the assessee's contention of bona fide transaction, as no legal basis was provided for non-applicability, and the transaction price was significantly lower than the FMV.The valuation report and fairness opinion, including the share entitlement ratio approved by the NCLT, were considered insufficient to negate the applicability of section 56(2)(x) since the transaction price was below the FMV as per the valuation report and stock exchange data.The AO and CIT(A) were correct in treating the difference between acquisition price and quoted market price as income under section 56(2)(x) and Rule 11UA, given the off-market nature of the transaction and the lower consideration paid.The AO and CIT(A) did not fail to consider the transaction in its entirety; the submissions regarding prior option agreements and negotiation timelines were found factually incorrect or irrelevant to the transaction date and valuation date.The Tribunal allowed the assessee's application under Rule 29 to admit additional evidence and remanded the issue to the CIT(A) for fresh consideration on merits, directing proper verification and opportunity of hearing. RATIONALE: The legal framework applied includes section 56(2)(x) of the Income-tax Act, 1961, which is an anti-abuse provision designed to tax 'income from other sources' arising from receipt of shares or securities where consideration is less than FMV, along with Rules 11U and 11UA prescribing valuation methods for shares.The FMV of listed shares is determined as the lowest price quoted on a recognized stock exchange on the valuation date, per Rule 11UA(1)(c)(a)(ii) of the Income Tax Rules, 1962.The Court emphasized that the legislative intent behind section 56(2)(x) is to address unaccounted money and bogus transactions, and thus the provision applies to off-market transactions where the consideration is below FMV, notwithstanding claims of bona fide dealings.The Tribunal accepted the principle that bona fide business negotiations and timing factors do not exempt a transaction from the applicability of section 56(2)(x) if the consideration is less than FMV.The Tribunal recognized the importance of evidence in adjudication and allowed admission of additional evidence under Rule 29, indicating a procedural safeguard to ensure fair hearing and proper evaluation of facts.No dissent or doctrinal shift was indicated; the decision follows established principles on valuation and applicability of section 56(2)(x) to off-market share transactions.