TaxTMI 
TaxTMI 
2025 (5) TMI 813
X X X X Extracts X X X X
X X X X Extracts X X X X
....s engaged in the business of procuring and setting 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 a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mpany whose shares were bought FMV of shares as per Rule 11UA (Rs.) Date purchase of Person buying the shares 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 F....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nd to be non-genuine 6.11 Thereafter, the assessing officer has recorded his conclusion as under. 1. The assessee submitted that purchase value was determined as per the valuation report certified by the Chartered Accountant enclosed 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... This is a complete a "Sham Transaction" as per law: A sham transaction is a business deal entered into parties for the purpose of deception, like to escape a tax liability or in other words, simply to avoid paying tax. For detecting whether a deal is sham transaction, we can apply two-fold test of which 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Total 72,215 3,48,79,845 50,000 3,48,29,845 Total income chargeable u/s. 56(2)(vii)(c) r.w. Rule 11UA 3,48,29,845 Thus, the amount of Rs. 3,48,29,845/- is taxable u/s 56(2)(vii) (c) of the IT Act, 1961 read with Rule 11UA in the hands of the assessee." 3. Accordingly, the AO made an addition of Rs. 3,48,29,845/- under section 56(2)(vii)(c) of the Act r.w.r. 11UA of the Rules while 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 f....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e assessee has acquired 50% of shares i.e. 72,215 shares in RFAPL. From this it is clear that the AO has not only considered the FMV value per share of the underlying asset in the books of M/s Farista Financial Consultants Pvt Limited but has also considered the number of shares alleged to be indirectly acquired by the assessee. Therefore the point of dispute is what should be the value of underlying assets that has to be considered 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... himself has arrived at the FMV of the value of shares of M/s.Farista Financial Consultants Pvt. Ltd. at Rs. 7.67 per share taking the value of assets including shares of RFAPL at book value (refer page 6 of AO's order). However the AO for the purpose of making addition under section 56(2)(vii)(c) has considered the FMV of the RAFPL shares thereby valuing the underlying assets of M/s.Farista Financial Consultants Pvt. Ltd. at FMV which is applicable only from 01.04.2018. In this regard we notice that the Hon'ble Delhi High Court while considering 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. 4....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ve, other than those set apart towards depreciation; (iv) any amount representing provision for taxation, other than 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, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto; (v) any amount representing provisions made for meeting liabilities, other than ascertained liabilities; (vi) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares;" [Emphasis is ours 12. It is not in dispute 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nting contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares;" [Emphasis is ours] 13. In other words, if immovable property, such as land, had to be taken into account in arriving at the Fair Market Value of unquoted shares by adopting the formula prescribed in Rule 11UA of 1962 Rules we.f. 1-4-2018, i.e., AY 2018-19, the AO would have to factor in the value of such land, by taking into account the circle rate prevailing in the area. 14. It is this error which the AO committed, ie., applying the formula contained in Rule 11UA of 1962 Rules, which was not applicable to the AY in issue, ie., 2014-15" 9. We further notice that a similar view has been held by the Co-ordinate Bench in the case of Smiti Holding & Trading Company Pvt. Ltd. (supra) where it has been held that "6.1 A similar issue 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l Consultants Pvt. Ltd. under section 56(2)(vii)(c). In our considered view the formula applied by the AO for making the addition is not as per the method provided under Rule 11UA which provides that FMV is to be worked at by applying the formula (A - L) x (PV)/(PE). The AO ought to have arrived at the FMV of the shares of M/s.Farista Financial Consultants Pvt. Ltd. by applying Rule 11UA for the relevant AY and if the FMV thus arrived is more than consideration paid by the assessee for obtaining the shares of M/s.Farista Financial Consultants Pvt. Ltd. then the difference should have been added under section 56(2)(vii)(c). The difference between the FMV of the shares RAFPL and the purchase consideration paid by the assessee for obtaining shares in M/s.Farista Financial Consultants Pvt. Ltd. which is added by the AO under section 56(2)(vii)(c) in our view does not fall within any method prescribed 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 rec....