TaxTMI 
TaxTMI 
2026 (6) TMI 88
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....nergy Limited was a wholly owned subsidiary of M/s. Cethar Ltd. The parent company had entered into severe financial distress and was subjected to Corporate Insolvency Resolution Process pursuant to proceedings initiated before the Hon'ble NCLT, Chennai Bench. Consequent to failure in settlement of debts, liquidation proceedings were commenced and various assets of the corporate debtor, including its shareholding in M/s. Cethar Energy Limited, were brought for auction by the Liquidator. 4. At the relevant point of time, the financial position of M/s. Cethar Energy Limited was substantially impaired. A major portion of the assets reflected in its books consisted of receivables, investments and advances from related entities that were themselves under liquidation and therefore had no realizable value. Considering the distressed financial condition and lack of realizable assets, the Insolvency Resolution Professional fixed the reserve price of the company at Rs. 5 crores approximately. 5. Since no bidders participated in the first auction, the reserve price was reduced. Ultimately, in the second e-auction conducted under the supervision of the NCLT process, the assessee emerged ....
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....by the assessee. 10. Before the ld.CIT(A), the assessee reiterated that the valuation adopted by the AO was fundamentally flawed as it ignored the commercial and legal realities surrounding the transaction. It was specifically argued that the Share Purchase Agreement, sale confirmation letter and auction documents clearly established that several assets reflected in the balance sheet were either unrealizable or held merely in trust for the benefit of the liquidator and did not confer any beneficial ownership upon the assessee. 11. The assessee emphasized that under Clause 3.2.1 of the Share Purchase Agreement, certain specified assets and recoveries, even if realized in future, were to accrue exclusively to M/s.Cethar Ltd. through the liquidator and not to the assessee. Therefore, inclusion of such assets for determining fair market value was contrary to both factual and legal realities. 12. The principal unrecoverable assets wrongly considered by the Assessing Officer included: * Doubtful debts due from M/s. Cethar Ltd. - Rs. 89.17 crores * Investment in Maa Durga Thermal Power - Rs. 12 crores * Land and Building belonging to M/s. Cethar Ltd. - ....
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....n of the NCLT. 19. The valuation methodology adopted by the Assessing Officer defeats commercial reality and leads to absurd results. Shares acquired through a distress auction conducted under NCLT supervision at Rs. 3.59 per share cannot, within a span of a few months and without any improvement in financial position, be artificially valued at Rs. 104.917 per share merely on the basis of inflated book entries representing irrecoverable assets. 20. The ld.AR further submits that valuation provisions contained in Rule 11UA must be interpreted reasonably and purposively and cannot be applied in isolation from surrounding facts. The rule contemplates determination of fair market value and therefore assets having no realizable value or beneficial ownership ought necessarily to be excluded from computation. 21, These fictitious assets were principally due from group companies which are by themselves under NCLT Liquidation and thus possess Nil Fair Market Value. The assets that need to be excluded according to the ld.AR are as under: * Doubtful debts from M/s. Cethar Ltd. of Rs. 89.17 crores * Investments in Maa Durga Thermal Power of Rs. 12.00 crore *....
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....olvency proceedings initiated against M/s.Cethar Limited. The acquisition was made for a total consideration of Rs. 4,51,00,000/- and the effective acquisition cost worked out to Rs. 3.59 per share. Subsequently, during the relevant previous year, the assessee transferred 20,87,400 shares to Shri T.P. Pradeep Raj at Rs. 2.40 per share for a total consideration of Rs. 50 lakhs. 28. The Assessing Officer invoked the provisions of Section 50CA of the Income Tax Act by adopting the Fair Market Value of the shares under Rule 11UA of the Income Tax Rules and computed the value at Rs. 104.917 per share by mechanically relying upon the balance sheet figures of the company. Consequently, the actual sale consideration declared by the assessee was substituted with the deemed consideration determined by the AO resulting in an addition of Rs. 21.15 crores towards Short Term Capital Gain. 29. The principal grievance of the assessee is that the authorities below failed to appreciate that substantial assets reflected in the balance sheet of M/s.Cethar Energy Limited were either unrealizable, fictitious, commercially worthless or otherwise incapable of yielding any economic benefit. It was fu....
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....s and consequently such assets cannot be regarded as assets yielding economic benefit to the assessee. 34. The authorities below, in our considered opinion, committed a serious error in completely ignoring the binding contractual terms contained in the Share Purchase Agreement. The beneficial ownership and actual economic entitlement attached to an asset constitute an essential component in determination of Fair Market Value. Assets whose realization can never enure to the benefit of the assessee cannot be artificially loaded into the valuation mechanism merely because they continue to appear in the balance sheet. 35. We also find from the documents produced before us that certain immovable properties situated at Gandharva Kottai, which formed part of the fixed assets schedule, were subsequently sold for a consideration of Rs. 1,09,44,841/- and the entire sale proceeds were credited to the account of M/s.Cethar Limited under liquidation. Significantly, no portion of such proceeds was received by the assessee. This factual circumstance further substantiates the contention of the assessee that the disputed assets neither possessed the value reflected in the books nor belonged b....