In a recent case, Ahmedabad “A” bench of the Income Tax Appellate Tribunal (ITAT) rejected allegations of fabrication regarding the Long Term Capital Gain (LTCG) earned by the assessee from the sale of shares of a Private Limited Company under liquidation and validated the sale price of the said unquoted shares, which was higher than the actual price of the shares.
The assessee, Bipin Babubhai Panchal, filed a return of income declaring a total income of ₹11,77,540 on July 31, 2012. The return was processed under Section 143(1) of the Income Tax Act 1961 (ITA), and a notice under Section 143(2) was issued on August 12, 2013, followed by additional notices under Section 142(1) on March 6, 2014, and November 24, 2014, along with a detailed questionnaire. The assessee, who derives income from trading, commission business, and other sources, responded by submitting details and evidence.
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Later on, the Assessing Officer (AO) passed an Assessment Order on March 23, 2015.
However, this order was later set aside by the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income Tax Statute, which empowers the revision of erroneous and prejudicial assessments. Following the PCIT’s order, the AO passed a revised Assessment Order on December 26, 2017, under Section 143(3) read with Section 263 of ITA. In this order, the AO noted that the assessee had sold shares of M/s. Machinery & Equipments Manufacturers Pvt. Ltd., an unquoted company, and had earned LTCG from the sale. The AO raised an addition of ₹1,05,65,905 based on the claim of artificial LTCG, suspecting that the company was under liquidation and had inadequate net worth.
Aggrieved by this addition, the assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], who deleted the addition, accepting the assessee’s claim that the LTCG was genuine.
In response, the Revenue filed an appeal challenging the CIT(A)’s deletion of the addition and raising concerns over the valuation of the shares sold by the assessee before the ITAT.
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Before the tribunal, the Revenue’s main argument was that the assessee earned artificial LTCG from the sale of shares in a company that was not liquidated but was also not listed. The counsel for Revenue contended that the CIT(A) failed to consider Rule 11UA(c)(b), which prescribes the manner of valuation of such shares. The AO had adopted the value of ₹2,04,180 per share, based on the net worth of the company under liquidation, while the CIT(A) accepted the sale price of ₹2,85,770 per share.
The counsel stressed that the CIT(A) had failed to appreciate the fact that the company was not a going concern and had an inadequate net worth, and argued that the AO had correctly invoked the valuation rules.
On the other hand, the counsel for the assessee argued that the AO had misdirected himself by considering the company’s assets and land valuation to ascertain the value of its shares. Attention was drawn to the fact that the CIT(A) noted what was sold were the shares of the company, not the company itself or its assets, and the transaction was governed by Section 50CA of the Income Tax Legislature, which applies only when the sale consideration for unquoted shares is less than the fair market value.
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It was submitted that the assessee sold its shares to a rival business group, Cambatta Group, which wanted full control over the company. The group was willing to pay a premium for the shares, considering the future value of the company’s assets and their interest in gaining complete control. The CIT(A) found that this justified the higher sale price of ₹2,85,770 per share, as opposed to the AO’s valuation of ₹2,04,180.
After hearing both parties and reviewing the material on record, the division bench of Ms Suchitra Kamble and Mr Naredra Prasad Sinha noted that the AO had made direct inquiries with the Cambatta Group, the purchaser of the shares, under Section 133(6) of the Income Tax Statute, and their response supported the sale price of ₹2,85,770 per share. The bench agreed with the CIT(A) that the sale price reflected the intrinsic value of the land and the strategic advantage gained by the purchaser, who sought full control over the company.
Thus, the ITAT ruled in favor of the assessee, upholding the deletion of the LTCG addition. Consequently, the appeal of the Revenue was dismissed.
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