IN INCOME TAX APPELLATE TRIBUNAL BENCH, MUMBAI BEFORE SHRI MAHAVIR SINGH, JUDICIAL MEMBER AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER . I.T.A. No.76 6 Mum 2012 ( [ [ Assessment Year : 2008-09) Shri Amritlal T. Shah, ITO 19 (1)(3), B-4 , Khandelwal Co-Op Mumbai. v. Society, Plot No. 485 486, 17 t h Road, Khar (W), Mumbai 400 052. . PAN : AACPS7522D ( Appellant) .. ( Respondent) Assessee by Dr. K. Shivaram Revenue by : Shri A. Ramachandran Date of Hearing : 30-6-2016 Date of Pronouncement : 22-09-2016 ORDER PER RAMIT KOCHAR, Accountant Member This appeal, filed by assessee , being ITA No. 766 Mum 2012, is directed against appellate order dated 16th December, 2011 passed by learned Commissioner of Income Tax (Appeals)- 22, Mumbai (hereinafter called CIT(A) ), for assessment year 2008-09, appellate proceedings before learned CIT(A) arising from assessment order dated 20th December, 2010 passed by learned Assessing Officer (hereinafter called AO ) u s 143(3) of Income Tax Act,1961 (Hereinafter called Act ). 2 ITA 766 Mum 2012 2. grounds of appeal raised by assessee in memo of appeal filed with Income Tax Appellate Tribunal, Mumbai (hereinafter called Tribunal ) read as under:- 1. learned CIT(A) erred in upholding action of AO who valued sale consideration of shares at Rs. 202 - as against Rs.1195 - per shares shown by assessee, thereby assessing consideration of Rs. 20,25,720 - as unexplained income without appreciating that there is no provision under Act whereby AO could reduce value of sale consideration of shares sold and tax difference amount as unexplained income . 2. Id. CIT(A) failed to appreciate that value of shares is accepted by department in A.Y. 2007-08 in case of Mr. Satish A. Shah (Son) thus computation capital gain by assessee may be allowed and benefit u s. 54EC of Act may also be allowed. 3. brief facts of case are that assessee is individual deriving income from salary, income from house property, capital gains and income from other sources. During course of assessment proceedings u s. 143(3) read with Section 143(2) of Act, it was observed by A.O. that assessee has sold 2040 equity shares of face value of Rs. 100 - per share in BEC Industrial Investment Company Pvt. Ltd. to another company BAT Enterprises Ltd. and booked net profit of Rs. 22,33,800 -. details of which are as under:- Sale of 2040 shares @ Rs. 1195 - per share at total sale consideration of Rs. 24,37,800 Less: Cost of acquisition of 2040 shares @ Rs. 100 - per share Rs. 2,04,000 Long term capital gain as per books Rs. 22,33,800 3 ITA 766 Mum 2012 assessee after taking indexed cost at Rs. 8,17,928 - and further having invested Rs. 16,20,000 - in Government REC bonds had offered net taxable capital gain at Rs. Nil. A.O. observed that it was necessary to verify whether this exorbitant high sale price of share at Rs. 1195 - per share was justified and based on same working or was it arbitrary , and assessee wanted to avoid tax which he otherwise was required to pay. A.O. observed that transaction of sale of shares related to Private Limited Company which is not listed company in any stock exchange therefore generally valuation adopted is based on Net asset Value (NAV) method of company of which shares belongs. assessee was directed to file Balance Sheet of BEC Industrial Investment Company Private Ltd. and on verification of Balance Sheet, it was observed that NAV of above company was just Rs. 202 - per share. calculation is as under based on annual report of company as on 31st March, 2007:- Issued, subscribed and paid up capital of company Rs.35,00,00 (35000 shares of Rs. 100 - each) Add: Reserve and surplus General reserve Rs. 8,50,000 - P&L account Rs. 27,21,831 - Total net assets Rs. 70,71,831 NAV per share = Net assets of company Rs. 70,71,831 = =Rs.202 per share No. of shares 35,000 Thus assessee was asked to explain justification and working of valuation of shares of BEC Industrial Investment Company Private Limited taken by assessee at Rs. 1195 - per share which are sold to BAT Enterprises Ltd. 4 ITA 766 Mum 2012 assessee in reply submitted that BEC Industrial Investment Company Pvt. Ltd. is 100% holding company of BEC Chemicals Pvt. Ltd. and as such valuation of share of BEC Industrial Investment Company Pvt. Ltd. depends upon valuation of BEC Chemicals Pvt. Ltd. , and BEC Chemicals Pvt. Ltd. is manufacturing company having turnover of more than Rs. 10 crores and also it is EOU. It was submitted that BEC Chemicals Pvt. Ltd. is also having factory at Roha, whose valuation of shares as per books is Rs.562 - per share and if depreciation till date is not considered book value comes to Rs.1406 - per share as on 31st March, 2007 , and apart from above goodwill valuation is also to be considered as well necessity of buyer is to be taken into account while negotiating price of share. It was also submitted that when valuation of shares of principal company is derived, valuation of subsidiary is also taken into account. A.O. considered submission of assessee but rejected same. A.O. observed that assessee has not provided any working or basis of valuation of adopting sale price at Rs.1,195 - per share of BEC Industrial Investment Company Private Limited. Therefore, it seems that same is taken arbitrarily without any calculation or base. A.O. observed from Balance Sheet of above company BEC Chemicals Private Limited that said company is in-fact loss making company. It has incurred loss of Rs.16,43,220 - for year ended March, 2007, which was further increased to net loss of Rs. 31,43,652 - for year ended March, 2008 and moreover company has not declared any dividend also. Thus, It was observed that subsidiary company which is loss making and not paying any dividend cannot add value to holding company and hence AO rejected contentions of assessee. 5 ITA 766 Mum 2012 AO also observed that said BEC Chemicals Private Ltd. has issued 15000 new shares @ Rs. 100 - each at par during year ended 31-03-2008 which itself is contradictory to assessee s claim of high valuation. Thus, if assessee claim would have been right, said company BEC Chemicals Private Ltd would have also issued shares at premium of Rs.1100 per share. It was also observed that registered office of M s BEC Industrial Investment Company Pvt. Ltd. in which assessee was holding shares and corporate office of BAT Enterprises Ltd., buyer of shares, is same premises and even Fax and phone number of both companies are same which proves that both companies are under same management and assessee was in position to influence both companies. Hence, buyer of shares cannot be said to be genuine and it contradicts assessee s claim that valuation also depend upon necessity of buyer. Thus, it was held by AO that assessee was interested in both companies namely BEC Industrial Investment Company Private Limited whose shares were sold and BAT Enterprises Limited , who purchased shares from assessee and thus, assessee was in position to influence their business and that is why he had to receive large sum of money to avoid tax burden whereby sale of shareholding in BEC Industrial Investment Company Pvt. Ltd. to BAT Enterprises Ltd. was made at unjustifiably and abnormally high price of Rs.1195 - per share in order to avoid tax liability and also to get benefit u s 54EC of Act , thus causing huge loss to Revenue. A.O. considering above facts, worked out income under head capital gains as under:- Total consideration on sale of 2040 shares @ Rs. 202 - per share Rs. 4,12,080 - 6 ITA 766 Mum 2012 Less: Indexed cost of 2040 shares Rs. 8,17,928 - Long term capital loss(allowed to be carry forward)(-) Rs.4,05,848 - =========== and difference between sale proceed shown by assessee and sale proceed based on NAV of shares @ Rs. 202 - per share was worked out by AO at Rs. 20,25,720 - which was taxed in hands of assessee as unexplained income under head income from other sources instead of income from capital gains , vide assessment order dated 20th December, 2010 passed by AO u s 143(3) of Act. 4. Aggrieved by assessment order dated 20-12-2010 passed by A.O. u s. 143(3) of Act, assessee filed first appeal before ld. CIT(A). 5. Before ld. CIT(A) , assessee reiterated submissions what were made before A.O. which are not repeated and submitted that sale of shares to its promoters by BEC Chemicals Pvt. Ltd. at par is for subsequent period and hence not relevant. It was submitted that rate of Rs. 1195 - per share of BEC Industrial Investment Company Private Limited was fixed in pursuance to mutual agreement and there is no provision under Act whereby to reduce value of share sold. ld. CIT(A) rejected contentions of assessee and agreed with finding of A.O. that there was no basis for taking exorbitant value @ Rs. 1195 per share as compared to NAV of Rs.202 - worked out by A.O. . It was observed by learned CIT(A) that M s BEC Chemicals Pvt. Ltd. is loss making company and hence valuation of shares of BEC Industrial Investment Company Private Limited @ Rs. 1195 - per share against face value of Rs 100 per share was not reasonable. Further it was observed that assessee himself admitted that it was fixed mutually among buyers and assessee which proves that there was no basis for same. A.O. 7 ITA 766 Mum 2012 adopted scientific formula being NAV method for valuing shares. A.O. is duty bound to check valuation and to tax correct income. ld. CIT(A) accordingly held that A.O. has rightly taxed income of Rs.20,25,720 - under head Income from other sources as unexplained income and learned CIT(A) upheld assessment order dated 20-12- 2010 passed by AO u s. 143(3) of Act, vide appellate order dated 16.12.2011 passed by learned CIT(A). 6. Aggrieved by appellate order dated 16.12.2011 passed by ld. CIT(A), assessee filed second appeal with Tribunal. 7. ld. Counsel for assessee submitted that assessee has sold 2040 equity shares of face value of Rs. 100 - per share in M s BEC Industrial Investment Company Pvt. Ltd. to BAT Enterprises Ltd. @ Rs. 1195 - per share. A.O. adopted value of sale per share at Rs. 202 - based upon Net asset Value (NAV) and balance income has been treated as unexplained income under head Income from other sources and brought to tax as such. ld. Counsel took us through orders of ld. CIT(A) and submitted that ld.CIT(A) has not considered arguments raised by assessee in proper perspective. ld. Counsel contended that it is mutual agreement between buyer and seller and price was fixed at Rs. 1195 - per share of BEC Industrial Investment Company Private Limited. ld. Counsel submitted that BEC Industrial Investment Co. Pvt. Ltd was holding 100% shares in BEC Chemicals Private Limited who has factory at Roha and also having turnover of more than Rs. 10 crores and is EOU unit. ld. Counsel submitted that valuation of shares of BEC Chemicals Pvt. Ltd., which is also having factory at Roha, as per book is Rs. 562 - per share and if depreciation is not considered, book value comes to Rs. 1406 - per share, as on 31st March, 2007.It was submitted that above valuation does not include increased valuation of land and building 8 ITA 766 Mum 2012 held by said BEC Chemicals Private Limited as also goodwill of said company. ld. Counsel drew our attention to paper book page No. 5 filed with Tribunal whereby letter dated 29th October, 2010 addressed by assessee to A.O. wherein detail explanations was given by assessee to justify valuation of shares . ld. Counsel also took us through audited accounts of BEC Industrial Investment Co. Pvt. Ltd. and BEC Chemicals Pvt. Ltd. as on 31st March, 2007. share capital of BEC Industrial Investment Co. Pvt. Ltd. is Rs. 70 lakhs while reserves and surplus is Rs. 3.23 crores. ld. Counsel also took us through paper book page 108 wherein calculation of book value of BEC Chemicals P. Ltd. is worked out which comes to Rs. 562 - per share of Rs. 100 - face value and market value of fixed assets such as land and building was not considered. It was also submitted that assessee has entered into share purchase agreement dated 6th March, 2007 whereby sellers have agreed to sell their equity shares at agreed price of Rs.1195 - per share, which is placed at paper book page 57 to 79. ld. Counsel also drew our attention to share transfer form which is placed at paper book page 80 & 81 wherein assessee has transferred 2040 shares of BEC Industrial Investment Company Pvt. Limited to BAT Enterprises Limited for total consideration of Rs. 24,37,800 -. consideration was received by way of cheque, photocopy of same is placed at paper book page 83. confirmation letter from M s BAT Enterprises Ltd. having confirmed purchase of 2040 shares of Rs. 100 - at price of Rs. 1195 - per share by assesse is placed at paper book page 85. Board Resolution passed by BAT Enterprises Limited is also placed at paper book page 86 approving purchase of 2040 shares of BEC Industrial Investment Company Private Limited. ld. Counsel submitted that there is no provision under Act to substitute full value of consideration. Section 48 of Act clearly defines that full value of consideration i.e. actual sales consideration should be taken for purpose of computation of capital gain. It was further submitted that 9 ITA 766 Mum 2012 assessment has been framed in case of Mr. Satish Amritlal Shah for assessment year 2007-08 wherein he also sold 1665 equity shares of BEC Industrial Investment Company Private Limited under share purchase agreement dated 06-03-2007 @ Rs.1195 - per share and there is no addition made by Revenue and capital gains declared have been accepted by Revenue in assessment framed in case of Mr. Satish Amritlal Shah u s 143(3) of Act. assessment order dated 20-08-2009 passed in case of Mr Satish Amritlal Shah for assessment year 2007-08 u s. 143(3) of Act has been placed at paper book page 96 to 101. Similarly, it was submitted that assessment has been framed in case of BAT Enterprises Ltd. for assessment year 2007-08 u s 143(3) of Act whereby no additions have been made by Revenue. 8. ld. D.R., on other hand, relied upon orders of authorities below. 9. We have considered rival contentions and also perused material available on record. We have observed that assessee is shareholder of company namely BEC Industrial Investment Company Limited along with his family members holding in aggregate 5000 equity shares of BEC Industrial Investment Company Private Limited of face value of Rs 100 each of which 2040 equity shares were held by assessee . Thus, assessee family member also hold equity shares in said company and aggregate shareholding of family is 5000 equity shares of face value of Rs.100 each in BEC Industrial Investment Company Private Limited out of total shares being 35000 equity shares issued by BEC Industrial Investment Company Private Limited. Out of shareholding consisting of 5000 equity shares of BEC Industrial Investment Company Private Limited , assessee holds 2040 equity shares jointly with Mrs. Shantaben Amritlal Shah , Mrs Shantaben Amritlal Shah holds 1295 equity shares jointly with Mr. Amritlal 10 ITA 766 Mum 2012 T. Shah i.e. assessee , while Mr Satish Amritlal Shah holds 1665 equity shares jointly with Mr. Amritlal T. Shah i.e. assessee in BEC Industrial Investment Company Private Limited. assessee had sold 2040 equity shares of face value of Rs. 100 - per share of BEC Industrial Investment Company Private Ltd. to BAT Enterprises Ltd. @ Rs. 1195 - per share whereby assessee has received Rs. 24,37,800 - as sales consideration and long term capital gain was worked out as per provisions and scheme of Act and same was invested by assessee in REC Bonds claiming exemption u s 54EC of Act whereby long term capital gain declared in return of income was at Rs. Nil. assessee along with his family members namely Mrs Shantiben Amritlal Shah and Mr Satish Amritlal Shah entered into two share purchase agreements dated 06-03-2007 and 07-04-2007 with BAT Enterprises Limited and others which are placed in paper book page 57-79 whereby assessee and his above family members agreed to sell equity shares of BEC Industrial Investment Company Private Limited at Rs. 1195 -per share to BAT Enterprises Limited. said valuation is based upon price mutually agreed and negotiated between both parties i.e. willing buyer and willing seller and vide these share purchase agreements it was agreed to sell share holding in BEC Industrial Investment Co. P. Ltd. @ Rs. 1195 - per equity share to BAT Enterprises Limited. Further it is on record that BEC Industrial Investment Co. P. Ltd. is 100% holding company of BEC Chemicals Private Ltd. (page 24 paper book) and hence valuation of share of former depends on valuation of shares of later which value of shares of BEC Chemicals Private Limited has necessarily to be included for computing value of share of BEC Industrial Investment Company Private Limited which is 100% holding of BEC Chemicals Private Limited who was having manufacturing unit at Roha and is EOU unit , whereby book value of share of BEC Chemicals Private Limited , as per books was Rs. 562 - per share as on 31st March, 2007 and if depreciation is excluded book value comes to Rs. 1406 - per 11 ITA 766 Mum 2012 share. This value is supported by audited financial statement of BEC Chemicals Private Limited and valuation details which are placed at page 7-55 & 108 paper book . said valuation details states that goodwill of BEC Chemicals Private Limited is not considered in this valuation and also market value of land and building of BEC Chemicals Private Limited is also not considered while valuing above price which is computed from audited financial statements being NAV of BEC Chemicals Private Limited with or without depreciation. copies of audited financial statements of BEC Chemicals Private Limited is filed by assessee for financial year 2006-07 which shows that share capital of BEC Chemicals Private Limited is Rs 70 lacs and reserves and surplus is Rs. 323.07 lacs as at 31-03-2007 as per audited financial statements of BEC Chemicals Private Limited said valuation is not disputed by Revenue. It is say of assessee that even market value of land and building held by BEC Chemicals Private Limited is also to be factored while valuing BEC Chemicals Private Limited apart from goodwill of BEC Chemicals Private Limited. On perusal of share purchase agreements dated 06-03-2007 and 07-04-2007, it clearly reveals that assessee was Director of BEC Industrial Investment Company Private Limited and BEC Chemicals Private Limited on date of sale of afore-stated and he resigned from directorship of these companies persuant to sale of 5000 equity shares held by himself and his family members held in BEC Industrial Investment Company Private Limited which were sold to BAT Enterprises Limited which is borne out from clause 2.3(iv) of share purchase agreement dated 06-03-2007 whereby Resolutions were also obtained from these companies accepting resignation of assessee as Director of these companies. said share purchase agreement dated 06- 03-2007 also stipulates that assessee shall be relieved from personal guarantees provided by him for working capital finance as well as term loan or any other personal guarantees to Bank and financial institution in his capacity as Director of these companies namely BEC Industrial Investment 12 ITA 766 Mum 2012 Company Private Limited and BEC Chemicals Private Limited . Thus, in our considered view entire transaction of sale of 5000 equity shares of BEC Industrial Investment Company Private Limited @ Rs. 1195 per shares by assessee( out of total 5000 equity shares sold, assessee selling 2040 equity shares) and his family members is genuine and bonafide transaction which is to enable restructuring and re-aligning shareholding pattern of these companies whereby one shareholders group consisting of assessee and his family members holding 5000 equity shares in BEC Industrial Investment Company Private Limited have sold and exited from shareholding held by them in BEC Industrial Investment Company Private Limited in favour of BAT Enterprises Ltd. at mutually agreed negotiated price between willing seller and willing buyer to make exit from shareholding in BEC Industrial Investment Company Private Limited and its subsidiaries . exit from closely held company BEC Industrial Investment Company Private limited with its subsidiaries could in commercial parlance definitely command premium in addition to normal price based on NAV as first of all valuation of subsidiary would get embedded in price of share of BEC Industrial Investment company Private Limited and that valuation has to be done based on present value of enterprise and not necessarily book value as represented by financial statements and also controlling premium is embedded in price for shares paid by acquiring shareholders to selling shareholder group to vest strengthen their control in BEC Industrial Investment Private Limited which shall get embedded in mutually agreed negotiated price between buyer and seller, hence, under these circumstances and on analyzing whole transactions in proper perspective , we have no hesitation in holding based on material on record that entire transaction for sale of share represented through share purchase agreements dated 06-03-2007 and 07-04-2007 produced by assessee is genuine and bonafide transaction of sale of shares held by assessee and his family members in BEC Industrial 13 ITA 766 Mum 2012 Investment Company Private Limited to BAT Enterprises Limited and assessee has rightly computed capital gain in return of income filed with Revenue by taking actual sale consideration of 2040 equity shares @ Rs 1195 - per share as full value of consideration as contemplated u s. 48 of Act. issue of shares by BEC Chemicals Private Limited to promoters subsequently at face value at Rs 100 per shares is all irrelevant consideration having no bearing on establishing genuineness and bonafide of transactions for sale and purchase of share executed by assessee and his family members with BAT Enterprises Limited vide share purchase agreements dated 06-03-2007 and 07-04-2007.Similarly that BEC Industrial Investment Company Private Limited and BAT Enterprises Limited has common address etc and assessee ould be able to manipulate transaction are again having no relevance and are merely conjectures and conjectures . In-fact on perusal of share purchase agreement dated 06-03- 2007 and 07-04-2007 will reveal that persuant to these agreement, assessee and his family members have agreed to shift offices of their companies and concerns from IBI house by 30-4-2007 , clause 4.6 of agreement dated 06-3-2007(page 65 paper book). Nothing incriminating has been brought on record by Revenue and conjectures and surmises has no place while computing and bringing to tax income of tax-payer within chargeability to tax under provisions and scheme of Act . Revenue has also accepted capital gains based on actual sale consideration in case of Mr Satish Amritlal Shah while framing assessment u s 143(3) of Act for assessment year 2007-08 in hands of Mr Satish Amritlal Shah wherein said Mr. Satish Amritlal Shah also sold 1665 equity shares of BEC Industrial Investment Company Private Limited to BAT Enterprises Limited @ Rs 1195 per share vide share purchase agreement dated 06-03- 2007 . Revenue has also accepted purchase of equity shares of BEC Industrial Investment Company Private Limited @ Rs 1195 - per share from assessee and his family members vide share purchase agreement dated 14 ITA 766 Mum 2012 06-03-2007 in hands of BAT Enterprises Limited while framing assessment u s 143(3) of Act for assessment year 2007-08 of BAT Enterprises Limited. assessment orders are placed in file w.r.t. Mr. Satish Amritlal Shah and BAT Enterprises Limited for assessment year 2007-08. We do not find any reasons to interfere in working of capital gains furnished by assessee computed in manner by taking actual sale consideration @ Rs.1195 per equity shares of BEC Industrial Investment Company Private Limited as full value of consideration as contemplated u s. 48 of Act. As such we set aside orders of ld. CIT(A) and AO computing capital gains by adopting NAV @ Rs 202 per share and bringing to tax balance amount of Rs. 20,25,720 - as unexplained income under head income from other sources which in our considered view cannot be sustained in eyes of law. We accordingly allow appeal of assessee as indicated above. We order accordingly. 10. In result, appeal filed by assessee in ITA No. 766 Mum 2012 for assessment year 2008-09 is allowed. Order pronounced in open court on 22nd September, 2016. 22-09-2016 Sd - sd - (MAHAVIR SINGH) (RAMIT KOCHAR) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated 22-09-2016 R.K., Ex. Sr. PS 15 ITA 766 Mum 2012 Copy of Order forwarded to : 1. Appellant 2. Respondent. 3. ( ) CIT(A)- concerned, Mumbai 4. CIT- Concerned, Mumbai 5. , , DR, ITAT, Mumbai Bench 6. Guard file. BY ORDER, True Copy (Dy. Asstt. Registrar) , ITAT, Mumbai Amritlal T. Shah v. ITO – 19(1)(3), Mumbai