2016 (11) TMI 1148 - AT - Income Tax

Capital gains computation by adopting NAV @ ₹ 202 per share - balance amount taxable under unexplained income under the head income from other sources - Held that - On perusal of share purchase agreement dated 06-03- 2007 and 07-04-2007 will reveal that persuant to these agreement, the assessee and his family members have agreed to shift the offices of their companies and concerns from IBI house by 30-4-2007 , clause 4.6 of the agreement dated 06-3-2007(page 65/paper book). Nothing incriminating has been brought on record by the Revenue and conjectures and surmises has no place while computing and bringing to tax income of the tax-payer within the chargeability to tax under the provisions and scheme of the Act . The Revenue has also accepted the capital gains based on actual sale consideration in the case of Mr Satish Amritlal Shah while framing assessment u/s 143(3) of the Act for the assessment year 2007-08 in the hands of Mr Satish Amritlal Shah wherein the said Mr. Satish Amritlal Shah also sold 1665 equity shares of BEC Industrial Investment Company Private Limited to BAT Enterprises Limited @ ₹ 1195 per share vide share purchase agreement dated 06-03- 2007 . The Revenue has also accepted the purchase of equity shares of BEC Industrial Investment Company Private Limited @ ₹ 1195/- per share from the assessee and his family members vide share purchase agreement dated 06-03-2007 in the hands of BAT Enterprises Limited while framing assessment u/s 143(3) of the Act for the assessment year 2007-08 of BAT Enterprises Limited. The assessment orders are placed in the file w.r.t. Mr. Satish Amritlal Shah and BAT Enterprises Limited for the assessment year 2007-08. Thus no reasons to interfere in the working of capital gains furnished by the assessee computed in the manner by taking actual sale consideration @ ₹ 1195 per equity shares of BEC Industrial Investment Company Private Limited as full value of consideration as contemplated u/s. 48 of the Act. As such we set aside the orders of the ld. CIT(A) and the AO computing capital gains by adopting NAV @ ₹ 202 per share and bringing to tax balance amount of ₹ 20,25,720/- as unexplained income under the head income from other sources which in our considered view cannot be sustained in the eyes of law. - Decided in favour of assessee

Summary

Issues Involved:
1. Valuation of sale consideration of shares.
2. Assessment of the difference in sale consideration as unexplained income.
3. Application of Section 54EC of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Valuation of Sale Consideration of Shares:
The primary issue was the valuation of 2040 equity shares sold by the assessee at ?1195/- per share, which the Assessing Officer (AO) valued at ?202/- per share based on the Net Asset Value (NAV) method. The AO contended that the high sale price was arbitrary and aimed at tax avoidance. The AO's calculation was based on the Balance Sheet of BEC Industrial Investment Company Pvt. Ltd., which showed a NAV of ?202/- per share. The assessee argued that the valuation was justified considering BEC Industrial Investment Company Pvt. Ltd. was a 100% holding company of BEC Chemicals Pvt. Ltd., and the valuation should include the latter's assets and goodwill. The Tribunal found the transaction genuine and bonafide, considering the mutual agreement between the buyer and seller and the commercial parlance that could command a premium.

2. Assessment of the Difference in Sale Consideration as Unexplained Income:
The AO assessed the difference between the sale price shown by the assessee and the NAV-based sale price as unexplained income under 'income from other sources.' The CIT(A) upheld this view, agreeing with the AO that there was no basis for the high valuation. However, the Tribunal disagreed, noting that the transaction was genuine and supported by mutual agreements and commercial considerations. The Tribunal emphasized that the valuation should consider the overall enterprise value, including goodwill and market value of assets, not just the NAV. The Tribunal also noted that similar transactions were accepted by the Revenue in other cases involving the same shares and parties.

3. Application of Section 54EC of the Income Tax Act:
The assessee claimed exemption under Section 54EC by investing the capital gains in REC Bonds. The AO's assessment of the sale consideration at ?202/- per share resulted in a long-term capital loss, which was allowed to be carried forward. The Tribunal, however, upheld the assessee's original computation of capital gains based on the actual sale consideration of ?1195/- per share, thus validating the exemption claimed under Section 54EC.

Conclusion:
The Tribunal allowed the appeal, setting aside the orders of the CIT(A) and AO. It upheld the assessee's valuation of shares at ?1195/- per share and the resultant capital gains computation. The Tribunal concluded that the transaction was genuine, commercially justified, and the assessee correctly claimed the exemption under Section 54EC. The appeal was allowed, and the assessment order computing capital gains based on NAV and taxing the difference as unexplained income was overturned.