BIGSTAR HOTELS RESORTS PVT. LTD.,NEW DELHI vs. ITO WARD 5(1), NEW DELHI

ORDER PER MANISH AGARWAL, AM :

The present appeal is filed by the assessee against the order dated 09.07.2024 passed by Ld. Commissioner of Income Tax (A), National Faceless Appeal Centre (“NFAC”), Delhi [“Ld.CIT(A)”] in Appeal No.NFAC/2019-20/10183384 passed u/s 250 of the Income Tax Act, 1961 [“the Act”] arising from the assessment order dated 29.09.2022 passed u/s 143(3) r.w.s 144B of the Act pertaining to assessment year 2020-21.

1. “Under the facts and in the circumstances of the case, the Learned Commissioner of Income Tax (A) ("Ld. CIT(A)") vide a non-speaking and un-reasoned order dated 09.07.2024 u/s. 250 of the Income-tax Page | 2 Act, 1961 ("Act") (hereinafter referred to as "1st impugned order") has erred in sustaining the addition made by the Ld. Assessing officer ("AO") vide assessment order dated 29.09.2022 passed u/s. 143(3) r.w.s. 144B of the Act (hereinafter referred to as "2nd impugned order") as the same is bad and untenable in law.

2. That on facts and law, the 1st impugned order passed by the Ld. CIT(A) dated 09.07.2024 is completely devoid of any reasons and is a non-speaking order, passed after non consideration of the Appellant's detailed submissions on law and on merits in the matter whereby it has held vide Para 4.3 of its order that the documents submitted by the Appellant are mere "colorful devices" sans giving any reasoning for the same.

3. That on facts and in law, the Ld. CIT(A) vide order dated 09.07.2024 failed to appreciate that the additions made by the Ld. AO vide order dated 29.09.2022 amounting to Rs. 7,01,25,181/- (without even mentioning the section of addition) are ex-facie erroneous, unsustainable, and non-est in law.

4. That on the facts and in law, the 1st impugned order dated 09.07.2024 passed by the Ld. CIT(A) is unsustainable in law as the same is based on the perverse and arbitrary findings vide 2nd impugned order dated 29.09.2022 passed by the Ld. AO without proper appreciation of the fact that converting the declared STCL of Rs.5,47,28,550/- into STCG at Rs.16,00,250/- on sale of shares of Apex Homes Pvt. Ltd. thereby refusing the set off of said loss against Capital Gains during the relevant AY 2020-21 is absolutely illegal and unjustified in law as well as on facts and merits.

5. That on the facts and in law, the 1st impugned order dated 09.07.2024 passed by the Ld. CIT(A) is unsustainable in law as the same is based on the perverse and arbitrary findings vide 2nd impugned order dated 29.09.2022 passed by the Ld. AO without proper appreciation of the fact that converting the declared LTCL of Rs.10,64,222/- into LTCG of Rs.1,58,17,698/-on sale of shares of same company i.e. Apex Homes Pvt. Ltd., is absolutely illegal and unjustified in law as well as on facts and merits.

6. That the Ld. AO has grossly erred in making and subsequently the Ld. CIT(A) has erred in sustaining addition by converting the declared STCL of Rs.5,47,28,550/- into STCG at Rs.16,00,250/- on sale of shares of Apex Homes Pvt. Ltd by wrongly calculating deemed sale price U/s. 50CA of the Act at Rs.186 against correctly calculated U/s. 50CA of the Act and so declared by Appellant at Rs.(-)546.68 per share as on 27.09.2019 as also substantiated by the Merchant Banker's report. That even otherwise, the Appellant sold the shares at a much higher price of Rs. 10 per share.

7. That the Ld. AO has grossly erred in making and subsequently the Ld. CIT(A) has erred in sustaining addition while not accepting the declared LTCL of Rs.10,64,222 on sale of shares of Apex Homes Pvt. Ltd. and by converting the said declared LTCL into LTCG of Rs.1,58,17,698/- by wrongly calculating deemed sale price U/s.50CA of the Act at Rs.186 against correctly calculated U/s.50CA of the Act and so declared by Appellant at Rs.(-)546.68 per share as also substantiated by the Merchant Banker's report. That in this case also, even otherwise, the Appellant sold the shares at a much higher price of Rs. 10 per share.

8. That the Ld. CIT(A) as well as the Ld. AO have erred while ignoring the submissions of the Appellant regarding the documentary evidences substantiating the valuation of properties of Apex Homes to be as per the circle rate/government valuer's report and not as per book value of the said properties in line with provisions of Rule 11UA and the settled law vide Pr. Commissioner of Income Tax-6 v. Minda SM Technocast Pvt. Ltd. ITA 942/2018, Delhi High Court dated 04.08.2023.

9. That the Ld. CIT(A) as well as the Ld. AO have failed to appreciate that it is the discretion of the Assessee and not the Revenue to decide which method of valuation is to be adopted while calculating Fair Market Value ("FMV") of share as per Rule 11UA(1)(c)(b) of the Income Tax Rules, 1962 ("the Rules") and not as per Section 50CA, vide Pr. Commissioner of Income Tax Vs. M/s Cinestaan Entertainment Pvt. Ltd. in ITA 1007/2019 and ITO vs Appealing Infrastructure Pvt. Ltd. [ITA No. 1958 (Delhi) 2019]. 10. That under the facts and circumstances, the Ld. CIT(A) vide the 1st impugned order has failed to appreciate that the Ld. A.O. exceeded his jurisdiction in examining the issues of addition/disallowance in limited scrutiny without seeking mandatory approvals for extending the scope of examination during assessment U/s.143(3) of the Act, in complete disregard of the binding CBDT instruction no. 20/2015 dated 29.12.2015 and 5/2016 read with DGIT (vigilance) letter dated 30.11.2017. 11. That both the Ld. CIT(A), as well as the Ld. AO, have failed to note that vide their respective orders that under the facts and circumstances, no interest U/s. 234A and 234B should have been charged as for levy of interest there should be specific order passed by the Assessing Officer vide CIT v. Udayan Misthan Bhandar/Ranchi Club Limited [2001] 247 ITR 209 (SC). 12. That the Appellant craves leave to add, delete or modify the aforementioned Grounds of Appeal at any time during the pendency of the Appeal.

13. All the aforesaid grounds of appeal are independent and without prejudice to one another.” 5. Ground of appeal No.1 is general in nature hence, dismissed.

6. Ground No.10 related to the action of the AO in extending the scope of limited scrutiny without following the due procedure.

7. Heard the rival contentions and perused the material available on records. From the perusal of the reasons for limited scrutiny as appearing in the assessment order, it is seen that one of the reasons is large capital gain set off large capital loss. The AO while examining the issue of capital gain vis-à-vis capital loss had examined each and every transactions on which capital gain was declared and during this process, the AO come across the issue of valuation of shares sold. Thus, it is well within the reasons of limited scrutiny and AO has not exceeded his jurisdiction. According, Ground No.10 raised by the assessee is dismissed.

Ground Nos. 2 to 9 raised by the assessee are in relation to 8. the action of AO in computing the amount of long term capital gain and short term capital gain at a figure higher than the amount declared by the assessee. Thus, all the grounds are taken together for consideration.

10. Ld.AR has filed a written submissions which reads as under:- 2. “The Appellant purchased 95,920 unquoted equity shares of M/s. Apex Homes Pvt. Ltd. ("Apex Homes") on 14.04.2008 @ Rs. 10 per share and subsequently 3,20,050 unquoted equity shares of Apex Homes on 28.03.2019 @ Rs. 181 per share. In totality, the Appellant purchased 4,15,970 unquoted equity shares (hereinafter referred to as 'subject shares) of Apex Homes (refer pages 175-178 of paper- book). That the purchase cost of subject shares worked out on book value of assets (as per Rule 11UA(2)(a) r.w.s 56(2)(viib) of the Income Tax Act, 1961) has been accepted by the Assessing Officer/ Ld. CIT(A) [refer findings at Para 12 of AO order & Para 4.3 of CIT(A) order respectively]. 3. The aforementioned subject shares were then sold off in the subject AY (refer pages 177-178 of paper-book) in the following manner: Date of Sale Quantity (A) Per Share value (B) Sale Value (A x B) 27.09.2019 95,920 Rs.10/- Rs.9,59,200/- 05.10.2019 3,20,050 Rs.10/- Rs.32,00,500/- 4,15,970 Rs.41,59,700/- [[[[[ 4. That on account of the aforementioned sale transaction in the subject AY the Appellant incurred (Long Term/Short Term) capital loss in the following manner (refer pg 271 of the paper book): Purchase Date 14.04.2008 28.03.2019 Purchase Quantity (nos.) 95,920 3,20,050 Purchase Cost (in Rs.) 9,59,200 5,79,29,050 Indexed Cost (in Rs.) 20,23,422 NA Sale Date 27.09.2019 (Long-Term) 05.10.2019 (Short-term) Sale Quantity (nos.) 95,920 3,20,050 Sale Value (in Rs.) 9,59,200 32,00,500 Capital Gain/Loss -10,64,222(LTCL) -5,47,28,550 (STCL) 5. The valuation of the subject shares at the time of purchase/allotment by the issuing Company (Apex Homes) to the Page | 6 Appellant (i.c. buyer), was done lawfully at book value of assets as per Net Asset Method vide Rule 11UA(2)(a) of the Income-tax Rules, 1962 ("the Rules") r.w.s. 56(2)(viib) of the Income-tax Act, 1961 ("the Act") (refer pages 147 to 151 of the paper-book).

9. However both, the Ld. CIT(A) and the AO, rejected the Appellant's contentions based on conjecture and surmises holding that the transactions made by the Appellant and valuation reports are colourable device to generate losses. With that, the Ld. CIT(A) erred in confirming the action of the Ld. AO in valuing the shares at the time of purchase/allotment and subsequently at the time of sale in a similar manner, ie. at the book value, which is prima facie inconsistent with the settled law viz, in the case of unquoted equity Page | 7 shares, at the time of purchase Rule 11UA(2) will be applied (i.c. book value of all assets including land and buildings as per audited financial statements), per contra, at the time of sale Rule 11UA(1)(c)(b) will be applied (by which, inter alia for valuation of immovable properties the value adopted or assessed or assessable by any authority of the Government for the purpose of payment of stamp duty is to be adopted).

11. However, contrary to the facts of the case and legal position, the Ld. AO proceeded to determine the FMV of shares at the time of sale by arbitrarily taking the Book Value of all assets (including immovable assets) at Rs. 394.20 Cr., (@Pg. 103 of the paper-book & Para 9 of the AO order) for the sake of parity of FMV at the time of purchase/ allotment vis-à-vis subsequent sale of shares (no legal basis) and thereby, assessed the FMV of shares (@ Rs. 186/- per share (at book value) and determined Capital Gain of Rs. 1,74,17,948/- Consequently, made an addition of Rs. 7,01,25,181/-, which was later upheld by the 1.d. CIT(A).

12. It reiterated that Rule 11UA(1)(c)(b) (as per applicable Section 50CA r.w. Rule 11UAA) states that at the time of calculating FMV of unquoted equity shares, if the underlying asset is an immovable property, then "the value adopted or assessed or assessable by any authority of the Government for the purpose of payment of stamp duty in respect of the immovable property" has to be the FMV of such said immovable property. Consequently, for the purposes of Rule 11UA, the book value of land and building does not depict correct valuation of immovable property which and is not in accordance with the applicable provisions of law (vide Hon'ble Delhi High Court in PCIT v. Minda Sm Technocast Pvt. Lad. ITA 942/2018).

15. In the view of above-stated fact, it is rightly contended that the Ld. CIT(A) & Ld. AO failed to consider the Present Appellant has correctly chosen the FMV based NAV method u/s 50CA r.w.r. 11UAA & 11UA(1) of the Act. With that, the Appellant has presented the valuation of shares done by the Merchant Banker i.e. Finshore Management Service Limited, based on the method prescribed under law. Thus, it is duly established that the FMV as lawfully computed by the Appellant is lawfully correct. Consequently, it is humbly prayed that the impugned addition of Rs. 7,01,25,181/- shall be quashed or set aside, as the same is based on the conjecture surmises of Ld. AO.”

10. Ld.AR submits that the assessee has declared Long Term Capital Gain and Short Term Capital Gain on the sales of shares of M/s. Apex Homes Pvt. Ltd. and in support of the sales, a report of the valuer was filed before the AO which is placed at pages 152 to 158 of the Paper Book as was filed before the AO alongwith reply dated 05.08.2022 available at pages 146 of the Paper Book. Ld.AR submits that in the said valuation report, the merchant banker has taken the value of immovable assets owned by M/s. Apex Homes Pvt. Ltd. in terms of provision of Rule 11UA of the Income Tax Rules, 1962 (“the Rules”) r.w.s. 56(2)(viib) of the Act. It is further submitted by Ld.AR that in terms of provision of Rule 11UA(1)(c)(b), the fair market value (“FMV”) of the immovable assets is to be taken at a value assessed / assessable by stamp value authorities. Accordingly, the merchant banker while computing the value per share of M/s. Apex Homes Pvt. Ltd. as on the date of sale had taken value of the immovable property at INR 1,51,27,43,006/- as against book value at INR 3,93,78,35,262/- being the value assessable by the stamp value authorities. Ld. AR thus submitted that the Page | 9 valuation done by the merchant banker which is solely based on the FMV of the immovable assets based on the value assessable by the stamp value authorities, thus, the same should be accepted. Ld.AR further submits that in the case of the assessee for the purposes of valuation of unquoted shares, the assessee has followed the procedure as laid down under the Act according to which the valuation has been done by the merchant banker and such report cannot be doubted. More particularly, when the AO has not brought on record any contrary valuation done in this regard. Ld.AR also placed reliance on the judgement of Hon’ble Jurisdictional High Court in the case of PCIT vs Minda SM Technocast Pvt. Ltd. in order dated 04.08.2023 wherein the Hon’ble Court has held that for the purpose of valuation u/s 11UA of Rules, AO should have taken into account the circle rate prevailing in the area for value of land. In the last, Ld.AR submits that the AO has referred the valuation report of the buyer of the shares however, the said report is not obtained in the case of the assessee and was of other person and both are submitted on different nature of transaction and thus the valuation report of the buyer cannot be applied in the case of the assessee who got the valuation report done in accordance with the Rule 11UA of the Income Tax Rules, 1962 and therefore, the addition made in the capital gain declared by the assessee, based on the working done by the AO at his opinion, working of the FMV as on the date of sale deserves to be hold bad in law and addition be deleted. He prayed accordingly.

13. As per Rule 11UAA, for the purpose of valuation u/s 50CA of the Act, the FMV of share of a company other than quoted share shall be determined in the manner provided in sub-clause (b) or sub-clause (c), as the case may be, of clause (c) of sub-Rule (1) of Rule 11UA and the valuation date for the purpose is the date when the shares were transferred. Thus, it is clear that for the purpose of valuation of unquoted shares to compute capital gain in accordance with the provisions of section 50CA of the Act, one has to follow the provision of Rule 11UA of I.T. Rules.

14. In the present case, the assessee has obtained the valuation report from the merchant banker where the FMV was determined at net asset value as provided in Rule 11UA(1)(c)(d) of the Rules which reads as under: