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Facts
The Revenue appealed against the CIT(A)'s order deleting an addition made by the AO. The assessee purchased a large number of equity shares for a nominal consideration, which the AO treated as having a significantly higher fair market value.
Held
The Tribunal found shortcomings in the orders of the lower authorities regarding the determination of the fair market value of the shares. The issue was restored to the AO for a fresh assessment, considering all relevant factors including a reconstruction scheme and convertible warrants.
Key Issues
Whether the fair market value of shares purchased for a nominal consideration, which were under lock-in, should be determined based on stock exchange prices or other valuation methods as per the Income Tax Act rules.
Sections Cited
56(2)(vii)(c), 147, 143(3), 11UA(1)(c)(b)
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Income Tax Appellate Tribunal, DELHI BENCH “A”, DELHI
(A.Y.2015-16) Assistant Commissioner of Income Tax, Circle 28(1), R. No. 1001, 10th Floor, E-2, Block, Pratyaksh Kar Bhawan, Civic Centre, ...... अपीलाथ�/Appellant J L Nehru Marg, New Delhi 110002 बनाम Vs. Ajay Singh, B-1, Kalindi Colony, New Delhi 110065 ..... �ितवादी/Respondent PAN: ABJPS-9222-J Assessee by : None Department by : Shri Javed Akhtar, CIT(DR) सुनवाई क� ितिथ/ Date of hearing : 03.03.2025 घोषणा क� ितिथ/ Date of pronouncement : : 30.05.2025 आदेश/ORDER
PER VIKAS AWASTHY, JM:
This appeal by the Revenue is directed against the order of Commissioner of Income Tax (Appeals)-10, New Delhi (hereinafter referred to as 'the CIT(A)') dated 06.12.2019, for assessment year 2015-16.
The Revenue in appeal has assailed the order of CIT(A) by raising following grounds:-
(AY 2015-16) “1. Whether on facts and in circumstances of the case, the Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs. 7,98,97,75,682/- made by the AO to the income of the assessee on account of provisions of section 56(2)(vii)(c) of the IT Act ignoring the fact that the assessee has acquired shares for a consideration which is less than aggregate fair market value of the shares? 2. Whether on facts and in circumstances of the case, the Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs. 7,98,97,75,682/- made by the AO to the income of the assessee on account of provisions of section 56(2)(vii)(c) of the IT Act ignoring the fact that shares of Spice jet purchased by assessee are quoted and there is no other method of valuation prescribed in case of locked-in quoted share than the rule 11UA(1)(c)(a)? 3. Whether on facts and in circumstances of the case, the Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs. 7,98,97,75,682/- made by the AO to the income of the assessee on account of provisions of section 56(2)(vii)(c) of the IT Act ignoring the fact that once a company is listed, all its shares are treated as quoted shares and the promoters can also offload their stake in that company through the stock exchange like other individual subject to regulation prescribed in this regard? 4. Whether on facts and in circumstances of the case, the Ld. CIT(A) also failed to appreciate that out of the total shares purchase from M/s Kal Airways Pvt. Ltd. 83,057,932 shares were encumbered with Allahabad Bank and Yes Bank? 5. Whether on facts and in circumstances of the case, the Ld. CIT(A) also failed to appreciate that Valuation of all these encumbered shares cannot be 'NIL' or 'NEGATIVE' due to negative valuation otherwise why would have Bank encumbered them? 6. The appellant craves leave to add, alter or amend any of the grounds of appeal before or during the course of haring of the appeal.”
3. The facts of the case in brief as emanating from records are: The assessee had purchased 110300753 equity shares of M/s. Spicejet Ltd. from Sri Kalanithi Maran on 17.03.2015 for a total consideration of Rs.1/- (Rupees 1 only) in pursuance of ‘Share Sale and Purchased Agreement’ dated 21.01.2015. M/s.
(AY 2015-16) Spicejet Ltd. is a public listed company whose equity shares are listed on Bombay Stock Exchange (BSE). The Assessing Officer (AO) in assessment proceedings did not accept the transaction value of sale of shares. The AO observed that since the equity share of M/s. Spicejet Ltd. are traded on stock exchange and the lowest price traded of M/s. Spicejet Ltd. shares on BSE on 17.03.2015 was Rs.22.88 per share, therefore, Fair Market Value on date of transfer as per section 56(2)(viii)(c) r.w.r. 11UA is Rs.22.88 per share. Thus, the AO made addition of Rs.798,97,95,628/-. Aggrieved by the assessment order dated 31.12.2018 passed u/s. 147 r.w.s 143(3) of the Income Tax Act,1961(hereinafter referred to as ‘the Act’), the assessee carried the issue in appeal before the CIT(A).
The assessee explained before the CIT(A), that the shares purchased by the assessee/appellant were under lock-in as per the requirements of SEBI (Issue of Capital & Disclosure Requirements Regulations) 2009. Therefore, the value of shares as traded on BSE cannot be taken as the fair market value of shares. The lock-in shares are akin to unlisted shares, hence, the Fair Market Value of unquoted equity shares in accordance with provisions of Rule 11UA has to be taken. The company M/s. Spicejet Ltd. has a negative net worth of Rs.16,355.37 million as on 31.12.2014. A valuation report was taken from the Auditors M/s. S.R Batliboi & Associates LLP and they have computed book value of equity shares of around (-) Rs.24 per share. Since, shares purchased by the assessee are under lock-in as per the requirements of SEBI Regulations 2009 (supra) such shares do not qualify as quoted shares as defined under Rule 11U of the Income Tax Rules. Therefore, the shares were required to be valued as per Rule 11UA(1)(c)(b). As per the Valuation Report the value of Fair Market Value of shares purchased by the assessee is in negative. The CIT(A) after considering submissions of the (AY 2015-16) assessee reversed findings of the AO and deleted the addition of Rs. Rs.798,97,95,628/-. Hence, present appeal by the Revenue.
Shri Javed Akhtar, representing the department vehemently defended the assessment order and prayed for reversing findings of the CIT(A). The Ld. DR submits that the CIT(A) has erred in not taking into consideration the fact that a scheme of reconstruction and rival for takeover of ownership, management and control of the company was approved. According to the approved scheme 189091378 convertible warrants having a nominal value of Rs.10 each were to be issued to the outgoing promoters i.e. Sri Kalanithi Maran for a consideration aggregating to Rs.3082.19 millions with an option to apply for equivalent number of equity shares of the face value of shares of Rs.10/- each at a premium of Rs.6.30 per share. The said scheme was approved on 22.01.2018 i.e. within the close proximity of time when the shares purchased by the assessee at NIL rate. He further pointed that the lock-in period of shares was for a short duration; hence, equity shares under lock-in cannot be equated with unquoted shares. He thus, prayed for upholding the assessment order.
We have heard the submissions made by ld. DR and have examined the orders of authorities below. The solitary dispute in this appeal is with regard to Fair Market Valuation of shares of Spicejet Ltd. purchased by assessee from Sri Kalanithi Maran. The assessee has purchased 110300753 equity shares from Sri Kalanithi Maran for a total consideration of Rs.1. The share purchased by the assessee are stated to be under lock-in as per SEBI Regulations 2009 (supra), the case of the assessee is that since the shares are under lock-in the Fair Market Value of shares cannot be taken as the price of quoted shares but has to be determined in accordance with the provision of Rule 11UA of Income Tax Rules as (AY 2015-16) unquoted shares. Accordingly, Valuation Report was sought under a scheme of reconstruction and rival for takeover of ownership management and control of the company. As per Valuation Report dated 22.01.2015, the value of shares is (-) Rs.24 per share. At the same time the shares of Spicejet Ltd. were traded on the stock exchange, the lowest price of the shares traded was Rs.22.88. The AO rejected assessee’s contention and adopted value of shares on which they were traded in the stock exchange and thus, made addition of Rs. 798,97,95,628/-. While examining the impugned order, we find that nowhere it is emanating from the assessment order or the order of CIT(A), the period of lock-in of shares purchased by the assessee. The shares were sold by Sri Kalanithi Maran to the assessee in pursuance of ‘Shares Sales and Purchase Agreement’ dated 21.01.2015. The convents of the said agreement are nowhere discussed in the orders of the authorities below. Further, the class of shares purchased by the assessee i.e. the share purchased by assessee are also listed on stock exchange is also not emanating from the impugned order. Mere fact that the shares are in lock-in is not sufficient to come to the conclusion that the market value shall be determined in a manner similar to that of unquoted shares i.e. in accordance with Rule 11UA. The AO shall also examine the relevance and impact of issuance of 189091378 convertible warrants having nominal value of Rs.10 each at a premium of Rs.6.30 per share to the outgoing promoter. Considering the above shortcomings in the orders of the authorities below, we deem it appropriate to restore this issue back to the AO for denovo assessment. Needless to say that the AO shall grant reasonable opportunity of making submissions to the assessee, in accordance with law.