SHRIHARSH SHRIDHAR GHATE,PUNE vs. ITO CIRCLE-7 , PUNE

Facts of the case, in brief, are that the assessee is an individual and filed his return of income u/s 139(1) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) on 31.10.2023 declaring total income of Rs.56,70,68,620/- after setting off of brought forward loss of Rs.3,26,010/- and after claiming deductions under Chapter VI-A at Rs.2,55,000/-. The assessee in his return of income had declared salary income of Rs.1,14,92,841/-, business income of Rs.1,27,430/-, short term capital gain of Rs.22,72,047/-, long term capital gain of Rs.52,96,90,358/- and

Accordingly, statutory notice u/s 143(2) of the Act was issued and served on the assessee. Subsequently, notice u/s 142(1) of the Act was issued and served on the assessee in response to which the assessee filed the requisite details. During the course of assessment proceedings the Assessing Officer asked the assessee to explain the capital gain declared by him. It was submitted by the assessee that the same has arisen on account of sale of equity shares held by the assessee as a promoter shareholder and Managing Director of the company namely KP Corporate Solutions Ltd. It was further stated that the stake sale is of the entire holding of the shares by the assessee and also other promoter shareholders and is sale of 100% of the holding under the Shares Sale Agreement with the acquiring company. The acquiring company is an independent company and has no relationship with any of the promoters and is done at the negotiated price and other terms and conditions as agreed to amongst the parties detailed in the Share Purchase Agreement which is a standard practice followed in such acquisitions and has standard warranties, covenants, conditions and restrictions along with long dates defined.

It was argued that KP Corporate Solutions Ltd. is a closely held limited company which was established and incorporated on 08.05.1997 i.e. after being in business and in operations for over 25 years as on the date of the sale of the entire

It was submitted that during the period ended March 2019 the company went through the process of merger of its wholly owned subsidiary namely K & P Capital Services Ltd. through NCLT order which was passed under CP(CAA) No.129 of 2018 order dated 15.11.2018 and which is effective from 01.04.2018 i.e. A.Y. 2019-20. The assessee and other shareholders of K & P Capital Services Ltd. got the shares of KP Corporate Solutions Ltd. under this merger in exchange for their shares held in K & P Capital Services Ltd. The assessee also filed a copy of Share Purchase Agreement dated 23.05.2022 executed with Qapita Fintech India Private Limited according to which the entire stake sale has to be done by the promoters of the company. Upon the transfer of shares held by KPMS to the assessee in the proportionate holding and Deemed Dividend Distribution Tax u/s 2(22)(a) were complied with payment of Dividend Distribution Tax. It was submitted that the amount of Dividend Distribution amounting to Rs.20,54,922/- has been offered to tax under the head ‘Income from other sources’. The assessee also filed sale purchase transfer agreement, NSDL share transfer report along with delivery slips, share acquisition details, valuation report based on Net Asset Value, audited financials of K.P. Corporate for March, 2022 and March, 2023, relevant

It was further submitted that as per Share Purchase Agreement purchasers retained the right on the moneys in the escrow account including the receipt of interest income accruing on the Escrow Account amount and recalling the whole of the amount in the Escrow Account. The amount of the consideration in para 7.1 of Rs.160 crores is the upper limit of the consideration and the second closing of Rs.32 crores is conditional upon the performance parameters and the amount comprising in the second closing ‘have been encumbered at source' by the purchasers. The amount of the consideration of Rs.128 crores is the legally correct amount of consideration that has been considered and offered for tax. It was further submitted that the un-accrued capital gain amounting to Rs.16,33,99,998/- has been offered for taxation in assessment year 2024-25.

However, the Assessing Officer was not satisfied with the arguments of the assessee. He observed that despite repeated opportunities given to the assessee to explain the source of funds received from Qapita Fintech India Pvt Ltd of Rs.81.71 crores and to explain the creditworthiness of the parties, the assessee could not furnish the financials and other details of the said company. He observed that in the interest of natural justice, this data was obtained from Qapita Fintech India Pvt Ltd. On going through the audited financials of Qapita Fintech India Pvt Ltd the Assessing Officer noted that this company hardly has reserves of Rs.94 lakhs in AY 2022-23 and it received a share premium of Rs.160 crores in AY 2023-24 and

As regards valuation, he noted that the valuation of shares of KP Corporate Solutions is Rs.466.86 per share as per the registered valuer. Since the assesse has sold 1,29,282 shares whose value comes to Rs.6,03,60,472, thus the shares have been sold at very much astronomically above its fair value to a buyer whose creditworthiness is doubtful and the buyer has received the funds as share premium, the premium which itself appears dubious. Relying on various decisions, the Assessing Officer made addition of Rs.59,91,41,144/- as unexplained cash credit u/s 68 r.w.s. 115BBE of the Act by observing as under: “Both the above landmark judgement held that even if a transaction or entry prima facie appear to be legal and is duly supported by documentary evidences, the tax authorities have the right to make deeper inquiries and examine the transaction in light of surrounding circumstances and test of human probability to uncover its real nature.

Since the Assessing Officer treated the capital gain declared by the assessee as unexplained cash credit u/s 68 of the I T Act, he did not proceed to examine the claim of deduction u/s 54F of the Act.

Before the Ld. CIT(A) / NFAC it was submitted that the long term capital gains arose from the transfer of shares which had been held for more than twenty five years and the transaction stands duly supported by the Share Purchase Agreement, audited financial statements, valuation report, bank records, and confirmations received from the buyer company. It was argued that the amendments brought in by the Finance Act, 2022 requiring proof of "source of source” are confined to cases of share capital and loans and do not extend to bonafide share transfer transactions which are already governed by the provisions of capital gains under the Act. The assessee also emphasised that the infusion of capital by the buyer company's foreign parent was a commercial funding arrangement, duly recorded in the statutory books of the company and that the assessee cannot be saddled with the legal obligation of proving the source of funds of the buyer's parent entity. In support of this position, the assessee relied on the principle of "real income," namely that only income which has in fact accrued or

However, the Ld. CIT(A) / NFAC was not satisfied with the arguments advanced by the assessee and upheld the addition by observing as under:

So far as denial of deduction u/s 54F is concerned, it was argued that notwithstanding the challenge to the additions made under section 68, the computation of long-term capital gains should be considered on its own merits. It was submitted that the shares sold were held for more than twenty five years and the resultant gains were rightly offered to tax under section 45 read with section 48 of the Income-tax Act. The assessee contended that the Assessing Officer failed to give due effect to the claim of deduction under section 54F which was made in the return of income and supported by evidence of investment in a residential property. It was urged that once the transaction is treated as a valid transfer of a capital asset, the computation must follow the statutory mandate under sections 45 and 48, and

However, the Ld. CIT(A) / NFAC rejected the grounds raised by the assessee by observing as under:

Aggrieved with such order of the Ld. CIT(A) / NFAC, the assessee is in appeal before the Tribunal by raising the following grounds: 1. Learned CIT(A)-NFAC erred in law and on facts in confirming the assessment order dated 27/3/2025 passed by learned AO-NFAC vide which, total income of the Appellant was quantified at Rs.63,65,19,406 instead of returned income of Rs.56,70,68,620. 2. The learned CIT(A)-NFAC erred in law and on facts in affirming the learned AO-NFAC'S action of changing the nature and quantum of income as follows: a) incorrect taxation of Rs.59,91,14,144 holding the same as unexplained credit u/s 68 r.w.s. 115BBE b) removal of long term capital gain of Rs.52,96,90,358 from the Return of Income as so offered by the Appellant. 3. The learned I-T authorities erred in law and on facts in treating consideration received for sale of shares of M/s KP Corporate Solutions Limited (i.e. KPCSPL), worked out at Rs.59,91,14,144 (i.e. Rs.65,29,41,144 - Rs.5,38,00,000) as unexplained cash credit u/s 68, ignoring the genuine bonafide transaction for transfer of shares of KPCSPL to an Arm's Length Party. Learned I-T authorities ought to have appreciated that, section 68 can't be triggered for genuine bonafide transaction for which, complete information, as could be expected from any assessee, exists. 4. The learned I-T authorities erred in invoking provisions u/s 68 for taxing the amount of Rs.59,91,14,144 u/s 115BBE after attributing excessive and illogical burden on Appellant as regards ascertaining the creditworthiness of the "source of source of funds" paid by the Arm's Length entity for purchase of shares of KPCSPL despite the fact that Source of Source was even confirmed by the Shares Purchasing entity even independently with supporting documents. I-T authorities also erred in misunderstanding the normal routine layering of corporate structure as if, an endeavor of Appellant. 5. The learned I-T authorities erred in law and on facts in attributing rigors of section 68 to the Appellant despite the fact that, no books of accounts were required to be maintained by the Appellant. I-T authorities ought to have appreciated that, in absence of books of accounts, section 68 can't be invoked. 6. The learned I-T authorities erred in law and on facts in over-reaching adverse conclusions by changing nature of consideration for sale of shares, as some, unexplained stream of funds. While reaching such illogical conclusions, I-T authorities also erred in-

The Ld. Counsel for the assessee strongly challenged the order of the Ld. CIT(A) / NFAC confirming the addition made by the Assessing Officer and reiterated the same arguments as made before the Ld. CIT(A) / NFAC. He submitted that the assessee has sold his shares and got the consideration from Qapita Fintech India Pvt Ltd. The Assessing Officer has obtained information u/s

Relying on various decisions he submitted that once the assessee has proved the identity and capacity of the purchaser and the genuineness of the transaction and the source of purchasers has also been established, therefore, no addition can be made in the hands of the assessee by invoking provisions of section 68 of the Act. He accordingly submitted that the addition made by the Assessing Officer and sustained by the Ld. CIT(A) / NFAC be deleted.

The Ld. DR on the other hand heavily relied on the orders of the Assessing Officer and the Ld. CIT(A) / NFAC. Referring to the orders of the Assessing Officer and the Ld. CIT(A) / NFAC, he submitted that both the authorities have given justifiable reasons while making addition u/s 68 of the Act in the hands of the assessee. Therefore, the order of the Ld. CIT(A) / NFAC be upheld and the grounds raised by the assessee be dismissed.

We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and the Ld. CIT(A) / NFAC and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the Assessing Officer in the instant case made addition of Rs.59,91,41,144/- u/s 68 r.w.s. 115BBE of the Act on account of sale of shares by the assessee to Qapita Fintech India Pvt Ltd on the ground that the creditworthiness of Qapita Fintech India Pvt Ltd is doubtful. Further, that company had issued 195122 fresh shares to its holding company Qapita Fintech Pte Ltd at a share premium of Rs.160 crores and there is no change in percentage of shareholding of

We find some force in the above arguments of the Ld. Counsel for the assessee. Once the assessee in the instant case has explained not only the source but the source of source, the Assessing Officer should not have invoked the provisions of section 68 r.w.s. 115BBE of the Act to the sale of shares. On a

So far as the deduction u/s 54F of the Act is concerned, since we have directed the Assessing Officer to delete the addition u/s 68 of the Act, we hold that the capital gain computed by the assessee is correct and therefore, the claim of deduction u/s 54F of the Act has to be allowed. However, since the Assessing Officer has not done the required factual verification of the nature of expenditure and investment made and the Ld. CIT(A) / NFAC has also not discussed the issue, therefore, we deem it proper to restore the issue to the file of the Assessing Officer to verify the factual details regarding the claim of deduction u/s 54F of the Act and allow it as per fact and law. Needless to say the Assessing Officer shall decide the issue after providing due opportunity of being heard to the assessee. We hold and direct accordingly. The second issue raised by the assessee in the grounds of appeal is accordingly allowed for statistical purposes.

In the result, the appeal filed by the assessee is allowed for statistical purposes.