ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-1(1)(1), BENGALURU vs. HIREHAL JAIRAJ BALRAM, BENGALURU

This appeal is filed by the ACIT, Circle 1(1)(1), Bengaluru [ The ld. AO ] in case of HIREHAL JAIRAJ BALRAM against the appellate order passed by the National Faceless Appeal Centre, Delhi (the learned CIT – A) dated 16 June 2025 wherein the appeal filed by the assessee against the assessment order u/s. 143(3) r.w.s. 144B of the Income Tax Act, 1961 [the Act] passed by the Assessment Unit, Income Tax Department (the ld. AO) was allowed. Therefore, the Assessee’s claim was accepted by the learned CIT – A and hence the learned AO is aggrieved and is in appeal.

At the outset, the appeal is barred by 4 days. The Revenue has filed a petition for condonation of delay stating the reason for delay being due to pressing time barring matters and other miscellaneous works. As the delay is nominal, no objection from the side of Assessee, we condone the delay.

The sole issue in this appeal is whether the learned CIT–A was correct in treating the sale of shares of NAM Estates Private Limited [NAM Estates] and the subsequent purchase of immovable property from Embassy Property Development Private Limited [Embassy Property] as independent transactions. The learned CIT–A also rejected the assessing officer’s invocation of section 69A of the Act, holding that the source of the investment had been fully explained. Further, the learned CIT–A accepted the Assessee’s claim that, for the purposes of section 54F, the cost of the new asset included power, water, maintenance, and club membership charges, contrary to decision of the Coordinate Bench in ITA No. 62/Jaipur/2017.

Briefly stated, the assessee is an individual deriving income from salary, share of profit, and business profit. During the relevant year, he sold 940 shares in NAM Estates to Embassy Property under a share purchase agreement dated 27 June 2019 for total consideration of ₹ 61,894,366. This formed one leg of the transaction. In the second leg, the assessee purchased a residential villa from Embassy under a sale deed dated 3 August 2019 for ₹ 58,986,710. The total investment in the property, including power, water, service, club membership, and maintenance charges, amounted to ₹ 62,003,100.

The Assessee’s case is that he sold a non-residential capital asset being shares in NAM investments Pvt Ltd and invested the sale proceeds in a residential house, thereby qualifying for deduction under section 54F of the Act. It is undisputed that assessee sold shares and also purchased property from Embassy.

He filed his return on 27 February 2021 declaring total income of ₹ 2,345,177, including short-term capital gains of ₹ 16,612 from the sale of equity-oriented mutual funds. The case was selected for limited scrutiny to examine the substantial investment in the property and the claim for deduction under section 54F.

In response to the assessing officer’s queries, the assessee produced the sale deed dated 3 August 2019, the share purchase agreement dated 27 June 2019, and the share transfer form. He also submitted Embassy Property’s ledger account relating to the house purchase, a valuation report dated 26 June 2019 issued by Real Growth Securities Private Limited under Rule 11UA of the Income Tax Rules in support of the share sale, and his Tamil Nadu Mercantile Bank statement evidencing receipt of the sale consideration and investment in the new asset.

The ld. AO examined the transaction and concluded that the shares of NAM Estates, which were stated to have a nil value on the date of transfer, were sold to Embassy Property for ₹ 61,894,366. The ld. AO further noted that both the assessee and Embassy Property were shareholders in NAM Estates, and that the assessee purchased a property from Embassy Property shortly after the share sale. On this basis, the ld. AO formed the view that the assessee had structured a sham transaction and employed a colourable device to create an apparent source of funds for the property purchase without disclosing the real source. Accordingly, the ld. AO made an addition of ₹ 58,986,710 under section 69 of the Act.

Aggrieved by the assessment order, the assessee filed an appeal before the learned CIT–A and also furnished additional evidence under Rule 46A. The assessee contended that the sale of shares and the purchase of the property were two separate and independent transactions, unrelated to each other, and that both were genuine and therefore could not be doubted by the ld. AO. It was further submitted that the addition made by the ld. AO was based merely on conjectures and surmises without supporting evidence. The assessee also challenged the applicability of section 69A of the Act.

After considering the facts and the additional evidence, the learned CIT–A noted that the assessee had sold shares of NAM Estates for ₹ 61,894,366, although their value had been shown as nil in the valuation report. The learned CIT–A observed that this nil valuation arose because the report adopted the acquisition cost of the land bank held by NAM Estates rather than its fair market value. According to the learned CIT–A, if the underlying land was valued at market rates, the share valuation was justified and the assessing officer’s assumption that the shares had no value could not be sustained. On that basis, the learned CIT–A held that section 69A of the Act had no application to the sale of shares of a private limited company where the consideration reflected the fair value of its underlying assets. As regards the alleged linkage between the share sale and the purchase of the flat, the learned CIT–A held that the two were separate and independent transactions and could not be treated as interconnected merely because both involved Embassy Property. The learned CIT–A further observed that Embassy Property had purchased the shares to consolidate its holding in NAM Estates, having regard to that company’s land bank, and had paid ₹ 61,894,366 by cheque. The same funds were then used by the assessee to purchase the residential property, which was duly recorded as an asset in his books of account. The learned CIT– A therefore found nothing unusual in the transactions. The learned CIT–A also held that section 56(2)(x) of the Act did not apply. In relation to section 54F, the learned CIT–A held that the power, water, service, club membership, and maintenance charges paid to the builder before acquisition formed part of the cost of the new residential asset, as those payments were necessary to obtain registration and complete possession. Accordingly, the learned CIT–A included those amounts in the cost of the house property and, by appellate order dated 16 June 2025, allowed the Assessee’s appeal.

The ld. AR supported the order of the learned CIT – A, whereas the learned DR vehemently supported the orders of the ld. AO.

The learned Sr. DR reiterated ld. AO’s principal contention that the assessee sold shares of NAM Estates to Embassy Property, which was itself a shareholder in that company. According to the Revenue, those shares had no real value yet were sold for a substantial consideration of ₹ 6 crores. The Revenue further pointed out that the assessee then purchased house property from the same builder for approximately the same amount. On that basis, the ld. AO treated the arrangement as a sham transaction and denied deduction under section 54F of the Act.

We have carefully considered the rival submissions and perused the orders of the lower authorities. The material facts are straightforward. The assessee sold shares of NAM Estates to another shareholder for ₹ 60,800,000. The ld. AO doubted the transaction because the valuation report reflected a nil value for the shares. However, that valuation was based on the book value of the company’s land bank. If the land is valued at market rates, the share value works out to approximately ₹ 6 crores. It is not the ld. AO’s case that the market value of the land held by NAM Estates did not justify that price. The assessee explained that the nil valuation arose from the net asset value method, where valuation of land bank is at cost, adopted in the report, whereas the actual sale consideration reflected the open market value of the shares having regard to the market value of the underlying land bank. The consideration was paid for by account-payee cheque, and the assessee used those funds to purchase a flat. Merely because the purchaser of the shares was also the developer from whom the assessee bought the flat does not, by itself, render the arrangement a sham. One leg of the transaction was the sale of shares of a private limited company; the other was the purchase of a flat, enabling the assessee to claim deduction under section 54F against the capital gains arising from the share sale. The ld. AO has not shown that either transaction was not at arm’s length. To hold a transaction to be sham, the ld. AO was required to establish that it was fictitious, which has not been done in the present case. The share purchase agreement and the flat purchase documents were produced before the ld. AO, and it has not been disputed that the flat stands registered in the Assessee’s name and is recorded as an asset in his balance sheet. In these circumstances, we find no merit in the Revenue’s appeal. Accordingly, we reject the ld. AO’s allegation that the sale of shares of NAM Estates to Embassy Property was an accommodation entry. The assessee has also produced substantial evidence to show that the shares were sold to Embassy Property Pvt. Ltd. at market value, and that position has not been controverted.

As regards the power, water, maintenance, club membership and similar charges, the learned CIT–A treated them as part of the cost of the new asset while computing deduction under section 54F of the Act, on the ground that those payments were mandatory for registration of the property in the Assessee’s name and for obtaining complete possession. We find no infirmity in that view. In any event, the net consideration invested in the new property qualifies for deduction under section 54F. Without payment of these charges, the assessee could not have acquired the property. These expenditures were therefore necessary for acquisition of a new asset. Accordingly, ground No. 3 of the appeal filed by the ld. AO is dismissed.

In the result appeal filed by the assessing officer is dismissed