ACIT, CIRCLE-1(1)(1), BENGALURU vs. HIREHAL JAIRAJ ARJUN, BANGALORE

Briefly stated facts of the case are the assessee, being an individual, filed his return of income for the Assessment Year 2020-21 admitting a total income of Rs.3,29,080/- on 19.02.2021. Subsequently, the case was selected for limited scrutiny through CASS for verification of the issue of:

Thereafter, statutory notices under sections 143(2) and 142(1) of the Act were issued and served on the assessee. In response, assessee filed its reply and submitted relevant documents from time to time. Thereafter, the case was transferred to FAO and accordingly notice under section 142(1) of the Act was issued on 29.11.2021. The learned AO, on perusal of the submission, found that the assessee has entered into a share purchase agreement dated 27.06.2019 with M/s Embassy Property Developments Pvt Limited (“Embassy”). In terms of the agreement, 1390 shares of the company M/s NAM Estates Pvt Limited (“NAM”) held by the assessee, being 1.9% of the total shareholding of the company was sold to Embassy. The consideration received was Rs 9,15,24,647/-. After indexing the cost of acquisition which stood at Rs 32,927/-, the assessee computed the capital gains at Rs 9,14,91,720/-. Assessee also claimed exemption under section 54F of the Act for purchase of residential property from Embassy for a consideration of Rs.8,77,43,640/ vide sale deed dated 03.08.2019. Assessee claimed the deduction at Rs.9,14,19,340/- including the stamp duty paid for the purchase of the residential property. The learned AO observed that the transaction has been orchestrated to prevent taxation on receipt of funds arising from sale of shares amounting to Rs.9.15 Crores received from Embassy. The learned AO further observed that these sets of transactions lead to exchange of shares with new property in the hands of the assessee which is covered under the definition of “transfer” under section 2(47) of the Act. The learned AO also observed that the sale consideration for the exchange of assets as provided under section 50D of the Act to be adopted. Thereafter, the assessee was issued a show cause notice dated 25.03.2022 for which assessee submitted the reply on 29.03.2022. On perusal of the reply furnished by the assessee, the AO observed that the assessee has not been able to give any cogent reasons in support of his contentions. He therefore treated the transaction as ‘exchange’ within the meaning of section 2(47) of the Act and proceeded to tax the long-term capital gain at Rs.9,14,19,340/-. The AO also denied the exemption claimed by the assessee under section 54F of the Act.

On being aggrieved by the Order of the learned AO, assessee filed an appeal before learned CIT(A). Similar submissions were made before the learned CIT(A). The learned CIT(A) considering the submissions found that the sale of shares and the purchase of residential property are independent transactions. He also observed that valuation report provided by the assessee for the sale of shares of “NAM” is for the purpose of section 56 of the Act and not for the current transaction. The learned CIT(A) also observed that assessee has held the shares of NAM for a period of almost 13 years before selling it to the Embassy at an agreed price of Rs.9,15,24,647/-. The learned CIT(A) also observed that the assessee and the Embassy are not related parties and therefore the transactions are at arm’s length. The learned CIT(A) also found that the AO has merely relied on the valuation report filed by the assessee prepared under Rule 11UA of the Income Tax Rules. 1962, for the purpose of section 56 of the Act. The valuation report is based on the method prescribed under Rule 11UA of the Rules which is Net Asset Value Method and has been computed for the applicability of section 56 of the Act. The learned CIT(A) therefore stated that the transaction cannot be construed as an exchange as defined under section 2(27) of the Act. He therefore allowed the appeal of the assessee.

On being aggrieved by the Order of the learned CIT(A), the Revenue is in appeal before us by raising the following grounds:

The learned DR through his written submissions contested that the transaction has been entered into with the same party, Embassy, who is both the purchaser of the shares and seller of the villa to the assessee. The two deeds are entered into within a period of 30 days and also the consideration is almost identical. He further submitted that as per Rule 11UA of the Rules, the intrinsic value of the shares is Nil. Further he also submitted that in an exchange the consideration is not money but the money’s worth of the asset and therefore the provisions of section 50D of the Act shall be applicable. He also submitted that the assessee has provided fresh material before the learned CIT(A) and the CIT(A) erred in not calling for the remand report from the AO. The learned DR also submitted that in the case relied on by the assessee where the facts in the case of the brother of the assessee is different from the facts in the instant case. He also submitted that in the instant case, the learned AO has invoked the provisions of exchange under section 2(47) of the Act and has denied the deduction claimed by the assessee against the long-term capital gain of Rs.9.15 Crores. He therefore prayed that the Order of the learned AO be upheld.

Per contra, the learned AR relied on the Order of the learned CIT(A).

We have heard the rival submissions and perused the material available on record including the written submissions of the Revenue. The assessee has sold the shares of NAM pursuant to the share purchase agreement dated 27.06.2019 entered into with Embassy for a consideration of Rs.9,15,24,647/-. The learned AO disbelieved the transactions because the valuation report reflected a Nil value for the shares. However, it was observed that the valuation was based on the book value comprising land bank. If the land is valued at market rates, the share value approximately be higher. The learned AO has not disputed the fact that the market value of the land held by NAM did not justify the price paid by the assessee. The consideration for the shares was paid for by account payee cheque and those funds were used to purchase the villa from M/s. Embassy. Merely because the purchasers of the shares and the seller of the villa being the same cannot render the arrangement as a sham. It is also noticed that the learned AO has not disputed the market price of the property. The assessee has claimed the deduction under section 54F of the Act against the long-term capital gain arising from the shares sales by way of investment in the villa property amounting to Rs.9,14,19,340/-. The learned AO’s contention was provision of section 50D of the Act applies since the market value of the shares on the date of transfer was not determinable. However, in an exchange, the consideration is not money but the assets reciprocatively transferred. The learned AO has not established that the transaction to be a sham. Further, the learned AO also accepted the long-term capital gain in the hands of the assessee but disallowed the claim under section 54F of the Act. The learned AO has also not disputed the fact that the assessee has received consideration of Rs.9,14,19,340/- and the long-term gain of Rs.9,14,19,340/- is liable to be taxed in the hands of the assessee as per section 45 r.w.s. 2(47) of the Act. Thus, the same cannot be held as exchange of assets as both the agreements are by nature is considered as a separate transaction. The assessee has also produced substantial evidence to show that the shares were sold to Embassy at market value which was not controverted by the lower authorities. In the case relied on by the assessee in ITA No.1961/Bang/2025 in the case of ACIT Vs. Hirehal Jairaj Balram, the Co-ordinate Bench of this Tribunal in para 13 has held as follows:

Respectfully following the decision of the Co-ordinate Bench, we therefore are of the opinion that the assessee is entitled to claim deduction under section 54F of the Act against the long-term capital gain arising from the sale of shares. We therefore dismiss the grounds raised by the Revenue.

In the result, appeal of the Revenue is dismissed.