ACIT, CENTRAL CIRCLE-1, THANE, THANE vs. NAKUL MARKHEDKAR, THANE

6.6 The assessee and her family members acquired the company namely M/s Ratangiri Financial Advisory Pvt Ltd in the month of December 2014 by acquiring the entire shares of its holding companies namely M/s Farista Financial Consultants Pvt Limited and M/s Deb Suppliers & Traders Pvt. Limited. As per assessee's submission filed during the assessment proceedings, M/s RFAPL was acquired in the following manner.

6.7 The assessing officer, therefore, observed that the Vikran Group acquired the company RFAPL by paying only Rs. 7,00,000/- although the said company had share capital including share premium of Rs. 14.02 crores. The assessing officer noticed that on the date of transfer, the FMV of the shares of M/s RFAPL as per Rule 11UA was Rs. 482.98 and the assessee by purchasing shares of M/s Farista Financial Consultants, had indirectly acquired 72,215 shares of RFAPL by paying only a sum of Rs. 50,000/-. Therefore, a show-cause notice was issued to the assessee asking her to explain as to why an addition u/s 56(2)(vii) (c) of the Act should not be made by taking the FMV of RFAPL at Rs. 483/- per share. 6.8 In response to this show-cause notice, the appellant submitted that he had purchased shares of M/s Farista Financial Consultants Pvt Limited and he did not purchase any share of RFAPL. It was also submitted that as per Rule 11UA of IT Rules, the FMV of shares of M/s Farista Financial was Rs. 7.67 per share. The appellant submitted that as per Rule 11UA applicable for AY 2015-16, the FMV of unquoted shares, is required to be arrived at by using 'book value of assets' and not on the basis of the 'FMV of underlying assets'. Since, the shares of M/s Farista Financial Consultants Pvt Limited, were purchased at face value i.e. & 786/Mum/2025 Nakul Markhedkar Rs. 10 per share, which is more than the FMV as per Rule 11UA, no addition u/s 56(2)(vii) (c) of the Act can be made. The assessee also filed the copies of Valuation Reportfor FMV of shares of M/s Farista Financial. 6.9 On receipt of above submission, the assessing officer examined the material collected by the investigation wing, Kolkata and observed that M/s Ratangiri Financial Advisory Pvt Limited, M/s Deb Suppliers & Traders Pvt Limited, M/s Farista Financial Consultants Pvt Limited as well as the 22 investor companies who invested Rs. 14.02 crores in M/s Ratangiri Financial on 31.03.2009 were shell companies being operated by Shri Anand Sharma, an accommodation entry operator. Detailed discussion on this issue has been made by the assessing officer in the assessment order which is not being repeated for the sake of brevity. 6.10 After analysing the material available with him, the assessing officer at page 29 of the assessment order, has recorded the following conclusion: In view of the above facts and findings, the share capital & premium amounting to Rs.14.03 crores raised by M/s. Ratangiri Financial Advisory Pvt Ltd is clearly found to be non-genuine and it is a shell concern operated by Shri Anand Sharma. Thus, the source of Share Capital and premium of Rs.14.03 crores of M/s. Ratangiri Financial Advisory Pvt Ltd which was later acquired by M/s. Vikran Group is found to be non-genuine 6.11 Thereafter, the assessing officer has recorded his conclusion as under.

1. The assessee submitted that purchase value was determined as per the valuation report certified by the Chartered Accountant enclosed as Annexure-

1. 1. On the analysis of the same, it was found that the holding companies did not have any business and the sole purpose of acquiring the holding companies was to acquire M/s. Ratangiri Financial Advisory Pvt Ltd.

2. It is pertinent to note that Shri Rakesh Markhedkar has acquired 1000 shares of M/s. Ratangiri Financial Advisory Pvt at Rs.500/- per share, whereas while acquiring the same shares through the holding companies, the assessee wants to consider the FMV of shares of holding companies. It is like when you purchase a single gold coin you are paying Rs.500/- but when you are purchasing the entire Pot of Gold coins you are paying price of the Pot only, ignoring the value and price of the Gold coins. Hence, it is clear that the shares of holding companies have been purchased by assessee at Face Value in exchange of cash equivalent to share capital of Ratangiri Financial Advisory Pvt Ltd.

& 786/Mum/2025 Nakul Markhedkar 3. Also, the fact that Shri Nakul Rakesh Markhedkar and Smt. Kanchan Rakesh Markhedkar of M/s. Vikran Group were made directors in M/s. Ratangiri Financial Advisory Pvt Ltd on 18.11.2014 prior to acquisition and Shri Rakesh Ashok Markehdkar and Shri Avinash Ashok Markhedkar were made directors on 02.11.2015 after acquisition makes it very clear that the purpose of acquisition of holding companies was solely to acquire total control over M/s. Ratangirni Financial Advisory Pvt Ltd.

6. The assessee has failed to explain as to how the shares of M/s. Ratangin Financial Advisory Pvt Ltd have been acquired for Rs.2 lacs by his family members when it had capital of Rs.14.03 crores and the FMV of each share as per Valuation report submitted by the assessee, placed on record, was Rs.482.98/- per share.

8. In the instant case the directors of M/s Vikran Group viz Smt Kanchan Markhedkar, Shri Nakul Markhedkar, Shri Vipul Markhedkar have acquired the shares of M/s Ratangiri Finacial Advisory Pvt. Limited for a value which is less than the Fair Market Value Rs 483/- per share of M/s Ratangiri Financial Advisory Pvt. Limited as per the valuation report provided by the assesse in his statement recorded u/s 131 on 28.05.2021. 9 Hence the acquisition of shares of M/s. Ratangiri Financial Advisory Pvt Ltd by Smt Kanchan Markhedkar, Shri Nakul Markhedkar, Shri Vipul Markhedkar made below FMV Rs 483/- attracts the provisions of S.56(2) (vii) (c) of the 1. T.Act, 1961. This is a complete a "Sham Transaction" as per law:

A sham transaction is a business deal entered into parties for the purpose of deception, like to escape a tax liability or in other words, simply to avoid paying tax. For detecting whether a deal is sham transaction, we can apply two-fold test of which the first one checks whether the transaction has any economic interest other than availing tax benefit, which is actually the "objective test" and second one checks whether the transaction has any business purpose other than availing a tax benefit, which is the "subjective test".

4. The ld. DR placed heavy reliance on the findings of the AO with regard to how the entire transaction of acquisition of shares in M/s Farista Financial Consultants Pvt Limited by the assessee at nominal value of Rs.10 is a colourable device to acquire the shares of RFAPL whose shares as per FMV is worth Rs.483/- per share. The ld. DR in this regard submitted that since the impugned transaction is a sham, the CIT(A) is not correct in deleting the addition merely on the ground that rule 11UA has been incorrectly applied. The ld DR accordingly prayed that the AO's order may be upheld.

5. The ld. AR on the other hand submitted that the limited ground on which the CIT(A) has given relief to the assessee is that the amendment to Rule 11UA which has been applied by the AO is applicable only from AY 2018-19 and not for the year under consideration. The ld. AR in support of this proposition placed reliance on the decision of the Hon'ble Delhi High Court in the case of PCIT vs. Minda SM Technocast Pvt. Ltd. [2023] 155 taxmann.com 548 (Del.) and on the decision of the Co-ordinate Bench in the case of Smiti Holding & Trading Company Pvt. Ltd. vs. PCIT [2018] 99 taxmann.com 157 (Mum. Trib.).

the fair market value of unquoted equity shares (A+B+C+D-L)x (PV)/(PE), where, A = book value of all the assets (other than jewellery, artistic work, shares, securities and immovable property) in the balance-sheet as reduced by.- (1) any amount of income-tax paid, if any, less the amount of income-tax refund claimed, if any, and (ii) any amount shown as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset; B= the price which the jewellery and artistic work would fetch if sold in the open market on the basis of the valuation report obtained from a registered valuer; C= fair market value of shares and securities as determined in the manner provided in this rule, D= 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; L= book value of liabilities shown in the balance sheet, but not including the following amounts, namely: (1) the paid-up capital in respect of equity shares, (ii) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company, (iii) reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation; (iv) any amount representing provision for taxation, other than amount of income-tax paid, if any, less the amount of income-tax claimed as refund, if any, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto; (v) any amount representing provisions made for meeting liabilities, other than ascertained liabilities, (vi) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares;" [Emphasis is ours] 13. In other words, if immovable property, such as land, had to be taken into account in arriving at the Fair Market Value of unquoted shares by adopting the formula prescribed in Rule 11UA of 1962 Rules we.f. 1-4-2018, i.e., AY 2018-19, the AO would have to factor in the value of such land, by taking into account the circle rate prevailing in the area.

9. We further notice that a similar view has been held by the Co-ordinate Bench in the case of Smiti Holding & Trading Company Pvt. Ltd. (supra) where it has been held that “6.1 A similar issue arose in Minda SM Technocast (P.) Ltd. (supra). The AY is 2014-15. The facts are that the assessee had acquired shares of M/s. Tuff Engineering Pvt. Ltd. (in short TEPL') at Rs. 5 per share. The shares were acquired by the assessee from three companies. The assessee claimed to have valued the shares of TEPL as per the provisions of Rule 11UA and filed a copy of the report prepared by the Chartered Accountants in support of its claim to justify the price of shares at which these were required. However, the AO was of the view that the assets declared by TEPL in its balance sheet should have been valued as per the circle rate while determining the value of shares acquired by the assessee. Accordingly, the AO determined the value of shares at Rs. 45.72 per share of TEPL and treated the difference of Rs. 40.72 as income from other sources under section 56(2)(viia) of the Act. The view taken by the AD was subsequently confirmed by the Id. CIT (A). In appeal, the Tribunal vide order dated 07.03.2018 held: "6.4 On the plain reading of above Rule, it is revealed that while valuing the shares the book value of the assets and liabilities declared by the TEPL should be taken into consideration. There is no whisper under the provision of 11UA of the Rules to refer the fair market value of the land as taken by the Assessing Officer as applicable to the year under consideration. Therefore, we are of the view that the share price calculated by the assessee of TEPL for Rs. 5 per shares has been determined in accordance with the provision of Rule 11UA. In holding so, & 786/Mum/2025 Nakul Markhedkar we find support and guidance from the judgment relied by the learned Authorized Representative which has been discussed in the preceding paragraphs. Therefore, we have no hesitation in reversing the order of the lower authorities. Hence, the grounds of appeal

of the assessee are allowed." 6.2 From the above, it is evident that Rule 11UA as in force in AY 2013-14 does not provide to replace fair value of quoted shares to book value and therefore, the value derived by the DCIT 4(1)(1) cannot be substituted to the value as derived under Rule 11UA. Rule 11UA, during the relevant period, provides for valuation of unquoted equity shares by adopting the amount as per book value.”

10. We find that the AO besides applying the incorrect Rule 11UA has also not followed the right way to calculate the addition to be made under section 56(2)(vii)(c). We notice that the AO has considered 50% of the total shares RAFPL held by M/s.Farista Financial Consultants Pvt. Ltd. and made the addition by taking the difference between FMV and the price paid by the assessee for acquiring shares of M/s.Farista Financial Consultants Pvt. Ltd. under section 56(2)(vii)(c). In our considered view the formula applied by the AO for making the addition is not as per the method provided under Rule 11UA which provides that FMV is to be worked at by applying the formula (A - L) × (PV)/(PE). The AO ought to have arrived at the FMV of the shares of M/s.Farista Financial Consultants Pvt. Ltd. by applying Rule 11UA for the relevant AY and if the FMV thus arrived is more than consideration paid by the assessee for obtaining the shares of M/s.Farista Financial Consultants Pvt. Ltd. then the difference should have been added under section 56(2)(vii)(c). The difference between the FMV of the shares RAFPL and the purchase consideration paid by the assessee for obtaining shares in M/s.Farista Financial Consultants Pvt. Ltd. which is added by the AO under section 56(2)(vii)(c) in our view does not fall within any method prescribed under the Act. It is also relevant to mention here that the AO while examining share value of & 786/Mum/2025 Nakul Markhedkar RAFPL which is alleged to be purchased by paper companies at a premium of Rs.490 has held that the premium is not substantiated since RAPFL is not carrying on any business and that the AO has recorded a detailed finding with respect each of the 22 companies who have purchased the shares of RAFPL. However the AO for the purpose of making addition under section 56(2)(vii)(c) in the hands of the assessee has arrived the FMV of RAFPL at Rs.483 by considering the alleged bogus premium into consideration as has been pointed out in the order of the CIT(A).

11. In view of these discussions and considering the facts unique in assessee's case we see no infirmity in the order of the CIT(A) in deleting the addition made under section 56(2)(vii)(c).

12. For AY 2016-17 the AO has made addition under section 56(2)(vii)(c) towards the shares purchased by the assessee in M/s. SarvapalikaVanikjya Pvt Ltd where the AO alleged that the assessee has indirectly obtained the shares in M/s. Bahar Vintrade Pvt Ltd the FMV value of which is at Rs.483. Similar to AY 2015- 16, though the AO himself has computed the FMV of the shares of M/s. SarvapalikaVanikjya Pvt Ltd at Rs.8.89 per share based on book value. However the addition is made by the AO considering the FMV value of the underlying asset i.e. shares of M/s. Bahar Vintrade Pvt Ltd. We have while considering the similar issue for AY 2015-16 held that the amended Rule 11UA where the FMV of underlying asset need to be considered for the purpose of section 56(2)(vii)(c) is applicable only from AY 2018-19. Therefore we see no reason to interfere with the decision of the CIT(A) in deleting the addition made under section 56(2)(vii)(c) for AY 2016-17 on ground that the AO has applied the Rule 11UA which is applicable only from AY 2018-19.