Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “G” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY, HONBLE & SHRI NARENDRA KUMAR BILLAIYA, HONBLE
ORDER \nPER NARENDRA KUMAR BILLAIYA, AM:\nThis appeal by the revenue is preferred against the order\ndated 08/03/2024 by NFAC, Delhi, [hereinafter 'the ld. CIT(A)']\npertaining to AY 2016-17.\n2. The grievance of the assessee reads as under:-\n“1. \"On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred\nin deleting the addition of Rs.126,98,69,717/- made u/s Section 56 (2)(viia) of the\nAct\"\n2. \"On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred\nin deleting the addition of 126,98,69,717/- made by the AO, without appreciating\nthe fact that the entire scheme of transactions embarked by the partners and the\nassessee firm is merely a colourable device to evade tax by misusing the provisions of\nthe Act\"\n3. The appellant craves leave to amend or alter or add a new ground which may be\nnecessary.”\nआयकर अपीलीय अधिकरण\nINCOME TAX APPELLATE TRIBUNAL\nΙ.Τ.Α. No. 2457/Mum/2024\n2\n3. Representatives were heard at length, case records carefully\nperused and the relevant documentary evidence brought on record\nduly considered in the light of Rule 18(6) of the ITAT Rules, 1963.\n4. The entire quarrel revolves around the following profit sharing\nratio of the assessee firm:-\nSr.no.\nName of the Partners\n01.04.2015 to 19.01.2016 to 18.03.2016 to\n18.01.2016\n18.03.2016\n31.03.2016\n1\nFerozeDhunjishawNeterwala\n33.34\n25\n3.34\n2\nShemaz Feroze Vakil\n33.33\n25\n3.33\n3\nPervinRussy Mehta\n33.33\n25\n3.33\n4\nUniversal Ferro and Allied\nChemicals P Ltd\n25\n90\nTOTAL\n100\n100\n100\n5. The bone of contention is the shares of M/s. Unitel Finance and\nInvestments P. Ltd. (UFIPL). The three partners, namely, Feroze\nDhunjishaw Neterwala, Shemaz Feroze Vakil and Pervin Russy Mehta\nhave introduced shares of UFIPL in the assessee firm as capital\ncontribution. The same can be understood from the following chart:-\nSr.no.\nName of the Partners\nNo. of shares of M/s.\nUnitel Finance and\nInvestments P Ltd\nAmount(Rs.)\n(@92.88/share)\n1\nFerozeDhunjishawNeterwala\n91,666\n85,13,938\n2\nShemaz Feroze Vakil\n91,667\n85,14,031\n3\nPervinRussy Mehta\n86,666\n80,49,538\nTOTAL\n2,69,999\n2,50,77,507\n6. As can be seen from the above chart, the shares of UFIPL have\nbeen introduced as capital contribution @ 92.88/- per share totaling to\nRs.2,50,77,507/-. The fair value of Rs.92.88/- per share was computed\nआयकर अपीलीय अधिकरण\nINCOME TAX APPELLATE TRIBUNAL\nΙ.Τ.Α. No. 2457/Mum/2024\n3\non 17/12/2015 as per the valuation report prepared by the Chartered\nAccountant as per Rule 11UA of the Income-tax Rules, 1962. Thereafter,\non 18/01/2016, all the assets of the assessee firm including shares of\nUFIPL were valued based on valuation report of M/s. V B Desai\nFinancial Services Limited (VBDFSL), a SEBI registered merchant\nbanker.\n7. A perusal of the report of VBDFSL, shows that the AO found that\nthe value per share of UFIPL was computed by a merchant banker on\nintrinsic value of Rs.4786.53/- per share. The AO accordingly took the\ndifferential price of Rs.4693.65 (4786.53 – 92.88) per share aggregating to\nRs.126,72,80,806/- as the fair value of shares of UFIPL and invoking the\nprovisions of Section 56(2)(viia) of the Act, the AO made the addition of\nRs.126,72,80,806/-.\n7.
1. At this stage, it would be pertinent to refer to the provisions of\nSection 56(2)(viia) of the Act:-\n\"Income from other sources.\n15 56. (1) Income of every kind which is not to be excluded from the total income under this\nAct shall be chargeable to income-tax under the head \"Income from other sources\", if it is\nnot chargeable to income-tax under any of the heads specified in section 14, items A to E.\n(2) In particular, and without prejudice to the generality of the provisions of sub-section\n(1), the following incomes, shall be chargeable to income-tax under the head \"Income from\nother sources\", namely : –\n(viia) where a firm or a company not being a company in which the public are\nsubstantially interested, receives, in any previous year, from any person or persons, on or\nafter the 1st day of June, 2010 [but before the 1st day of April, 2017], any property, being\nshares of a company not being a company in which the public are substantially\ninterested,\n(i)\nwithout consideration, the aggregate fair market value of which exceeds\nfifty thousand rupees, the whole of the aggregate fair market value of such\nproperty;\n(ii)\nfor a consideration which is less than the aggregate fair market value of\nआयकर अपीलीय अधिकरण\nINCOME TAX APPELLATE TRIBUNAL\nΙ.Τ.Α. No. 2457/Mum/2024\n4\nthe property by an amount exceeding fifty thousand rupees, the aggregate fair\nmarket value of such property as exceeds such consideration :\nProvided that this clause shall not apply to any such property received by way\nof a transaction not regarded as transfer under clause (via) or clause (vic) or clause (vicb) or\nclause (vid) or clause (vii) of section 47.\nExplanation. – For the purposes of this clause, \"fair market value\" of a property, being\nshares of a company not being a company in which the public are substantially interested,\nshall have the meaning assigned to it in the Explanation to clause (vii);]\n8. It would be pertinent to refer to the family settlement pursuant\nto the will of Mr. D.M. Neterwala. The relevant clause of the deed of\nfamily settlement dated 10/11/2015, reads as under:-\nDEED OF FAMILY SETTLEMENT\nThis deed of family settlement (“Deed”) is executed on the lO^day of November, 2015 by and\nBETWEEN\nMs. PcrvinRustom Mehta, Daughter of (Late) Mr. D.M. Neterwala aged 68ycars and resident of\n193, Venus Apartments, 87 Cuffe Parade, Colaba, Mumbai-400005\n(referred to in this deed as PRM)\nAND\nMs. ShernazFirozeVakil,Daughter of (Late) Mr. D.M. Neterwala aged 65years and resident of\n301, Shamiana, 67 Walkeshwar Road, Mumbai-400006\n(referred to in this deed as SFV)\nAND\nMr. FerozeDhunjishawNeterwala, Son of (Late) Mr. D.M. Neterwala aged 63 years and resident\nof Fla* No. 16 IL Palazzo, Little Gibbs Road, Malabar Hill, Mumbai- 400006 (referred to in this\ndeed as FDN)\nC. The Testator is survived by his three children namely, PRM, SFV and FDN\n(\"Family Members\" or \"Partners\") who are also the main beneficiaries as mentioned under\nthe sole will and testament of the Testator dated 3\"November, 2011 (\"Will\"). The Will\nexplains the manner of distribution of his personal assets as well as shares and interest held\nby nim in various companies, to his legal heirs.\nE. During the lifetime of the Testator, it was his pious wish that the management and\nadministration of various companies (together with all their fixed assets and liabilities)as\nstarted by him which were entrusted to his two children SFV and FDN for day to day\noperations, should upon his death, vest with SFV and / or FDN as the case may be, with full\npower and authority to deal with the same in the manner as they desire.\nJ. The Parties have agreed that in order to ensure smooth functioning of the family's\nbusinesses, companies set up by the Testator but managed separately by respective\nआयकर अपीलीय अधिकरण\nINCOME TAX APPELLATE TRIBUNAL\nΙ.Τ.Α. No. 2457/Mum/2024\n5\nbeneficiaries namely FDN and SFV, shall be solely entrusted to the respective beneficiaries.\nThis would inter alia involve reciprocal gifts of shares of companies between the Parties. One\nof the beneficiaries namely, PRM, though holding shares in various family companies was\nnot managing the affairs of any company and even during the family settlement proceedings\nshe expressed her desire not to be involved with the management of any companies.”\n8.
1. A perusal of the provisions of Section 56(2)(viia) shows that it is\nnot applicable in respect of capital contribution by partner in a firm.\n9. If the entire transaction is considered with the family settlement\nmentioned hereinabove, we find that the transfer of shares between\nfamily members was part and parcel of family settlement entered into\nbetween brothers and sisters to give effect to the will and desire of the\nfather, who were the promoters of the companies.\n9.
The Hon'ble Supreme Court in the case of Ram Charan Das vs\nGirjanandini Devi And Ors reported in AIR 1966 SC 323, has held that\ntransfer of property between family members would not amount to\ntransfer and that it was done to ensure amity and goodwill. When the\nGift-tax Act was in vogue, it was held in the case of Ziauddin Ahmed vs\nCommissioner Of Gift-Tax [1976] 102 ITR 253(Gauhati) that, if the\ntransaction is bonafide and to bring harmony, the provision of Gift-tax\nare not attracted at all. Similarly, the Hon'ble Madras High Court in the\ncase of Commissioner Of Income-Tax vs R. Ponnammal [1987] 164 ITR 707\n(Mad), has held that transfers between sons and daughters would not\nattract provision of Section 4(1)(a) or 4(2) of the Gift-tax Act and the\ntransactions are not taxable at all. Similar view was taken by the Hon'ble\nMadras High Court in the case of Cgt vs D. Nagrirathinam [2003]129\nTAXMAN 822 (Mad), stating that there is no question of deemed gift\nwhen transfer is in pursuance of a family arrangement.\n10. In light of the aforementioned judgments, one thing is clear that\nआयकर अपीलीय अधिकरण\nINCOME TAX APPELLATE TRIBUNAL\nΙ.Τ.Α. No. 2457/Mum/2024\n6\nwhere there is a family settlement to bring harmony and settlement of\ndisputes, there is no transfer of assets and the provisions of Section\n56(2)(viia) of the Act would not apply.\n11. We further find that while introducing the shares as capital\ncontribution of UFIPL, partners have undertaken determination of the\nFMV of the shares as laid down under Rule 11UA of the Income-tax\nRules, 1962 ('Rules') r.w.s.56(2)(viia) of the Act. The relevant part of\nRule 11UA, reads as under:-\n“Determination of fair market value.\n11UA. 30[(1)] For the purposes of section 56 of the Act, the fair market value of a property,\nother than immovable property, shall be determined in the following manner, namely, -\n\"(b) the fair market value of unquoted equity shares shall be the value, on the valuation\ndate, of such unquoted equity shares as determined in the following manner,\nnamely : –\nthe fair market value of unquoted\nequity shares = (A-L) × (PV),\nwhere,\n(PE)\nA = book value of the assets in the balance-sheet as reduced by any amount of tax paid as\ndeduction or collection at source or as advance tax payment as reduced by the amount\nof tax claimed as refund under the Income-tax Act and any amount shown in the\nbalance-sheet as asset including the unamortised amount of deferred expenditure\nwhich does not represent the value of any asset;\nL = book value of liabilities shown in the balance-sheet, but not including the following\namounts, namely: –\n(i) the paid-up capital in respect of equity shares;\n(ii) the amount set apart for payment of dividends on preference shares and equity shares\nwhere such dividends have not been declared before the date of transfer at a general\nbody meeting of the company;\n(iii) reserves and surplus, by whatever name called, even if the resulting figure is negative,\nother than those set apart towards depreciation;\n(iv) any amount representing provision for taxation, other than amount of tax paid as\ndeduction or collection at source or as advance tax payment as reduced by the amount\nof tax claimed as refund under the Income-tax Act, to the extent of the excess over the\ntax payable with reference to the book profits in accordance with the law applicable\nआयकर अपीलीय अधिकरण\nINCOME TAX APPELLATE TRIBUNAL\nΙ.Τ.Α. No. 2457/Mum/2024\n7\nthereto;\n(v) any amount representing provisions made for meeting liabilities, other than\nascertained liabilities;\n(vi) any amount representing contingent liabilities other than arrears of dividends payable\nin respect of cumulative preference shares;\nPE = total amount of paid-up equity share capital as shown in the balance-sheet;\nPV = the paid-up value of such equity shares;\"\n12. The AO was carried away with the valuation report of VBDFSL,\ncompletely ignoring the fact that the merchant banker has valued the\nshares at an intrinsic value. When the merchant banker itself has made\nclear that the term “intrinsic value\" is not intended to reflect the fair\nmarket value. The merchant banker under the heading “Purpose of\nValuation" laid down the purpose as follows:-\n“The valuation of the firm is being done for ascertaining the intrinsic value of the\nfirm for above transaction. The valuation is purely indicative and it is the prerogative\nof parties to the Transaction to decide about the Transaction price. The actual\nTransaction price may be higher or lower than our indicative analysis of value\ndepending upon the circumstances of the Transaction. The final Transaction value\nis something that the partners will have to decide upon.\"\n13. In our understanding of the facts emanating from the assessment\norder, we find that the shares were by way of capital contribution and\nthe valuation was done as per Rule 11UA of the Rules, honouring the\nwill of Mr. D.M. Neterwala, followed by the family settlements.\n14. These facts have not been disputed by the AO except that the\nsubsequent valuation done by the firm based upon the intrinsic value\nof the shares have been considered for making the impugned additions.\nIt is mandatory to value the shares as per Rule 11UA and the assesse\nhas computed the fair value as per Rule 11UA and applied the same at\nthe time of introduction of capital to the firm and, therefore, in our\nunderstanding of the law, the AO cannot substitute the same with the\nFMV/intrinsic value as done by the valuation report of VBDFSL.\nआयकर अपीलीय अधिकरण\nINCOME TAX APPELLATE TRIBUNAL\nΙ.Τ.Α. No. 2457/Mum/2024\n8\n15. As mentioned elsewhere, the shares were contributed as capital\nof the firm to give effect to the intention of Mr. D.M. Neterwala.\nTherefore, in our understanding of the law, for capital contribution, the\nprovisions of Section 56(2)(viia) of the Act would not apply at all. The\nAO has treated the entire transactions as a colourable device to avoid\ntax completely ignoring the will and the family settlement. Therefore,\nwe are of the considered view that the ld. CIT(A) did not err in deleting\nthe impugned addition. Therefore, we decline to interfere with the\nfindings of the ld. CIT(A).\n16. In the result, appeal of the revenue is dismissed.\nOrder pronounced in the Court on 20th March, 2025 at Mumbai.\nSd/-\n(SAKTIJIT DEY)\nVICE-PRESIDENT\nSd/-\n(NARENDRA KUMAR BILLAIYA)\nACCOUNTANT MEMBER\nMumbai, Dated 20/03/2025\n*SC SPS\nआदेश की प्रतिलिपि अग्रेषित/