ACIT 19(2), MUMBAI vs. SMT.PADMIMI SOMANI, MUMBAI

आदेश / O R D E R PER M. BALAGANESH (A.M):

2. The Revenue has raised the following grounds of appeal:-

1. "Whether on the facts and facts and in the circumstances of the case and in law, Ld. CIT(A) erred in not upholding the action of the AO in recalculating the purchase price of the shares at Rs.2.69 per share disallowance of long Term Capital loss (LTCL) resulting in the LTCL of Rs.2.69 crs.?" 2. "Whether on the facts and in the circumstances of the case and in law, the Ld CIT (A) is justified in allowing the appeal of assessee holding that assessee had made similar investment in another company which has yielded profit in assessment year 2017-18 without appreciating, that does not make losses of assessee genuine?" 3. The appellant craves leave to amend or alter or add a new ground which may be necessary. 3. We have heard rival submissions and perused the materials available on record. We find that assessee is deriving income from salary, capital gains and other sources. The return of income for the A.Y.2013-14 was filed by the assessee on 31/07/2013 declaring total income of Rs.36,70,750/-. The assessee claimed long term capital loss of Rs.2,68,26,678/- on sale of shares of Pyxis Systems Pvt. Ltd., The ld. AO sought to examine the veracity of these losses and sought to verify the details of purchase as well as sales of these shares during the course of assessment proceedings. The assessee submitted on 11/10/2011 & 02/12/2011 that she had invested in 1944599 shares of Pyxis Systems Pvt. Ltd., at a cost of Rs.2,99,46,827/- on the basis of negotiated price as advised by her advisor to whom an advisory fee of Rs.10,09,451/- was paid. These shares were acquired by the assessee at a premium of Rs. 14.40 per share for the face value of Rs.1/- per share. It was submitted by the assessee, that being a private equity investor, she had been making investments in various start-up companies based on advices given by various people including her own advisors. Since this start-up company (i.e. Pyxis Systems Pvt Ltd) could not improve its performance after the investments made by the assessee, the assessee on 26/02/2013 sold these 1944599 shares at Rs.0.014 per share for consideration of Rs.27,224/- to Mr. Nandlal Bhatkar who is a promoter shareholder and Director of Pyxis Systems Pvt. Ltd. The assessee furnished the share valuation certificate dated 19/12/2012 obtained from an independent Chartered Accountant who has certified the book value per share of Pyxis Systems Pvt. Ltd., at the time of sale at Rs.0.0149 per share. The ld. AO observed that similar valuation certificate was not obtained at the time of making investment in shares at a premium by the assessee. Accordingly, the purchase price paid by the assessee was sought to be disputed by the ld. AO as the said company was having accumulated losses of Rs.22.92 Crores even at the time of making investments. Hence, in the opinion of the ld. AO, there was no justification for the assessee to make investments in the said company i.e. Pyxis Systems Pvt. Ltd., at a premium. Accordingly, he concluded that the purchase price at Rs.15.40 per share was grossly overvalued. The ld. AO sought to obtain information u/s.133(6) of the Act from Pyxis Systems Pvt. Ltd., to understand the entire transactions of the assessee with the said company. No response was received from Pyxis Systems Pvt. Ltd for the notice issued u/s.133(6) of the Act. The ld. AO based on the valuation report obtained by the assessee from an independent Chartered Accountant at the time of sale, wherein the book value per share of Pyxis Systems Pvt. Ltd., as on 31/03/2011 was arrived at Rs 2.69 per share, substituted the said rate of Rs 2.69 per share to be the purchase price of shares and recalculated the long term capital loss of Rs.2,68,26,678/- as against the figure claimed by the assessee while completing the assessment.

3.1. The assessee submitted the rationale for making investments in Pyxis Systems Pvt. Ltd., as under:-

“In FY 2011, the appellant has invested 19,44,599 shares of Pyxis Systems Private Limited at a cost of Rs. 2,99,46,827/- Pyxis was established in 2004 by Nandlal Bhatkar, Pyxis is a specialized player in technologies for Global Markets Front Office and Market Risk, related to cash and derivatives instruments. Pyxis delivers Derivatives and Risk Management services and KPO. It includes Domain and Technology Solutions, Independent Valuation/Hedge Accounting and front/Mid-office outsourcing. Pyxis is a platform based service provider to the Financial Services industry in areas such as equity, forex, commodities and interest rates. It started off from an IT product company by building an IT platform, RisKompass (an ERP for the risk management function it treasuries, banks and corporates), InoPot (IT platform for pricing and mark-to-market for equities and forex) and EMS (Exposure Management System) The appellant invested based on the performance at the time of purchase and the expected performance / profitability over the years on the basis of the business plan. In FY 2010-11, the total revenue of the company was Rs. 8.68 Crores with loss of Rs. 3.44 Crores. Valuation of companies in early growth stage is an art and a science as most companies are loss making but command premium valuations based on its future growth potential. Companies like Snapdeal & Flipkart has grown 680% and 531% respectively, in 2015 from 2014, while Ola's valuation rose 109% during the same period and are valued at 2x to 20x one year forward revenue despite incurring huge operating losses. These companies have been raising subsequent rounds of funding at substantially higher valuations despite their financials continuing to remain negative.”

3.2. The assessee also submitted the investment at the time of purchase as under:-

“The assessee rolled upon the advisory services of its investment manager Lumis Consulting Private Limited (Lumis) to advise it on the investment strategies. The assessee paid advisory fees of Rs. 10,09,451/- to Lumis for advising it on investments @3% of cost plus service tax @12.36%. The rate at which advisory fees is paid is as per the prevailing rates paid for similar advisory services: Regarding the background of Investment Manager - Lumis Partners, we submit that founded in 2006, Lumis Partners is in Operating Private Equity player with specific focus on few sectors including education & human capital services, Service & Supply chain management and technology and consulting. All the above details were submitted to the Ld. AO during the course of the assessment proceedings. Further, we also submitted to the AO, a report of Gartner, a globally renowned Independent research and advisory firm providing information technology related insights, in its report dated 07.04.2011, named Pyxis as one of the 'Cool Vendors in Application Services, 2011). In view of the above, considering the growth potential of the company, the sector it caters to, pedigree of promoter, existing marquee investors, overall macro scenario, draft Term sheet which Pyxis had from Singapore based PE Fund by name Ojas Ventures (which incidentally was at higher valuation than entry price of MS. Padmini Somani) and on the advice of Investment Manager - Lumis, the assessee invested Rs. 3 Crores in Pyxis at Rs. 15.40/Share. Further, some of the other Investors in Pyxis are as under. Sr. Investor Date of Investment Amount Invested (Rs.Cr.) Investment No. 1 Arvind Sethi Aug-06 0.46 19.95 2 Janak Desai Dec-06 1.38 19.50 3 Girish Kulkarni Nov-08 0.17 19.50 Brief profile of the above Investors is as under: 1.Mr. Arvind Sethi is a Director of Old World Hospitality India Pvt. Limited. Mr. Sethi is a Director of Rabo India Finance Limited, Rabo India Securities Pvt. Limited, and the Association of Mutual Funds in India. Previously, he was the Managing Director and Chief Executive Officer af Tata Asset Management Limited, also served as its Associate Director, Managing Partner at CAPM Consulting, Managing Director of Global Financial Markets at Bank of America, Treasurer at ANZ Grindleys, Head of Retail Banking at HSBC India, Associate in the firm's debt capital markets team and had also served as the Treasurer, Manager of Foreign Exchange at Grindlays Bank plc.Mr. Sethi earned an M.B.A. in Finance from INSEAD and an M.A. and a B.A. (Honors) degree in Philosophy, Political Science, and Economics from the Oxford University.

Management Activity. Having supported and advised several start-ups, Girish has rich experience in creating and supporting entrepreneurs. A successful Investor, Girish wants to make that change and is willing to travel any distance to make it happen.

3.3. The assessee also submitted the reasons for exiting from the said investments as under:- Reasons for exit: a. Over the last decade, India has emerged as one of the top destinations for private equity investment. In FY 15, the country received $22.4 Bn. In investments i.e. 47% increase over the previous year. b. India has the fundamentals-large population that is young with rising incomes, increasingly online and consuming more-that make it one of the most interesting countries to invest in for investors with a long-term investment horizon and appetite. c. However, this industry is subject to various macros factors that affect outcome of the investment. Some of the risks associated with PE investment include: i. PE investments are illiquid as EXIT is dependent on conducive market environment and various external factors apart from performance of the Company. ii. Such investments offer high risk - high reward as the subsequent rounds of valuation and exit are subject to the company being able to bring in new investors. d. The global markets were in a turmoil post 2012. This impacted the growth of many promising companies in growth stage including Pyxis. e. The Company was unable to acquire the targeted orders from potential customers leading to de-growth in the revenue. f. In order to reduce its costs, the company reduced its employee strength by -50%. g. However, due to the poor financial position and high attrition the company was unable to attract funding from external investors to continue its operations and maintain its growth. h. The Company received an offer from Polaris to purchase the business (only assets) on going-concern basis for Rs. 3.5 Cr. The funds were needed to discharge outstanding liabilities including secured creditors & statutory liabilities. Post the transaction there would be no assets or Operating business left in the Company. i. As the company was not receiving positive feedback from other external Investors and was in dire need for funds, it was keen to accept the offer presented by Polaris. j. Despite being long term value investors, considering the financial position of the company and need of the hour, the investors including the appellant (based on the advice of its Investment Manager-Internal note dated 05.02.2013 enclosed along with other marquee investors like Janak Desai, Arvind Sethi & Girish Kulkarni agreed to sell their stake to Mr. Nandlal Bhatkar at NAV (Rs. 0.014/ Share) to facilitate this transaction.

3.4. Accordingly, it was submitted that assessee had proper rationale and justification for making investments in the shares of Pyxis Systems Pvt. Ltd., at Rs.15.40 per share considering the future potential of the said company. However, based on the macro factors and global turmoil experienced post 2012 which affected the start up companies like Pyxis Systems Pvt. Ltd., the said company was unable to achieve its target orders which lead to double reduction in its revenue. Under these special circumstances, the assessee had to sell its investment at a market price of Rs.0.014 per share only to the promoters as there were no buyers for the same. The assessee and the promoters of Pyxis Systems Pvt. Ltd., were not related in any manner whatsoever and hence, these transactions could not be construed as a pre-arranged transaction by any stretch of imagination. It was submitted that it was a genuine investment loss incurred by the assessee. The assessee also placed reliance on the decision of the Hon’ble Madras High Court in the case of CIT vs. Sriram Investments reported in 77 taxmann.com 113 wherein it was held that the ld. AO could not reject sale of shares at a lower price without producing supporting documents to rebut such claim. The assessee also placed on record the provisions of Section 56(2)(viib) of the Act before the ld. CIT(A) wherein it was submitted that when the shares are issued at a price which exceeds face value of the shares, the consideration received which is in excess of book value would be added in the hands of the issuer company i.e. Pyxis Systems Pvt. Ltd., Hence, it was submitted that the excess of Rs.12.71 per share being the difference of issue price of Rs.15.40 and book value of Rs.2.69 calculated by the ld. AO could only be added in the hands of Pyxis Systems Pvt. Ltd., and not in the hands of the assessee. Further, the assessee also submitted that apart from the investment made in Pyxis Systems Pvt. Ltd., she had also made other private equity investments in the shares of the following companies:-

Investments made in Year of Year of Sale Sold for Investment % People Strong HR Services Beginning from FY2016-17 Gains of Rs, 17.45 Pvt. Ltd. FY2012-13 crores, offered to tax Anna Education Services FY 2014-1 5 Held till date Not Applicable Pvt. Lid. High Ground Enterprises FY 201 5-1 &^ Held till date Not Applicable Ltd.

3.5. Considering these facts, the ld. CIT(A) had granted relief to the assessee. Aggrieved, the Revenue is in appeal before us.

3.6. At the outset, we find that the Revenue is only seeking to disturb the purchase price of acquisition of shares paid by the assessee @15.40 per share in view of the fact that the company in which assessee had invested is a loss making company and did not command any investment at a premium. It is not in dispute that the payment for acquisition of shares has been made by the assessee out of disclosed sources and there is absolutely no element of any undisclosed income thereon. Now, the primary question that needs to be addressed in this regard is as to whether the Revenue could at all disturb the purchase price of acquisition of shares within the mandate provided in the Act. In our considered opinion, the answer is an emphatic ‘no’ in as much as there is no provision in the Act warranting to disturb the purchase price of shares by the assessee. What is required to be seen is whether the assessee had sufficient sources for making such investment in shares. As stated earlier, there is absolutely no dispute that payments for acquisition of shares at Rs.15.40 per share had been duly met out of disclosed sources of the assessee. Moreover, it is also pertinent to note that the said investment had been made by the assessee in A.Y.2012-13 i.e. the earlier year. We find that assessee had duly explained the rationale behind making investment in the shares of Pyxis Systems Pvt. Ltd., at a premium, based on the advice given by certain parties and after analysing the various reports that are made available to her by her advisors and had also taken cognizance of the strength of the promoters of the said company and their capabilities. The assessee had also furnished the proper reasons for exiting out of her investment from the said company. None of these explanations furnished by the assessee were found to be false by the Revenue. Hence, it was only the failed investment deal of an assessee being a private equity investor, which had resulted in incurrence of loss for the assessee which is claimed as a long term capital loss by the assessee. We further hold that there is absolutely no basis for the ld. AO to arrive at the revised book value per share at Rs.2.69 per share based on the financials as on 31/03/2011 of Pyxis Systems Pvt. Ltd., and concluding that the said rate should be the fair market value which the assessee ought to have paid for the purpose of making investment in shares. If this is to be accepted then what will happen to the remaining money paid by the assessee towards acquisition of shares? The order of the ld. AO is completely silent on this aspect. Hence, we conclude that the ld. AO does not have any power to substitute the purchase price of shares with a different value than the value at which actually it was paid. We hold that the ld. AR was justified in placing reliance on the decision of the Hon’ble Madras High Court in the case of CIT vs. Sriram Investments reported in 77 taxmann.com 113. The relevant question raised before the Hon’ble Madras High Court and its decision thereon are as under:-

4. Whether on the fact and in the circumstances of the case, the Income Tax Appellate Tribunal was right in deleting the dis-allowance of Long Term Capital Loss of Rs. 3,98,07,218/- on account of sale of shares to a sister concern without applying the ratio of the Supreme Court's decision in the case of Aishini Least Finance P. Ltd., (309 I.T.R. 320)? 4. ……………………………………………………………………………………………… ………………………………………………………………………………………………… ………… “Adverting to question No. 4, the brief facts are as follows:— The assessee/respondent is a Non Banking Financial Company engaged in the business of hire purchase, financing, leasing and investments. By virtue of guidelines issued by the Reserve Bank of India, Non Banking Financial Companies (NBFC) were required to concentrate on core financing business and exit from manufacturing and other activities. The assessee consequently wished to divest its shareholding in Shriram Auto Components (Madras) Limited (name changed to Rambal Limited) and Shripet Cybertech Systems Limited. The shareholding of the assessee in the aforesaid two companies was valued at the figure of Rs. 1/- per share and the sale resulted in a capital loss of an amount of Rs. 3.98 crores (Rs. 2.88 + 1.10 crores).

Order pronounced on 26/10/2022 by way of proper mentioning in the notice board.