AADARSH SURANA, CHENNAI,CHENNAI vs. DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 1(1), CHENNAI, CHENNAI

The assessee has raised the following grounds of appeal: -

That the Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [“Ld.CIT(A)”] has erred in law and on facts in sustaining the addition of Rs.113,46,87,657/- made by the Assessing Officer u/s.68 of the Income Tax Act, 1961 (“the Act”), by treating the credits in the capital account during the relevant assessment year as unexplained.

That the Ld.CIT(A) has failed to appreciate that the amount of Rs.19,83,67,287/- received by the appellant as gifts in the form of property settlements from his father and brother is exempt from tax and, therefore, cannot be brought to tax u/s.68 of the Act.

That the Ld.CIT(A) has erred in not considering that the gain of Rs.93,63,20,420/- arsing from business succession is exempt from tax u/s.47(xiv) of the Act, and hence the provisions of section 68 are inapplicable to such amount.

That the Ld.CIT(A) has erred in law and on facts in upholding the action of the Assessing Officer in invoking section 68 of the Act, despite the explanations and documentary evidence furnished by the appellant demonstrating the genuineness and source of the credits.

During the course of hearing before us, the Ld.AR submitted that the assessee had raised a legal ground challenging the validity of the assessment order before the Ld.CIT(A), and the said ground was duly adjudicated against the assessee. It was further submitted that, due to inadvertence, the said ground could not be incorporated while filing the present appeal before this Tribunal. The Ld.AR, therefore, prayed for admission of the said legal ground as an additional ground of appeal, which reads as under: -

The facts of the case, as emanating from the assessment order, are that the assessee is an individual engaged in the business of real estate, which he carries on as a sole proprietorship concern. The assessee is also a Director in the company M/s. Amar Prakaash Developers Private Limited.

For the impugned assessment year, the assessee filed his return of income electronically on 14.12.2017 declaring a total income of Rs.2,54,04,050/- comprising of salary income of Rs.84,00,000/-, business income of Rs.1,71,42,113/-, income from house property of Rs.7,000/- and income from other sources of Rs.14,826/-. The case was selected for limited scrutiny assessment for verification of the following issues: - i. Expenses incurred for earning exempt income ii. Share capital/capital

Consequently, notice u/s.143(2) of the Act was issued on 28.08.2018, followed by multiple notices u/s.142(1) of the Act.

During the course of the assessment proceedings, the AO noted from the capital account of the assessee that the opening capital as on 01.04.2016 stood at Rs.5,62,81,243/-, whereas the closing capital as on 31.03.2017 was Rs.120,88,94,849/-, thereby resulting an increase of Rs.115,26,13,606/- during the relevant previous year. The assessee was called upon to explain the source and justification for such substantial accretion in capital.

In response, the assessee submitted that he was engaged in the business of real estate as a sole proprietor and that, on 31.03.2017, he had entered into a Business Succession-cum-Transfer Agreement with the company M/s.Amar Prakaash Developers Private Limited, whereby his proprietorship concern was transferred as a going concern to the company for a consideration of Rs.110,03,66,310/-. The consideration was discharged by way of allotment of equity shares valued at Rs.188.70 per share by the Company. The assessee relied upon a valuation advisory report issued by M/s.S.L.Gadhiya & Co., Chartered Accountants, in support of the computation of the consideration. It was further submitted that the assessee had received immovable properties by way of gifts from his father and brothers aggregating

The AO observed that the assessee had disclosed fixed assets of only Rs.1,21,28,099/- and finished goods/stock of Rs.3,99,81,447/- under current assets, which were taken over by the company. However, in the valuation report the same assets were classified as ongoing projects, upcoming projects and long-term holdings valued at Rs.134,94,13,602/-. Considering the disclaimer clause in the valuation report, the AO held the said report to be unreliable. The AO further observed that the assessee’s assets valued at Rs.5,21,09,546/- prior to transfer were revalued to Rs.134,94,13,602/- without any corroborative evidence or documentation. The AO held that the assessee had adopted a colourable device by relying on an inflated and unsubstantiated valuation to determine the consideration at Rs.110.03 crore.

The AO also observed that neither the assessee nor the valuer had furnished concrete evidence regarding the basis of the Memorandum of Understanding or the quantification of liabilities. Further, the AO noted that the fair market value of the shares of the company, as per Rule 11UA of the Income- tax Rules, 1962, worked out to only Rs.23.36 per share. The AO therefore concluded that the valuation of the proprietorship concern at Rs.134.94 crore and the share valuation at Rs.188.70 per share were unreliable and unsupported.

With respect to the gifts credited in the capital account, the AO found that substantial discrepancies existed between the market value declared in the registered settlement deeds and the values adopted in the valuation report. For instance, the settlement deed dated 10.02.2017 relating to land at Kundrathur reflected a market value of Rs.1,00,00,000/-, whereas the valuer adopted a figure of Rs.6,84,67,000/-. Similarly, in another settlement deed dated 08.03.2017 executed by the assessee’s brother, the market value was stated as Rs.2,00,00,000/-, while the valuation report adopted Rs.25,88,36,000/-. The :-5-: ITA. No.:1840/Chny/2025

In view of the above, the AO held that the assessee had failed to substantiate the increase in capital amounting to Rs.115,26,13,606/- and treated the same as unexplained cash credit u/s.68 of the Act.

The AO further noted that the assessee had purchased immovable property valued at Rs.4,30,62,000/- during the relevant year. According to the AO, the said transaction was neither reflected in the valuation report nor in the assessee’s balance sheet, and the assessee failed to explain the source of such investment. The AO accordingly treated the said amount as unexplained investment u/s.69 of the Act. The AO also disallowed Rs.25,152/- u/s.14A of the Act.

The impugned assessment was thus completed u/s.143(3) of the Act on 29.12.2019 determining the total income at Rs.122,11,04,812/- after making the following additions: - i. Unexplained cash credit u/s.68 of the Act on account of increase in capital amounting to Rs.115,26,13,606/-; ii. Unexplained investment u/s.69 of Rs.4,30,62,000/-; iii. Disallowance u/s.14A of Rs.25,152/-.

Aggrieved by the assessment order and the consequential additions, the assessee carried the matter in appeal before the Ld.CIT(A).

The Ld.CIT(A), vide order dated 21.11.2022 passed u/s.250 of the Act, dismissed the appeal of the assessee without affording a reasonable opportunity of being heard and rendered an ex-parte, non-speaking order without adjudicating the grounds on merits. Aggrieved by the said order, the assessee preferred an appeal before this Tribunal. This Tribunal, vide order dated 08.09.2023 in ITA No. 20/Chny/2023, set aside the aforesaid order of the Ld.CIT(A) and remitted the matter back to his file with a direction to consider

During the course of the appellate proceedings before the Ld.CIT(A), the assessee submitted that he had been engaged in the business of real estate development since July 2009 and had, over the years, entered into various agreements, contracts and understandings with parties, customers and clients in the capacity of a sole proprietor. It was further submitted that the assessee had executed a “Business Succession-cum-Transfer Agreement” with M/s.Amar Prakaash Developers Private Limited on 31.03.2017, in terms of which the entire proprietorship business of the assessee, along with all its assets and liabilities, stood succeeded by the said company for a net consideration of Rs.110,03,66,310/-. The assessee stated that the capital gain arising on such succession had been computed at Rs.93,63,20,420/-, which amount was credited to his capital account during the relevant assessment year. It was the contention of the assessee that the said transfer was squarely covered by the exemption contained in section 47(xiv) of the Act, the conditions prescribed therein having been duly fulfilled, and consequently, the capital gain of Rs.93,63,20,420/- was not exigible to tax.

The assessee further submitted before the Ld.CIT(A) that the addition of Rs.115,26,13,606/- made by the AO u/s.68 of the Act included the aforesaid capital gain arising from the succession of the proprietorship business as well as gifts received from his father and brothers, which were duly credited to the capital account. According to the assessee, the deeming provisions of section 68 could not be invoked in respect of such credits. It was contended that the gifts received from relatives were exempt u/s.56 of the Act, and the capital gain arising on business succession was not taxable in view of section 47(xiv) of the Act.

The assessee also contended that his case had been selected for limited scrutiny and that the additions made by the AO were beyond the scope of such limited scrutiny. It was argued that the AO had expanded the scope of assessment without obtaining the mandatory approval of the PCIT, thereby acting contrary to binding CBDT Instructions prohibiting unauthorized conversion of limited scrutiny cases into complete scrutiny. On this ground, the assessee urged that the assessment order was void ab initio and liable to be quashed.

The assessee additionally brought to the notice of the Ld.CIT(A) that the addition u/s.68 of the Act also erroneously included the current year’s income of Rs.2,54,04,050/-, which had already been subjected to tax and was merely credited to the capital account.

With respect to the addition of Rs.4,30,62,000/- made u/s.69 of the Act towards alleged unexplained investment, the assessee submitted that the land in question had been duly recorded in the books of account and had subsequently been transferred to the company as part of the business succession. Therefore, its absence from the Balance Sheet as on 31.03.2017 could not be treated as unexplained investment. Hence, no addition u/s.69 of the Act was warranted.

On the issue of disallowance of Rs.25,252/- u/s.14A of the Act, the assessee submitted that no expenditure had been incurred for earning exempt income and that the disallowance made by the AO was therefore unjustified.

In view of the aforesaid submissions, the assessee prayed before the Ld.CIT(A) that the impugned assessment order be quashed as bad in law, or alternatively, that the additions made by the AO be deleted in toto.

During the course of the appellate proceedings, the AO furnished a remand report before the Ld.CIT(A), wherein it was stated that the addition of :-8-: ITA. No.:1840/Chny/2025

The assessee contended that the rectification proceedings initiated during the pendency of the appellate proceedings amounted to an attempt by :-9-: ITA. No.:1840/Chny/2025

Upon a careful consideration of the submissions advanced by the assessee, the Ld.CIT(A) rejected the legal ground raised challenging the validity of the assessment order on account of the alleged absence of approval of the Ld. PCIT. On merits, the Ld.CIT(A) granted partial relief.

With regard to the addition of Rs.4,30,62,000/- made by the AO towards unexplained investment u/s.69 of the Act, the Ld.CIT(A) recorded that the assessee had brought to his notice that the said addition had not been pressed inasmuch as it stood deleted in the rectification order passed u/s.154 of the Act. Consequently, the Ld.CIT(A) dismissed the ground relating to the addition u/s.69 of the Act as having become infructuous.

Adverting to the legal ground assailing the juri iction of the AO, the Ld.CIT(A) observed that the case of the assessee had been selected for ‘limited scrutiny’ for examination of the parameters, viz., “expenses incurred for earning exempt income” and “share capital/capital”. The Ld.CIT(A) noted that the AO had made three additions, viz., (i) increase in capital u/s.68 of the Act, (ii) unexplained investment u/s.69, and (iii) disallowance u/s.14A of the Act. According to the Ld. CIT(A), the addition of Rs.4,30,62,000/- made by the AO formed an integral part of the addition made towards increase in share capital and thus fell squarely within the parameter of “share capital/capital”. The Ld.CIT(A) further noted that the addition u/s.69 of the Act had already been deleted by the AO u/s.154 to avoid duplication. Hence, the Ld.CIT(A) concluded

With respect to the addition of Rs.115.26 crores made u/s.68 of the Act, the Ld.CIT(A) observed that the said sum represented credits in the capital account of the assessee, and accordingly the contention that section 68 of the Act was inapplicable was held to be untenable. The Ld.CIT(A) identified that the addition comprised three components: (i) Rs.2.54 crores pertaining to income of the current year, (ii) Rs.19.83 crores representing gifts/settlements from relatives, and (iii) Rs.93.63 crores representing consideration arising on transfer of the assessee’s proprietary business to M/s.Amar Prakaash Developers Private Limited (“APDPL”).

Insofar as the component of Rs.2.54 crore is concerned, the Ld.CIT(A) found no dispute regarding the fact that the assessee had already offered the said income in the return of income. Accordingly, the Ld.CIT(A) held that the assessee had discharged his onus and directed for deletion of this portion of the addition.

In relation to the gifts aggregating to Rs.19.83 crores, the Ld.CIT(A) noted that although copies of gift deeds and settlement deeds were furnished, the assessee had failed to rebut the discrepancies pointed out by the AO in respect thereof. The Ld.CIT(A) held that the assessee had not established the identity and creditworthiness of the donors nor the genuineness of the alleged gift transactions. The Ld.CIT(A) therefore concluded that the assessee failed to discharge the onus cast upon him u/s.68 of the Act, and accordingly confirmed the addition of Rs.19.83 crores.

With respect to the sum of Rs.93.63 crores representing consideration arising on succession of the assessee’s proprietary business by M/s.APDPL,

The Ld.CIT(A) also highlighted that the title of the document relied upon by the assessee described it merely as an “Advisory Report on Valuation”, which, in his view, could not be equated with a formal valuation report. The Ld.CIT(A) pointed out that it lacked essential particulars such as the scope of work, date of engagement, details of expertise or independence of the valuer, and hence could not be treated as independent evidence. The Ld.CIT(A) further noted that the same valuer had undertaken both the valuation of the assessee’s business and the valuation of APDPL's equity shares as on the same date, coinciding with the execution of the Business Transfer Agreement, thereby casting further doubt on the bona fides of the transactions. The Ld.CIT(A) also recorded that the gift and settlement deeds were unsupported by any independent evidence.

The Ld.CIT(A) further noted that the Tax Audit Reports for AYs.2016-17 and 2017-18, though dated earlier, were uploaded much later, coinciding with the filing of the first appeal. Cumulatively, these facts fortified the finding that the transactions of Rs.19.83 crores and Rs.93.63 crores were sham, and that the apparent was not real.

The Ld.CIT(A) additionally observed that the sudden and steep increase in capital from below Rs.20 crores in AY 2016-17 to around Rs.110 crores in AY 2017-18 was contrary to normal human probabilities, invoking the ratio of the Hon’ble Supreme Court in CIT v. Durga Prasad More (82 ITR 540). The Ld.CIT(A) held that the assessee had failed to satisfactorily explain the nature and source of the credits even at the appellate stage.

In view of the foregoing findings, the Ld.CIT(A) upheld the addition u/s.68 of the Act to the extent of Rs.113,46,87,657/-, comprising Rs.93,63,20,420/- attributable to the purported transfer of business and Rs.19,83,67,287/- being gifts from relatives, thereby granting partial relief.

The Ld.CIT(A) also confirmed the disallowance of Rs.25,152/- made u/s.14A of the Act. As the said issue has not been challenged before us, no discussion thereon is warranted.

The Ld. CIT(A), vide order dated 31.03.2025, thus partly allowed the appeal. Aggrieved by the said order, the assessee is now in further appeal before us.

Assessee was represented by Shri R.Venkata Raman, Chartered Accountant (hereinafter referred to as the “Ld.AR”), and the Revenue was represented by Shri Shiva Srinivas, CIT (hereinafter referred to as the “Ld.DR”). Both parties advanced their respective submissions with considerable emphasis. The arguments so placed on record have been duly considered, and the same are discussed by us in a concise manner in the succeeding paragraphs.

The Ld.AR, in support of the additional ground raised, submitted that cases selected for scrutiny may fall under either limited scrutiny or complete scrutiny. In instances of complete scrutiny, the AO possesses wider powers to examine any issue arising in the assessment proceedings, without the requirement of any specific approval. Conversely, in limited scrutiny cases, the :-13-: ITA. No.:1840/Chny/2025

Turning to the facts of the instant case, the Ld.AR invited our attention to the order of the Ld.CIT(A), wherein the reasons for selection of the impugned assessment year for limited scrutiny have been reproduced. It was submitted that the assessee’s case was selected for limited scrutiny on two issues, namely: (i) expenses incurred in relation to earning exempt income, and (ii) capital. According to the Ld.AR, therefore, the juri iction of the AO stood circumscribed to these two issues alone. Drawing our attention to the computation sheet part of the assessment order, the Ld.AR submitted that the AO has made additions on three counts (i) increase in capital u/s.68 of the Act, (ii) unexplained investment u/s.69 of the Act, and (iii) disallowance u/s.14A of the Act. The Ld.AR submitted that the additions relating to increase in capital and disallowance of expenses relatable to exempt income fall within the permissible domain of the limited scrutiny. However, the addition made u/s.69 of the Act towards unexplained investment, being outside the scope of the parameters of limited scrutiny, could have been made only after obtaining the requisite approval of the ld.PCIT. It was further submitted that it is an admitted position that no such approval had been obtained by the AO.

On a query from the Bench regarding the manner in which this issue was dealt with by the Ld.CIT(A), the Ld.AR referred to pages 32 and 33 of the order of the Ld.CIT(A). He submitted that the Ld.CIT(A) held that the net consideration of Rs.110.03 crores quantified under the Business Transfer Agreement (“BTA”) in connection with the succession of the assessee’s sole proprietorship by M/s.Amar Prakash Developers Pvt. Ltd. inherently encompassed the purchase

The Ld.AR further submitted that the AO, while making the addition of Rs.4,30,62,000/- u/s.69 of the Act, had categorically recorded that the asset in question neither appeared in the valuation report nor in the balance sheet of the assessee, and that the assessee had failed to explain the source of investment. Thus, the addition was made not because the investment was subsumed within the capital account, but for altogether different reasons. Hence, the conclusion of the Ld.CIT(A) that the addition was within the scope of limited scrutiny is erroneous. The Ld.AR submitted that the assessment order, having been passed without the mandatory prior approval of the ld.PCIT for enlargement of the scope of scrutiny, is bad in law.

In support of his contentions, the Ld.AR placed reliance on the decision of the Kolkata Bench of the Tribunal in Srimanta Kumar Shit v. ACIT [2024] 169 taxmann.com 185 (Kol. Trib.). The Ld.AR accordingly prayed that the impugned assessment order be declared void ab initio.

Per contra, the Ld.DR submitted that even if there was any deviation by the AO from the CBDT instructions governing limited scrutiny, such deviation would render the AO liable for administrative or disciplinary action, but would not vitiates the assessment order per se. The Ld.DR further submitted that the addition of Rs.4,30,62,000/- made u/s.69 of the Act had, in any event, been deleted subsequently by the AO through rectification u/s.154 of the Act. Therefore, no grievance survives for the assessee, as the remaining additions fall squarely within the permissible parameters of limited scrutiny. The Ld.DR thus supported the order of the lower authorities and prayed for dismissal of the assessee’s legal grounds.

In rejoinder, the Ld.AR submitted that disciplinary consequences for violation of the limited scrutiny norms are inevitable, and the mere possibility or initiation of such disciplinary action cannot validate an assessment order vitiated by an incurable juri ictional defect. The Ld.AR further submitted that the action of the AO in deleting the addition made u/s.69 of the Act through the rectification order passed u/s.154 of the Act clearly demonstrates that the AO had, in the original assessment, ventured into matters beyond the scope of the limited scrutiny mandate.

The Ld.AR additionally contended that, as on the date of passing of the assessment order, the order suffered from a juri ictional infirmity owing to the absence of approval from the PCIT, as mandated for expansion of limited scrutiny. Such an invalid assessment order, according to the Ld. AR, cannot be cured or revived by any subsequent rectification proceedings.

On the merits of the matter, the Ld.AR drawing our attention to the assessee’s capital account as on 31.03.2017 (placed at page 2 of the Paper Book), submitted that the addition of Rs.113,46,87,657/- sustained by the Ld.CIT(A) u/s.68 of the Act is wholly misconceived, inasmuch as the impugned sum comprises two distinct and fully explained components. The first component is Rs.93,63,20,420/-, representing capital gains arising on account of the succession of the assessee’s sole-proprietorship business by a company. The second component is Rs.19,83,67,287/-, being gifts and family settlements received from the assessee’s father and brothers.

The Ld. AR submitted that save and except for issues marginally relating to valuation there is no factual dispute that the sum of Rs.93.63 crores represent capital gains arising upon the transfer of business assets consequent to succession by the company. Such gains, being governed by the specific computational and charging provisions contained in Chapter IV-E of the Act, cannot be re-characterised as unexplained cash credits u/s.68 of the Act. It was further submitted that the balance amount of Rs.19.83 crores reflect assets received under a bona fide family settlement from persons who squarely fall within the statutory definition of “relatives,” and therefore, by express legislative exclusion, such receipts do not attract the operation of section 56(2)(x) of the Act.

The Ld. AR emphasised that section 68 of the Act is a deeming provision intended to cover unexplained or unsubstantiated credits found in the books of account, for which the assessee fails to offer a satisfactory explanation. It cannot be invoked where the nature of the transaction is otherwise governed by specific charging provisions of the Act, such as capital gains, or where the receipt itself is exempt by statute. The Ld.AR submitted that judicial principles consistently hold that deeming fictions cannot be extended beyond their legitimate field. In the present case, both components of the impugned sum stand duly explained, supported by evidence, and fall outside the ambit of unexplained cash credits.

The Ld. AR thus contended that the Ld. CIT(A) erred in sustaining the AO’s action u/s.68 of the Act without appreciating the true nature of the transactions and the applicable statutory provisions. According to the Ld.AR, once the source, nature, and character of the credits are established and especially when the amounts arise from transactions expressly recognised under the Act the invocation of section 68 of the Act is patently unwarranted. It was therefore submitted that the addition sustained by the Ld.CIT(A) is liable to be deleted in full.

The Ld. AR submitted that Section 47 of the Act, enumerates transactions which are not regarded as “transfer” for the purpose of chargeability of capital gains. Adverting specifically to clause (xiv) of Section 47 of the Act, the Ld.AR contended that the succession of a sole proprietorship business by a company does not constitute a “transfer” and, therefore, any capital gains ostensibly arising therefrom fall outside the ambit of chargeability under the head “Capital Gains”.

The Ld.AR further submitted that the exemption contemplated under Section 47(xiv) is subject to the satisfaction of the three conditions stipulated in the proviso thereto, namely: (i) that all the assets and liabilities of the sole proprietary concern relating to the business immediately before succession become the assets and liabilities of the company; (ii) that the shareholding of the sole proprietor in the company is not less than 50% of the total voting power and such shareholding continues for a period of five years from the date of succession; and (iii) that the sole proprietor does not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company.

Inviting our attention to the Business Succession-cum-Transfer Agreement (“BTA”) dated 31.03.2017, placed at pages 4 to 35 of the paper book, the Ld. AR submitted that it is an undisputed fact that the assessee’s sole

With respect to the third condition, the Ld.AR invited reference to the consideration clause in the BTA (page 11 of the paper book), wherein the consideration for the transfer was agreed at Rs.110,03,66,310/-, to be discharged entirely through the allotment of fully paid-up equity shares at Rs.188.70 per share in M/s.Amar Prakaash Developers Private Limited. The Ld.AR submitted that it is not the Revenue’s case that the assessee received any consideration other than such shares. Accordingly, the assessee having satisfied all the prescribed conditions, the gain of Rs.93,63,20,420/- arising on business succession and credited to the capital account is exempt in terms of Section 47(xiv) of the Act.

The Ld.AR argued that neither the AO nor the Ld.CIT(A) has disputed the genuineness of the BTA or its terms. However, the exemption u/s.47(xiv) of the Act was denied, and an addition u/s.68 of the Act was made, solely on the premise that the valuation of the transferred assets was allegedly excessive. The Ld.AR submitted that a mere allegation of higher-side or abnormal valuation does not empower the Revenue authorities to ignore the statutory exemption once the substantive conditions of Section 47(xiv) of the Act stand duly fulfilled. It was submitted that the Act contains no provision enabling the AO to disregard the exemption u/s.47(xiv) of the Act merely on account of perceived inconsistencies in the valuation of assets forming part of the BTA.

The Ld.AR submitted that both the AO and the Ld.CIT(A) have laid undue emphasis on the valuation adopted in the Business Transfer Agreement (BTA), apparently proceeding on the premise that an alleged abnormal valuation would result in loss of revenue. In this regard, the Ld.AR drew our attention to the provisions of section 49(1)(iii)(e) of the Act and contended that, for the purposes of business profits at the time of subsequent sale by the company, the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner had acquired the same. This implies irrespective of the valuation at which business has been transferred, the cost originally incurred shall prevail.

The Ld.AR further submitted that, in view of the aforesaid statutory provision, the original cost incurred by the assessee in acquiring the stock-in- trade and other assets would alone be allowable as deduction in the hands of M/s.Amar Prakaash Developers Private Limited at the time of recognition of profits arising from the sale of such assets. Accordingly, it was contended that the consideration of Rs.110.03 crores as determined under the BTA has no bearing on the computation of taxable income and, therefore, does not result in any loss to the Revenue.

The Ld.AR emphasised that, having regard to this specific deeming provision governing the allowability of cost, the statute has consciously not prescribed any mechanism for determination or substitution of the valuation of the business transferred u/s.47(xiv) of the Act. It was thus argued that the allegation of higher or abnormal valuation, as made by the lower authorities, is wholly irrelevant for the purpose of denying the exemption available to the assessee u/s.47(xiv) of the Act.

The Ld.AR relying on the decision of Panaji Bench of this Tribunal in ACIT v. Joe Marcelinho Mathias [2013] 156 TTJ 777 (Panaji – Trib) submitted that where assessee, a proprietary concern, had transferred all his assets and liabilities to a company and against consideration he was allotted shares of the company, even though value of those shares was much more than value of :-20-: ITA. No.:1840/Chny/2025

The Ld.AR further placed reliance on the decision of this Tribunal in DCIT v. D. Satish Babu [2016 (2) TMI 348] and submitted that the conversion of the assessee’s proprietary concern into a private limited company as a going concern, wherein all the assets and liabilities of the proprietorship were taken over by the company and the assessee continued to hold 51% of the share capital with corresponding voting rights immediately after such conversion, was a transaction squarely fulfilling the conditions prescribed under section 47(xiv) of the Income-tax Act, 1961. It was contended that such conversion, therefore, did not amount to a “transfer” within the meaning of the Act and consequently did not attract capital gains tax under section 45. The Ld. AR further submitted that the provisions of section 50B of the Act relating to slump sale were also not applicable to the facts of the case, inasmuch as the conversion was not in the nature of a sale but was a statutory reorganisation expressly contemplated under section 47(xiv) of the Act.

Per contra, the Ld.DR submitted that there is no dispute with regard to the fact that the assessee transferred his sole proprietorship concern to the company and that the assessee held 61% shareholding in the said company, as duly noted by the AO in the assessment order. It was further submitted that the consideration for such transfer was discharged by way of allotment of equity shares.

However, the Ld.DR contended that the valuation of assets and liabilities as reflected in the valuation report and the consequent determination of consideration as stipulated in the Business Transfer Agreement (BTA) are highly abnormal, artificial, and devoid of commercial rationale, and therefore cannot be accepted as genuine. According to the Ld. DR, in view of such abnormal and artificial valuation adopted in the BTA, the transaction fails to satisfy the conditions prescribed u/s.47(xiv) of the Act. Consequently, the impugned

In the rejoinder, the Ld.AR submitted that since all the conditions prescribed u/s.47(xiv) of the Act stand duly satisfied, the gains arising from the said transaction are squarely covered by the exclusion provided therein and, therefore, do not constitute a transfer chargeable to tax. The Ld.AR further contended that the credit arising in the capital account on account of succession of business is purely a book / notional entry without any inflow of cash or monetary consideration. It was submitted that such notional credit cannot be brought to tax u/s.68 of the Act. In support of the aforesaid submissions, the Ld. AR placed reliance on the following judicial precedents: - i. Jatia Investment Co v. CIT [1994] 206 ITR 718 (Cal); ii. V.R. Global Energy (P.) Ltd v. ITO [2018] 407 ITR 145 (Mad); iii. ITO v. V.R. Global Energy (P.) Ltd [2020] 268 Taxman 392 (Sc); iv. DCIT v. NCR Business Park (P.) Ltd [2022] 196 ITD 678 (Del-Trib); v. Abhijeet Enterprise Ltd v. ITO [ITA No.308/Kol/2017 dated 27.03.2019]; vi. PCIT v. Abhijeet Enterprise Ltd [2024] 162 taxmann.com 859 (Cal)

On the issue of addition in respect of gifts and settlement aggregating to Rs.19,83,67,287/- credited to the capital account, the Ld.AR submitted that there is no dispute regarding the factum of receipt of the said amounts by the assessee from his father and brothers. It was submitted that the receipt of such gifts and settlement is duly evidenced by the settlement deeds, copies of which were placed on record before the lower authorities.

The Ld.AR contended that both the AO as well as the Ld.CIT(A) have adopted an identical approach by treating the transaction akin to gains arising on succession of a sole proprietorship concern and consequently made an addition u/s.68 of the Act, solely on the premise of alleged abnormal valuation of the assets transferred.

It was further submitted that in terms of the provisions of section 56(2)(x) of the Act, any receipt of immovable property from persons falling within the :-22-: ITA. No.:1840/Chny/2025

Per contra, the Ld.DR submitted that there is no dispute with regard to the receipt of gifts and settlement by the assessee from his father and brothers. However, it was argued that having regard to the abnormal valuation adopted in respect of the assets received, the assessee is not entitled to the benefit of the exception carved out u/s.56(2)(x) of the Act. It was further contended that the AO has rightly invoked the provisions of section 68 of the Act and the addition so made has been correctly upheld by the Ld.CIT(A). The Ld.DR, therefore, prayed that the order of the Ld.CIT(A) be upheld.

We have carefully considered the rival submissions advanced by both the parties and perused the material available on record and gone through the orders of the authorities along with the paper book and case laws relied on. It is observed that the case of the assessee for the impugned assessment year was selected for limited scrutiny for the purpose of examining the expenses incurred in relation to earning exempt income and capital. On examination of the records, we note that the capital account of the assessee for the assessment year under consideration reflected an increase of Rs.115,26,13,606/-, which was treated as unexplained and added by the AO u/s.68 of the Act. Out of the said addition, an amount of Rs.113,46,87,657/- was confirmed by the Ld.CIT(A). We further observe that the sustained addition of Rs.113,46,87,657/- comprises the following two components:

Both the lower authorities have recorded adverse findings with respect to the valuation report relied upon by the assessee for determining the consideration in connection with the succession of the business. It has been observed by them that there were several inconsistencies and infirmities in the valuation report, and that the valuation of assets and liabilities was artificial and exorbitantly inflated. On the basis of these findings, the authorities below held that the Business Succession-cum-Transfer Agreement was a sham transaction, devoid of commercial substance, and accordingly treated the resultant amount as unexplained cash credit taxable u/s.68 of the Act. A similar view has been taken by the AO as well as by the Ld.CIT(A) with respect to the addition on account of gifts and settlements received by the assessee from his father and brothers. Before us, both the parties have advanced elaborate submissions in support of their respective stands. The same have been duly heard and carefully considered while adjudicating the issues arising in the present appeal.

We have considered the additional ground raised by the assessee, whereby the validity of the assessment order itself has been challenged. On perusal of the records, it is observed that the said ground was duly raised by the assessee before the Ld.CIT(A) and the Ld.CIT(A) has also adjudicated upon the same. However, due to inadvertence, the said ground was not specifically incorporated in the grounds of appeal filed by the assessee before this Tribunal. It is further noted that the additional ground so raised is purely juri ictional in nature and goes to the very root of the matter. Admittedly, the facts necessary for adjudication of the said ground are already borne out from the material available on record and do not require any further investigation of facts. Therefore, no prejudice would be caused to the Revenue by admitting the said additional ground at this stage. In view of the settled legal position and respectfully following the ratio laid down by the Hon’ble Supreme Court in the :-24-: ITA. No.:1840/Chny/2025

Admittedly, for the impugned assessment year, the case of the assessee was selected for limited scrutiny with the specific purpose of examining the following issues: i. expenses incurred for earning exempt income; and ii. share capital/capital.

It is a matter of record that, while completing the assessment, the AO proceeded to make three additions, namely: a. addition on account of unexplained cash credits u/s.68 of the Act; b. addition on account of unexplained investment u/s.69 of the Act; and c. disallowance of expenses allegedly incurred for earning exempt income u/s.14A of the Act.

Before adverting to the merits of the additions so made, we deem it appropriate, at the threshold, to examine the juri iction and scope of enquiry permissible to the AO in cases selected for limited scrutiny. For this purpose, it would be relevant to refer to the instructions issued by the CBDT governing the procedure to be followed and the extent of enquiry permissible in limited scrutiny assessments. The relevant instructions, as relied upon and taken note of by us, are reproduced hereunder.

Instruction No.7/2014 dated 26.09.2014 issued by CBDT reads as under:- “It has come to the notice of the Board that during the scrutiny assessment proceedings some of the AOs are routinely calling for information which is not relevant, for enquiry into the issues to be considered. This has been causing undue harassment to the taxpayers and has also drawn adverse criticism from several quarters. Further, feedback and analysis of such orders indicates that many times the core issues, which formed the basis of selection of the case for scrutiny were not examined properly. Such :-25-: ITA. No.:1840/Chny/2025

Therefore, for proper administration of the Income-tax Act, 1961 ('Act'), Central Board of Direct Taxes, by virtue of its powers under section 119 of the Act, in supersession of earlier instructions/guidelines on this subject, hereby directs that the cases selected for scrutiny during the Financial Year 2014-2015 under CASS, on the basis of either AIR data or CIB information or for non re-conciliation with 26AS data, the scope of enquiry should be limited to verification of these particular aspects only. Therefore, in such cases, an Assessing Officer shall confine the questionnaire and subsequent enquiry or verification only to the 2 specific point(s) on the basis of which the particular return has been selected for scrutiny.

The reason(s) for selection of cases under CASS are displayed to the Assessing Officer in AST application and notice u/s 143(2), after generation from AST, is issued to the taxpayer with the remark "Selected under Computer Aided Scrutiny Selection (CASS)". The functionality in AST is being modified suitably to flag the reasons for scrutiny selection in AIR/CIB/26AS cases. This functionality is expected to be operationalised by 15th October, 2014. Further, the Assessing Officer while issuing notice under section 142(1) of the Act which is enclosed with the first questionnaire would proceed to verify only the specific aspects requiring examination/verification. In such cases, all efforts would be made to ensure that assessment proceedings are completed expeditiously in minimum possible number of hearings without unnecessarily dragging the case till the time-barring date.

In case, during the course of assessment proceedings, it is found that there is potential escapement of income exceeding Rs. 10 lakhs (for non- metro charges, the monetary limit shall be Rs. 5 lakhs) on any other issue(s) apart from the AIR/CIB/26AS information based on which the case was selected under CASS requiring substantial verification, the case may be taken up for comprehensive scrutiny with the approval of the Pr. CIT/DIT concerned. However, such an approval shall be accorded by the Pr. CIT/DIT in writing after being satisfied about merits of the issue(s) necessitating wider and detailed scrutiny in the case. Cases so taken up for detailed scrutiny shall be monitored by the Jt. CIT/Addl. CIT concerned.

The contents of this Instruction should be immediately brought to the notice of all concerned for strict compliance.”

Further, relevant part of Instruction No.20/2015 dated 29.12.2015 issued by CBDT reads as under: -

The Board further desires that in all cases under scrutiny, where the Assessing Officer proposes to make additions or disallowances, the assessee would be given a fair opportunity to explain his position on the proposed additions/disallowances in accordance with the principle of natural justice. In this regard, the Assessing Officer shall issue an appropriate show- cause notice duly indicating the reasons for the proposed additions/disallowances along with necessary evidences/reasons forming the basis of the same. Before passing the final order against the proposed additions/disallowances, due consideration shall be given to the submissions made by the assessee in response to the show-cause notice.

The contents of this Instruction should be immediately brought to the notice of all concerned for strict compliance.”

Further, relevant part of Instruction No.5/2016 dated 14.07.2016 issued by CBDT reads as under: -

Further, while forming the reasonable view, the Assessing Officer would ensure that:

It is further clarified that in cases under 'Limited Scrutiny', the scrutiny assessment proceedings would initially be confined only to issues under 'Limited Scrutiny' and questionnaires, enquiry, investigation etc. would be restricted to such issues. Only upon conversion of case to 'Complete Scrutiny' after following the procedure outlined above, the AO may examine the additional issues besides the issue(s) involved in 'Limited Scrutiny'. The AO shall also expeditiously intimate the taxpayer concerned regarding conducting 'Complete Scrutiny' in such cases.

It is also clarified that once a case has been converted to 'Complete Scrutiny', the AO can deal with any issue emerging from ongoing scrutiny proceedings notwithstanding the fact that the reason for such issue have not been included in the Note.

To ensure proper monitoring in cases which have been converted from 'Limited Scrutiny' to 'Complete Scrutiny', it is suggested, that provisions of section 144A of the Act may be invoked in suitable cases. To prevent possibility of fishing and roving enquiries in such cases, it is desirable that these cases should invariably be picked up while conducting Review or Inspection by the administrative authorities.”

The CBDT taking a stern view on unauthorized expansion of limited scrutiny to complete scrutiny has issued a directive dated 30.11.2017 under reference F.No.DGIT(Vig.)/HQ/Sl/2017-18, which reads as under: -

Further, the guidelines for proper maintenance of order sheets have been given in the Manual of Office Procedure issued by the Directorate of Organisation and Management Services. The Manual clearly lays down:

Instances have come to notice of CBDT where some Assessing Officers are travelling beyond their juri iction while making assessments in Limited Scrutiny cases by initiating inquiries on new issues without complying with mandatory requirements of the relevant CBDT Instructions dated 26.09.2014, 29.12.2015 and 14.07.2016. These instances have been viewed very seriously by the CBDT and in one case the Central Inspection Team of the CBDT was tasked with examination of assessment records on receipt of allegations of several irregularities. Amongst other irregularities it was found that no reasons had been recorded for expanding the scope of limited scrutiny, no approval was taken from the PCIT for conversion of the limited scrutiny case to a complete scrutiny case and the order sheet was maintained very perfunctorily. This gave rise to a very strong suspicion of mala fide intentions. The Officer concerned has been placed under suspension.

Further, CBDT has issued a circular F.No.225/402/2018/ITA.II dated 28.11.2018 which is applicable for the cases selected for limited scrutiny under CASS cycles 2017 and 2018. The same is reproduced as under: -

In this regard, several representations have been received in the Board from the field authorities that in several cases under 'Limited Scrutiny', information pointing out specific tax-evasion for the relevant year, given by any law-enforcement/intelligence/regulatory authority or agency is available with the concerned Assessing Officer, however, in view of the restrictive nature of enquiry/investigation which can be made in 'Limited Scrutiny' cases, the same presently cannot be acted upon.

The matter has been considered by the Board. In order to enable proper enquiry/investigation in pending 'Limited Scrutiny' cases which were selected through CASS cycles of 2017 and 2018, where credible material or :-29-: ITA. No.:1840/Chny/2025

It is pertinent to mention that unlike CASS 2015 and 2016 cycles, where consideration of any additional issue lead to the conversion of case to 'Complete Scrutiny' as laid down in Instruction No. 5/2016 dated 14.07.16, the pending 'Limited Scrutiny' cases of CASS 2017 and 2018 cycles would not be taken up for 'Complete Scrutiny' as the present directive is only to facilitate consideration of those issues wherein specific information of tax- evasion has been furnished by any law-enforcement/intelligence/regulatory authority or agency. Therefore, in such 'Limited Scrutiny' cases, Assessing Officer shall not expand the scope of enquiry/investigation beyond the issue(s) on which the case was flagged for 'Limited Scrutiny' & issue arising from nature of information mentioned in para 2 and 3, above.

The following procedure shall be adopted while examining the additional issue:

The above directive shall be applicable from the date of its issue and shall apply to the pending 'Limited Scrutiny' cases which were selected under the CASS 2017 and 2018 cycles. It is reiterated that the grounds mentioned in para 3 above are the only grounds on which a 'Limited Scrutiny' case of CASS 2017 and 2018 cycles can be expanded in its scope and that too only to the extent of the issues referred to by the law – enforcement / intelligence/ regulatory authority or agency.

It may be brought to the notice of all for necessary compliance.”

We have carefully perused the instructions issued by the CBDT from time to time governing selection of cases under CASS. From the said instructions, it emerges that during the Financial Year 2014-15, cases were selected for scrutiny under CASS primarily on the basis of AIR/CIB/26AS data. However, with effect from Financial Year 2015-16, the CBDT introduced two distinct categories of scrutiny assessments, namely, ‘Limited Scrutiny’ and ‘Complete Scrutiny’.

In cases selected for complete scrutiny, the AO is vested with wider juri iction to examine all issues arising from the return of income. In contrast, in cases selected for limited scrutiny, the juri iction of the AO is confined strictly to the specific issues for which the case has been selected, and the AO is prohibited from travelling beyond such issues. The underlying object of these instructions is to place effective checks and balances on the powers of the AO and to prevent fishing and roving enquiries in limited scrutiny assessments.

The CBDT instructions further provide that where, during the course of limited scrutiny assessment proceedings, the AO notices potential escapement of income exceeding Rs.5,00,000/- in non-metro charges and Rs.10,00,000/- in metro charges, the case may be converted into complete scrutiny, subject to prior approval of the Principal Commissioner of Income-tax (PCIT)/Director of Income-tax (DIT). Such approval is required to be accorded in writing after due satisfaction regarding the merits of the proposal. The AO is mandatorily required to record reasons justifying the expansion of the scope of scrutiny and place the same before the PCIT/DIT for approval. Only upon grant of such approval can the AO legally expand the scope of assessment from limited scrutiny to complete scrutiny.

It is also clarified that if the AO proceeds to examine issues other than those for which the case was originally selected under limited scrutiny, without following the prescribed procedure, such action would tantamount to an impermissible conversion of limited scrutiny into complete scrutiny.

In so far as cases selected under CASS for AYs 2017-18 and 2018-19 are concerned, the CBDT instructions further tighten the scope of enquiry. In such cases, the AO is not empowered to travel beyond the issues for which the case has been selected under limited scrutiny. The only exception carved out is where specific and credible information regarding tax evasion is received from an authorized external agency, and even in such circumstances, the AO can examine such additional issues only after obtaining prior approval of the ld.PCIT/DIT.

Thus, with effect from A.Y.2017–18, in cases selected for limited scrutiny, the juri iction of the AO is strictly confined to the original limited scrutiny issues and such specific tax evasion issues as may be flagged by authorized external agencies, subject to prior approval of the competent authority.

We find that the aforesaid instructions have been issued by the CBDT in exercise of its statutory powers u/s.119 of the Act. Such instructions, being binding in nature, are mandatorily required to be followed by the AO. It is a well- settled proposition of law that failure on the part of the AO to adhere to the specific circulars and instructions issued by the CBDT while framing the assessment vitiates the assessment proceedings, rendering the resultant assessment order unsustainable in the eyes of law. In this regard, reliance is placed on the following judicial precedents, wherein it has been consistently held that the circulars and instructions issued by the CBDT in exercise of its powers u/s.119 of the Act are binding on the AO.

The Hon’ble Supreme Court in UCO Bank v. CIT [1999] 237 ITR 889 (SC) noted as under: - “…..What is the status of these circulars ? Section 119(1) of the Act provides that, "The Board may, from time to time, issue such orders, instructions and directions to other income-tax authorities as it may deem fit for the proper administration of this Act, and such authorities and all other persons employed in the execution of this Act shall observe and follow such orders, instructions and directions of the Board : Provided that no such orders, instructions or directions shall be issued (a) so as to require any income-tax

Following the judgment of the Hon’ble Supreme Court in UCO Bank v. CIT (supra), the Hon’ble Andhra Pradesh High Court in CIT v. Smt. Nayana P. Dedhia [2004] 141 Taxman 603 (AP) held as under: - “The Supreme Court in this judgment, which is clear from the paragraph quoted above, held in no uncertain terms that:

Keeping in view the aforesaid legal principles and adverting to the facts of the case on hand, we observe that the additions made by the AO on account of increase in capital u/s.68 of the Act and the disallowance of certain expenditure u/s.14A of the Act admittedly fall within the scope of issues for which the assessee’s case was selected for limited scrutiny.

However, the addition of Rs.4,30,62,000/- made by the AO towards alleged unexplained investment u/s.69 of the Act, in our considered opinion, is clearly dehors the scope of the limited scrutiny assessment. By making the said addition, the AO has evidently travelled beyond the issues for which the case was selected under the CASS for limited scrutiny. In effect, the AO has assumed juri iction to conduct a complete scrutiny assessment, despite the fact that no authority is vested in him to do so in the absence of conversion of the case from limited scrutiny to complete scrutiny in the manner prescribed under law.

We further note that the addition made u/s.69 of the Act does not emanate from any information pertaining to tax evasion received from an external agency. It is also evident from the assessment order as well as the remand report that no prior approval of the ld.PCIT was obtained by the AO for widening the scope of scrutiny, as mandatorily required under the CBDT Instructions governing limited scrutiny cases.

In our considered view, the reasons for selection of a case under CASS for ‘limited scrutiny’ have to be read strictly and literally, without any scope for expansion or interpretative enlargement. In such cases, the additions, if any, must directly relate to and arise from the specific issues for which the case was selected for scrutiny. The concept of making indirect or consequential additions by enlarging or extrapolating the scope of the reasons for scrutiny is not permissible in law in the context of limited scrutiny assessments.

In the instant case, the assessee’s case was selected for limited scrutiny specifically to examine (i) expenses incurred in relation to earning exempt income and (ii) share capital/capital. Thus, the juri iction of the AO was confined to examining the applicability of the provisions of sections 14A and 68 of the Act. By making an addition u/s.69 of the Act, the AO has clearly exceeded the juri iction vested in him and travelled beyond the scope of limited scrutiny.

For this reason, we are unable to subscribe to the reasoning adopted by the Ld.CIT(A) that since the asset in question was included in the gain arising on account of business succession and credited to the capital account, the addition u/s.69 of the Act is inherently covered within the issue of “share capital/capital”. We concur with the contention advanced by the Ld.AR that if such a line of reasoning is accepted, the very object and purpose of introducing the concept of limited scrutiny would be defeated, and the Assessing Officers would be at liberty to enlarge the scope of any scrutiny assessment in an indirect manner, which is impermissible under law.

We also note that the subsequent deletion of the addition made u/s.69 of the Act by way of a rectification order u/s.154 of the Act does not cure or obliterate the inherent juri ictional defect in the impugned assessment order. A juri ictional infirmity strikes at the very root of the assessment and cannot be validated or remedied by subsequent proceedings.

In view of the aforesaid facts and circumstances, we hold that the impugned assessment order dated 29.12.2019 passed u/s.143(3) of the Act is liable to be quashed as null and void, since the AO has undertaken an unauthorized conversion of ‘Limited Scrutiny’ into ‘Complete Scrutiny’, which is expressly impermissible under the CASS guidelines applicable for Assessment Years governed by CASS-2017 and CASS-2018 by way of a circular issued by the CBDT vide F.No.225/402/2018/ITA.II dated 28.11.2018. :-35-: ITA. No.:1840/Chny/2025

We draw support for the above conclusion from the decision of the Coordinate Bench of Kolkata in the case of Weilburger Coatings (India) Pvt. Ltd. v. DCIT [ITA No. 753/Kol/2019, dated 28.03.2023], wherein it has been categorically held that unless a limited scrutiny case is validly converted into a complete scrutiny by following the prescribed procedure, the AO has no juri iction to examine issues beyond the scope of limited scrutiny. In the absence of such conversion, the assessment order passed by the AO was held to be bad in law and unsustainable. The relevant observations of the Tribunal are reproduced hereunder:

The aforesaid decision of the Tribunal has been affirmed by the Hon’ble Calcutta High Court in PCIT v. Weilburger Coatings (India) Pvt. Ltd. [2023] 155 taxmann.com 580 (Cal), wherein the Hon’ble High Court upheld the view that such an assessment suffers from a juri ictional defect and cannot be treated as a mere procedural irregularity, holding as under: -

In view of the foregoing discussion and upon a careful consideration of the facts and circumstances of the case, as well as respectfully following the binding judicial precedents governing the issue, we are of the considered opinion that the impugned assessment order passed by the AO suffers from a fundamental legal infirmity and is, therefore, void ab initio and unsustainable in the eyes of law. Accordingly, the said assessment order is hereby quashed. In consequence thereof, the additional ground raised by the assessee succeeds and is allowed.

Considering the peculiar facts and circumstances of the assessee’s case, we deem it appropriate to examine the issues on merits as well. Accordingly, the same are adjudicated hereunder.

We have perused the capital account of the assessee for the assessment year under consideration and note that the assessee has credited the following amounts therein:

For the sake of clarity and ready reference, the capital account of the assessee as on 31.03.2017 is reproduced hereunder.

It is an admitted fact that the assessee was engaged in the business of real estate, which was hitherto carried on in the status of a sole proprietorship concern. As on 31.03.2017, the said sole proprietorship concern stood succeeded by a company, namely M/s. Amar Prakaash Developers Private Limited, pursuant to a Business Succession-cum-Transfer Agreement (hereinafter referred to as “the BTA”).

On a careful perusal of the BTA, it is evident that the entire business of the sole proprietorship, together with all its assets and liabilities, was transferred to the successor company as a going concern. The total consideration for the said transfer was fixed at Rs.110,03,66,310/-, which was discharged by the successor company through the allotment of equity shares at a value of Rs.188.70 per equity share to the assessee.

For the sake of completeness and ready reference, the relevant ‘consideration’ clause as contained in the BTA is extracted hereinbelow: –

We have perused the terms of the BTA and observe that the net consideration of Rs.110,03,66,310/- was mutually agreed upon between the assessee and the transferee company on the basis of revaluation of the assets and liabilities. As evident from Annexure–I to the BTA, the aggregate value of assets transferred, including stock-in-trade, was determined at Rs.134,94,13,602/-, whereas the corresponding liabilities taken over were quantified at Rs.24,90,47,292/-. After adjusting the aforesaid liabilities against the value of assets, the resultant net consideration was arrived at Rs.110,03,66,310/-. For the sake of clarity and ready reference, the statement of assets and liabilities as set out in Annexure–I to the BTA is reproduced hereinbelow: -

We further observe that, except for the allotment of equity shares in M/s.Amar Prakaash Developers Private Limited, no other consideration, whether in cash or otherwise, was received by the assessee. It is also not the case of the Revenue that any additional direct or indirect consideration was passed on to the assessee in connection with the succession of the sole proprietorship business by the company.

We take note of the fact, admittedly as recorded in paragraph 10 of the assessment order, that consequent to the succession, the shareholding of the assessee in M/s.Amar Prakaash Developers Private Limited stood at 61%. The Ld.DR candidly admitted that there is no dispute with regard to the fact that the sole proprietorship concern of the assessee was succeeded by a company and that the statutory conditions prescribed u/s.47(xiv) of the Act, insofar as they relate to the allotment of equity shares and the requirement of post-succession shareholding of more than 50%, stand fulfilled.

However, the contention of the Ld.DR is that the valuation adopted, which formed the basis for determining the net consideration, is abnormal and grossly inflated. According to him, such inflated valuation renders the entire transaction of succession a sham arrangement, thereby disentitling the assessee from the exemption contemplated u/s.47(xiv) of the Act. On this premise, it was argued that the amount of Rs.93.63 crores credited to the capital account of the assessee is liable to be taxed as unexplained cash credit u/s.68 of the Act.

Keeping in view the aforesaid undisputed facts, it is apposite to advert to the provisions of section 47(xiv) of the Act. For the sake of ready reference, the said provision is reproduced hereinbelow: - “(xiv) where a sole proprietary concern is succeeded by a company in the business carried on by it as a result of which the sole proprietary concern sells or otherwise transfers any capital asset or intangible asset to the company :

We have carefully considered the rival submissions advanced by the parties and have perused the material available on record, including the relevant statutory provisions. The issue arising for our adjudication pertains to the taxability of the gains of Rs.93,63,20,420/-, arising on the transfer of a proprietary business undertaking of the assessee to a private limited company, and whether such transfer qualifies for the exemption provided u/s.47(xiv) of the Act. The further question which falls for our consideration is whether, merely on account of a higher valuation of the undertaking, the benefit of section 47(xiv) of the Act can be denied and the resulting gain can be brought to tax by invoking the provisions of section 68 of the Act.

At the threshold, it is necessary to advert to the charging provision contained in section 45 of the Act. The said section mandates that any profits or gains arising from the transfer of a capital asset shall be chargeable to income-tax under the head “Capital gains” and shall be deemed to be the income of the previous year in which the transfer is effected. The charge so created is, however, subject to the exemptions and exclusions specifically provided under the Act, including those enumerated in sections 54 to 54H of the Act.

For a transaction to fall within the ambit of section 45 of the Act, the following indispensable ingredients must co-exist: firstly, the existence of a capital asset; secondly, a transfer of such capital asset during the relevant previous year; thirdly, the accrual of profits or gains as a consequence of such transfer; and lastly, the absence of any statutory exemption applicable to such gains. In the absence of any one of these conditions, the charging provision

Equally important is the requirement of “transfer” of such capital asset. Section 2(47) of the Act defines the term “transfer” in an inclusive and expansive manner so as to bring within its fold various modes by which ownership or enjoyment of a capital asset is relinquished. Sale, exchange, or relinquishment of an asset squarely fall within the ambit of the said definition. In the case before us, the assessee, who was carrying on business as a sole proprietor, transferred the entire sole proprietorship business to a private limited company. It is well settled that a proprietary concern and a company incorporated under the Companies Act are distinct legal entities and separate taxable persons under the Act. The consideration for such transfer was discharged by the company through allotment of its shares to the assessee. Such a transaction, therefore, constitutes an exchange and is clearly covered by the definition of “transfer” under section 2(47) of the Act.

The next limb of section 45 of the Act relates to the accrual of profits or gains from such transfer. The expression “profits or gains” is of wide import and is not restricted to monetary gains alone. It includes any economic benefit flowing from the transfer and, in appropriate cases, also comprehends losses. In the present case, it is evident from the record that the undertaking was transferred at a value higher than its net worth as appearing in the books of :-43-: ITA. No.:1840/Chny/2025

However, the scheme of the Act does not end with section 45 of the Act. Section 47 of the Act provides a list of transactions which, though otherwise in the nature of transfer, are expressly excluded from being regarded as transfer for the purposes of section 45 of the Act. These provisions are in the nature of statutory carve-outs and are intended to facilitate genuine business reorganizations without attracting an immediate tax incidence. If a transaction squarely falls within the scope of section 47 of the Act, the charging provision under section 45 of the Act stands eclipsed.

Clause (xiv) of section 47 of the Act specifically deals with the succession of a sole proprietary concern by a company. It provides that where a sole proprietorship business is succeeded by a company in the business carried on by it, and as a result of such succession the proprietor transfers any capital asset or intangible asset to the company, such transfer shall not be regarded as a transfer for the purposes of capital gains, subject to fulfillment of the conditions prescribed in the proviso thereto.

On a careful examination of the facts, we find that there is no dispute regarding compliance with clauses (a), (b) and (c) of the proviso to section 47(xiv). It is an admitted position that all the assets and liabilities of the proprietary concern relating to the business immediately before succession became the assets and liabilities of the company upon such succession. It is also undisputed that the assessee, being the sole proprietor, held not less than fifty per cent of the total voting power in the company after succession. Further, consideration was also discharged to the assessee in the form of equity shares and no other direct or indirect benefit have been passed on to the assessee.

The only grievance of the Revenue is alleged inflation of the value pertains to the assets and liabilities of the business of the assessee. According to the Revenue, since the shares were allotted at a value exceeding the book value of the assets transferred, the succession of the business of the assessee by the company is a sham transaction.

We find this objection to be misconceived and untenable. A plain and harmonious reading of section 47(xiv) of the Act it is abundantly clear that what is prohibited is the receipt of any consideration or benefit other than by way of allotment of shares. The statute expressly permits the proprietor to receive consideration in the form of shares of the successor company. The qualifying phrase “other than by way of allotment of shares in the company” governs and controls the entire preceding expression and leaves no room for ambiguity.

Significantly, the provision does not prescribe any restriction or cap on the value at which such shares may be allotted, nor does it mandate that the shares must necessarily be issued at the book value of the assets transferred. The law equally does not prohibit revaluation of assets at the time of succession. In the absence of any such statutory embargo, the mere fact that the assets were alleged overvalued and shares were allotted at a value higher than the book value of the proprietary concern cannot be construed as conferring an impermissible benefit upon the assessee.

It is also not the case of the Revenue that the assessee received any consideration in cash or in any other form apart from the allotment of shares. In such circumstances, the essential condition stipulated under clause (c) of the proviso to section 47(xiv) of the Act stands fully satisfied.

We find merit in the contention advanced by the Ld.AR that, by virtue of the revaluation exercise undertaken by the assessee and the consequent

We further observe that the statute does not prescribe any condition for withdrawal or denial of the exemption granted u/s.47(xiv) of the Act on account of any alleged discrepancy in the valuation of the assets taken over or the issue price of shares allotted by the successor company.

We find support from the decisions of the Co-ordinate Benches of the Tribunal, wherein it has been consistently held that once the conditions stipulated u/s. 47(xiv) of the Act are duly satisfied, the assessee is entitled to the exemption provided therein, and no addition can be made merely on account of revaluation of assets or valuation of shares.

The Panaji Bench of this Tribunal in ACIT v. Joe Marcelinho Mathias [2013] 143 ITD 132 (Panaji – Trib) has held as under: -

In the case of Asstt. CIT v. Madan Mohan Chandak [2011] 14 taxmann.com 27/47 SOT 207 (Chennai), (URO) the Hon'ble Tribunal has taken the view that provision of Sec. 47(xiv) shall apply even in case of sale and the provisions of Sec. 50B will not apply. While dealing with the issue, the Tribunal under para 6 of its order held as under :

Further, the Co-ordinate Bench of this Tribunal, in the case of DCIT v. Shri D. Satish Babu [ITA No. 1807/Mds/2015, order dated 13.01.2016], upheld the findings of the CIT(A) and held that where all the conditions prescribed u/s.47(xiv) of the Act are duly satisfied, the transfer in question does not attract the provisions of section 45 of the Act. Consequently, the gains arising therefrom cannot be brought to tax as capital gains.

We also find force in the submissions of the Ld.AR that the amount of Rs.93,63,20,420/- does not represent a cash credit as contemplated u/s.68 of the Act, but is merely a book entry arising on account of the succession of the assessee’s sole proprietorship business by a company. The impugned entry reflects the accounting treatment of transfer of assets and liabilities pursuant to such succession and does not involve any actual inflow of cash or receipt of money. In our considered view, the scope and applicability of section 68 of the Act are confined to cases where any sum is found credited in the books of account of the assessee and such credit represents a real and tangible receipt of money, the nature and source of which remains unexplained. The provisions of section 68 of the Act cannot be invoked in respect of notional entries or book adjustments which do not result in the introduction of any fresh funds into the business of the assessee. A mere accounting entry, without any corresponding receipt of cash or equivalent consideration, cannot be brought to tax u/s.68 of the Act. In the present case, it is an undisputed fact that the amount of Rs.93.63 crores has arisen solely on account of the vesting of the proprietorship business

We rely on the judgement of the Hon’ble Madras High Court, in V.R. Global Energy (P.) Ltd. v. ITO [2018] 407 ITR 145 (Mad), wherein the Hon’ble Court has upheld the order of the Tribunal holding that the provisions of section 68 of the Act are not attracted in cases where the alleged cash credits representing share capital are admittedly brought about only through book adjustments and not by way of actual receipt of funds. The Special Leave Petition filed by the Revenue against the said judgement was dismissed by the Hon’ble Supreme Court in ITO v. V.R. Global Energy (P.) Ltd. [2020] 113 taxmann.com 31 (SC), thereby affirming the view taken by the Hon’ble High Court.

We further place reliance on the decision of the Co-ordinate Bech of Kolkata Tribunal in Abhijeet Enterprise Ltd v. ITO [ITA No.308/Kol/2017 dated 27.03.2019], wherein it was held as under: -

In view of the above decision we are of the considered view that the phrase ‘any sum’ employed in Section 68, cannot be extended to include any book entry, notional adjustment, payment in kind etc. The Ld. AR’s reliance on the findings recorded in the context of the interpretation of the provisions of Section 68 in the decision of the Special Bench of this Tribunal comprising of five members in the case of Manoj Agarwal Vs. CIT (supra) is also found to be of much relevance, wherein this Tribunal had held as under:

We also rely on the judgment of the Hon’ble Madras High Court in the case of V R Global Energy Pvt Ltd. Vs ITO (supra) which is squarely applicable in the present case. In the decided case there was an outstanding due of Rs.60.67 crores payable to one Mrs. VR by the assessee company. Instead of paying cash, the assessee company allotted its shares to Mrs. VR in satisfaction of the outstanding dues. The AO assessed the increase in share capital by way of unexplained cash credit u/s 68 of the Act. On appeal the Hon’ble High Court observed that there was no actual involvement of money but the allotment of shares in lieu of outstanding dues was only a book adjustment and therefore held that provisions of Section 68 could not be invoked in the given facts of the case. The relevant extracts of the judgment are as under……”

The aforesaid decision of the Kolkata Bench of the Tribunal has been affirmed by the Hon’ble Calcutta High Court in PCIT v. Abhijeet Enterprises Ltd [2024] 162 taxmann.com 859 (Cal), wherein the Hon’ble Court has held as under: -

The decision of the Hon'ble Division Bench of this Court in Jatia Investment Co. v. CIT [1994] 206 ITR 78 will also support the case of the respondent/assessee. In the said decision, the Court found that cash did not pass at any stage though entries were made in cash book showing payment and receipts; but since the entries made a complete round, no passing of cash was necessary for the purpose of making entries. Further, it was held that if there was no real cash entry on credit side of the cash book by merely an emotional or fictitious cash entry, as admitted by the Income Tax Officer, there is no real credit to cash, to its cash book the question of inclusion of the amount of the entry as unexplained cash credit cannot arise. In the light of the above decision, the view taken by the learned Tribunal was perfectly in order and sustainable.”

In view of the foregoing discussion and upon a holistic appreciation of the facts and circumstances of the case, we are of the considered opinion that the assessee has duly complied with and satisfied all the conditions prescribed u/s.47(xiv) of the Act. Consequently, the transfer of the proprietary concern by the assessee to the company does not constitute a “transfer” within the meaning of section 45 r.w.s. 47(xiv) of the Act, and therefore, no capital gains tax is chargeable on such transaction.

Once the transaction is expressly exempt under the specific provisions governing capital gains, the same falls outside the ambit of taxation under that head. In such circumstances, the provisions of section 68 of the Act, which operate in a different field, cannot be invoked to tax the very same transaction indirectly. The specific statutory exclusion provided u/s.47(xiv) of the Act overrides the general provisions, and hence, section 68 of the Act has no application in the present facts of the case.

In this backdrop, the amount of Rs.93,63,20,420/- credited to the assessee’s capital account, representing the net value of the business transferred, cannot be brought to tax. Accordingly, the addition made by the AO and subsequently sustained by the Ld.CIT(A) u/s.68 of the Act is legally unsustainable, misconceived, and devoid of merit. The impugned addition is therefore liable to be deleted on merits.

Accordingly, we hold that the AO erred in making an addition of Rs.93,63,20,420/- u/s.68 of the Act and the same is deleted on merits as well. The ground of appeal raised by the assessee challenging the said addition is, therefore, allowed on merits.

The next issue for our consideration is the taxability of gifts aggregating to Rs.19,83,67,287/- received by the assessee from his father and brothers, and whether the difference between the value declared in the registered

At the outset, it is an admitted and undisputed fact that the assessee has received the impugned immovable properties through duly registered settlement/gift deeds executed by his father and brothers. The relationship between the assessee and the donors has not been doubted by the AO. It is also not in dispute that the transfer of the properties stood completed in accordance with the provisions of the Transfer of Property Act, 1882, and the entries in the capital account of the assessee are supported by such registered instruments.

The AO has made the impugned addition mainly on the ground that there exists a substantial variation between the value mentioned in the registered settlement deeds and the value adopted by the valuer in the valuation report, and on that basis, concluded that the valuation adopted by the assessee is artificially inflated. Accordingly, the AO invoked the provisions of section 68 of the Act and treated the credit appearing in the capital account as unexplained. The Ld.CIT(A) confirmed the action of the AO by holding that the assessee failed to prove the identity and creditworthiness of the donors and the genuineness of the transactions.

In our considered opinion, the approach adopted by the lower authorities is not sustainable in law. Once the receipt of the properties is evidenced by duly registered settlement deeds and the relationship of the donors with the assessee stands admitted, the identity of the donors is conclusively established. The donors being the father and brothers of the assessee, their existence and capacity cannot be doubted merely on account of a difference in valuation. The genuineness of the transactions is also established by the execution and registration of the settlement deeds, which have neither been alleged nor proved to be sham, bogus or fictitious. It is well settled that a registered

Coming to the applicability of section 68 of the Act, we find considerable force in the submission of the Ld.AR that the said provision deals with unexplained cash credits. In the instant case, the credit in the capital account does not represent any receipt of money but represents the value of immovable properties received by way of gift/settlement. The source of such credit is clearly identifiable and traceable to registered settlement deeds. Merely because the assessee has adopted a value based on a valuation report which is higher than the value mentioned in the settlement deeds, the same cannot, by itself, lead to the conclusion that the credit represents unexplained income of the assessee. The law does not mandate that the value recorded in the books must necessarily be identical to the value stated in the registered document, particularly when the underlying transaction itself is not in dispute.

The objection of the Revenue based on alleged abnormal or excessive valuation is also misplaced. Valuation is inherently a matter of estimation and opinion. Unless the statute specifically provides for substitution of value or adoption of a deemed value, mere variation in valuation cannot give rise to a taxable addition. In the present case, the AO has not brought on record any material to show that the assessee introduced any unaccounted money in the guise of gifts, nor has any evidence been produced to demonstrate that the donors lacked the capacity to own or transfer the properties in question or that the transactions were colourable devices.

Further, we find that the provisions of section 56(2)(x) of the Act squarely apply to the facts of the case. The said provision expressly excludes from taxation any receipt of immovable property from a ‘relative’ as defined therein. It is an undisputed position that the father and brothers of the assessee fall within the definition of ‘relative’. Once the receipt itself is excluded from the ambit of taxation u/s.56(2)(x) of the Act, the same cannot be indirectly brought

The contention of the Ld.DR that alleged abnormal valuation disentitles the assessee from the benefit of section 56(2)(x) of the Act is devoid of merit. The statute does not provide for any such exception based on valuation differences for the purpose of making additions under the provisions of the Act. When the legislature, in its wi om, has granted an unconditional exclusion in respect of gifts received from relatives, the tax authorities cannot read into the provision conditions which are not expressly provided therein.

In view of the foregoing discussion, we hold that the assessee has duly discharged the onus cast upon him. The identity of the donors, their relationship with the assessee and the genuineness of the transactions stand proved beyond doubt as the gift has been received from the relative as contemplated u/s.56 of the Act. Consequently, the addition of Rs.19,83,67,287/- made u/s.68 of the Act is unsustainable both on facts and in law. Hence, the same is hereby deleted by allowing the ground raised by the assessee.

In the result, the appeal of the assessee is allowed.