ACIT, NON-CORPORATE CIRCLE 7(1), CHENNAI, CHENNAI vs. LATE SHRI MAHAVEER BHANDARI, LEGAL HEIR- SMT. LALITHA BHANDARI, CHENNAI

-3 - ITA. No:2785/Chny/2024 Ground No.7 - For those and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned CIT(A) may be set aside and that of the Assessing Officer restored.

-5 - ITA. No:2785/Chny/2024 From the above it was very evident that on the date of transfer of shares the fair value of the shares was Rs.586 while appellant restricted to the sale consideration to Rs.35 crores, which incidentally was the cash consideration determined in the SPA. The share consideration was not determined and neither was the swap ratio, then determined. Notice under section 133(6) was issued to EMIL to produce the valuation report to justify the revision of the asset value to Rs.76.79 crs. EMIL produced a valuation report of American Appraisal India Pvt. Ltd., a division of DUFF & PHELPS (D&P) submitted by Vinay Gupta. The appellant objected to the proposal of determining the Full Value of transaction at Rs. 528.3 million. Appellant has referred to the Annual Report of 2015-16 but no reference has been made to the Annual Report of 2016-17. EMIL has revised the securities premium account as on 31.3.2016 by Rs.17.80 crs as fair value adjustment in the annual report of 16-17. Since there is no actual flow of cash, and being an exchange of share, the Full Value of consideration has to be the Fair market value of the shares as on date of transfer. Hence the Full value of consideration is adopted @Rs.586 per share and LTCG is therefore determined by adopting the full value of consideration at Rs.586 per share, which results in the addition of Rs.8,84,50,194/-. The AO iterated that the benefit derived in the form of capital gains from the sale of shares of the Company held is already offered for taxation. Further, one of the promoters also had been employed in the Company subsequent to 2015, the amount of consideration / value of benefits received on account of employment enjoyed through the Company was also offered for taxation under the head ‘income from salaries’ during the relevant Assessment Years. Such income has been offered to tax at the maximum marginal rate applicable to individuals (subject to the slab rates applicable to the individuals). It is to be noted that Mr. Naveen Bhandari, the above said promoter had received Rs.2.41 Crores during FY 2015-16 revenues / benefits from -6 - ITA. No:2785/Chny/2024 the Company. The appellant claim that other than capital gain the only other benefit, that the promoters derived, was on account of salary paid to Shri Naveen Bhandari. And no other shareholder took any other benefit. It is categorically clear that the remuneration is a separate and distinct benefit element of the SPA. Moreover, the appellant and his wife were not actively involved in the operations of the company. The idea and the product of the company was the brain child of Mr.Naveen Bhandari and his employment and continuation in the company was required to download the technology, to the new management. With regard to the existence of the non-competition agreement, the appellant’s claim that no separate agreement exist is correct to the extent that there is no separate agreement, but there does exist the clauses pertaining to non compete and non solicitations in the SPA, clause (9) of SPA which of course has not been separately valued. With regards to the taxability of the amount of non compete fees, though there is no separate valuation mentioned in the agreement some portion of the sales consideration should be allocated towards no compete fees. Hence an amount of Rs.2 crores based on valuation made by D&P is attributable to no compete fees and taxable as business receipts u/s 28(va) of the Act. Proportionate value to appellant comes to Rs.99,39,998/-. Consequently, the LTCG will stand reduced by Rs.99,39,998 and be treated as Business income. The FMV of the EIML shares under Rule 11UA works out to Rs. 582 per share. If the appellant’s argument that the full value of consideration of the shares was at Rs.388.47 per share, then the provision of section 56(vii) will be attracted because the fair market value as determined under Rule 11UA, exceeds the consideration declared by appellant. In this case the Fair market value works out to Rs. 26,06,09,124 as against the consideration of Rs.17,39,50,059 offered by appellant. Hence the difference Rs.8,66,59,065 was charged under section 56(vii) of the Income Tax Act under the head income from other sources.

-7 - ITA. No:2785/Chny/2024 The appellant in his submissions stated that in exchange of transfer by way of sale of UPSPL shares to EMIL and pursuant to the share purchase agreement dated 24.02.2015, EMIL had approached their Board of Directors, shareholders, stock exchanges (NSE and BSE), SEBI and the Government of India (FIPB division) for necessary approvals. While EMIL’s shareholders approval which is relevant for the purpose of SEBI (ICDR) Regulations was received on 26.03.2015, the Government of India (FIPB division) granted its approval only on 20.07.2015. Due to this delay in the receipt of the Government approval, the process of allotment of shares to them and the relatives was completed only on 01.08.2015, yet within 15 (fifteen) days from the date of receipt of the regulatory approval as required under the SEBI (ICDR) Regulations. SPA between the parties clearly specifies the agreed consideration by the parties as Rs. 35 Crores. Preamble C of the amendment to the SPA between the parties entered on 28.07.2015 provided for payment of Rs. 185 (One Hundred and Eighty Five only) by way of cheque to Mr. Mahaveer Bhandari. This payment of Rs. 185 was done to ensure that the consideration of Rs. 35 Crores is paid in full, and as such there was no amendment to the purchase consideration. The value of investment recorded in the books of accounts of the Buyer i.e., EMIL for FY 2015-16 in Schedule “14. Non- current Investments” is Rs. 35 Crores. The transaction was also certified by SEBI registered Category – I Merchant Banker (valuation expert), stock exchanges with the “Relevant Date” of determining the share price as 24.02.2015. FY 2016-17 was the transition year and therefore, EMIL was required to adopt Ind-AS and make revaluation as against Indian GAAP which followed different principles. EMIL has restated its value of investment which is purely an accounting treatment and book entry adjustment recorded in their books of accounts under Ind-AS.

-8 - ITA. No:2785/Chny/2024 5. The ld. CIT(A) findings are as under: I have gone through all the submissions and documents furnished by the appellant. Income Tax Appellate Tribunal – Ahmedabad in the case of Mohan Polyfab Pvt. Ltd.,, Ahmedabad vs The Ito, Ward- 2(1)(4),, Ahmedabad on 12 February, 2020 held that:

IN THE INCOME TAX APPELLATE TRIBUNAL, "SMC" BENCH, AHMEDABAD BEFORE SHRI RAJPAL YADAV, VICE- PRESIDENT AND SHRI AMARJIT SINGH, ACCOUNTANT MEMBER नधा रण वष / Asstt. Year: 2009-2010 Mohan Polyfab P.Ltd. ITO, Ward-2(1)(4) C/o. Ketan H. Shah, Vs. Ahmedabad. Advocate 512, Time Square-1Opp: Ram Baug Bungalow Thaltej Shila Road Thaltej, Ahmedabad PAN : AABCM 0389 G (Applicant) (Responent) Assessee by : Shri Ketan Shah, and Shri Aman Shah, AR Revenue by : Shri Dilipkumar, Sr.DR सन ◌ुवाई क तार ख/ Date of Hearing : 27/01/2020 घोषणा क तार ख / Date of Pronouncement: 12/02/2020 आदेश /O R D E R PER RAJPAL YADAV, VICE- PRESIDENT Assessee is in appeal before the Tribunal against order of the ld.CIT(A)-2, Ahmedabad dated 19.12.2017 passed for the Asstt.Year 2009-10.

2. The ld.counsel for the assessee at the very outset submitted that though the issue of reopening is involved in the present appeal, but the assessee does not want to press this issue, therefore, the finding of the ld.CIT(A) to the extent of upholding of reopening of the assessment, is confirmed. On merit, the grievance of the assessee is that the ld.CIT(A) has erred in confirming the addition of Rs.28,03,000/-.

"2.3. I have carefully considered the facts of the case, assessment order and submission of the appellant. The AO has made the disallowance of bogus commission of Rs.28,03,000/- on the basis of investigation carried out in the case of Shri Satish Saraf Group, where Shri Rahul Jhunjunwla has admitted that he was indulged in providing accommodation entries to various companies through his paper company M/s. Sunlight Agency Pvt. Ltd. 2.4. The appellant company has claimed commission of Rs.28,03,000/-paid to M/s. Sunlight Agency Pvt. Ltd. for the sale made to M/s. Sajjan India Limited, Mumbai. The AO in the assessment order has noted that M/s.Sunlight Agency Pvt. Ltd. is a paper company -10 - ITA. No:2785/Chny/2024 of Shri Rahui Jhunjunwla which has been used to provide entry. The Honourable ITAT, Ahmedabad in the case of Pavankumar M. Sanghvi Vs. ITO, Wd. 3(1)(2), Baroda [2017] 81 Taxmann.com 308 has observed on such type of transaction as under:-

8. As I proceed to deal with genuineness aspect, it is important to bear in mind the fact that what is genuine and what is not genuine is a matter of perception based on facts of the case vis- a-vis the ground realities. The facts of the case cannot be considered in isolation with the ground realities. It will, therefore, be useful to understand as to how the shell entries, which the loan creditors are alleged to be, typically function, and then compare these characteristics with the facts of the case and in the light of well settled legal principles. A shell entity is generally an entity without any significant trading, manufacturing or service activity, or with high volume low margin transactions - to give it colour of a normal business entity used as a vehicle for various financial manoeuvers. A shell entity, by itself, it not an illegal entity but it is their act of abatement, of, and being part of, financial manoeuvring to legitimize illicit monies and evade taxes, that takes it actions beyond what is legally permissible. These entities have every semblance of a genuine business - its legal ownership by persons in existence, statutory documentation as necessary for a legitimate business and a documentation trail as a legitimate transaction would normally follow. The only thing which sets its apart from a genuine business entity is lack of genuineness in its actual operations. The operations carried out by these entities, are only to facilitate financial manoeuvring for the benefit of its clients, or, with that predominant underlying objective, to give the colour of genuineness to these entities. These shell entities, which are routinely used to launder unaccounted monies, are a fact of life, and as much a part of the underbelly -11 - ITA. No:2785/Chny/2024 of the financial world, as many other evils. Even a layman, much less a Member of this specialized Tribunal, cannot be oblivious of these ground realities.

2.5. It is noticed that M/s. Sunlight Agency Pvt. Ltd. has been engaged in providing accommodation entry and has been used to launder unaccounted money. The above company is shell company and its name have recently been struck off from Registrar of Companies in the cracking down the shell companies by government. Recently, Honourable Mumbai High Court in the case of Sanjay Vimalchand Jain (L/H) Shantidevi Vimalchand Jain Vs. Pr. CIT - 1, Nagpur in the Income Tax Appeal No. 18/2017 dated 10/04/2017, after examining the transaction of Shri Rahul Jhunjunwala controlled company has held that the group was indulged in dubious transaction meant to account for the undisclosed income. In view of the above, the addition made by the AO is found to be correct and justified and hence the same is confirmed."

4. A perusal of the record would indicate that stand of the AO is that Shri Rahul Jhunjhunwala was found to be indulged in providing only accommodation entries, and not in carrying any business. This fact revealed during the search carried out at the premises of Shri Rahul Jhunjhunwala. He has admitted this fact before search party. Thus, the AO on the strength of entries found in the books of accounts of Rahul Jhunjhunwala assumed that commission paid by the assessee to M/s.Sunlight Agency P.Ltd on account of sale facilitated by this concern to Sajjan India Ltd. is bogus commission, and it deserves to be disallowed as expenditure of the assessee. The case of the assessee is that it has not availed any bogus commission entry. It has requested for cross-examination of such concerned person viz. Shri Rahul Jhunjhunwala that or any other person who has disclosed this fact. The ld.AO did not provide cross-examination, rather concluded that as far as the fact of admission by Shri Rahul Jhunjhunwala that he -12 - ITA. No:2785/Chny/2024 was indulged in providing only accommodation entry is concerned, this has been resolved by DCIT, Cent.Cir.4(3). In other words, the information submitted by the DCIT, Cent.Cir.4(3)was treated by the AO as gospel truth for making a disallowance in the case of the assessee.

According to us, not allowing the assessee to cross- examine the witnesses by the Adjudicating Authority though the statements of those witnesses were made the basis of the impugned order is a serious flaw which makes the order nullity inasmuch as it amounted to violation of principles of natural justice because of which the assessee was adversely affected. It is to be borne in mind that the order of the Commissioner was based upon the statements given by the aforesaid two witnesses. Even when the assessee disputed the correctness of the statements and wanted to cross- examine, the Adjudicating Authority did not grant this opportunity to the assessee. It would be pertinent to note that in the impugned order passed by the Adjudicating Authority he has specifically mentioned that such an opportunity was sought by the assessee. However, no such opportunity was granted and the aforesaid plea is not even dealt with by the Adjudicating Authority. As far as the Tribunal is concerned, we find that rejection of this plea is totally untenable. The Tribunal has simply stated that cross- examination of the said dealers could not have brought out any material which would not be in possession of the appellant themselves to explain as to why their ex- -13 - ITA. No:2785/Chny/2024 factory prices remain static. It was not for the Tribunal to have guess work as to for what purposes the appellant wanted to cross-examine those dealers and what extraction the appellant wanted from them."

, and delete addition.

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

In the present case AO has relied upon financial statements of EMIL for FY 2016-17, and in this context, appellant has requested AO to provide an opportunity to cross examine the CFO of EMIL who has signed the financial statements for FY 2016-17 being relied upon, or his current incumbent, the Company Secretary of EMIL who has signed the financial statements for FY 2016-17 being relied upon, or his current incumbent, auditors of EMIL who has signed the financial statements for FY 2016-17 being relied upon, or his current incumbent but AO has not provided opportunity to cross examine any of them. Without providing requisite and adequate opportunity, AO passed the assessment order with an addition of Rs.8.85 crore as income in the hands of Mr. Mahaveer Bhandari.

-14 - ITA. No:2785/Chny/2024 In view of the factual matrix of the case at hand and the discussion above, as well as the judicial precedents cited, these grounds of appeal are, accordingly, allowed and the addition made by the AO on this account is, hereby, deleted.

6. In the result, the appeal is allowed. In the result, the appeal is decided as above.

7. This order has been passed under Section 250 read with Section 251 of the Income Tax Act, 1961.

6. The ld.DR for the revenue has supported the case of the AO. She further referred the judgment of the Hon’ble Supreme Court of India in the case of I.C.D.S. Ltd Vs Commissioner of Income Tax [2020] 117 taxmann.com 723 (SC) and pleased for the set aside of the impugned order for the cross-examination.

Long Term Capital Gains (LTCG) – Rs.7,85,10,196/–  Non-compete fees – Rs.99,39,998/–  Section 56(2)(vii) – Fair Market Value adjustment  Alleged lack of cross-examination being an invalid ground for  deletion by Ld. CIT(A).

The respondent/assessee, Mr. Mahaveer Bhandari, filed his return of income for A.Y.2016–17 declaring a total income of Rs.17,40,10,730/–. The case was selected for scrutiny under CASS and assessment was completed u/s 143(3), determining the total income at Rs.26,24,60,920/–. The additions primarily arose from a share swap transaction entered into by the assessee (and his family -15 - ITA. No:2785/Chny/2024 members) with M/s. Eros International Media Ltd. (EIML) for the sale of shares of M/s. Universal Power Systems Pvt. Ltd. (UPSPL). The AO adopted a fair market value of Rs.586 per share of EIML based on EIML's financial statements for FY 2016–17, resulting in enhanced capital gains. Further, based on a report from Duff & Phelps, the AO allocated Rs.2 crores towards non-compete consideration (proportionate Rs.99.39 lakhs to the assessee) and taxed the same u/s 28(va). The assessee disputed the basis of valuation and treatment of the transaction. He submitted that the transaction was entered into for a pre-agreed consideration of Rs.35 crores, supported by regulatory approvals and merchant banker valuation. He also raised the issue that the AO had failed to provide an opportunity to cross-examine key officials of EIML whose financial statements were relied upon. We observe that the Ld. CIT(A) has rightly allowed relief by placing reliance on judicial precedents, including the judgment of the Hon'ble Supreme Court in Andaman Timber Industries vs. CCE [(2015) 62 taxmann.com 3 (SC)], which held that reliance on third-party statements or documents without offering the assessee an opportunity of cross- examination is a serious breach of natural justice.

In the present case, the AO relied heavily on the financial statements of EIML for FY 2016–17, and valuation reports not authored or submitted by the assessee. Despite specific requests by the assessee to cross-examine the CFO, Company Secretary, and auditors of EIML, such opportunity was denied. Therefore, respectfully in line with the decisions of Andaman Timber Industries (SC) and Mohan Polyfab Pvt. Ltd. vs. ITO (ITAT Ahmedabad), we find that the denial of cross-examination on material used adversely against the assessee vitiates the assessment proceedings to the -16 - ITA. No:2785/Chny/2024 extent of such reliance. Hence, case law relied by the revenue is not applicable in the facts of the case.

On LTCG – Valuation and Share Consideration, the AO adopted a fair market value of Rs.586 per share of EIML based on accounting revaluations in Ind-AS financial statements for FY 2016–17. The Ld. CIT(A) held, and rightly so, that such revaluation was not indicative of actual consideration received by the assessee. The SPA dated 24.02.2015 clearly specified a fixed consideration of Rs.35 crores. The actual value received was certified by a SEBI-registered merchant banker and approved by FIPB and SEBI. No new tangible evidence was brought on record by the AO to rebut the terms of the SPA or the contemporaneous regulatory approvals. Therefore, the Ld. CIT(A)’s decision to delete the LTCG enhancement is justified.

Non-Compete Fees – Section 28(va)

Section 56(2)(vii) – Income from Other Sources

In view of the above discussion and judicial precedents, we find no infirmity in the order of the Ld. CIT(A). The deletion of additions made by the AO under LTCG, non-compete fees, and section 56(2)(vii) was based on sound reasoning, legal principles, and evidence on record. Accordingly, we uphold the order of the Ld. CIT(A). All grounds raised by the Revenue are dismissed.

Order pronounced in the open court on 15th October, 2025 at Chennai.