Loading judgment…
Facts
The Revenue appealed against the CIT(A)'s order deleting additions made by the Assessing Officer. The additions related to the valuation of unquoted shares, cash loans advanced on Hundi, and agricultural income.
Held
The Tribunal held that the CIT(A)'s deletion of additions related to the valuation of unquoted shares was correct, aligning with a previous identical case. The deletion of additions related to cash loans on Hundi was also upheld. However, the deletion of addition for agricultural income was partly set aside, allowing a reasonable amount as agricultural income and the rest as income from other sources.
Key Issues
Whether the CIT(A) erred in deleting additions related to fair market value of shares, cash loans, and agricultural income. The primary issue revolves around the valuation of unquoted shares and the nature of cash transactions.
Sections Cited
56(2)(x), 11U, 11UA, 16(c), 50CA, 43CA, 69A, 271AAB, 271AAC
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, PUNE BENCH “A”, PUNE
Before: SHRI R. K. PANDA & MS. ASTHA CHANDRA
This appeal filed by the Revenue is directed against the order dated 31.03.2024 of the Ld. CIT(A), Pune-12 relating to assessment year 2021-22.
Grounds raised
by the Revenue are as under:
1. Whether in the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs.1,44,42,560/- made u/s 56(2)(x) of the Income Tax Act, 1961 without appreciating the fact that the valuation for the purpose of section 56(2)(x) is the Fair Market Value [FMV] which is derived as prescribed method of valuation in accordance with the Rule 11U & 11UA of Income Tax Rule, 1962 with respect to the unquoted shares.
2. Whether in the facts and circumstances of the case and in law, the Ld. CIT (A) erred in considering other various aspects as per the valuation standard as per the Companies Act, 2013, Valuation Standard issued by ICAI, other factors like discount on marketability, purpose of valuation & availability of willing buyers, realisability of Immovable property and margin of safety as they are not applicable for determining the FMV of unquoted shares for the purpose of section 56(2)(x) in accordance with the Rule 11U & 11UA of Income Tax Rules, 1962.
Whether in the facts and circumstances of the case and in law, the Ld. CIT (A) erred in accepting the second valuation report furnished by assessee for the purpose of land situated at Survey No. 79, 82, 83 & 86 Village-Yerur valuing at Rs.7,44,67,966/- and not accepting the value of said land as determined by AO at Rs.9,84,25,980/- in accordance with the Rule 16(c) of Stamp Duty Act based on first valuation report furnished by assessee.
4. Whether in the facts and circumstances of the case and in law, the Ld. CIT (A) erred in accepting the second valuation report furnished by assessee for the purpose of land situated at Survey No. 159/1, 2, Kochi Bhadravati, Chandrapur valuing at Rs.60,75,383/- as per the IGR rate and not accepting the value of said land as determined by AO at Rs.74,29,514/- as per stamp duty value based on first valuation report furnished by assessee.
5. Whether in the facts and circumstances of the case and in law, the Ld. CIT (A) erred In accepting the deduction for provisions of gratuity while determining the FMV of unquoted shares in accordance with the provisions of Rule 11U & 11UA of the Income Tax Rules, 1962 though It's a non- contingent & non-current liability.
6. Whether in the facts and circumstances of the case and in law, the Ld. CIT (A) erred in accepting the concept of tolerance limit & safe harbor while determining the FMV of unquoted shares in accordance with the provisions of Rule 11U & 11UA of the Income Tax Rules, 1962.
7. Whether in the facts and circumstances of the case and in law, the Ld. CIT (A) erred in deleting the addition of Rs.26,00,000/- made on account of amount advanced on Hundi to Vikas Industries, by accepting the contention of the assessee, even when the two seized documents in the form of promissory note clearly demonstrates that the assessee has advanced cash loan of Rs. 13,00,000/- each to Vikas Industries.
Whether in the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs. 26,00,000 made on account of loans and advances given in cash through promissory notes, without considering the ledger account of Vikas Industries furnished by the assessee during assessment proceedings, which clearly demonstrates that the opening balance of unsecured loans taken by the assessee was squared up by making payment or Rs.25,00,000/- on 24-08-2020 through banking channel, and the loans advances given in cash through seized promissory notes at Rs. 13,00,000/- each (total Rs. 26,00,000/-) is altogether a new transaction having no relevance with the payment of Rs. 25,00,000/-made through banking channel on account of opening credit balance.
9. Whether in the facts and circumstances of the case and in law, the Ld. CIT (A) erred in deleting the addition of Rs. 1,28,700/- made on account of interest received on advances given in cash on Hundi to Vikas Industries, even when interest calculation is mentioned in seized documents which clearly demonstrate that the assessee has received interest from Vikas Industries.
10. Whether in the facts and circumstances of the case and in law, the Ld. CIT (A) erred in deleting the additions made on agricultural Income at Rs.1,76,015/- only on the basis of land holding ignoring the fact that assessee could not produce any supporting documentary evidences with respect to the agricultural activities carried out by him and subsequent sale of agricultural produces.
11. The appellant reserves the right to alter, amend and add & modify any grounds of appeal during the Appellate Proceedings.
3. Grounds of appeal No.1 to 6 filed by the Revenue relate to the order of the Ld. CIT(A) in deleting the addition of Rs.1,44,42,560/- made by the Assessing Officer u/s 56(2)(x) of the Act.
Facts of the case, in brief, are that the assessee is an individual and one of the directors of M/s. Metarolls Ispat Pvt. Ltd. The assessee filed his return of income on 30.12.2021 declaring total income of Rs.2,94,34,790/-. A search and seizure action u/s 132 of the Income Tax Act, 1961 (hereinafter referred to as „the Act‟) was carried out on 23.09.2021 in the case of Metarolls group of cases at Jalna and all other concerns related to this group of cases wherein the case of the assessee was also covered. The case was selected for scrutiny under the compulsory manual selection guidelines parameters. Accordingly, statutory notices u/s 143(2) and 142(1) of the Act were issued and served on the assessee, in response to which the assessee filed the various details as called for by the Assessing Officer from time to time.
During the course of assessment proceedings the Assessing Officer noted that the assessee, during the year under consideration, had purchased 1,19,360 unlisted shares of M/s. Metarolls Ispat Pvt. Ltd. (MIPL) from 7 persons and the share price was adopted at Rs.540/- per share. He, therefore, asked the assessee to substantiate the share price adopted with respect to the shares of MIPL. The assessee in response to the same submitted the valuation report of Shri Shashank Malu, Chartered Accountant wherein the fair market value as per Market Value Method was determined at Rs.752.50. It was seen that the valuation report had considered the DCF Method, Book Value Method and Market Value Method and after considering the weighted values as per the above-mentioned methods, the valuation of shares was arrived at Rs.522.48 per share. However, on perusal of provisions of section 50CA, the Assessing Officer noted that the valuation of shares for transfer purpose is required to be determined per sub-clause (b) of Rule 11UA. The Assessing Officer calculated the fair market value of shares as per Market Value Method and since the fair market value as per sub-clause (b) of Rule 11UA was higher than that was determined in valuation report, he issued a show cause notice asking the assessee to explain as to why the higher fair market value of the shares of MIPL should not be adopted for the purpose of calculation of sale and purchase consideration of shares. The assessee in response to the same filed a detailed submission objecting the higher fair market value as mentioned in the show cause notice.
Without prejudice to the objection raised by assessee in his submission with respect to the higher fair market value, the assessee had furnished a new valuation report of Shri Vishal Holani, Chartered Accountant valuing the shares at Rs.640/- per share. It was contended to provide the benefit of tolerance limit of 10% to 20% under the provisions of section 50CA and 43CA of the Act. In his submission by applying the tolerance limit of 15% and 20%, the assessee had determined the fair market value at Rs.544/- & Rs.512/- respectively. The assessee had furnished second valuation report u/s 11UA (1)(c)(b) from Shri Vishal Holani, C.A. and he had arrived at the valuation of shares at Rs.643.80 & rounded it off to Rs.640/-. The first valuation report had determined the value of shares at Rs.752.50/-. The difference of Rs.112.50/- in first and second valuation report was due to change in value of immovable properties.
During the assessment proceedings, the change in the value of two immovable properties was not acceptable to the Assessing Officer. He noted that earlier value of immovable property situated at Survey Number 79, 82, 83 & 86, Yerur was determined at Rs.10,07,20,500/-. However, later the value was reduced to Rs.7,44,67,966/- due to claim of internal roads, DP Road & open land, Parking area & transport. On verification of the NA order passed by the competent authority, it was seen that NA permission was taken for erection of factory. In the Ready Reckoner the value of such NA land was to be determined by allowing 10% allowance in stamp duty value. These rules were made by state government for determination of stamp duty. Therefore, the value of this land was determined at Rs.9,84,25,980/-. Further, the value of survey number 159/1, 2 etc was adopted in first valuation report at Rs.74,29,514/- which was as per stamp duty value. Later the value was reduced to Rs.66,75,383/- which was not acceptable. The value of this property was considered at Rs.74,29,514/- as per earlier valuation report. In the valuation report, the assessee had deducted an amount of Rs.1,45,28,805/- towards long term provision for gratuity. This was contingent provision though it was made as per Gratuity Act. Final liability in such cases should have been determined at the time of retirement of persons which can be different amount. Hence the amount of Rs.1,45,28,805/- was not allowed as deduction as non-current liability. Accordingly, the value of shares of MIPL as per rule 11UA (1)(c)(b) of the Act was calculated by the Assessing Officer at Rs.661/- per share and addition of Rs.1,44,42,560/- was made to the total income of the assessee by observing as under: “Fair Market Value of Unquoted Equity Shares (Rounded Off) It is seen that the valuation of shares purchased by the assessee comes to Rs.661/- per share as per valuation method prescribed under rule 11UA(1(c)(b) of IT Rules. This values requires to be adopted for the purpose of provisions of section 56(2)(x) of the Income Tax Act. It is seen that the assessee has adopted fair market value of Rs.540/- per share which is not acceptable. The assessee has purchased 1,19,360 shares. Details of such purchase is as under: S.No. Name of the persons from whom you Total Number Value have purchased shares of Metarolls of shares Ispat Private Limited 1 Madhavi Rathi 10,000 54,00,000
2 Saroj Rathi 600 3,24,000 3 Kantilal Rathi 32,580 1,75,93,200 4 Madhusudan Rathi 26,125 1,41,07,500 5 Kiran Rathi 10,000 54,00,000 6 Prafullata Rathi 36,430 1,96,72,200 7 Vitthal Polypack Private Limited 3,625 19,57,500 Total Number of Shares Purchased 1,19,360 6,44,54,400/- Thus, considering the fair market value of Rs.661/- per share the differential amount of Rs.121/- (661-540)*1,19,360 which comes to Rs.1,44,42,560/- is added to the income of the assessee u/s 56(2)(x) of the Income Tax Act. Penalty proceedings u/s. 270A for under reporting of income are initiated herewith.”
8. In appeal, the Ld. CIT(A) deleted the addition by observing as under: “5.2 I have gone through the submission of the appellant along with supporting documents submitted during the appellate proceedings as well as during the assessment proceedings before the Ld. AO. The appellant has contested the determination of fair market value of the equity shares of Meta Rolls Ispat Private Ltd (MIPL). During the year under consideration, the appellant has purchased the equity shares of MIPL from Smt Saroj Rathi. The appellant has submitted that while estimating the FMV of equity shares, various aspects need to be considered as per the valuation standards accepted under the Companies Act, valuation standards issued by the ICAI which are in line with international valuation standards, factors like- lack of discount on marketability, purpose of valuation and availability of willing buyers, realisability of immovable properties margin of safety, WDV of depreciable assets as per the Income Tax Act etc. The Ld. AO has determined the fair market value (FMV) of the shares as per rule 11UA and rejected the contentions of the appellant as under. 5.2.1 On the basis of the submission made by the appellant the AO observed that one of the immovable properties which belongs to the appellant is situated at Survey No. 79,82,83, and 86 of Yerur Village (adjacent to Tadali MIDC). The Ld. AO has not accepted the valuation determined by the appellant. The value determined by the appellant based on guideline rate is Rs. 7,44,67,966/-whereas the AO has derived the value at Rs. 9,84,25,980/-, the net difference being Rs. 2,39,58,014/-. I have gone through the of valuation report submitted by the appellant along with the guideline rates of Industrial NA plot with open area, amenity area and parking area. The appellant has submitted the valuation as per stamp duty rules. It is seen that there are different rules for valuation of industrial NA plots based on criteria like open area, amenity area and parking area etc. Further, the appellant has submitted fair valuation of the land situated at Survey No. 79, 82, 83, and 86 of Yerur Village which is an undeveloped industrial NA land and the said land is a barren land. Further, the said land is not demarcated as usable land as per the NA order as per the Stamp Duty Authority Rules for valuation which need to be followed while assessing the fair value of the immovable property for levy of stamp duty purpose. On perusal of the valuation report it is seen that the Stamp Duty Authority Rules are followed by the valuer for assessing the value of Immovable property. Hence, the valuation done by the valuer of Land situated at Survey No. 79,82,83 and 86 Yerur Village (adjacent to Tadali MIDC) at Rs. 7,44,67,966/- is found to be acceptable since no uniform valuation rate is to be used for the entire land. Thus, impact of higher value of Rs. 10.20 per equity shares worked out by the Ld. AO is Rs. 2,39,58,014/- (i.e. difference between value worked out by the Ld. AO and the Appellant divided by / Rs. 2,34,67,670/- paid up capital Rs. 10/- face value of equity shares.) 5.2.2 Secondly, the AO noted that in the valuation report submitted by the appellant, the value adopted for land situated at Survey No. 159/1,2 Kochi Bhadravati Chadrapur is Rs. 60,75,383/- whereas the AO has derived the value at Rs.74,29,514/-. Thus net difference is Rs. 13,54,131/- On perusal of the valuation report of the appellant which is supported by valuation rules for stamp duty it is seen that the value arrived at Rs. 60,75,383/- is as per the IGR rate available on the website of Government of Maharashtra. Thus, the valuation adopted by the appellant is found to be reasonable. In view of this, impact of higher value of Re. 0.06 per equity shares worked out by the Ld. AO is Rs. 13,54,131/- ie. difference between value worked out by Ld. AO and Appellant divided by / Rs. 2,34,67,670/- paid up capital Rs. 10/- face value of equity shares. 5.2.3 Further, in the valuation report of Shri Vishal Holani, he has deducted the provision for gratuity and considered as liability which is payable in near future as most of the employees of the appellant company have submitted that they have their continuous service of more than 5 years and eligible for the gratuity entitlement, thus provision for gratuity is a certain liability, and the shareholders/members of the company are bound to be paid the gratuity. Thus, it is accounted as per the accounting standards. It is to be noted that the gratuity is mandatorily to be paid to those employees who have completed their service as per the rules and regulations of receipt of gratuity and payment is required to be made to the employees once they are retired. Most of the employees have crossed the requisite limit of service and are eligible for gratuity. On perusal of the same, it is seen that such provision of gratuity is made based on some scientific approach and the same has been derived by analyzing past data. Therefore, liability of the gratuity needs to be considered at the time of valuation. Thus, impact of higher value of Rs. 0.62 per equity share worked out by the Ld. AO is Rs. 1,45,28,805/- (i.e. provision for gratuity divided by / Rs. 2,34,67,670/- paid up capital Rs. 10/- face value of equity shares). 5.2.4 The appellant has made the submission as to why there is no scope for estimating the value of equity shares under rule 11UA of the Income Tax Rules. The factors like concept of safe harbor limit or tolerance band or discount for lack of marketability apply when the valuation is considered as per the valuation standards and adopted under the companies act. The concern raised by the appellant is considered and seems to be logical and a valid ground on account of uncertainty to arrive at fair market value (FMV), basis of fair valuation, as it
depends on various factors viz. the willingness of the buyer, type of assets, generation of income from those assets, legally clear and freely traded in open market, availability of willing buyers etc. In the present case the Rajuri group members and promoters had decided to part of their shareholding pattern of the company viz. Rajuri Steels Private Ltd (now Rathi Steel and Metal Private Limited (RSMPL), Meta Rolls Ispat Private Limited (MIPL). The promoters of this company have decided to exchange the shares of these companies amongst promoters/members of the group only and not to transfer to any third person. Thus, the promoters/members, considering the various aspects to arrive at fair market value determined the equity shares as per weighted average method out of three methods viz. DCF. NAV and NAV (based on market price of immovable property) considering the various aspects such as future earnings, value of assets and capacity of the plant etc. The purpose of transfer of shares is distribution of shares among the promoters/members only. As per the provisions of Companies Act 2013 related to transfer of share in case of Private Company, restrict the Private Company to transfer the shares without prior consent of previous shareholders. This arrangement is done only to transfer the shares internally among the promoters and is within the law. 5.2.5 As per the rules for valuation with regard to the Plant and machinery and other depreciable assets there are two values one is book value as per books and other is WDV as per the Income Tax Act. In the present case the book value as per books is higher than the WDV as per the Income Tax Act. Further as per the section 50C of the Income Tax Act, the capital gain is calculated by considering the WDV as per Income Tax Act. The reason behind the difference in these two mechanisms for arriving at the fair valuation is the question of law. However, the new shareholders might lose the benefit of tax saving on depreciation. Consequently, this element to determine the valuation of the unquoted equity shares is to be considered in a broader way. 5.2.6 Further while determining the deeming income under the Income Tax Act, various concepts are there such as Safe Harbor Rule, Section 50C etc for dealing with the practical difficulties and uncertainties. However, the section 50CA is silent on such deeming fiction. The same issue of Fair valuation is dealt with in section 50C where the Income Tax Act allows 10% of the difference between stamp duty value and the sales consideration in case of Immovable property. This rate of variation is increased from 5% to 10% in the Finance Act 2020 keeping in mind the practical difficulties and uncertainties while calculating the fair value. 5.2.7 Similarly as regards to the valuation of shares under rule 11UA, over the period, valuation method has changed from Net asset valuation method to Discounted Cash Flow method. On 25th September 2023 a notification was issued by the Central Board of Direct of Taxes (CBDT). The amended Rule 11UA provides five more methods of valuation for issue of unquoted equity shares viz. Comparable Company Multiple Method, Probability Weighted Expected Return Method, Option Pricing Method, Milestone Analysis Method and Replacement Cost Method. Further the Income Tax Act has also allowed the discount for lack of marketability.
5.2.8 As per the amended rules of shares valuation, the method to be used has to be from the prescribed methods as per the valuation standards issued by the ICAI valuation, in line with international valuation standards which has been adopted under the Companies Act and Insolvency and bankruptcy Code monitored by Insolvency and Bankruptcy Board of India (IBBI) and National Company Law Tribunal. The appellant has used weighted average of DCF, NAV and NAV of market value to determine the value of equity shares for calculation of fair valuation of shares. The same is most appropriate and in accordance with law and regulations accepted by the various statues and bodies which is most perfect to estimate the value of equity shares with set rules and guidelines. The Appellant has taken the valuation report from the certified valuer by adopting this method and the valuer has considered the challenge and uncertainties to determine the fair valuation as the concept of fair valuation is very dynamic in nature. 5.2.9 Based on the various aspects and considering the practical difficulties and uncertainties the value of share at Rs. 540 is found to be reasonable as the Fair value of equity shares of MIPL. Even if it is considered that the value of shares determined under the rule 11UA worked out by the CA of Rs. 640 per equity shares is to be adopted, however, considering the various practical difficulties to sell the immovable properties of the appellant companies by removing the plant thereon and required timeframe as well as some legal issues such as related to employees, demolishing the plant, the time taken for big industrial unit etc. the discount of 15% is to be considered on account of lack of marketability of shares needs to be given. Accordingly, as discussed above the fair market value of equity shares of MIPL comes to Rs. 544 and rounded to Rs.
Thus, the estimated addition under section 50CA or 56 (2)(x) of the Act deserves to be deleted. The addition made under section 56(2)(x) of the Act for purchase of equity shares of MIPL below the FMV determined by the Ld. AO of Rs. 1,44,42,560/- (i.e. purchase of equity shares of MIPL of 119360 Rs.121 (Rs. 661/- FMV determined by the Ld. AO less Rs. 540 determined as per valuation as discussed above)) is, therefore, deleted. Grounds no. 1 to 3 of the appeal are, therefore, ALLOWED.”
Aggrieved with such order of the Ld. CIT(A), the Revenue is in appeal before the Tribunal.
We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and the Ld. CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find an identical issue had come up before the Tribunal in the case of ACIT vs. Dwarkaprasad Bhikulal Soni vide for assessment year 2021-22, order dated 14.02.2025 where the Tribunal after considering the rival arguments made by both sides dismissed the appeal filed by the Revenue on this very issue by observing as under: “7. We have heard Ld. Counsels from both the sides and perused the material available on record in this regard. With regard to addition of Rs.12,92,000/- u/s 50CA and Rs.3,32,79,840/- u/s 56(2)(x) made by the Assessing Officer, we find that Ld. CIT(A) has deleted both the additions by observing as under :-
“5.2 I have gone through the submission of the appellant along with supporting documents submitted during the appellate proceedings as well as during the assessment proceedings before the Ld. AO. The appellant has contested the determination of fair market value of the equity shares of Meta Rolls Ispat Private Ltd (MIPL). During the year under consideration, the appellant has transferred the equity shares of MIPL to Smt Radhika Birla. The appellant has submitted that while estimating the FMV of equity shares, various aspects need to be considered as per the valuation standards accepted under the Companies Act, valuation standards issued by the ICAI which are in line with international valuation standards, factors like- lack of discount on marketability, purpose of valuation and availability of willing buyers, realisability of immovable properties, margin of safety, WDV of depreciable assets as per the Income Tax Act etc. The Ld. AO has determined the fair market value (FMV) of the shares as per rule 11UA and rejected the contentions of the appellant as under. 5.2.1 On the basis of the submission made by the appellant the AO observed that one of the immovable properties which belongs to the appellant is situated at Survey No.79, 82, 83, and 86 of Yerur Village (adjacent to Tadali MIDC). The Ld. AO has not accepted the valuation determined by the appellant. The value determined by the appellant based on guideline rate is Rs. 7,44,67,966/- whereas the AO has derived the value at Rs.9,84,25,980/-, the net difference being Rs. 2,39,58,014/-. I have gone through the of valuation report submitted by the appellant along with the guideline rates of Industrial NA plot with open area, amenity area and parking area. The appellant has submitted the valuation as per stamp duty rules. It is seen that there are different rules for valuation of industrial NA plots based on criteria like open area, amenity area and parking area etc. Further, the appellant has submitted fair valuation of the land situated at Survey No. 79, 82, 83, and 86 of Yerur Village which is an undeveloped industrial NA land and the said land is a barren land. Further, the said land is not demarcated as usable land as per the NA order as per the Stamp Duty Authority Rules for valuation which need to be followed while assessing the fair value of the immovable property for levy of stamp duty purpose. On perusal of the valuation report it is seen that the Stamp Duty
Authority Rules are followed by the valuer for assessing the value of Immovable property. Hence, the valuation done by the valuer of Land situated at Survey No. 79,82,83 and 86 Yerur Village (adjacent to Tadali MIDC) at Rs. 7,44,67,966/- is found to be reasonable since no uniform valuation rate is to be used for the entire land. Thus, impact of higher value of Rs. 10.20 per equity shares worked out by the Ld. AO is Rs. 2,39,58,014/- (i.e. difference between value worked out by the Ld. AO and the Appellant divided by / Rs. 2,34,67,670/- paid up capital * Rs. 10/- face value of equity shares.) 5.2.2 Secondly, the AO noted that in the valuation report submitted by the appellant, the value adopted for land situated at Survey No. 159/1,2 Kochi Bhadravati Chadrapur is Rs. 60,75,383/- whereas the AO has derived the value at Rs.74,29,514/-. Thus net difference is Rs. 13,54,131/-. On perusal of the valuation report of the appellant which is supported by valuation rules for stamp duty it is seen that the value arrived at Rs. 60,75,383/- is as per the IGR rate available on the website of Government of Maharashtra. Thus, the valuation adopted by the appellant is found to be reasonable. In view of this, impact of higher value of Re. 0.06 per equity shares worked out by the Ld. AO is Rs. 13,54,131/- i.e. difference between value worked out by Ld. AO and Appellant divided by / Rs. 2,34,67,670/- paid up capital * Rs. 10/- face value of equity shares. 5.2.3 Further, in the valuation report of the valuer Shri Vishal Holani, CA, he has deducted the provision for gratuity and considered as liability which is payable in near future as most of the employees of the appellant company have submitted that they have their continuous service of more than 5 years and eligible for the gratuity entitlement, thus provision for gratuity is a certain liability, and the shareholders/members of the company are bound to be paid the gratuity. Thus, it is accounted as per the accounting standards. It is to be noted that the gratuity is mandatorily to be paid to those employees who have completed their service as per the rules and regulations of receipt of gratuity and payment is required to be made to the employees once they are retired. Most of the employees have crossed the requisite limit of service and are eligible for gratuity. On perusal of the same, it is seen that such provision of gratuity is made based on some scientific approach and the same has been derived by analyzing past data. Therefore, liability of the gratuity needs to be considered at the time of valuation. Thus, impact of higher value of Rs. 0.62 per equity share worked out by the Ld. AO is Rs. 1,45,28,805/- (i.e. provision for gratuity divided by/ Rs. 2,34,67,670/- paid up capital * Rs. 10/- face value of equity shares). 5.2.4 The appellant has made the submission as to why there is no scope for estimating the value of equity shares under rule 11UA of the Income Tax Rules. The factors like concept of safe harbor limit or tolerance band or discount for lack of market ability apply when the valuation is considered as per the valuation standards and adopted under the companies act. The concern raised by the appellant is considered and seems to be logical and a valid ground on account of uncertainty to arrive at fair market value (FMV), basis of fair valuation, as it depends on various factors viz. The willingness of the buyer, type of assets, generation of income from those assets, legally clear and freely traded in open market, availability of willing buyers etc. In the present case the Rajuri group members and promoters had decided to part of their shareholding pattern of the company viz. Rajuri Steels Private Ltd (now Rathi Steel and Metal Private Limited (RSMPL), Meta Rolls Ispat Private Limited (MIPL). The promoters of this company have decided to exchange the shares of these companies amongst promoters/members of the group only and not to transfer to any third person. Thus, the promoters/members, considering the various aspects to arrive at fair market value determined the equity shares as per weighted average method out of three methods viz. DCF, NAV and NAV (based on market price of immovable property) considering the various aspects such as future earnings, value of assets and capacity of the plant etc. The purpose of transfer of shares is distribution of shares among the promoters/members only. As per the provisions of Companies Act 2013 related to transfer of share in case of Private Company, restrict the Private Company to transfer the shares without prior consent of previous shareholders. This arrangement is done only to transfer the shares internally among the promoters and is within the law. 5.2.5 As per the rules for valuation with regard to the Plant and machinery and other depreciable assets there are two values- one is book value as per books and other is WDV as per the Income Tax Act. In the present case the book value as per books is higher than the WDV as per the Income Tax Act. Further as per the section 50C of the Income Tax Act, the capital gain is calculated by considering the WDV as per Income Tax Act. The reason behind the difference in these two mechanisms for arriving at the fair valuation is the question of law. However, the new shareholders might lose the benefit of tax saving on depreciation. Consequently, this element to determine the valuation of the unquoted equity shares is to be considered in a broader way. 5.2.6 Further while determining the deeming income under the Income Tax Act, various concepts are there such as Safe Harbor Rule, Section 50C etc for dealing with the practical difficulties and uncertainties. However, the section 50CA is silent on such deeming fiction. The same issue of Fair valuation is dealt with in section 50C where the Income Tax Act allows 10% of the difference between stamp duty value and the sales consideration in case of Immovable property. This rate of variation is increased from 5% to 10% in the Finance Act 2020 keeping in mind the practical difficulties and uncertainties while calculating the fair value. 5.2.7 Similarly as regards to the valuation of shares under rule 11UA, over the period, valuation method has changed from Net asset valuation method to Discounted Cash Flow method. On 25th September 2023 a notification was issued by the Central Board of Direct of Taxes (CBDT). The amended Rule 11UA provides five more methods of valuation for issue of unquoted equity shares viz. Comparable Company Multiple Method, Probability Weighted Expected Return Method, Option Pricing Method, Milestone Analysis Method and Replacement Cost Method. Further the Income Tax Act has also allowed the discount for lack of marketability. 5.2.8 As per the amended rules of shares valuation, the method to be used has to be from the prescribed methods as per the valuation standards issued by the ICAI valuation, in line with international valuation standards which has been adopted under the Companies Act and Insolvency and bankruptcy Code monitored by Insolvency and Bankruptcy Board of India (IBBI) and National Company Law Tribunal. The appellant has used weighted average of DCF, NAV and NAV of market value to determine the value of equity shares for calculation of fair valuation of shares. The same is most appropriate and in accordance with law and regulations accepted by the various statues and bodies which is most perfect to estimate the value of equity shares with set rules and guidelines. The Appellant has taken the valuation report from the certified valuer by adopting this method and the valuer has considered the challenge and uncertainties to determine the fair valuation as the concept of fair valuation is very dynamic in nature. 5.2.9 Based on the various aspects and considering the practical difficulties and uncertainties the value of share at Rs. 540 is found to be reasonable as the Fair value of equity shares of MIPL. Even if it is considered that the value of shares determined under the rule 11UA worked out by the CA of Rs.640 per equity shares is to be adopted, then also, considering the various practical difficulties to sell the immovable properties of the appellant companies by removing the plant thereon and required timeframe as well as some legal issues such as related to employees, demolishing the plant, the time taken for big industrial unit etc. the discount of 15% is to be considered on account of lack of marketability of shares needs to be applied. Accordingly, as discussed above the fair market value of equity shares of MIPL comes to Rs.544 and rounded to Rs.540. Thus, the estimated addition under section 50CA or 56(2)(x) of the Act needs to be restricted. Addition u/s 50CA of the Act of Rs. 12,92,000/- on account of sale of equity shares of MIPL (i.e. 9500 equity shares * Rs. 136 (Rs. 661- Rs. 525). The appellant has sold the equity shares below the FMV as discussed above and the FMV worked out is Rs.540/-). Thus, the addition is restricted to Rs.1,42,000/- [i.e.9500*(Rs.540/- i.e. FMV determined as discussed above– Rs.525/- i.e. selling price of shares)].”
8. From perusal of the above order of Ld. CIT(A), we find that Ld. CIT(A) has considered various factors such as different rules for valuation of Industrial NA plots based on criteria like open area, amenity area & parking area. Further, he has also given a finding that the land situated at Survey No.79, 82, 83 & 86 of Yerur village was an undeveloped industrial NA Land & the said land was a barren Land. Even as per the Stamp Duty Authority Rules, the said land is not demarcated as usable land. It was also found by Ld. CIT(A) that while preparing the valuation report Stamp Duty Authority Rules were followed for assessing the value of immovable property. Accordingly Ld. CIT(A) has accepted the valuation furnished by the valuer of the assessee of land situated at Yerur village. A perusal
of the order shows that Ld. CIT(A) has passed a detailed and speaking order wherein he has also provided the reasons for allowing 15% discount in the value calculated as per Rule 11UA of the IT Rules. No contrary material has been brought on record by Ld. DR against the detailed reasonings of the Ld. CIT(A) on this issue. Therefore, in absence of any distinguishable feature brought on record we do not find any infirmity in the order passed by Ld. CIT(A) on this issue. Accordingly we confirm the same. Thus, the ground nos.1 to 6 raised by the Revenue are dismissed.”
Since the facts of the instant case are identical to the facts of the case already decided by the Tribunal in the case of ACIT vs. Dwarkaprasad Bhikulal Soni (supra), therefore, in absence of any contrary material brought to our notice by the Ld. DR, we do not find any infirmity in the order of the Ld. CIT(A) on this issue. Accordingly, we uphold the order of the Ld. CIT(A) and dismiss the grounds of appeal Nos.1 to 6 raised by the Revenue.
Grounds of appeal No.7 and 8 relate to the order of the Ld. CIT(A) in deleting the addition of Rs.26 lakhs made by the Assessing Officer on account of amount advanced on Hundi to M/s. Vikas Industries.
Facts of the case, in brief, are that during the course of search u/s 132 of the Act two Hundis of Rs.13 lakh each were found with the assessee. On the Hundi, it is clearly mentioned that the amounts are advanced in cash. Therefore, the assessee was asked to explain these transactions. However, no satisfactory reply was filed by the assessee. It was claimed that the assessee has given loan of Rs.25,00,000/- to M/s Vikas Industries by cheque. As the seized material shows that the amount was advanced in cash, another show cause notice was issued asking the assessee to explain as to why an amount of Rs.26,00,000/- given in cash should not be added as income from unexplained sources. The assessee in response to the same furnished an affidavit from Shri Murlidhar Mundada, according to which a loan of Rs.25,00,000/- was accepted by cheque from the assessee. The Assessing Officer noted that the assessee is continuously saying that the amount is advanced by cheque. However, he did not accept the contention of the assessee. On examination of the seized documents, he noted that there is clear mention of cash payment on Hundi. Therefore, he held that the amount has been paid in cash only. He held the affidavit as self serving document. Further, on the seized papers, there is clear calculation of interest made by the assessee. Therefore, rejecting the various explanations given by the assessee, the Assessing Officer made addition of Rs.26 lakh to the total income of the assessee u/s 69A of the Act by observing as under: “These figures pertains to interest receivable on cash loan advanced to M/s Vikas Industries. One calculation is for 5 months and another calculation is for 6 months. Amount of Rs.1,00,000/- is received by the assessee and balance amount of Rs.28,700 is to be received by the assessee. Further, it is seen that one cheque against which loan was credited in the bank account of assessee which proves that the amount of Rs.26,00,000/- is advanced by him only. When the seized papers are speaking, no further investigation is required. In view of the above remarks an amount of Rs.26,00,000/- is added u/s 69A of the Income Tax Act, 1961. As the addition is made on the basis of seized papers found during the course of search, penalty proceedings under clause (b) of subsection 1A of section271AAB of the IT Act, 1961 are initiated herewith. As the income falls under the category undisclosed income therefore Penalty proceedings u/s 271AAC of the IT Act, 1961 is also initiated separately herewith.”
In appeal, the Ld. CIT(A) deleted the addition made by the Assessing Officer by observing as under:
“6.2 I have gone through the submission of the appellant along with supporting documents submitted during the appellate proceedings as well as during the assessment proceedings before the Ld. AO. While making the addition on the above account, the Ld. AO relied upon the seized document which is a promissory note, stating that M/s Vikas Industries have taken a hand loan amounting to Rs. 26,00,000/- by way of cash and contained the details of cheques with cheque numbers, date of the cheque and the bank on which they are drawn as a security for the loan. The appellant had submitted the copy of ledger account of M/s Vikas Industries and bank statement substantiating that the loan of Rs. 25,00,000/- was given through banking channel. In support of the same, the appellant has also submitted an affidavit from Shri Murlidhar Mundada, proprietor of M/s Vikas Industries wherein he had stated that against the said unsecured loan he had issued two post-dated cheques of Rs. 13,00,000/- which includes proposed interest of Rs. 1,00,000/- It is observed from the bank statement produced by the appellant that the appellant had given Rs. 25,00,000/- to M/s Vikas Industries on 24.08.2020 through banking channel. Further, it is observed that the promissory notes are dated 15.11.2020. It is submitted by the appellant that the original loan period was of 3 months which was extended by entering into the promissory notes and taking the postdated cheques as security. Further it is submitted that the excess amount of Rs. 1,00,000/- is on account of interest to be receivable from M/s Vikas Industries at the rate of 1.5% per month and therefore, the cheques amounting to Rs. 26,00,000/- were taken as a security from M/s Vikas Industries. The Ld. AO has relied heavily on the use of the word "Cash" in the promissory note, to which the appellant submitted that it is a common practice to use the word cash. The appellant has submitted all the corroborative evidence in support of his explanation whereas the Ld. AO has not been able to prove that the documents are fake or incorrect. The Ld. AO has simply stated that satisfactory reply has not been given by the appellant. Thus, the contention of the Ld. AO is not correct. The appellant has countered all the arguments/contentions raised by the Ld. AO with supporting documents, thus the argument of the appellant is found to be correct. 6.3 Considering the fact of the case and submission made by the appellant the addition made by the AO is deleted. The Ground no. 4 of the appeal is, therefore, allowed.”
Aggrieved with such order of the Ld. CIT(A), the Revenue is in appeal before the Tribunal.
The Ld. DR heavily relied on the order of the Assessing Officer whereas the Ld. Counsel for the assessee relied on the order of the Ld. CIT(A).
We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and the Ld. CIT(A) and the paper book filed on behalf of the assessee. We find the Assessing Officer in the instant case made addition of Rs.26 lakh on the basis of seized documents found during the course of search, according to which 2 Hundis of Rs.13 lakh each were found with the assessee and on one Hundi it was clearly mentioned that the amounts are advanced in cash. Further, the assessee according to the Assessing Officer could not substantiate with any evidence to his satisfaction that these are not cash loans but paid by cheque. Further the seized documents also contain the calculation of interest on such advances. We find the Ld. CIT(A) deleted the addition, the reasons of which have already been reproduced in the preceding paragraphs. We do not find any infirmity in the order passed by the Ld. CIT(A) on this issue. It is an admitted fact that as per the bank statement produced by the assessee an amount of Rs.25 lakh has been given to M/s. Vikas Industries on 24.08.2020 through banking channel. Further, the promissory notes are dated 15.11.2020. We find the assessee had explained that the original loan period was 3 months which was extended by entering into the promissory notes and taking the postdated cheques as security. Further it was submitted that the excess amount of Rs.1 lakh is on account of interest to be receivable from M/s. Vikas Industries at the rate of 1.5% per month and therefore, the cheques amounting to Rs.26 lakh was taken as a security from M/s. Vikas Industries. Although the assessee had filed the copy of affidavit of M/s. Vikas Industries and the bank statement substantiating the loan of Rs.25 lakh paid through banking channel and also the affidavit from Shri Murlidhar Mundada, proprietor of M/s Vikas Industries stating that as against the said unsecured loan he had issued two postdated cheques of Rs.13 lakh each which includes the proposed interest of Rs.1 lakh, we find the Assessing Officer rejected the same and made the addition merely on the basis of word „cash‟ written in the promissory note. There is no evidence with the Assessing Officer that the loan of Rs.26.00 lakh is over and above the amount of Rs.25.00 lakh paid by cheque or that the amount of Rs.25.00 lakh has been refunded by cheque or cash. Therefore, under these circumstances, the order of the Ld. CIT(A) deleting the addition in our opinion cannot be faulted with. We, therefore, uphold the order of the Ld. CIT(A) on this issue. The grounds No.7 and 8 raised by the Revenue are accordingly dismissed.
Ground No.9 raised by the Revenue relates to the order of the Ld. CIT(A) in deleting the addition of Rs.1,28,700/- being the interest receivable on advances given in cash on Hundi to M/s. Vikas Industries.
After hearing both sides, we find the Assessing Officer made addition of Rs.1,28,700/- being the amount of interest receivable from M/s. Vikas Industries. Since the assessee had not offered the same for taxation, the Assessing Officer made the addition. We find the Ld. CIT(A) deleted the addition by observing as under: “7.2 I have gone through the submission of the appellant. While making the addition on the above account, the Ld. AO relied upon some jottings on a piece of paper. The seized document relied upon by the AO is the same as discussed above
in Ground no 4. It is observed from the seized document that the calculation pertains to interest on the loan given by the appellant to M/s Vikas Industries. The appellant has also accepted the same as interest which is receivable from M/s Vikas Industries. The issue of giving the loan through bank channels has already been discussed in the Ground 4 and therefore, the contention of the Ld. AO that the interest amount is received is not correct. The Ld. AO has simply stated that the interest amount has been received which is not supported by any evidence. Since the cheque has not been encashed during the year under consideration, it is observed that the interest amount is still receivable. Considering the facts of the case and submission made by the appellant the addition made by the AO is deleted. The Ground no. 5 of the appeal is, therefore, allowed.”
Since the assessee has admitted that he has given an amount of Rs.25 lakh as loan to M/s. Vikas Industries, therefore, interest accrued on the same has to be added to the total income of the assessee. We, therefore, set aside the order of the Ld. CIT(A) and restore the order of the Assessing Officer on this issue. The ground No.9 raised by the Revenue is accordingly allowed.
Ground No.10 relates to the order of the Ld. CIT(A) in deleting the addition of Rs.1,76,015/- made by the Assessing Officer treating the agricultural income as „Income from other sources‟.
Facts of the case, in brief, are that the Assessing Officer during the course of assessment proceedings noted that the assessee has not provided the details in support of agricultural income of Rs.1,76,015/-. He, therefore, made addition of the same to the total income of the assessee treating as „Income from other sources‟.
In appeal, the Ld. CIT(A) deleted the same by observing as under: “8.2 I have gone through the submission of the appellant. The document of 7/12 has been produced by the appellant which shows that the appellant has sufficient land holding i.e 4-hectare 6 R and further it is observed that the 7/12 extract has noting of the crop cultivated during the year. The agricultural land holding of the appellant is 4 hectare and net agricultural income per hectare is worked to Rs.43,353/- only a very negligible agricultural income. In the light of the documentary evidence of land holding and noting of crop cultivated on the agricultural land by the appellant and considering that the agriculture income is of Rs 1,76,015 which is very meager, the contention of the appellant is allowed.”
Aggrieved with such order of the Ld. CIT(A), the Revenue is in appeal before the Tribunal.
We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and the Ld. CIT(A) and the paper book filed on behalf of the assessee. We find the assessee during the course of assessment proceedings has not filed any details to substantiate the agricultural income. Merely because the assessee is holding certain land i.e. 4 hectare 6 R and 7/12 extract shows some cultivation of crop, the same cannot give rise to huge agricultural income to the extent of Rs.1,76,015/-. The order of the Ld. CIT(A) that the agricultural income per hectare is worked out to Rs.43,353/- only which is very negligible agricultural income, cannot be accepted in absence of proof of cultivation, nature of products produced, names of persons to whom sold, amount of expenditure incurred for raising the agricultural products, etc. Therefore, the order of the Ld. CIT(A) deleting the entire addition of Rs.1,76,015/- cannot be accepted. However, since the assessee is holding 4 hectare 6 R of agricultural land and 7/12 extract shows the crop cultivation, therefore, considering the totality of the facts of the case and in the interest of justice and to put a quietus to the litigation, we are of the considered opinion that an amount of Rs.75,000/- may be considered as reasonable from agricultural activity. Therefore, the balance amount of Rs.1,01,015/- has to be treated as “Income from other sources”. The order of the Ld. CIT(A) is modified accordingly. The ground No.10 raised by the Revenue is accordingly partly allowed.
In the result, the appeal filed by the Revenue is partly allowed.
Order pronounced in the open Court on 16th June, 2025.