BRAWNY NIVESH P.LTD,NEW DELHI vs. ACIT, CENTRAL CIRCLE-13, NEW DELHI

“(i) Purchaser / receiver of shares is a company in which public are substantially interested; ii) If shares involved in the transaction is of a company in which public are substantially interested; and iii) Difference between the consideration and fair market value of share is less than fifty thousands. iv) This section shall not apply on transactions not regarded as transfer under clause (via) or clause (vic) or clause (vicb) or clause (vid) or clause (vii) of section 47.”

2.3. In light of the above provisions and to find out whether the transaction was covered in point no. (iii) above or not, the AO noted that the Fair Market Value (FMV) of shares of Gain E Commerce Pvt. ltd. and Kanti Commercial Pvt. Ltd was required. Thereafter, the AO determined the of FMV of the share of M Gain E Commerce Pvt. ltd. at Rs. 966.50/ per shares and of Kanti Commercial Pvt. ltd. at Rs. 3,113.30/ per shares as on 31st March 2014 on the basis of balance sheet available at the MCA website.

2.4 Thereafter, the AO noted that the assessee had purchased 50,000/- shares of M/s Gain E Commerce Pvt. Ltd. @ Rs. 950/- per share and Fair Market Value (FMV) of the same was Rs. 966.50 per shares. Accordingly, the AO added a sum of Rs. 8,25,000/-, being the difference in the purchase value and FMV u/s 3

ITA No.-571/Del/2019 Brawny Nivesh Pvt. Ltd. 56(2)(viia) of the Act. The relevant discussion in the assessment order made by the AO is as under:

“ ii) Assessee has purchased 50000 shares of M/s Gain E Commerce Private Limited @Rs.950/- per share which comes to Rs.4,75,00,000/-, however the total fair market value of 50000 shares of Gain E commerce Pvt. Ltd. @ Rs. 966.50/- per share comes to Rs.4,83,25,000/- and as such difference of the total fair market value and total purchase consideration comes to Rs.8,25,000/- which is far excess than rupees fifty thousand and as such transaction of purchase of shares of M/s Gain E commerce Pvt. Ltd is grossly covered u/s 56(2)(viia) of the I.T. Act, 1961. In view of the aforesaid discussion difference of the total fair market value and total purchase consideration of Rs.8,25,000/- is hereby added to the returned income of the assessee.”

2.5 Further, the AO also noted that the assessee has purchased 18,000/- shares of M/s Kanti Commercial Pvt. Ltd. @ Rs. 3000/- per shares, the fair market value of the same was Rs. 3,113.30. Accordingly, the AO added sum of Rs. 20,39,400/- being the difference in the purchase value and FMV u/s 56(2)(viia) of the Act. The relevant discussion made by the AO in the assessment order made by the AO is as under:

“ iii) Assessee has purchased 18000 shares of M/S Kanti Commercial Pvt. Ltd. @Rs.3000/- per share which comes to Rs.5,40,00,000/-, however the total fair market value of 18000 shares of M/S Kanti Commercial Pvt. Ltd. @ Rs. 3,113.30/-per share comes to Rs.5,60,39,400/- and as such difference of the total fair market value and total purchase consideration comes to Rs.20,39,400/- which is far excess than rupees fifty thousand and as such transaction of purchase of shares of M/s Kanti Commercial Pvt. Ltd is grossly covered u/s 56(2)(viia) of the 1.T. Act, 1961. In view of the aforesaid discussion difference of the total fair market value and total purchase consideration of Rs. 20,39,400/- is hereby added to the returned income of the assessee.”

ITA No.-571/Del/2019 Brawny Nivesh Pvt. Ltd. 3. Aggrieved with said findings of the AO the assessee filed an appeal before the ld. CIT(A) wherein the assessee challenged the applicability of section 56(2)(viia) of the Act, in respect of the additions made on account of difference between the purchase value and the fair market value of the sales shares.

3.1. On merits, the Ld. CIT(A) dismissed the appeal of the assessee on this issue and held that the invocation of section 56(2)(viia) of the Act by the AO was justified. The relevant extract of the order of the Ld. CIT (A) is reproduced as under:

“ It is seen that as per section 56(1), income from any source that is not exempted, 'shall be chargeable to income tax, if the same is not chargeable to Income Tax under the specified heads of the IT Act. This is clearly a deeming provision; specifically creating a fiction that 'the following income' as detailed in (section 56(2)) shall is chargeable to tax. The section then enumerates in details as to what is deemed to be income as per clause viia of 56 (2) and so forth. Therefore, the differential between the fair market value so computed and the cost of acquisition essentially constitutes income. The appellant has also taken a plea that there was a dispute and the conditions for allotment of the shares were not fulfilled and therefore there was breach of contract the share application/allotment of shares were not legally valid. This is not acceptable as the transaction has not been called off. It seems to be a collusive device to hoodwink correct income determination. The issue of the assets remaining under hypothecation with financial institutions is also not tenable, as the assets remain in the name and custody of the appellant entity. There is no loss yet of the assts. Hence these are bound to be considered for the purposes of valuation. Accordingly, I uphold invoking of section 56(2)viia as a correct measure on the facts and as in law.”

3.2. The assessee also challenged about the valuation as per Rule 11UA of the Income Tax Rules, 1962. The Ld. CIT(A) also did not accept this contention of ITA No.-571/Del/2019 Brawny Nivesh Pvt. Ltd. the assessee and held that valuation of the shares as determined by the AO was justified. The relevant extract of the finding of the Ld. CIT(A) is reproduced as under:

“c. The consideration paid by the appellant clearly falls within the scope of section 56 (2) viia for evaluating if the appropriate consideration was indeed transacted as per the provisions of law. The appellant has failed in furnishing a reliable and robust basis of valuation of such equity. The relevant rule in this regard is rule 11 UA(1) cb. The AO has carried out the valuation on NAV method. The appellant assessee is in clear mischief of the same, hence the premium charged by the assessee is to be subjected to the provisions of section 56 (2) viia read with rule 11UA. It is bounden on the assessee to furnish reliable valuation determining such share premium as in its case for the AY 2015-16, from a qualified valuer. The assessee has not done the same, nor has any submission filed before me in this regard. The AO has carried out the exercise of computing the share valuation basis the assets owned by the appellant in absence of appellant discharging its onus. The quantum of consideration determined and accordingly payable on account of rule 11UA clearly falls within scope and zone of understatement of considerations. The same, therefore, to be brought to tax. The relevant addition in case of the assessee is upheld for this period.”

4. Aggrieved with the said findings of the Ld. CIT(A), the assessee is in appeal before us on the following grounds of appeal:

“1. That on the facts and in the circumstances of the case the action of the Ld. CIT(A) to confirm the addition of Rs.8.25,000/- made by the A.O. u/s 56(2) (vila) of the Act, on account of purchase of shares of M/s Gain E Commerce (P) Ltd. without accepting the valuation of shares declared by the assessee is against the provisions of law and the addition made is arbitrary, excessive and illegal.

2. That on the facts and in the circumstances of the case the action of the Ld. CIT(A) to confirm the addition made by the A.O. of Rs.20.39.400/- u/s 56(2) (viia) of the Act, on account of purchase of shares of M/S Kanti Commercial (P) Ltd. without accepting the valuation of shares declared by the assessee is against the provisions of law and the addition made is arbitrary, excessive and illegal.”

ITA No.-571/Del/2019 Brawny Nivesh Pvt. Ltd.

5. During the course of hearing before us, the ld. AR submitted that the difference in the valuation of the shares as per the Assessee and the AO was on account of reduction in the value of the assets of the respective companies on account of ‘Amount shown in the Balance Sheet which has no realisable value and hence not represent the value of assets’. In this regard, the Ld. AR referred to page no. 108 and 110 of the paper book, wherein such no realizable value was Rs. 4,55,10,000/- and Rs. 139,52,78,482/- in the case of M/s Gain E-Commerce Pvt. Ltd. and M/s Kanti Commercial Pvt. Ltd. as on 31.03.2014 respectively. The Ld. AR referred to its submissions made before the Ld. CIT(A), that the said deduction in the value of the assets was done by the Chartered Accountant after going through the books of account. The Ld. AR further submitted that the AO has not stated in the order about the method of valuation adopted by him and the reason for the difference in the valuation made by the Chartered Accountant and hence thus failed to discharge the onus cast upon him and his action was in violation of principle of natural justice. The Ld. AR further submitted that the AO had erred in rejecting the valuation report of the Chartered Accountant and therefore the addition made was erroneous and bad in law.

6. The Sr. DR supported the orders of authorities below.

ITA No.-571/Del/2019 Brawny Nivesh Pvt. Ltd.

“ Valuation of Unquoted Equity Shares as per Rule Annexure - A 11UA of M/s Gain E Commerce Pvt Ltd as on 31.03.2014 FMV of Unquoted Equity Shares = (A-L)/PE x PV RS A =Book Value of the Assets 310,141,409 Less: Amount shown in the Balance Sheet which has no realizable 45,510,000 value and hence not represent the value of assets 264,631,409 L = Book value of all the liabilities 47,749,244 PE = Total Amount paid up equity share capital 2,714,750 PV = Paid up value of such equity shares 10 (264631409-47749244)/2714750*10 = 798.90 Therefore Fair Market Value is Rs.799/- per share

“ Valuation of Unquoted Equity Shares as per Rule Annexure - A 11UA of M/s Kanti Commercial Pvt. Ltd. as on 31.03.2014 FMV of Unquoted Equity Shares = (A-L)/PE x PV RS A =Book Value of the Assets 4,594,795,541 Less: Amount shown in the Balance Sheet which has no realizable 1,395,278,482 value and hence not represent the value of assets (A)3,199,517,059 L = Book value of all the liabilities 376,817,971 Add: Income Tax Demand for A/Y 2012-13 1,064,428,011 (L) 1,441,245,982 8

ITA No.-571/Del/2019 Brawny Nivesh Pvt. Ltd.

PE = Total Amount paid up equity share capital (PE) 13,548,000 PV = Paid up value of such equity shares (PV) 10 (3199517059-1441245982)/ 13548000*10 = 1297.81 Therefore Fair Market Value is Rs.1,298/- per share (emphasis supplied by us) 7.1 On perusal of the above valuation reports submitted by the assessee it is seen that the fair market value of the unquoted equity shares of the respective two companies was calculated by the assessee by reduction in the valuation of the said shares by ‘Amount shown in the Balance Sheet which has no realisable value and hence not represent the value of assets’ amounting to Rs. 4,55,10,000/- and Rs. 139,52,78,482/- in the case of M/s Gain E-Commerce Pvt. Ltd. and M/s Kanti Commercial Pvt. Ltd. as on 31.03.2014 respectively. However, neither the AO nor the Ld. CIT(A) has verified the above claim of the assessee in reducing the valuation of the shares by claiming the said assets having no realisable value. This aspect needs verification and in absence of the said verification about the claim of the assessee the order of the AO confirmed by the Ld. CIT(A) cannot be sustained. Therefore, we set aside both the above orders and restore the matter to the file of the AO to decide it de-novo, keeping in view our above observations. Ground nos. 1 and 2 of the appeal are allowed for statistical purposes.

ITA No.-571/Del/2019 Brawny Nivesh Pvt. Ltd.

8. Further, the AO noted from the assessment order passed u/s 143(3) of the Act in the case of the assessee for A.Y. 2014-15, that the assessee was a mere name lender and had acted as a conduit for parties/beneficiaries of the company, and the assessee had not done any actual purchase or sale and these facts showed that sundry debtors of Rs. 29,47,215/- created from fictitious sale made during the A.Y. 2014-15 had no worth and was only a book entry. Thereafter the AO quoted the relevant extract from the said assessment order in the case of the assessee for AY 2014-15 and asked the assessee vide letter dated 28.11.2017 to explain as to why all the receipts from trade receivable should not be liable to be added to its total income as unexplained. The relevant extract of the said assessment order in the case of the assessee for A.Y. 2014-15 and the letter dated 28.11.2017 of the AO to the assessee are reproduced as under:

(a) Relevant extract of the Assessment Order in the case of the assessee for A.Y. 2014-15.

“ On verification of the statement of affairs of the assessee company for the current year as well as earlier assessment year for which debtors are available on record, following facts emerges:-  “The assessee company has hardly any business during the past few years.  Sales and purchases of fabrics and shares were purchased/sold to selective parties keeping huge Sundry debtor in the balance sheet.  Despite having stock of cotton knitted fabrics, no sign of commensurate expenses on account of rent, maintenance etc. is visible.  Despite some sales claimed to have effected during the year, no transportation cost found as debited in the P&L A/c. "

ITA No.-571/Del/2019 Brawny Nivesh Pvt. Ltd. (b) Relevant extract of the AO’s letter dated 28.11.2017

“2 This may be mentioned that based on immediately preceding years observation, it is found that your claim of purchases, sales as well stock having no genuineness. There is nothing available to hold otherwise for the current assessment year as well. In such a situation, all receipts from trade receivable liable to be added to your total income as unexplained. You are requested to explain your position in this regard."

8.1 In the reply to the aforesaid letter of the AO, the assessee submitted its explanation vide letter 05.12.2017 and claimed that the said transactions were genuine and stated that the assessee company traded in shares & securities and cotton knitted fabrics and submitted the sale and purchase bills as per Annexure B to its reply. The relevant explanation filed by the assessee vide letter dated 05.12.2017 as extracted in the assessment order is reproduced as under:

“During the year consideration company traded in shares & securities and Cotton Knitted Fabrics. The details of sales & Purchase in shares & Cotton Knitted Fabrics along with respective Sale & Purchase bills are enclosed as per Annexure "B" Kindly note that Cotton Knitted Fabrics were sold from the stock in Trade and no fresh Purchase made during the year..

From the enclosed details it may be evident that all the information required about the goods so purchased and sold are duly clarified in the bills and the proper entries duly been incorporated in the Books of Account maintained by the company. The books of accounts duly been audited by the Auditor and on this basis the annual accounts were drown and duly audited. Hence there is nothing in genuine. As such question of addition to the total income does not arise."

8.2. However, the AO observed that the assessee had failed to submit any of the evidence in support of its claim that the sales was genuine and observed that ITA No.-571/Del/2019 Brawny Nivesh Pvt. Ltd. from perusal of the details submitted by the assessee for the current year and placed on record same facts emerge as that had emerged in the previous year. The relevant observations of the AO are reproduced as under:

“From, the perusal of the above submission it can be said that assessee has failed to submit any fresh evidence in support of his claim that sale is genuine. From perusal of the details submitted by the assessee for the current year and placed on record same facts emerged as was emerged in the immediate previous year i,e. i) Sales and purchases of fabrics and shares were purchased/sold to selective parties keeping huge Sundry debtor in the balance sheet, ii) despite having huge stock of cotton knitted fabrics, no sign of commensurate expenses on account of rent, maintenance etc., and iii) despite some sales claimed to have effected during the year, no transportation cost found as debited in the P&L A/c”

8.3. Thereafter, the AO observed that from the aforesaid facts it was clear that assessee had not carried any business during the current year also.

8.4. The AO further noted that investments had been purchased from sundry debtors and sundry debtors of Rs. 29,47,215/- relating to AY 2014-15 had been concluded as bogus during the assessment proceedings for AY 2014-15 and since current year sale was also not genuine on the same set of facts as discussed in the assessment order held that the sundry debtors of Rs. 69,08,950/- relating of current year was also fictitious and as such investment made during the year by the assessee company to the extent of aggregate of sundry debtors of A.Υ. 2014- 15 & Α.Υ. 2015-16 of Rs. 98,56,165/- was treated as not genuine and added to the returned income of the assessee. Accordingly, the AO added a sum of Rs. 12

ITA No.-571/Del/2019 Brawny Nivesh Pvt. Ltd. 98,56,165/- which comprised the sundry debtors of Rs. 29,47,215/- relating to assessment year 2014-15 and Rs. 69,08,950/- relating to current assessment year i.e. 2015-16. The relevant discussion by the AO in this regard, is reproduced as under:

“Since, investment has been purchased from sundry debtors and sundry debtors of Rs.29,47,215/- relating to A.Y. 2014-15 has been concluded as fictitious during the assessment proceedings of A.Y. 2014-15 and since, current year sale is also not genuine on same set of facts as discussed above, sundry debtors of Rs. 69,08,950/- relating of current year is also fictitious and as such investment made during the year by the assessee company to the extent of aggregate of sundry debtors of A.Υ. 2014-15 & Α.Υ. 2015-16 of Rs.98,56,165/- is hereby treated as not genuine and as such added to the returned income of the assessee.”

ITA No.-571/Del/2019 Brawny Nivesh Pvt. Ltd. 11. Aggrieved with the said finding of the Ld. CIT(A), the assessee is in appeal before us on the following grounds of appeal:

“3. That on the facts and in the circumstances of the case the action of the Ld. CIT(A) to confirm the addition made by the A.O. of Rs.98,56,165/- as unexplained investments on the reason that the Sundry Debtors are fictitious is contrary to the settled principles of law and the addition is arbitrary, excessive and illegal.

ITA No.-571/Del/2019 Brawny Nivesh Pvt. Ltd. assessment year. The Ld. AR further, relying upon the details of “other expenses” of the assessee company for the assessment year 2015-16 placed at page no. 14 of the Paper Book, stated that the assessee had incurred “freight and transportation charges” – Rs. 2,720/- and had also paid rent of Rs. 30,000/- along with other expenses other head totalling Rs. 38,063/-and therefore the observation of the Assessing Officer that no such expenses were incurred by the assessee was not correct. Further, the Ld. AR also drew our attention to page no. 40 of the Paper Book, in which the assessee in its letter dated 09.10.2017 to the Assessing Officer had intimated the address of the Office as - 302, Adhishwar Apartment,34, Firoz Shah Road, New Delhi-110001 and of the Godown -cum-Office as 5, Russel Street, Kolkata-700071. Further, the Ld. AR also drew our attention to page no. 13 of the Paper Book, wherein total purchases/sales in equity shares amounting to Rs. 33,80,000/- and Rs 34,06,000/- respectively was reflected and similar details of sales in respect of cotton fabrics amounting to Rs 35,02,950/- was also reflected on the said page of the paper book. In view of these facts the Ld. AR submitted that the business carried out by the assessee was genuine and the finding of the Assessing Officer that no genuine business was carried out by the assessee was not correct. Further, the Ld. AR also referred to page no. 12 of the Paper Book to show that the trade receivable i.e. the sundry debtors amounted to ‘Nil’ during 15 ITA No.-571/Del/2019 Brawny Nivesh Pvt. Ltd. the year and thus no addition on account of sundry debtors could be made by the Assessing Officer during the present assessment year.

7. The AO has not given specific finding pointing out any bogus transaction in the relevant year with the help of any corroboratory evidence. Further, we find that the AO on one hand has held that the entire business transactions including trading and investments in shares are bogus/non-genuine, then no addition on account of purchases and sales treating then real and genuine can be made in the hands of the assessee. We are not able to persuade ourselves that how such contradictions will go together. As far as the addition on account of sundry debtors Rs.29,35,130/- for AY 2014-15 is concerned, we are of the considered view that the same cannot be taxed in the relevant year even if it is fictitious in nature. The current year sale of the shares i.e. Rs.37,74,000/- has not resulted any sundry debtor. Theassessment order does not pin-point say any adverse material regarding the sale of shares. Further, the Revenue has not brought any material on the record to demonstrate that the trading of shares is non-genuine. Therefore, the addition of Rs.37,74,000/- cannot be sustained. Accordingly, the addition of Rs.37,74,000/- is deleted.

14.1 In this case, as noted above, the facts in the present case of the assessee are similar to the facts of the cited case. Further, the assessee has submitted documents/evidences in support of its claim of carrying out its business in sale ITA No.-571/Del/2019 Brawny Nivesh Pvt. Ltd. of cotton fabrics and sale of shares as narrated in para no. 12 of this order, which was not been contradicted or commented upon either by the AO or by the ld. CIT(A). 14.2 Therefore, considering the entire facts as discussed above and by following the above order of the Tribunal, we are satisfied that the addition of Rs. 98,56,165/-on account of sundry debtors is not sustainable in this case and we accordingly delete the same. Ground nos. 3 to 5 of the appeal are allowed.

15.1 In the above ground, the assessee has challenged that the action of the Ld. CIT(A) in confirming the assessment made by the AO by rejecting the scope of ‘limited scrutiny’ having been expanded by the AO without prior permission was in violation of the provision u/s 119 of the Act and the assessment passed was illegal and bad in law. This case as per the AO was selected for scrutiny as one of the reasons being “large increase in investment in unlisted equities during the year”. In this case, the AO made the addition u/s 56(2) (viia) of the Act, as discussed above in respect of the investments made by the assessee in the unlisted equity sharers being the share of M/s Gain E-Commerce Pvt. Ltd. and 18

ITA No.-571/Del/2019 Brawny Nivesh Pvt. Ltd. M/s Kanti Commercial Pvt. Ltd., which is within by the scope of the reasons for the selection of the scrutiny of the case as stated above. Further, during the course of assessment proceedings, the AO vide letter dated 28.11.2017 in para 3 placed at page no. 82- 84 of the paper book (as reproduced below) had asked the assessee about the application of section 56(2)(viia) of the Act, in respect of M/s Kanti Commercial Pvt. Ltd. and M/s Dahisar Traders Pvt. Ltd.

“ 3. Without prejudice to the above, it is also noted that the investments made in the shares of M/s. Kanti Commercial Pvt. Ltd. and M/s Dahisar Traders Pvt. Ltd. are at a lesser value than the fair market value of the shares based on valuation of such shares as on 31/03/2014. Hence, you are requested to explain why suitable additions should not be made on this account in terms of section 56(2)(viia) of the I.T. Act, 1961. You are further requested to file the valuation of shares with respect to all investments made during the year as on the date of transfer otherwise the undersigned will be constrained to take the valuation of shares based on last audited balance sheet.”

15.2 In reply, the assessee submitted that the provision of section 56(2)(viia) of the Act will not be applicable in the case of Dahisar Traders Pvt. Ltd. as the said shares were allotted as per the scheme of amalgamation of transferee company. Further in respect of investments made in three scripts during the year, the assessee enclosed the necessary valuation reports and submitted that as such there were no violation of 56(2)(viia) of the Act no addition could be made on this account. The relevant reply of the assessee in para 2 of its letter dated 14.12.2017 (placed at page no 103 to 112 of the paperbook) is reproduced as under: 19

ITA No.-571/Del/2019 Brawny Nivesh Pvt. Ltd. “ 2. Valuation Report of Unlisted Equity Investment made during the year :- Kindly note that the valuation report of the shares in respect of the investment made in the shares of Dahisar Traders Pvt. Ltd does not applicable in our case. As the shares of Dahisar Traders Pvt Ltd were allotted to us as per the Scheme of Amalgamation of transferee Company. The copy of Allotment Advice is enclosed. And in respect of investment made in three scripts during the year, the necessary valuation report under rule 11UA are enclosed for your necessary perusal. As such there is no violation of section 56(2)(viia) of the I.T. Act and no addition could be made on this account”

15.3 Thus, it is seen that the assessee did not object to the above queries made by the AO proposing to make addition u/s 56(2)(viia) of the Act, during the course of assessment proceedings contending that the same was not within the scope of the limited scrutiny of this case for which the case was selected for scrutiny. On the other hand, the assessee submitted the necessary replies as sought by the AO. Therefore, as discussed above, we hold that the addition made by the AO u/s 56(2)(viia) of the Act, in this case, was within the scope of the “limited scrutiny” for which this case was selected for scrutiny. Therefore, this ground of appeal in respect of the addition made by the AO u/s 56(2)(viia) of the Act, in this case, is not sustainable and the same is dismissed.

15.4 Further, in view of the ground nos. 3 to 5 of the appeal being allowed, the ground no. 6 of the appeal becomes academic in respect of the addition of Rs. 98,56,165/- on account of sundry debtors and is left open in this case.

ITA No.-571/Del/2019 Brawny Nivesh Pvt. Ltd. 16. Ground no. 7 of the appeal is reproduced as under:

“That the assessment framed by the AO and confirmed by the Ld. CIT(A) is unjust, illegal, arbitrary and excessive.”

16.1 This ground of appeal is general in nature and does not require any separate adjudication.

Order pronounced in the open court on 17th December, 2025.