DEEPA PAMNANI,MUMBAI vs. ITO WARD 20(1)(4), MUMBAI

The learned assessing officer examined the claim of the assessee and found that :-

Assessee submitted deed of transfer dated 1/3/2015 where assessee purchased 60% right in the property which originally belongs to his husband for a consideration of Rs. 3 crores. The AO found that this document is not registered and therefore the AO asked to produce the purchase agreement, share certificate from the society, change in the percentage of share certificate after purchases and whether any no objection certificate was obtained from the society for sale of the property. The assessee submitted on 15/20/2017 documents for purchase however with respect to the other queries of the society, assessee submitted that as the society has not at all been formed therefore all these details are not available. The AO rejected the contention of the assessee because the property is Flat No 803, Khandelwal Friends coop Housing society Limited therefore according to AO assessee is giving incorrect reply. The AO was of the view that in view of section 17 of the registration act a person is considered lawful owner of the property only after property is registered in her name, and it is mandatory to register the document for transfer of the property. Therefore, AO stated that it is Page 4 of 18 doubtful that the husband book capital gain/ loss on sale of property to his wife it is further avoidance of payment of taxes on sale of shares. Accordingly, the learned AO held that series of transactions starting from gift by son of assessee, sale of shares by the assessee, purchase of property being 60% right in property owned by husband of the assessee for claim of exemption under section 54F of the act are sham transaction and a colourable device to avoid tax payment involving the son of the assessee, the assessee, the husband of the assessee, the buyer of the shares and the company who shares are transferred. Therefore, he denied the claim of exemption under section 54F of the act. AO was also of the view that in Suraj Lamp industries Pvt Limited honourable Supreme Court has held that the sale transaction carried in the name of general power of attorney will have no legal sanctity and immovable property can be sold or transferred only through the registered deed. As there is no registered deed to convey the title, the assessee is also not entitled to benefit of section 54F of The Act. In view of this the learned AO disallowed the claim under section 54F and passed an assessment order under section 143 (3) of The Income Tax Act 1961 on 27/12/2017 determining the total income of the assessee at Rs. 29,684,005/–.

Assessee aggrieved with the assessment order preferred an appeal before the learned CIT – A. The learned CIT Appeal confirmed the disallowance of exemption under section 54F of the act. The learned CIT appeal went further ahead and held that the capital gain earned by the assessee on sale of shares is also required to be added as unexplained cash credit under section 68 of the income tax act 1961 as the assessee has failed to give any explanation about the nature and source for fake value of shares and a false capital gain offered. For this finding the learned CIT A looked at the balance sheet of the company i.e., Beam Developers Private Limited whose shares are transferred. According to him the amount of Rs. Page 5 of 18 29,432,755/– upon sale of shares derived is questionable and not supported by any evidence as to how the value has been derived at. Therefore, according to him the long-term capital gain claimed by the assessee is wrong and therefore deduction under section 54F is also not allowable. Therefore, he held that long-term capital gain earned by the assessee, accepted by the AO, is unexplained income under section 68 of the act. In fact, he considered the capital gain earned by the assessee as fictitious because there is an astronomical rise in the price of those shares as transacted by the assessee. According to him the gift of 28,750 shares from the sun to the mother (assessee) is having value of Rs. 287,500 as on 11/12/2014 [ Rs 10/- per share] but on 27/2/2015 the assessee transferred those shares to Mr. Suresh Galani for Rs. 3 crores [ Rs 1043/- per share] . Thus, the value of the shares transferred by the assessee is fictitious. He looked at the annual accounts of the company and found that it has two directors and has an authorized share capital of Rs. 23 lakhs . According to him, the net worth of the company is Rs. 13,21,02,820/- only and earning per share of the company was only Rs. 27.38 per share. He also noted that the company has (1) no activity as construction and development of building is concerned as there is no inventory , (2) there is no addition to the fixed assets and depreciation claimed is minimal, (3) major income of the company is from rent received of Rs. 10,147,375/–. He also questioned that the son of the assessee has given gift to the assessee and assessee has sold shares to another promoter director of that company, therefore it is a circuitous transaction. He further stated that that the gift deed is not registered and executed on stamp paper of Rs 100/- and also acquisition of the property is also by way of an unregistered sale deed. Thus, according to him, the theory of said transaction is rejected as lacking in fundamentals and the value of so-called capital gain derived is nothing but unaccounted income Page 6 of 18 of the assessee which is declared in the garb of capital gain and then the appellant has adopted a method to claim deduction under section 54F of the Act to legitimize the transaction.

Assessee is aggrieved with appellate order has preferred appeal before us. The learned authorized representative referred to a paper book containing 132 pages. He submitted that the only issue before the learned CIT – A was with respect to the deduction claimed under section 54F of the act. The learned assessing officer has accepted the long-term capital gain earned by the assessee. However, the learned CIT – A has considered the long-term capital gain shown by the assessee as income chargeable to tax under section 68 of The Income Tax Act as unexplained income. Therefore, the learned assessing officer accepted the transaction but the learned CIT – A transaction considering the same as unexplained income of the assessee without issuing any notice under section 251 of The Income Tax Act. It amounts to an enhancement to the total income of the assessee as the income is taxed under section 68 of the income tax act, it loses the claim of exemption under section 54F also. For this proposition he referred to the decision of Naresh Sunderlal Chug V ITO [ 93 taxmann.com 485] and CIT V Sardarilal 251 ITR 864 {SC} stating that the learned CIT – A without issuing notice under section 251 of the income tax act could not have done so. He further referred to the sequence of the event and stated that it is a simple transaction of son of the assessee making a gift of 28,750 shares of a private limited company to his mother i.e., assessee, the assessee is selling/transferring all these shares to another promoter of the group of the private limited company at fair market value. Therefore, the cost of acquisition in the hands of the donor and the period of holding of the donor of the asset shall be considered for the purposes of computation of capital gain in the hands of the assessee, Donee. On this basis, the assessee computed the long- Page 7 of 18 term capital gain on transfer of the shares. With the consideration received, the assessee acquired 60% shares in the residential property owned by assessee’s husband. He submits that assessee has executed gift deed on stamp paper of Rs. 100/–. As the assessee has acquired the right to acquire 60% of the property from husband in a residential house property, the assessee claimed deduction under section 54F of the act. The assessee satisfies all the conditions of the computation of long-term capital gain as well as deduction under section 54F of the act. He referred to the computation of capital gain placed at page number 12 of the paper book in the computation of total income. He submits that the date of acquisition is considered as 24/8/2006 wherein the shares were acquired by Son of the assessee, and same were transferred on 6/2/2015 to the other promoter director of the company. Assessee has incurred an expenditure on stamp duty of Rs. 75,000/- which is also claimed as deduction from the capital gain. The consideration received of Rs. 3 crores are paid to the husband of the assessee for acquiring 60% of the right to the residential property which is owned by him and claimed the deduction under section 54F of the act. He referred to the indenture of gift placed at page number 18 of the paper book, copy of the share certificate of Beams Developers Private Limited which was registered in the name of son of the assessee for 28,750 shares, those shares were transferred in the name of the assessee on 11/12/2014 and subsequently those shares were transferred in the name of one Mr. Suresh Galani on 27/2/2015. He also referred to the annual accounts of the company and submitted that book net worth of the company is Rs 13.21 crores, it has inventory of Real estate of Rs. 9.28 crores, the cash and bank of Rs. 3.44 crores, loans, and advances of Rs. 65 lakhs and other current assets of Rs. 30.20 lakhs. The assessee has depreciated fixed assets of a very small amount but also has short term borrowing of Rs. 64 lakhs. He referred to the Page 8 of 18 profit and loss account of the company wherein the total revenue of the assessee was Rs. 1,40,78,869/- out of which the main revenue was from the rent amounting to Rs. 1,03,78,569/-. He submits that assessee company has issued sale capital of 2,30,000 equity shares of Rs. 10 each. The net worth of the company is Rs. 13.21 crores therefore the book value of the shares itself is Rs. 574/- per share. The assessee has sold 28,750 shares for a consideration of Rs. 3 crores which gives the transacted value of the shares at Rs. 1043/- per share. He submits that the value of the shares as per the balance sheet is historical cost and the inventory of the assessee is inventory of real estate. Therefore, the value of the shares of Rs. 1043 per share along with the controlling stake and the fair market value of the assets is appropriate. He submits that the finding of the learned CIT – A is without any basis. His finding is also incorrect to ignore that the assessee has a real estate inventory of Rs. 9.29 crores. For this proposition he referred to schedule 13 of the balance sheet. He further referred to the deed of transfer by the husband of the assessee in the name of the assessee of flat number 803 on the eighth floor admeasuring 113.17 m² of the property for which consideration of Rs. 3 crores were paid. He also submitted that the husband of the assessee has also offered capital gain on the sale of the shares and further also referred to the income tax return of the buyer of the shares who has also disclosed acquisition of those shares. He further referred to the reply dated 29/11/2017 justifying the claim of deduction under section 54F. In the end he submits that the issue is squarely covered in favour of the assessee by the decision of the coordinate bench in ITA number 4150/Del/2018 of Mrs. Swati Oberoi [page No 117-126 of the Paper book] and also the decision of the honourable Bombay High Court in 413 ITR 248 in case of Vembu Vaidhyanathan to show that despite the non- registration of the sale deed the assessee is entitled to deduction under Page 9 of 18 section 54F of the act of the property being 60% share were acquired in a residential house owned by the husband of the assessee. He also submitted a chart wherein the findings of the ld. AO, ld. CIT (A) with the remarks of the assessee.

The learned departmental representative vehemently supported the order of the learned CIT – A. He submits that the learned CIT – A has not made any enhancement to the income of the assessee but has merely classified the long-term capital gain as unexplained income of the assessee chargeable to tax under section 68 of the income tax act and therefore there is no requirement of issue of any notice under section 251 of the income tax act. He further submitted that the son of the assessee has given a gift to the mother who has sold the shares to the third-party and the shares transacted are of a company, which does not justify the price at which they are transferred. He referred to the order of the learned CIT – A to support his argument that the company does not have the value at which it is transacted. He further stated that the assessee has acquired 60% of the rights in our house property which is owned by the husband of the assessee. The transfer is on stamp paper of Rs. 100/– and has not been registered. Therefore, the decision of the honourable Supreme Court in case of Suraj lamp & Industries Pvt Ltd AIR (2012) SC 206 applies. It was further stated that the assessee has entered into a preplanned tax saving scheme and therefore the learned CIT – A is correct in holding that the transaction is a device to reduce taxation. Therefore, the order of the learned CIT – A deserves to be upheld and the assessee is not entitled to any deduction/exemption under section 54F of the act.

In the rejoinder the learned authorized representative submitted that the balance sheet of the company whose shares are transferred is placed at page number 24 – 43 of the paper books which itself shows that the book value of the share itself is more than Rs. 500 and where the inventory of Page 10 of 18 the assessee company is real estate which is shown as a book value while considering the value of the shares at Rs. 500 per share, if they are restated at their market value, the company would have a share valuation of more than Rs. 1000. He further stated that the order of the learned CIT – A was passed without looking at the balance sheet and ignoring the inventory of Rs. 9.29 crores at book value. He further submitted that the decision cited by the learned departmental representative and referred to by the learned DR of Suraj lamp and industries private limited versus state of Haryana in special lives leave petition number 13917 of 2009, the issue was with respect to the general power of attorney where the property was transferred based on that decision did not consider the definition of transfer as per Income tax Act. He submits that the decision has held that the sale agreement, general power of attorney and will transaction does not convey any title and does not create any interest in any immovable property. In this case the assessee has acquired 60% of the rights in the residential house property owned by the husband and therefore it perfectly satisfies the condition of section 54F of the act. He submits that the decision of the honourable Supreme Court was not with respect to the claim of deduction under section 54F of the act and the decision of the honourable Bombay High Court in case of a Vembu Vaidhyanathan clearly covers the issue.

We have carefully considered the rival contention and perused the orders of the lower authorities. We have also considered the paper book filed by the assessee as well as the various judicial precedents cited before us by the parties. Issue before us is whether the assessee is entitled to the claim of deduction under section 54F of the act on acquiring 60% share in the residential property already held by her husband out of consideration on sale of shares of a private limited company which were gifted to assessee by her son , resulting into a long-term capital gain. Page 11 of 18

Fact shows that the son of the assessee, namely Mr. Vijay Pamnani acquired 28,750 shares of one company i.e., Beam developers private limited at a face value of Rs. 10 each on 24/8/2006. These shares were gifted by deed of gift dated 11 December 2014 to the assessee. The physical copy of the share certificate in the name of Mr. Vijay Pamnani for 28,750 shares having distinctive number 172501 – 201250 was transferred in the name of the assessee on 11/12/2014. To support this transaction along with the gift deed , the assessee also submitted the photocopy of the share certificate which is placed on page number 22 of the paper book. These shares were sold by the assessee on 6/2/2015 to Mr. Suresh galani who is another promoter director of Beam developers private limited at a consideration of Rs. 3 crores. The shares sold were shown by Mr. Galani as acquisition of those shares. Further the sale consideration was also received by the assessee. Assessee computed long- term capital gain on sale of the shares considering the holding period of those shares by her son and also the cost of acquisition incurred by her son. Thus the cost of acquisition of the shares have been taken in terms of the provisions of section 49 (1) (ii) of the Act whereby it is provided that the cost of acquisition of the shares in the mode of acquisition by gift would be cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be. According to the provisions of section 2 (29AA) and 2 (42A) read with explanation 1 (b) the assessee is also entitled to consider the holding period of the assets held by the donor. As the shares held by the son of the assessee are beyond 36 months, the property transferred is a long-term capital asset and the same is shown by the assessee as long-term capital gain. This is also not disputed by the learned AO but by the learned CIT – A. Page 12 of 18

The Ld. CIT (A) has disputed the price of the share at which those are sold to another Director Mr. Suresh Galani. According to him the price of the shares cannot be so much looking at the balance sheet of Beam developers private Limited. He compared the prices of the shares which are shown as cost of acquisition by the assessee [ Rs 10/- per share] and price at which are those shares are transferred on 06/02/2015 at Rs 1043/- per share. We find that the price of the taken by the assessee as cost of acquisition is only Rs 10/- per share and sale of shares by the assessee is at Rs 1043/- per share. This is so because the shares were allotted to the son of The Assessee Mr. Vijay Pamnani on 24/08/2006 at face value. These shares were gifted to assessee by Mr. Vijay Pamnani to her mother i.e. Assessee on 11/12/2014. Therefore, the price of shares should have been compared by ld. CIT (A) as of 11/12/2014 with the price of the shares on 06/02/2015. Firstly, he did not arrive at any price on 11/12/2014. The dl CIT (A) wrongly compared the price of Rs 10/- which was cost in the hands of the assessee by virtue of section 49 (1) of The Act. There cannot be any difference in the price on 11/12/2/14 [ date on which share were gifted by son to the assessee] and on 6/2/2015 [ date on which shares are sold by assessee] because both falls in the same accounting year and does not have any material events affecting prices between these dates. Thus, the finding of the ld. CIT (A) is incorrect that there is a rise in the price of the shares of company is fictious.

Secondly CIT (A) held that the company does not have any business activity to do. We have looked at the balance sheet of the company and find that the Company has net worth based on the book value of Rs. 13,21,02,820/- and issued capital is 23000 equity shares. This gives the book value of the shares at Rs. 574/- per share. The company has a real estate inventory at a book value of Rs. 9.29 Crores .

Further Shri Vijay Pamnani was holding only 12.5 % shares of the company and the balance 87.5 % shares of the company were held by Mr. Kamal Galani and Mr. Suresh Galani . BY transferring these 12.% 5 shares , Mr. Vijay Pamnani has transferred all his shareholding in this company and now Galanis have acquired 100 % shareholding of this company. Therefore, there is always a price of acquiring 100 % shareholding of a company by other parties.

Mr. Suresh Galani has made payment to an assessee of Rs 3 Cr and has also recorded the same in his accounts. His income tax return was filed by the assessee before the ld. AO. Neither Mr. Galani was questioned about this transaction nor the valuation of the shares of the company were made. 17. The transfer of shares has been recorded by the Company from Mr. Vijay Pamnani to assessee and assessee to Mr. Suresh Galani . This is evident from the photocopy of share certificates placed before us . Therefore, it cannot also be the case that Capital gain of Mr. Vijay Pamnani is transferred in the name of the assessee without transfer of assets by the son of the assessee. 18. It is the finding of the lower authorities that Gift deed is executed by the son of the assessee in favour of assessee a on a stamp paper of Rs 100/- purchased from same stamp vendor. This finding is in total ignorance of the fact that on Gift of shares assessee has paid stamp duty of Rs 75,000/- which is also claimed by the assessee as cost . In these facts , purchase of stamp paper from same stamp vendor does not have any relevance. 19. Thus, assessee has shown how shares are acquired by her i.e., by gift from his son, to whom she has sold those shares to Mr. Suresh Galani, details of transfers also shown endorsed on the share certificates, consideration has also passed through, the share price of the company at Page 14 of 18 which those shares are sold is also fair. In view of the above facts, we do not find any reason to sustain the appellate of the ld. CIT (A) that long term capital gain earned by the assessee is unexplained credit chargeable to tax u/s 68 of the act . Therefore, Assessee has correctly offered long term capital on the sale of shares to Mr. Suresh Galani. Accordingly Ground no 1 of appeal is allowed. 20. Now coming to second Ground of appeal

With respect to objection of the ld. AO that assessee has not given details of entries in the records of the society of recording acquisition of property by society, assessee submits that no such society is formed and therefore these details are not available. Naturally if the society is not formed, argument of assessee on facts cannot be rejected unless it is found that such society is in fact registered.

According to section 54 F of the act if the assessee acquired a house property within specified time by using sale consideration, then proportionate capital gain is not charged to tax. Thus, Assessee has purchased a house property for Rs 3 Crores. In case of PCIT V Vembu Vaidyanathan [(2019) 413 ITR 248 (Bom) ] honourable Bombay High court has held that even ‘letter of allotment’ also satisfies the requirement of section 54F is allowable. Comparing that case with the case of this assessee, it stands on a better footing where the assessee has acquired 60 % of the existing property. The decision of Honourable Supreme court in the case of Suraj Lamp Industries also cannot apply to the fact of the case as assessee has not entered into any sale deed and has not registered it. Therefore, the assessee deserves the benefit of section 54F of The Act. In view of this Ground no 2 of the appeal is allowed and ld. AO is directed to grant benefit of section 54F of the act.

Ground no 3 is with respect to deduction of Rs 75,000/- of stamp duty on sale of shares while computing capital gains. In fact, the relevant from NO SH 4 are furnished before us where in it is found that stamp duty is paid by the assessee when she transferred shares to Mr. Suresh Galani. We have not been explained why the Transferor assessee would pay stamp duty when the buyer is Mr. Suresh Galani . If it is so, under which section this deduction is allowable. If the stamp duty is paid by the assessee on the Gift of shares received , then obviously it become the cost of acquisition of those shares and assessee is eligible for deduction of the same. ON verification of the form of stamp duty paid of Rs 75,000/- , it is paid on 5/2/2015 where the shares are transferred by the assessee on 06/02/2015. As there is no clarity on which transaction assessee has paid stamp duty of Rs 75,000/-, we restore Ground no 3 back to the file of the ld. AO with direction to the assessee to substantiate this claim before ld. AO more so for the reason that none of the lower authorities have discussed and decided this issue.

In view of our decision in Ground no. 1 and 2 other issues raised by assessee including of action u/s 251 of the Act are merely academic and dismissed. 25. In the result, the appeal of the assessee is partly allowed.