ACIT, NEW DELHI vs. SMT. DIVYA JAIN, NEW DELHI

Date of Hearing : 07-9-2015 Date of Order : 09-10-2015 ORDER

PER H.S. SIDHU, JM

CO No. 355/Del/2011 1. That the Ld. CIT(A) erred in law and on facts of the case in deleting the addition of Rs. 3,34,47,563/- made on account of long term capital gain. 2(a) The order of the CIT(A) is erroneous and not enable in law and on facts.

(b) The appellant craves leave to add, alter or demand any / all of the grounds of appeal before or during the course of hearing of appeal.

3. The grounds raised in the Assessee’s Cross Objection being CO No. 355/Del/2011 (A.Y. 2007-08) read as under:-

“1. That having regard to the facts and circumstances of the case Ld. CIT(A) has rightly deleted the addition of Rs. 2,34,47,563/-, which was made by AO on the ground of alleged sale proceeds of shares received by the appellant as against Rs. 3,00,000/- declared by her.

2. The Ld. CIT(A) is erred under the law while holding that AO has a valid jurisdiction u/s. 153A of the Act.

4.1 As per the return filed; the assessee derives salary income in her capacity as director of Mahagun Group of companies, income from capital gain and income from other sources which includes bank interest and interest on loan advanced to Mahagun (India) 3

CO No. 355/Del/2011 Pvt.Ltd. and Mahagun Developers Ltd. During the year, the assessee has sold 3000 shares of Mahagun Realtors Pvt.Ltd. @ Rs.100/- per share. On 01.12.2006, these shares have been sold outside the normal market channels amongst the members of the group only. The shares had a paid up value of Rs.I00/- each and had been acquired on 29.9.2004 for acquisition cost of Rs.30,000/-. The only question that can arise is whether in a group transaction, the assessee has received fair market value for these shares or not.

4.2 As per the facts on record, Mahagun Realtors Pvt. Ltd. had merged with Mahagun (India) Pvt. Ltd. w.e.f. 01.4.2006 though the orders of the court sanctifying this merger was passed only on 10.9.2007 and was supposed to take effect from 01.4.2006. The High Court had approved the merger scheme without any modification. Both the companies i.e. Mahagun Realtors Pvt. Ltd. and Mahagun (India) Pvt.Ltd. are family owned concerns. As per the Merger Scheme approved by the court, the shareholders of Mahagun Realtors Pvt. Ltd. were to receive 45 equity shares of Mahagun (India) Pvt.Ltd. of face value Rs.10/- each fully paid up of Mahagun Realtors Pvt.Ltd. This benchmarking of the relative value of shares of the two companies had the full support and approval of the members of the Mahagun Group.

CO No. 355/Del/2011 4.3 Fortunately, there is concrete proof about the value of shares of Mahagun (India) Pvt. Ltd. as on 31.3.2006 (the case is also assessed in this Circle only). On 31.3.2006, Mahagun (India) Pvt.Ltd. had issued and allotted the. following shares at the rate and premium mentioned below.- Name of the No. of Face Value Share Total amount Share shares (per share) Premium received Applicant (per share) Mahagun 280000 10/- 240/- 7,00,00,000/- Developers Ltd. Mahagun 236000 10/- 240/- 5,90,00,000/- Realtors Pvt. Ltd. ADR Home 11600 10/- 240/- 29,00,000/- Décor Pvt. Ltd. 4.4 Thus, there is independent evidence that the value of shares of Mahagun (lndia) Pvt.Ltd. was Rs.250/- per share after including premium of Rs.240/- per equity share. The assessee, Smt. Divya Jain, possessed 3000 shares of Mahagun Realtors Pvt. Ltd. which were equivalent to 3000 x 45 = 1,35,000 shares of Mahagun (India) Pvt. Ltd. The value of each share of Mahagun (India) Pvt. Ltd. on 31.3.2006 was Rs.250/- and on that basis the fair market value of 3000 shares of Mahagun Realtors Pvt. Ltd. comes to 1,35,000 x 250 = Rs.3,37,50,000/-. Therefore, in view of the close nit family connections and intersee transactions, it is held that the assessee

CO No. 355/Del/2011 received sale proceeds of Rs.3,37,50,000/- and not Rs.3,OO,OOO/- as declared by her. Accordingly, the total income was assessed at Rs. 3,41,17,363/- vide order dated 29.12.2010 passed u/s. 153C read with Section 143(3) of the I.T. Act, 1961.

REVENUE’S APPEAL

CO No. 355/Del/2011 upon the order passed by the Ld. CIT(A). Ld. Counsel of the assessee in support of his contention has also filed the Brief Synopsis in Revenue’s Appeal as well as Assessee’s Cross Objection which is reproduced as under:-

“The only issue in the departmental appeal IS against the relief of Rs.3,34,47,563/- allowed by Ld. CIT(A) in respect of addition made by the AO on the ground that sale consideration of the shares should have been equal to Fair Market Value.

Facts are like this that assessee sold 3000 shares of Mahagun Realtors Pvt Ltd at contracted price of @ Rs.I00 per share on 01.12.2006. Accordingly, assessee calculated Capital Gain by taking the sale consideration based on actual sale price i.e. Rs.100 per share.

According to A.O., there was merger of Mahagun Realtors (P) Ltd with Mahagun India (P) Ltd subsequently and as per the court's order dated 10.09.2007, the shareholders of Mahagun Realtors (P) Ltd were to receive 45 shares of Mahagun India (P) Ltd. for each share and that too of the worth @ Rs.250 per shares. Therefore, according to Ld. A.O., assessee ought to have received sale proceeds equal to Rs.3,37,50,000/- (3000x45x250)

CO No. 355/Del/2011 and not Rs.3,OO,OOO/- as claimed by the assessee and computed the capital gain based on this fictional amount.

Ld. CIT(A) deleted the addition and held that so far assessee is concerned, she sold her shares on 01.12.2006 much before the date of the order of High Court and she received Rs.3,00,000/- only and when High Court approved the scheme on 10.09.2007, the share were not held by the assessee because she had already sold her shares on 01.12.2006.

In fact, there is no infirmity in the order of Ld. CIT (A) as u/s 45 read with section 48, actual sale consideration in the hands of the assessee is the sole determining factor 'for computing the capital gain. Assessee sold her shares on 01.12.2006 on "as is where is" basis @ Rs.100/shares. If by subsequent order of High Court dated 10.09.2007, some more consideration in the form of shares were to be received, it was to be received and in fact was received by the holder of shares on the date of the order of High Court which in any case was not the assessee. Therefore, there was no question to say in the present case that assessee received enhanced consideration. Fact of the matter is that assessee did not receive

CO No. 355/Del/2011 anything except an aggregate actual sale consideration of Rs.3,00,000/- in consideration of transfer of her 3000 shares.

PB 22-24 is the Computation of Income of the assessee showing sale consideration at Rs.3,OO,OOO/-.

PB 41 is letter to Ld. A. O. submitting that sale of share by the assessee was an independent transaction and share of Private Limited Company are not freely transferable and therefore, such sale has got nothing to do with the merger scheme.

PB 12-21 are the submission before Ld. CIT (A) submitting that sale of these shares already took place on 01.12.2006 and even the petition was filed in Delhi High Court for merger only on 26.02.2007 i.e. after the date of sale and the capital gain is taxable u/s 48 on the basis of full value of the consideration received by the assessee and not on the basis of fair market value and relying upon several judicial decisions as under:-

CIT vs. Infosys Technologies Ltd. reported in [2008] 297 ITR 167 (SC)

CO No. 355/Del/2011 Hilder vs. Dexter (1902) AC 474 (HL). Head & Co. Ltd. vs. Ropner Holding Ltd. (1951) 2 AIi ER 994 (Ch. D) followed in Shearer (Inspector of Taxes vs. Bercain Ltd. (1980) 3 All ER 295 K.P. Varghese's Case [1981] 131 ITR 597 (SC)

CIT vs. Nilofar I Singh (2009) 309 ITR 0233 dated August 27, 2008 Dev Kumar Jain vs. ITO (2009) 309 ITR 0240 Commissioner of Income George Henderson and Co. Ltd. (1967) 066 ITR 0622 (SC)

Commissioner of Income Tax vs. Gillianders Arbuthnot and Co. GilIanders Arbuthnot and Co. vs. Commissioner of Income Tax (1973) 087 ITR 0407 (SC)

CIT vs. Shivakami Co. P. Ltd. (1986) 159 ITR 0071 CIT vs. I.P. Chaudhari (2010) 328 ITR 0007, jurisdiction Delhi-High Court Moral Trading & Investment Ltd. vs. DCIT (2011) 0007 ITR (Trib) 0548 (Delhi)

Rupee Finance vs. ACIT (Mumbai ITAT) (2009) 120 ITD0539 CIT vs. Vania Silk Mills P. Ltd. (1977) 107 ITR 300 (Guj.)

CO No. 355/Del/2011 CIT vs. Lake Palace Hotels and Motels Ltd. (2010) 321 ITR 165 (Raj.)

CIT vs. Gulshan Kumar (Decd.) [2002] 257 ITR 0703 PB 44-45 is the remand report in which Ld. A.O. has said that assessee should have received the fair market value.

PB 47-48 is our submission to remand report submitting that capita gain is taxed on the actual sale consideration and is not calculated based upon fair market value and any addition based upon fair market value was brought on the statute w.e.f. 01.10.2009 u/s 56(2)(vii). Therefore, there is no infirmity in the order of Ld. CIT(A).

Assessee's Cross Objections The only issue in Cross Objection is regarding assumption of jurisdiction u/s 153C (wrongly mentioned as 153A in the grounds of appeal).

Submission of the assessee is that for assuming jurisdiction u/s 153C, not only the documents of the assessee should be found and seized but those

CO No. 355/Del/2011 documents found and seized must be of incriminating nature. To treat a person as searched u/s 153C is very harsh and mere discovery of disclosed documents should not confer this harsh jurisdiction, as held in the judicial decisions given herein after.

PB 25 is the copy of notice u/s 153C.

PB 26-29 is the copy of document, which is copy of the sale deed of property, B-66, Vivek Vihar, purchased by the assessee for Rs.22,00,OOO/- on the basis of which the jurisdiction has been assumed u/s 153C.

PB 30-33 in the copy of return of the assessee wherein at PB-33, the property B-66, Vivek Vihar has been shown for Rs.11,72,959/- (being half share of the assessee, inclusive of expenses).

PB 34-40 are the submission before Ld. A.O. submitting that the document was not incriminating and was disclosed in the return and relying upon the following decision:-

Saraya Industries vs. UOI 306 ITR 189 (Delhi)

Jurisdiction is bad on this reason also that the assessment of the assessee was not pending and therefore, could not CO No. 355/Del/2011 be reopened up 153C in view of the following decisions reported at PB 37:-

Anil P. Khimani v/s. DCIT 2010 - TIOL -177 ITAT - Mumbai "B" Bench Anil Kumar Bhatia vis. ACIT (ITA No. 2660to2665/Del/2009 ITAT 'B' Bench LMJ International Ltd. vls. DCIT (2008) 119 TTJ 214 (Kol)

Ms. Shyam Lata Kaushik vls. ACIT (2008) 114 TTJ 940 (Del) Shivnath Rai Harnarain (India) Ltd. (2008) 304 ITR (AT) 271 (Del) PB 3-12 are the submission before Ld. CIT(A).

PB 43-44 is the copy of remand report of this issue giving the satisfaction note u/s 153C and it may please be seen, based on that, that the only basis was the document relating to B-66, Vivek Vihar, which was already disclosed.

PB 46-47 are the reply to remand report giving few more judicial decisions which are reproduced as under:-

LMJ International Ltd. vls. DCIT (2008) 119 TTJ 214 (Kol)

CO No. 355/Del/2011 Sinhgad Technical Education Society vls. ACIT 140 TTJ 233 (Pune)

Bharati Vidya Peeth vts. ACIT 119 TTJ 0261 (Pune)

ACIT vts. Srj Peety Steels P Ltd. 137 TTJ 0627 (Pune)

Ld. CIT(A) has also wrongly interpreted section 153C which is not in accordance with the law as laid down in above decisions.”

“9. I have considered the assessment order, written submissions filed by the AR, AO's subsequent reports and the AR's rejoinder as well as the facts of the case and position of law. It is observed that the contention of the AR that the law does not permit the A.O. to substitute "Fair Market Value" in place of "Actual Sale Consideration" received for the purpose of calculation of capital gain is fairly valid. Moreover, the A.O. has not, adduced any evidence found either during search proceeding on the group

CO No. 355/Del/2011 company's business premises u/s 132 or post search proceedings of the appellant which may establish that the appellant has received the consideration more than what she has declared in her I.T. Return for the year under review. A combined reading of section 45(1)(a) and section 48 of the Act shows that when a sale of capital assets take place the capital gain arising out of such transfer has to be computed by looking at full value of consideration received or accruing as a result of such transfer. The expression "full value of consideration" is not the same as "fair market value" as appearing in section 55A of the Act. Thus for the purpose of computing capital gain there is no necessity to determine the fair market value unless it is specifically provided in the Act. Reliance is placed on the following authorities:-

• Moral Trading & Investment Ltd. vis. DCIT (2011) 007 ITR (Trib) 0548 (Delhi) • CIT vis. I.P. Chaudhari (2010) 328 ITR0007 (Del) • CIT v. Lake Palace Hotels and Motels Ltd. [2010]321 ITR 165 (Raj) CO No. 355/Del/2011 • CIT vis. Ni/ofar I Singh (2009) 309 ITR 0233 (Del)

• Rupee Finance Vs ACIT( Mumbai ITAT) (2009) 310 ITR 403 • Dev Kumar Jain vis. ITO (2009) 309 ITR 0240(Del)

• Commissioner of Income Taxrge Henderson and Co. Ltd. (1967) 066 ITR 0622 (SC)

• Commissioner of Income Tax vis. Gillianders Arbuthnot and Co. Gillanders Arbuthnot and Co. v/s. Commissioner of Income Tax (1973) 087 ITR 0407 (SC)

• CIT v/s Shivakami Co. P Ltd. [1986]159 ITR 0071.

• CIT v. Vania Silk Mills P. Ltd. [1977]107 ITR 300 (Guj)

CO No. 355/Del/2011 Delhi High Court, which came on 10.09.2007 i.e. after a gap of 9 months (approx) from the date of sale of shares. Had ,the appellant kept the shares, he would have got 1,35,000 equity shares of MIPL only on 08.04.2008 i.e. the date of allotment of shares after merger as stated above or in other words after 18 months from the date of sale. In other words, it was only prospective benefit attached with the shareholding of the appellant in the MRPL as on date of sale. The AR relied upon Hon'ble Apex Court decision in the case of CIT vis. Infosys Technologies Ltd. (2008) ITR 167. Where it was held that if prospective benefit is in the nature of income or specifically included, by the legislature as part of income, the same is not taxable.

11. Therefore, keeping in view the above facts & circumstances and legal authorities cited by the AR, the adoption of Fair Market Value of share in lieu of I value of sale consideration as declared by the appellant is not valid particularly when there is no provision under the law to include prospective benefit in the ambit of the word "income". The appellant succeed on this ground appeal.” 17

CO No. 355/Del/2011 9.1 After going through the aforesaid relevant findings of the impugned order on the issue involved in Ground No. 1 raised by the Revenue, we are of the considered view that the Ld. CIT(A) has deleted the addition in dispute by observing that the law does not permit the A.O. to substitute "Fair Market Value" in place of "Actual Sale Consideration" received for the purpose of calculation of capital gain is fairly valid. We note that in the present case the A.O. has not adduced any evidence found either during search proceeding on the group company's business premises u/s 132 or post search proceedings of the assessee which may establish that the assessee has received the consideration more than what she has declared in her I.T. Return for the year under review. A combined reading of section 45(1)(a) and section 48 of the Act shows that when a sale of capital assets take place the capital gain arising out of such transfer has to be computed by looking at full value of consideration received or accruing as a result of such transfer. The expression "full value of consideration" is not the same as "fair market value" as appearing in section 55A of the Act. Thus for the purpose of computing capital gain there is no necessity to determine the fair market value unless it is specifically provided in the Act. We have perused the following case laws as relied cited by the Ld. CIT(A), which supports the case of the Assessee:-

CO No. 355/Del/2011 • Moral Trading & Investment Ltd. vis. DCIT (2011) 007 ITR (Trib) 0548 (Delhi)

• CIT vis. I.P. Chaudhari (2010) 328 ITR0007 (Del) • CIT v. Lake Palace Hotels and Motels Ltd. [2010]321 ITR 165 (Raj) • CIT vis. Nilofar I Singh (2009) 309 ITR 0233 (Del)

• Rupee Finance Vs ACIT( Mumbai ITAT) (2009) 310 ITR 403 • Dev Kumar Jain vis. ITO (2009) 309 ITR 0240(Del)

• Commissioner of Income Taxrge Henderson and Co. Ltd. (1967) 066 ITR 0622 (SC)

• Commissioner of Income Tax vis. Gillianders Arbuthnot and Co. Gillanders Arbuthnot and Co. v/s. Commissioner of Income Tax (1973) 087 ITR 0407 (SC)

• CIT v/s Shivakami Co. P Ltd. [1986]159 ITR 0071.

• CIT v. Vania Silk Mills P. Ltd. [1977]107 ITR 300 (Guj)

9.2 In this case the assessee was allotted 3000 shares of M/s MRPL on 29.09.2004 at its face value of Rs. 10/- each. The same has been 19

CO No. 355/Del/2011 sold on 01.12.2006 to its group company. The merger scheme in which the exchange ratio of shares Of MIPL & MRPL was formulated was on 26.02.2007 and the exchange ratio so determined was further subject to approval of Delhi High Court, which came on 10.09.2007 i.e. after a gap of 9 months (approx) from the date of sale of shares. The assessee kept the shares and he would have got 1,35,000 equity shares of MIPL only on 08.04.2008 i.e. the date of allotment of shares after merger as stated above or in other words after 18 months from the date of sale. In other words, it was only prospective benefit attached with the shareholding of the assessee in the MRPL as on date of sale. We find that the case law referred by the Ld. CITA(A) in his impugned order of the Hon'ble Apex Court decision in the case of CIT v/s. Infosys Technologies Ltd. (2008) ITR 167 supports the case of the assessee wherein it was held that if prospective benefit is in the nature of income or specifically included, by the legislature as part of income, the same is not taxable.

9.3 In the background of the aforesaid discussions and the precedent relied upon by the Ld. CIT(A) in his impugned order, we are of the considered opinion that the adoption of Fair Market Value of share in lieu of value of sale consideration as declared by the assessee is not valid particularly when there is no provision under the law to include prospective benefit in the ambit of the word 20

CO No. 355/Del/2011 "income". Therefore, the Ld. CIT(A) has rightly allowed this ground and deleted the addition in dispute, which does not need any interference on our part, hence, we uphold the action of the Ld. CIT(A) on this ground and dismissed the ground no. 1 raised by the Revenue in its Appeal. In the result, the Appeal filed by the Revenue stands dismissed.

ASSESSEE’S CROSS OBJECTION

10. With regard to ground no. 1 relating to rightly deletion of addition of Rs. 3,34,47,563/- which was made by the AO on the ground of alleged sale proceeds of shares received by the assessee as against Rs. 3,00,000/- declared by her. Since we have already dismissed this ground of appeal raised in the Revenue’s Appeal by upholding the action of the Ld. CIT(A) of deletion of the addition, as aforesaid, hence, this issue has become infructuous as such.

CO No. 355/Del/2011 no incriminating material belonging to the assessee were found during search period. Therefore, he stated that the assessment made in the case of the assessee is without jurisdiction, in view of the Hon’ble Jurisdictional High Court decision dated 28.8.2015 in the case of CIT vs. Kabul Chawla passed in 709 and 713/2014. He further stated that when no incriminating material are found relating to assessee in the course of search, then the proceedings initiated u/s. 153C is null and void and this issue has already been adjudicated and decided in favor of the assessee by the Hon’ble Jurisdictional High Court in the case of CIT vs. Kabul Chawla (Supra), which shall be followed in the present case of the assessee. In this behalf, he draw our attention towards the relevant para no. 38 of the order, which is reproduced hereunder:-

38. The present appeals concern AYs 2002-03, 2005-06 and 2006-07. On the date of the search the said assessments already stood completed. Since no incriminating material was unearthed during the search, no additions could have been made ot the income already assessed.

CO No. 355/Del/2011 13. We have heard both the counsel and perused the records, we find considerable cogency in the assessee’s counsel submission that if no incriminating material belonging to the assessee were found during search period, the assessment made is without jurisdiction and proceedings initiated u/s. 153C is null and void. To support this contention, we follow the Hon’ble Jurisdictional High Court decision dated 28.8.2015 in the case of CIT vs. Kabul Chawla passed in 709 and 713/2014 wherein vide para no. 38 it has been held as under:-

“38. The present appeals concern AYs 2002-03, 2005-06 and 2006-07. On the date of the search the said assessments already stood completed. Since no incriminating material was unearthed during the search, no additions could have been made ot the income already assessed.”

13.1 In the background of the aforesaid discussions and precedent, we are of the considered view that the present issue involved in ground no. 2 in the cross objection is squarely covered by the decision of the Hon’ble Jurisdictional High Court decision dated 28.8.2015 in the case of CIT vs. Kabul Chawla passed in 709 and 713/2014. Respectfully, following the above precedent, we quash the assessment made u/s. 153C and decide

CO No. 355/Del/2011 the issue raised in ground no. 2 in favour of the assessee and accordingly, this ground is allowed. In the Result, the Cross Objection is partly allowed.

Order pronounced in the Open Court 09-10-2015.