ANAND VELUMANI,BENGALURU V. ASSISTANT COMMISSIONER OF INCOME TAX, MUMBAI

ITA 5339/MUM/2024

AI Insights

The case involves Anand Velumani, who appealed against the order of the Commissioner of Income Tax (Appeals), which had dismissed his appeal on the grounds of non-compliance without examining the merits. The primary issue in the appeal was the addition of Rs 80,62,431 to the assessee's income for the Assessment Year 2017-18, under Section 56(2)(vii)(c) of the Income Tax Act, 1961, due to the alleged undervaluation of shares acquired in a foreign entity. The Tribunal found that the assessee had received communication of the CIT(A)'s order through an employee's email, which was not directly communicated to him, and thus condoned the delay in filing the appeal.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 25073 (ITAT-MUMBAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-01-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2017-2018
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAM KRISHN KEDIA
• Assessee Lawyers: T. J. PANDIAN
• Keywords: Fair market value; Period of limitation; Principle of natural justice; Liquidation
• Section: 143(3); 142(1); 143(2); 250; 143(1); 56; 131; 133(6)

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH, MUMBAI BEFORE MS. KAVITHA RAJAGOPAL, JM AND SHRI. OMKARESHWAR CHIDARA, AM ITA No. 5339/Mum/2024 (Assessment Year: 2017-18) Anand Velumani 17, Embasy Boulevard, Hosahalli, Hunsamaranahalli Post, Yelahanka, Bengaluru, Karnataka, 562157. Vs. Assistant Commissioner of Income Tax, Mumbai Room No.306, 3rd Floor, Tower No. 6, Vashi Railway Station, Commercial Complex Vashi, Navi Mumbai - 400703. PAN/GIR No. AGNPV2035R (Assessee) : (Respondent) Assessee by : Shri. T. J. Pandian Respondent by : Shri. Ram Krishn Kedia (Sr. DR) Date of Hearing : 06.01.2025 Date of Pronouncement : 08.01.2025 O R D E R Per Kavitha Rajagopal, J M: This appeal has been filed by the assessee, challenging the order of the learned Commissioner of Income Tax (Appeals), Delhi (‘ld. CIT(A)’ for short), National Faceless Appeal Centre (‘NFAC’ for short) passed u/s.250 of the Income Tax Act, 1961 (‘the Act'), pertaining to the Assessment Year (‘A.Y.’ for short) 2017-18. 2. It is observed that the said appeal is filed belatedly with a delay of 325 days for which the assessee has filed an application for condonation of said delay alongwith an affidavit. The learned Authorised Representative (‘ld. AR’ for short) appearing for the assessee contended that the assessee had shifted his residence from Mumbai to Bangalore and has also quit the organization which he was earlier associated with in ITA No. 5339/Mum/2024 (A.Y. 2017-18) Anand Velumani 2 the year 2022 and that all the communication of the department was sent through the mail id which belong to his professional employee of the erstwhile organization. The ld. AR further contended that the assessee was not communicated the NFAC’s mails and order passed u/s. 250 dated 21.09.2023. The ld. AR further stated that there was no malafide intentions on the part of the assessee and it was also not wanton by the assessee in filing the appeal belatedly with a delay of 325 days. The ld. AR stated that the assessee has got a meritorious case and prayed that the delay be condoned. Per contra, the learned Departmental Representative (‘ld. DR’ for short) contended that the assessee did not have a ‘sufficient cause’ for condoning the delay and further stated that the assessee has been non-compliant before the first appellate authority. The ld. DR vehemently opposed for condoning the said delay. On perusal of the rival contentions and the materials available on record, we deem it fit to hold that the assessee has substantiated the delay in filing the present appeal by ‘sufficient cause’, where the assessee has received mail communication of the ld. CIT(A)’s order in the mail id of the employee of the assessee’s erstwhile organization which was not communicated to the assessee. As there being a ‘sufficient cause’, we deem it fit to condone the delay in filing the appeal beyond the period of limitation. Delay condoned. 3. The assessee has raised the following grounds of appeal: 1. “The sole ground of adding of Rs 80,62,431/- to the income of the assessee for the AY 2017-18 is that the assessee’s subscription of shares by way of allotment on 08.03.2017 was at a price of 100 Bahrain Dinar per share, which is higher than the price of $ 1/- paid for the purchase of a share in the same company in the previous week on 28.02.2017; therefore, the matter fell under the ambit of Section 56 (2)(vii)(c) of the Income Tax Act 1961 according to the AO. The AO and the NFAC failed to appreciate the difference between purchase of unquoted ITA No. 5339/Mum/2024 (A.Y. 2017-18) Anand Velumani 3 share from a holder at a negotiated price and subscription of shares of an entity at the issued price. 2. Although the Chartered Accountant had fixed a value of 10.9 Bahrain Dinar per share under DCF (Discounted Cash Flow) method as against the face value of 100 Bahrain Dinar, the AO and the NFAC have failed to take note of the legal position that the Bahrain Commercial Law does not permit issue of shares by an entity below face value. In fact, Section 53 of the Indian Companies Act 2013 and the corporate laws of many countries too prohibits issue of shares at discount. Issue price cannot be the choice of an investor. 3. This share subscription was made to infuse long term funds with the objective of improvising the foreign entity’s net worth as per the local statutory requirement. It was also for augmenting resources for working capital needs of the foreign entity. They were so purposed to earn profit to justify the purpose of acquisition in a territory where competition was less, which were all commercial decisions. 4. Bahrain Commercial Law empowers the government to deregister an entity whose net worth is negative. If such investment decision was not done to make net worth positive, the foreign entity would have been deregistered resulting in loss of the entire of foreign investment. 5. The AO and the NFAC further erred to note that the DCF valuation method adopted for the second acquisition by way of allotment is a statutorily approved method under Rule 11-UA of the IT Rules 1961. It was also in due compliance of FEMA Regulations and RBI’s guidelines. In fact, the valuation itself is not disputed by any of the authorities. It is not the case of the AO that the valuation done is through an unapproved method. 6. The decision of the NFAC is therefore liable to be rejected in toto as unfair and unjustified without evaluating the same to facts and commercial decisions.” 4. Brief facts of the case are that the assessee is an Individual engaged in the business of Medical Diagnostics specifically In-Vitro Blood testing of clinical Biochemistry tests and had filed his return of income dated 25.10.2017 declaring total income at Rs.83,30,310/- out of income from profit sharing from group companies, Dividend from shareholding in Thyrocare Technologies Ltd. and Bank interest, etc. The return was processed u/s. 143(1) of the Act and the assessee’s case was selected for limited ITA No. 5339/Mum/2024 (A.Y. 2017-18) Anand Velumani 4 scrutiny under CASS for the reason that the assessee has entered into transactions of buying shares of foreign entity viz. Thyrocare Gulf Laboratories WLL, twice dated 28.02.2017 and 08.03.2017 at two different rates. Notice u/s. 143(2) and 142(1) were duly issued and served upon the assessee. The learned Assessing Officer ('ld. A.O.' for short) passed the assessment order u/s. 143(3) of the Act dated 20.12.2019, determining total income at Rs. 1,63,92,741/- after making an addition of Rs. 80,62,431/- u/s. 56(2)(vii)(c) of the Act, being the difference in the face value of the shares as per latest certificate of the Chartered Accountant of the assessee. 5. Aggrieved the assessee was in appeal before the first appellate authority, challenging the assessment order and the ld. CIT(A) vide an ex parte order dated 21.09.2023, dismissed the appeal filed by the assessee on the ground that the assessee has failed to substantiate his claim by documentary evidences. 6. The assessee is in appeal before us, challenging the impugned order of the ld. CIT(A). 7. We have heard the rival submissions and perused the materials available on record. It is observed that the assessee has purchased 4315 shares of ‘Thyrocare Gulf Laboratories WLL’ which is based in Bahrain from ‘Thyrocare International Holding Company’ which is based in Mauritius at 1 USD per share dated 28.02.2017. The assessee subsequently purchased 910 shares of ‘Thyrocare Gulf Laboratories WLL’ through Private Placement of Shares at Face Value of 100 Bahrain Dinar (BD) per share dated 08/03/2017 within the span of 7 days. The ld. AO observed that the Chartered Accountant of the assessee, Mr. M. Chinnaswamy had valued and furnished the valuation certificate for both the transactions, where it was stated in the first ITA No. 5339/Mum/2024 (A.Y. 2017-18) Anand Velumani 5 transactions that “Since the company has incurred financial loss with net worth completely eroded, the book value of the company is Nil and therefore the pre-agreed value of $1 per equity share is appropriate”, whereas for the second transaction the same was valued at 100 Bahrain Dinar per share, where the same Chartered Accountant had followed the Discounted Cash Flow Method in which he assumed growth rate of ‘Thyrocare Gulf Laboratories WLL’ to be 2% and Weighted Average Cost of Capital to be 25% thereby arriving at 10.9 Bahrain Dinar per share price. The ld. AO issued notice u/s. 133(6) of the Act to Mr. M. Chinnaswamy and notice u/s. 131 was issued and served upon the assessee. The assessee contended that ‘Thyrocare Gulf Laboratories WLL’ was incorporated by investment from ‘Gems International WLL’ which was the majority shareholder and ‘Thyrocare International Holding Company’ which was the minority shareholder which then later decided to liquidate the business as the operational loss of ‘Thyrocare Gulf Laboratories WLL’ was increasing due to various reasons. The assessee further contended that in order to infuse capital into company, the assessee and his family members agreed to take up the operations and buy the shares at nominal value of 1 USD per share having Face Value 100 Bahrain dollar. In that way, the day-to-day operation and the other activities of the business could be taken care of by infusing additional funds as primary equity investment by acquiring 910 shares at Face Value of 100 BD, was transacted for helping the business to grow. Thus, the assessee states that he had acquired the shares at a nominal value of 1 USD per share for avoiding the company from going into liquidation as desired by the majority and minority shareholders who were not ready to infuse funds into ITA No. 5339/Mum/2024 (A.Y. 2017-18) Anand Velumani 6 ‘Thyrocare Gulf Laboratories WLL’. The ld. AO was not in agreement with the contentions of the assessee and held that the assessee had pre-mediated the plan of buying shares below the market rate, thereby making an addition u/s. 56(2)(vii)(c) of the Act, where an individual or HUF has received any property, other than an immovable property, for a consideration which is less than aggregate fair market value of such property which exceeds Rs. 50,000, then the same would be taxed as income from other sources to the extent of the difference in the fair market value. The ld. AO also failed to consider the assessee’s submission that Rule 11UA of the Income Tax Rules, would be applicable, where the value offered for purchase of shares on the date of transaction is to be considered as the fair market value for which the assessee be obtained report from a merchant banker or an accountant in respect of such valuation. The ld. AO made an addition on the difference between the market rate and the consideration paid per share and determined the total income of the assessee. 8. In an appeal before the ld. CIT(A), the assessee inspite of notices issued on 14.01.2021, 20.08.2023 and 10.09.2023 through email, no compliance has been made and the ld. CIT(A) dismissed the appeal of the assessee vide an ex parte order without getting into the merits of the case. 9. On the above factual matrix, we deem it fit that since the first appellate authority had not decided the issue on merits, this matter has to be remanded back to the file of the ld. CIT(A) for de novo adjudication on the merits in order to extend the assessee with another opportunity by adhering to the principles of natural justice and in the interest of justice dispensation. We therefore direct the assessee to cooperate with the ITA No. 5339/Mum/2024 (A.Y. 2017-18) Anand Velumani 7 proceeding before the first appellate authority without any undue delay and the ld. CIT(A) is directed to decide the issue on the merits. It is also pertinent to point out that we have not expressed any view on the merits of the case which will have to be adjudicated afresh by the ld. CIT(A). 10. In the result, the appeal filed by the assessee is allowed for statistical purpose. Order pronounced in the open court on 08.01.2025 Sd/- Sd/- (OMKARESHWAR CHIDARA) (KAVITHA RAJAGOPAL) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai; Dated: 08.01.2025 Karishma J. Pawar (Stenographer) Copy of the Order forwarded to: 1. The Appellant 2. The Respondent 3. CIT- concerned 4. DR, ITAT, Mumbai 5. Guard File BY ORDER, (Dy./Asstt.Registrar) ITAT, Mumbai "