ITO 8(1)(2), MUMBAI V. CONCEPT REALITY & SECURITIES P. LTD, MUMBAI

ITA 4522/MUM/2009

• Counselvise Citation: [2010] 119 COUNSELVISE.COM (IT) 6172 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 3 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-11-2010
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 25-11-2010
• Assessment Year: 2005-2006
• Appeal Filed On: 31-07-2009
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: MAYANK PRIYADARSHI
• Keywords: Fair market value; Valuation report

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES C, MUMBAI BEFORE SHRI R.S.SYAL, AM AND SHRI VIJAY PAL RAO, JM ITA NO.4522/MUM/2009 : ASST.YEAR 2005-2006 THE INCOME TAX OFFICER WARD 8(1)(2) MUMBAI. VS. M/S.CONCEPT REALITY & SECURITIES PVT.LTD. TAINWALLA HOUSE, OPP. PLOT NO.18 ROAD NO.118, MIDC, MAROL ANDHERI (EAST), MUMBAI 400 093. PA NO.AACCA4355K. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI MAYANK PRIYADARSHI RESPONDENT BY : SHRI SHASHI TULSIYAN O R D E R PER R.S.SYAL, AM : THIS APPEAL BY THE REVENUE ARISES OUT OF THE ORDER PASSED BY THE COMMISSIONER OF INCOME-TAX (APPEALS) ON 11.05.2009 IN RELATION TO THE ASSESSMENT YEAR 2005-2006. 2. THE ONLY GROUND IS AGAINST THE DELETION OF ADDIT ION OF RS.56,50,806 MADE ON ACCOUNT OF EXCESSIVE PRICE ON PURCHASE OF SHARES. B RIEFLY STATED THE FACTS OF THE CASE ARE THAT THE ASSESSEE WAS ENGAGED IN THE BUSINESS O F PURCHASE AND SALE OF SHARES AND ALSO TRANSPORTATION OF GOODS. THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAD PURCHASED SHARES FROM PERSONS COVERED U/S.40A(2)(B) IN EXCESS OF MARKET PRICE. IT WAS OBSERVED THAT THE ASSESSEE-COMPANY PURCHASED 11 66801 SHARES OF M/S. TAINWALA CHEMICALS( INDIA) LTD. FROM M/S KATYAN CO NSTRUCTION & DEVELOPMENT LIMITED AND SHRI RAKESH TAINWALA ON TWO DIFFERENT DATES AND BOTH THE PARTIES FROM WHOM THE PURCHASES WERE MADE STOOD COVERED U/S 40A( 2)(B). IT WAS SEEN THAT THE PURCHASES WERE MADE AT THE RATE OF RS.10 PER SHARE WHEREAS THE PREVAILING MARKET RATE AS ON THE DATES OF PURCHASE VIZ. 16.08.2004 AN D 29.03.2005 WAS RS.4.17 AND RS.7.70 PER SHARE RESPECTIVELY. IT WAS, THEREFORE, HELD THAT THE ASSESSEE HAD MADE EXCESS PAYMENT OF AROUND RS.6 PER SHARE TO M/S.KATY AN CONSTRUCTION & ITA NO.4522/MUM/2009 M/S.CONCEPT REALITY & SECURITIES PVT.LTD. 2 DEVELOPMENT LIMITED AND AROUND RS.3 PER SHARE TO SHRI RAKESH TAINWALA. THE EXCESS AMOUNT PAID OVER THE MARKET PRICE OF THE SHA RES AS ON THE DATE OF PURCHASE WAS WORKED OUT AT RS.56,50,806, FOR WHICH THE ADDI TION WAS MADE. 3. THE ASSESSEE CONTENDED BEFORE THE FIRST APPELLATE AUTHORITY THAT IT HAD SUBMITTED THE VALUERS REPORT INDICATING FAIR MARKE T VALUATION OF THE SHARES BASED ON THE ERSTWHILE GUIDELINES FOR VALUATION OF EQUITY SHARES OF COMPANIES AND THE BUSINESS AND NET ASSETS OF BRANCHES ISSUED BY THE M INISTRY OF FINANCE, DEPARTMENT OF ECONOMIC AFFAIRS DATED 30.07.1990. IT WAS STATED THAT THIS VALUATION REVEALED FAIR MARKET VALUE OF RS.10.17 PER SHARE. IT WAS ALS O FURTHER CONTENDED THAT THE NET ASSET VALUE OF THE SHARES WAS APPROXIMATELY RS.20.3 3 PER SHARE, WHICH WAS MORE THAN TWICE THE TRANSACTION VALUE. IN THE BACKDROP O F THESE FACTS, WHICH WERE STATED BEFORE THE AO AS WELL, THE ASSESSEE ARGUED BEFORE T HE LEARNED FIRST APPELLATE AUTHORITY THAT THE PURCHASE PRICE OF RS.10 PER SHAR E WAS FAR BELOW THE FAIR MARKET VALUE AND HENCE WAS NOT EXCESSIVE. IT WAS ALSO CONT ENDED THAT IF THE ASSESSING OFFICER INTENDED TO DECREASE THE PURCHASE PRICE THE N THE RESULTANT DECLINE IN THE VALUE OF CLOSING STOCK WOULD ALSO BE CALLED FOR WHI CH WOULD RESULT IN TO NO CHANGE IN THE ULTIMATE PROFIT FIGURE. THE LEARNED CIT(A) N OTED THE PRESCRIPTION OF SECTION 40A(2)(B) AS UNDER:- OF THIS SUB-SECTION AND THE AO IS OF OPINION THAT SUCH EXPENDITURE IS EXCESSIVE OR UNREASOBABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS, SERVICES, OR FACILITIES FOR WHICH THE PAYMENT IS MADE OR THE LEGITIMATE NEEDS OF THE BUSINESS OR PROFESSION OF THE ASSESSEE OR THE BENEFIT DERIVED BY OR ACCRUING TO HIM THEREFROM , SO MUCH OF THE EXPENDITURE AS SO CONSIDERED BY HIM TO BE EXCESSIVE OR UNREASONABLE SHALL NOT BE ALLOWED AS A DEDUCTION. 4. HE OBSERVED THAT THE PROVISIONS OF SECTION 40A(2 )(B) REFERRED TO THE FAIR MARKET VALUE AND NOT THE MARKET VALUE. AS THE FA IR MARKET VALUE OF THE SHARES, AS PER VALUATION REPORT, WAS RS.10.69, THE LEARNED CIT(A) HELD THAT THE SAME FIGURE ITA NO.4522/MUM/2009 M/S.CONCEPT REALITY & SECURITIES PVT.LTD. 3 WAS REQUIRED TO BE CONSIDERED AND NOT THE MARKET VA LUE OF THE SHARES. HE, THEREFORE, ORDERED FOR THE DELETION OF ADDITION, AGAINST WHIC H THE REVENUE HAS COME UP IN APPEAL BEFORE US. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS CLEAR THAT THE ASSESSEE WAS ENGAGED I N THE BUSINESS OF PURCHASE AND SALE OF SHARES, APART FROM THE TRANSPORTATION OF GOODS. THE ASSESSEE PURCHASED SHARES OF M/S.TINWALA CHEMICALS (I) LTD., WHICH IS A LISTED C OMPANY, FROM THE PERSONS SPECIFIED U/S.40A(2)(B) AT THE RATE OF RS.10 PER SH ARE AS AGAINST THE QUOTED PRICE ON THE STOCK EXCHANGE OF RS.4.08 AND RS.7.00 ON THE DA TES OF TRANSACTIONS. HOWEVER WHILE VALUING THE CLOSING STOCK, THE ASSESSEE ADOPT ED THE FIGURE OF RS.7 PER SHARE AS ON 31.3.2005. IN THIS VIEW OF THE MATTER THE CONTEN TION RAISED BY THE LEARNED A.R. THAT THE REDUCTION IN THE PURCHASE PRICE WOULD AUTO MATICALLY LEAD TO THE REDUCTION IN THE VALUE OF CLOSING STOCK AND HENCE IT WOULD BE TA X NEUTRAL, IS UNFOUNDED. WHEN THE ASSESSEE ADOPTED THE VALUE OF CLOSING STOCK AT RS.7 PER SHARE AND NOT RS.10 PER SHARE, THE IMPACT OF MAKING PURCHASE AT HIGHER RATE WAS DONE AWAY WITH. FURTHER THE VALUATION OF CLOSING STOCK LIES IN AN ALTOGETHE R DIFFERENT COMPARTMENT. IF THE ASSESSEE IS FOLLOWING THE METHOD OF VALUING THE CLO SING STOCK AT COST OF MARKET PRICE, WHICH EVER IS LESS, THEN THE VALUATION HAS TO BE DONE ON SUCH VALUE. MOREOVER THE VALUATION OF CLOSING STOCK IS NOT IN D ISPUTE BEFORE US. WE, THEREFORE, DO NOT FIND ANY FORCE IN THIS SUBMISSION RAISED ON BEHALF OF THE ASSESSEE. 6. THE NEXT POINT URGED BY THE LEARNED A.R., WITH A LOT OF VEHEMENCE WAS THAT SECTION 40A(2)(B) REFERS TO `FAIR MARKET VALUE OF GOODS AS INTERPRETED BY THE LD. FIRST APPELLATE AUTHORITY AND IN THAT VIEW OF THE M ATTER, THE MARKET PRICE OF THE SHARES LOOSES SIGNIFICANCE. ACCORDING TO HIM THE V ALUATION REPORT DEPICTS THE MARKET VALUE OF SHARES AT RS.10.09 AND HENCE THE PU RCHASE RATE OF RS10 PER SHARE WAS NOT UNREASONABLE OR EXCESSIVE. WE ARE UNABLE T O COUNTENANCE THIS POINT OF VIEW FOR THE REASON THAT THE RATIONALE BEHIND SECTI ON 40A(2)(B) IS TO DISALLOW ITA NO.4522/MUM/2009 M/S.CONCEPT REALITY & SECURITIES PVT.LTD. 4 EXPENDITURE, WHICH IN THE OPINION OF THE ASSESSING OFFICER IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS, SERVICES OR FACILITIES FOR WHICH THE PAYMENT IS MADE OR THE LEG ITIMATE NEEDS OF THE BUSINESS OR PROFESSION OF THE ASSESSEE OR THE BENEFIT DERIVED BY OR ACCRUING TO HIM THERE FROM IS LESS THAN THE EXPENDITURE INCURRED. SUCH EXCESS IS TO BE DISALLOWED UNDER THIS SECTION. WHEN THE SHARES OF A LISTED COMPANY A RE AVAILABLE, ON THE DATE OF TRANSACTIONS AT RS.4 OR RS.7 , THERE IS ABSOLUTELY NO LOGIC IN MAKING THE PURCHASE OF THE SAME SHARES AT RS.10 PER SHARE FROM THE RELATED PERSON COVERED U/S.40A(2)(B). IT IS NOT ONLY THE EXCESS EXPENDITURE HAVING REGARD TO THE FAIR MARKET VALUE OF GOODS, AS TAKEN NOTE OF BY THE LD. FIRST APPELLATE AUTHORI TY, WHICH IS COVERED WITHIN THE PURVIEW OF THIS SECTION, BUT IT ALSO EMBRACES A CASE WHERE THE BENEFIT DERIVED BY OR ACCRUING TO THE ASSESSEE FROM THE TRANSACTION IS LESS. THE LD. CIT(A) BEHAVED TOO TECHNICALLY IN KEEPING THE TOTALITY AND THE SPIRIT OF THE SECTION AT A DISTANCE. WHEN THE ASSESSEE IS DERIVING BENEFIT OF RS7 OR RS4, BY PAYING RS.10 TO THE RELATED PARTIES, THE EXCESS EXPENDITURE WOULD STAND COVERED UNDER THE KEN OF THIS PROVISION. 7. IN OUR CONSIDERED OPINION THE LEARNED CIT (A) WAS NOT JUSTIFIED IN DELETING THIS ADDITION. WE, THEREFORE, SET ASIDE THE IMPUGNE D ORDER AND RESTORE THE ADDITION OF RS.56,50,806 AS MADE BY THE ASSESSING OFFICER. 8. IN THE RESULT, THE APPEAL IS ALLOWED. ORDER PRONOUNCED ON THIS 30 TH DAY OF NOVEMBER, 2010. SD/- SD/- ( VIJAY PAL RAO ) ( R.S.SYAL ) JUDICIAL MEMBER ACC OUNTANT MEMBER MUMBAI : 30 TH NOVEMBER, 2010. DEVDAS* ITA NO.4522/MUM/2009 M/S.CONCEPT REALITY & SECURITIES PVT.LTD. 5 COPY TO : 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT CONCERNED 4. THE CIT(A) - VIII, MUMBAI. 5. THE DR/ITAT, MUMBAI. 6. GUARD FILE. TRUE COPY. BY ORDER ASSISTANT REGISTRAR, ITAT, MUMBAI.