Appeal Details
Counselvise Citation
[2022] 104 COUNSELVISE.COM (IT) 1154 (ITAT-BANGALORE)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
3 year(s) 6 month(s) 7 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
11-10-2022
Appeal Filed By
Department
Order Result
Dismissed
Bench Allotted
A
Next Hearing Date
23-08-2022
Assessment Year
2010-2011
Appeal Filed On
04-04-2019
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : BANGALORE BEFORE SMT. BEENA PILLAI, JUDICIAL MEMBER AND SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER ITA No.679/Bang/2019 Assessment Year : 2010-11 The Dy. Commissioner of Income Tax, Central Circle-2(3), Bengaluru. Vs. M/s Bioworth India Pvt. Ltd., Kemwell Manor, 10/D/2, Ho Chi Minh Sarari, Kolkata-700 071. PAN – AABCB 0319 D APPELLANT RESPONDENT Assessee by : Shri Akkal Dudhewala, C.A Revenue by : Shri K Sankar Ganesh, JCIT (DR) Date of hearing : 24.08.2022 Date of Pronouncement : 12.10.2022 O R D E R Per Laxmi Prasad Sahu, Accountant Member :- This is an appeal filed by the Revenue against the order passed by the CIT(A)-VIII, Kolkata dated 19/02/2014 on the following grounds of appeal:- “1. 'That, on the facts and in circumstances of the case, the Ld. CIT(A) has erred in law in restricting the disallowances of travelling expenses of Rs.16,96,648/- made u/s 37 of the Income Tax Act, 1961, failing to consider that the assessee has failed to furnish any documentary evidences in support of the claim to prove that the expenses was incurred wholly and exclusively for the purpose of it's business". 2. "That, on the facts and in circumstances of the case, the Ld. CIT(A) has erred in law in deleting the disallowance of Professional Fees of Rs. 33,00,000/- made by the Assessing Officer, failing to consider that both the assessee has failed to prove the type of services rendered by the parties along with evidences." ITA No.679/Bang/2019 Page 2 of 27 3. "That, on the facts and in circumstances of the case, the Ld. CIT(A) has erred in law in deleting the disallowance of capital loss incurred on sale of unquoted shares for Rs.3,07,50,800/- made by the Assessing Officer ignoring the findings that the shares were sold at Rs.10/- considering the Net Realizable Value instead of Book Value of Rs.90.36/- per share, thereby ignoring the laid down accounting standards which resulted in perversity of Law." 4. "That, on the facts and in circumstances of the case, the ld.CITL(A) has erred in law in passing a perverse order which needs to be quashed and order of the Assessing Officer be restored." 5. "That, the appellant craves leave to add, alter and/or further amend grounds of appeal on or before hearing." 2. The brief facts of the case are that the assessee has filed return of income on 27/09/2010 for the assessment year 2010-11 showing total income of Rs.3,65,77,480/-. The case was selected for scrutiny and statutory notices were served to the assessee. In response to notice, the assessee filed detail reply. The AO observed that the assessee is engaged in the business of investing, trading and rental services and mutual funds. The AO calculated disallowance under Rule 8D(2)(iii) of Rs.4,68,999/- and the assessee has also suo moto made disallowance of Rs.1,510/-. The AO further observed that the assessee has claimed travelling and conveyance expenses in the profit and loss account amounting to Rs.16,96,408/- for foreign travelling and allowances. The assessee was asked to file details of the expenditure incurred and purpose for the visit outside India. In response, the assessee submitted that the visit was in connection with business purpose but the assessee could not produce any evidence which shows that there was no direct nexus with the business exigency. Therefore, the AO disallowed u/s 37 of the Act to the tune of Rs.16,96,468/- and added into the total income of the assessee. 2.1 The AO further observed that the assessee has debited into the profit and loss account under the head professional fee of Rs.30.00/- lakhs and 3.00/- lakhs respectively which was paid to Kemwel Pvt. Ltd. and Chemesworth Pvt. Ltd. respectively and these companies are the group companies of the assessee. The assessee was asked to furnish the full details of expenses along with bills and vouchers and the type ITA No.679/Bang/2019 Page 3 of 27 of servicers rendered by those companies to the assessee company. The assessee filed evasive reply by stating that the payments were made by cheque and there is agreement for making such payments and also submitted that both the companies are taxpaying companies but in the opinion of the, AO the assessee could not produce any evidence for the nature of services rendered by these two companies. The observation of the AO is as under:- ““5.1 Further to substantiate the above, efforts were made to gather such information, particularly specific services rendered by both the parties, notices u/s 133(6) of the Act were issued toKernwel Pvt. Ltd. and Chemesworth Pvt. Ltd. In the notice itself, it was specifically asked to both the parties to state what services were rendered by them during the year. Again, both the parties evaded this straight question by referring to some agreement between assessee and them. 5.2 From above discussion, it transpires that assessee and its group company entered into transactions but could not state what services were rendered and received. Not a single specific instance of services has been given by both the parties. An amount of Rs.33,00,000/- changed hands but both the sides the payer and the payee, cannot give a single instance of business activities occurred between them. This conclusively proves this was a sham transaction to accommodate each other. In view of this, it is held that expenses incurred in the name of professional services was bogus and the said amount is disallowed within the provisions of section 37 of Income Tax Act, 1961 and added to the total income of the assessee. Penalty proceedings u/s 271(1)(c) of Act is initiated separately.[Addition Rs.33,00,000/-]” 2.2 Accordingly he added into the total income of the assessee the entire payments made to these two companies of Rs.33.00/- crores. 2.3 During the course of assessment proceedings, the AO observed that the assessee has purchased shares of Kemwell Infrastructure Pvt. Ltd., one of its group company amounting to Rs.2,80,00,000/- in March 2009 and has sold this share on 23/03/2010 at Rs.28/- lakhs . In the process of this, the assessee claimed capital loss of Rs.2,52,00,000/- . 2.4 Since the shares of Kemwell Infrastructure Pvt. Ltd., was unquoted shares, therefore, the market rate was not available. The assessee was asked to provide the details of loss and based of taking sale price for such unquoted shares of its own group company and it was also asked to show cause for the transaction why it should not be treated as sham ITA No.679/Bang/2019 Page 4 of 27 one to accommodate the assessee. In reply, the assessee has submitted that he sold this shares after taking report from C.A which shows the price of the share at Rs.10. The valuation of shares was done on the basis of net reliable value and by not taking the book value of the company even though the company possesses huge reserve in their books of account. It was observed from audited books of accounts of Kemwell Infrastructure Pvt. Ltd., for asst. year 2009-10 that the accounts were prepared on the basis of going concern and no qualification as there in the notes to accounts of the company. Accordingly assessee’s protest of treting net reliable value as sale value is not justified. He also observed that in the case unquoted shares where the market value is not available, the book value is the justification for FMC for sale consideration. It was observed from the financial statement of Kemwell Infrastructure Pvt. Ltd., that the book value of shares as on 31/10/2010 are Rs.90.36 (net share holder fund including reserve and surplus/outstanding shares), whereas the assessee has taken it as Rs.10. He noticed that the assessee has booked bogus losses by purchasing and selling of shares of group companies and the assessee had sufficient income to which by stating of loss he can avoid paying income-tax and to overcome such situation, the assessee has resorted to such transaction and has taken bogus losses in its books. The explanation offered by the assessee was nothing but a cooked story to avoid taxes and thus the explanation offered by the assessee is not accepted and the AO recalculated the gain/loss as under:- ITA No.679/Bang/2019 Page 5 of 27 2.5 He further noticed that the assessee has entered into the similar transaction in regard to unquoted equity shares of Kemwell Infrastructure Pvt. Ltd., which was also group company and assessee’s capital loss was of Rs.82,50,000/-. During the year as explained above, the assessee restored to this transaction but set off its taxable profits and the assessee was asked to provide book value of the script as it was not provided but accordingly he disallowed the entire loss of Rs.82,50,000/- and added into total income of the assessee. 2.6 Feeling aggrieved from the order of the AO, the assessee filed appeal before the CIT(A) and he also filed details written submissions. The remand report was also called for from the AO. The ld.CIT(A) after considering the detailed written submissions allowed the disallowance made by the AO on account of travelling expenditure, professional fee of Rs.33 lakhs and entire loss claimed by the assessee on sale of unquoted equity shares and upheld the disallowance made by the AO u/s 14A of the Act. 3. Feeling aggrieved from the order of the CIT(A), the revenue filed appeal before us. 4. The ld.DR relied on the order of the AO and he has filed written synopsis, which is as under : “Ground No 1: Disallowance of Travelling Expenses: ITA No.679/Bang/2019 Page 6 of 27 1.1. The AO (Page 4 and para 4 of assessment order) called for bills, vouchers, the purpose of the visit for which travelling expenses were claimed. The assessee did not produce evidence to prove that the expenses had nexus to the business to prove that the expenses were incurred wholly and exclusively for the purpose of business. Hence, the AO disallowed the expenses u/s 37 of IT Act 1961. It is to be noted that the business income of the assessee comes only from Rent and Service Charges which is a business located within in India whereas travelling expense of Rs 16,96,468 was incurred to visit foreign countries. 1.2. Before the Ld. CIT(A) the assessee ad claimed that it gave break up of expenses along with propose of such visits before AO. However the assessee has not submitted the details about the purpose visit along with supporting documents. In addition before CI! (A) the assessee had submitted as follows "The appellant was engaged in promoting and managing companies engaged in pharmaceutical companies. In particular the company's directors are qualified in the held of agency business. In course of the appellant's business and to promote its business interests, the directors of the company were required to liaise with FDA authorities of U.S. & European countries. Accordingly the directors/staff of the appellant company regularly undertook extensive foreign travelling. The appellant was one of the Principal promoters of M/S Millipore India Pvt Ltd which was a joint venture with M/s Millipore Inc, a leading pharmaceutical company of the USA which has its subsidiaries & affiliates in large number of countries." 1.3. After considering the above reply the CIT(A) directed the AO to restrict disallowance only 25 % of total foreign travel expenses. The CIT(A) failed to appreciate that a. The assessee had not submitted any correspondence made with drug regulating authorities of US and European countries. b. The assessee itself admits that the travel was in connection with business of its one of the group companies. c. When the purpose of visit was related to the business of group concern the expenditure should have been booked in the hands of the group concerns and not in the hands of the assessee. d. As said earlier the assessee is in the business of letting out of properties and derives income from services rendered in connection with the properties. If the assessee claims that it is in the agency business involved in rendering services to pharmaceutical business the assessee ought to have disclosed income from such business. (Schedule 9 to Financials does not reveal such income - page 9 of assessee's paper book. Rs 1.5 lacs offered as service income was received from M/s Kemwell Pvt Ltd- Annexure B to Assessee's submission before AO dated 10.07.20 12 and not from M/S Millipore India Pvt Ltd ). The assessee have not charged service fee on its group concerns. e. Though the assessee was telling repeatedly that the directors and employees travelled abroad, it is only Ms. Kum Kum Bagaria one of the directors of the company travelled abroad as seen from the details submitted by the assessee (page 15 of the paper book). She travelled every month during FY 2009-10. It is tabulated below: Table 1: Travel details ITA No.679/Bang/2019 Page 7 of 27 1.4. If the director had travelled in connection with liaison with FDA the assessee can very well produce email correspondences and the director's qualifications and ability to deal with such matters and her actual involvement in such liaison work. But such evidences were not produced by the assessee 1.5. In such a circumstance it is prayed that the disallowances made by the AO needs to be confirmed. Ground NO 2: Disallowance of Professional fees 2.1. The assessee had paid professional fee to the following group companies: a. Kemwel Pvt Ltd. Rs. 30,00,000 b. Chemsworth Pvt Ltd. - Rs. 3,00,000 Total Rs. 33,00,000 2.2. The AU called for bills and vouches and the specific nature of services / expertise/opinion availed from the above group companies. But the assessee did not provide necessary proof to show that the services were availed form them. The AO issued notice u/s 133(6) to the above companies they only submitted agreements entered between them and the assessee but did not produce evidence to show that the services were rendered by them. Hence, the AU disallowed the above expenses. Before the Ld. CIT (A) the assessee stated that I. It had paid consultancy charges to M/S Kemwcll Pvt Ltd and M/S Chemsworth Pvt Ltd in pursuance of the subsisting agreements with the aforesaid ITA No.679/Bang/2019 Page 8 of 27 companies for providing consultancy in connection with investments, business administration and management and financial activities of the assessee. II. Though the assessee was carrying out multifarious activities had only two employees in its payroll and they look after only day to day administrative and clerical works and are paid only Rs 5 lakhs. III. The company engaged the service of the above said companies to manage the diverse activities of the companies, day to day administrative affairs and comply with numerous statutory laws/requirements like municipalities, State authorities & other levies, income tax/service tax compliances, company law & ROC compliances, so on and so forth. IV. A common administrative arrangement was made to mange group companies and the cost is shared among them which is a common practice followed by many group companies. V. The above said companies paid service tax on the receipt of money and TDS was made by the assessee. VI. The AU issued notice u/S 133(6) to the above companies and they submitted necessary details. VII. M/S. Kemwell Pvt Ltd earned 9.38 Crore from management consultancy fees and the amount paid by the assessee constitutes only 3% of it. The company M/S. Kemwell Pvt ltd transferred its consultancy business to it M/S Kemwell Bio Pharma Pvt Ltd and the profit of M/S Kemwell Rio Pharma was in excess of Rs. 7 Crore for the period ended on 31.03.20 10 and the company had paid tax on it. VIII. In earlier year the same amounts was paid by the assessee and were allowed by the AU. 2.3. The Ld. CIT (A) accepted the above arguments and allowed the assessec's appeal. 2.4. In this regard the following arguments are submitted: 1. The statement that the assessee and group companies provided necessary evidence for rendering the service is not true. They had submitted the agreement alone. The existence of agreement alone is not sufficient to prove that the services were actually rendered by group companies. The assessee has to prove with adequate evidence that the services were actually received. The onus is on the assessee which the assessee failed to prove so far. 2. Though the assessee had stated that the management and consultancy business of M/s. Kemwell Pvt. Ltd was transferred to MIs. Kemwell Bio Pharma Pvt Ltd perusal of scheme of arrangement (page 61 of paperbook) reveals that Pharma Business was transferred rather than consultancy business. It is to be noted that for pharmacy business of the group companies the assessee claimed that it was rendering consultancy services and on that pretext claimed travelling expenses. 3. Though the assessee argue that the company M/S Kemwell Pvt Ltd is profit making company the Rol filed by the company ( page 18 of the paperbook) reveals that the company had claimed loss. 4. Moreover, the income should be taxed at the right hand and in the right assessment year. The assessee may shift income to other company which have scope to book excessive expenditure which the assessing officer cannot examine and do not always get opportunities to examine. 5. The assessee did not clarify the basis to pay Rs. 3,00,000 to M/S Chernsworth Pvt Ltd and Rs. 30,00,000 to M/S Kemwell Pvt Ltd which is 10 time the amount paid to M/S.Chemsowrth Pvt Ltd. 6. In fact the number of services supposed to be rendered by M/S.Chemsowrth Pvt Ltd is more than the the number of services supposed to be rendered by M/S Kemwell Pvt Ltd. 7. The company M/S. Kcmwcll Pvt Ltd is supposed to render advice and consultancy on the following ( Ref 69 of Paper Book) ITA No.679/Bang/2019 Page 9 of 27 a. Management and Financial consultants b. Investment Consultants c. Rental & Service Charges Consultants Whereas the company MIS. Chemsowrth Pvt Ltd is supposed to render advice and consultancy on the following (Ref 98 of Paper Book) a. Management and Financial consultants b. Investment Consultants c. Rental & Service Charges Consultants d. Exclusive advisor in connection witl the possible sale of shares in Millipore Pvt Ltd. And it is not known how payment with respect to advice that was supposed to be rendered in connection with capital asset transaction qualifies as business expenditure. No. 3: Disallowance of Capital loss claimed 3.1. The AO had disallowed capital loss on account of sale of shares of two of its group companies. The losses are as follows: a. Loss on account of sale of shares of Kemwell Infrastructure Pvt. Ltd (KIPL). - Rs. 2,52,00,000 b. Loss on account of sale of shares of Kemwell Pvt Ltd Rs. 82,50,000. a. Loss from Kemwcll Infrastructure Pvt. Ltd (KIPL). 3.2. The assessee had purchased 2,80,000 shares of KIPL at Rs 100 /share on 19.03.2009 i.e at Rs 90 premium ( page no 120 of paper Book). The total purchase value was Rs 2.8 Crores and sold the same on 23.03.20 10 for Rs. 0.28 Crores. It was sold at 90 % loss. The shares were sold to M/s. Kemwell Pvt. Ltd (KPL) as evident from the page 121 of the Paper book filed by the assessee. M/s. KIPL is subsidiary of M/S. KPL (Page 30 of paper book). The shares of subsidiary company were sold to the parent company at a deep loss. 3.3. The AO during assessment had called for the basis for share valuation to arrive at the sale consideration. The assessee had submitted that the assessee arrived at the value based on valuation report (Page 123 -124 of the paper book) which valued the share based on Net Realizable Value Method. 3.4. 1-lowever the AO held that it is a sham transaction. The reasons given by the AO are i. The assessee had used Net Realizable Value instead of Book Value of the Company KIPL and ii) The assessee sold the shares to its group companies with the aim of reducing the tax burden as the assessee had substantial taxable income. 3.4.1. The AO assessed the sale consideration at Rs 90.36 per share based on the book value. 3.5. In the appeal before the Ld.CIT(A) the CIT(A) deleted the addition stating that though the AO treated the transaction as sham he did not treat the transaction as fiscal nullity, instead assessed the capital loss at Rs. 26,99,200 instead of loss of Rs. 2,52,00,000 claimed by the assessee. In addition the CIT(A) stated that the AO received the relevant documents under S. 133(6) and verified them and the assessee also submitted valuation reports. The CIT(A) further stated that the AO having verified the relevant documents did not find any consideration received over and above the amount disclosed by the assessee and in such a case CIT Vs. Shivakami Co Pt Ltd 159 ITR 71 is applicable. He also stated relying on Hon'ble Apex Court Judgement in CIT Vs. George Henderson & CO Ltd. 66 ITR 622 that full value consideration does not mean the market vale but the price bargained by the parties. He also relied on CIT Vs K.P. Verghese 131 FIR 597 to support this view. 3.6. In such a circumstance kind attention is invited to the valuation report dated 26.03.2010 submitted by the assessee. The Valuation report elaborates the reason for adopting the Net Realizable Value Method. It primarily says that the assessee company had a proposal to set up SEZ at 1310 PHARMA SEZ Park near ITA No.679/Bang/2019 Page 10 of 27 Bangalore and paid advances for purchase of land. However the SEZ project was scrapped for lack of approval from the concerned Governments. Hence the advances were irrecoverable and considered Net Realisable Value was adopted. 3.8. From the above time lines it is clear that i. The events that were called in support of Net Realizable Value Method and lower sale value have occurred even before the date of purchase of shares. ii. There is no particular event that brought down the value of the shares from Rs 100 to Rs 10 inthe aftermath of the purchase of shares. ii. The valuation was done after sale of shares. 3.9. More importantly as per the valuation report dated 02.09.2009 (Pages 108-118 of paper book) to sell the shares of KPL the parent company of the KIPL as on 3 1.03.2009 the net worth at the book value of the company KIPL with respect to 2,80,000 shares was determined at Rs. 2,52,39,540 (ref 114 of paperbook book - particularly point no (vii)). The assessee purchased 2,80,000 shares KIPI. at Rs. 2.8 Crore on 19.03.2009. Going by this, the value of the Company KIPL was 14 Crore for the purpose of purchase of shares as the total number of shares issued by KIPL is 14,00,000. However, after a gap of 6 months i.e. on 26.03.2010 the net worth after adjustment is stated to be Rs. 60,90,822. 3.10. The above facts make it clear as stated by the AO the entire transaction is a make believe arrangement to reduce the tax burden of the assessee by transacting among the group companies. In this context the case laws relied on by the assessee and the I.A. CIT (A) are not applicable. 3.11. Even if the AU failed to treat the transaction as fiscal nullity the CIT (A) having noticed the need to do so ought to have treated the transaction as fiscal nullity as his powers arc co terminus with the power of the AO. Instead he gave relief to the assessee and erred. hence it is prayed that the order of the CIT (A) may be set aside and the order of the AU is restored. ITA No.679/Bang/2019 Page 11 of 27 b. Loss from Kemwehh Pvt. Ltd. 3.12. The assessee had transacted in shares of KPL shares as tabulated below: Note: The assessee had claimed that the transactions listed in sl. no 1-3 as LTCG and the fourth one as STCG (Ref. page 14 of assessee's paperbook). However all transactions are of Long Term in nature. 3.13. The AO investigated the transaction listed in SI. No. 4 which was purchased for Rs 1.02 Crores on 28.03.2007 and sold on 29.09.2009 for Rs. 0.195 Crores. It was sold at 80% loss. The loss claimed was Rs. 82,50,000/- The shares were sold to 1\'IJS. Subash Family Trust as evident from the page 121 of the Paper book filed by the assessee. The trust is managed by the shareholders of the assessee company. It is also a transaction among group entities. 3.14. The AO found that this transaction was also made among group companies with the intention to reduce the tax burden of the assessee. He called for the book value of the shares sold but the assessec did not submit. Hence he disallowed the entire loss. 3.1. The assessee appealed before CIT(A). The CIT (A) observed that the AO disallowed the loss of Rs. 82,50,000 only, for the reason the assessee did not submit book value. He also stated that the AO did not have power to substitute sale consideration with book value. 3.16. In addition the Ld. CIT(A) pointed out that the shares were purchased on various dates at varying prices between 23.11.2000 to 28.03.2007. He also pointed out that the assessee had sold 73,320 shares during the current assessment year and incurred loss. However, the AO had disallowed the loss on sale of 15,000 shares only and allowed loss on sale of 58,320 shares. Based on these observation the Ld. CIT(A) stated that the assessee was justified in claiming the loss of Rs. 82,50,000 (Ref Para 20 of the CIT (A) order). 3.17. The above thing makes it clear that the Ld. CIT (A) used the failure on the part of the AO to look at the other transaction also as a justification to allow the loss claimed by the assessec. The Ld. CIT(A) failed to appreciate that the AO had investigated only the short term capital loss claimed by the assessee and the for the reason the AO failed to investigate LTCG neither the assessee nor the CIT(A) cannot take advantage of it. The Ld. CIT (A) failed to appreciate that his powers are co- terminus as that of the AO. The CIT (A) ought to have disallowed the entire loss including the LTC loss on KPL shares instead he chose to allow relief to the assessee. 3.18. An analysis of the table 3 would reveal that not only the sale of KPL shares but purchase also arranged to suit the needs of the assessee's group companies. The shares of the same company which were valued at Rs. 5000/ share in June 2005 were valued at Rs. 670 in a gap of 6 months. Again the shares of the same company were valued at Rs. 110 at a gap of 9 months. Again after a gap of 7 months the shares were purchased at Rs 680 per shares. Finally they were sold at Rs 130 per share. 3.19. Moreover the valuation reports prepared by the assessee show inconsistencies. Specific gaps in the valuation report dated 02.09.2009 is discussed here. The company KPL is a going concern. However the valuer adopted Net worth Method with adjustments. The valuer valued the worth of subsidiaries also based ITA No.679/Bang/2019 Page 12 of 27 on Net worth Method and counted their value to arrive at the value of the company KPL. The valuer did not substantiate the reason to adopt Networth Method in case of all subsidiaries without exception. All those subsidiaries would have been under different business circumstances, each would have varied in its prospects and nature. They may warrant different valuation methodology. However, the valuer adopted same methodology to value all subsidiaries. This also shows that the valuation was done to suit the needs of the group companies. 3.20. One of the reasons given for low value of the shares of KPL is contingent loss expected from the investment by M/S. Rubtech Exports Pvt Ltd. It is stated that M/S Rubtech is 100 % subsidiary of KPL and Rubtech was expected to incur loss from its investments in Reametrix Inc, USA and Pluromed Inc, USA. It was stated that both the foreign companies were in the initial stages and were loss making and had accumulated losses. However both were founded in 2003. While the valuer said that these companies were not worthy of their investment the company Reametrix Inc reaised $ 21,00,000 from market on Nov 24, 2009 (Source https://www.crunchbase.coi- /ory,anizatioii/reainetrix/company_overview/overview_timeline and https://www.crunchbase.com/organization/reainetrix) (Ref Annexure A to this submission). This shows that the valuation was prepared without complete knowledge about the prospects of the company and with insufficient information and to suit the needs of the assessee's group companies. 3.21. In addition the valuer considered 15% discount for contingencies and uncertainties. The However, there is no justification to show how this 15 % was considered. 3.22. All these things show that the assessee values the shares of the group companies to suit the needs of the assessee and group companies anti the whole transaction is a sham one anti a fiscal nullity. Hence the order of the AO may be upheld and the Ld. CIT(A) order may be set aside.” 4.1 In addition to the written submission the ld.DR vehemently argued the case and submitted that during the course of assessment proceedings, the assessee was unable to provide details of the foreign travel expenses incurred by the assessee and the purpose of visit was also not explained, therefore, the AO has rightly disallowed the foreign travel expenditure. The ld.DR in respect of ground No.2 he submitted that the nature of service rendered by both the companies could not have been proved. Merely by making payments by way of account payee cheque and debited TDS is not sufficient for proving the payment is genuine payment for services rendered. Further in respect of ground No.3, he submitted that the assessee was unable to prove the FMV determined at Rs.10/- and Rs.130/- with the supporting documents for substantiating the case in the case of unquoted equity shares, if the market value of unquoted equity shares was not available in such case, the book value is to be considered as FMV of the shares, to ITA No.679/Bang/2019 Page 13 of 27 which the AO has rightly calculated. He relied on the judgment of Hon’ble Karnataka High Court in the case of CIT Vs. Wipro Ltd., reported in 50 taxmann.com 421 and also the decision of the coordinate Bench of ITAT in the case of O3 Capital Global Advisory Pvt. Ltd., in ITA No.931/Bang/2018. 5. Ground No.1 - The ld.AR in respect of ground No.1 relied on the order of the CIT(A) and he fairly admitted that 25% of the total expenditure may be disallowed. 6. In respect of ground No.2, the ld.AR relied on the order of the CIT(A) and he also submitted that financial statements of M/s Kemwell Infrastructure Pvt. Ltd., and Gems Worth Pvt. Ltd., are provided in respect of consultancy services in respect of financial managements and business managements of the assessee company, therefore, the assessee made agreement between these companies. The tax rate for this companies are equal to the assessee company, therefore, there was no loss to the revenue and in big companies such type of arrangements are also made for getting/rendering services. The assessee company has also got benefited for taking services of these 2 companies. The ld.CIT(A) has rightly considered the issue for analyzing the details. 7. The ld.AR in respect of ground No.3 reiterated the submissions made before the AO as well the CIT(A) and he relied on the order of the CIT (A). He has also filed written synopsis before us, which is as under:- No. 3 - Disallowance of capital loss (A) Loss incurred on sale of shares of Kemwell Infrastructure Pvt Ltd 5- The Ld. DR has set out the timeline of purchase and sale of shares. According to him, the timelines does not reveal as to what event had occurred which called for adoption of NRV Method and what event had occurred which led to reduction in value of shares from Rs.1001- to Rs. 10/ - per share. He has also questioned the valuation which was done after date of sale. He has further averred that purchase ITA No.679/Bang/2019 Page 14 of 27 and sale happened within a span of 6 months and therefore it was a make believe arrangement to reduce the tax burden. The Ld. DR has also noted that the AO did not treat the entire transaction in the shares of M/s Kemwell Infrastructure Pvt Ltd as a fiscal nullity either in assessment proceedings or in the remand proceedings. According to him however, the AO had erred on this aspect and that the Ld. CIT(A) ought to have treated all transactions as a fiscal nullity. 5.1 From the assessment order it shall be noted that the limited dispute raised by the AO was regarding the valuation of the shares of M/s Kemwell Infrastructure Pvt Ltd which was sold by the assessee. According to AO, the shares ought to have been valued by applying Book Value Method rather than Net Realizable Method followed by the assessee. The AO had accordingly re-computed the sale consideration by applying book value method at Rs.90.36/- as opposed to Rs.10/- at which the assessee transacted the shares thereby disallowing the claim of long term capital loss to the extent of Rs.2,25,00,800/- out of the total loss of Rs.2,52,00,000/- claimed by the assessee in the return of income. 5.2 In the written submissions, the Ld. DR has heavily stressed that the entire transaction was a fiscal nullity and, although the AO did not do the same, the Ld. CIT(A) ought to have done the same. It is submitted that the aforesaid contention of the Ld. DR is not only far-fetched but untenable as well. Undisputedly it was neither the case of the AO in the assessment order dated 28.03.2013 nor in his remand report dated: 2:- 2014 that the transaction involving purchase & sale of shares of is Kemwell Infrastructure Pvt Ltd by the assessee was a complete tarn and therefore a nullity. The Ld. CIT(A) also took categorical note d this admitted fact at Para 16 of the appellate order [Page 341. In that view of the matter, the present contention raised by the Ld. DR does not emanate from the orders of the lower authorities nor has any such ground been raised in the appeal. In that view of the matter, this particular contention of the Revenue deserves to be outrightly rejected in limine. 5.3 Apart from the above, the Ld. DR has questioned the manner in which NRV method was applied by the Chartered Accountant on two fronts viz., (a) the event which triggered the fall in value of shares and (b) the date of valuation report was post the transaction of sale. 5.4 With regard to (a), it is first submitted that shares can be valued based on various valuation methodologies which are recognized and accepted across the world. Each security has its own unique characteristics and various internal & external factors influence the fair value of shares of a security. The valuation methodologies differ across different analysts who based on the data & information available with them determine the intrinsic value following a particular methodology which they deem fit. In many instances it is found that even in case of quoted companies the intrinsic value differs from valuer to valuer. The assessee had followed the NRV Method which is one of the recgonized methods of valuation of shares. Reference may be made to the following judgments wherein the judicial forums have held that once the assessee has adopted one of the recognized methods of valuation, then the AO is not permitted to change or adopt a completely different methodology. Useful reference in this regard may be made to the judgment of the Hon'ble Bombay High Court in the case of Vodafone M-Pesa Ltd. v. DCIT [2018] 92 taxniann.com 73 (Born) wherein the Hon'ble High Court had categorically held that "there is certainly no immunity from scrutiny of the valuation report submitted by the assessee. Therefore, the AO is undoubtedly entitled to scrutinize the valuation report and determination afresh either by himself or by calling for a final determination from an independent valuer to confront the petitioner. However, the basis has to be the DCF method and it is not open to him to change the method of valuation which has been opted for by the Assessee." Following the said judgment, similar view has been rendered by the coordinate Bench of the Hon'ble Tribunal at Bangalore in the case of Innoviti ITA No.679/Bang/2019 Page 15 of 27 Payment Solutions Pvt. Ltd. v. ITO [ITS-4-ITAT-2019] wherein it was held that if the assessee has opted for DCF method, the AO cannot discard it and adopt another method, but the AO can only challenge underlying assumptions, if he is not satisfied with the same, and suggest necessary modification. 5.5 Coming to the facts of the present case, it is submitted that M/s Kemwell Infrastructure Pvt Ltd had sought to develop a Special Economic Zone ('SEZ') with an area of 12 hectares for which it had filed an application with the Ministry of Commerce and Industry on 22nd January 2007. On perusal of the said application, it shall be observed that the expected cost was estimated at Rs.3280 lacs and one of the means of financing was by raising equity to the tune of Rs.541 lacs, which would be raised at appropriate stages. Subsequent thereto, based on the discussions held with the concerned officials at the Ministry of Commerce and Industry, it was proposed to develop the SEZ on 30 hectares of land for which further land was to be acquired. It was brought to the notice of the Urban Development Department vide letter dated 11.10.2008 that the concerned Dy. Commissioner, Bangalore Rural District was not permitting the company to acquire further agricultural lands. Vide communication dated 31.10.2008, the Ministry of Commerce and Industry had informed the Urban Development Department that the State High Level Clearance Committee had approved the SEZ project and also classified the identified land parcels as industrial land and thereby accorded permission to acquire the same. It was further stated that the project had been recommended for principle approval pending completion of other formalities. It also acknowledged the fact that the company had already entered into agreements with land owners and had advanced large amount of monies to acquire the same. Pursuant thereto and having regard to the fact that the project had received in-principle approval, M/s Kemwell Infrastructure Pvt Ltd had invested large sums by way of advances to land owners for acquiring land parcels for the SEZ project aggregating to Rs. 1143 lacs and that too at a premium value. At that material time, the company had raised equity at a price of Rs.100/share [FV : Rs.10, Premium : Rs.90]. Accordingly even the assessee had acquired the shares at the price of Rs.100/share on 19th March 2009. 5.6 In the relevant FY 2009-10 the company had undertaken several efforts to fructify the SEZ project and complete the land acquisition formalities, which was required to be submitted, but due to difficulties and hurdles faced locally and with the State authorities, the acquisition of land could not be completed. Accordingly the Ministry of Commerce and Industry refrained from granting the final approval and the project was scrapped. Consequent thereto, even the advances given to the local farmers for acquiring land parcels for the SEZ project aggregating to Rs. 1143 lacs had turned bad and unrealizable. Accordingly, as the business of developining, operating & maintaining SEZ stood scrapped, the NRV Method was taken to be the most prudent method to value the shares of the company. The book value of the loans & advances given to farmers did not represent the true and correct state of affairs in as much as the entire advances were irrecoverable as none of the locals would repay them and due to the resistance & hurdles faced from the local authorities, the land acquisition also could not be completed. This is supported by the fact that till date, these advances are lying outstanding in the books of M/ s Kemwell Infrastructure Pvt Ltd which proves the bonafides that the fair value of these advances was NIL. The company thus submits that the NRV Method followed by the assessee I, value the shares and the assumptions made therein was both fair & reasonable. In these circumstances the Ld. CIT(A) had rightly held that the AO's action of substituting the NRV Method with Book Value Method was unjustified. 5.7 Without prejudice to the above and in the alternate, it is further submitted that there was no provision in law as on 1st April 2010 which permitted the AG to substitute the actual sale consideration of shares with deemed sale consideration. It is imperative to mention that the provisions of Section 50CA of the Act was ITA No.679/Bang/2019 Page 16 of 27 inserted by the Finance Act, 2017 which was made applicable from 01.04.2018. This clearly shows that prior to AY 2018-19, there was no provision in law empowering the AG to substitute the actual sale consideration of shares with any deemed or notional value. It is thus submitted that the action of the AG substituting the actual sale price of Rs.90.36/share with Rs.10/share did not have sanction in law, as it stood then, and on this score alone the impugned disallowance deserves to be deleted. 5.8 It is also relevant to mention that, it was only by the Finance Act, 2010, that provision of Section 56(2)(viia) was then inserted by the Legislature and therein the 'book value' method was prescribed for valuation of the adequacy of consideration paid by purchaser for acquiring shares of an unquoted company. The provisions of Section 56(2)(viia) was made effective from 01.06.2010 and was therefore applicable from AY 201112 and onwards. It is further submitted that Section 56(2)(viia) brings to tax the difference between the price at which unquoted shares are sold and the "fair market value" of shares, in the hands of the "acquirer" of shares as the deemed income. The Legislature has consciously introduced the said provision which taxes the price differential in the hands of the "purchaser" and not the "seller" of shares. As pointed out earlier, the provisions of Section 50CA was brought in to tax the price differential between actual sale consideration and 'FMV' only from AY 2018-19 and onwards. Having and to the foregoing, it shall thus be noted that there was no provision in the Income-tax Act, 1961 to disregard the loss incurred on sale of shares and/or substitute the actual sale consideration with any other deemed or notional value. 5.9 It is also not the case of the Revenue that the company did not receive a single rupee in excess of the price as reflected in the sale. In the absence of any material or evidence to suggest that the assessee had received any on-monies on sale of shares, the Revenue could not have disallowed the loss incurred on sale of shares. The approach of the AO was therefore in gross violation of the extant provisions of the Act. It is thus submitted that the reliance placed by the Ld. CIT(A) on the following judgments of the Hon'ble Supreme Court which were rendered on similar facts and circumstances were proper and justified. CIT Vs George Henderson & Co. Ltd (66 ITR 622) CIT Vs Shivakami Co Pvt Ltd (159 ITR 71) 5.10 As regards contention (b), it is submitted that the fact that the valuation report was obtained subsequent to sale is completely irrelevant. Rather what is relevant is whether valuation report supports the share price determined by the assessee or not. Useful reference in this regard is made to the decision of Coordinate Bench, ITAT, Chennai in the case of Sri Sakthi Textiles Ltd. v. DCIT (188 lTD 946) wherein it was held as follows: "Further, timing of filing valuation report at the time of original assessment proceedings u/s. 143(3) or during revision proceedings u/s. 263 of the Act is not a relevant criteria to decide whether fair market value of shares issued by assessee is substantiated to the satisfaction of Assessing Officer or not. But, what is relevant is whether valuation report supports share price determined by the assessee or not. In this case, valuation report obtained by the assessee from independent Chartered Accountant supports share price. Therefore, when the assessee has substantiated share price to the satisfaction of the AO with the help of valuation report, even such valuation report is obtained subsequent to the date of issue of ( shares, it does not alter the situation. Therefore, we are of the considered view that Assessing Officer as well as learned CIT(A) were erred in rejecting valuation report filed by assessee on this count. B) Loss incurred in shares of Kemwell Pvt Ltd 6. According to Ld. DR the assessee had purchased shares of this company on several dates across different years, starting from the year 2000, at different prices, which according to him was done to suit the needs of the company. He has further contended that the NAV Method adopted by the company to value the shares was ITA No.679/Bang/2019 Page 17 of 27 not justifiable. The primary contention cited by him is that KPL held investments in a WOS, M/s Rubtech Exports Pvt Ltd which in turn held stake in Reametrix USA and Pluromed Inc, USA which was stated to be loss making entities while determining the networth of M/s Rubtech Exports Pvt Ltd. The Ld. DR has cited information gathered by him from www.crunchbase.com to allege that Reametrix USA had raised 21,00,000 from market in November 2009 which according to him showed that it was a worthy investment. He has thus alleged that the valuation exercise conducted by the Chartered Accountant suffered from inconsistencies. 6.1 The first contention of the AO that the prices at which the assessee acquired the shares of M/s Kemwell Pvt Ltd over the years was not justified is completely arbitrary and whimsical. Clearly, it is not the case of the AO himself that the cost of acquisition of the shares of M/s Kemwell Pvt Ltd was doubtful or erroneous. Moreover the cost of acquisition of the 73320 shares of M/s Kemwell Pvt Ltd in the earlier years has been accepted by the Revenue in the respective income-tax assessments framed for those years. The fact that the AO in the relevant year has not disputed the cost of acquisition of shares of M/ s Kemwell Pvt Ltd. As is evident from the computation of income, assessment order and Ld. CIT(A)'s order. Not only has the AO himself accepted the cost of acquisition, sale price and consequent losses incurred by the company upon sale of 58320 shares of M/s Kemwell Pvt Ltd which were acquired in the years 2000-01, 2005-06 & 2006-07, but the cost of acquisition of the balance 15000 shares has also been accepted by the AO. In that view of the matter, the Revenue cannot be permitted to make out a completely new case, which was admittedly neither the case of the AG nor the Ld. CIT(A). 6.2 With regard to the so-called information gathered by the Ld. DR from www.crunchbase.com to allege that Reametrix USA had raised 21,00,000 from market in November 2009, which according to him, showed that it was a worthy investment and not a loss-making entity as stated the Chartered Accountant in his valuation report dated 02.09.2009, it is submitted as follows: 6.2.1. At the onset it is submitted that this is a completely new unverified media report/ information brought on record by the Ld. DR without following the mandate set out in Rule 29 of the ITAT Rules and on this score alone it ought not be admitted. 6.2.2. Without prejudice to the above, it is further submitted that the information cited by Ld. DR supports the case of the assessee. The company has enclosed the screenshot of the information available on www.crunchbase.com which shows that M/s Reametrix USA had raised funding of $21,00,000 in November 2009 whose nature was unknown. The Ld. DR has simply assumed that it was pure equity funding and not debt funding raised by the company. Hence, his reference to this information is factually perverse and misleading. 6.2.3. To further disprove the theory prounded by the Ld. DR, it is relevant to first mention that M/s Reametrix USA was a start-up which was engaged in developing a tool to monitor antiretroviral therapy for HIV+ patients at a substantially low cost of Rs.120/- as opposed to Rs.1200/- charged by foreign multinationals. Like any start-up, it required series of funding to nuture the idea & product. Only if the product gets successfully developed and is accepted by the market, that the start- up can actually give returns to their investors. Until then, it is a valuation game wherein the debt/equity funding is based on projected valuations of the idea itself rather than the actual revenues and/or profit of the start-up. Accordingly, M/s Reametrix / USA had raised funding from Venture Capitalists who found their idea to be promising. It is well understood that venture funding itself is a risky proposition wherein venture capitalists bet on several start-ups, amongst which several fail and few are successful. However, it is the astronomical returns from the few successful ones which negates th@-.) losses incurred in other loss-making start-ups. In the present case also, M/s Reametrix USA was in their initial product development stage wherein the company was incurring huge losses and did not ITA No.679/Bang/2019 Page 18 of 27 have any viable income/revenue streams. Accordingly, the Chartered Accountant had rightly ascertained the NAV of the investment at Reametrix USA, having regarding to its losses. 6.2.4. The company has further enclosed a news report of 2013 which states that M/s Reametrix has been developing this diagnostic testing for over a decade which are yet to be made available or cleared for use. In the meanwhile however this start- up was acquired by M/ s Beckamn Coulter Life Sciences. 6.2.5. The above facts considered cumulatively thus supports the CA's valuation of the shares of M/s Reametrix USA held by the subsidiary, M/s Rubtech Exports Pvt Ltd, whose shares were held by the target company M/s Kemwell Pvt Ltd. 6.3 It is further relevant to reiterate that the company had sold total 73320 shares of M/s Kemwell Pvt Ltd on 26.09.2009 at a price of Rs.130/share, which resulted in long term capital loss of Rs.2,33,37,812/- qua 58320 shares and short term capital loss of Rs.82,50,000/- in relation 15000 shares. Both in the assessment as well as remand proceedings, the AO has neither disputed the sale price of Rs.130/share in relation to 58320 shares sold by the assessee nor has the AO disputed the long term capital loss of Rs.82,50,000 incurred in relation thereto. Hence, when the AO himself has accepted the sale price of Rs.130/share in respect of shares of M/s Kemwell Pvt Ltd sold on 26.09.2009, his action of partially disbelieving the loss incurred on sale of 15000 shares at the same price of Rs.130/share held on short term basis was wholly unjustified both on facts and in law. The Ld. CIT(A) had thus rightly held that when the AO did not find any adverse material in respect of loss incurred on sale of 58320 shares at price of Rs. 130/share, there was no reason or justification to disbelieve the loss incurred only on sale of 15000 shares. 7.1 He further submitted that the assessee sold equity shares of 2 closely held companies which was unquoted equity shares. During the course of assessment proceedings, the copy of sale bills and bank statement for genuine transaction was produced and he also produced the valuation of shares done by CA following the Net Reliable Value method and it was not rejected by the assessing officer and there was no enabling provision in the income tax act for valuation of unquoted equity shares. He also try to justified the future loss to be faced by the companies and referred to the paper books and correspondence made with the state govt. authorities for setting up and cancelation of new units. . The AO has also asked information u/s 133(6) of the Act, which was submitted by the assessee companies. He further submitted that case law relied by the ld.DR is not applicable in the present facts of the case. 9. Ground No.1 - After considering the rival submission and order of the CIT(A), we accept the prayer of the assessee that 25% of the total expenses may be disallowed. Accordingly, Rs.4,24,125/- is herby decided ITA No.679/Bang/2019 Page 19 of 27 in favour of the revenue and assessee gets relief of Rs.12,72,374/-. Accordingly this ground is partly allowed. 10. After considering the rival submissions and persued the records and from the submissions made before the CIT(A), we observe that there is no infirmity in the order of the CIT(A) on this issue. for the sake of convening, we reproduce the same here under:- 11. 1 I have considered the submissions placed before me. From the facts as are available in the records it is not in dispute that the companies to whom professional fees were paid belonged to the same group to which the assessee belonged. The assessee as well as the two payee companies were controlled and managed by members of Bagaria. family. This material fact raised AO's suspicion regarding genuineness of the expenditure. However, before the AO held the expenditure to be bogus, he should have considered totality of the facts and his finding should not have been influenced by mere suspicion. As noted from the AIR's submissions and the past assessments, the assessee paid. Professional fees pursuant to written agreements with the said parties which were executed in the financial years 2007-08. Income-tax assessment for the immediate preceding years were completed under Section 143(3) in which the payments of professional fees paid to the same parties pursuant to the same agreements were accepted and no disallowance was made in the regular assessments. In the face of such evidence, before the expenditure was held to be fictitious or bogus, heavy burden was on the AO's shoulder to substantiate his finding. From the assessee's audited accounts I note that the assessee had investiblè funds in excess of Rs.14 crores. The assessee also earned substantial income from provision of services, interest, dividend and investment gains. Assessee's gross revenue for the relevant year was in excess of Rs.764.86 lacs. Being a company, assessee is required to comply with statutory regulations both of the central and state governments. In order to comply ith the regulatory conditions it was necessary for the assessee to employ people. From the audited accounts it appeared that during the year the assessee incurred expenditure of only Rs.5,03,335/- on salary which was paid only to two persons. One person 1ooke.fter accounting and administrative functions whereas the other was a peon. Having regard to these facts therefore I find force in the A/R's explanations that the assessee needed services of outside agency to obtain advise on regulatory compliance matters as also to effectively manage its substantial finances and assist the appellant in providing services from which income in excess of Rs. 123 lacs was earned. Save and except meager amount of Rs.5 .03 lacs paid as salary to only two incur any expenditure except the professional fees paid to said two cornanies4 Having regard to these facts therefore I find force in the A/R's submissions that the group companies who received the professional fees assisted the appellant in managing its business functions being group resource companies. In this matter I find that a number of business houses functioning in India currently follow the practice of availing services provided by the group resource companies. This practice is followed to avoid duplication of costs, enjoy economies of scale and avail services of the experts. The companies belonging to the group can have access to the services provided by the common group resource company. Payments are made for the services availed. This business practice is followed in many reputed business houses and therefore if the assessee followed similar business practice then assessee's action could not be termed to be bogus or sham. Particularly in the appellant's own case such business practice was accepted, by the AO in the past assessment. I further note that the assessee as well as the payee companies were ,ax-paying companies. Total ITA No.679/Bang/2019 Page 20 of 27 income returned by both the payee companies was far in excess of the payments received by them from the assessee. Expenditure claimed by the appellant constituted income of the payee companies and suffered tax at the same rate at which the assessee paid tax on its income. lsnote that MIs Kemwell Pvt Ltd to whom the assessee paid professional fees of Rs.30,00,000/-' in its accounts reported income in excess of Rs.93 8.77 lacs under the head "Consultancy and Analytical Income". I therefore find that appellant was not. the only person from whom the payee had received professional fees. Assessee had also paid service tax on the professional fees paid and had deducted tax at source u/s 194J of the Income-tax Act. 1961 at the full rate material fact that the professional fees received by the payee companies suffered tax at normal tax rate in the hands of the payees was strong indicator of the fact that the arrangement between the parties was not a measure of tax evasion or tax avoidance as alleged by the Assessing Officer. En the contrary I find that th) assessee has proved the business necessity as well as expediency involved in the arrangement for availing services of group resource companies. In the circumstances I do not find merit in the AO's conclusion that professional fees paid were bogus. The disallowance of Rs.33 lacs is therefore directed to deleted. Ground No.6 & 7 are allowed. 10.1 We observed from the above order the CIT (A) has considered in details the issue before him, There were agreements for availing services by the assessee company and as per the agreements they have raised bills and paid accordingly. The recipients companies have offered it as his income in their hands and there is no loss to the revenue. Accordingly we uphold the order of the CIT (A). The Ground No. 02 raised by the revenue is dismissed. 11. We have Considering the rival submissions it has been observed that the assessee has sold unquoted equity shares of the Kemwell Infrastructure Pvt. Ltd. and Kemwell Pvt. Ltd. which are group company at the price lower than the purchase value which was doubted by the AO and sales considerations were not accepted. The assessee produced valuation report done by Chartered Account following the Net realizable value of both the companies. From the paper books it has been observed that the both companies replied the notices issued u/s 133(6) of the I. T. Act. which are placed on the record. Before the CIT (A) the assessee filed detail written submissions alongwith documents and relying some case law, the CIT (A) after considering the submissions and remand report he allowed the appeal of the assessee the relevant part isn as under:- ITA No.679/Bang/2019 Page 21 of 27 15. I have considered submissions placed before me. From the discussion in e impugned order and the details of capital gains I note that during the relevant year the assessee had sold shares of numerous companies and earned long term capital gain or incurred long term capital loss. Out of the several transactions the AO drew adverse inference in respect of sale of shares of only two companies namely, KIPL & KPL. AO's suspicions were prompted by the fact that shares in jiistion were of the companies belonging to the same group. Examination of the assessment records showed that in the course of assessment assessee had placed before the: AO all primary documents in support of the shares acquired from the two companies. Assessee also placed on record the evidences in support of the sale of shares and the considerations received. The assessee also placed before the AO valuation reports furnished by two Chartered Accountants to the investee companies in which "value" of the equity shares were determined. Copies of these valuation reports were filed before me as ll. In the case of KIPL shares, valuation was conducted by P.V. Ramareddy & Co., Chartered Accountant in which the shares were valued by adopting net realizable value method for determining true net worth of the company. Based on the value of net realizable assets the valuer determined value of each equity share of KTPL at Rs4.35. In the case of KPL, shares were valued by G. Bagrodia & Co.., Chartered Accountants. In this case also the valuer adopted net realizable value method and considered net realizable value of the assets as on the valuation date He determined value of each equity share KPL at Rs.130 per share. Assssee sold shares of KIPL at the rate of Rs 10 per share and shares of KPL were sold at Rs.130 per share. In order to verify the explanations furnished before him the AO had also issued notices u/s 133(6) to both the companies to ascertain the correct facts. In response both the companies furnished the copies of the valuation reports obtained and confirmed that the assessee had sold their shares during FY 2009-10. In the light of the material facts available in the records, it cannot therefore be disputed that the assessee had discharged the onus of proving the genuineness of its sale transactions and therefore it could not be held that the sale of shares was bogus. I therefore find that the AO had not only obtained the details of shares sold but he also obtained confirmation of sale directly from the said two companies. 16. In his remand report the AO confirmed the fact that during the scrutiny assessment proceedings, notices uis 133(6) were issued to KIPL & KPL and responses were received prior to passing of the assessment order on 28.03 .2013. On examination of the assessment records, the replies received from the said two companies were found to be available and copies of the replies received have been kept in the appellate folder. The major component of disallowed related to loss incurred, on sale of KIPL shares. In the first instance the AO's said finding is prima facie self contradictory. If it was a case of sham transaction then ''the entire loss incurred should have1een sham transaction is one which is fictitious and therefore for tax purposes it has to be Fda fiscal nullity and its tax effects need to be ignored. However pursuant of the assess the order shows that the AO did not treat sale of shares to be fiscal nullity. Rather the AO assessed loss on sale of 280000 shares at Rs.26,99,200/and allowed its set off. This fact therefore proves that the AO accepted sale of 280000 shares during the FY 2009-10 to be genuine but assessed the said loss at a figure which was less than -the loss declared in the return. 17. From the discussion in the impugned order it appeared that according to capital gain was liable to assessed not with reference to consideration actually received but with reference to the consideration which should have been equal to the book value, of shares on the date of transfer. In AO's opinion irrespective of the consideration actually bargained by the parties, for the purposes of assessing capital gains the full value of consideration should have been the 'book value" of shareiJçpis proposition is however not supported by language expressly employed by the Legislature in Section 48 of the Income- tax Act, 1961. The Supreme Court in the case of CIT V s George Henderson & Co Ltd 66 ITR 622 had occasion to consider the provisions of the I.T. Act relating to assessment of capital gains involving a case where the consideration actually paid was much less than the market value of shares prevailing on the date of sale. After ITA No.679/Bang/2019 Page 22 of 27 considering the language employed in the Act, the Supreme Court held that the expression 'full value of consideration' did not mean the market value of the asset transferred but the price bargained for by the parties. The Court further explained that expression 'full value of consideration' cannot be construed as having a reference to the market value of the asset transferred but it only means full value of the things received by the transferor in lieu of the capital asset transferred. In the case of "sale" the said expression meant the full sale price actually paid and did not refer to the adequacy or the inadequacy of the price bargained. The Court also held that the expression "full value of consideration" does not have any reference to the market value of the capital asset which is the subject marier of transfer. The decision of the Supreme Court in the case of CIT Vs K.P. Verghese 131 ITR 597 also supported the asssessee's plea. In this judgment the Court held that the market value of the asset cannot be substituted when the transaction was bonafide. Even under Section 51 of the Act (which is since omitted) the onus was on the Revenue to establish that not only the consideration was understated but something more than the declared consideration was actually passed between the parties. 18. In the present case despite collecting information under Section 133(6) the AO did not bring on record any material which in any way proved that declared consideration was not the real consideration. Decision of the Supreme Court in the case of CIT V s Shiyakami Co Pvt Ltd 159 ITR 71 therefore supported the appellant's plea. In the case before the Apex Court the assessee sold shares in a company at value which was much lower than its market value and therefore the assessee incurred.ioss. The AO disallowed the loss holding it to be "non genuine" or sham. The, AO instead substituted "market value" of the shares in place of the actual sale price and thereby assessed gain in place of loss. This was reversed by the appellate authorities. On appeal the Supreme Court noted that the AO did not bring on record any evidence which suggested that the consideration actually rc'eived was ±nore than disclosed. The Court held that the Act did not contain any deeming provision by which AO was permitted to substitute market valu of the asset in place of the actual price for the purpose of assessing loss or gain under the head "Capital Gains". Reliance placed by the assessee on various other judgments of the High Courts and the Income-tax Appellate Tribunals in this regard is also found to be relevant and appropriate. In all these judgments the judicial principle laid down is that the income under the head "Capital Gain" can be assessed only with reference to price actually transacted by the parties. 19. Applying the judicial principle laid down in the decided cases to the facts of the present case I find that the assessee had placed before the AO all primary evidences for sale of KIPL shares. The assessee had substantiated the sale of shares by filing copy of the sale bills. Copies of the bank statements evidencing receipt of sale consideration were, also filed. The assessee also filed valuation report which KIPL had obtained ",-om a Chartered Accountant in which based on the net realizable method th a1uer had certified the real net worth of the company and according to which value of each share was only Rs.4.54. The facts submitted before the AU. wce confirmed by KIPL in its reply to the AO's notice u/s 133(6) of the Act. For the reasons best known however the AO did not make any reference to the notice issued u/s 133(6) and the reply received. Be the same as it may I find that no evidence was brought on record by the AO which in any manner proved that the consideration actually received was not truly stated by the assessee. No material was brought on record by the AO which in any manner showedtht on sale of 280000 shares the consideration actually received was anything thore than Rs. 10 per share. On the contrary the AO admitted in March 2010.111d ässessee in fact sold 280000 shares of KIPL. Having accepted this fact hO .ver the AO assessed the loss by adopting full value of consideration at th&tEof Rs.90.63 per share being the 'book value' of KJPL shares. As held by heSupreme Court in the case of CIT Vs George Henderson & Co Ltd suprä the Income-tax Act does not contain any deeming provision by which an AO is permitted to substitute fair market value of a capital asset in place of price actually received Having regard to the totality of the facts therefore I have no hesitation in holding that the AO was not justified ITA No.679/Bang/2019 Page 23 of 27 -M, reducing the loss .' incurred on sale of KIPL shares by Rs.2,25,00,800/-. The AO is accordingly directed to assess the loss on sale of KIPL shares at RS.252 lacs. 20. As regards loss on sale of KPL shares, amounting to Rs.82,50,000/- I note that the AO did not discuss any particular reasons. According to AO loss was to be disallowed because the assessee did not establish the "book value" of the shares. As discussed in the foregoing the AO was not authorized to substitute the actual consideration by the "book value" because no enabling provision therefor exists in the Income-tax Act, 1961. Apart from this fact I further note that during the FY 2009-10 assessee in aggregate sold 73320 shares of KPL. These 73320 shares were sold by the'ssessee m one go on 26.09.2009 to the same person & at the same price of Rs. 130 per share; and realized gross sale consideration of Rs.95,3 1,600/-. KPL shares were acquired by the assessee from time to time during the period 23.11.2000 to 28.03.2007 at varying prices. On sale of 73,320 shares assessee incurred long term capital loss. From the statement of long term capital gains filed with the return I find that the AO disallowed the loss only in respect of 15000 KPL shares which were acquired on 28.03.2007. The loss which the assessee incurred on the remaining 58,320 shares was however assessed in the impugned order at ks.2,3337,812/- and its set off was also allowed. From the statement of capital gain I find that 58320 shares were sold on 26.09.2009 at the same price of Rs.130 per share to the same person. In respect of the loss incurred on sale of 58320 shares at the rate of Rs.130 per share the AO did not find any adverse material and accordingly assessed the loss on sale of 58320 shares without demure. Even though the fact was highlighted in the A/R submissions, in his remand report the AO chose to remain silent on this vital aspect of the matter. If in respect of 58320 KPL shares sold at the same price, AO did not find any reason to disbelieve then apparently there was no reason or justification for the AO to disallow the loss incurred only on sale of 15000 shares. I therefore find full justification in the A/R's submissions that the loss of Es. 82,50,000/- incurred on sale of 15000 KPL shares was disallowed only on surmise. Besides the aforesaid finding, as discussed in the preceding paragraphs, the Hon'ble Supreme Court in the cases • of CIT Vs George Henderson & Co Ltd supra and CIT Vs Shivakami Co Pvt Ltd supra has held that that the AO does not have the power to substitute the actual sale consideration with the market value/ book value of shares. For the reasons discussed in the forgegoing therefore I direct the AO to assess loss on sale of 15000 KPL shares at Rs. 82,50,000/- Ground No. 8 to 11 are accordingly allowed. 11.1 After considering the above order of CIT (A) and going through the detailed written synopsis filed by both the sides and arguments, we observed that the ld.DR had submitted that the CIT(A) has coterminous power and he could have examined the issue in details whereas that during the appellate proceedings, the CIT(A) has called remand report from the AO and the CIT(A) observed that there is no shame transactions carried out by the assessee on sale of shares. During the assessment proceedings, the assessee had submitted shares valuation report obtained form Chartered Accountant. We found substance on the submission of the ld.AR of his written synopsis at para No. 5.5 and 5.6 cited supra in regard to reason for decrease in value of shares. We further observed that sec.50CA was inserted by the Finance Act 2017 which was made applicable from 01/04/2018, before this amendment as on ITA No.679/Bang/2019 Page 24 of 27 01/04/2010 there was no enabling provisions for taxing to the deemed sales consideration instead of actual sales consideration received. We further noted that sec.56(2)(viia) was inserted by the Finance Act 2010 w.e.f 01/06/2010 and was therefore applicable from assessment yaer 2011-12 onwards and this section applies to the hands of the acquirer. The company has received consideration on sale of shares which has been disclosed in his regular return of the income, but in the absence of corroborating material or evidences to suggest that the assessee has received over and above from the sales consideration the disallowance cannot be made, the revenue could not brought any materials against the assessee that he has received extra money/considerations. Further, in the case of loss on sale of shares of M/s Kemwell Pvt. Ltd., the AO has doubted only on the sale of shares of Rs.15,000/- resulting a loss of Rs.82,50,000/-, whereas the assessee sold the entire shares of Rs.73,230/- @ Rs.130/- per share whereas it was purchased at more than the sales value which is clear from the written submissions of Ld. D.R.. The AO accepted the sale price of 58,320 shares @ Rs.130/- which resulting a loss of Rs.17024800/- and gain of Rs.6,00,000/-. The AO has allowed set off of loss from gain on sale of shares, the AO has taken dual policy the partially disallowance is not acceptable. The ld. AR has referred the case law before the CIT (A) support the case of the assessee, we are also relying on the same which is as under:- An identical situation was considered by the Delhi Bench of the Tribunal in the case of DCIT vs General Equipment and Leasing & Consultancy Services Ltd. (131 lTD 263). In this case the assessee had purchased shares of a company at Rs. 10/- per share when book value of the same shares was Rs. 31.80 per share. Later on, 250000 shares were sold to 3 family members of the promoters © Rs. 121- per share when the book value of shares was around Rs.254.50. The AO held that the transaction of sale was a device adopted to pass on undue monetary benefit to the lady members of the promoters' family. The AO therefore computed the capital gains adopting the "fair market value" of shares to be the "full value of consideration". The CIT(A) deleted the addition as the AO did not adduce any evidence of understatement of sale consideration. On appeal the Tribunal dismissed the appeal by holding that nothing was brought on record to show that it was an inappropriate transaction. The Tribunal held that there was no dispute as to the fact that the transaction had taken place at value far less than the "arms length price", but in absence of any evidence of the receipt etc. of more than the stated consideration, computation of capital gains could not be altered. The Tribunal, therefore, held that CIT(A) was right in directing the AO to compute the income on the basis of consideration actually passed between the parties. In arriving at this conclusion ITA No.679/Bang/2019 Page 25 of 27 the Tribunal relied on a decision of the Supreme Court in the case of George Henderson & Co. Ltd (supra). Reference in this regard is also made to the decision of the Mumbai Bench of ITAT in the case of Morarjee Textiles Limited [ITA No. 19791Mum12009]. In the decided case the assessee had purchased the shares of a company at the rate of Rs 18.10 per share and subsequently sold it for Rs. 17.99 per share thereby incurring a loss. The AO however rejected the sale consideration received by the assessee and chose to substitute the same with the average of price determined on the basis of the book value, yield method etc. On appeal the Tribunal held that only the sale çnsideration actually received by fhe assessee has to be considered for the purposes of computing gain arising on sale of shares. It was held that there is no provision in the Act for substituting fair market value in the place of the actual consideration received. Accordingly the loss disallowed by the AO was deleted and the income original returned was accepted by the Tribunal. While arriving at this conclusion the ITAT referred to the decision of the Supreme Court in the case of K.P. Varghese [131 ITR 5971 wherein the Apex Court held that the market value cannot be substituted when the transaction is bonafide and the onus is on Revenue to establish that the assessee has not correctly or understated his income. The onus is on Revenue to establish that the assessee has not correctly stated or declared his income or understated his income and had received monies in excess of the sale consideration declared in the books of accounts. Similar view was expressed by the Apex Court in another judgment rendered in the case of CIT Vs Shivakami Co. (P.) Ltd. (159 ITR 71). In the decided case the assessee sold shares held in a company at a value much lower than its market value and incurred loss. The said loss was disallowed by the Assessing Officer holding it to be in-genuine and substituted the market value of the shares in place of the actual sale price. On appeal the Apex court observed that the AO did not bring on record any evidence, direct or inferential to suggest that the consideration actually received by the assessee was more than what was disclosed in the accounts. It was held that there was no deeming provision in the Act to substitute the market value in place of actual sale price for the purposes of calculating the loss or gain arising on sale of shares and accordingly deleted the addition made by the Assessing Officer. 11.2 Considering the entire facts and submissions from both the sides, the ld.CIT(A) has done good reasoned order and it does not require any interference accordingly, we uphold the order of the CIT(A) and dismissed the grounds 03 raised by the revenue. 12. The ground No. 04 is general in nature , therefore, it becomes academic in nature 13. After the hearing the revenue has filed additional ground vide his letter dated 25/08/2022 and the ld.AR also filed rejoinder against the additional grounds filed by the revenue. Since both the parties contentions are not accepted because they have filed after conclusion of the hearing. ITA No.679/Bang/2019 Page 26 of 27 14. In the result, the appeal filed by the revenue is dismissed. Order pronounced in court on 12 th day of October, 2022 Sd/- Sd/- (BEENA PILLAI) (LAXMI PRASAD SAHU) Judicial Member Accountant Member Bangalore, Dated, 12 th October, 2022 / vms / Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order Asst. Registrar, ITAT, Bangalore ITA No.679/Bang/2019 Page 27 of 27 1. Date of Dictation .......................................... 2. Date on which the typed draft is placed before the dictating Member ......................... 3. Date on which the approved draft comes to Sr.P.S ................................... 4. Date on which the fair order is placed before the dictating Member .................... 5. Date on which the fair order comes back to the Sr. P.S. ....................... 6. Date of uploading the order on website................................... 7. If not uploaded, furnish the reason for doing so ................................ 8. Date on which the file goes to the Bench Clerk ....................... 9. Date on which order goes for Xerox & endorsement.......................................... 10. Date on which the file goes to the Head Clerk ......................... 11. The date on which the file goes to the Assistant Registrar for signature on the order ..................................... 12. The date on which the file goes to dispatch section for dispatch of the Tribunal Order ............................... 13. Date of Despatch of Order. .....................................................
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