Shambhu Atmaram Pai Panandiker, Goa V. Deputy Commissioner Of Income Tax, Assessment Circle-2(1), Bangalore

ITITA 909/BANG/2022

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The case revolves around the dispute concerning the valuation of unquoted shares for the purpose of calculating Long Term Capital Gains under the Income Tax Act, 1961. The assessee, Shambhu Atmaram Pai Panandiker, HUF, transferred shares of M/s. Marpol Pvt. Ltd. to Kansai Nerolac Pvt. Ltd. and reported a long term capital loss based on a valuation report from a Chartered Accountant. The AO rejected this valuation and recalculated the cost of acquisition using the book value method, leading to an addition of Rs.1,11,20,610 to the assessee's income. The Dispute Resolution Panel (DRP) upheld the AO's decision, leading to the appeal before the Tribunal.

• Counselvise Citation: [2022] 140 COUNSELVISE.COM (IT) 115321 (ITAT-BANGALORE)
• Duration Of Justice: 2 month(s) 5 day(s)
• Appeal Type: Income Tax (International Taxation) Appeal
• Pronouncement Date: 27-11-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 23-11-2022
• Assessment Year: 2019-2020
• Appeal Filed On: 21-09-2022
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Sale consideration of property below Jantri Value; Capital asset; Depreciation; Cost of acquisition; Fair market value; Valuation report; Capital Gains
• Section: 56; 143(3); 56(2); 144C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BENGALURU “B” BENCH, BENGALURU Before Shri N.V. Vasudevan, Vice President and Ms. Padmavathy S., Accountant Member IT(IT)A No. 909/Bang/2022 (Assessment Year: 2019-20) Shambhu Atmaram Pai Panandiker, HUF 116, First Floor Hemmady Regency, Nr. SBI Personal Banking Branch, Malbhat Margao, Goa 403601 PAN – AAEHS1894J vs DCIT Assessment, Circle-2(1) BMTC Building, 80 Feet Road Koramangala Bengaluru 560095 (Appellant) (Respondent) Assessee by: None Revenue by: Dr. Manjunath Karkihalli, CIT-DR Date of hearing: 24/11/2022 Date of pronouncement: 28/11/2022 O R D E R Per: Padmavathy, A.M. This appeal is against the order of the DCIT, Circle – 2(1), Bengaluru passed under Section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (the Act) dated 25.07.2022 for AY 2019-20. 2. The assessee raised the following grounds of appeal: - 1. On the facts and circumstances of the case, learned AO erred in making an addition of Long Term Capital Gains of Rs.1,11,20,610/- by re-computing the cost of acquisition of unquoted shares in a manner that is contrary to the provisions of law by computing fair market value under the book value method under Rule 11 UA(2). 2. On the facts and circumstances of the case, learned AO erred in acting beyond the scope of law by rejecting the valuation considered by your appellant obtained from independent expert on the subject determined on the basis of globally accepted methods. IT(IT)A No. 909/Bang/2022 Shambhu Atmaram Pai Panandiker, HUF 2 3. On the facts and circumstances of the case, learned AO erred in applying valuation Rules u/s 11UA(2) to compute cost of acquisition u/s 55(2) being FMV of unquoted shares as on 01.04.2001.This Rule is applicable specifically in respect of determination of income u/s 50CA and 56(2)(viib) and has no application in Section 55 for determination of the cost of acquisition. 4. On the facts and circumstances of the case, learned AO erred in disallowing the expenses claimed in connection with transfer of shares amounting to Rs.33,925/-. 5. On the facts and circumstances of the case, to leave, to add, alter amend, modify and correct the grounds of appeal at or before the time of hearing. 3. The assessee is a HUF and filed the return of income for AY 2019-20 on 25.07.2019 admitting a total income of Rs.24,13,160/-. The case was selected for scrutiny. The assessee was a shareholder in a closely held unlisted company namely M/s. Marpol Pvt. Ltd. since 1983 and transferred its shareholding to one Kansai Nerolac Pvt. Ltd. vide share purchase agreement dated 04.04.2018. The assessee reported a long term capital loss of Rs.11,45,171/- after deducting the indexed cost of acquisition of Rs.3,19,33,440/- which was based on the Fair Market Value (FMV) of the shares as on 01.04.2001 in accordance with the valuation report of the Chartered Accountant. The valuation report was rejected by the AO who proceeded to arrive at the value as on 01.04.2001 based on book value. Accordingly the AO made an addition of Rs.1,11,20,610/-. The assessee being eligible assessee, the AO issued the draft assessment order as per provisions of Section 144C of the Act. Aggrieved, assessee filed the objections before the DRP. 4. The DRP upheld the addition made by the AO by stating that valuation report obtained by the assessee under Rule 11UA(2)(b) is faulty and that after 24.05.2018 the Chartered Accountant cannot certify the valuation done under Rule 11UA(2)(b). IT(IT)A No. 909/Bang/2022 Shambhu Atmaram Pai Panandiker, HUF 3 5. The assessee is in appeal before the Tribunal against the final order passed by the AO in accordance with the directions of the DRP. 6. During the course of hearing none appeared for the assessee, though notice through RPAD was served on the assessee conveying the date of hearing. We have taken on record the detailed written submission filed by the assessee along with the appeal and proceeded to adjudicate the matter. 7. The relevant portion of the written submission of the assessee are extracted here: - Your appellant submits that the learned AO has wrongly rejected the cost of acquisition of shares citing the provision of Section 11UA(2) which do not apply to determination of cost of acquisition. Your appellant further submits that the Learned AO has misinterpreted the provisions of law and adopted a valuation under Rule 11 UA(2) for determination of fair market value for cost of acquisition purpose, whereas section 48does not prescribe Rule 11 UA(2) for determination of FMV. It is a well understood fact and legal position that the Income Tax Act and the Rules made there under prescribe specific and separate methodologies for the purpose of determination of fair market value of each category or type of asset. This scheme of valuation and methodology are prescribed with a specific purpose so that the assessees are not burdened or face undue hardships and at the same time adhere to the tax provisions framed for which they are intended. Further for different transaction and different legs of the same transaction different methodologies may be prescribed by the Act and the rules made there under as thought valid and apt. The impugned addition by the learned AO by substituting the cost of acquisition claimed by your appellant fails on the tests of law on account of following reasons: a) The income of the assessee from transfer of capital asset i.e unquoted shares is chargeable to tax under the head "Capital Gains". Section 50CA provides for considering the higher of the fair market value of unquoted shares or the actual sale consideration. Rule 11 UAA is to be applied with respect to Section 50CA for FMV that has to be computed under the "book value method" for the purpose of Section 50CA or 56(2). This rule has no application in determination of cost of acquisition. IT(IT)A No. 909/Bang/2022 Shambhu Atmaram Pai Panandiker, HUF 4 Thus, Rule 11 UAA is to be invoked to determine the fair market value AT THE TIME OF THE SALE. The AO has questioned the cost of acquisition and not the sale value but has chosen to use a rule prescribed for determination of fair value for a specific section viz. 50CA and 56(2) for a completely different section viz Section 48. To reiterate Rule 11UAA has no application in the matter since the AO's contention is towards determination of cost of acquisition and not sale consideration. The AO cannot thrust upon the valuation under Rule 11 UAA or Rule 11 UA when the Rules are transaction-specific and do not apply in determination of cost of acquisition at all. The Law in it's wisdom has prescribed the Rule 11 UA for Section 50CA and 56(2) and not for section 48. When the methodology has not been specifically prescribed for determination of fair market value in the case of cost of acquisition u/s 55, the learned AO cannot artificially import the rule in the matter and that to by disregarding a valuation report obtained from an independent agency issued on the basis of internationally accepted valuation principles. b) The learned AO has computed the Fair Market Value of the shares stating that provisions of Rule 11UA are applicable. The learned AO at para No. 10, page 6 and 7 of the assessment order states as under: "10. In view of the above, FMV of shares as on 01.04.2001 is calculated using Rule11UA of the Income Tax Rules on the basis of Financials of M/s Marpol Private Limited provided by the assessee for the year ended 31st March 2001. As per Rule 11 UA Fair Market Value of Unquoted Shares= (A-L) X (PV) (PE) Were, A= book value of the assets in the balance-sheet but not including as mentioned below. L= book value of liabilities shown in the balance-sheet, but not including as mentioned below. PE= total amount of paid-up equity share capital as shown in the balance- sheet PV= the paid-up value of such equity shares. For ascertaining the book value of assets, following amounts shall be excluded: IT(IT)A No. 909/Bang/2022 Shambhu Atmaram Pai Panandiker, HUF 5 - Advance Tax, Tax deduction or collection at source or any amount of taxpaid as reduced by refund claimed under the Income Tax Act. − any unamortized amount of deferred expenditure which does not represent the value of any asset. For ascertaining the book value of liabilities, following amounts shall be excluded: − the paid-up capital in respect of equity shares; - the amount set apart for payment of dividends on preference or equity shares - reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation; − any amount representing provision for taxation, other than amount of tax paid as reduced by the amount of tax claimed as refund − any amount representing provisions made for meeting liabilities, other than ascertained liabilities; − any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares." Your appellant submits that the above methodology is specifically applicable in case to determine if any income transaction falls under section 56(2)(viib) and has no application for determination of cost of acquisition in respect of a capital asset. Therefore, the invocation of valuation as prescribed in Rule 11 UA is remotely not applicable to determine cost of acquisition in respect of a capital asset acquired prior to 31.03.2001. Rule 11 UA starts as under: "11UA. [(1)] For the purposes of section 56 of the Act, the fair market value of a property, other than immovable property, shall be determined in the following manner, namely, ............ Thus, it is evident from above facts and position of law that the learned AO has recomputed the cost of acquisition by misapplication of the provisions of law. c) More importantly, the cost of acquisition and indexed cost of acquisition in respect of a capital asset are defined u/s 55(2) of the Income Tax Act. The cost of acquisition in respect of the capital asset transferred by your assessee is covered under clause (b) of section 55(2). The relevant provisions read as under: "(b) in relation to any other capital asset,— IT(IT)A No. 909/Bang/2022 Shambhu Atmaram Pai Panandiker, HUF 6 (i) where the capital asset became the property of the assessee before the 1st day of April, 2001, means the cost of acquisition of the asset to the assessee or the fair market value of the asset on the 1st day of April, 2001, at the option of the assessee". It is evident from the reading of the above provisions that cost of acquisition in the case of an asset acquired prior to 01.04.2001 can be taken as the Fair Market value as on 01.04.2001 or the actual cost of acquisition at the option of the assessee. Thus, the provisions of the said section are beneficial provisions of the law and the assessee is given the discretion to adopt the cost or fair market value as is beneficial to the assessee. The above provisions define the cost of acquisition in certain cases (more specifically to state in the present case the capital asset acquired prior to 01.04.2001) but it does not prescribe any specific methodology for the purpose of determination of FMV as on 01.04.2001 nor there is any reference made to any other provisions of the Law or valuation rules for this purpose. This fact is also accepted by Hon.DRP-2,Bengaluru in its order u/s 144C(5) dated 18.06.2022. Hon. Panel has stated at para 2.1 of the order as under: 2.1 Panel : - The panel observes that there is no specific method defined under the Act to arrive at the valuation of unquoted equity shares as on 01.04.2001." Your appellant further states that the Fair Market value as on 01.04.2001 in the case of unquoted shares transferred is based on the valuation report of an independent and expert chartered accountants firm who have determined the fair value by adopting the two globally recognized and accepted valuation methods i.e the Earnings method and the DCF method. The contention of the learned AO for not adopting the valuation by the chartered accountants is on account of a misconstrued reading of the provisions. The only exclusion or limitation on the acceptance of valuation by chartered accountant in determination of fair value is provided in Rule 11 UA(2) which is applicable only in case any income is chargeable to tax u/s 56(2)(viib).Rule 11 UA(2)is remotely not applicable in respect of the sale of shares by your appellant. Further, no such bar is placed under any other provisions of the Act or Rules made there under for obtaining the valuation report with respect to determination of cost of acquisition by consideration of FMV as at 01.4.2001 as provided in section 48. Your appellant states that the beneficial provisions of the law should be read liberally and not strictly. Where the discretion is given to the assessee under any such provision, the same should not be tampered with by the Revenue. The impugned addition of capital gains in the assessment order on account of substitution of cost of acquisition by changing the methodology is IT(IT)A No. 909/Bang/2022 Shambhu Atmaram Pai Panandiker, HUF 7 thus misplaced due to misinterpretation of the provision of the Income Tax Rules. The learned AO, in the instant case, has acted beyond the powers vested in him under the Act while rejecting the cost of acquisition determined as per the valuation method allowable under the Rules. The rejection itself is on flimsy ground not applicable under Law in the matter since the restriction for valuation placed on CAs is only with respect to Rule 11 UA which the AO has artificially imported in the instant case. Therefore, the addition is not tenable. Rule 11UA discussed by the AO and applied for determining the impugned cost of acquisition has no application in the instant case. Rule is applicable in determination of any income chargeable u/s 50CA or 56 only. Rule 11 UA(2)(b) was amended to omit "accountant" as an eligible person to issue a valuation report in respect of the transaction referred u/s 56(2)(viib). When it is evident that the Rule 11 UA itself is not applicable for determination of cost of acquisition, the question of reference to a limitation prescribed under such Rule does not arise in any case. Thus amendment to Rule 11 UA referred to by the learned AO in the draft assessment order relied by Hon.DRP and further considered as the basis in the final assessment order has no relevance at all in the instant case. Your appellant had also claimed expenses in connection with transfer as defined u/s 48(i) amounting to Rs.33,925/-. The expenses claimed comprise of your appellant's share of fees paid to the Valuers for the purpose of valuation of shares. However, while re-computing the capital gains from transfer of shares in the assessment order u/s 143(3) r.w.s. 144C(13), the learned AO has not allowed said expenses without specifying any valid reason. 8. The learned D.R. submitted that the impugned issue is with regard to the cost of acquisition of shares for which the assessee has done a valuation report as on 01.04.2001 certified by the Chartered Accountant which was not accepted by the AO. The learned D.R. also submitted that there is no prescribed method under the Act for determination of FMV as on 01.04.2001 for unquoted shares and therefore the AO has taken the book value as on 01.04.2001 to arrive at the FMV. Accordingly the learned D.R. supported the order of the AO. 9. We have heard the rival contentions and perused the material on record. Before proceeding further let us recapitulate the facts of the present case. IT(IT)A No. 909/Bang/2022 Shambhu Atmaram Pai Panandiker, HUF 8 During F.Y 2018-19 relevant to A.Y 2019-20, the assessee transferred the shares to Kansai Nerolac Pvt Ltd vide a share purchase agreement dated 04.04.2018 for a consideration of Rs.3,08,22,194/-. The assessee declared a long term capital loss of Rs.11,45,171/- after deducting the indexed cost of acquisition of Rs.3,19,33,440/- which was computed by considering the Fair Market Value as at 01.04.2001, since the assessee had acquired the unquoted shares of the said company prior to 31.03.2001 and thereby was entitled to claim as cost the higher of the cost of acquisition or the fair market value as at 01.04.2001.For the purpose of determining the Fair Market Value of shares as on 01.04.2001, assessee relied on the valuation report obtained from an independent chartered accountant firm M/s Bansi S.Mehta and Co., Chartered Accountants. The FMV determined as on 01.04.2001 as per the valuation report was Rs.48.25 per share which was calculated as an average of fair market value determined under Earnings Approach and Discounted Cash Flow (DCF) Method. Additionally, the assessee had also obtained a valuation report from the said chartered accountants firm for the purpose of determination of fair market value as on 31.03.2018 i.e. immediately before the specified date of transfer. The only purpose as per the submissions of the assessee, of obtaining a valuation report as on this date was to confirm that the value determined as sale consideration is in compliance with the provisions of section 50CA of the Income Tax Act. The FMV determined as on 31.03.2018 as per the valuation report of the chartered accountant firm was Rs.42.24/- as against the sale price per share of Rs.114.16, thus the sale consideration was not in violation of provisions of section 50CA. The value determined as on 31.03.2018 was in accordance with the prescribed method under Rule 11UAA r.w.r. 11UA(1)(c)(b). 10. We notice that the assessee explained before the AO that the assessee is entitled to claim as cost of acquisition the fair market value as at 01.04.2001 IT(IT)A No. 909/Bang/2022 Shambhu Atmaram Pai Panandiker, HUF 9 of Rs.48.25 per share as duly determined vide the report of FMV obtained from M/s Bansi S. Mehta & Co. Chartered Accountants which is supported by the relevant documentary evidences corroborating the claims to prove the genuineness and validity cost of acquisition claimed. We also notice that the AO rejected the valuation done by the assessee by stating as under: - 9. The contention of the assessee is not accepted for the following reasons: i. As rightly pointed out by the assessee there is no specific method defined under the Income Tax Act to derive at indexed cost as at 01.04.2001. Then question is how to calculate Fair Market Value of shares as on 01.04.2001. The assessee has relied Valuation Report prepared by Charted Accountant Bansi Mehta and Company. However, he had adopted two different approaches to arrive at the FMV of same shares on different dates. Fair Market Value of share has been calculated as on 31.03.2018 as per the approach specified in Rule 11UA of the Income Tax Rules and FMV as on 01.04.2001 calculated as per earning approach and DCF approach. As on date to arrive @ FMV method prescribed in Rule 11UA is the only method apart from merchant banker's valuation report. ii. Earlier, a Chartered Accountant was also permitted to determine the FMV of unquoted equity shares. However, with effect froM 24th May 2018 only Merchant Banker is authorised to determine the FMV of such equity shares. The valuation report submitted by the assessee was dated 25.08.2018, which is after 24.05.2018, the date on which the Rule came into force, for valuation of shares certificate of Chartered Accountant is not valid in the eyes of law. iii.The assessee has sold his shares after amendment in rules effective from 01 April, 2017 for determining FMV of unquoted shares and has not valued shares of the company from Merchant Banker, which are applicable to A.Y.2019-20. Further assessee himself in his submission accepted that after 24.5.2018 only a merchant banker's report is accepted for determining value of share based on DCF for the purpose issue of shares. v. The assesse's contention that Rule 11UA is only used to identify whether sale consideration is lower than FMV of the shares actually received or not is not acceptable because by using same approach Fair Market Value of shares can also be calculated. IT(IT)A No. 909/Bang/2022 Shambhu Atmaram Pai Panandiker, HUF 10 11. We further notice that the DRP has held that valuation is done applying Rule 11UA and it should not have been certified by a Chartered Accountant but a merchant banker after 24.05.2018. 12. From the perusal of the reasons quoted by the lower authorities for rejecting the valuation report as of 01.04.2001, it is clear that there has been a misconception in understanding the facts. The lower authorities failed to take note of the fact that the valuation done as of 01.04.2001 is for the purpose of determining the cost of acquisition and the same cannot be rejected for the reason that it is obtained from the same Chartered Accountant who has given the FMV valuation on the date of sale. Another reason for rejection is that the FMV as on 01.04.2001 and FMV as on 31.03.2018 are computed following different approaches or methods and there is a lack of consistency. However, it is to be noted here that the two reports are for different purposes one being for cost of acquisition and the other is to substantiate that the sale consideration was not in violation of provisions of section 50CA of the Act. Section 55(2) of the Act provides that where the capital assets are acquired before the first day of April 2001, the cost of acquisition of the asset to the assessee or the FMV of the asset as of 01.04.2001 at the option of the assessee. It is to be noted here that the method of arriving at the FMV for the purpose of determining the cost of acquisition is not specified under the Act. In the common commercial parlance in respect of an unquoted share the FMV would be the value which the shares would fetch if sold in open market. We therefore see merit in the submission that the FMV is determined using DCF method since the Act does not contain any specific method for arriving at the FMV of unquoted shares as of 01.04.2001. Accordingly we are of the view that the valuation report obtained by the assessee determining the FMV of the unquoted shares as on 01.04.2001 cannot be rejected. The next reason given being the FMV is not certified by the merchant banker is not tenable since the FMV as of IT(IT)A No. 909/Bang/2022 Shambhu Atmaram Pai Panandiker, HUF 11 01.04.2001 is obtained for determining the cost of acquisition of the shares and therefore Rule 11UA is not applicable in that case. 13. In view of these discussions we see no reason to reject the Valuation Report as of 01.04.2001 prepared using DCF method and certified by the Chartered Accountant. We therefore delete the addition made in this regard and allow the appeal in favour of the assessee. 14. In the result, the appeal filed by the assessee is allowed. Dictated and pronounced in the open Court on 28 th November, 2022. Sd/- Sd/- (N.V. Vasudevan) (Padmavathy S) Vice President Accountant Member Bengaluru, Dated: 28 November, 2022 Copy to: 1. The Appellant 2. The Respondent 3. The DRP-2, Bengaluru 4. The CIT - 5. The DR, ITAT, Bengaluru 6. Guard File By Order Assistant Registrar ITAT, Bengaluru n.p.