BACKGROUND
- During AY 2021-22, the Assessee1 purchased 5.92 Cr. shares of IG3 Infra Limited ('IG3') at INR 12.43 per share and 18.43 Cr. shares of ETL Power Services Limited ('ETL') at the price of INR 14.30 per share on 08.08.2020. Both these shares were purchased from Green Grid Group Pte Ltd., Singapore ('Green Grid').
- The case was selected for scrutiny and notice u/s 143(2) of the Income Tax Act, 1961 ('the Act') was issued.
- Assessee furnished two valuation reports as per Rule 11UA of the Income-tax Rules, 1962 ('Rules') dated 06.07.2020 and 09.12.2022 based on unaudited balance sheet and audited balance sheet respectively.
- Contention of Assessing Officer('AO'):
- AO treated the Assessee's share acquisition from Green Grid as an international transaction between associated enterprises and referred it to the TPO. The TPO determined the arm's length price ('ALP') of IG3 shares at INR 29.48 per share based on a comparable third-party transaction.
- Based on the TPO findings, AO invoked sections 56(2)(x) on the ground that shares acquired from Green Grid are lower than the Fair Market Value ('FMV') determined by TPO.
- AO disregarded the valuation report dated 09.12.2022 by contending that the same is received after the share acquisition date.
- Further, AO ignored the negative FMV of unquoted shares held by IG3 as per valuation report dated 09.12.2022 and considered the same as nil even where the valuation is derived as per Rule 11UA of the Rules.
- CIT(A) reversed the order of AO and ruled decisively in favour of the Assessee.
TRIBUNAL'S OBSERVATIONS
- ITAT rejected the AO's approach of adopting the ALP as the FMV, based on the price at which a third party acquired shares of IG3.
- Further, observed that merely because a third party purchased the same shares for a price higher than the price calculated as per Rule 11UA, such transacted value cannot be substituted with the value determined as per Rule 11UA of the Rules. Thus, deletes the impugned addition made by AO under section 56(2)(x) of the Act.
- ITAT relied upon the various rulings2 and upheld that the valuation report which was issued subsequent to the transaction date is valid where the FMV is worked out as per Rule 11UA of the Rules based on the audited balance sheet available as on 'valuation date'.
- ITAT further held that negative FMV derived through prescribed methods (i.e. Rule 11UA of the Rules) cannot be arbitrarily treated as nil and the Court cannot override the legislature intent or insert omission.
- ITAT dismissed all the grounds raised by Revenue and upheld the order of CIT(A) in favour of the Assessee.
AURTUS COMMENTS
- This ruling reinforces the principle that taxation provisions are to be construed with precision and strict adherence to their language, leaving no scope for presumption, assumptions or interpretative liberties. Further, the ruling also emphasizes that value determined in accordance with methodology prescribed under Rule 11UA is conclusive to determine taxability under Section 56(2)(x) of the Act.
Footnote
1. Aathmika – Holdings Pvt. Ltd [TS-989-ITAT-2025(CHNY)]
2. Sri Sakthi Textiles Limited vs. DCIT (188 ITD 946) Jayshri Propack Pvt Ltd vs. ACIT (198 ITD 17)
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