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Amritlal T. Shah vs. ITO (ITAT Mumbai)

COURT:
CORAM: ,
SECTION(S): , ,
GENRE:
CATCH WORDS: ,
COUNSEL:
DATE: September 22, 2016 (Date of pronouncement)
DATE: November 1, 2016 (Date of publication)
AY: 2008-09
FILE: Click here to download the file in pdf format
CITATION:
S. 45/48: In valuing the shares of a privately held co, the “enterprise valuation” has to be taken by valuing even the assets held by subsidiaries of the Company. It is common for the sellers to charge a “controlling premium” for the sale of the shares. Such transfers to enable restructuring and re-aligning the shareholding pattern are genuine and bona fide. The alleged excess consideration for the sale of the shares cannot be treated as “unexplained income”

(i) The assessee is a shareholder of the company namely BEC Industrial Investment Company Limited along with his family members holding in aggregate 5000 equity shares of BEC Industrial Investment Company Private Limited of face value of Rs 100 each of which 2040 equity shares were held by the assessee. Thus, the assessee family member also hold equity shares in the said company and aggregate shareholding of the family is 5000 equity shares of face value of Rs.100 each in BEC Industrial Investment Company Private Limited out of the total shares being 35000 equity shares issued by BEC Industrial Investment Company Private Limited. Out of the shareholding consisting of 5000 equity shares of BEC Industrial Investment Company Private Limited, the assessee holds 2040 equity shares jointly with Mrs. Shantaben Amritlal Shah, Mrs Shantaben Amritlal Shah holds 1295 equity shares jointly with Mr. Amritlal T. Shah i.e. the assessee, while Mr Satish Amritlal Shah holds 1665 equity shares jointly with Mr. Amritlal T. Shah i.e. the assessee in BEC Industrial Investment Company Private Limited.

(ii) The assessee had sold 2040 equity shares of face value of Rs. 100/- per share of BEC Industrial Investment Company Private Ltd. to BAT Enterprises Ltd. @ Rs. 1195/- per share whereby the assessee has received Rs. 24,37,800/- as sales consideration and the long term capital gain was worked out as per provisions and scheme of the Act and the same was invested by the assessee in REC Bonds claiming exemption u/s 54EC of the Act whereby long term capital gain declared in the return of income was at Rs. Nil. The assessee along with his family members namely Mrs Shantiben Amritlal Shah and Mr Satish Amritlal Shah entered into two share purchase agreements dated 06-03-2007 and 07-04-2007 with BAT Enterprises Limited and others which are placed in the paper book page 57-79 whereby the assessee and his above family members agreed to sell the equity shares of BEC Industrial Investment Company Private Limited at Rs. 1195/-per share to BAT Enterprises Limited. The said valuation is based upon the price mutually agreed and negotiated between both the parties i.e. the willing buyer and the willing seller and vide these share purchase agreements it was agreed to sell share holding in BEC Industrial Investment Co. P. Ltd. @ Rs. 1195/- per equity share to BAT Enterprises Limited.

(iii) Further it is on record that BEC Industrial Investment Co. P. Ltd. is a 100% holding company of BEC Chemicals Private Ltd. (page 24/paper book) and hence the valuation of share of the former depends on the valuation of the shares of later which value of shares of BEC Chemicals Private Limited has necessarily to be included for computing value of share of BEC Industrial Investment Company Private Limited which is 100% holding of BEC Chemicals Private Limited who was having a manufacturing unit at Roha and is an EOU unit , whereby the book value of the share of BEC Chemicals Private Limited , as per the books was Rs. 562/- per share as on 31st March, 2007 and if depreciation is excluded the book value comes to Rs. 1406/- per share. This value is supported by the audited financial statement of BEC Chemicals Private Limited and the valuation details which are placed at page 7-55 & 108/paper book. The said valuation details states that goodwill of BEC Chemicals Private Limited is not considered in this valuation and also market value of land and building of BEC Chemicals Private Limited is also not considered while valuing the above price which is computed from the audited financial statements being NAV of BEC Chemicals Private Limited with or without depreciation. The copies of audited financial statements of BEC Chemicals Private Limited is filed by the assessee for the financial year 2006-07 which shows that share capital of BEC Chemicals Private Limited is Rs 70 lacs and reserves and surplus is Rs. 323.07 lacs as at 31-03-2007 as per audited financial statements of BEC Chemicals Private Limited The said valuation is not disputed by the Revenue.

(iv) It is the say of the assessee that even market value of land and building held by the BEC Chemicals Private Limited is also to be factored while valuing BEC Chemicals Private Limited apart from goodwill of BEC Chemicals Private Limited. On perusal of the share purchase agreements dated 06-03-2007 and 07-04-2007, it clearly reveals that the assessee was Director of BEC Industrial Investment Company Private Limited and BEC Chemicals Private Limited on the date of sale of afore-stated and he resigned from directorship of these companies persuant to sale of 5000 equity shares held by himself and his family members held in BEC Industrial Investment Company Private Limited which were sold to BAT Enterprises Limited which is borne out from clause 2.3(iv) of the share purchase agreement dated 06-03-2007 whereby Resolutions were also obtained from these companies accepting the resignation of the assessee as Director of these companies. The said share purchase agreement dated 06- 03-2007 also stipulates that the assessee shall be relieved from the personal guarantees provided by him for working capital finance as well as term loan or any other personal guarantees’ to Bank and financial institution in his capacity as a Director of these companies namely BEC Industrial Investment Company Private Limited and BEC Chemicals Private Limited.

(v) Thus, in our considered view the entire transaction of sale of 5000 equity shares of BEC Industrial Investment Company Private Limited @ Rs. 1195 per shares by the assessee (out of total 5000 equity shares sold, the assessee selling 2040 equity shares) and his family members is a genuine and bonafide transaction which is to enable restructuring and re-aligning the shareholding pattern of these companies whereby the one shareholders group consisting of the assessee and his family members holding 5000 equity shares in BEC Industrial Investment Company Private Limited have sold and exited from the shareholding held by them in BEC Industrial Investment Company Private Limited in favour of BAT Enterprises Ltd. at a mutually agreed negotiated price between the willing seller and willing buyer to make an exit from the shareholding in BEC Industrial Investment Company Private Limited and its subsidiaries. The exit from the closely held company BEC Industrial Investment Company Private limited with its subsidiaries could in commercial parlance definitely command premium in addition to the normal price based on NAV as first of all the valuation of the subsidiary would get embedded in the price of share of BEC Industrial Investment company Private Limited and that valuation has to be done based on present value of enterprise and not necessarily the book value as represented by financial statements and also controlling premium is embedded in the price for the shares paid by acquiring shareholders to the selling shareholder group to vest/strengthen their control in the BEC Industrial Investment Private Limited which shall get embedded in mutually agreed negotiated price between the buyer and the seller, hence, under these circumstances and on analyzing the whole transactions in proper perspective, we have no hesitation in holding based on material on record that the entire transaction for sale of share represented through share purchase agreements dated 06-03-2007 and 07-04-2007 produced by the assessee is a genuine and bonafide transaction of sale of shares held by the assessee and his family members in BEC Industrial Investment Company Private Limited to BAT Enterprises Limited and the assessee has rightly computed the capital gain in the return of income filed with the Revenue by taking actual sale consideration of 2040 equity shares @ Rs 1195/- per share as full value of consideration as contemplated u/s. 48 of the Act.

(vi) The issue of shares by BEC Chemicals Private Limited to the promoters subsequently at face value at Rs 100 per shares is all irrelevant consideration having no bearing on establishing the genuineness and bonafide of transactions for sale and purchase of share executed by the assessee and his family members with BAT Enterprises Limited vide share purchase agreements dated 06-03-2007 and 07-04-2007. Similarly that the BEC Industrial Investment Company Private Limited and BAT Enterprises Limited has common address etc and the assessee ould be able to manipulate the transaction are again having no relevance and are merely conjectures and conjectures . In-fact on perusal of share purchase agreement dated 06-03- 2007 and 07-04-2007 will reveal that persuant to these agreement, the assessee and his family members have agreed to shift the offices of their companies and concerns from IBI house by 30-4-2007, clause 4.6 of the agreement dated 06-3-2007(page 65/paper book).

(vii) Nothing incriminating has been brought on record by the Revenue and conjectures and surmises has no place while computing and bringing to tax income of the tax-payer within the chargeability to tax under the provisions and scheme of the Act. The Revenue has also accepted the capital gains based on actual sale consideration in the case of Mr Satish Amritlal Shah while framing assessment u/s 143(3) of the Act for the assessment year 2007-08 in the hands of Mr Satish Amritlal Shah wherein the said Mr. Satish Amritlal Shah also sold 1665 equity shares of BEC Industrial Investment Company Private Limited to BAT Enterprises Limited @ Rs 1195 per share vide share purchase agreement dated 06-03- 2007. The Revenue has also accepted the purchase of equity shares of BEC Industrial Investment Company Private Limited @ Rs 1195/- per share from the assessee and his family members vide share purchase agreement dated 06-03-2007 in the hands of BAT Enterprises Limited while framing assessment u/s 143(3) of the Act for the assessment year 2007-08 of BAT Enterprises Limited. The assessment orders are placed in the file w.r.t. Mr. Satish Amritlal Shah and BAT Enterprises Limited for the assessment year 2007-08. We do not find any reasons to interfere in the working of capital gains furnished by the assessee computed in the manner by taking actual sale consideration @ Rs.1195 per equity shares of BEC Industrial Investment Company Private Limited as full value of consideration as contemplated u/s. 48 of the Act. As such we set aside the orders of the ld. CIT(A) and the AO computing capital gains by adopting NAV @ Rs 202 per share and bringing to tax balance amount of Rs. 20,25,720/- as unexplained income under the head ‘income from other sources’ which in our considered view cannot be sustained in the eyes of law. We accordingly allow the appeal of the assessee as indicated above. We order accordingly.

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