ITAT New Delhi Dismisses Revenue Appeal Against Bharat Kalia, Finds No 50CA Violation In Share Sale

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) on 10 April dismissed the Revenue's appeal against Bharat Kalia and held that no addition under Section 50CA of the Income Tax Act, 1961 can be made where the sale consideration of unquoted shares exceeds the fair market value determined under the prescribed rules.

Section 50CA applies when a taxpayer transfers unquoted shares at a price lower than their fair market value (FMV), triggering substitution of the consideration for tax purposes.

A Bench comprising Judicial Member Anubhav Sharma and Accountant Member Manish Agarwal observed:

“provision of Rule 11UA(2) of the Rules are applicable for the purpose of valuation of unquoted equity shares of section 56(2)(viib) of the Act. Whereas for the purpose of determination of fair market value of unquoted equity shares u/s 50CA of the Act, provisions as contained in sub-clause (b) & (c) of Rule 11UA(1)(b) of the Rule are applicable, according to which report could be obtained either from Merchant Banker or from CA.”

Bharat Kalia sold 14,219 shares of Lifelong Online Retail Pvt. Ltd., an unlisted company, to Thrasio LL Acquisitions Inc. for over Rs. 83 crore, resulting in substantial long-term capital gains.

The dispute arose from the order of the Commissioner of Income Tax (Appeals), NFAC, which deleted an addition of Rs. 3.80 crore that the Assessing Officer had made for alleged understatement of capital gains.

The Assessing Officer noted that Lifelong Online Retail issued fresh shares during the year to the same buyer at a higher price and treated this as evidence of understatement. He invoked Section 50CA and substituted the declared consideration with a higher deemed value.

The Revenue argued that the valuation report relied on by the taxpayer, prepared by a Chartered Accountant under the Net Asset Value (NAV) method, lacked validity. It contended that post-amendment, only a merchant banker could conduct valuation using the Discounted Cash Flow method.

Kalia argued that Rule 11UA permits valuation under the NAV method for Section 50CA purposes and does not require a merchant banker in all cases. He also pointed out that it sold the shares at Rs. 1,650 per share, which exceeded the fair market value determined under the rule, and therefore no addition could arise.

The Tribunal held that the Assessing Officer misapplied Rule 11UA(2), which governs Section 56(2)(viib), instead of applying the correct framework under Section 50CA. It clarified that Rule 11UA(1) governs valuation under Section 50CA and allows the use of the NAV method, without mandating valuation exclusively by a merchant banker. It noted:

“the assessee has obtained Valuation Report from CA who valued the unquoted equity shares sold by the assessee on the basis of NAV method as prescribed under sub-clause (b) of Rule 11UA(1)(b) of the Rules as per which value per share was computed at INR 1,650/-. Since the assessee has sold the share at the higher price than the fair market value determined as per section 50CA, therefore, no addition is required to be made.”

The Tribunal further noted that the sale consideration exceeded the computed FMV and the Revenue failed to show any evidence of additional consideration.

Accordingly, the ITAT held that the addition lacked legal basis and dismissed the Revenue's appeal.

For Appellant: Indu Bala Saini, Sr.DR

For Respondent: Dinesh Gupta, CA