Income Tax Appellate Tribunal - Chandigarh
Torque Pharmaceuticals Private ... vs Dcit, Central Circle-2, Chandigarh on 21 April, 2026
1 IN THE INCOME TAX APPELLATE TRIBUNAL "B" BENCH, CHANDIGARH PHYSICAL HEARING BEFORE HON'BLE SHRI RAJPAL YADAV, VICE PRESIDENT AND HON'BLE SHRI MANOJ KUMAR AGGARWAL, AM आयकर अपील सं./ ITA No.547/CHANDI/2025 (निर्धारण वर्ा / Assessment Year: 2021-22) M/s Torque Pharmaceuticals Pvt. Ltd. DCIT Central Circle - 2 बिधम/ CR Building, Himalaya Marg Plot No. 693, Industrial Area Phase-II, Chandigarh - 160002 Vs. Sector - 17E, Chandigarh - 160017 स्थायीले खासं./जीआइआरसं./PAN/GIR No. AABCT-1244-P (अपीलाथी/Appellant) : (प्रत्यथी / Respondent) अपीलाथीकीओरसे/ Appellant by : Sh. Sudhir Sehgal (Advocate) a/w Sh. Sumit B. Nagpal (CA) & Sh. Siddharth Khurana (CA) - Ld. ARs प्रत्यथीकीओरसे/Respondent by : Sh. Vivek Aggarwal (CIT) - Ld. DR सुनवाईकीतारीख/Date of Hearing : 17-03-2026 घोषणाकीतारीख /Date of Pronouncement : 21/04/2026 आदे श / O R D E R Manoj Kumar Aggarwal (Accountant Member) 1.1 Aforesaid appeal by assessee for Assessment Year (AY) 2021-22 arises out of an order of learned Commissioner of Income Tax (Appeals)-3, Gurgaon [CIT(A)] dated 21-02-2025 in the matter of an assessment framed by Ld. Assessing Officer [AO] u/s 143(3) of the Act on 08-06-2023. 1.2 The original grounds of appeal as raised by the assessee read as under: -
1. That the Ld. Assessing Officer has grossly erred in framing the assessment u/s 143(3), which should have been framed u/s 147 read with section 143(3) of the Act because of the following facts and circumstances: -2
(a) That the Ld. Assessing Officer has failed to appreciate that the search had taken place on assessee u/s 132 on 08.12.2021 relevant to assessment should have been framed under Section 147 read with Section 143(3) of the Act, by issuance of notice u/s 148 and, as such, the completion of assessment u/s 143(3) without complying with the mandatory requirement of issuance of notice u/s 148, the assessment as framed by the Assessing Officer deserves to be quashed.
(b) That the Ld. Assessing Officer has failed to follow the mandatory requirement of compliance to Explanation-2(i) to section 148, which clearly substantiates the contentions of the assessee, that in the case of search after 1 st day of April 2021, the Assessing Officer shall be deemed to have information, which suggest that the income chargeable to tax has escaped assessment and, as such, non-issue of notice u/s 148 for the Asst. Year 2021-22 under such specific provisions and completion of assessment u/s 143(3) being general provisions of assessment is bad in law.
2. Notwithstanding the above said ground of appeal, the Ld. CIT(A) has erred in dismissing the appeal of the assessee raising various grounds of appeal, which is against the facts and circumstances of the case.
3. That the Ld. CIT(A) erred in sustaining the addition of Rs. 110,18,25,132/- so made u/s 56(2)(x)(c) of the Act by applying deeming fiction wherein the actual price paid per share of Rs. 533.33 was enhanced to Rs.1316.845, and consequentially the difference of Rs. 1283.515 per share was added to the returned income of the appellant for 14,06,259 number of shares making the total addition of Rs. 110,18,25,132/-.
a) That the Ld. CIT(A) has erred in sustaining the inclusion of 'lease hold property' in the ambit of "immovable property" for the purposes of Rule 11UA(1)(c)(b) of the Income Tax Rules, 1962 (Rule) read with section 56(2)(x)(c) which is bad in law.
b) That the Ld. CIT(A) has further erred in sustaining the valuation wherein the stamp duty value of 'free hold' property has been considered at par with that of 'lease hold property' for the purposes of Rule 11UA(1)(c)(b).
c) That without prejudice to the above ground of appeal (b), if at all, the book value of 'lease hold' property has to be substituted with the stamp duty value of 'lease-hold' property which otherwise is not available for the property under consideration, then suitable adjustments to the stamp duty value of 'free-hold' property should have been carried out in order to arrive at the valuation of the stamp-duty value of a lease hold property.
d) That the Ld. CIT(A) has erred in not considering and recognizing the liabilities as outstanding in the balance sheet of the assessee to the tune of Rs. 20.16 crores, which was on account of FF&E Reserve (Furniture/Fixtures & Equipment Reserve), which is mandated by the agreement with Marriot and the amount of Reserves is to be created mandatorily and has to be used for specific purpose only.
e) That the Ld. CIT(A) has failed to appreciate that for the past few years and later years, substantial amount of expenses on account of FF&E (Furniture/Fixtures & Equipment) have been made from such reserve and, as such, the non-consideration of such liabilities for the purposes of valuation of shares as per rule 11 UA(1)(c)(b) is against the facts and circumstances of the case.
4. That in the facts and circumstances of the case, the Ld. CIT(A) has erred in facts and in law by upholding the order of the Ld. AO, where an addition amounting to Rs.1,58,10,093/- u/s 69C of the Act has been made on account of alleged payments of GWR and Bonus:
3a) That on the facts and circumstances of the case and in law, the Ld. AO and Ld. CIT(A) has erred in making the impugned addition by completely ignoring the submissions of the appellant and by invoking the provisions of Section 69C of the Act on the subject issue.
b) That the confirmation of addition by the Ld. CIT(A) is again non substantial since the impugned addition is an outcome of reliance on certain vague statements so recorded of the employees which were never confronted even to the Directors/Human Resources Management or other Senior Officials of the company and, such, without any particulars of cross examination of such employees, the whole basis of making the addition is on surmises and conjectures.
c) That the Ld. CIT(A) has failed to appreciate that the excel sheet on the basis of which, the addition have been made, does not depict the name of any employees of the assessee to whom, the alleged payments have been made.
d) That the Ld. CIT(A) has failed to consider that the impugned addition has been made by the Ld. Assessing Officer not relying upon the actual seized data and rather upon an excel sheet which was prepared during the course of search itself on the insistence of authorized officer.
5. That in the facts and circumstances of the case, the Ld. CIT(A) has erred by upholding the impugned addition of Rs.7,00,00,000/- made by the Ld. AO u/s 69C on account of alleged Cash Payments made to Sh. Harpal Singh by the appellant:
a) That the Ld. AO failed to make any independent enquiries before making the so-called addition on the basis of mere statement of Sh. Amar Iqbal Sigh Bedi, which was recorded during search and has also failed to appreciate the judgment of Hon'ble Apex Court in the case of CIT Vs Mantri Share Brokers, 96 taxmann.com 280, that the addition made on the basis of the statement alone is bad in law.
b) Notwithstanding the above said ground of appeal, the Ld. CIT(A) has failed to consider that whereas on one hand it has been alleged in the case of appellant that the alleged payment of Rs. 7 Crores has been made on account of investment in M/s Lok Priya Buildwell Pvt Ltd, whereas on the other hand, the alleged receiver i.e., M/s Lok Priya Buildwell Pvt Ltd.
Who was being assessed by the same assessing officer was not left Scot free and no addition on this account was made in its case.
c) Notwithstanding the above said ground of appeal, the Ld. CIT(A) has failed to appreciate that the so-called receipt was found from the independent residential premises of the director namely, Sh. Amar Iqbal Singh Bedi and the appellant company being separate person, no addition could have been made while framing the assessment in the hands of the company.
6. That in the facts and circumstances of the case, the Ld. CIT(A) has erred by upholding the impugned addition made by the Ld. AO, being disallowance of Rs.17,38,35,813/- u/s 37 of the Act on account of alleged Bogus Purchase from M/s RSG Packaging.
a) That the Ld. CIT(A) has erred by upholding the order of the Ld. AO wherein the plethora of documentary evidences submitted disproving the allegations made by the Ld. AO were submitted and such documentary evidence were ignored without finding any factual defect, whatsoever, and has failed to appreciate the E-way bills/invoices and other evidences as filed during the assessment proceedings.
b) That the Ld. CIT(A) has grossly erred in confirming the addition since no incriminating evidence was found during the year under consideration regarding the alleged bogus purchases made from RSG packaging and the such upholding of addition is also against the 4 judgment of Hon'ble Delhi High Court in the case of Saksham Commodity, reported in 161 taxmann.com 485, in which, it has been held that the addition in search assessments has to be made only on the basis of evidence found during the course of search for that year.
c) That the Ld. CIT(A) has erred by ignoring the facts that the impugned addition has been made merely by extrapolation of certain impugned evidences found and analyzed for the AY 2022-23 and not for the year under consideration, i.e. AY 2021-22 wherein the whims and fancies only the impugned addition has been made.
7. That in the facts and circumstances of the case, the Ld. CIT(A) has erred in facts and in law by sustaining the additions of Rs. 2,28,12,970/- made by the Ld. AO u/s 36(1)(iii) of the Act:
a) that the Ld. CIT(A) and the Ld. AO failed to appreciate the documentary evidence and the submissions made by the appellant on this issue and the addition has been made in the instance case without appreciating the fact that the appellant was having sufficient availability of interest free funds, hence, the provisions of Section 36(1)(iii) of the Act could not have applied in the instant case specially on account of commercial expediency and the honorable SC Judgment in S.A. Builders v. CIT 288 ITR 1 SC.
b) That Ld. CIT(A) erred in upholding the factual errors committed by the Ld. AO while determining the quantum of addition made u/s 36(1)(iii) of the Act.
c) That the Ld. CIT(A) and the Ld. AO has failed to follow principles of consistency as the same AO has assessed the assessee's case for AY 2023-24 and in such assessment no adverse inference has been taken over this issue.
8. That the Ld. CIT(A) has failed to consider that any addition based on digital evidence has to be considered as per the guidelines provided in the Digital Evidence Investigation Manual so issued by NADT, Nagpur and the same has been held to be binding upon tax authorities as per the judgment of Hon'ble High Court of Madras in Saravana Selvarathnam Retails (P.) Ltd. V. Commissioner of Income-tax Appeals, in [2024] 160 taxmann.com 287 (Madras).
9. That the CIT(A) has failed to appreciate that the approval so granted by the Range Head was in a mechanical manner, without application of any independent mind and, thus, the approval having been granted in the present case deserves to be quashed.
10. That the appellant craves leave to add to or amend the aforesaid grounds before the appeal is finally heard or disposed off.
1.3 The Assessee has filed additional grounds of appeal on 18-06-2025 which reads as under:
1. That the assessment framed under Section 143(3) is bad in law, as it pertains to a year immediately preceding search year where the mandatory approval as prescribed under Section 148B of the Income Tax Act, 1961, has not been followed. That in the absence of compliance with the provisions of section 148B read with CBDT issued the Manual of Officer Procedure in February 2003, that assessment is vitiated and liable to be annulled.
2. That without prejudice to ground No.3 with regard to addition made by the Assessing Officer u/s 56(2)(x)(c), the same is not maintainable in the light of the judgment of Hon'ble Gujarat High Court in the case of PCIT Vs. Jashawanlal Shah, (154 taxmann.com 568), being fresh preferential allotment of shares to the appellant by M/s Kranti Buildwell Pvt. Ltd."5
Since the additional grounds are merely legal grounds which do not require appreciation of new facts, the same are admitted and taken on records in terms of decision of Hon'ble Apex Court in the case of National Thermal Power Co. Ltd. (229 ITR 383).
1.4 The Ld. AR advanced legal arguments as well as arguments on merits and drew attention to various documents as placed in the paper book. The detailed brief synopsis has also been filed during the course of hearing before us. The Ld. CIT-DR also advanced arguments and extensively controverted the arguments of Ld. AR. Having heard rival submissions and upon perusal of case records, our adjudication would be as under. 1.5 The assessee being resident corporate assessee was subjected to search action by the department u/s 132(1) on 08-12-2021 which has led to impugned assessment on the assessee. The assessee filed return of income u/s 139(1) on 31-03-2022 declaring income of Rs.48.48 Crores which was subjected to scrutiny after obtaining administrative approval of Ld. Pr. CIT(C), Gurugram vide his office letter F.No. Pr.CIT(C)/ ITO(Hq.)/GGM/2022-23/1128-29 dated 17-06-2022 and through DIN & Document No.ITBA/AST/S/118/2022-23/1043583455(1) dated 27-06-2022. During the course of assessment proceedings, various notices were issued by Ld. AO to the assessee u/s 142(1) from time to time which were duly been responded to by the assessee and the assessee filed detailed submissions and documents. On the basis of the same, various additions have been made by Ld. AO in the hands of the assessee which has been 6 confirmed by Ld. CIT(A). Aggrieved, the assessee is in further appeal before us. The additions as made by Ld. AO are enumerated as under.
2. Addition for Investments in Shares 2.1 The first issue that was identified by Ld. AO was investment by the assessee in shares of certain entity. It was noted by Ld. AO that the first five-star hotel of Chandigarh JW Mariott as situated at Plot No.6, Sector 35B, Chandigarh (hereinafter referred to as 'hotel property') was owned by one Shri Harpal Singh and his wife Smt. Rachna Singh through a corporate entity by the name M/s Kranti Buildwell Pvt. Ltd. (in short 'KBPL'). M/s KBPL had wholly-owned subsidiary (Wos) by the name M/s Lok Priya Buildwell Pvt. Ltd. (In short 'LBPL'). The said hotel as well as the land on which it was built was owned by M/s LBPL. M/s KBPL held 99.9% shares in M/s LBPL and by virtue of this shareholding, it had complete rights over the assets of M/s LBPL including the hotel property. Shri Harpal Singh and his wife held 100% shares in M/s KBPL and thus they exercised absolute rights on the property of M/s KBPL and in turn, of M/s LBPL.
2.2 During the course of search at assessee's corporate premises at Mohali, certain documents were found which were seized as Annexure A5 (Page Nos. 165 to 168). As per these Pages, the assessee was allotted 14,06,259 number of shares of M/s KBPL by way of fresh allotment on 31- 03-2021. The shares were having face value of Rs.10/- per share and the same were issued at a premium of Rs.523.33 per share. These documents established that M/s KBPL had allotted equity shares to the assessee on 31-03-2021 for a total consideration of Rs.75 Crores. The revised 7 shareholding pattern of KBPL as on 31-03-2021 after allotment of shares to the assessee was as under: -
Shareholding of M/s KBPL as on 31-03-2021 No. Name of Shareholder No. of equity Percentage of shares held shareholding
1. Shri Harpal Singh 14,99,999 51.61%
2. Smt. Rachna Singh 1 0.01 %
3. Torque Pharmaceuticals Pvt. Ltd. (assessee) 14,06,259 48.38% Total 29,06,2590 100.00 % 2.3 During search at hotel property, one original signed agreement was found which was seized as per Annexure A-1 Team HK1(2) (Pages 1-6).
The agreement was between the assessee, Shri Harpal Singh / Mrs. Rachna and M/s LBPL. During search at corporate office of the assessee, one unsigned agreement between the assessee and M/s KBPL, M/s LBPL and Shri Harpal Singh was also found which was marked as Annexure A-5, TK-1 (Pages 60-64).
2.4 The signed agreement was in the shape of shareholders' agreement (SHA) dated 12-10-2020 between Shri Harpal Singh, Mrs. Rachna, the assessee and M/s LBPL. The agreement was with respect to purchase of 50% shares in M/s KBPL by the assessee. As per this agreement, Shri Harpal Singh agreed to sell his 7.50 Lacs number of shares to the assessee for a total consideration of Rs.150 Crores i.e., Rs.2000 per share. As per the agreement, the assessee was to appoint two directors on the board of M/s KBPL within 180 days from execution of the said agreement. Thus, as per this agreement, the assessee agreed to buy 50% ownership in M/s KBPL and agreed to pay Rs.150 Crores to acquire 7.50 Lacs number of shares as belonging to Shri Harpal Singh. By virtue of this agreement, the 8 assessee would become 50% owner in Wholly-owned subsidiary (wos) M/s LBPL who ultimately owned the hotel property. It was specifically mentioned that the assessee would have ownership rights in the assets of the subsidiary as well as that of M/s KBPL. One peculiar feature of this agreement was that the assessee was desirous of investing Rs.150 crores for purchase of 7.50 Lacs number of shares of Shri Harpal Singh in M/s KBPL. There was no mention of fair market value (FMV) of shares to be transferred. It was also mentioned that the shareholders would maintain shareholding interest in the company in the specified portions i.e., 50% stake by Shri Harpal Singh / Rachna Singh and 50% stake by the assessee. The agreement thus clearly stated that the assessee had valued 50% ownership of the hotel property to be Rs.150 Crores. It would further imply that by purchasing 50% shares in M/s KBPL, the assessee would be gaining control over 50% of the assets of the holding company as well as on the assets of Wos i.e., M/s LBPL which ultimately owned hotel property. Thus, assessee would invest total of Rs.150 crores to buy 7.50 Lacs number of shares of the holding company to gain control over 50% ownership of the hotel property which is ultimately operated by M/s LBPL. However, the assessee stated that this agreement was entered into by the director of the assessee company in little haste. Nevertheless, Ld. AO concluded that the assessee valued 50% ownership at Rs.150 Crores whereas the final transaction was completed at Rs.75 Crores. 2.5 To bolster its allegation, Ld. AO referred to unsigned and undated shareholder's agreement which was between M/s KBPL, M/s LBPL, Shri Harpal Singh and the assessee. In this agreement, M/s KBPL agreed to 9 allot additional 15 Lacs equity shares to the assessee for Rs.150 Crores at Rs.1000/- per share. Therefore, as per this agreement also, 50% of ownership of the hotel property was estimated at Rs.150 Crores. After allotment of 15 Lacs new equity shares to the assessee, both parties i.e., Shri Harpal Singh / Rachna Singh and the assessee would each become 50% owner in M/s KBPL and both the parties would maintain their 50% shareholding in M/s KBPL after execution / completion of the deal. The voting rights would be in proportion to the respective share capital as held in the company. Therefore, the sole intent of the assessee was to acquire 50% ownership in M/s KBPL by paying Rs.150 Crores.
2.6 The Ld. AO made further reference to one hand-written document which was seized as Annexure A-3 (Page 11). In this Page, the value per share was mentioned as Rs.1173/- which was computed as per Balance Sheet dated 31-03-2020 of M/s KBPL. As per these calculations, the FMV of shares of M/s KBPL would be Rs.1173/- per share. The 14,06,259 number of shares, if issued at Rs.1173/- per share, would aggregate to Rs.165 Crores approximately which was closer to the agreed value of Rs.150 Crores.
2.7 On these facts, Ld. AO concluded that it was decided long back between the parties that the total investment to be done would be Rs.150 Crores. However, the method and mode kept on changing to suit their plans and designs to evade taxes by undervaluing the deal. Ultimately, Rs.75 Crores was shown to be invested in the shares whereas the balance Rs.75 Crores was planned to be compensated through bogus or colorable loans through hard cash.
102.8 The Ld. AO then referred to Page-10 of Annexure A-3 which was found from the corporate office of the assessee. The same was hand- written document dated 06-03-2021 which was confronted to Shri Navneet Gupta (Vice President-Finance of the assessee company). His statement was recorded u/s 132(4) on 09-12-2021. In reply to Q. No.47, Shri Navneet Gupta acknowledged that the said document was found and seized from the room of Shri AIS Bedi (Executive Director of the assessee company) and the document was written by him on the instructions of Shri AIS Bedi. The said document was about the deal between M/s KBPL and the assessee. The total deal was for Rs.150 Crores. A sum of Rs.75 Crores had already been paid towards share capital of M/s KBPL and Rs.25 Crores out of Rs.50 Crores had been paid as unsecured loan to M/s LBPL till 06- 03-2021. The cash involved was Rs.25 Crores but in his presence, no cash was paid / delivered to the owner of M/s KBPL or M/s LBPL. His reply to Q. No. 49 was as under:-
Q.49 Please explain the other entriesmentioned on the Page 10 of Annexure A3. Ans: 60 crores was paid to Kranti for shares till 26.2.2021 and 15 crore was paid by 15.3.2021, Further, 15 crore was paid to Lokpriya as unsecured loan by 6.3.2021. Out of 25 crores cash to be given, 7 crore cash was given by 6.3.2021 and 18 crores cash is pending. As per my knowledge the cash to be given is still pending. It was decided that Lokpriya Buildwell can pay interest on Unsecured Loan @ 7.5%, No interest has been paid till date. The returns from the investment in JW Mariott can be in the form of Salary to directors, repayment of unsecured loans and dividend on share capital issued. We expect a return of 15% on the investment per annum. There is no agreement regarding this deal with JW Mariott till date. 15 crores had to be paid by Kranti / Lokpriya to SBI and 75 Crore to Edelweiss through the money received from Torque. The profit before depreciation of Lokpriya is 18 croresout which 2.5 crore has to be paid to Municipal Corp Chd.11
The Ld. AO again observed that he expressly stated that the deal between the assessee and M/s KBPL was for Rs.150 Crore and it was intended to be the final investment in hotel property.
2.10 The seized Page-10 as well as the statement of Shri Navneet Gupta was confronted to Shri AIS Bedi during the course of recording of his statement u/s 132(4) on 09-12-2021. In reply to Q.No.20, he admitted that there was a deal by the assessee to invest Rs.150 Crores for acquisition of 50% ownership of the hotel property. In reply to Q.No.22, he admitted that the page was written as per his directions. The total deal was worth Rs.150 Crore out of which Rs.25 Crores was planned to be paid in the form of cash. Out of the same, Rs.7 Crores had already been paid whereas they had no intention of paying the remaining amount in cash. In reply to Q.No.21, it was stated that there was an agreement for the deal. In all, Rs. 107 Crores had been paid which include Rs.75 Crores for allotment of Shares of M/s KBPL to the assessee, Rs.25 Crores was paid in the form of unsecured loans to M/s LBPL and Rs.7 Crores was paid in cash. The remaining amount was yet to be paid. It was thus established that the total deal was worth Rs.150 Crores to be invested by the assessee for granting 50% ownership in the hotel property.
2.11 One valuation report of Shri Kashish Khunger was seized as Annexure A-5 (Pages 135-149). The same was valuation report dated 31-
03-2021 for determination of Fair market value (FMV) of equity shares of M/s KBPL. The valuer adopted Net Assets Value (NAV) approach for valuation of shares of M/s KBPL. The said valuation was based on audited financials of M/s KBPL for FY 2019-20. The valuer arrived at FMV of shares 12 at Rs.526.75 per share. While valuing, non-current investments were taken as Rs.88.99 Crores whereas the same, as per balance sheet as on 31-03- 2020, was Rs.172.05 Crores. The value of Rs.88.99 Crores was stated to be based on book-value method. The statement of Shri Kashish Khunger was recorded u/s 131(1A) on 09-05-2022 and this issue was confronted to him. His reply was as under:
I am providing the working of the value of "non-current investment" arrived at Rs.8899.57 lakhs under my signature. Fair Market Value of assets of Lokpriya Buildwell Ltd. shown in its Balance Sheet as on 31.03.2020 in the head "shareholder's fund" is taken as its fair market value. It is based on book value method. While calculating the fair market value in the case of Kranti Buildwell Pvt. Ltd., asset value is taken at proportionate to the shares held by Kranti Buildwell Pvt. Ltd. It is worthwhile to mention here that I have prepared this report in compliance with international valuation standard (IVS-105) for the purpose of Companies Act, 2013 and not for the purpose of Income Tax Act 1961. in addition, I prepared this report for the purpose of proposed issuing / allotment of new shares and not for transfer of equity shares. Further, I want to add that valuation report as on 31.03.2020 is valid up to 06 six monthsi.e.upto 30/09/2020, not later than this date.
However, finding various flaws in the said valuation, the value of Rs.526.75 per share as computed by the valuer was rejected by Ld. AO. The Ld. AO maintained that the investment made by the assessee to acquire 50% ownership in the hotel property was undervalued and FMV of the shares needed to be revalued as per the provisions of the Act.
2.12 The signed agreement was confronted to the assessee during the course of assessment proceedings. The assessee opposed the allegation of Ld. AO on the ground that the agreement was entered into by the director in little haste which was motivated by the attraction of buying 50% stake in hotel property and the same was done without making proper due diligence and valuation of its shares. The assessee, after making due 13 diligence, market analysis and valuation of shares, jotted the offer down to Rs.75 Crores. On the date of subject negotiation, the relevant shares of Shri Harpal Singh and its original documents were still in possession of the banker and therefore, the assessee had offered an alternative wherein it suggested for issue of fresh equity shares by M/s KBPL against the underlying consideration. The negotiation went back and forth and finally the transaction was done at Rs.75 Crores for newly / freshly issued shares being issued to the assessee. The assessee justified valuation on the basis of Balance Sheet of KBPL as on 31-03-2021 which was arrived at Rs.420.73 per share as per Rule 11UA(1)(c)(b). On these facts, the assessee opposed application of provisions of Sec.56(2)(x)(c). The valuation of Rs.420.73 Lacs as furnished by the assessee has been extracted on Page Nos.62 to 65 of the assessment order. Upon perusal of the same, it could be seen that firstly, the assessee has computed book value per share of M/s LBPL as under: -
Calculation of Fair Market Value of Shares of M/s Lok Priya Buildwell Pvt. Ltd. as per Rule 11UA(1)(c)(b) No. Particulars Amount A A=Book Value of all the assets Rs.2,58,79,07,352/-
(Other than Jewellery, artistic work, shares, securities and immovable property) a. (Rs,121,35,42,421/-) in the Balance Sheet
1.Land As reduced by:- 1. Rs.(38,35,591/-)
(i) any amount of Income Tax paid, if any, less the amount of Income Tax 2. Rs,(3,29,13,181/-) Refund claimed, if any; and
(ii) any amount shown as asset including the amortized amount of deferred expenditure which does not represent the value of any asset;
1. TDS / TCS for FY 2020-21
2. Deferred Tax Assets (Net) Total A Rs.1,33,76,16,159/-
B The price which the jewellery and artistic work would fetch if sold in the open Nil market on the basis of the valuation report obtained from a registered valuer Total B Nil 14 C Fair market value of shares and securities as determined in the manner Nil provided in this rule Total C Nil D The value adopted or assessed or assessable by any authority of the a. Rs.121,35,42,421/-
Government for the purpose of payment of stamp duty in respect of the immovable property
1. Land Total D Rs.121,35,42,421/-
L L= book value of liabilities shown in the Balance Sheet
1. Other Long-Term liabilities 1. Rs.1,59,91,99,882/-
2. Other Current Liabilities 2. Rs.3,64,15,426/-
3. Short Term Provisions 3. Rs.12,22,33,336/-
4. FF & E Reserve (As per Note 2) 4. Rs.20,16,03,159/-
Total L Rs,1,95,94,51,804/-
Total fair market value of shares of M/s Lok Priya Buildwell Pvt. Ltd.= Rs.59,17,06,776/-
(A+B+C+D-L)
Fair market value of total stake of M/s Kranti Buildwell Pvt. Ltd / (47045295 Rs.59,16,47,605/-
shares of M/s Kranti Buildwell Pvt. Ltd.) / 47050000 (total number of shares issued and subscribed for Lok Priya Buildwell Pvt. Ltd. as on date Thereafter, by substituting the book value of investment as made by M/s KBPL in M/s LBPL with aforesaid arrived value of Rs.59,16,47,605/-, the value of shares of M/s KBPL has been computed by the assessee as under: -
Calculation of Fair Market Value of Shares of M/s Kranti Buildwell Pvt. Ltd.
No. Particulars Amount
A A=Book Value of all the assets Rs.250,99,72,730/-
(Other than Jewellery, artistic work, shares, securities and immovable property) in a. (Rs.172,05,00,000/-)
the Balance Sheet
(Investment in shares of M/s Lok Priya Buildwell Pvt. Ltd.) As reduced by: - Nil
(i) any amount of Income Tax paid, if any, less the amount of Income Tax Refund claimed, if any; and
(ii) any amount shown as asset including the amortized amount of deferred expenditure which does not represent the value of any asset;
Total A Rs.78,94,72,730/- B The price which the jewellery and artistic work would fetch if sold in the open Nil
market on the basis of the valuation report obtained from a registered valuer Total B Nil C Fair market value of shares and securities as determined in the manner provided Rs.59,16,47,605/-
in this rule(Investment in shares of M/s Lok Priya Buildwell Pvt. Ltd.) 15 Total C Rs.59,16,47,605/-
D The value adopted or assessed or assessable by any authority of the Government Nil for the purpose of payment of stamp duty in respect of the immovable property Total D Nil L L= book value of liabilities shown in the Balance Sheet Rs.75,00,20,000/-
Total L Rs.75,00,20,000/-
Total fair market value of shares of M/s Kranti Buildwell Pvt. Ltd.= (A+B+C+D-L) Rs.63,11,00,335/-
PV The paid value of such equity shares Rs.10
PE Total amount of paid-up equity share capital as shown in the Balance Sheet Rs.1,50,00,000/-
Fair market value per share (A+B+C+C-L) x PV/PE Rs.420.73 per share
The assessee, accordingly, justified the issue price of Rs.533.33 per share and opposed application of provisions of Sec.56(2)(x)(c). 2.13 The Ld. AO questioned the aforesaid valuation on various grounds. In one of the objections, Ld. AO pointed out the Land and Building as held by M/s LBPL was considered at Book Value whereas in terms of Rule 11UA(1)(c)(b), the fair market value of Land & Building should have been considered as against the book value as taken by the assessee. Further, while valuing the shares of M/s LBPL, Furniture, fixture and equipment (FF&E) reserves for Rs.20.16 Crores were considered as liability and reduced from valuation. The same being reserves in nature, could not be reduced from assets. The assessee clarified that the land was under
lease from Municipal Corporation, Chandigarh to M/s LBPL for which the assessee was paying ground rent. The copy of lease deed was furnished to Ld. AO. It was stated that the land on which hotel property was constructed was leased out by Municipal Corporation, Chandigarh to M/s LBPL for a period of 99 years only. The land was not freely transferrable and M/s LBPL enjoyed limited rights with respect to the said land. Therefore, the value of the Land was rightly considered at its Book value. The building was on the 16 lease hold land and therefore, the same was also taken at book value. The FF&E component represents Furniture, Fixtures and Equipment Reserve Account. It was explained that M/s LBPL was under franchise agreement with JW Mariott which mandated creation of this reserve. As per the contractual terms, M/s LBPL was under contractual obligation to set aside this sum for regular repair and maintenance. Only the nomenclature was reserves but the said sum represents ascertained liability in relation to the repair and maintenance as mandated under the contract. The said appropriation could be considered at par with the depreciation on assets which constitute charge on the assets and set aside by the business for replacement of the asset on account of regular wear and tear. As per the terms of agreement, the reserve could be used only for specified purposes as detailed in the agreement. No sort of withdrawals could be made for any other purposes. Therefore, this was not mere reserves but ascertained liability for the assessee and accordingly, rightly reduced from the assets. 2.14 Upon perusal of assessee's documents & submissions, Ld. AO observed that land measuring 12694.422 Square Yard was allotted to M/s LBPL on lease hold basis for Rs.101.37 Crores with annual ground rent of Rs.253.42 Lacs for a period of 99 years. The land was allotted on 11-10-
2006 and the collectors' rates as applicable on that date were perused. Applying circle rate of Rs.25,000/- per square yards, the land would be valued for Rs.31.37 Crores whereas it was allotted for Rs.101.37 Crores i.e., at a premium of approx. 230% from existing circle rate. As per the terms of allotment, the assessee could transfer rights in the site subject to the condition that 50% of the unearned increase in the value of the land at 17 the time of sale shall be payable to Municipal Corporation, Chandigarh. Therefore, the assessee was not correct in taking the book value of Land & Building while arriving at the share valuation. In terms of Sec.27(iiib), the assessee would be deemed to be the owner of leasehold land which was taken on lease of 99 years from appropriate authority. Therefore, the contention of the assessee could not be accepted.
2.15 The Ld. AO thereafter proceeded to value the said land on the basis of prevailing stamp duty value of the property. For this purpose, information was called for by Ld. AO u/s 133(6) from Sub-Registrar, UT, Chandigarh on 16-12-2022. It transpired that the collectors' rate as applicable from 18-09-2017 would apply on 31-03-2021. The circle rate for freehold property (SCO / SCF / Bay shops in Madhya Marg, sub city) was Rs.4,16,988/- per square yard which would give land valuation of Rs.529.34 Crores. The said rate would be justified since the initial allotment was at 230% of the existing circle rates. This value was adopted for land valuation. The built-up area of the building was estimated at Rs.800/- per square feet which valued the building at Rs.24.47 Crores (built up area 305928.17 x 800/-). The total value of Land and Building was thus considered by Ld. AO to be Rs.553.81 Crores (Rs.529.34 Crores + Rs.24.47 Crores). The assessee's claim qua FF&E reserves was also rejected since the said reserves would ultimately be realized by the assessee company. The reserves were in the nature of unascertained liability. The value per share before issuance of equity shares by M/s KBPL was computed at Rs.2633.69 whereas the value per share after issuance of fresh equity shares by M/s KBPL was computed at Rs.1316.845 per share. Finally, the 18 value per share of M/s KBPL was worked out at Rs.1316.845 as against allotment price of Rs.533.33 per share. In such a case, the provisions of Sec. 56(2)(x)(c) would apply as the assessee received the shares of M/s KBPL at less than its FMV. The differential in the two prices was to be considered as deemed income of the assessee u/s 56(2)(x)(c). 2.16 The Ld. AO perused the provisions of Sec.56(2)(x)(c) and observed that the assessee received shares of M/s KBPL for less than the FMV and the differential was to be considered to be the income of the assessee. The FMV of shares, as per explanation to this section, was to be calculated as per Clause 56(2)(vii) which provided that FMV was to be calculated as per Rule 11UA(1)(c)(b). Applying the value of Rs.1316.845 per share, Ld. AO computed difference of Rs.110.18 Crores which would be deemed to the income of the assessee u/s 56(2)(x)(c) and accordingly, show-caused the assessee.
2.17 The assessee opposed the same on three grounds viz. (i) the immoveable property as mentioned in Rule 11UA(1)(c)(b) does not include leased rights of the land; (ii) The leasehold rights should not be equated to freehold rights by assessing the stamp valuation at par with circle rates existent in the area; (iii) While valuing the FMV of shares of M/s KBPL as per Rule 11UA(1)(c)(b), the liability associated with the transfer of leasehold rights i.e., transfer of 50% unearned profits to the Municipal Corporation and lease rental for 99 years should be recognized and due benefit need to be given. However, all these objections stood rejected by Ld. AO. 2.18 With respect to assessee's first objection, Ld. AO noted that during the course of search proceedings, two agreements were found and 19 seized. One of the agreements was a signed agreement whereas the other agreement was an unsigned agreement. Both of these agreements indicate that the assessee always wanted to acquire 50% stake in M/s KBPL in order to enjoy 50% ownership of M/s LBPL which ultimately owned hotel property. The understanding would show that both the agreements valued the deal in the range of Rs.150-165 Crores. The 50% ownership of hotel property as valued by the assessee and M/s KBPL was in the range of Rs.150-165 Crores. It was further revealed that the deal was modified to include cash component. It was decided that Rs.75 Crores would be invested in the form of equity, 25 Crores would be paid in cash which went to Shri Harpal Singh and Rs.50 Crores was payable in the shape of unsecured loan to M/s LBPL. Thus, 50% ownership was always valued at Rs.150 Crores. The assessee categorically accepted the fact that the reason to acquire the shares of M/s KBPL was for the purpose of owning 50% share in the hotel property. The whole purpose of issuance of shares was to eventually transfer 50% rights to enjoyment of hotel property through 50% ownership in M/s LBPL.
2.19 In the said background, in order to calculate FMV of shares of M/s KBPL, the Explanation to Sec.56(2)(vii) needs to be referred. As per clause (b) of said Explanation, FMV of property other than immoveable property means the value determined in accordance with the method as may be prescribed. The prescribed method to calculate FMV was provided in Rule 11UA of Income Tax Rules. By this explanation, Sec.56(2)(vii) gives primacy to the method prescribed and it would imply that the words appearing in Rule 11UA need to be interpreted in terms of what is intended 20 in Rule 11UA. The Rule 11UA(1)(c)(b) provided that FMV of unquoted equity shares shall be the value on the valuation date. The value of assets other than certain categories of assets in the Balance Sheet of the assessee should not be valued at their book value. Immoveable property was one such asset which was not to be valued at book value but the same was to be valued as per method prescribed. During the valuation of shares of M/s KBPL as per Rule 11UA(1)(c)(b), the valuation of shares of M/s LBPL also needed to be done as per the said rule since M/s KBPL held substantial shares in M/s LBPL. M/s LBPL was the undisputed owner of leasehold rights of the land on which the hotel was located. The Ld. AO referred to sub-clause (2) of Rule 11UA which provide that for the purpose of Section 56(2)(viib), FMV of the shares needs to be calculated as per method specified in Rule 11UA(2)(a) but for the purpose of Sec.56(2)(x)(c), FMV was required to be calculated as per the method prescribed in Rule 11UA (1)(c)(b). Thus, two different methods of valuation were prescribed. The Rule 11UA(2)(a) was applicable to Sec.56(2)(viib) which provide that the assets were to be considered at book value whereas Rule 11UA (1)(c)(b) was applicable for the purposes of Sec.56(2)(x)(c) which provide for taking the value of assets other than immoveable property, jewellery, artistic work, shares and securities at their book value. Therefore, all the specified assets should not be valued at book value for the purpose of Sec.56(2)(x)(c) which was actually applicable to the case of the assessee. The Ld. AO also referred to the provisions of Sec.2(47)(vi) which provide that transfer would include any transaction (whether by way of becoming member of, or acquiring shares in, a co-operative society, company or other 21 association of persons or by way of any agreement or any arrangement on in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immoveable property. The whole purpose of present transaction was to transfer 50% ownership rights in the hotel property. As per Explanation-1 to Sec.2(47)(vi), immoveable property shall have the same meaning as mentioned in clause (d) of Sec.269UA which includes any rights in land and building. Therefore, any agreement which has the effect of transferring / enabling the enjoyment of any immoveable property, the same would be inclusive of rights in the immoveable property. Therefore, the term immoveable property would include the leasehold rights also. As per General Clauses Act, immoveable property shall include land, benefits arising out of land and things attached to the earth or permanently fastened to anything attached to the earth. It was thus amply clear that the immoveable property as appearing in Rule 11UA(1)(c)(b) includes leasehold rights as well. Therefore, the contention that the meaning of immoveable property needs to be inferred as per the provisions of Sec.56(2)(vii) could not be accepted, Further, conjoint reading of Sec.50C(1) and Sec.54D(1) would reveal that immovable property is intended to include any right associated with the land or building which inherently implies that the leasehold rights would be an immoveable property. The assesses himself categorized the lease rights as immoveable property in valuation report as submitted by him. In this report, the immoveable property of M/s LBPL was valued at book value which is prohibited under Rule 11UA(1)(c)(b) Therefore, the objection so raised by the assessee was rejected. The Rule 11UA(1)(c)(b) mandates that the 22 immoveable property needed to be valued as per the value adopted or assessed or assessable by any authority of the Government for the purpose of stamp duty in respect of the immoveable property. Finally, the said objection of the assessee stood rejected.
2.20 The second objection was that the leasehold rights were equated with the freehold rights by assessing the stamp valuation at par with the circle rate as existing in the area. For this, Ld. AO maintained that the hotel site was allotted to the assessee at a premium of more than 230% from existing circle rate. Therefore, assessing lease hold rights at existing commercial collectors' rate was justified. Similar comparable rates did not exist since the land in question was a unique hotel site. Nevertheless, Ld. AO referred to a sale deed dated 09-07-2019 with respect to SCO property situated at Sector 9-D, Chandigarh wherein the circle rate was Rs.3,08,880/- per square yards whereas the sale was executed at much higher price of Rs.4,16,988/-. Therefore, the aforesaid objection was rejected.
2.21 The third objection was to consider the twin liabilities as associated with the hotel property. The first liability was payment of 50% unearned profits to Municipal Corporation and lease rental for remining period of the lease. The Ld. AO noted that valuation date was 31-03-2021 and the Balance Sheet as on 31-03-2021 need to be taken into consideration. The valuation has to be done on the basis of assets and liabilities as recognized by M/s KBPL and M/s LBPL on valuation date. These two liabilities were not recognized and therefore, the same was not to be considered. Even otherwise, only ascertained liabilities were to be 23 considered. The unearned profit as payable to Municipal Corporation would be ascertained liability once the land was actually sold which was not the case here. The lease rental for 99 years was also not ascertained liability. If the lease rights are transferred at any point of time by way of sale, then there would no longer be rental payments and therefore, lease rentals for 99 years were not ascertained liabilities. The argument to consider FF&E reserves as liabilities was also rejected.
2.22 The whole position was finally summarized by Ld. AO on Page- 111 as under: -
1. The assessee had entered into multiple agreements with Shri Harpal Singh, M/s KBPL, M/s LBPL (as seen from the seized agreements during the course of search) which had valued the deal of 50% ownership of JW Marriot at 150-165 Cr.
2. However, at the end 50% ownership in the shares of M/s KBPL was acquired by the assessee at a valuation of 75 Cr only leading to the applicability of Section 56(2)(x)(c).
3. In the valuation submitted by the assessee, it was seen that the leasehold rights in JW Marriott, held by M/s LBPL, were valued at book value which were in contravention of Rule 11UA(1)(c)(b).
4. The assessee changed it's stance multiple times during the assessment proceedings and after SCN claimed that leasehold rights were not to be considered as "immovable property"
as intended in Rule 11UA(1)(C)(b) for the calculation of FMV of shares as per Section 56(2)(x)(c).
5. However, Section 2(47)(vi), Section 269UA, General Clause Act and the mandate of Section 56(2)(x)(c) along with the intended meaning in Rule 11UA and conjoint reading of Section 50C and Section 54D(1) all point towards the fact the assessee's contention had no meaning. The assessee itself, submitted this contention for the first time in response to the SCN, while during the assessment proceedings, M/s LBPL, M/s KBPL and the assessee have classified "lease hold right" as a immovable property while calculating the FMV of shares as per Rule 11UA(1)(c)(b).
6. Based on the information received from sub-registrar UT, the lease hold rights were assessed at existing circle rates in the vicinity for the purpose of determination of stamp value.24
7. The contention of the assessee that 50% unearned profits and the ground rent for 99 years may be regarded as liability for the valuation as per rule 11UA(1)(c)(b) was rejected since both of them are unascertained liability and also not recognized as liability.
8. Further, FF&E reserves were not considered as a liability for calculation as per Rule 11(UA)(1)(c)(b) because the same were in the nature of reserves/unascertained liability.
9. Keeping in mind the above calculation the FMV of shares of M/s KBPL was calculated as 1316.845 per shares.
2.19 Finally, the FMV of shares of M/s KBPL, as allotted to the assessee, was adopted at Rs.1316.845 per share as against Rs.533.33 as transacted by the assessee. The differential of the two was deemed to be the income of the assessee as per the provisions of Section 56 (2)(x)(c) read with Rule 11UA)(1)(c)(b). The same stood quantified at Rs.110,18,25,132/- which was added to the income of the assessee.
3. Issue of Cash Payment to Shri Harpal Singh 3.1 Proceeding further in the same directions, Ld. AO proceeded to make the addition of Rs.7 Crores as stated to be paid by the assessee to Shri Harpal Singh in the above deal. To make the addition, Ld. AO referred to Page No.10 of Annexure A-3 as enumerated by us in preceding para 2.8. This page was confronted to Shri Navneet Gupta. In reply to Q. No.47, it was stated by him that the document was written by him on the directions of Shri AIS Bedi (Executive Director of the assessee company) and the said document was with respect to deal of JW Mariott between M/s KBPL and the assessee. The total deal was for Rs.150 Crores. The sum of Rs.75 Crores was already paid towards share capital of M/s KBPL and 25 Crores out of 50 Crores was paid as unsecured loans to M/s LBPL till 06-03-2021. He was not aware if any cash was paid to the owner till now as no such 25 transaction had happened in his presence. In reply to Q. No.49, he, inter- alia, stated that out of Rs.25 Crores cash to be given, Rs.7 Crores cash was given by 06-03-2021 and Rs.18 Crores cash was pending. The cash to be given was stated to be still pending. Shri AIS Bedi, in reply to Q. No.22, also admitted that Rs.25 Crores was planned to be paid in the form of cash out of which Rs.7 Crores had already been paid and they had no intention of paying the remaining amount in cash.3.2 To bolster its allegation, Ld. AO referred to Annexure A-1, Page No.37
which was a receipt dated 11-10-2020 for Rs.5 Crores by Shri Harpal Singh towards sale of 50% share in hotel property. Shri AIS Bedi, in reply to Q. No.24 admitted the said fact. A statement was recorded from Shri Harpal Singh u/s 131(1A) and he admitted that the said receipt was issued by him. However, he stated that this was mere arrangement to raise capital to square off the deal. There was no scope of cash transactions and nothing was transacted. However, the said statement stood rejected by Ld. AO on the ground that no one would issue such cash receipt without receiving the money. Accordingly, the assessee was show-caused for proposed addition of unaccounted cash expenditure by the assessee for Rs.7 Crores u/s 69C. The assessee, vide reply dated 28-04-2023, denied exchange of cash in the deal and stated that the statement was given under pressure which was also rejected by Ld. AO.
3.3 The final position as emerging out from the above facts was summarized by Ld. AO as under: -
1. Genuineness of the cash receipt of Rs. 5 Crore (Page 37, Annexure A1) has been established beyond doubt, as both Sh. Harpal Singh and Sh. AIS Bedi have acknowledged its genuineness.26
2. Page 10, Annexure A3 corroborated the cash receipt. The genuineness of Page 10 Annexure A3 has also been established beyond doubt. The same has been admitted to be written by Sh. Navneet Gupta under consultation with Sh. AIS Bedi, director of M/s TPPL
3. Further Sh. AIS Bedi had categorically admitted that M/s TPPL has paid Rs.7 Cr to Sh. Harpal as part of the deal.
4. In Para 1, it has been categorically established that the valuation of shares of M/s KBPL issued to M/s TPPL has been under-valued. This further corroborates the cash expenses of Rs.7 Cr given to Mr. Harpal Singh by M/s TPPL.
Finally, the source of payment of Rs.7 Crores was held to be unexplained and accordingly, added to the income of the assessee u/s 69C.
4. Addition of cash expenditure:
4.1 During search at Unit-III of the assessee at Baddi, Solan, all the data and information as contained in the desktop was forensically cloned and seized as per Annexure A11. An excel sheet was also prepared from the data contained in the path E:/Bhupinder/WAGES 3rd unit from the said desktop. This data pertained to alleged cash expenditure at Unit-III of the assessee during the period from FYs 2016-17 to 2021-22. This sheet was prepared in the presence of Shri Navdeep Singh (General Manager, Unit III) and the same was signed by him on 10-12-2021. The statement of Shri Navdeep Singh was recorded u/s 132(4) wherein he was shown the excel sheet as Exhibit-3 and asked to give comments on the same. In reply to Q. Nos. 26 & 28, it was stated by him that the same represents cash payments by the assessee company to its employees for overtime work. He also described the procedure / process by stating that the details of the overtime would be sent to the Head Office along with computation of overtime payment to be made to the staff / employees. Based on this, overtime 27 payment is received from the Head Office which is disbursed to the employees. The payment is sometime received in cash or sometimes in cheques. The cash payment was being received from HR department. After extensive analysis, it was concluded by Ld. AO that the assessee incurred cash expenditure on account of Good Work Reward (GWR) / Overtime wages for Unit-III and the such cash expenditure for various years was tabulated at para 2.10 of the assessment order. The cash expenditure for this year was quantified at Rs.20,02,360/-, the source of which remained unexplained.
4.2 Similar findings were noted with respect to Unit-II of the assessee whereas the statement of Shri Sonu Kumar (Assistant Manager, HR) was recorded u/s 132(4) on 08-12-2021. He also stated that cash was being collected by him personally on regular basis from HR Manager, Mohali. The cash would thereafter be disbursed to employees for overtime / extra work hours. No cash books were being maintained by him for this and no entry was being made in the ERP or regular books of accounts. In reply to Q. No.12, he provided details of cash payments made to staff / workers of Unit- II for overtime and bonus period from FYs 2017-18 to 2021-22 which has been extracted on Page No.144 of the assessment order. The said fact was further corroborated by Shri Pritam Singh (factory / admin manager) in his statement u/s 132(4). He stated that payment for extra time / overtime work was being made in cash on monthly basis by the company to its workers / staff / employees. The cash was being collected by Shri Sonu Kumar from corporate office and disbursed to the employees. Similar corroboration was made by Shri Virji Bhatt (Production Manager) in his 28 statement u/s 132(4). He further added that overtime is fixed @15% of salary for him as well as for other staff / employees. The amount of such expenditure for this year for Unit-II was quantified by Ld. AO at Rs.84,79,284/-.
4.3 Similar findings emerged for Unit-1 of the assessee at Dera Bassi. The statement of Shri Sushil Kumar (Assistant Manager, HR) was recorded u/s 132(4) who made similar admission of cash payment. The same stood further corroborated by Overtime Muster Roll Register as found and seized as Annexure-A-3 (Team TK-2). This register contained entries from December, 2015 to October, 2021. In this register, there was no entry related to cash payment of overtime and bonus. The authorized signatory certified that no overtime had been performed during the entire period of six years. There was further corroboration in the shape of statement of Shri Manvendra Singh (QC Manager) as recorded u/s 132(4). The emails sent by Shri Sushil Kumar to HR Manager of Head office further corroborated the same. These emails conveyed monthly cash requirements for such payments to the employees. The cash expenditure incurred by this unit for this year aggregated to Rs.38,11,737/-.
4.4 The total cash expenditure incurred by these three units during FYs 2016-17 to 2021-22 has finally been tabulated by Ld. AO at Para 2.20 of the assessment order. The payment made for this year on account of overtime payment / GWR/ bonus aggregated to Rs.1,58,10,093/- as under: -
(Amt. in Rs.)
No. Particulars Unit-I Unit-II Unit-III Total
1. Overtime Cash Payment 20,02,360/- 84,79,284/- 38,11,737/- 1,42,93,381/-
2. Bonus 8,07,380/- 7,09,332/- - 15,16,712/-
Total 1,58,10,093/-29
4.5 Post search proceedings, upon being confronted, the assessee stated that the said sheet was never confronted either to the directors of the company or to the CFO of the company. No query, in this regard, was raised from accounting staff which was entrusted with the responsibility of maintaining accounts. The assessee refuted the allegation of cash payment. However, considering the overwhelming evidence as well as going by the search findings, Ld. AO rejected all the submissions of the assessee and the aforesaid amount of Rs.1,58,10,093/- was added to assessee's income as unexplained expenditure u/s 69C.
5. Issue of bogus purchases from RSG Packagings Pvt. Ltd. 5.1 During search proceedings, a ledger account of RSG Packagings Pvt. Ltd. (in short 'RSG') in the books of the assessee for the period from 01-04- 2018 to 07-12-2021 was extracted from the ERP system and seized as Annexure A-40. It was observed that the assessee made huge purchases from RSG. The purchases for this year were Rs.25.63 Crores. As per GST returns, RSG declared gross receipts of Rs.37.87 Crores for this year. Thus, majority of the receipts were from assessee. This percentage for this year was 67% approx. in comparison to approx. 50% in earlier two years. The Ld.AO made allegation of bogus purchases by referring to a register which was found from the room of Shri AIS Bedi director and the same was sized as Annexure A-41 (Pages 1-148).
5.2 The register was in the shape of hand-written notes and had 108 pages in a long spiral book. Shri AIS Bedi stated that the register was maintained by him for daily work. The Page No.107 allegedly contained 30 cash transactions undertaken by the assessee with RSG. After analyzing the same, Ld. AO concluded that the assessee would transfer certain amounts to RSG, who, in turn, would deduct certain amount and return back the cash to the assessee. No merchandise was provided by RSG against these entries. The Ld. AO referred to three entries of Rs.75 Lacs each as paid by the assessee to RSG through RTGS on 17-05-2021 and 18-05-2021. Against aggregate payment of Rs.225 Lacs, amount of Rs.2,00,59,322/- was stated to be received back after deduction of GST and commission. The Ld. AO sought further corroboration of the same by the visit of Shri Abhinav Gupta of RSG as recorded in visitor's register as well as in CCTV footage.
5.3 On the above facts, Ld. AO made allegation of bogus purchases by the assessee from RSG. The ledger account of RSG as appearing in the regular books of the assessee for the period from 01-04-2021 to 08-12- 2021 was examined by Ld. AO. The assessee maintained multiple ledger accounts in the name of RSG. However, only two accounts marked as 't' and 'u' were utilized to record such kind of transactions with RSG. It was alleged by Ld. AO that the purchases recorded under these two ledgers were received back in cash through Shri Abhinav Gupta. These purchases were non-genuine. There was no description of material, quantity, rate, GST etc. in these two ledgers. It was thus established that these ledger accounts were used by the assessee to accommodate fake bills for the period from 01-04-2021 to 08-12-2021. These purchases would not enter the stock of the assessee. The Ld. AO sought corroboration of the same by 31 referring to the statement u/s 131(1A) of Shri Anurag Sharma (Assistant Manager, Finance) and delivery vehicle enquiries from Vahan portal. 5.4 The Ld. AO, at para 4.11, quantified the amount transferred in these two accounts during financial year 2021-22. The same aggregated to Rs.14.79 Crores. These payments matched with the details found noted on Page No.107 of Annexure A-41. The cash was returned back to the extent of Rs.12.23 Crores after deduction of GST and commission. The Ld. AO referred to Page 94 of Annexure A-41 wherein the entries were written in the same manner. This Page had entries starting from 07-12-2020 to 31-03- 2021. The aggregate amount paid by the assessee was Rs.8,29,18,825/- against which the assessee received back cash of Rs.7,55,76,360/-. However, Ld. AO held that entries appearing in the two ledgers prior to 07- 12-2020 would also be bogus purchases against which the assessee received back cash from RSG after deduction of GST and commission. The total purchases made by the assessee under the two ledgers for whole of this year aggregated to Rs.17.28 Crores. Since no material was purchased by the assessee and only the expenses were being booked, the said expenditure was disallowed u/s 37 of the Act.
6. Interest disallowance u/s 36(1)(iii) This disallowance stems from the fact that the assessee's financial statement had capital work-in-progress (CWIP) for Rs.944.46 Lacs at year- end. The assessee also made investment of Rs.75 Crores in unquoted equity shares. The assessee pointed out that there was net reduction in CWIP during this this year for Rs.84.82 Lacs. Also, the assessee raised interest free funds of Rs.30 Crores during this year from directors which 32 were expensed towards CWIP. However, the submissions stood rejected by Ld. AO. The Ld. AO computed average cost of debt to be 2.7% and applied the same to CWIP and investment in shares to compute disallowance of Rs.228.13 Lacs.
7. Finally, the assessment was framed after making all the additions in the aforesaid manner which was subjected to assessee's challenge in first appeal.
8. The assessee assailed the jurisdiction of Ld. AO on various legal grounds and assailed quantum additions on merits by way of elaborate written submissions which have already been extracted in the impugned order. However, all these arguments did not find favor with Ld. CIT(A) who primarily endorsed the findings of Ld. AO and dismissed the appeal of the assessee. Aggrieved, the assessee is in further appeal before us. Our findings and Adjudication
9. The Ld. AR has filed 5 paper books viz. Paper Book I to IV and a common paper book along with three brief synopsis which have been marked as Brief Synopsis-I, II & III. The same are in support of legal grounds, additional grounds of appeal as well as on quantum additions on merits. We have duly gone through the relevant documents coupled with rival submissions as made before us.
10. The assessee, in its legal grounds, has raised pertinent legal issues. In original Ground No.1, the assessee has contended that Ld. AO has erred in framing the assessment u/s 143(3) whereas as per extant statutory provisions, the assessment should have been framed u/s 147 r.w.s. 143(3) since the search took place on the assessee u/s 132 on 08-12-2021 which 33 fall in AY 2022-23. The AY 2021-22 immediately precedes this year. Therefore, in this case, the assessment should have been framed u/s 148 whereas the impugned assessment has been framed u/s 143(3) without complying with the mandatory requirement of issuance of notice u/s 148. The Ld. AR has relied on Explanation-2(i) to Sec.148 which would be applicable to the case of the assessee since the search has happened on the assessee. The said provision mandate issuance of notice u/s 148. In the absence of such a notice, the assessment would be bad-in-law. In the additional grounds of appeal No.1, the assessee has further contended that the assessment as framed by Ld. AO u/s 143(3) is bad-in-law since the impugned year is a year which immediately precedes the search year. For this year, the mandatory approval as required u/s 148B has not been taken by Ld. AO. In the absence of compliance with the provisions of Sec.148B read with CBDT Manual of Office Procedure in February, 2003, the assessment is liable to be vitiated and liable to be annulled. To support this argument, Ld. AR has referred to various judicial decisions favoring the assessee on this issue. The copies of the same have been placed on record. In regular Ground No.2, the assessee has assailed the action of Ld. CIT(A) in dismissing various grounds of appeal. The Ld. AR stated that approval as obtained by Ld. AO from Addl. CIT on 02-06-2023 before passing the assessment order was invalid one since the approval ought to have been obtained u/s 148B of the Act which was not done in the present case. The copy of the approval as sought by Ld. AO has been placed on Page 74 of the paper book-I which show that Ld. AO has sought approval to pass order u/s 143(3) as required by CBDT instruction 34 F.No.299/36/2021/Dir (Inv.III) / 577 dated 15-07-2022 which mandate that order u/s 143(3) / 144 of the I.T. Act, 1961 in Central charge shall be passed with the prior approval of Additional / Joint Commissioner of Income Tax. The approval has been granted by Ld. CIT(OSD), Special Range, Chandigarh on 02-06-2023. A copy of the same is on Page 75 of Paper Book-1. This approval has been granted to finalize draft assessment order u/s 143(3) in terms of CBDT instruction F.No.299/36/2021/Dir (Inv.III) /577 dated 15-07-2022. It has been argued by Ld. AR that no prior approval has been taken as mandated u/s 148B and in the absence of such mandatory approval, the assessment order is liable to be quashed.
11. The grounds as well as the submissions of the assessee was confronted to Ld. CIT-DR who vehemently opposed the legal grounds of the assessee. It has been contended by Ld. CIT-DR that in the new regime of reassessment, Ld. AO has option to make assessment under both the statutory provisions since the provisions do not bar application of other statutory provisions unlike the earlier provisions of Sec.153A which start with non-obstante clause. By referring to the statutory provisions, Ld. CIT- DR contended that new provisions of Sec.148 do not have any such non- obstante clause and the concept of abatement of assessment has not been provided in the new provisions unlike the earlier provisions. In such a case, when the time limit to issue notice u/s 143(3) was available with Ld. AO, the assessment could have been framed by Ld. AO u/s 143(3) as well u/s 147 r.w.s. 148 and there was no infirmity in the action of Ld. AO in framing assessment u/s 143(3). In such a case, Ld. AO would assume jurisdiction not only to make regular assessment but also empowered to consider 35 material found during search action. There is no bar in the statute as such. The Ld. AR, on the other hand, maintained that this issue is no longer res- integra and now covered by various judicial decisions of various benches of the Tribunal and therefore, the same view may be taken. We have duly considered the rival submissions and perused case records as cited before us.
12. The undisputed fact that emerges is that the assessee was subjected to search action on 08-12-2021 and notice u/s 143(2) was issued by Ld. AO to the assessee on 28-06-2022. In the meanwhile, the assessee filed return of income u/s 139(4) on 31-03-2022 (Page 6 of common paper-book). The time limit to file the return of income for this year stood extended by CBDT vide Circular No.01/2022 dated 11-01-2022 to 15-03-2022. Post search action, the case of the assessee has been centralized and an order u/s 127(2) has been passed by Ld. Pr. CIT, Chandigarh-1 on 03-02-2022 (Page No.1-2 of common paper book). The centralization of assessee's case trigger from search action on the assessee and accordingly, the jurisdiction of all connected cases has been centralized. Subsequently, notice u/s 143(2) has been issued to the assessee on 28-06-2022 (Page 7-8 of common paper book). Before issuing this notice, administrative approval has been taken for compulsory selection for complete scrutiny of assessee's case. This approval has been sought by Ld. ACIT, Central Circle-2, Chandigarh from Ld. Pr. CIT (Central), Gurugram vide letter dated 14-06-2022 (Page 1-3 of Paper Book-1). By making reference to search action on the assessee on 08-12-2021, Ld. AO, at para-3, has stated that the cases of the group are required to be selected for compulsory scrutiny 36 for the AY 2021-22 as per CBDT Instruction F.No.225/81/2022/ITA-II dated 03-06-2022 as the assessment in the case arise from search and seizure action. As per para 2.2 of the said circular, such cases could be selected for scrutiny only with prior administrative approval of relevant authority. Accordingly, an administrative approval has been sought in terms of the said notification. The said approval has been granted by appropriate authority as conveyed vide letter Pr. CIT(C)/ITO (Hq.)/GGM/2022-23/1128- 1129 dated 17-06-2022 followed by final approval through ITBA on 27-06- 2022. Finally. Notice u/s 143(2) has been issued to the assessee on 28-06- 2022. It could thus be seen that the case of the assessee has been subjected to complete scrutiny as per CBDT instructions to examine the issue which arises from the search proceedings. In the background of all these facts, it could very well be concluded that the scrutiny on the assessee has been triggered primarily by search action on the assessee on 08-12-2021. The whole purpose of scrutiny was to examine various issues which arise from the search action on the assessee. Such search cases were liable for complete scrutiny as per CBDT instructions (supra) and the provisions of mandatory approval by appropriate authority were made in the said instructions itself. The Ld. AO, guided by the said instructions, has obtained the required approval and finally issued notice u/s 143(2). Now the pertinent question that arises is whether the assessment was to be framed u/s 143(3) or u/s 147 r.w.s. 148. The argument of Ld. CIT-DR is that unlike earlier provisions of Sec.153A, the new Section 148 do not have non- obstante clause and as such, there is no bar in making assessment in either of these two sections.37
13. All these legal issues, as rightly pointed out by Ld. AR, have comprehensively been dealt with by co-ordinate bench of Chandigarh Tribunal in the case of M/s Homelife Buildcon Pvt. Ltd. (ITA No.880/Chd/2024 & ors. order dated 17-07-2024). We find that on identical facts, the coordinate bench held as under: -
22. The core question before the Bench is whether, in the facts and circumstances of the case, the assessment ought to have been framed under section 143(3) or under section 147 of the Income-tax Act, 1961. From the plain reading of the statutory provisions and in light of Explanation 2 to section 148, it becomes abundantly clear that the legislature has widened the scope of reassessment, particularly through the Finance Act, 2021, which introduced significant changes to the reassessment regime. These amendments explicitly include instances involving third-party search material and make it incumbent upon the Assessing Officer (AO) to follow the procedure under section 148, including obtaining prior approval from the Principal Commissioner of Income Tax (PCIT).
23. In the present case, the AO proceeded to frame the assessment under section 143(3) despite relying heavily on material found during searches conducted on third parties. The AO, instead of complying with the jurisdictional preconditions laid down under the reassessment provisions, proceeded without recording the mandatory satisfaction and without obtaining prior sanction from the competent authority. This conduct not only, violates the express mandate of law, but also renders the assessment a jurisdictional error. The AO has, in fact, gone a step further by bypassing the legal safeguards embedded in section 147, thereby vitiating the assessment proceedings ab initio.
24. Furthermore, a plain reading of the Finance Act, 2021 and the Explanatory Memorandum to the Finance Bill clearly indicates that the legislative intent was to bring all searches conducted on or after 1st April 2021 within the ambit of the new reassessment regime under section 147 of the Income-tax Act, 1961. This new regime was introduced through significant amendments to section 147 and section 148, along with the insertion of Explanations 1 and 2, and the concept of "information suggesting escapement of income" was explicitly defined. From the reading of Explanation 2 to Section 147, it is evident that in cases where a search is initiated on or after 1st April 2021, the Assessing Officer shall be deemed to have information, which suggests that income chargeable to tax has escaped assessment for three assessment years immediately preceding the assessment year relevant to the previous year, in which, the search is initiated, provided that books of account, documents, assets, bullion, jewellery, or other valuable articles are seized or requisitioned in the course of the search. This deeming provision is not limited only to the person searched, but also extends to "other persons", provided that due procedure under the law-specifically, the recording of satisfaction that such seized material belongs to the assessee and obtaining prior approval from the PCIT-is followed.
25. In the present case, where the AO has admittedly relied upon material seized during searches conducted on other persons, i.e., Sh. Ravi Kapoor and Sh. Ajay Kumar Prabhakar, it was mandatory for the AO to invoke the provisions of section 147 and not to bypass the statutory framework by proceeding under section 143(3). Granting such unfettered powers to 38 the AO to rely on third-party material without adhering to the safeguards under section 147 would defeat the very purpose of the amendment and open the floodgates to arbitrary assessments.
26. The relevant extract Memorandum explaining the finance bill is reproduced as under:-
'(ii) Assessments or reassessments or in re-computation in cases where search is initiated under section 132 or requisition is made under 132A, after 31st March 2021, shall be under the new procedure.
(vi) Further, in search, survey or requisition cases initiated or made or conducted, on or after 1st April, 2021, it shall be deemed that the Assessing officer has information which suggests that the income chargeable to tax has escaped assessment in the case of the assessee for the three assessment years immediately preceding the assessment year relevant to the previous year, in which, the search is initiated or requisition is made or any material is seized or requisitioned or survey is conducted."
27. The notice issued under section 143(2) was also produced by the AR. Upon perusal of the said notice, it is evident that the assessment under section 143(3) was initiated solely for the purpose of verifying the return of income filed by the assessee. In such circumstances, the importing and reliance upon material seized from third-party searches, namely, those conducted on Sh. Ajay Kumar Prabhakar and Sh. Ravi Kapoor, goes beyond the jurisdiction conferred under section 143(3). Particularly, where the applicable law-- Explanation 2 to section 148 (as amended by the Finance Act, 2021) mandates prior approval from the Principal Commissioner of Income Tax (PCIT) before initiating reassessment proceedings on the basis of such material, the failure to comply with that requirement renders the assessment legally untenable.
28. In the present case, the AO did not issue a notice under section 148, nor did he follow the due process of law under the new reassessment framework, including recording of satisfaction and obtaining prior sanction from the PCIT. Therefore, the assessment framed under section 143(3), because of being based on third-party material without adhering to statutory safeguards, is bad in law. The AO was only empowered to verify the return of income and restrict his scope of inquiry accordingly; he was not permitted to expand the assessment by importing and relying upon third-party seized material without following the mandatory procedure laid down under the law.
29. Furthermore, there exists a mandatory statutory requirement that in all cases involving search-related assessments falling within the assessment year, immediately preceding the year of the search, the prior approval of the Joint Commissioner is required under section 148B of the Income-tax Act, 1961. In the present case, the Assessing Officer (AO) has proceeded without obtaining such approval, which is a clear violation of the procedural safeguards envisaged under the law and, as such, vitiates the assessment proceedings. In the present case, approval has been granted for assessment framed u/s 143(3) only. The relevant provision of section 148B reads as under:
Prior approval for assessment, reassessment or recompilation in certain cases. 148B. No order of assessment or reassessment or recompilation under this Act shall be passed by an Assessing Officer below the rank of Joint Commissioner, in respect of an assessment year to which clause (i) or clause (ii) or clause (iii) or clause (iv) of Explanation 2 to section 148 apply except with the prior approval of the Additional Commissioner or Additional Director or Joint Commissioner or Joint Director.39
30. A comparison of the requirement of approval under section 153D and section 148B is drawn, from which it is evident that approval under section 153D was earlier required only in cases where assessments were completed under section 153A/153C and also for search year. However, under the amended provisions, approval under section 148B is now required in all cases where proceedings are initiated pursuant to a search, requisition, or survey, or where asset/material/documents found during such search pertain to or relate to another person. In such cases, the Assessing Officer must take the approval under section 148B from the specified higher authority.
Aspect Section 153D Section 148B (with Explanation 2 to Section 148) Applicable Period Search initiated between 01.06.2003 to Search/survey initiated on or after 31.03.2021 01.04.2021 but before 01.09.24 Context Search assessment under Section 153A/153C All cases where assessment/reassessment is based in respect of an assessment year to which clause (i) or clause (ii) or clause (iii) or clause (iv) of Explanation 2 to section 148 Triggering Event Search or requisition on the assessee under 1. Search/requisition 2. Survey Sections 132 /132A or material is used against (except under 133A(2A)) on assessee from third party search assessee 3. Search/requisition on another person, but assets/documents relate to assessee Purpose of Approval Supervisory check in search assessments to assessments to ensure fairness and ensure fairness and oversight oversight Prevent misuse of powers in reassessment based on search/survey-related information under new regime Who gives approval Joint Commissioner (mandatory) Any of: Joint Commissioner / Addl.
Commissioner / Joint Director / Addl.
Director Aspect Section 153D Section 148B (with Explanation 2 to Section 148) Deeming Presumption Not expressly stated Explanation 2 creates a legal presumption: AO is deemed to have information suggesting income escaped assessment in specified cases
31. This requirement has also been explicitly discussed in the Explanatory Memorandum to the Finance Bill, 2022, which emphasizes the need to protect taxpayer rights by ensuring that no reassessment is carried out without proper sanction and due process. It is further seen that the Joint Commissioner has not even been supplied seized material relied upon as seized from third-party in the present assessment. There exists a prescribed procedure under which such seized material (including material found from third-party premises) is to be forwarded to the approving authority at least 30 days in advance of granting approval. This procedural safeguard is crucial to prevent arbitrary and unregulated use of third-party material.
32. In the present case, there is no evidence to demonstrate that the prescribed procedure was followed, or that the Joint Commissioner was apprised of the seized material by forwarding copies of the documents found from the third party prior to framing the assessment.
40The complete failure to comply with the mandatory provisions of section 148B renders the reassessment not only. procedurally defective but also without jurisdiction.
33. Even we find while framing the assessment under section 143(3), the Assessing Officer (AO) has, on the last page of the assessment order, referred to an approval obtained from the supervisory authority. However, a bare perusal of this approval shows that it was obtained in reference to F. No. 299/36/2020/1DAR/INV3(3)/577 dated 15.07.2022, i.e., in accordance with the CBDT Circular dated 15th July 2022, and not under the mandatory provisions of section 148B of the Income-tax Act, 1961.
At the outset, it is important to note that the approval so obtained does not mention or consider any of the seized materials sourced from the third party. searches conducted on Sh. Ajay Kumar Prabhakar and Sh. Ravi Kapoor, despite the AO having heavily. relied on those materials in framing the additions. The approval merely states that the appraisal report was considered, without any reference to the original documents seized or to the statutory procedure outlined under section 148B.
It is pertinent to refer to the Manual of Office Procedure in February 2003, which lays down a mandatory protocol: that in all search cases, especially where material pertains to persons other than the one searched, such material is to be forwarded in original to the approving authority, and a draft order is required to be submitted for approval at least 30 days in advance. In the present case, the approval letter was issued by the DCIT only on 22nd August 2023, which clearly contravenes this procedural requirement. This procedural lapse is further compounded by the judgment of the Hon'ble Supreme Court in Serajuddin and Co. case, [2024] 163 taxmann.com 118 (SC) wherein it was held that in search cases, strict adherence to the approval protocol as laid down in the departmental Manual of Office Procedure in February 2003 and law is essential to uphold the validity of the assessment.
34. Thus, from the above, it is quite evident from the approval granted by the Addl.CIT(Central), there is no mention or consideration of the seized material sourced from the third party, namely Sh. Ajay Prabhakar and Sh. Ravi Kapoor, though, we find that in the assessment order and in the order of CIT(A), both the authorities have heavily relied upon on such seized material and it only states that the appraisal report have been considered without any reference to any original documents seized for statutory procedure outlined u/s 148. Thus, in view of above, the assessment as framed by Assessing Officer vide order dated 24.08.2023 is quashed."
The coordinate bench, on identical facts, observed that on the plain reading of the statutory provisions and in light of Explanation-2 to Sec.148, it becomes abundantly clear that the legislature has widened the scope of reassessment, particularly through the Finance Act, 2021, which introduced significant changes to the reassessment regime. These amendments explicitly make it incumbent upon the Assessing Officer (AO) to follow the procedure under section 148, including obtaining prior approval from the 41 Principal Commissioner of Income Tax (PCIT). The Ld. AO proceeded to frame assessment u/s 143(3) despite relying heavily on searched material. The AO, instead of complying with the jurisdictional preconditions laid down under the reassessment provisions, did not obtain prior sanction from the competent authority which violates the express mandate of law and also renders assessment a jurisdictional error. The AO bypassed the legal safeguards embedded in Sec. 147, thereby vitiating the assessment proceedings ab-initio.The plain reading of the Finance Act, 2021 and the Explanatory Memorandum to the Finance Bill clearly indicates that the legislative intent was to bring all searches conducted on or after 1st April 2021 within the ambit of the new reassessment regime u/s 147 and this new regime was introduced through significant amendments to Sec. 147 & Sec. 148 along with the insertion of Explanations 1 and 2 wherein the concept of "information suggesting escapement of income" was explicitly defined u/s 148. From the reading of Explanation 2 to Section 148, it was evident that in cases where a search is initiated on or after 1st April 2021, the Assessing Officer shall be deemed to have information, which suggests that income chargeable to tax has escaped assessment for three assessment years immediately preceding the assessment year relevant to the previous year, in which, the search is initiated, provided that books of account, documents, assets, bullion, jewellery, or other valuable articles are seized or requisitioned in the course of the search. This deeming provision is not limited only to the person searched, but also extends to "other persons", provided that due procedure under the law-specifically, the recording of satisfaction that such seized material belongs to the assessee 42 and obtaining prior approval from the PCIT, is followed. Since Ld. AO relied upon seized material, it was mandatory for the AO to invoke the provisions of Sec. 148 and not to bypass the statutory framework by proceeding under Sec. 143(3). Granting such unfettered powers to the AO to rely on third- party material without adhering to the safeguards under Sec. 148 would defeat the very purpose of the amendment and open the floodgates to arbitrary assessments. The bench referred to the Memorandum of finance bill and observed that notice u/s 143(3) was initiated solely for the purpose of verifying the return of income filed by the assessee. In such circumstances, the importing and relying upon material seized from third- party searches, goes beyond the jurisdiction conferred u/s 143(3) particularly where the applicable law i.e., Explanation 2 to section 148 (as amended by the Finance Act, 2021) mandates prior approval from the Principal Commissioner of Income Tax (PCIT) before initiating reassessment proceedings on the basis of such material. The failure to comply with that requirement renders the assessment legally untenable. In the present case, the AO did not issue a notice u/s 148, nor did he follow the due process of law under the new reassessment framework, including recording of satisfaction and obtaining prior sanction from the PCIT. Therefore, such an assessment would be bad-in-law. There exists a mandatory statutory requirement that in all cases involving search related assessments falling within three assessment years, immediately preceding the assessment year of the search, the prior approval of the Joint Commissioner is required under section 148B of the Income-tax Act, 1961. In the present case, the Assessing Officer (AO) proceeded without 43 obtaining such approval which was in clear violation of the procedural safeguards envisaged under the law and as such, vitiates the assessment proceedings. In the present case, approval has been granted for assessment framed u/s 143(3) only. The provisions of Sec.148B mandate prior approval of specified authority in respect of an assessment year to which clause (i) or clause (ii) or clause (iii) or clause (iv) of Explanation 2 to Sec. 148 applies. The bench drew parity between approval granted in earlier provisions of Sec.153D and the approval which is granted u/s 148B. It was noted that under the amended provisions, approval u/s 148B was now required in all cases where proceedings were initiated pursuant to a search, requisition, or survey, or where asset / material / documents found during such search pertain to or relate to another person. In such cases, the Assessing Officer must take the approval u/s 148B from the specified higher authority. In the absence of such an approval, the assessment would stand vitiated. The bench also referred to Manual of Office Procedure as issued by CBDT in February 2003, which lays down a mandatory protocol that in all search cases, especially where material pertains to persons other than the one searched, such material is to be forwarded in original to the approving authority, and a draft order is required to be submitted for approval at least 30 days in advance. In the present case, such condition was violated which would make the assessment bad in terms of decision of Hon'ble Supreme Court in Serajuddin and Co. case, [2024] 163 taxmann.com 118 (SC) wherein it was held that in search cases, strict adherence to the approval protocol as laid down in the departmental Manual of Office Procedure in February 2003 and law is essential to uphold 44 the validity of the assessment. In the light of all these facts, the assessment as framed by Ld. AO was quashed. We find that the facts of present case before us are quite identical to this case except for the fact in the present case, the Ld. AO has relied on material as seized from the assessee which is covered under Explanation 2(i) whereas the above case has been rendered in the context of Explanation 2(iv) which stand exactly on same footing. Therefore, the above case laws squarely apply to the facts of the present case before us. Similar facts exist in the present appeal before us barring the fact that the incriminating material has been found from the premises of the assessee himself. Nevertheless, all the findings of the bench would equally apply to the facts of the present case since the case of the assessee is covered by clause (i) of Explanation-2 to Sec.148.
14. At this juncture, we find that the extant provisions of Sec.148, as applicable to the case of the assessee, read as under: -
Issue of notice where income has escaped assessment.
148. Before making the assessment, reassessment or recomputation under section 147 and subject to the provisions of section 148A, the Assessing Officer shall serve on the assessee a notice, along with a copy of the order passed, if required, under clause (d) of section 148A, requiring him to furnish within such period, as may be specified in such notice, a return of his income or the income of any other person in respect of which he is assessable under this Act during the previous year corresponding to the relevant assessment year, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed;
and the provisions of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under section 139:
Provided that no notice under this section shall be issued unless there is information with the Assessing Officer which suggests that the income chargeable to tax has escaped assessment in the case of the assessee for the relevant assessment year and the Assessing Officer has obtained prior approval of the specified authority to issue such notice.
Explanation 1.--For the purposes of this section and section 148A, the information with the Assessing Officer which suggests that the income chargeable to tax has escaped assessment means,--
(i) any information flagged in the case of the assessee for the relevant assessment year in accordance with the risk management strategy formulated by the Board from time to time;
(ii) any final objection raised by the Comptroller and Auditor General of India to the effect that the assessment in the case of the assessee for the relevant assessment year has not been made in accordance with the provisions of this Act.45
Explanation 2.--For the purposes of this section, where,--
(i) a search is initiated under section 132 or books of account, other documents or any assets are requisitioned under section 132A, on or after the 1st day of April, 2021, in the case of the assessee; or
(ii) a survey is conducted under section 133A, other than under sub-section (2A) or sub-section (5) of that section, on or after the 1st day of April, 2021, in the case of the assessee; or
(iii) the Assessing Officer is satisfied, with the prior approval of the Principal Commissioner or Commissioner, that any money, bullion, jewellery or other valuable article or thing, seized or requisitioned under section 132 or section 132A in case of any other person on or after the 1st day of April, 2021, belongs to the assessee; or
(iv) the Assessing Officer is satisfied, with the prior approval of Principal Commissioner or Commissioner, that any books of account or documents, seized or requisitioned under section 132 or section 132A in case of any other person on or after the 1st day of April, 2021, pertains or pertain to, or any information contained therein, relate to, the assessee, the Assessing Officer shall be deemed to have information which suggests that the income chargeable to tax has escaped assessment in the case of the assessee for the three assessment years immediately preceding the assessment year relevant to the previous year in which the search is initiated or books of account, other documents or any assets are requisitioned or survey is conducted in the case of the assessee or money, bullion, jewellery or other valuable article or thing or books of account or documents are seized or requisitioned in case of any other person.
Explanation 3.--For the purposes of this section, specified authority means the specified authority referred to in section 151.
For the purpose of Sec.148, Explanation-2(i) provides that in case of search on the assessee on or after 01-04-2021, the Assessing Officer shall be deemed to have information which suggests that the income chargeable to tax has escaped assessment in the case of the assessee for the three assessment years immediately preceding the assessment year relevant to the previous year in which the search is initiated or books of account, other documents or any assets are requisitioned or survey is conducted in the case of the assessee or money, bullion, jewellery or other valuable article or thing or books of account or documents are seized or requisitioned in case of any other person. Thus, the assessee's case gets covered under clause
(i) of Explanation-2 and it would thus be clear case of deemed escapement of income for three AYs immediately preceding the AY relevant to previous 46 year in which search is initiated. The search on the assessee has happened on 08-12-2021 which falls in previous year 2021-22 and the relevant AY would be 2022-23. The immediately three AYs would be 2019-20, 2020-21 & 2021-22. Thus, AY 2021-22 is the specified assessment year for which Ld. AO is deemed to have information which suggests that the income chargeable to tax has escaped assessment in the case of the assessee. Therefore, for this year, the assessment ought to have been framed u/s 147 by issuing notice u/s 148. In such a case, prior approval of specified authorities has to be obtained. However, the approval, as already noted by us in preceding paragraphs, has been obtained by Ld. AO from specified authority to issue notice u/s 143(2) and not for issuance of notice u/s 148. We further find that the provisions of Sec.148B, as inserted by Finance Act, 2022, mandate that no order of assessment or reassessment or recomputation under this Act shall be passed by an Assessing Officer below the rank of Joint Commissioner, in respect of an assessment year to which clause (i) or clause (ii) or clause (iii) or clause (iv) of Explanation-2 to Section 148 apply except with the prior approval of the Additional Commissioner or Additional Director or Joint Commissioner or Joint Director. As noted earlier, the approval for draft assessment order which is to be passed u/s 143(3) has been taken by Ld. AO and no such approval has been taken to pass assessment order u/s 147. On these facts, it could be well that the initiation of assessment proceedings as well as the framing of assessment order lacked valid statutory sanction which makes entire proceedings void-ab-initio. Therefore, the impugned assessment order is 47 liable to be quashed on these first and foremost legal grounds as urged by Ld. AR.
15. We further find that the above decision in Homelife Buildcon (supra) has subsequently been followed by another bench and a similar view has been taken in Jamna Dass Nikkamal Jain Saraf Private Ltd. (ITA No.403/Chd/2025 &ors.). Faced with similar facts / situation, the bench observed that the impugned assessment year being one of the three preceding years would fall under Explanation 2(iv) to Sec.148. The Explanation provides that if a search is initiated then the AO shall be deemed to have information suggesting escapement of income for the three AYs immediately preceding the AY relevant to the previous year in which the search is initiated. Therefore, the only permissible statutory course was to issue notice u/s 148 and obtain prior approval u/s 148B before passing assessment order. Since the AO completed the assessment u/s 143(3) without issuing the notice u/s 148, the assessment proceedings so initiated could not be validly continued and completed after a search u/s 132 has been conducted in the case of an assessee without following the required procedure of Sec.148, Explanation-2. Though the provisions of Sec. 143 provide the general framework for regular assessment, the provisions of Sec. 147 & 148 (post-2021 regime) deal with reassessment based on information suggesting escapement of income including that unearthed during a search. A plain reading of Sec.143(2) would show that such a notice could be issued only when a return of income was furnished u/s 139 or in response to notice u/s 142(1). It empowers the AO to scrutinize the return if he considers that income has been understated or tax was 48 underpaid. However, when a search u/s 132 takes place and materials are found indicating possible escapement of income, the statute envisages a different route for carrying out assessment or reassessment u/s 147 r.w.s. 148 which is special mechanism for bringing to tax the income discovered in consequence of a search. Although Sec.148 (inserted w.e.f. 01-04-2021) does not begin with a non-obstante clause similar to the erstwhile section 153A, its context and Explanation-2 make it clear that where a search is initiated, the jurisdiction thereafter must flow through this special channel, subject to prior satisfaction and approval of the Principal Commissioner or Commissioner. The legislative intent is to ensure that when a search is carried out, the assessment is framed under the specific provisions meant for such cases and not under the general provision of Sec.143(3). This position finds substantial support from the ratio of various decisions of Hon'ble High Court and Hon'ble Supreme Court unanimously holding that once a search was conducted and proceedings were triggered u/s 153A, the AO could not continue parallel proceedings u/s 143(3) or u/s 147 for the same AY since the entire assessment for that year stands merged in the search assessment. The Courts emphasized that the existence of a special procedure for assessment consequent to a search is a complete code in itself and therefore, ordinary assessments abate and could not co-exist with the search-based assessment. Therefore, AO must act u/s 148 (which now performs the role formerly assigned to Sec. 153A) rather than continuing with a pending Sec.143(3) proceedings. The legislative intent was to prevent multiplicity of proceedings and ensure that only one comprehensive order is passed, factoring in both the pre-search and post search materials.
49This rationale is further reinforced by the well-settled principle of generalia specialibus non derogant i.e., the special provision overrides the general provisions of the Act. Therefore, the special provisions of Sec.148 must prevail over general provisions of Sec.143. Allowing the AO to continue and conclude proceedings u/s 143(3) after a search would defeat this legislative scheme and render the safeguards, such as prior approval of the specified authority, redundant. The bench also observed that the statutory approval was sought by Ld. AO on 31-03-2024 and the same was granted by Addl. CIT on the same date on which the draft assessment order was forwarded by AO. The revenue could not demonstrate that the voluminous seized material was actually forwarded to the approving authority, nor was it shown that the Ld. Addl. CIT made any independent examination thereof. It was difficult to comprehend that a meaningful consideration of such voluminous material in a single day had taken place. The grant of approval was not an empty formality as it would have the trapping of a quasi-judicial function by the competent authority. The approval authority is bound to apply its mind, which reflects the application of its mind and the documents submitted to it. The record shows that there was a tiring hurry to grant the approval without looking into the contents of the underlying documents and placing on record the replies, if any, received in the office and the queries raised by the Addl. CIT. The bench then referred to the decision of Tribunal in the case of AB Alcobev Pvt. Ltd. (ITA Nos. 356/Chd/2024 &ors.) and the decision in Pushpanjali Construction Pvt. Ltd. (ITA No.1001/Del/2025) wherein it was held that approval granted in a mechanical manner without application of mind renders the assessment order invalid. Once the statutory approval 50 suffers from non-application of mind, the consequential assessment cannot survive in the eyes of law. On these facts, the assessment order was held to be without jurisdiction and the assessment order was held to be passed without taking the approval from the competent authority as envisaged under the Act. The approval was mechanical one and was not in accordance with law. Finally, the assessment order was quashed on legal grounds. In this decision, the bench has already considered the argument of absence of non-obstante clause as raised by Ld. CIT-DR. We find that the above said legal propositions squarely apply to the facts of the present case before us. These decisions have subsequently been followed by Delhi bench of Tribunal in the case of Montage Enterprises (P.) Ltd. vs. DCIT (182 Taxmann.com 11) and a similar view has been taken.
16. Finally, considering the entirety of facts and circumstances of the case, we would hold that the assessment ought to have been framed under special provisions of Sec.148. To initiate proceedings u/s 148, requisite approval was to be taken from specified authority which is not shown to have been taken. Further, the approval of specified authority as envisaged u/s 148B was required to be taken while framing the assessment which is not shown to have been taken. The approval of appropriate authority to pass the assessment order stood vitiated for application of mind. The procedure as required under the provisions of Sec.148 is not shown to have been fulfilled in the present case. The approval as sought by Ld. AO of the order u/s 143(3) is non-est / bad-in-law and the granting of the approval of the order u/s 143(3) by the Addl. CIT is null and void and thus, assessment as framed u/s 143(3) vide order dated 08-06-2023 deserves to be quashed 51 on these very legal grounds. We order so. Since the assessment order has been quashed on legal grounds, delving into the merits of the case has been rendered mere academic in nature. However, since substantive arguments have also been made on merits by both the sides, we deem it fit to deal with the same for the sake of completeness.
Adjudication on Merits
17. In Ground No.3, the assessee has assailed the quantum addition on merits as made by Ld. AO by invoking the provisions of Sec.56(2)(x)(c). In Ground No.5, the assessee has assailed the addition of Rs.7 Crores as made by Ld. AO on account of alleged cash payment by the assessee to Shri Harpal Singh. In Additional Ground No.2, the assessee has contended that the addition as made u/s 56(2)(x)(c) is not maintainable considering the decision of Hon'ble Gujarat High Court in the case of PCIT vs. Jashawanlal Shah (154 Taxmann.com 568) holding that the provisions of Sec.56(2)(vii)(c) ought to be applied only in case of transfer of shares and the allotment of new shares cannot be regarded as transfer of shares under Section 56(2)(vii)(c). This decision has been rendered considering the decision of Hon'ble Apex Court in Khoday Distilleries Ltd. (307 ITR 312). In this decision, the Hon'ble Court, referring to the decision of Sri Gopal Jalan & Co. v. Calcutta Stock Exchange Association Ltd. [1963] 33 Comp. Case 862 (SC) / 1964 (3) SCR 698, held that "allotment" means appropriation out of previously unappropriated capital of a company, of a certain number of shares to a person and till such allotment the shares do not exist as such". Therefore, it is only on allotment that the shares come into existence. In every case, the words "allotment of shares" having used 52 to indicate the creation of shares appropriation out of unappropriated share given to a particular person which is also referred to in the notice of clause to the Finance Bill 2010. Therefore, the aim and intention behind amending the provision of sec.56 is to prevent the practice of transferring unutilized shares at a price which are allotted for the first time by way of right shares. The amendment was, therefore, never meant to aim the "fresh issue" or "fresh allotment" of shares by a company. This decision has been followed by Hyderabad Tribunal in the case of Thermodyne Dynamics Pvt. Ltd. (176 Taxmann.com 485) to hold that the provisions of Section 56(2)(viia) are not attracted to fresh allotment of shares since allotment does not constitute 'receipt' of shares. All these grounds are inter-connected grounds and stem from same facts. The same are adjudicated on merits as under.
18. It could be seen that both these addition stems from some material as found during search on the assessee. The primary facts qua ownership of corporate entities and respective shareholdings are not in much dispute. It could be seen that Shri Harpal Singh and Mrs. Rachna Singh held complete shareholding in M/s KBPL. M/s LBPL is wholly-owned subsidiary of M/s KBPL and M/s LBPL owns the hotel property on a leasehold land as allotted by appropriate authorities. From the search findings and documents seized therein, it emerges that with a view to secure ownership over the hotel property, the assessee had been allotted 14,06,259 number of shares of M/s KBPL on 31-03-2021 at premium of Rs.523.33 per share. The share was having face value of Rs.10/- per share. After allotment of shares in M/s KBPL, the assessee has held 48.38% shares (1406259 number of shares out of total 2906259 number of shares - as per table extracted in preceding 53 para 2.2). The said shares as allotted to the assessee are fresh allotment of shares by M/s KBPL to the assessee and no transfer of shares has happened between Shri Harpal Singh and the assessee. The shares have been allotted to the assessee for a consideration of Rs.75 Crores and the allotment has been made at Rs.533.33 per share. The said valuation is backed up by valuation report of Shri Kashish Khunger which was seized as Annexure A-5 (Pages 135-149). The same was valuation report dated 31- 03-2021 wherein the valuer has computed FMV of shares at Rs.526.75 per share. The statement of valuer was recorded u/s 131(1A) wherein he has maintained that the report has been prepared in compliance with international valuation standard. There is no admission that the valuation of the shares was manipulated, in any manner. The assessee furnished valuation of shares based on financials as on 31-03-2021 and arrived at valuation of Rs.420.73 per share which stood rejected by Ld. AO primarily on the ground that the leasehold land and building constructed thereon was to be revalued on the basis of stamp duty value though it has been observed by Ld. AO that the hotel site was a unique hotel site and no comparable rates were available. The Ld. AO has justified the application of freehold rates on the ground that the initial allotment of land to the assessee was at a value which was 230% of the applicable stamp duty value the time of allotment. The Ld. AO has also not allowed the unearned increase in land value as payable by the assessee to the Municipal Authorities which was a pre-condition for transfer of such rights by the assessee. Lastly, the liability which is classified as FF&E reserves has not 54 been allowed to the assessee on the ground that the same was not an ascertained liability.
19. From the enumerated facts, it could be well said that conclusion of Ld. AO stems from two agreements which have been found from the possession of the assessee during search. The first agreement has been found (marked as Annexure A-1, Team HK1(2), Pages 1-6) which is between Shri Harpal Singh / Ms. Rachna Singh, the assessee and M/s LBPL. The agreement is in the nature of Shareholders' agreement (SHA) dated 12-10-2020 with respect to purchase of 50% shares in M/s KBPL by the assessee. As per this agreement, Shri Harpal Singh has agreed to sell his 7.50 Lacs number of shares in M/s KBPL for aggregate value of Rs.150 Crores i.e., at Rs.2000/- per share. By virtue of this agreement, the assessee would, indirectly, become 50% owner in M/s LBPL who ultimately own the hotel property. One of the stipulations was that the shareholders would continue to maintain shareholdings interest in M/s LBPL in specified portions only viz. 50% stake by Shri Harpal Singh / Mrs. Rachna Singha and 50% stake by the assessee. However, it clearly emerges that the terms of this agreement have ultimately not been followed by the respective parties. The facts show that the assessee has not acquired any shares from Shri Harpal Singh but the assessee has been allotted fresh shares in M/s KBPL and the assessee's ultimate shareholding in M/s KBPL is only 48.38%. Both these facts run contrary to the signed agreement as referred to by Ld. AO. The same also fortifies that stand of the assessee that the agreement was done without making proper due diligence and without proper valuation of shares. The argument that on the date of subject 55 negotiation, the relevant shares of Shri Harpal Singh and its original documents were still in possession of the bank and the parties resorted to alternative proposal, has substantial force. This alternative was in the shape of fresh allotment of Shares by M/s KBPL to the assessee at Rs.533.33 per share. This valuation was much higher than the valuation of Rs.420.73 per share as arrived at by the assessee on the basis of audited Balance Sheet of M/s KBPL as on 31-03-2021. This valuation was arrived at on the basis of Rule 11UA(1)(c)(b). In the said valuation, the leasehold land and building was taken at the book value.
20. Another agreement as referred to by Ld. AO is the unsigned and undated agreement which was also seized during search. This agreement is stated to be between M/s KBPL, M/s LBPL, Shri Harpal Singh and the assessee. In this agreement, M/s KBPL has agreed to allot additional 15 Lacs number of shares to the assessee for Rs.150 Crores @Rs.1000/- per share. This agreement similarly stipulated that the respective parties would maintain their 50% shareholding in M/s KBPL after completion of the deal. It is quite clear that this agreement is an unenforceable agreement since the same is an unsigned and undated agreement having no evidentiary value in the eyes of law. It is another fact that the terms of this agreement have also not been carried out since the assessee has not been allotted 15 Lacs number of shares as mentioned in the agreement. Secondly, the stipulation of maintaining 50% shareholding has ultimately not been followed by the respective parties. The shareholding pattern as extracted at para 2.2 would show that Shri Harpal Singh and Smt. Rachna Singh held 15 Lacs shares in M/s KBPL. After allotment of impugned shares, the assessee's 56 shareholding is to the extent of 48.38% only. As per signed agreement dated 12-10-2020, Shri Harpal Singh agreed to sell his 7.50 Lacs shares to the assessee for consideration of Rs.150 Crores. The unsigned agreement envisages fresh allotment of 15 Lacs shares to the assessee for a consideration of Rs.150 Crores. Quite clearly, considering the logic of Ld. AO, these two agreements could not go side-by-side since if both the agreements are considered together, the assessee's shareholding would become 75% i.e., sum of 7.5 Lacs shares as proposed to be acquired from Shri Harpal Singh (as per agreement dated 12-10-2020) and another 15 Lacs additional shares as proposed to be issued by M/s KBPL to the assessee as per unsigned and undated agreement. If seen on standalone basis also, the assessee has not purchased proposed 7.5 Lacs number of shares from Shri Harpal Singh as per signed agreement. The assessee has also not been allotted 15 Lacs shares as proposed in the unsigned agreement. Therefore, both these documents run contrary to the actual transaction that has happened i.e., allotment of 14,06,259 number of shares by M/s KBPL to the assessee. Applying this logic, the conclusion of Ld. AO has no sound logic. In our considered opinion, the unsigned and undated agreement has no enforceability and the same is nothing more than a dump document which cannot be relied upon, to all, to draw any adverse conclusion or to make any addition in the hands of the assessee. Therefore, the unsigned and undated agreement have to be discarded for all purposes and no cognizance of the same could be taken while framing the assessment. The terms of the signed agreement has also not been carried out by the respective parties.
5721. The handwritten document which is seized as Annexure A-3 (Page
11) has computed the value of share of M/s KBPL at Rs.1173/- per share which is based on Balance Sheet dated 31-03-2020 whereas the allotment has happened on 31-03-2021. To make any such addition u/s 56(2)(x)(c), any document showing value per share on the basis of Balance Sheet as on 31-03-2021 would be the only valid document which could have been considered by Ld. AO to dispute the valuation of shares as issued by M/s KBPL. The sale consideration of 14,06,259 number of shares, as per this valuation, would come to Rs.165 Crores which is totally alien to the figures as found mentioned in the seized documents. The page is apparently not more than a valuation exercise which is not of much relevance for the purpose of adjudicating the impugned additions. This page does not convey any indication that the shares were allotted at less than their respective fair market value. The conclusion of Ld. AO that it was decided long time between the parties that the total investment to be done would be Rs.150 Crores and the method and mode kept on changing to suit the places and designs to evade taxed by undervaluing the property has no sound basis and the same has to be rejected.
22. The Page-10 of Annexure A-3, as referred to by Ld. AO, is a hand- written document dated 06-03-2021 which was confronted to Shri Navneet Gupta (VP, Finance). He stated that this was about deal between M/s KBPL and the assessee. The total deal was for Rs.150 Crores. The cash involved was for Rs.25 Crores but in his presence, no cash was paid or delivered. This document was confronted to Shri AIS Bedi (Executive Director) who stated that Rs.25 Crores was planned to be paid in the form of cash. Out of 58 the same, Rs.7 Crores had already been paid whereas they had no intention of paying the remaining amount in cash. Against this consideration, the receipt of Rs.5 Crores was found during search which was signed by Shri Harpal Singh. When confronted, Shri Harpal Singh admitted that the receipt of Rs.5 Crores was issued by him. However, he stated that this was a mere arrangement to raise capital to square-off the deal. There was no scope of cash transactions and nothing was transacted. The same stood rejected by Ld. AO who made allegations of unaccounted cash expenditure for Rs.7 Crores and the same was consequently added to the income of the assessee as a separate addition.
23. At the same time, Ld. AO has revalued the hotel land and building and finally arrived at value of Rs.1316.845 per share as against allotment price of Rs.533.33 per share. The differential of the two has been added to the income of the assessee invoking the provisions of Sec.56(2)(x)(c). In the process, the assessee's objection to valuation (land being leasehold land) and reduction of liabilities (payment of 50% unearned profits to Municipal Corporation and lease rentals) as connected with hotel property stood rejected by Ld. AO. The Ld. AO has disputed the valuation so made by the assessee and made addition u/s 56(2)(x)(c) by reworking the valuation of the shares. The same is done primarily by revaluing the hotel property by applying stamp duty value rates as applicable to freehold land. The difference in the valuation of shares of M/s LBPL as done by the assessee and as done by Ld. AO could be tabulated as under: -
59Valuation of Shares of M/s Lok Priya Buildwell Pvt Ltd No. Particulars Amount as per Appellant Amount as per Ld. AO A. A= book value of all the assets Rs. 2,58,79,07,352/- Rs. 2,58,79,07,352/-
(Other than jewellery, artistic work, shares, - Rs. 2,42,00,00,000/-
securities and immovable property) in the (Land and land appurtenant to
balance-sheet building)
as reduced by, --
(i) any amount of income-tax paid, if any, less
the amount of income-tax refund claimed, if
any; and
(ii) any amount shown as asset including the
unamortized amount of deferred expenditure
which does not represent the value of any
asset;
a. TDS/TCS for FY 2020-21 a. Rs. (38,35,591/-) a. Rs. (38,35,591/-)
b. Deferred Tax Assets (Net) b. Rs. (3,29,13,181/-) b. Rs. (3,29,13,181/-)
Total A Rs. 2,55,11,58,580/- Rs. 13,11,58,580/-
B. the price which the jewellery and artistic work Nil Nil
would fetch if sold in the open market on the
basis of the valuation report obtained from a
registered valuer
Total B Nil Nil
C. fair market value of shares and securities as Nil Nil
determined in the manner provided in this rule
Total C Nil Nil
D. the value adopted or assessed or assessable Nil Rs. 553,81,64,176/-
by any authority of the Government for the (Land and land appurtenant to
purpose of payment of stamp duty in respect of building)
the immovable property
Total D Nil Rs. 553,81,64,176/-
L. L= book value of liabilities.
a. Other Long-term Liabilities a. 1,59,91,99,882/- a. 1,59,91,99,882/-
b. Other Current Liabilities b. 3,64,15,426/- b. 3,64,15,426/-
c. Short-term Provisions c. 12,22,33,336/- c. 12,22,33,336/-
d. FF & E Reserve d. 20,16,03,159/- d. 0
Total L Rs. 1,95,94,51,804 /- Rs. 1,75,78,48,645/-
Total Fair Market Value of Shares of M/s Lok
Priya Buildwell Pvt. Ltd.= (A+B+C+D-L) Rs. 59,17,06,776/- Rs. 391,14,74,111/-
Fair Market Value of total stake of M/s Kranti Rs. 59,16,47,605/- Rs. 391,10,82,963/-
Buildwell Pvt. Ltd (47045295 (shares of m/s
Kranti Buildwell Pvt Ltd)/47050000 (total no
of shares issued and subscribed for Lok
Priya Buildwell Pvt Ltd as on date)
60
Thereafter, the valuation of Shares of M/s KBPL, has been computed by the assessee and Ld. AO as under: -
Valuation of Shares of M/s Kranti Buildwell Pvt Ltd No. Particulars Amount as per Amount as per Ld. AO Appellant A. A= book value of all the assets Rs. 2,50,99,72,730/- Rs. 2,50,99,72,730/-
(Other than jewellery, artistic work, shares, securities (Rs. 1,72,05,00,000/-) (Rs. 1,72,05,00,000/-) and immovable property) in the balance-sheet (Investment in Shares of M/s Lok Priya Buildwell) as reduced by, -- Nil Nil
(i) any amount of income-tax paid, if any, less the amount of income-tax refund claimed, if any; and
(ii) any amount shown as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset;
Total A Rs. 78,94,72,730/- Rs. 78,94,72,730/- B. the price which the jewellery and artistic work would fetch if Nil Nil
sold in the open market on the basis of the valuation report obtained from a registered valuer Total B Nil Nil C. fair market value of shares and securities as determined in the manner provided in this rule Rs. 59,16,47,605/- Rs. 391,10,82,963/-
(Investment in Shares of M/s Lok Priya Buildwell)- As per above Total C Rs. 59,16,47,605/- Rs. 391,10,82,963/-
D. the value adopted or assessed or assessable by any Nil Nil authority of the Government for the purpose of payment of stamp duty in respect of the immovable property Total D Nil Nil L. L= book value of liabilities. Rs. 75,00,20,000/- Rs. 75,00,20,000/-
Total L Rs. 75,00,20,000/- Rs. 75,00,20,000/-
Total Fair Market Value of Shares of M/s Kranti Buildwell Pvt. Ltd.= (A+B+C+D-L) Rs. 63,11,00,335/- Rs. 395,05,35,693/-
Fair Market Value Per Share (A+B+C+D-L) X PV/PE Rs. 420.73/- Rs. 1316.845/-
It could be seen that the difference in two valuation arises due to the difference in valuation of Land & Building and on account of FF&E reserves being treated as ascertained liability by the assessee which has not been 61 accepted by Ld. AO. The assessee has considered the book value of land and building whereas Ld. AO has valued the same at freehold stamp duty valuation.
24. Coming back to Page-10 of Annexure A-3, there is clear admission by Shri Navneet Gupta that this document was written by him on the instructions of Shri AIS Bedi. The said document was about the deal between M/s KBPL and the assessee. The total deal was for Rs.150 Crores out of which Rs.75 Crores stood paid towards share capital. The amount of Rs.50 Crores represents unsecured loans. The cash component involved was only for Rs.25 Crores. Out of cash component, Rs.7 Crores stood repaid by 06-03-2021. Shri AIS Bedi also admitted about the said deal and the facts as enumerated by Shri Navneet Gupta. Pertinently, it was stated by him that Rs.7 Crores had already been paid whereas they had no intention of paying the remaining amount in cash. In fact, this position stood accepted by Ld. AO since Ld. AO, by considering these documents, has made addition of cash component of Rs.7 Crores which stood exchanged between the parties as per the seized documents. The respective statements made u/s 132(4) are not shown to have any valid retraction and therefore, these statements, in our considered opinion, were important and valid piece of evidence which could certainly be used while framing the assessment particularly when the same stood corroborated with seized material (cash receipt) during search on the assessee. Therefore, these documents as well as the recorded statements u/s 132(4) are to be taken at their face value and are to be fully relied upon to draw adverse inference against the assessee. Under these circumstances, the allegation of Ld. AO 62 that the shares were issued at less than FMV would have no legs to stand since the said allegation run contrary to the search findings which indicate that the assessee has parted with much more money than the one as found recorded in the regular books of accounts. The Ld. AO could not blow hot and cold at the same time. The provisions of Sec. 56(2)(x)(c) would get attracted only if the shares are actually issued at less than FMV which is not the case here. Quite clearly, extra consideration has flown in the shape of agreed cash component as well and therefore, these provisions, in our considered opinion, do not have any applicability to the facts of the present case before us. Applying the said provisions to the fact of the present case would run contrary to the seized material and statements recorded therein. This being so, the question of computing FMV of shares of M/s KBPL as on 31-03-2021 would be of no consequence. This question would be rendered infructuous. As a logical consequence, the addition made by Ld. AO u/s 56(2)(x)(c) stands deleted on merits on the ground that these provisions would not, at all, apply to the facts of the present case before us. At the same time, the addition of Rs.7 Crores would stand confirmed since the same is based on incriminating documents and seized material as unearthed by the department during search on the assessee coupled with the recorded statements therein. The argument of Ld. AR that the addition should be restricted to the extent of Rs.5 Crores only since the receipt was found for that amount, could not be accepted in view of the clear admission on behalf of the assessee. The same is corroborated by recorded statements of respective parties. In other words, while upholding the 63 addition of Rs.7 Crores, the addition made by Ld. AO by invoking the provisions of Sec.56(2)(x)(c) stand deleted.
25. Another argument as raised by Ld. AO is that the land is leasehold land, the value of which could not be equated with freehold land as applied by Ld. AO. The copy of Land allotment letter dated 17-10-2006 has been placed on Page Nos. 32 to 36 of Paper Book-II. Upon perusal of the same, it could be seen that the said land has been acquired by the assessee in an auction process. The assessee has been allotted land on Lease hold basis for a period of 99 years only. The total sale price has been fixed for Rs.101.37 Crores and the assessee is required to pay ground rent of 2.5% of premium for every year for first 33 years, premium of 3.75% for next 33 years and finally, 5% of premium for remaining 33 years. The premium for first 33 years is computed at Rs.2,53,42,500/- per year for first 33 years. The clause-14 of the allotment read as under: -
14. After the sub-lessee has paid full premium of the site whether before or after constructing a building according to the sanction plan, he may also with the permission of the Additional Commissioner, transfer his rights in the site subject to the condition that 50% (fifty percent) of the unearned increase in the value of the land at the time the said rights in the siteare sold or transferred shall we payable to the Municipal Corporation,Chandigarh before registering such sale or transfer. The value of the property for this purpose shall be assessed by the Additional Commissioner-cum-Estate officer or any other authority, which may be appointed by the Commissioner,Municipal Corporation, Chandigarh whose decision shall be final and binding on the sub-lessee. The sub lessee shall also be liable to pay unearned increase / Transfer fees / charges as per the provision of the Rules 1973 as amended from time to time in this behalf.64
Upon perusal of the terms of allotment, it could very well be seen that the property was a leasehold property which was acquired in the auction process. The assessee was liable to pay lease premium as well as ground rent per year at specified rates. The assessee thus enjoyed limited rights in the property. These rights could be transferred by the assessee subject to payment of 50% unearned increase in the value of the land to the Municipal Corporation. For the said purpose, the value of the land was to be assessed by appointed authority whose decision would be final and binding on the sub-lessee. Therefore, these rights, in our considered view, were distinct partial rights out of bundles of rights as available in the case of a freehold property and these rights could not be equated with full-fledged ownership freehold rights. These two rights are quite distinct in nature which bears separate value for the purchaser thereof. The condition of allotment itself recognizes this fact and provides for valuation of the land by appropriate authority at the time of transfer thereof. If the logic of Ld. AO in applying the freehold rates is accepted then there would have been no such requirement in the allotment letter. It is also clear that the transfer of rights is subject to payment of 50% unearned increase in the value of the land to the appropriate authority at the time of transfer of leasehold rights. The logic of Ld. AO that the initial allotment was at 230% of the stamp duty value does not carry much weight since it is not a case of allotment by the authorities but a case of acquisition of leasehold rights on certain land by way of auction process which would generally fetch high prices for the authority. The initial allotment price has not been decided by the authority but it has 65 been determined in an auction process. Therefore, this fact do not justify application of freehold rates to the leasehold land.
26. Further, the right so acquired by the assessee was transferable subject to stipulated payment of 50% of unearned increase in value of land to the appropriate authorities and also subject to payment of ground rent on yearly basis. The leasehold rights of the assessee in the said land were fastened with both these liabilities and the same would be relevant consideration to determine the value of these rights from purchaser's point of view. These rights were encumbered rights as against un-encumbered freehold rights. The leasehold rights could be converted into freehold rights only after payment of conversion fees at the specified rates only. Therefore, these two rights could not be equated with each other and the valuation of the two rights could not be considered to be at par with each other. The owner of leasehold rights cannot enjoy the property in the same manner as the owner of a freehold property. Section 105 of the Transfer of Property Act, 1882, defines 'lease' as a transfer of a right to enjoy an immovable property for a certain time, or in perpetuity against consideration of a price paid or promised to the transferor by the transferee, who accepts the transfer on such term. As such, lease is only a transfer of right to enjoy an immovable property and not the transfer of immovable property itself. The property under consideration is a leasehold property the ownership of which vests with the Central Government as noted by Hon'ble Apex Court in Estate Officer vs. Charanjit Kaur, CIVIL APPEAL NO. 4964 OF 2021 (arising out of SLP (Civil) NO. 5051 OF 2018). This case was related to an appeal for conversion of a leasehold site in Chandigarh into a freehold 66 site. The context of the argument as made by the appellant Estate Office, UT Chandigarh states as under: -
"That the title of leasehold property vests with the Central Government in terms of Section 3 of the Act and the Rules framed thereunder. The Central Government had granted lease of residential plots for a period of 99 years under the 1973 Rules. The conversion fee fixed to convert leasehold property leased for 99 years to freehold property, if allowed, would absolve the allottees from payment of annual rent in terms of Rule 13 as well as the payment of unearned increase in the case of transfer of leasehold rights in terms of Rule 17(10) of the 1973 Rules. Thus, an un- encumbered title would pass on to the purchaser as against 99-year lease to an allottee under the 1973 Rules."
The appropriate authority has taken a position that the title of leasehold property vests with the Central Government in terms of Section 3 of the relevant act. The Central Government had granted lease of residential plots for a period of 99 years under the 1973 Rules. The conversion fee fixed to convert leasehold property leased for 99 years to freehold property, if allowed, would absolve the allottees from payment of annual rent in terms of Rule 13 as well as the payment of unearned increase in the case of transfer of leasehold rights in terms of Rule 17(10) of the 1973 Rules. Thus, an un-encumbered title would pass on to the purchaser as against 99-year lease to an allottee under the 1973 Rules. A distinction has been created by the appropriate authority itself between freehold property and a leasehold property. The conversion from leasehold property to freehold property is subject to hefty conversion fees to the Government since the same would absolve the assessee from paying annual ground rent as well as payment 67 of unearned increase in value of land. Considering this fact, the adoption of freehold rates by Ld. AO could not be held to be justified at all.
27. It could further be seen that there exists no stamp duty value of this property in any records as is also evident from clause 14 of lease deed. Since the very stamp duty value is absent as on the date of valuation, i.e., there exists no value so adopted by the Stamp Valuation Authority for the subject land, the valuation mechanism as provided in Rule 11UA(1)(c)(b) cannot be applied and therefore, no computations could be made in terms of decision of Hon'ble Apex Court in the case of B.C. Srinivasan Shetty; (1981) 128 ITR 294. Similarly, Chandigarh Tribunal in the case of CSJ Infrastructure (P.) Ltd. v. ACIT [2025] 174 Taxmann.com 1231 held that where neither AO nor DVO could lay hands on correct rate of stamp valuation authority as on date of sale agreement, the value so declared by assessee in sale deed on which stamp duty had been paid was to be construed as correct value and no addition was required to be made in hands of assessee as per Section 43CA. In the present case also, Ld. AO is not able to find out the correct stamp duty value and therefore, the claim of the assessee is to be accepted. On these facts, we would hold that the action of Ld. AO in applying Collector rates as applicable to freehold Shop- cum-Office (SCO) and Shop-cum-Flat (SCF) properties in the area is clearly flawed and the said computations could not be accepted. There is a fundamental error since the impugned property is neither an SCO nor an SCF but a leasehold property. Consequently, the revaluation as done by Ld. AO suffer from infirmity and legally liable to be set aside. In the absence 68 of established leasehold rates, the rates as applicable to freehold SCO or SCF could not be applied to the impugned land and building. We order so.
28. Proceeding further, if the liability of payment of 50% unearned increase in land value alone is considered, the same amounts to Rs.264.67 Crores (50% of stamp duty value of Rs.529.34 Crores as computed by Ld. AO as on 31-03-2021) which would drastically reduce the value of the shares. The Ld. AR has also computed that the liability on account of yearly ground rent for remaining 82 years of lease would aggregate to Rs.207.80 Crores. If these two components are reduced from valuation, the whole case of Ld. AO to make impugned addition u/s 56(2)(x)(c) would fail. Coming to the issue of FF&E reserve, it could be seen that as per contractual terms of franchise agreement of M/s LBPL with the hotel operator Mariott, M/s LBPL was obligated to earmark the specified amounts for replacement, renewals and additions to the furniture fixture & equipment for the hotel and to meet out routine capital expenditure. The amount is to be kept aside every year at specified percentage of gross revenue. M/s LBPL was required to keep this amount in a separate bank account and no withdrawals are permitted from the said account except with the consent of the operator and that too, for renewals of furniture, fixtures and equipment or to meet capital expenditure. M/s LBPL was required to expand the said amount in specified manner only as per the direction of the operator and the left-over balance was to be carried forward to next year. During this year, the FF&E reserves balance is Rs.20.16 Crores against which M/s LBPL has incurred expenditure of Rs.15.70 Crores up-to March, 2022. Therefore, the said liability has to be considered as ascertained liability only. The creation 69 of the fund was mandatory for M/s LBPL as per contractual terms. The amount was to be spent for maintenance and betterment of the assets. The Ld. AO, in our considered opinion, has erred in denying the same while computing the value of shares of M/s LBPL. This liability alone stands at Rs.20.16 Crores. Considering the same, nothing would be left for addition u/s 56(2)(x)(c).
29. Another substantive argument of Ld. AR is that the provisions of Sec.56(2)(x)(c) do not apply to leasehold rights in the land. For this purpose, it would be useful to take note of the provisions of Sec.56(2)(x)(c) which read as under: -
Income from other sources.
56. (1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head "Income from other sources", if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E. (2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head "Income from other sources", namely:
.....
(x) where any person receives, in any previous year, from any person or persons on or after the 1st day of April,2017,--
.....
(c) any property, other than immovable property, --
(A) without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property; (B) for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration .....
Explanation. -- For the purposes of this clause, the expressions "assessable", "fair market value", "jewellery", "property", "relative" and "stamp duty value" shall have the same meanings as respectively assigned to them in the Explanation to clause (vii).
70It could be seen that the relevant provisions of Sec. 56(2)(x)(c) of the Act provide that where any person receives, in any previous year, from any person or persons on or after 01-04-2017 any property, other than immovable property for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration shall be chargeable to tax as income from other sources. The Explanation to this clause, inter-alia, provides that the expression 'fair market value' and 'property' shall have the same meaning as assigned to it in the Explanation to clause (vii). The Explanation to Clause (vii) define the property to mean the following capital asset of the assessee, namely:--(i) immovable property being land or building or both; (ii) shares and securities; (iii) jewellery; (iv) archaeological collections; (v) drawings; (vi) paintings; (vii) sculptures (viii) any work of art; (ix) bullion. Thus, the expression property has been defined to mean immovable property being Land or Building or Both. There is no mention of any rights in such land and building. The reliance of Ld. AO on Sec.27(iii) is misplaced since the said provisions are in the context of allotment of the building or lease of the building and not with respect to leasehold land. In this context, it is vital to adhere to the established principles of interpreting fiscal legislation. As observed by the Hon'ble Apex Court in Commissioner of Income Tax-III v. Calcutta Knitwears, Ludhiana (2014) 362 ITR 673 (SC):
"Before we proceed to explain the said provision, we intend to remind ourselves of the first or the basic principles of interpretation of a fiscal legislation. It is time and again reiterated that the courts, 71 while interpreting the provisions of a fiscal legislation should neither add nor subtract a word from the provisions of instant meaning of the sections. It may be mentioned that the foremost principle of interpretation of fiscal statutes in every system of interpretation is the rule of strict interpretation which provides that where the words of the statute are absolutely clear and unambiguous, recourse cannot be had to the principles of interpretation other than the literal rule..."
This principal mandate that where the words of a statute are clear, they must be interpreted literally, without adding or subtracting terms. Hence, in the instant case, it has been clearly and directly provided in the Act that the immovable property for Section 56(2)(x)(c) only includes Land or Building but not the rights in such land or building. Whenever the legislature has intended to include "lease rights" within the ambit of a property definition, it has been done explicitly within the specific section. An example would be provisions of Sec.54D (1) which define 'capital asset' to include 'land or building or any right in land or building'. No such expression has been used in Explanation to Section 56(2)(vii). The express use of one specific expression inherently excludes the other. Therefore, in our considered opinion, this argument of Ld. AR has substantial force and the same is to be accepted.
30. Another argument of Ld. AR is that fresh allotment of shares would not attract the impugned provisions of Sec.56(2)(x)(c). To support the same, Ld. AR has quoted the decision of Hon'ble Gujarat High Court in the case of PCIT vs. Jashawanlal Shah (154 Taxmann.com 568) holding that the provisions of Sec.56(2)(vii)(c) ought to be applied only in case of transfer of shares and the allotment of new shares cannot be regarded as transfer of shares under Section 56(2)(vii)(c). This decision has been rendered considering the decision of Hon'ble Apex Court in Khoday Distilleries Ltd.
72(307 ITR 312). In this decision, the Hon'ble Court, referring to the decision of Sri Gopal Jalan & Co. v. Calcutta Stock Exchange Association Ltd. [1963] 33 Comp. Case 862 (SC) / 1964 (3) SCR 698, held that "allotment" means appropriation out of previously un-appropriated capital of a company, of a certain number of shares to a person and till such allotment the shares do not exist as such". Therefore, it is only on allotment that the shares come into existence. In every case, the words "allotment of shares" having used to indicate the creation of shares appropriation out of unappropriated share given to a particular person which is also referred to in the notice of clause to the Finance Bill 2010. Therefore, the aim and intention behind amending the provision of Sec.56 is to prevent the practice of transferring unutilized shares at a price which are allotted for the first time by way of right shares. The amendment was, therefore, never meant to aim the "fresh issue" or "fresh allotment" of shares by a company. This decision has been followed by Hyderabad Tribunal in the case of Thermodyne Dynamics Pvt. Ltd. (176 Taxmann.com 485) to hold that the provisions of Section 56(2)(viia) are not attracted to fresh allotment of shares since allotment does not constitute 'receipt' of shares. We find that the provisions of Sec.56(2)(x)(c) are similarly worded to the provisions of Sec.56(2)(vii)(c) with the only difference that the provisions of Sec.56(2)(vii)(c) are applicable prior to the 01-04-2017 whereas the provisions of Sec.56(2)(x)(c) are applicable thereafter. Therefore, the cited case laws duly support the case of the assessee and are applicable to the facts of present case before us. Considering the said decisions, the impugned addition as made by Ld. AO u/s 56(2)(x)(c) could not be sustained.
7331. Finally, considering the facts and circumstances of the case, the impugned addition as made by Ld. AO invoking the provisions of Sec.56(2)(x)(c) stand deleted on merits. The addition of Rs.7 Crores stand confirmed. The corresponding grounds of appeal stand disposed-off accordingly.
32. The third issue on merits is addition of alleged cash expenditure on payment of overtime wages / GWR / overtime to the employees. This issue has been discussed by us at length in preceding para-4. From the detailed facts, it is quite clear that ample clinching documentary evidences have been found from all the three units of the assessee which indicate that the assessee indulged in incurring such cash expenditure. There is clear admission by the concerned employees who were running the three units of the assessee. The mode and manner in which such expenditure was being quantified and disbursed to the employee has also been elaborated by them in their respective statements u/s 132(4). No plausible explanation has been furnished by the assessee to controvert the findings of Ld. AO. Therefore, the addition of Rs.158.10 Lacs so made by Ld. AO stand confirmed on merits.
33. The next issue that falls for our consideration is alleged bogus purchases from RSG. From the enumerated facts, it is quite clear that Page No.107 contains transactions for FY 2021-22. The whole exercise as well as conclusion of Ld. AO is based on this page. The relevant Page for this year is Page No.94 (Annexure-41) which contain only few entries for this year. It has been contended by Ld. AR that the allegation could not be extrapolated to the entire year for which no notings was found in the record.
74The Ld. AR has stated that the assessee has furnished ample documents to substantiate the purchases so made from RSG and therefore, extrapolation could not be done by Ld. AO. We concur with these arguments of Ld. AR since the addition has to be restricted to the extent of incriminating document found during search. As per Page-94, the assessee has received back cash component of Rs.7,55,76,360/-. Therefore, the addition stands restricted to that extent only. This addition is backed up by incriminating material as well as the recorded statements / CCTV footage. The findings of Ld. AO remain to be controverted with plausible explanation. The corresponding grounds of appeal stand partly allowed.
34. The last issue is issue of interest disallowance u/s 36(1)(iii). We find that the provisions of Sec.36(1)(iii) provide for deduction of amount of the interest paid in respect of capital borrowed for the purposes of the business or profession. The Hon'ble Apex Court in the case of S.A.Builders (288 ITR 1) held that the expression "for the purpose of business" includes expenditure voluntarily incurred for commercial expediency and it is immaterial if a third party also benefits thereby. Further, the expression "for the purpose of business" is wider in scope than the expression "for the purpose of earning profits. The expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure, if it was incurred on grounds ofcommercial expediency. The facts of the present case would show that the investment of Rs.75 Crores as made by the assessee was to acquire new business 75 venture and the expenditure was certainly incurred on commercial expediency for the purpose of business only. The test of 'incurred for the purpose of business and the test of 'commercial expediency' stood satisfied for this investment. Therefore, the disallowance with respect to investment of Rs.75 Crores could not be sustained. The Hon'ble Apex Court in the case of CIT vs Reliance Industries Ltd. (102 Taxmann.com 52) held that if the interest free funds available to the assessee were sufficient to meet its investments, then it could be presumed that the investments were made from the interest free funds available with the assessee. It could also be seen that there is net reduction in CWIP during this year by Rs.84.82 Lacs whereas the assessee has returned income of more than Rs.48.48 Crores and accordingly, the aforesaid presumption would apply in assessee's favor. The assessee has also raised interest free funds of Rs.30 Crores during this year which also favors the case of the assessee. On these facts, the impugned addition of interest disallowance u/s 36(1)(iii) stand deleted. No other ground has been urged in the appeal.
35. In the result, the assessee succeeds on legal grounds and the assessment order stand quashed on legal grounds. Our adjudication on merits would be effective only if the aforesaid legal grounds are subsequently reversed by any higher judicial forum. All the grounds stand disposed-off accordingly.
76Conclusion
36. The appeal stands partly allowed.
Order pronounced on 21/04/2026
Sd/- Sd/-
(RAJPAL YADAV) (MANOJ KUMAR AGGARWAL)
VICE PRESIDENT ACCOUNTANT MEMBER
AS
Dated: 21/04/2026
आदे श की प्रनिनलनप अग्रेनर्ि /Copy of the Order forwarded to :
1. अपीलाथी/Appellant
2. प्रत्यथी/Respondent
3. आयकरआयुक्त/CIT
4. ववभागीयप्रवतवनवि/DR
5. गार्ड फाईल/GF ASSISTANT REGISTRAR ITAT CHANDIGARH