ITAT Restricts Substitution Where Actual Consideration Exceeds Rule 11UA FMV

Hon’ble Mumbai Tribunal holds that where the sale consideration for unquoted shares exceeds the Rule 11UA FMV, the AO cannot substitute the actual consideration with a higher value derived from asubsequent independent strategic transaction.

BACKGROUND

• Shri Bharat Vinod Daftary ('Assessee'), held a substantial equity shareholding in Bharat Serums and Vaccines Limited ('BSVL'), an unlisted company. Following his death on 7 December 2023, his legal heir, Smt. Bhavna Bharat Daftary, was substituted in the appellate proceedings. 
• Thekeyissuebeforethe ITATwaswhether,in the absenceofanapplicable statutory deeming provision, the Assessing Officer (‘AO’) could replace the actual consideration of an earlier completed transfer of unquoted shares with the price arising from asubsequent and independent transaction.

FACTSOFTHECASE¹

• On30 September 2019, the Assessee transferred 5,95,500 equity shares of BSVL to Aksipro Diagnostics Private Limited (‘ADPL’) at INR 265 per share. At that time, ADPL was a closely held company owned equally by the Assessee and his brother, Shri Gautam Daftary. The transfer was undertaken to consolidate the family's BSVL shareholding in one corporate vehicle for a potential future strategic divestment.
• The fair market value ('FMV') of the shares determined under Rule 11UA on 30 September 2019 was INR 257.20 per share. Accordingly, the actual consideration of INR 265 per share was higher than the prescribed FMV.
• The consideration accrued on the date of transfer and, instead of being paid immediately, was credited to the running loan account maintained between the Assessee and ADPL.Theoutstanding balance wassettled on7February2020. 
• On 18 November 2019, the promoters and Anasamira Limited, an Advent Group company, executed a Definitive Agreement for the strategic acquisition of BSVL through ADPL. The agreement did not fix a final price and only prescribed a methodology for determining consideration, subject to due diligence, fulfilment of conditions precedent, infusion of capital and closing.
• On 6 February 2020, after fulfilment of the contractual conditions, Anasamira Limited acquired control of ADPL through a primary capital infusion. On 7 February 2020, the Assessee transferred a further 12,56,053 BSVL shares to ADPL at the final contractual price of INR 1,893.98 per share, determined upon closing.
• TheAOtreated the two transfers as part of one composite arrangement, principally because the amount relating to the first transfer was received on 7 February 2020 and newspaper reports indicated that negotiations for the BSVL acquisition had commenced earlier. The AO therefore adopted INR 1,894.09 per share for the first transfer, resulting in an addition of INR 97,01,23,095. A further addition of INR 1,37,161 was madeonaccountofavariationin thesalepriceadoptedfor thesecond transfer, taking the aggregate addition to INR 97,02,60,256. 
• The CIT(A) deleted the entire addition after holding that the consideration of the subsequent transfer could not be substituted for the actual consideration arising from the separate transfer completed on 30 September 2019.

ARGUMENTS PLACED

Assessee’s Arguments

• The Assessee argued that the transfers dated 30 September 2019 and 7 February 2020 were independent transactions governed by different commercial circumstances, ownership structures and pricing mechanisms. The first was an internal restructuring undertaken when ADPL was family controlled, whereas the second was effected after ADPL had come under the control of the AdventGroup.
• It was submitted that the first transfer was completed on 30 September 2019 through the depository mechanism. The consideration accrued on that date and was adjusted in the running loan account. The subsequent receipt merely discharged an existing liability and could not postpone the transfer or alter its consideration.
• The Assessee contended that section 50CA was inapplicable because the declared consideration of INR 265 per share exceeded the Rule 11UA FMV of INR 257.20 per share. In the absence of any other statutory provision authorising substitution, the AOcould notadopt a notional consideration.
• It was further argued that no final strategic-sale price had crystallised on 30 September 2019. Even the Definitive Agreement dated 18 November 2019 made the final consideration dependent on future conditions, due diligence and closing.
• Reliance wasplacedon CITv.George Henderson & Co. Ltd. (1967) 66ITR622 (SC) and CIT v. Gillanders Arbuthnot & Co. Ltd. (1973) 87 ITR 407 (SC), for the proposition that ‘full value of consideration’ under section 48 means the consideration actually received or accruing to the transferor, and not any notional or marketvalue, absent anexpressstatutory deeming fiction.
• Reliance was also placed on K.P. Varghese v. ITO (1981) 131 ITR 597 (SC), for the proposition that the Revenue cannot proceed on assumptions as to what the Assessee might have received unless the statute itself authorises such an inference.
• On the newspaper reports, reliance was placed on Laxmi Raj Shetty v. State of Tamil Nadu and Samant N. Balakrishna v.GeorgeFernandez & Ors. [1969] 3SCR 603, holding that newspaper reports do not, by themselves, constitute substantive evidence of the facts stated therein unless independently proved.

Revenue’s Arguments

• The Revenue argued that receipt of the consideration for the first transfer on 7 February 2020, simultaneously with completion of the second transfer, indicated that both transfers formed part of one composite arrangement.
• It contended that newspaper reports regarding the proposed acquisition of BSVL demonstrated that negotiations had commenced before the first transfer and that the price ultimately received in February 2020 represented the real consideration for the September 2019 transfer as well.

ITAT’S RULING

• The ITAT held that sections 45 and 48 require capital gains to be computed with reference to the consideration actually received or accruing from the particular transfer. The expression 'full value of consideration' does not permit the AO to replace contractual consideration with market value or a notional amount unless the Act expressly creates such a deeming fiction.
• The Tribunal observed that section 50CA permits substitution in the case of unquoted shares only when the declared consideration is lower than the prescribed FMV. Since INR 265 per share exceeded the Rule 11UA FMV of INR 257.20 per share, section 50CA was inapplicable. The AO could not create an alternative substitution mechanism outside the statute.
• TheITATheldthat the transfer of 5,95,500 shares stood completed on 30 September 2019. The delivery instructions and the corresponding demat debit were independent third-party evidence whose genuineness was not disputed by the Revenue.
• TheTribunaldistinguished the date of transfer and accrual of consideration from the later date of payment. The loan ledger account reflected that the consideration stood credited to the Assessee on the date of transfer itself and formed part of the outstanding balance payable by ADPL, while the payment made on 7 February 2020 merely settled that pre-existing liability. Deferred payment could not postpone a completed transfer. 
• The ITAT accepted that the two transfers were distinct. Although ADPL was the immediate transferee in both cases, it was family controlled at the time of the first transfer and controlled by the Advent Group at the time of the second. The contractual framework, ownership, commercial purpose and pricing conditions were therefore fundamentally different.
• The Tribunal found that the Definitive Agreement undermined the AO's inference. The agreement was executed only on 18 November 2019 and, even then, the final consideration was not fixed but remained dependent on conditions precedent, due diligence, capital infusion and closing. Accordingly, the February 2020 price could not be presumed to have been predetermined on 30 September 2019.
• The ITAT held that newspaper reports may, at best, indicate ongoing negotiations and do not constitute substantive evidence of a fixed consideration unless independently established.
• TheRevenue had neither alleged nor established that the transactions were sham, fictitious or colourable, that the documents were fabricated, or that any consideration over and above INR 265 per share had been received for the first transfer. The addition therefore rested on perceived commercial probabilities rather than on statutory authority or on evidence of suppressed consideration. 
• Accordingly, the ITAT upheldthe CIT(A) order anddismissedtheRevenue's appeal.

AURTUS COMMENTS

• This ruling reaffirms that capital gains are computed on the consideration actually received or accruing on the transfer. Substitution of that consideration requires an express deeming fiction. Once section 50CA is excluded because the price exceeds the Rule 11UA FMV, the AO could not invoke any residual power to substitute the actual consideration with a commercially perceived value. 
• Forpromoterfamilies considering consolidation of shareholding ahead of a strategic divestment, the decision indicates that an internal transfer may be distinguished from a subsequent strategic transaction where the transfers are independently structured, the consideration is appropriately supported with documentation, and the internal transfer precedes any binding arrangement with the incoming investor.

Footnote

1. DCIT-3(1)(1), Mumbai v. Bhavna Bharat Daftary(ITA No. 9520/Mum/2025