DCIT v. M. Mahadevan

Case snapshot

Sections / provisions: 56; Rule 11UA

Questions before the Court / Tribunal

• Undervalued related-party share transfer and valuation: The reported order concerns shares transferred to a related party at a price far below a claimed valuation and remands the valuation exercise for computation under the prescribed framework.

Material facts and background

1. The order of the learned Commissioner of 1ncome Tax (Appeals) is erroneous on facts of the case and in law. 2. The Ld.CIT(A) erred in directing to treat the residential status of the assessee as Non-Resident and consequently deleting the addition made of Rs.1,95,70,965/ - being the income earned by the assessee abroad and brought to tax. 3. The ld. CIT(A) erred in holding that the data as per Foreigner Regional Registration Office cannot be considered for the purpose of determination of period of stay of the assessee in India. 4. The ld. CIT(A) erred in holding that the stampings in the Visas indicating the purpose of travel abroad to Malaysia, Singapore, Thailand, etc. as 'social purpose' is for business purpose and consequently, the travel outside India is for the purpose of employment and therefore the assessee has to be treated as Nonresident considering that the period of stay is not exceeding 182 days. 5. The ld. CIT(A) has erred in ignoring the fact that the assessee's claim that he was resident of UAE Was disproved by the AO with evidence and the same is also relevant for the purpose of determination of residential status of the assessee. 6. The ld. CIT(A) has failed to...

he has not declared global income in the tax returns filed in any country. 7. For these grounds and any other ground including amendment of grounds that may be raised during the course of the appeal proceedings, the order of learned CIT(Appeals) may be set aside and that of the Assessing Officer be restored. FOR AY-2019-20

1. The order of the learned Commissioner of Income Tax (Appeals) is erroneous on facts of the case and in law. 2. The Ld.CIT(A) erred in directing to treat the residential status of the assessee as Non-Resident and consequently deleting the addition made of Rs.2,11,13,549/- being the income earned by the assessee abroad and brought to tax. 2.1 The ld. CIT(A) erred in holding that the data as per Foreigner Regional Registration Office cannot be considered for the purpose of determination of period of stay of the assessee in India. 2.2 The ld. CIT(A) erred in holding that the stampings in the Visas indicating the purpose of travel abroad to Malaysia, Singapore, Thailand, etc. as 'social purpose' is for business purpose and consequently, the travel outside India is for the purpose of employment and therefore the assessee has to be treated as Nonresident considering that the period of stay is not exceeding 182 days. 2.3 The ld. CIT(A) has erred in ignoring the fact that the assessee's claim that he was resident of UAE was disproved by the AO with evidence and the same is also relevant for the purpose of determination of residential status of the assessee. 2.4 The ld. CIT(A) has failed...

Appellant / assessee submissions

held to be resident for the purpose of Income-tax Act, 1961, in India during AYs 2013-14 to 2019-20. The Ld.AO rejected the arguments of the assessee qua his tax residency, in corresponding period, in UAE w.r.t DTAA between India and UAE. The Ld.AO, inter alia, observed that by merely furnishing the tax residency certificate from UAE in the name of the assessee (obtained during 2021 for the past years) does not confer the residential status to assessee, as per Article 4 of DTAA between INDIA and UAE, in the Arab Emirates. During the assessment proceedings, the assessee submitted before the Ld.AO, the computation of income for AYs 2013-14 to 2019-20 taking into account the global incomes of the assessee based on the return of income filed in USA and Canada for the said assessment years and for the other countries estimated income admitted in the sworn statement given on 03.01.2019, vide his letter dated 21.03.2022. The Ld.AO held that by being a resident of Indian the assessee ought to have declared all his global income, for taxation in India. The purpose of showing the residential status as NRI by the assessee is only a ploy to ensure that his global income is not assessed and...

therefore confirm the order of the Ld.AO and set aside the order of Ld.First Appellate Authority. The Ld. AR submitted that it has paid taxes in foreign jurisdictions and that, given the assumption of the Ld.AO for taxing its global income treating the assessee as a resident, due credit ought to have been given for the said payment of foreign taxes. Credit of foreign taxes paid by an assessee as its overseas income is available in accordance with the provisions of the section-90-91 of the Act. The Ld. AO is directed to verify from the original records produced by the assessee of payment of foreign taxes and allow necessary credit in accordance with law. The assessee shall be required to produce all the documents in this regard before Ld.AO and the Ld.AO shall pass an order after giving due opportunity of being heard to the assessee on the issue of allowance of credit of foreign taxes. All the grounds of appeal raised by the appellant Revenue on the issue for AY-2013-14 vide ITA No.1824 / Chny/ 2024 are therefore partly allowed. 6.0

The Ld. AR submitted that the Ld. CIT(A) has accorded relief

The Ld. AR of the assessee, during the present

Revenue / respondent submissions

resident of UAE for which a certificate of tax residency was also produced, and therefore he is beyond the purview of section-6 of the Act. It has been therefore argued that the assessee’s income cannot be brought to tax in India. The Ld. DR argued that the relief accorded by the Ld.CIT(A) accepting the residence certificate issued by UAE authorities indicating that assessee is a tax resident in Dubai is based upon wrong

building included a property bearing No.71 Cathedral Road Chennai. The Ld. DR submitted that OCPL sold the same property being No.71 Cathedral Road Chennai to Smt. Badrunissa W/o assessee vide sale deed dated 18.12.2018 for Rs.3,29,06,808/-, an amount for less than the stamp duty value. The Ld. DR further conveyed that the Ld.AO noted that the assessee has entered into a share transfer agreement dated 18.08.2018 with PF for sale of his 31.8% shareholding in OCPL comprising 28256 shares for Rs.100 each aggregating to Rs.28,25,600/-. The Ld. AO had noted that the FMV of the impugned share of OCPL sometimes in June-2018 was Rs.19,556/- and vide valuation report dated 09.03.2018 was about Rs.20,000/-. The Ld. AO noted that the impugned shares were valued at Rs.100/ share as on 18.08.2018. The Ld. DR drew reference to electronic communications exchanged between the assessee and its associates as well as valuation report of one Brahmayya and company CAs in support of its arguments. In support of its above contentions, the Ld.DR invited reference to following sworn statement of one Shri Sandeep Reddy sole director of Avini Pvt Ltd which provides advisory services to Peepul Fund II LLC...

The Ld. DR submitted that the valuation of OCPL shares of

30.06.2018 was reported on 04.09.2018 as against the alleged sale of share at Rs.100 / share indicated in the agreement dated 18.08.2018. The Ld. DR thus argued that the corresponding valuation of shares made by the assessee u/s 56(2)(x) of the Act r.w. rule-11UA(1)(c )(v) as on 31.07.2018 at Rs.11 / share was also an afterthought.

Court / Tribunal analysis and reasoning

a Central Government Agency, its data cannot be suspected or doubted. The agency is mandated to keep on real time basis data of entry and exit of foreigners and citizens at country’s borders. We therefore find force in the reliance of the Revenue upon the FRRO data for calculating the period of the stay of the assessee in the country. The arguments of the Ld.AR therefore cannot be accepted. We have also noted that provisions of section-6 cannot be read in silos and have to be given a conjoined reading.

and tourist Visas have been considered. It is the case of the Revenue that the assessee, as evident from Visas granted to him, was not travelling for business purposes and therefore cannot claim that the visits were for business purposes.

the assessee that the Revenue has, through search proceedings, unequivocally admitted that the assessee was having extensive overseas business interest and was travelling and that therefore its global income cannot be taxed in India.

visas it only supports the view of the Ld. AO and as such sec 6(1) (c) of the IT Act is squarely applicable and thereby the assessee is the resident for tax purposes in India. The arguments of the assessee therefore fails, and we are unable to subscribe its views qua it being a non-resident in assessment years under appeal. 4.8

resident of UAE for which a certificate of tax residency was also produced, and therefore he is beyond the purview of section-6 of the Act. It has been therefore argued that the assessee’s income cannot be brought to tax in India. The Ld. DR argued that the relief accorded by the Ld.CIT(A) accepting the residence certificate issued by UAE authorities indicating that assessee is a tax resident in Dubai is based upon wrong

certificate on the premise that it was issued in 2021. It has been argued that the very purpose of DTAA is to determine the tax liability of person who belongs to one country but has certain transaction which are taxable in both the countries but to avoid the double taxation of same income at both the countries has to necessarily determine the residential status of that person as per the relevant article of the DTAA only. It is the case of the Revenue that because in the instant case assessee has stayed for more than 182 days in India in accordance with the provisions of Section6(1) of the Act, therefore Article-4 of the DTAA provisions of India-UAE would not be applicable. We have noted that the Ld. AO has comprehensively analyzed the situation to establish that Article-4 of the DTAA provisions of India-UAE is not applicable in this case. 4.9

therefore confirm the order of the Ld.AO and set aside the order of Ld.First Appellate Authority. The Ld. AR submitted that it has paid taxes in foreign jurisdictions and that, given the assumption of the Ld.AO for taxing its global income treating the assessee as a resident, due credit ought to have been given for the said payment of foreign taxes. Credit of foreign taxes paid by an assessee as its overseas income is available in accordance with the provisions of the section-90-91 of the Act. The Ld. AO is directed to verify from the original records produced by the assessee of payment of foreign taxes and allow necessary credit in accordance with law. The assessee shall be required to produce all the documents in this regard before Ld.AO and the Ld.AO shall pass an order after giving due opportunity of being heard to the assessee on the issue of allowance of credit of foreign taxes. All the grounds of appeal raised by the appellant Revenue on the issue for AY-2013-14 vide ITA No.1824 / Chny/ 2024 are therefore partly allowed. 6.0

Rs.10,52,09,225/-. The Ld. DR argued that the conclusions drawn by the Ld.CIT(A) while according relief to the assessee were therefore based upon wrong appreciation of facts and hence excessive and erroneous. The Ld. DR vehemently argued that the entire construction of agreements, valuation reports by the assessee indicated towards indulgence in tax evasion through the use of colourable devices. Reliance was placed upon the decision of Hon’ble Apex Court in the case of McDowell’s. 7.2

demonstrative, documented electronic records which cannot be altered. The dates mentioned therein are therefore real dates and there cannot be any doubt about it. It goes on to indicate that the agreements executed prior to such electronic communication were engineered or fabricated to suit specific personal interests. As per any accepted principle of management, valuation reports, preparation of financial statements, draft agreements would precede actual execution of any formal agreement and not the otherwise.

Operative decision and relief

the above issues are therefore partly allowed. Page - 48 - of 49

Result Partly allowed. Partly allowed. Partly allowed.

Authorities and precedents appearing in the judgment

• Supreme Court in the case of MacDowell and Company Limited vs The
• J. in Wood Polymer Ltd. v. Bengal Hotels Limited(1) where the

This list is machine-assisted from the judgment text and is not a substitute for checking the full citation chain in the PDF.

Ratio and legal principle

The decision turns on Undervalued related-party share transfer and valuation. The operative result is classified as Partly Allowed. Read the rule only with the statutory version, factual findings and precedent chain recorded in the full judgment.

Why this judgment matters

The case is relevant to taxpayers, advisers and litigators dealing with Undervalued related-party share transfer and valuation. Its practical value lies in the interaction between the statutory text, the evidentiary record and the procedural route followed in this case.

Practitioner action points

• Keep registration, audit-report, Form 10/10B/10BB and filing timestamps together; many exemption disputes are procedural and depend on when the form existed versus when it was uploaded.
• For litigation, attach the full judgment/order to the working paper and cite the paragraph/page supporting the proposition rather than relying on a headnote alone.

Full judgment and source trail

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