Valuation Rules Versus Transaction Price: Aathmika Holdings Ruling

The interplay between statutory valuation rules and real-world transaction prices often sparks disputes under Section 56(2)(x). In Aathmika Holdings Pvt. Ltd., the Chennai ITAT was called upon to decide whether a negotiated third-party price could override the formula-based FMV prescribed by Rule 11UA.

- By Anirudha Jain

Background of the Case

A search action under Section 132 of the Income Tax Act, 1961 (Act) was conducted in 2020 on the Thiagarajan Group. Aathmika Holdings Pvt. Ltd. (assessee), is an investment holding company of Thiagarajan Group.

For AY 2021-22, the assessee filed its return of income on February 6, 2022, declaring a total income of ₹22,32,201/-.

The assessee purchased 5,92,41,134 shares of M/s IG3 Infra Limited (IG3) at ₹12.43/- per share (totalling ₹73,63,67,296/-) and 18,43,73,618 shares of M/s ETL Power Services Limited (ETL Power) at ₹14.30/- per share (totalling ₹263,65,42,737/-) on August 8, 2020. Both purchases were from M/s Green Grid Group Pte Ltd., Singapore (G3).

The Assessing Officer (AO) considered these transactions as international transactions with an associated enterprise and referred the case to the Transfer Pricing Officer (TPO).

The TPO proposed the Arm's Length Price (ALP) for IG3 shares to be ₹29.48/share by benchmarking it based on a transaction where M/s Chidaatma Contractors Pvt. Ltd. acquired the same IG3 shares from ILFS Realty Fund in the same year. Likewise, adopting the FMV price of IG3 shares at ₹29.48/share, the AO also recomputed the FMV of ETL Power shares [which also held IG3 shares] at ₹53.95/share as opposed to price of ₹14.30/share actually paid by the assessee.

The TPO, in his order dated December 28, 2022, recommended the AO to use this ALP for additions under appropriate sections.

The AO subsequently issued a show cause notice proposing to invoke Section 56(2)(x) of the Act, arguing that the shares were acquired at a price lower than their Fair Market Value (FMV) determined by the TPO (₹29.48/share for IG3 and ₹53.95/share for ETL Power, the latter recomputed based on IG3's FMV).

The AO's proposed addition under Section 56(2)(x) amounted to ₹8,32,04,75,288/-.

Assessee's Stance and Valuation Reports: