ITAT Ahmedabad Ruling: Corporate Demerger Necessitates Proportionate Cost Adjustment for Unlisted Shares Under ICDS VIII

Introduction and Executive Overview

In a significant judicial determination concerning the valuation of securities post-corporate restructuring, the Income Tax Appellate Tribunal (ITAT) Ahmedabad has clarified the application of Income Computation and Disclosure Standards (ICDS) to unlisted shares. In the case of DCIT Vs Harsha Rajeshbhai Jhaveri, the Tribunal dismissed the Revenue's appeal and sustained the deletion of a massive ₹4.30 crore addition.

The core of the dispute revolved around whether an assessee must mechanically continue to value unlisted shares at their original pre-restructuring acquisition cost under ICDS-VIII, or if a legally sanctioned demerger warrants a proportionate adjustment to reflect the shifting of underlying assets. The ITAT decisively ruled that when a company undergoes a demerger approved by the National Company Law Tribunal (NCLT), the original cost of acquisition must be logically apportioned between the retained shares and the newly allotted securities. Ignoring this allocation would lead to a distorted valuation of closing stock.

Furthermore, the Tribunal quashed additions related to alleged accommodation entries, emphasizing that genuine trading transactions supported by robust documentary evidence cannot be discarded based on generic investigation reports.

Genesis of the Dispute: Reassessment and Alleged Accommodation Entries

The matter pertains to the Assessment Year 2018-2019. The assessee, a resident individual, was actively engaged in the business of share trading and investment. The Income Tax Department initiated reassessment proceedings based on intelligence from the Investigation Wing, which alleged that the assessee was a beneficiary of syndicates providing bogus accommodation entries to manipulate profits and losses in the securities market.

According to the information relied upon by the Assessing Officer, the assessee had allegedly executed questionable transactions in the scrips of Kushal Ltd. and Padmanabh Industries Ltd. Additionally, the report claimed the existence of a fictitious accommodation loan transaction amounting to ₹90 lakh involving a specified individual, Shri Jignesh Shah.

Following the statutory procedure, a notice was issued under Section 148A(b) of the Income Tax Act 1961. The assessee filed detailed objections, vehemently denying any loan or accommodation arrangement with Shri Jignesh Shah. The assessee clarified that the ₹90 lakh figure was not a loan, but merely the aggregate turnover of shares bought and sold in Padmanabh Industries Ltd. on a recognized stock exchange.

Despite these clarifications, the Assessing Officer rejected the objections, passed an order under Section 148A(d), and subsequently issued a notice under Section 148. The reassessment was finalized under Section 143(3) read with Section 147 of the Income Tax Act 1961, resulting in three distinct additions to the assessee's income.