ACIT v. Kanchan Markhedkar (ITA No. 713/Mum/2025 and ITA No. 784/Mum/2025)
I. Introduction
The relationship between tax avoidance doctrines and statutory valuation rules has often produced some of the most challenging questions in Indian tax jurisprudence. While courts have repeatedly recognised the Revenue’s power to disregard sham transactions and colourable devices, they have been equally consistent in holding that where Parliament has prescribed a specific computational mechanism, tax liability must ultimately be determined within the confines of that mechanism. The recent decision of the Mumbai Bench of the Income Tax Appellate Tribunal in ACIT v. Kanchan Markhedkar revisits this delicate balance and reiterates an important principle of tax law: anti-avoidance concerns cannot justify the retrospective application of a valuation methodology which the statute itself did not contemplate.
The controversy arose under section 56(2)(vii)(c) of the Income-tax Act, 1961, a provision enacted to tax the receipt of property for inadequate consideration. Although the objective of the provision is relatively straightforward, disputes have frequently arisen regarding the determination of the “fair market value” of the property received. In cases involving shares of unlisted companies, Parliament delegated this exercise to Rule 11UA of the Income-tax Rules, 1962, which prescribes a detailed computational framework for determining fair market value.
The dispute before the Tribunal was not one of mathematical computation but of legal interpretation. Could the Assessing Officer ignore the statutory valuation formula and instead determine the value of shares by looking through the corporate structure to the assets held by subsidiary companies? More importantly, could a valuation methodology introduced only from Assessment Year 2018-19 be applied, directly or indirectly, to transactions undertaken several years earlier?
The Tribunal answered both questions in the negative. While the Revenue argued that the taxpayer had engineered an elaborate structure to acquire valuable companies through intermediary holding companies at nominal consideration, the Tribunal held that such allegations could not override the valuation mechanism expressly prescribed under Rule 11UA as it existed during the relevant assessment years. In doing so, the decision reinforces a fundamental principle of tax jurisprudence that computation provisions are not merely procedural; they define the very extent of the charging provision itself.
The judgment is significant not only because of its interpretation of Rule 11UA but also because it clarifies the limits of judicial and administrative “look-through” approaches in the pre-GAAR era. It also provides useful guidance on the interaction between specific anti-abuse provisions, general anti-avoidance principles, and statutory valuation rules.
Legislative Background: The Genesis of Section 56(2)(vii)
Section 56 has traditionally functioned as a residuary charging provision, bringing within the tax net income that cannot appropriately be classified under any other head. Over time, however, Parliament expanded its scope to address transactions that, though formally structured as transfers or gifts, effectively resulted in the receipt of economic benefits without corresponding tax consequences.
Initially, clause (v) of section 56 targeted monetary gifts received without consideration. Subsequently, clauses (vi) and (vii) expanded the scope to include both money and specified properties received either without consideration or for inadequate consideration. The legislative concern was evident. Taxpayers could transfer valuable assets to related persons or connected entities for nominal amounts, thereby avoiding taxation on what was, in substance, an accretion of wealth.
Section 56(2)(vii)(c), as applicable to the years involved in the present case, addressed one such situation. It provided that where an individual or Hindu Undivided Family received certain specified properties, including shares and securities, for a consideration lower than their fair market value by more than the prescribed threshold, the difference between the fair market value and the consideration paid would be taxable as “Income from Other Sources.”
The provision therefore contained three essential ingredients.
First, there must be a receipt of “property” as defined in the Explanation to the section.
Secondly, the property must be received for inadequate consideration.
Thirdly, the differential amount had to be computed with reference to the fair market value determined in the manner prescribed under the Rules.
The last requirement assumed considerable importance because Parliament deliberately refrained from defining “fair market value” within the Act itself. Instead, Rule 11UA supplied a mandatory computational mechanism for different classes of assets.
Accordingly, while section 56(2)(vii)(c) imposed the charge, Rule 11UA determined its quantitative application.
Rule 11UA Before the 2017 Amendment
For unquoted equity shares, Rule 11UA adopted what was essentially a balance-sheet based approach. The fair market value of shares was determined through the well-known formula:
FMV = (A – L) × PV / PE
where “A” represented the book value of assets appearing in the balance sheet after specified adjustments, “L” represented liabilities subject to prescribed exclusions, “PV” denoted the paid-up value of the shares under valuation, and “PE” represented the total paid-up equity share capital.
The rule, therefore, consciously relied upon accounting figures recorded in the company’s books. It did not authorise substitution of book values with independently estimated market values, except where specifically provided.
An equally important feature of the unamended Rule was what it omitted. Where the assets of the company included investments in other companies, those investments continued to be reflected at their book value in the balance sheet. The Rule contained no provision requiring an Assessing Officer to ascertain the intrinsic value of those underlying companies or to replace the recorded figures with independently computed fair market values.
This position changed only through the Income-tax (Twentieth Amendment) Rules, 2017, effective from 1 April 2018. The amendment recognised that book values could significantly understate the economic worth of investments, particularly where companies held valuable shares, securities or immovable properties. Consequently, the amended Rule required certain underlying assets, including shares and securities, to be considered at their own fair market value while computing the value of the holding company’s shares.
The amendment thus introduced, for the first time, a limited statutory “look-through” mechanism. Parliament consciously expanded the valuation exercise beyond the immediate balance sheet of the company whose shares were being transferred.
The distinction between these two versions of Rule 11UA formed the very foundation of the controversy before the Tribunal.
Facts Giving Rise to the Dispute
The taxpayer was the Managing Director of the Vikran Group, which was engaged in the business of executing contracts relating to power transmission and distribution infrastructure. A search under section 132 was conducted on the group during March and April 2021, resulting in the initiation of proceedings under section 153A for several earlier assessment years.
During the course of assessment, the Revenue examined transactions undertaken by the taxpayer and members of her family involving the acquisition of shares in several private companies.
The Revenue’s investigation revealed a layered corporate structure.
Certain operating companies had, over time, accumulated substantial share capital and share premium despite allegedly carrying on little or no significant commercial activity. These operating companies were themselves owned by intermediary holding companies. The taxpayer and her family members did not directly purchase shares of the operating companies. Instead, they acquired shares of the holding companies at face value, thereby indirectly obtaining control over the underlying companies.
For Assessment Year 2015-16, the controversy related to the indirect acquisition of Ratnagiri Financial Advisory Private Limited (subsequently renamed Vikran Engineering & Exim Private Limited). For Assessment Year 2016-17, the dispute concerned Bahar Vintrade Private Limited (later renamed Vikran Global Infraprojects Private Limited). In both cases, the acquisitions were made through intermediary holding companies for consideration based on the face value of their shares.
The Assessing Officer considered these transactions highly suspicious. According to the assessment order, the intermediary entities were merely paper companies, while the underlying companies possessed substantial value arising from significant share capital and premium introduced through alleged accommodation entries. The Revenue therefore concluded that the taxpayer had effectively acquired valuable companies for a fraction of their true worth by interposing holding companies between herself and the underlying assets.
Proceeding on this premise, the Assessing Officer ignored the valuation of the holding companies themselves and instead computed the fair market value of the shares of the underlying companies under Rule 11UA. The difference between this valuation and the consideration actually paid by the taxpayer was treated as income under section 56(2)(vii)(c), resulting in additions aggregating more than ₹10 crore across the two assessment years.
The taxpayer disputed this approach on a simple yet legally significant ground. She argued that she had never purchased shares of the underlying companies. The only property received by her consisted of shares of the holding companies. Consequently, the statutory valuation exercise had to be confined to those shares alone, applying Rule 11UA exactly as it stood during the relevant assessment years. Since the consideration paid exceeded the fair market value of the holding companies as determined under the applicable Rule, section 56(2)(vii)(c) itself was incapable of being invoked.
The dispute, therefore, ultimately crystallised into a narrow but significant legal question. Could the Revenue disregard the legal identity of the property actually transferred and instead value an entirely different asset merely because the transaction allegedly achieved the economic result of indirectly acquiring control over another company?
The Tribunal’s answer to this question has important implications not merely for Rule 11UA but for the broader relationship between statutory computation provisions and judicial anti-avoidance principles. Those aspects are examined in the following part of this article.
II. The Tribunal’s Analysis: Statutory Interpretation Prevails
The central issue before the Tribunal was deceptively simple. What was the “property” received by the assessee for the purposes of section 56(2)(vii)(c)? Was it the shares of the holding companies which were actually purchased, or could the Revenue ignore that legal form and instead proceed on the basis that the assessee had, in substance, acquired the shares of the underlying operating companies?
The answer to this question determined not merely the valuation methodology but the very applicability of section 56(2)(vii)(c). If the property received consisted of the shares of the holding companies, Rule 11UA had to be applied to those shares alone. If, however, the transaction was viewed through a “look-through” lens, the Assessing Officer’s computation based on the intrinsic value of the subsidiaries could potentially be justified.
The Tribunal preferred the former interpretation, holding that the charging provision itself compelled such an approach.
The Importance of Identifying the Correct Property
Section 56(2)(vii)(c) taxes the receipt of “property” for inadequate consideration. The provision does not refer to economic benefits, indirect acquisitions, beneficial ownership, or effective control. Rather, it taxes the receipt of a legally identifiable asset.
This distinction became decisive.
The assessee had purchased equity shares of intermediary holding companies. She had not entered into any agreement for purchase of shares of Ratnagiri Financial Advisory Private Limited or Bahar Vintrade Private Limited. Those companies continued to remain separate legal entities with distinct share registers, corporate personalities and ownership structures. The acquisition of the holding companies undoubtedly resulted in indirect control over the subsidiaries, but that commercial consequence did not alter the legal nature of the asset transferred.
The Tribunal therefore observed that the “property received” under section 56(2)(vii)(c) was the shares of the holding companies alone. Once that conclusion was reached, the valuation exercise became largely mechanical. Rule 11UA had to be applied to those shares and not to any other asset.
This reasoning reflects a broader principle that frequently appears in tax jurisprudence. While tax statutes often seek to capture economic reality, they ordinarily do so through carefully defined legal concepts. Unless the statute itself authorises the Revenue to disregard legal form, the computation must proceed on the basis of the legal rights and property that were actually transferred.
Rule 11UA as a Complete Computational Code
A striking feature of the Tribunal’s reasoning is the emphasis placed upon Rule 11UA as a mandatory computational provision rather than a mere guideline.
The Revenue’s argument proceeded on the assumption that Rule 11UA merely provided one method of valuation and that where circumstances indicated tax avoidance, the Assessing Officer could adopt an economically more realistic approach.
The Tribunal rejected this premise.
The formula prescribed under Rule 11UA was not advisory. It constituted the statutory mechanism through which Parliament chose to quantify fair market value. Where legislation prescribes both the charge and the method of computation, neither the taxpayer nor the Revenue is free to substitute an alternative formula merely because it appears commercially preferable.
This approach is entirely consistent with long-settled principles governing computation provisions. The Supreme Court has repeatedly observed that charging provisions and computational provisions operate together. A charging section cannot be expanded by ignoring the computational machinery enacted by Parliament. Conversely, where Parliament has consciously chosen a particular method of valuation, courts ordinarily refrain from replacing that method with one they consider economically superior.
The Tribunal accordingly held that Rule 11UA, as applicable during Assessment Years 2015-16 and 2016-17, required the Assessing Officer to compute the fair market value of the holding companies by applying the statutory formula to their own balance sheets. It did not permit substitution of book values with independently determined values of the assets owned by subsidiary companies.
Why the 2017 Amendment Became Decisive
Perhaps the strongest aspect of the Tribunal’s reasoning lies in its treatment of the amendment made to Rule 11UA with effect from 1 April 2018.
Prior to the amendment, investments appearing in the balance sheet of a company were generally taken at their book value while computing the fair market value of the company’s shares. The amendment fundamentally altered this approach by directing that certain underlying assets, including shares and securities, should themselves be considered at their fair market value.
In effect, Parliament consciously introduced a limited “look-through” valuation mechanism from Assessment Year 2018-19 onwards.
This legislative change carried an important implication. If the law already permitted valuation based upon the intrinsic value of underlying companies, there would have been little necessity for Parliament to amend the Rule at all.
The amendment therefore demonstrated that the earlier Rule deliberately adopted a different methodology.
The Tribunal treated this legislative history as significant. Rather than regarding the amendment as clarificatory, it considered it to be substantive in nature. Consequently, the amended valuation methodology could not be imported into earlier assessment years under the guise of purposive interpretation.
This aspect of the decision reflects a well-established canon of statutory construction. Where Parliament amends a computation provision by introducing an entirely new valuation principle, courts ordinarily presume that the amendment changes the law unless there is clear legislative indication to the contrary.
Reliance upon Minda SM Technocast
The Tribunal’s reasoning received substantial support from the decision of the Delhi High Court in PCIT v. Minda SM Technocast (P.) Ltd..
The High Court had considered the scope of Rule 11UA in relation to a period prior to its amendment and concluded that valuation must strictly follow the Rule as it stood during the relevant assessment year. The Revenue could not substitute the prescribed methodology by relying upon amendments introduced subsequently.
Although Minda SM Technocast arose in a different factual setting, the underlying legal principle was identical. Rule 11UA represents a complete statutory code for valuation. Any departure from that code requires legislative sanction and cannot be justified merely on grounds of perceived commercial reality.
By relying upon the Delhi High Court’s reasoning, the Tribunal reinforced the proposition that valuation disputes under section 56 cannot be resolved by importing concepts that Parliament itself introduced only prospectively.
This reliance also illustrates an important trend in contemporary tax jurisprudence. Courts have increasingly insisted upon fidelity to statutory valuation mechanisms, particularly where those mechanisms determine the extent of the tax charge itself. The preference has shifted away from broad equitable principles towards greater textual certainty in computational provisions.
The Revenue’s “Look-Through” Approach
Perhaps the most interesting feature of the litigation is the Revenue’s attempt to adopt what may loosely be described as a “look-through” approach.
The Assessing Officer argued that the intermediary companies had little independent commercial significance. Their principal assets consisted of investments in valuable operating companies. By acquiring the holding companies at face value, the assessee had effectively acquired the underlying companies for a fraction of their intrinsic worth.
Commercially, this argument possesses considerable force.
Corporate acquisitions frequently occur through acquisition of holding companies rather than through direct purchase of operating subsidiaries. Investment bankers, valuation professionals and commercial lawyers often value such transactions by reference to the underlying assets controlled by the holding company. From an economic perspective, the value of a pure holding company is frequently nothing more than the aggregate value of its investments.
The Tribunal did not dispute this commercial reality.
Instead, it held that commercial valuation cannot displace statutory valuation.
This distinction deserves careful attention. The Tribunal did not hold that the Revenue’s valuation was economically incorrect. Rather, it held that the Income-tax Rules did not authorise such valuation for the years under consideration.
The judgment therefore reflects judicial restraint rather than judicial preference.
Courts are often confronted with situations where an alternative interpretation appears commercially attractive. Yet tax liability cannot rest upon commercial attractiveness alone. Unless the statutory language permits such interpretation, the courts remain bound by the computational mechanism enacted by Parliament.
Substance Over Form: Was the Tribunal Too Formalistic?
The Revenue repeatedly argued that the corporate structure represented a colourable device designed to acquire valuable companies without attracting tax.
This argument inevitably invokes the enduring debate between legal form and commercial substance.
Beginning with McDowell & Co. Ltd. v. CTO, the Indian judiciary has recognised that colourable devices intended solely to avoid tax do not deserve judicial approval. Subsequent decisions, particularly the Constitution Bench judgment in Vodafone International Holdings BV v. Union of India, clarified that McDowell did not abolish the principle that taxpayers remain free to arrange their affairs within the framework of law.
The present case occupies an interesting position between these two lines of authority.
The Tribunal did not reject the possibility that the arrangement might have produced indirect commercial benefits. Nor did it hold that lifting the corporate veil is impermissible in tax proceedings.
Instead, it identified a more fundamental obstacle.
Even assuming that the Revenue’s factual allegations were entirely correct, section 56(2)(vii)(c) still required valuation to be carried out according to Rule 11UA.
In other words, the alleged avoidance could not justify ignoring the statutory computation mechanism.
This aspect of the judgment is particularly significant because it demonstrates that anti-avoidance doctrines do not operate independently of the charging provision. They supplement the statute; they do not replace it.
If Parliament intended pre-2018 Rule 11UA to incorporate a look-through valuation, it could have said so expressly. The subsequent amendment indicates that Parliament eventually chose to do precisely that. Until then, however, neither the Assessing Officer nor the courts could rewrite the Rule in pursuit of what they perceived to be the economically correct outcome.
The Tribunal therefore reaffirmed an important constitutional principle. In taxation, legislative policy is determined by Parliament, while adjudicatory bodies are tasked only with giving effect to that policy as expressed in the statutory language. The temptation to improve legislation through interpretation must yield to the discipline of the text itself.
This principle ultimately formed the foundation upon which the Tribunal dismissed the Revenue’s appeals and affirmed the deletion of the additions made under section 56(2)(vii)(c).
Conclusion
The decision in ACIT v. Kanchan Markhedkar reaffirms a fundamental principle of tax jurisprudence that where the legislature has prescribed a specific valuation mechanism, tax authorities must apply it as it stands and cannot substitute it with a methodology founded on commercial substance or perceived tax avoidance. By holding that the “property” received under section 56(2)(vii)(c) was the shares of the holding companies and that their valuation had to be undertaken strictly in accordance with the pre-amended Rule 11UA, the Tribunal declined to retrospectively import the look-through approach introduced only from Assessment Year 2018-19.
While the Revenue’s concerns regarding colourable arrangements and indirect acquisitions may have had commercial merit, the judgment underscores that anti-avoidance objectives cannot override the express language of a charging provision or its computation mechanism. The ruling therefore strengthens the principle of certainty in tax law and serves as a reminder that legislative amendments operate prospectively unless expressly provided otherwise. At the same time, it leaves open the possibility that similar transactions undertaken after the amendment to Rule 11UA, or examined under GAAR or other anti-abuse provisions, may invite a different legal outcome.