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ITAT Mumbai Upholds Tax Relief in Rs127-Crore Family Business Share Dispute
Moneylife Digital Team 14 April 2025
Economy & Nation
In a significant ruling, the Mumbai bench of the income-tax appellate tribunal (ITAT) has dismissed the income-tax (I-T) department’s appeal challenging tax relief granted to SDN Company over a Rs126.98 crore addition made under Section 56(2)(viia) of the I-T Act.
 
"If the entire transaction is considered with the family settlement, we find that the transfer of shares between family members was part and parcel of family settlement entered into between brothers and sisters, Feroze Dhunjishaw Neterwala, Shemaz Feroze Vakil and Pervin Russy Mehta to give effect to the Will and desire of the father, industrialist M Neterwala, who were the promoters of the companies," the ITAT says.
 
The case revolved around the capital contribution of shares by partners in SDN Company, a firm associated with the heirs of the late industrialist. In a closely examined family settlement, the children of Mr Neterwala introduced shares of Unitel Finance and Investments Pvt Ltd (UFIPL) into the company as capital, following his wishes as laid out in a 2011 Will.
 
The tax authorities had questioned the valuation of these shares, arguing that the market value was significantly higher than declared. They relied on a Securities and Exchange Board of India (SEBI)-registered merchant banker’s intrinsic value report, which valued UFIPL shares at Rs4,786.53 per share—well above the Rs92.88 per share declared by the assessee—leading to an addition of Rs126.72 crore.
 
However, the tribunal, comprising vice-president Saktijit Dey and accountant member Narendra Kumar Billaiya, ruled that the valuation used by the I-T department is not intended to reflect fair market value (FMV), but rather an 'indicative' intrinsic value and, hence, could not be the basis for taxation.
 
ITAT noted that the shares were introduced as capital contributions in accordance with rule 11UA of the I-T Rules, and that these transactions were part of a bona fide family settlement aimed at upholding the patriarch’s vision for business continuity. ITAT cited several precedents, including Supreme Court and High Court rulings, to support the view that genuine family arrangements intended to preserve goodwill and avoid disputes cannot be treated as taxable transfers or colourable devices.
 
“In our understanding of the law, for capital contribution, the provisions of Section 56(2)(viia) of the Act would not apply at all,” the order stated.
 
ITAT upheld the findings of the commissioner of income-tax (appeals) (CIT-A), Delhi (NFAC), who had earlier deleted the addition, affirming that the tax officer had erred in disregarding the legally compliant valuation and the underlying intent of the family arrangement.
 
With this ruling, the tribunal has reinforced the legal sanctity of genuine family settlements in business restructuring, especially when executed transparently and in accordance with existing tax regulations.
 
(Case No. ITA No2457/Mum/2024  Date: 20 March 2025)
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