Unrealizable insolvency assets must be excluded from Rule 11UA

Unrealizable insolvency assets must be excluded from Rule 11UA Fair Market Value computations.

Issue

Whether the Assessing Officer (AO) is legally justified in mechanically invoking Section 50CA and Rule 11UA to calculate the Fair Market Value (FMV) of unquoted shares based purely on book values, without excluding unrealizable insolvency assets or considering the price discovered under an NCLT-supervised auction.

Facts

The assessee acquired approximately 1.25 crore unquoted shares of M/s. Cethar Energy Ltd. through a liquidation auction supervised by the National Company Law Tribunal (NCLT).
During Assessment Year 2020-21, the assessee sold 20.87 lakh shares from this lot and declared a short-term capital loss based on the sale price.
The AO rejected the declared transaction price and invoked Section 50CA read with Rule 11UA, computing a fictional FMV of ₹104.92 per share based strictly on book values in the balance sheet.
This mathematical adjustment replaced the declared loss with a deemed short-term capital gain addition of ₹21.15 crores.
The company’s balance sheet included approximately ₹125 crores of assets that were completely unrealizable or lacked beneficial ownership due to binding terms of the Share Purchase Agreement (SPA) and ongoing liquidation proceedings.

Decision

The addition of ₹21.15 crores made by the AO is deleted, and the revenue is directed to recompute the capital gains.
Unrealizable assets and assets lacking beneficial ownership due to insolvency must be excluded from the FMV calculation under Rule 11UA. Including assets worth ₹125 crores merely because they are on a balance sheet is legally impermissible.
The commercial valuation determined by an Insolvency Resolution Professional in an NCLT-supervised auction carries significant evidentiary weight and cannot be ignored without cogent proof.
The final fair market value for Section 50CA purposes must be reasonably adopted matching the actual price discovered during the NCLT-supervised auction, rather than the fictional book value calculated by the AO or the price disclosed by the assessee.

Key Takeaways

Real Income Rules Over Book Values: Deeming provisions like Section 50CA are intended to curb tax avoidance, not to create artificial or absurd income. If an asset on a balance sheet is proven to be completely unrealizable due to corporate insolvency, forcing its book value into a Rule 11UA formula creates a hypothetical tax liability disconnected from commercial reality.
Judicial Auction Price Carries Evidentiary Weight: A transaction price discovered through a transparent, court-monitored bidding process (such as an NCLT liquidation) serves as a highly robust benchmark for determining actual market value. The tax department cannot summarily brush aside such judicially monitored valuations in favor of strict, mechanical formulaic assessments.

IN THE ITAT CHENNAI BENCH ‘A’

Rajasehar Buvaneswari

Income-tax Officer

GEORGE GEORGE K, Vice President
and S.R. Raghunatha, Accountant Member

IT Appeal No. 3332 (Chny) of 2025
[Assessment year 2020-21]

MAY 22, 2026

Y. Sridhar, FCA for the Appellant. Ms. Pavuna Sundar E., CIT for the Respondent.

ORDER

S.R. Raghunatha, Accountant Member. – The present appeal is filed by the assessee against the order dated 17.09.2025 passed by the learned Commissioner of Income Tax (Appeals) Delhi, National Faceless Appeal Centre (hereinafter referred to as “ld.CIT(A)”), dismissing the appeal filed by the assessee against the assessment order dated 08.03.2025 passed u/s.147 r.w.s. 144/144B of the Income Tax Act, 1961 (hereinafter referred to as the “Act”), pertaining to Assessment Year (A.Y.) 2020-21.

2. The brief facts of the case emanating from the records are that the assessee is an individual in the business of construction and had filed Return of Income for the A.Y.2020-21, u/s.139(1) of the Act on 13.12.2020 declaring a total Income Rs.5,77,410/-.

3. M/s. Cethar Energy Limited was a wholly owned subsidiary of M/s. Cethar Ltd. The parent company had entered into severe financial distress and was subjected to Corporate Insolvency Resolution Process pursuant to proceedings initiated before the Hon’ble NCLT, Chennai Bench. Consequent to failure in settlement of debts, liquidation proceedings were commenced and various assets of the corporate debtor, including its shareholding in M/s. Cethar Energy Limited, were brought for auction by the Liquidator.

4. At the relevant point of time, the financial position of M/s. Cethar Energy Limited was substantially impaired. A major portion of the assets reflected in its books consisted of receivables, investments and advances from related entities that were themselves under liquidation and therefore had no realizable value. Considering the distressed financial condition and lack of realizable assets, the Insolvency Resolution Professional fixed the reserve price of the company at Rs.5 crores approximately.

5. Since no bidders participated in the first auction, the reserve price was reduced. Ultimately, in the second e-auction conducted under the supervision of the NCLT process, the assessee emerged as the successful bidder and acquired 1,25,66,185 unquoted equity shares of M/s. Cethar Energy Limited for a total consideration of Rs.4.54 crores, translating to approximately Rs.3.59 per share. The acquisition was effected through a Share Purchase Agreement dated 01.03.2019 executed pursuant to the liquidation proceedings.

6. Subsequently, the assessee transferred 20,87,400 shares to Shri T.P. Pradeep Raj on 19.10.2019 for a consideration of Rs.50 lakhs at Rs.2.40 per share. According to the assessee, Shri T.P. Pradeep Raj had played a significant role in facilitating participation in the auction and the transfer was made taking into consideration both his contribution and the deteriorating financial position of the company. Due to further erosion in the value of the company and continuing uncertainty regarding realization of assets, the transfer price was lower than the acquisition cost, resulting in a short-term capital loss of Rs.24,93,766/-, which was duly disclosed in the return of income.

7. The assessment was reopened on the ground that the transfer consideration received by the assessee was lower than the fair market value determined under Rule 11UA. During reassessment proceedings, the assessee specifically contended that the valuation mechanism under Rule 11UA could not be mechanically applied without considering the true economic realities and the exceptional circumstances surrounding the liquidation process.

8. It was submitted that substantial assets appearing in the balance sheet were in fact irrecoverable and had no realizable value since the underlying debtor entities were themselves under insolvency or liquidation proceedings. The assessee further contended that the same distressed conditions prevailing at the time of acquisition continued even at the time of transfer and therefore the fair market value of the shares could not exceed the actual realizable value.

9. However, the AO disregarded these submissions and adopted the book value of assets reflected in the financial statements without excluding non-recoverable assets and investments. By applying Rule 11UA(1)(c)(b) in a strict and mechanical manner, the AO determined the fair market value of each share at Rs.104.917 and consequently invoked Section 50CA to compute a deemed short-term capital gain of Rs.21,15,09,980/- instead of the short-term capital loss declared by the assessee.

10. Before the ld.CIT(A), the assessee reiterated that the valuation adopted by the AO was fundamentally flawed as it ignored the commercial and legal realities surrounding the transaction. It was specifically argued that the Share Purchase Agreement, sale confirmation letter and auction documents clearly established that several assets reflected in the balance sheet were either unrealizable or held merely in trust for the benefit of the liquidator and did not confer any beneficial ownership upon the assessee.

11. The assessee emphasized that under Clause 3.2.1 of the Share Purchase Agreement, certain specified assets and recoveries, even if realized in future, were to accrue exclusively to M/s.Cethar Ltd. through the liquidator and not to the assessee. Therefore, inclusion of such assets for determining fair market value was contrary to both factual and legal realities.

12. The principal unrecoverable assets wrongly considered by the Assessing Officer included:

•	Doubtful debts due from M/s. Cethar Ltd.	–	Rs.89.17 crores
•	Investment in Maa Durga Thermal Power	–	Rs.12 crores
•	Land and Building belonging to M/s. Cethar Ltd.	–	Rs.20.30 crores
•	Doubtful project advances	–	Rs.3.79 crores

13. These assets, aggregating to approximately Rs.125 crores, were either non-existent in practical terms or incapable of realization and therefore could not legitimately form part of the valuation exercise under Rule 11UA.

14. Despite acknowledging the apparent inequity and unrealistic outcome arising from the valuation, the ld.CIT(A) upheld the addition by holding that Rule 11UA was mandatory in nature and had been correctly applied by the AO.

15. Dissatisfied by the conclusion drawn by the ld.CIT(A), the assessee had fostered multiple grounds of appeal and the primary crux among them which were sought to be adjudicated by our Bench are reproduced hereunder:

That the Ld. CIT(A) and the AO erred in ignoring the paramount condition laid down in Para 3.2.1 of the Share Purchase Agreement which is crucial in determining the value of the unquoted shares.

ii.

That the Ld. CIT(A) erred in failing to appreciate that the computation adopted by the FAO to determine the value of unquoted shares is inappropriate, when it had failed to exclude the unrealizable assets and bad investments from its purview.

16. The financials in support of the contention of the assessee, valuation reports and other documents provided during the assessment proceedings and the appellate proceedings were submitted in the form of a paper book for the relevant assessment year.

17. The ld.AR for the assessee, Mr.Y.Sridhar, FCA had pleaded that the contents of the share purchase agreement, a statutory document was never taken into cognizance, in determining the fair market value of the asset. According to ld.AR, the AO wrongly applied Rule 11UA(1)(c)(b) in a mechanical manner by using the book value shown in the balance sheet of the Company without excluding the bad and irrecoverable assets worth approximately Rs.125 crores, which have been already documented in the NCLT order before directing to auction. These unrealisable assets had been recorded in all the documents in the process of pre auction and post- auction proceedings.

18. The ld.AR submits that the authorities below erred in law and on facts in adopting a purely mechanical interpretation of Rule 11UA without appreciating the extraordinary circumstances arising from insolvency proceedings and liquidation under the supervision of the NCLT.

19. The valuation methodology adopted by the Assessing Officer defeats commercial reality and leads to absurd results. Shares acquired through a distress auction conducted under NCLT supervision at Rs.3.59 per share cannot, within a span of a few months and without any improvement in financial position, be artificially valued at Rs.104.917 per share merely on the basis of inflated book entries representing irrecoverable assets.

20. The ld.AR further submits that valuation provisions contained in Rule 11UA must be interpreted reasonably and purposively and cannot be applied in isolation from surrounding facts. The rule contemplates determination of fair market value and therefore assets having no realizable value or beneficial ownership ought necessarily to be excluded from computation.

21. These fictitious assets were principally due from group companies which are by themselves under NCLT Liquidation and thus possess Nil Fair Market Value. The assets that need to be excluded according to the ld.AR are as under:

•

Doubtful debts from M/s. Cethar Ltd. of Rs.89.17 crores

•

Investments in Maa Durga Thermal Power of Rs.12.00 crore

•

Land & Building belonging to M/s. Cethar Ltd. of Rs.20.30 crore

•

Doubtful project advances of Rs.3.79 crore

22. The ld.AR submitted that these exclusions are already mentioned in Clause 3.2.1 of the Share Purchase Agreement and even if realized, these amounts were to be appropriated by the liquidator and would never reach the appellant. Therefore, including non-existent or irrecoverable assets leads to a distorted and inflated valuation.

23. The Ld. AR finally summarized that the value adopted by the AO defeats the principle of reasonableness and sense of proportions. The ld.AR further argued that by no stretch of imagination, the shares of a company which were acquired at the cost of Rs.3.59 per share can be sold within a span of six months at a price of Rs.104/-per share. It is therefore prayed that the addition made u/s.50CA by adopting an artificial fair market value be deleted and the shortterm capital loss originally declared by the assessee be accepted.

24. Per contra, the ld.DR strongly supported the orders passed by the AO as well as the ld.CIT(A) and submitted that the valuation mechanism prescribed u/s.50CA read with Rule 11UA is mandatory in nature and leaves no discretion with the AO once the statutory conditions are satisfied.

25. It was contended that Section 50CA was specifically introduced by the legislature to prevent understatement of consideration in transfer of unquoted shares and therefore the deeming fiction created under the provision has to be strictly implemented in accordance with the prescribed rules. The Revenue submitted that where the actual sale consideration is lower than the fair market value computed in the manner prescribed under Rule 11UA, such computed value is statutorily deemed to be the full value of consideration for the purpose of computation of capital gains.

26. We have carefully considered the rival submissions advanced by both sides, perused the material available on record, examined the orders passed by the lower authorities and also gone through the paper book and supporting documents furnished by the assessee.

27. The undisputed facts borne out from the records reveal that the assessee had acquired 1,25,66,185 unquoted equity shares of M/s. Cethar Energy Limited through an e-auction conducted under the supervision of the Hon’ble National Company Law Tribunal pursuant to insolvency proceedings initiated against M/s.Cethar Limited. The acquisition was made for a total consideration of Rs.4,51,00,000/- and the effective acquisition cost worked out to Rs.3.59 per share. Subsequently, during the relevant previous year, the assessee transferred 20,87,400 shares to Shri T.P. Pradeep Raj at Rs.2.40 per share for a total consideration of Rs.50 lakhs.

28. The Assessing Officer invoked the provisions of Section 50CA of the Income Tax Act by adopting the Fair Market Value of the shares under Rule 11UA of the Income Tax Rules and computed the value at Rs.104.917 per share by mechanically relying upon the balance sheet figures of the company. Consequently, the actual sale consideration declared by the assessee was substituted with the deemed consideration determined by the AO resulting in an addition of Rs.21.15 crores towards Short Term Capital Gain.

29. The principal grievance of the assessee is that the authorities below failed to appreciate that substantial assets reflected in the balance sheet of M/s.Cethar Energy Limited were either unrealizable, fictitious, commercially worthless or otherwise incapable of yielding any economic benefit. It was further contended that several such assets were specifically excluded by the Insolvency Resolution Professional while determining the reserve price for auction and therefore the same could not have been considered for the purpose of valuation under Rule 11UA.

30. Upon careful examination of the material placed before us, we find considerable force in the submissions advanced on behalf of the assessee. The records clearly establish that the parent company M/s.Cethar Limited had already entered into Corporate Insolvency Resolution Process and several entities from whom substantial receivables were shown were themselves under insolvency proceedings. The documents available on record further demonstrate that the Insolvency Resolution Professional had, after due verification and valuation, treated substantial assets aggregating to approximately Rs.125 crores as unrealizable and commercially non-recoverable while conducting the auction proceedings.

31. The following assets, amongst others, were specifically shown to be either doubtful or incapable of realization:

(a) doubtful debts recoverable from M/s. Cethar Limited amounting to Rs.89.17 crores; (b) investments in M/s. Maa Durga Thermal Power Company Limited amounting to Rs.12 crores; (c) land and building relating to M/s. Cethar Limited amounting to Rs.20.30 crores; and (d) doubtful project advances amounting to Rs.3.79 crores.

32. It is an admitted factual position that the entities from whom these amounts were recoverable were themselves under insolvency and liquidation proceedings. Therefore, the recoverability of these amounts was virtually nonexistent. In such circumstances, inclusion of these assets at their book value for determining Fair Market Value of shares would result in an artificial and distorted valuation completely divorced from commercial reality.

33. We further find that Clause 3.2.1 of the Share Purchase Agreement assumes substantial importance in adjudicating the controversy involved in the present appeal. The said clause clearly stipulates that in the event of realization of certain specified assets, the proceeds thereof were required to be handed over to M/s.Cethar Limited under liquidation and the assessee was not entitled to appropriate or retain such realizations. Thus, the assessee never acquired beneficial ownership over those assets and consequently such assets cannot be regarded as assets yielding economic benefit to the assessee.

34. The authorities below, in our considered opinion, committed a serious error in completely ignoring the binding contractual terms contained in the Share Purchase Agreement. The beneficial ownership and actual economic entitlement attached to an asset constitute an essential component in determination of Fair Market Value. Assets whose realization can never enure to the benefit of the assessee cannot be artificially loaded into the valuation mechanism merely because they continue to appear in the balance sheet.

35. We also find from the documents produced before us that certain immovable properties situated at Gandharva Kottai, which formed part of the fixed assets schedule, were subsequently sold for a consideration of Rs.1,09,44,841/- and the entire sale proceeds were credited to the account of M/s.Cethar Limited under liquidation. Significantly, no portion of such proceeds was received by the assessee. This factual circumstance further substantiates the contention of the assessee that the disputed assets neither possessed the value reflected in the books nor belonged beneficially to the assessee.

36. The AO proceeded entirely on the basis of the figures appearing in the balance sheet without undertaking any enquiry regarding the real economic value or recoverability of the assets. Such a mechanical application of Rule 11UA, in our considered view, defeats the very object of fair valuation contemplated under the statute.

37. The expression “Fair Market Value” inherently postulates a realistic and commercially viable valuation. Rule 11UA cannot be interpreted in a manner that compels adoption of fictional or hypothetical values disconnected from ground realities. The Rule itself contemplates exclusion of assets which do not represent real value. Therefore, unrealizable receivables, fictitious investments and assets lacking economic substance cannot be included merely because they continue to find place in the books of account.

38. It is a settled principle of law that taxation is to be levied on real income and not on hypothetical or illusory gains. The provisions of Section 50CA, though deeming in nature, cannot be invoked in a manner that leads to absurd or commercially impossible consequences. The deeming fiction cannot be extended beyond the legitimate purpose for which it has been enacted.

39. We also find merit in the submission of the ld.AR that by no stretch of imagination could shares acquired under NCLT-supervised distress sale at Rs.3.59 per share appreciate to Rs.104.917 per share within a short span of few months, particularly when there was no improvement whatsoever in the financial position of the company. The insolvency conditions continued to persist and the underlying assets remained commercially non-recoverable. Therefore, the valuation adopted by the AO lacks both economic rationale and commercial prudence.

40. The valuation determined by the Insolvency Resolution Professional pursuant to auction proceedings conducted under judicial supervision carries substantial evidentiary value and cannot be brushed aside without cogent material. The market itself had recognized the distressed value of the shares and the same was reflected in the auction outcome where even the initial reserve price failed to attract bidders.

41. In our considered opinion, the authorities below failed to appreciate the distinction between book entries and actual realizable value. Mere reflection of an amount as an asset in the balance sheet does not automatically establish its fair market value. Where overwhelming evidence demonstrates that such assets are irrecoverable and commercially worthless, adoption of their book value would result in taxation of fictional gains.

42. Considering the entirety of the facts and circumstances of the case, the insolvency proceedings, auction documents, Share Purchase Agreement, valuation records and commercial realities surrounding the transaction, we hold that the unrealizable assets amounting to approximately Rs.125 crores ought to have been excluded while computing the Fair Market Value under Rule 11UA.

43. Accordingly, while we reject the artificial valuation of Rs.104.917 per share adopted by the Assessing Officer under Rule 11UA, we are also of the considered opinion that the acquisition price of Rs.3.59 per share determined through the NCLT-supervised auction represents a more reasonable and fair basis for valuation of the shares transferred by the assessee.

44. The provisions of Section 50CA, though deeming in nature, cannot be invoked in a manner leading to absurd or hypothetical valuation disconnected from commercial realities. Equally, the transaction value disclosed by the assessee may also be subjected to reasonable scrutiny where contemporaneous market evidence exists in the form of an actual arm’s length acquisition under judicial supervision.

45. Considering the entirety of facts and circumstances, the insolvency proceedings, auction records, valuation reports, commercial realities and the contemporaneous acquisition price, we hold that the fair market value for the purpose of Section 50CA deserves to be reasonably adopted at Rs.3.59 per share being the price discovered in the NCLT-supervised auction conducted shortly prior to the impugned transfer. The AO is accordingly directed to recompute the capital gains by adopting the sale consideration at Rs.3.59 per share in place of Rs.104.917 per share adopted in the assessment order and in place of Rs.2.40 per share disclosed by the assessee.

46. In the result, the order passed by the ld.CIT(A) stands partly modified and the appeal of the assessee is partly allowed.