TMI Blog2016 (10) TMI 1326X X X X Extracts X X X X X X X X Extracts X X X X ..... onsideration for transfer of assets in specified cases. It is therefore unjust and unwarranted to impute/ assume consideration in cases which clearly do not fall within the ambit of such specified Provisions. Allegation of AO for taking the revaluation of assets as a consideration for transfer of undertaking, the learned AO has failed to understand that the Business Restructuring Reserve created in the books of the assessee was merely an accounting entry passed in the books of the Appellant on account of revaluation of its investment and that, the amount representing an accounting entry could not be deemed to be the value of consideration for transfer of the telecom undertaking by the assessee. The fair valuation of the investments by the assessee in its books cannot by any stretch of imagination be considered as a consideration received by the assessee from ICL for de-merger of its telecom undertaking. The creation of such a reserve only represents an accounting entry passed by the assessee in its books of account and does not represent any consideration whatsoever received from ICL or any third person towards transfer of the telecom undertaking to ICL. Further, in case of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome-tax (Appeals) - 21, Mumbai ['CIT(A)'] has: Ground no. 1- Wrongly affirmed the order passed by the Deputy Commissioner of Income tax-10(1) ('AO') 1. erred in substantially confirming the order passed by the AO treating a sum of ₹ 5261,28,25,486/- as liable to capital gains tax as a short term capital gain; 2. failed to appreciate that as a result of the demerger of the Appellant's telecom undertaking to Idea Cellular Limited ('ICL'), its holding company, no liability arose under the Income-tax Act, 1961 ('Act'); Ground no. 2 - Demerger of telecom undertaking not chargeable to tax 3. failed to appreciate that in order to levy capital gains tax it is a condition precedent that the alleged profit! gain must arise from the transfer of a capital asset, which condition is not satisfied in the present case; 4. without prejudice to above grounds, erred in treating the demerger of telecom undertaking by the Appellant as a transfer chargeable to tax under the head 'Capital gains' under Section 45 of the Act, without appreciating the fact that a. demerger of a telecom undertaking, without any consideration is a valid lawfu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enefit has accrued and would be subsequently recovered later by the Appellant; 9. failed to appreciate that the reserve was created on account of an unilateral act by the Appellant, pursuant to the Court approved scheme and independent of the telecom undertaking being demerged and the creation of the reserve represents a mere accounting entry passed by the Appellant and no consideration has accrued or received by the Appellant from ICL; 10. erred in proceeding on the totally incorrect fact that the Appellant has itself considered the revalued amount of retained asset, as full value of consideration for transfer of telecom 11. erred in proceeding on absurd/ irrelevant proposition that the said Scheme approved by the Hon'ble High Courts of Bombay and Gujarat is under the Companies Act, 1956, which is in clash with the Act; 12. without prejudice to the above, not appreciating the fact that the imputed consideration, if any, should be restricted to the value of the demerged undertaking and cannot be absurdly computed with reference to the fair value of an unrelated investment asset; Ground no. 4 - Demerger of telecom undertaking not a slump sale under Section 2(42C) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement under Section 391 to 394 of the Companies Act, 1956 with the Hon‟ble High Courts of Gujarat and Mumbai for demerging its telecom undertaking to ICL. Under the said Scheme, the assessee had transferred all the assets and liabilities of the telecom undertaking to Idea without any consideration. The said Scheme of arrangement was filed on 1st April 2009 and was approved by the Hon'ble High Courts on 2nd December 2009 and 22 January 2010 and became effective on 1st March 2010. In terms of scheme assessee also revalued its investment in Indus, an asset separate from demerged undertaking and business restructuring reserve was created. During the course of scrutiny assessment, the AO issued a notice asking the assessee to show cause as to Why the demerger under the said Scheme should not be treated as a 'transfer' for the purposes of Section 45 of the Act and be taxed as 'capital gains'. In response to the above, the assessee made detailed submissions before the learned AO stating that there was no consideration for demerger of undertaking therefore, no capital gains accrued in the hands of assessee. However, not convinced with the submissions of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court was as under :- Section 45 is a charging section. For the purpose of imposing the charge, Parliament has enacted detailed provisions in order to compute the profits or gains under that head. No existing principle or provision at variance with them can be applied for determining the chargeable profits and gains. All transactions encompassed by s. 45 must fall under the governance of its computation provisions. A transaction to which those provisions cannot be applied must be regarded as never intended by s. 45 to be the subject of the charge. This inference flows from the general arrangement of the provisions in the Income-tax Act, where under each head of income the charging provision is accompanied by a set of provisions for computing the income subject to that charge. The character of the computation provisions in each case bears a relationship to the nature of the charge. Thus the charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section. Otherwise one would be driven to concl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the applicant cannot be said to have derived any profit or gain from the transaction. We may add that if the 'consideration' is such that it is incapable of being valued in definite terms or it remains unascertainable on the date of occurrence of taxable event, the question of applying section 45 read with section 48 of the Income-tax Act does not arise : 7. In the case of Bajnath Chaturbhuj, 31 ITR 643, the Hon‟ble Bombay High Court held that the full value must be the true value, not any artificial value which parties for any purpose may assign to a particular capital asset. A hypothetical benefit cannot be taxed under sec. 45 of the IT Act. 8. The Authority of Advance Ruling in the case of Amiantit International Holding Ltd., 322 ITR 678, has also held as under :- It is not possible to identify or pinpoint anything which has the characteristics of profit or gain or any consideration which is capable of being valued in praesenti. The income in the sense of profit and gain should be real but not hypothetical income. The income may be in cash or in kind and need not necessarily be pecuniary in nature. Even then, the alleged consideration for which the sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not something which can be implied or assumed. No profit or gain in the form of consideration for transfer can be inferred by a process of deeming or on presumptive basis and there must be a causal nexus between the transfer of capital asset and the profit or gain accruing to or received by the assessee and that hypothetical benefit cannot be taxed under Section 45 and held that 7.2................... On the basis of these statements in the Annual Report, the revenue seeks to contend that the value of individual assets including transferred shares which forms part of the total enterprise i.e., $ 3563 (millions) constitutes consideration for the transfer. I am unable to accept this extreme contention. These statements in the Annual Report of DHC do not in any way support the proposition that a definite or agreed consideration has been received by the applicant in transferring the shares of the Indian companies to its subsidiaries and thereby the applicant made a profit or gain by transferring the shares. Shares may have been notionally valued for the purpose of preparing the financial statements or to facilitate the reorganization process. For that reason, it cannot be reason ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deration (and resultant profit from the transfer) no notional gain can be imputed in the hands of the seller to tax such transfer. Further, it would be pertinent to note that even under the erstwhile section 52 of the Act, which provided power to the assessing officer to consider fair market value of the asset as full value of consideration in case of understatement of the consideration, various Courts, inter-alia including the decision of Hon‟ble Supreme Court in the case of K.P.Varghese, 131 ITR 597, have broadly laid down the following principles for invoking of provisions of the erstwhile section 52 of the Act. As per the principles so laid down if the shares are sold at a value lower than the market price and there is no evidence direct or inferential, that the assessee had received the difference between the value actually received and market value of shares sold, then actual price received for the sale should be considered as full value of consideration. The capital gains tax is not a tax on what might have been received. The actual price received by the assessee may be less than the fair market value. Capital gains tax was intended to tax the gain of the assessee, not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been inserted by Finance Act 2012, with effect from April 2013 and accordingly cannot be applied in the subject AY 2010-11 under consideration. 13. In view of the above discussion it was contended that wherever considered appropriate, the legislature has inserted specific provisions for assumption of sale consideration for transfer of assets in specified cases. It is therefore unjust and unwarranted to impute/assume consideration in cases which clearly do not fall within the ambit of such specified provisions. 14. Reliance was placed on the decision of Dev Kumar Jain, 309 ITR 240, wherein the Hon‟ble Delhi High Court had an occasion to consider the scope of the full value of consideration and ruled that the full value of consideration and fair market value under Section 55A of the Act are two different concepts and the assessing officer cannot substitute full value of consideration by fair market value on his own. The Hon‟ble Court held as under :- 7. We find that a Division Bench of this Court in the case of CIT Vs. Smt. Nilofer I. Singh, 309 ITR 233(Delhi) dated August 27, 2008, in ITA No.154/2008 has held that the provisions of section 55A of the Act appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsideration recorded in the agreem4nt to sell would be substituted by the value arrived at by the DVO under section 55A of the Act. 15. Our attention was invited to the scheme of arrangement under which the existing investment of the assessee in Indus, an asset separate from the de-merged telecom undertaking, which continued to remain vested in the assessee post de-merger was revalued at its fair value and the difference between the fair value and book value of the investment were recognised in the Business Restructuring Reserve. This fact is vident from clause 11.3 of the Court approved scheme of Arrangement becoming effective the assessee would revalue its investments in Indus and create the Business Restructuring Reserve. Hence, creation of such a reserve is a result of a unilateral action by the assessee. Further, as is evident from Scheme of Arrangement, the AO has misinterpreted in the intent of clause 11.3 and ignored the fact that no consideration was paid by ICL to the assessee towards de-merger of its telecom undertaking. The AO has failed to understand that the Business Restructuring Reserve created in the books of the assessee was merely an accounting entry passed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arise out of independent transactions wherefrom independent rights are emanating. In the case of CIT Vs. Vania Silk Mills Pvt. Ltd. 107 ITR 300, the Hon‟ble Court while interpreting the sentence any profits or gains arising from the transfer of the capital asset in section 45 of the Act, eld that in order to subject any profit or gain received by or accruing to the assessee to the charge of capital gains, the sine qua non is that the receipt or accrual must have originated in a transfer within the meaning of section 45 read with section 2(47). 19. It was also contention of assessee before lower authorities that there is no nexus between transfer of telecom undertaking by the assessee and revaluation of the investment in Indus except that both the transactions are independent transactions arising from the Scheme of Arrangement. Hence, as no consideration has accrued to the assessee on account of the said de-merger no profit or gain can be said to have accrued or received by the assessee. 20. In view of the above discussion, the said Business Restructuring Reserve so created by assessee on account of revaluation of investment in entity, cannot be treated as considerat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revalued amount of assets is a full value of consideration hence, computation mechanism is not failed. Against the order of CIT(A) assessee is in further appeal before us. 24. It was argued by learned AR that Assessing Officer cannot challenge a scheme of arrangement approved by the High Court and the impute consideration. Reliance placed on Sadanand S. Varde and Others vs. State of Maharashtra (247 IT 609) (Bombay High Court). 25. It was further contended that telecom undertaking was transferred without any consideration pursuant to a Scheme of Arrangement ( Scheme‟) u/s 391 to 394 of the Companies Act, 1956 approved by the Hon‟ble Gujarat High Court and Hon‟ble Bombay High Court. Since there is no consideration for transfer of a capital asset, the capital gains computation mechanism fails and thus, no capital gains tax can be levied on such transfer and the same cannot be termed as Sale‟. Reliance was placed on (i) B.C.Srinivasa Setty (1981) (128 ITR 294) (SC); (ii) Amiantit International Holdings Ltd., In Re(2010)(322 ITR 678)(AAR) (iii) PNB Finance Ltd vs CIT (307 ITR 75) (SC) (iv) Dana Corporation vs DIT (321 ITR 178) (AAR) (v) Goo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in the case of Laksmanaswami Mudaliar had held that a company can do such acts which are permitted under the Memorandum of Association. 33. As per learned AR, de-merger of telecom undertaking is not chargeable to tax under Section 47(vib). As per learned AR since Idea held the entire equaity share capital in the Assessee, there was no requirement and it was also impossible for Idea to issue any shares to itself. Reliance placed on the AAR ruling in the case of Hoechst GmbH (289 ITR 312) 34. Learned AR invited our attention to the consent given by the preference share holders to the scheme of de-merger and for which no shares were required to be issued to them. 35. Learned AR also vehemently argued that de-merger is also not chargeable under Section 47 (v). Since in the instant case, transfer was by a wholly owned subsidiary company to the Indian holding company, the same cannot be recorded as transfer by virtue of specific exemption prescribed under Section 47 (v) of the Act. Attention was invited to the fact that the entire equity share capital of the assessee is held by Idea, which is an Indian company. 36. Our attention was also invited to the scheme of arrang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n has accrued to the assessee as it is to be received later by the assessee. Accordingly, the AO has correctly taken the revalued assets as accrued consideration and computed the capital gains taking this as full value consideration capital gain has been correctly computed by the AO and upheld by the CIT(A) after giving due reasoning in their respective orders. 39. As per learned DR, there was a consideration for transfer of undertaking, hence exemption under Clause 47(iii) cannot be allowed. Accordingly, he supported AO‟s treatment of revaluation of assets as full value of consideration, for transfer of undertaking. Since, there was a consideration, transfer of undertaking cannot be treated as a gift‟. 40. As per learned DR, assessee had not satisfied the conditions of demerger, hence, it is not eligible for capital gains u/s. 47(vib). 41. We have considered rival contentions and carefully gone through the orders of the authorities below and the documents placed on record to which our attention was invited during the course of hearing. We had also deliberated on the judicial pronouncements referred by lower authorities in their respective orders as well as cited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her constitute an integrated code and when there is a case to which the computation provisions cannot apply at all, it would imply that such case was not intended to fall within the scope of charging section. This Principle has been upheld in various judicial precedents, inter-alia, including the decision of Hon‟ble Supreme Court in case of B.C.Srinivasa Setty (128 ITR 294) wherein particularly in the context of Section 45 and Section 48 of the Act, held that where one of the ingredients for computation of capital gains is absent, no capital gains could be levied due to failure of the computation mechanism. 43. In case of B.C.Srinivasa Setty (supra) Hon‟ble Supreme Court observed as under:- Section 45 is a charging section. For the purpose of imposing the charge, Parliament has enacted detailed provisions in order to compute the profits or gains under that head. No existing principle or provision at variance with them can be applied for determining the chargeable profits and gains. All transactions encompassed by section 45 must fall under the governance of its computation provisions. A transaction to which those provisions cannot be applied must be regarded as n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... received by the assessee for de-merger of its telecom undertaking, no such consideration can be imputed in the hands of the assessee and hence, no capital gains tax liability can be levied upon the assessee. For this purpose reliance can be placed on the decision of Hon‟ble Supreme Court in the case of CIT vs George Henderson Co, (66 ITR 622), wherein full value of consideration was interpreted to mean the price bargained for by the parties to the sale. The Supreme Court further observed that the expression full value means the whole price without any deduction whatsoever and it cannot refer to the adequacy or inadequacy of the price bargained for between the parties. Similar view has been taken by Hon'ble jurisdictional Mumbai Tribunal in the case of Rupee Finance Management Ltd vs ACIT 22 SOT 174 , wherein the Tribunal has held that in absence of a specific enabling provision in the Act, there can be no notional taxation w.r.t fair market value. The said decision has been approved by Hon'ble Bombay High court. 46. In view of the above, it is amply clear that the full value of consideration has to be taken based on the price that has been commercially agreed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conclude that wherever considered appropriate, the legislature has inserted specific provisions for assumption of sale consideration for transfer of assets in specified cases. It is therefore unjust and unwarranted to impute/ assume consideration in cases which clearly do not fall within the ambit of such specified Provisions. 51. Now, coming to the allegation of AO for taking the revaluation of assets as a consideration for transfer of undertaking, the learned AO has failed to understand that the Business Restructuring Reserve created in the books of the assessee was merely an accounting entry passed in the books of the Appellant on account of revaluation of its investment and that, the amount representing an accounting entry could not be deemed to be the value of consideration for transfer of the telecom undertaking by the assessee. The fair valuation of the investments by the assessee in its books cannot by any stretch of imagination be considered as a consideration received by the assessee from ICL for de-merger of its telecom undertaking. The creation of such a reserve only represents an accounting entry passed by the assessee in its books of account and does not represent ..... X X X X Extracts X X X X X X X X Extracts X X X X
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