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2015 (12) TMI 35 - ITAT HYDERABAD

2015 (12) TMI 35 - ITAT HYDERABAD - TMI - Computation of capital gains under S.48 - transfer of equity shares - CIT(A) confirming the order of the Assessing Officer in substituting the full value of the consideration with fair value of consideration - Held that:- The reason for computing the capital gain by the Assessing Officer by estimating the sale consideration is that the shares of Bharati Cements have fetched a higher amount as compared to the shares of Silicon Builders, which is holding t .....

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considered as having a reference to the market value of the asset transferred, but the expression only named the full value of the thing received by the transferor in exchange for the capital asset transferred by him. S.12(B)(2) of the Indian Income Tax Act, 1922 is analogous to S.48 of the Income Tax Act,1961.

Thus we direct the Assessing Officer to adopt the full value of consideration as received by the assessee on sale of shares of M/s. Silicon Builders at cost to be the full con .....

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ssing Officer in substituting the full value of the consideration with fair value of consideration, for computing the capital gains under S.48 of the I.T. Act on transfer of equity shares. 2. Brief facts of the case are that the assessee company filed its return of income for the assessment year 2010-11 on 14.10.2010 declaring an income of ₹ 60,430. During the assessment proceedings under S.143(3) of the Income Tax Act,1961, the Assessing Officer observed that the assessee is holding 2,54, .....

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45 shares of M/s. Silicon Builders with a paid up capital of 2,57,93,406, equity shares constituting 0.99% of the company and M/s. Silicon builders was holding 1,50,00,000 equity shares in M/s. Bharati Cements. It was submitted that the assessee s group companies agreed to sell their entire equity in M/s. Bharati Cements to M/s. Parficim, France at ₹ 671.20 per share and the promoters of the cement company having taken separate consideration for transferring the controlling stakes, had als .....

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by the assessee also should be adopted at ₹ 671.20 per share and the long term capital gain on the sale of shares has to be computed accordingly. Accordingly, he brought an amount of ₹ 2,96,73,200 to tax. 3. Aggrieved, assessee preferred an appeal before the CIT(A), who confirmed the order of the Assessing Officer, and hence, assessee is in second appeal before us. 4. Learned counsel for the assessee submitted that the Assessing Officer has committed factual error in observing that .....

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e has placed reliance on the following decisions (a) CIT V/s. George Henderson (66 ITR 622)-SC (b) CIT Vs. Gillanders Arbuthnot & Co.(1973 AIR 989 ) SC (c) Reliance Communications Infrastructures V/s.CIT(34 SOT 245)- Mum (d) Morarjee Textiles Ltd. V/s. ACIT (ITA 1979/Mum/2009 for assessment year 2005-06) dated 10.5.2013) (e) Nariman Point Building Services & Trading P. Ltd. V/s. CIT(ITA No.798/M/2011 for assessment year 2006-07) dated 25.7.2012) (f) Venus Financial Services Ltd. V/s. ACI .....

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ed by the authorities below. Nor is the sale consideration received by the assessee questioned. The reason for computing the capital gain by the Assessing Officer by estimating the sale consideration is that the shares of Bharati Cements have fetched a higher amount as compared to the shares of Silicon Builders, which is holding the shares of Bharati Cements. As seen from the order of the CIT(A), the Assessing Officer has worked out the net worth of Bharati Cements to arrive at the share value o .....

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asset transferred by him. S.12(B)(2) of the Indian Income Tax Act, 1922 is analogous to S.48 of the Income Tax Act,1961. This fact has been taken note of by the coordinate bench of the Tribunal (Mumbai Bench) in the case of Reliance Communications Infrastructures V/s. CIT (34 SOT 245) as under- 24. In our opinion, as a provision of S.48 of the Act of 1961 is analogous to S.12B(2) of the Act of 1922 and hence, the interpretation given by their Lordships to the expression full value of the consid .....

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res and it is also not the case of the department that over and above ₹ 50 cores the assessee has received any amount, and hence, as the full value of the consideration is ₹ 50 crores as against the value of the shares of 50 crores, the capital gain worked out to be nil under S.48 of the Act. For the reasons given above, it cannot be said that short-term capital gains as held by the learned CIT in the order passed under S.263 has escaped assessment . Moreover, the case of the assesse .....

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5. We have considered the issue and examined the record. As far as the price adopted by the AO, we cannot approve the value as taken by the demat authorities as there seems to be an error in mentioning the value as the said company is a private limited company and there cannot be any market value as it is not quoted in the Stock Exchange. Therefore, part of AO's finding about the value of demat statement is not correct. With reference to the future profit and also adoption of book value ther .....

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levant assessment year, the AO has no power to adopt the 'fair market value' in place of 'full value of consideration'. The method of computation as prescribed under section 48 superficially mention that "income chargeable under the head 'Capital Gains' shall be computed, by deducting from the full value of consideration received or accruing as a result of the transfer of the capital asset the following amount, namely: - (i) expenditure incurred wholly and exclusivel .....

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der section 50C, there is special provision for substitution of full value of consideration in cases where Stamp Authorities adopts a particular value, i.e. deemed to be the full value of consideration received or accruing. Reference to Valuation Officer under section 55A is also for the limited purpose of arriving at the cost of asset at the fair market value in certain circumstances but it does not empower the AO to substitute the 'fair market value' to 'full value of consideration .....

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on the relevant date". This fair market value substitution is applicable only to the situation where the AO is empowered to determine the fair market value under the Act. As far as computation of capital gains on sale of shares are concerned under section 48 it does not empower the AO to substitute the fair market value for the full value of consideration. 16. The Hon'ble Supreme Court in CIT vs. George Henderson and Co. Ltd. (1967) 66 ITR 622 (SC) on the issue that the market value of .....

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the very asset transferred or parted with cannot be the consideration for the transfer. It follows that the expression "full consideration" in the main part of section 12B(2) cannot be construed as having a reference to the market value of the asset transferred but the expression only means the full value of the thing received by the transferor in exchange for the capital asset transferred by him. The consideration for the transfer is the thing received by the transferor in exchange fo .....

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d to use the words "full value of the consideration" because it was dealing not merely with sale but with other types of transfer, such as exchange, where the consideration would be other than money. If it is therefore held in the present case that the actual price received by the respondent was at the rate of ₹ 136 per share the full value of the consideration must be taken at the rate of ₹ 136 per share. The view that we have expressed as to the interpretation of the main .....

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made a distinction between the two expressions "full value of the consideration" and "fair market value of the capital asset transferred" and it is provided that if certain conditions are satisfied as mentioned in the first proviso to section 12B(2), the market value of the asset transferred, though not equivalent to the full value of the consideration for the transfer, may be deemed to be the full value of the consideration. To give rise to this fiction the two conditions o .....

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407 (SC) Their Lordships after applying the principles enunciated in George Henderson and Co. Ltd. supra has observed and held as under ( page 419):- "Now let us see what is the impact of section 12B(2) on the transaction? Under that provision, the amount of capital gains has to be computed after making certain deductions from the full value of the consideration for which the sale is made. What exactly is the meaning of the expression "full value of the consideration for which sale is .....

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price bargained for the sale of the shares and securities was only rupees seventy-five lakhs. The facts of this case squarely fall within the rule laid down by this court in Commissioner of Income-tax vs. George Henderson & Co. Ltd. Therein this Court observed:- "In case of a sale, the full value of the consideration is the full sale price actually paid. The legislature had to use the words "full value of the consideration" because it was dealing not merely with sale but with .....

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ll value of the consideration" is used in contradistinction with "fair market value of the capital asset" and there is an express power granted to the Income-tax Officer to "take the fair market value of the capital asset transferred" as "the full value of the consideration" in specified circumstances. It is evident that the legislature itself has made a distinction between the two expressions "full value of the consideration" and "fair market va .....

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t the transfer was effected with the object of avoidance or reduction of the liability of the assessee under section 12B. If the conditions of this proviso are not satisfied the main part of section 12B(2) applies and the Income-tax Officer must take into account the full value of the consideration for the transfer." Applying the principles enunciated in that decision we think that the full value of the sale price received by the assessee was only rupees seventy- five lackhs. That being so, .....

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e that the consideration for the transfer has been understated or, to put it differently, the consideration actually received by the assessee is more that what is declared or disclosed by him, sub-section (2) is immediately attracted, subject, of course, to the fulfillment of the condition of 15 per cent or more difference, and the revenue is then not required to show what is the precise extent of the understatement or, in other words, what is the consideration actually received by the assessee. .....

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ssee and brings to tax capital gains on the footing that the fair market value of the capital asset represents the actual consideration untruly declared or disclosed by him. This approach in construction of sub-section (2) falls in line with the scheme of the provisions relating to tax on capital gains. It may be noted that section 52 is not a charging section but is a computation section. It has to be read along with section 48 which provides the mode of computation and under which the starting .....

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r is understated and since in such cases it is very difficult , if not impossible, to determine and prove the exact quantum of the suppressed consideration, subsection (2) provides the statutory measure for determining the consideration actually received by the assessee and permits the revenue to take the fair market value of the capital asset as the full value of the consideration received in respect of the transfer. xxxxxx xxxxxx xxxxxxxx 18. We must, therefore, hold that sub-section (2) of se .....

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or disclosed the consideration received by him and there is understatement or concealment of consideration in respect of the transfer. Subsection (2) has no application in case of an honest and bona fide transaction where the consideration received by the assessee has been correctly declared or disclosed by him, and there is no concealment or suppression of the consideration........... " 19. . In Rupee Finance & Management (P) Ltd. (2008) 22 SOT 174 (Mum); (2009) 120 ITD 539 (Mum) it h .....

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onsideration received or accruing as a result of transfer of the capital asset. The Hon'ble Supreme Court in the case of K.P.Varghese (supra) held that sub-section (2) of section 52 can be invoked only when the full value of the consideration is received in respect of a transfer is shown at a lesser figure than that which is actually received by the assessee. It further laid down that the burden of proving such understatement of consideration is on the revenue and that the sub-section has no .....

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t in fact never accrued or was never received cannot be computed as capital gain. He relied on the decision of the Calcutta High Court in the case of CIT vs. Smt. Nandini Nopani (1998) 230 ITR 679. He rightly held that it is manifest that the consideration for the transfer of capital asset is what the transferor receives, in lieu of assets he parts with, i.e. money or monies worth and that the expression 'full consideration' cannot be construed as having reference to the market value of .....

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difference cannot be brought to tax under the head 'Capital gains'. We fully agree with these findings and the appeals filed by the revenue fail." 20. In view of the principles laid down above, we cannot uphold the orders of the AO and the CIT(A) in redetermining the full value of consideration by adopting the fair market value. Since the provisions of the Act does not provide for substitution of the values and the said provisions for substitution provided under the Act is not appl .....

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