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2016 (8) TMI 70 - ITAT HYDERABAD

2016 (8) TMI 70 - ITAT HYDERABAD - TMI - Addition representing long term capital gains on sale of shares - AO has adopted the Fair Market Value (FMV) at ₹ 843.24 per share, as against the actual price of ₹ 275 adopted by the assessee, as evidenced by a Share Purchase agreement and passing on the consideration through banking channels - Held that:- The approach of the Assessing Officer as well as the CIT(A) is against the legal precedents on the issue. Thus we direct the Assessing Off .....

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appeal is preferred by the Revenue against the order of the learned Commssioner of Income-tax(A) - 2, Hyderabad, dated 23- 12-2015 for AYs 2011-12. 2. Briefly the facts of the case are that the assessee company is an investment company filed its return of income for the AY 2010-11 on 15/10/2010 declaring loss of ₹ 8,20,77,710/-. However, the AO completed the assessment u/s 143(3) of the Income-tax Act, 1961 (in short the Act ) by making an addition of ₹ 97,18,78,900/-. 2.1 The only .....

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equity shares in Silicon Builders to M/s Classic Realty Pvt. Ltd., during the assessment year under appeal, i.e., 2010-11, for a consideration of ₹ 50,00,00,000. These shares were acquired by it during AY's 2008-09 and 2009-10 at a cost of ₹ 50,00,00,000. M/s Silicon Builders was holding 1,50,00,000 shares in M/s Raghuram Cements Ltd (later known as M/s. Bharathi Cement Corporation P. Ltd.) since AY 2008-09. During the scrutiny, the AO directed the assessee company to show cause .....

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ments Limited (now M/s Bharathi Cement Corporation P Ltd) which was acquired at par i.e., ₹ 10 per share. However, at the time of sale of shares of M/s Silicon Builders P Ltd., the value of shares of M/s Bharathi Cement Corporation P Limited is at ₹ 671. But the assessee sold his entire stake of 18,18,180 shares at ₹ 50 crore only to M/s Classic Realty P Ltd., which is also a company belonging to promoters of M/s Bharathi Cement Corporation P Ltd. In view of the above, it is as .....

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group companies agreed to sell their entire equity in Bharathi Cements to M/s Parficim, France at ₹ 671.20 per share. The promoters of the cement company have not taken separate consideration for transferring the controlling stakes, and also provided an exit to the investment with almost 100% appreciation on their investment. Hence the assessee sold the shares of Silicon Builders at cost considering commercial expediency and interests of the group". 2.3. Subsequently, the AO proposed .....

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filed its objections as under: ""The price of ₹ 1,450 was based on the offer to the group to acquire 15% of M/s Bharathi Cements at ₹ 300 crores, which works out to ₹ 342 per share. Since initially shares were purchased at a low value of ₹ 104 and ₹ 185, subsequently higher price was paid. However there is no record of such offer and who made the offer. " 2.5. Further, the assessee submitted as under: "The assessee has transferred the shares of .....

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ost considering commercial expediency and interests of the group. " 2.6. However, the AO has not accepted the above submissions of the assessee and has gone ahead with adopting the share price of M/s.Bharathi Cement Corporation P Ltd., at ₹ 1,450 in order to value the shares of M/s. Silicon Builders. AO's observations are as follows: "The transaction appears to be collusive in nature as the shares were transferred to a company promoted by Sri Y.S Jagan Mohan Reddy. It is evid .....

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arathi Cement Corporation P Ltd as on the date of sale. So the transfer in this case is not one of pure sale to consider only the sale price received as the full value consideration. So what is to be considered in this case is the value of equivalent shares of M/s Silicon Builders P Ltd held in M/s Bharathi Cement Corporation Limited. So to arrive at the full value of consideration, the market value of the equivalent shares of M/s Bharathi Cement Corporation P Limited is the only option. The val .....

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under: 2175,00,00,000 2,57,93,406 = 843.24 Accordingly, the long term capital gains u/s 112 are worked as under: Sale proceeds of Shares in Silicon Builders 18,18,180X843.24=153,31,62,103 Less: Indexed cost of acquisition FY 2007-08 for ₹ 29,99,99,700 34,41,01,289 FY 2008-09 for ₹ 19,99,99,800 21,71,81,913 56,12,83,203 Long term capital gains u/s 112 97,18,78,900 3. Aggrieved with the above order, the assessee carried the matter in appeal before the CIT(A). 4. Before the CIT(A), the .....

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.e.f. 01-06-2010, i.e., for the assessment year 2011-12. Further, charging the difference in Fair Market Value and full value of consideration in the hands of the transferee and not in the hands of transferor. In other words, it can be stated that there are no provisions in the Act for the assessment year 2010-11, being the period under appeal to substitute the Full value of consideration with Fair market value. 5.1. The CIT(A) further observed that as it is clear that specific provisions are av .....

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exclusively in connection with such transfer, and (ii) the cost of acquisition of the asset and the cost of any improvement thereto". Therefore, the 'full value of consideration' is clearly different from the 'fair market value'. It is to be noted that Section 50D, operative from 01.04.2013, permits fair market value being the full value of consideration in certain cases where as a result of transfer of capital asset by an assessee the consideration received or accruing is .....

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ower the AO to substitute the 'fair market value' to 'full value of consideration' . 5.4. He, therefore, observed that the two words, 'full value of consideration' and 'fair market value ' are differently used in the Act and fair market value cannot be substituted in place of full value of consideration, unless it is specifically empowered by the Act. Hence, as far as computation of capital gains on sale of shares is concerned under section 48, it does not empower .....

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8377; 97,18,78,900/- made by the AO. 6. Aggrieved by the order of the CIT(A), the revenue is in appeal before us raising the following grounds of appeal: 1. Whether in the facts and circumstances of the case the CIT(A) is correct in holding that the facts in the case of M/s. Sugini Constructions Limited are identical to the facts involved in the case of the assessee i.e.G2 Corporate Services Private Ltd? 2. Whether in the facts and circumstances of the case the CIT(Al ought to have appreciate th .....

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/- without considering the fact that the assessee on one hand sold shares of M/s. Silicon Builders Limited(which in turn held shares of Bharati Cement Corporation whose market value was ₹ 671/-) at ₹ 275/- to M/s. Claasic Reality which belongs to promoters of Bharati Cement Corporation and on the other hand its other group companies purchases shares of Bharati Cement Corporation at ₹ 1450/- from the promoters of the Bharathi Cement Corporation. 7. Before us, the ld. AR of the a .....

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n record as well as the orders of revenue authorities. We find that the issue in dispute is squarely covered by the decision of the coordinate bench of this Tribunal in case of M/s Suguni Constructions Pvt. Ltd. (supra) wherein the coordinate bench held as follows: 6. Having regard to the rival submissions and the material on record, we find that the sale of shares by the assessee to M/s. Parficim, France, of both the companies, i.e. M/.s. Silicon Builders as well as Bharati Cements is not doubt .....

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f Bharati Cements to estimate the share value of M/s. Silicon Builders. This, in our opinion, is fallacious. Hon ble Supreme Court in the case of CIT V/s. George Henderson (66 ITR 622) has held that the expression full consideration in the main part of S.12(B)(2) of the Indian Income-tax Act, 1922 cannot be 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 .....

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eration is equally applicable to the expression appearing in S.48 of the Act of 1961. Even after giving anxious consideration to the scheme of computation of capital gain, it is seen that there is no provision to substitute sale consideration declared by the assessee with that of market value , save provision of S.50C which is only applicable to capital asset in the form of land or building. In the present case, there is no dispute about the fact that the assessee has received only ₹ 50 co .....

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e is supported by the interpretation given by the Hon'ble Supreme Court to the expression full value of consideration in the case of George Henderson & Co. Ltd. (supra). Similar view has also been expressed by another bench of this Tribunal at Mumbai in the case of Morarjee Textiles Ltd. and Another V/s. ACIT (ITA No.1979/Mum/2009 for assessment year 2005-06) dated 10.5.2013, to which one of us, viz. Accountant Member, is a signatory, wherein, vide paras 15 to 21, it was held as under- 1 .....

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e is nothing brought on record by the AO how these amounts were arrived at. Therefore, we are unable to support the substitution of value even on facts. Be that as it may, first of all, the AO does not have power under the I.T. Act to substitute 'fair market value' for 'full value of consideration'. There are specific provisions for substitution of fair market value for full value of consideration like computation under section 50C and 50D in the I.T. Act at present but in the re .....

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y in connection with such transfer, and (ii) the cost of acquisition of the asset and the cost of any improvement thereto". The 'full value of consideration' is clearly different from the 'fair market value'. Section 50D inserted w.e.f. 01.04.2013 permits fair market value being the full value of consideration in certain cases where as a result of transfer of capital asset by and assessee the consideration received or accruing is not ascertainable or cannot be determined. Un .....

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'. These two words, 'full value of consideration' and 'fair market value ' are differently used in the Income Tax Act and fair market value cannot be substituted in place of full value of consideration, unless it is specifically empowered by the Act. The AO has also wrongly relied on section 2(22B)(i), which is as under: "the fair market value, in relation to a capital assets, means - (i) the price that the capital asset would ordinarily fetch on sale in the open market .....

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he shares which were allotted at ₹ 136/- per share was ₹ 620/- per share considered the expression " full value of consideration" as occurring in section 12B(2) of the Indian Income Tax Act and , 1922, which is analogous to section 48 of the Act has held as under:- " ............ It is manifest that the consideration for the transfer of capital asset is what the transferor receives in lieu of the asset he parts with, namely, money or money's worth and, therefore, t .....

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the asset transferred and it is not right to say that the asset transferred and parted with is itself the consideration for the transfer. The main part of section 12B(2) provides that the amount of a capital gain shall be computed after making certain deductions from the "full value of the consideration for which the sale, exchange or transfer of the capital asset is made." In case of a sale, the full value of the consideration is the full sale price actually paid. The legislature had .....

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part of section 12B(2) is borne out by the fact that in the first proviso to section 12B(2) the expression "full 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 .....

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the first proviso are(1) that the transferor was directly or indirectly connected with the transferee , and(2) that 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." 17. In CIT vs. Gillanders Arbuthnot & Co. (1973) 87 ITR 4 .....

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ade"? It is the consideration agreed to be paid or is it the market value of the consideration ? In the case of sale for a price, there is no question of any market value unlike in the case of an exchange. Therefore, in case of sales to which the first proviso to sub-section (2) of section 12B is not attracted, all that we have to see is what is the consideration bargained for. As mentioned earlier, to the facts of the present case, the first proviso is not attracted. As seen earlier, the p .....

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ther 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 part of section 12B(2) is borne out by the fact that in the first proviso to section 12B(2) the expression "ful .....

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ue 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 of the first proviso are(1) that the transferor was directly or indirectly connected with the transferee , and(2) that .....

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e capital gains made by the company were ₹ 27,04,772 as held by the High Court." 18 In K.P.Varghese vs. ITO (1981) 7 Taxman 13(SC); (1981) 131 ITR 597 (SC) it has been held vide para 15 and 18 as under:- "15. It is, therefore, clear that sub-section (2) cannot be invoked by the revenue unless there is understatement of the consideration in respect of the transfer and the burden of showing that there is such understatement is on the revenue. Once it is established by the revenue t .....

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at would in most cases be difficult , if not impossible, to show and hence sub-section (2) relieves the revenue of all burden of proof regarding the extent of understatement of concealment and provides a statutory measure of the consideration received in respect of the transfer. It does not create any fictional receipt. It does not deem as receipt something which is not in fact received. It merely provides a statutory best judgment assessment of the consideration actually received by the assesse .....

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nt of computation is "the full value of the consideration received or accruing". What in fact never accrued or was never received cannot be computed as capital gains under section 48. Therefore, sub-section (2) cannot be construed as bringing within the computation of capital gains an amount which, by no stretch of imagination, can be said to have accrued to the assessee or been received by him and it must be confined to cases where the actual consideration received for the transfer is .....

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be invoked only where the consideration for the transfer has been understated by the assessee or, in other words, the consideration actually received by the assessee is more than what is declared or disclosed by him and the burden of proving such understatement or concealment is on the revenue. This burden may be discharged by the revenue by establishing facts and circumstances from which a reasonable inference can be drawn that the assessee has not correctly declared or disclosed the considera .....

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para of the order that: " As already held in the order of Rupee Finance & Management Pvt. Ltd. there is no allegation much less, any evidence to show that these assesses before us have received monies in excess of amounts of sale consideration recorded and disclosed in the transaction for the sale of shares. The first appellate authority has rightly noted that under section 48 the starting point for computation of capital gains is the amount of full value of consideration received or a .....

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f a bona fide transaction, where the true consideration received by the assessee has been declared or disclosed by him. Section 50C, has come into the statute only with effect from 1.4.2003 by Finance Act, 2002 and is not applicable to the impugned assessment years. Hence, for the period prior to the insertion of section 50C no addition can be made by invoking the ratio of this section. The first appellate authority at page 21 of his order has rightly observed that, what in fact never accrued or .....

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refers to the price bargained for by the parties and it cannot refer to the adequacy of the consideration. He also rightly observed that the Legislature has used the words 'full value of the consideration' and not 'fair market value of the assets trnsferred'. He recorded that the Assessing Officer has not brought on record any material to show that the assessee has received more than what has been disclosed in the books and under these circumstances the difference cannot be brou .....

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case, we cannot approve the action of the AO in revaluing the sale price. Similar view was taken by the Coordinate Bench in the case of MGM Shareholders Benefit Trust (supra) wherein the ITAT ultimately did not approve the substitution of sale price on the facts of that case. The final finding in para 41 is as under: - "41. There is no quarrel on the principle of law laid down in the other decisions relied on by ld. D.R. However, in view of the principles enunciated by the Hon'ble Supr .....

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