The recently introduced Section 50CA of the Finance Act 2017 provides for adoption of the value to be determined as per the Rules, (for convenience sake referred to by me as FMV ) as the consideration for transfer of shares of a company which are not being quoted, where the actual consideration is lower than that. The difference shall be subjected to tax in the hands of the transferor.
Since Section 56(2)(x) provides for payment of tax by a receiver of any property (which includes shares also) without consideration or for a consideration lower than its FMV (as per the Rules) by more than Rs 50,000, (other than from specified relatives), there is an incidence of double taxation, in so far as the excess of the FMV over the actual consideration gets taxed as capital gains in the hands of the transferor and as income from other sources in the hands of the transferee. This article analyses the incidence of double taxation.
Supreme Court had held in the case of Shri Krishna Das vs Town Area Committee, Chirgaon (AIR 1981 SC 463) as to what constitutes a double taxation as below:
“Double taxation in the strict legal sense means taxing the same property or subject matter twice, for the same purpose, for the same period and in the same territory. To constitute double taxation, the two or more taxes must have been (!) levied on the same property or subject matter (2) by the same Government or authority (3) during the same taxing period (4) for the same purpose. “
In the case of Shaktikumar Sancheti vs State of Maharashtra, where dealers of motor vehicles in the City of Bombay challenged the levy of Octroi by Bombay Municipal Corporation as well as the levy of entry tax by the Sales tax authorities as a double taxation on the same goods on the same taxable event (viz., entry of goods into a ‘local area’ for sale use or consumption quoting this decision of the Supreme Court, Bombay High Court held that the two levies are for two different purposes by two different agencies and there was no double taxation. This decision was later affirmed by the Supreme Court in 1995 SCC(1).
There is apparently no double taxation since the transferor is taxed on the value foregone and transferee is taxed on the value accrued and the tax is on two different persons. In fact Section 49 which provides for determination of cost of acquisition with reference to certain modes of acquisition has specific provisions (Section 49(4)) to adopt the FMV as adopted for the taxation of the recipient of the property without consideration or for short consideration under Section 56((2)(vii). While this may mitigate the double taxation of the transferee at the time of his effecting further transfer, there is a definite double taxation on the first transaction since the short fall of the consideration over the determined value gets taxed in the hands of transferor as well as in the hands of the transferee.
There is an arguable case to hold that once the transferor is taxed on the capital gains by adoption of the FMV, the transferee should out of the mischief of Section 56(2)(x) and the deeming fiction created by the proposed Section 50CA should be taken to its logical end by deeming the same FMV as the actual consideration for the transferee also since purchase and sale are two sides of the same coin. In support of this, one can rely upon the decision of the Karnataka High Court in the case of Madhur Trading Company vs the State of Karnataka and Others 1993(90 STC 537),( subsequently approved by the Supreme Court) wherein it was held that if a transaction was not deemed as a sale under the Sales tax Act and the seller was exempted from sales tax, the purchaser cannot be asked to purchase tax on the same transaction, since the deeming provision of sale shall apply for the purchase side of the same transaction, notwithstanding a specific mention. While in terms of the Karnataka Sales tax Act silk fabrics were taxable @ 4% at the last point of sale, in terms a Proviso to Section 5, the sale by a hand loom or power loom weaver, who was not covered by the definition of ‘factory’ under the provisions of the Factories Act who produce silk fabric in Karnataka was not deemed as a sale for the purposes of the Act, In terms of Section 6 purchase tax was payable by a purchaser who purchases the goods at NIL rate of tax and effects stock transfers of such goods outside the State. Since the Assessee dealer purchases the goods from sellers who were not liable to tax as per the Proviso, Dept levied the purchase tax on the dealer on stock transfer of the same goods out of Karnataka treating the sale and purchase as two different transactions. High Court held that since purchase and sale are two sides of the same coin, if the transaction was not treated as a sale by the selling dealer, it cannot be treated as a purchase by the other dealer to levy purchase tax. On the same rationale, the deemed value of sale by the transferor should be construed as the consideration paid by the transferee for the purposes of Section 56(2)(vii).
An useful reference may also be made to the recent decision (dt 28-03-2017) of the Supreme Court in the case of CIT vs Annamalaiyar Mills (P) Ltd (CA 1864/2007), wherein it was held that Dept cannot claim Gift Tax (presently covered under Section 56(2)(ix)) as well as the capital gains tax on the same transaction. M/s Annamalaiyar Mills(P) Ltd was owned by two group of shareholders, Group A holding 61.26 % and Group B holding 38.74%. M/s Annamalaiyar Textiles (P) ltd was a 100% subsidiary of Annamalaiyar Mills (P) Ltd. Group A shareholders acquired the holdings of Group B, in consideration of transfer of the 100% shareholding of the subsidiary company.In addition the subsidiary company paid Rs 42.45 lakhs to Annamalaiyar Mills (P) Ltd, on which gift tax proceedings were initiated on Annamalaiar Textiles (P) Ltd. On the same amount AO of Annamalaiyar Mills ((P) Ltd levied capital gains tax. On the matter reaching ITAT, assessment was set aside and restored to AO to follow the directions of CBDT in this regard. On escalation to Supreme Court after the High Court, the Supreme Court held that since the transaction of payment of of Rs 42.45 lakhs had been subjected to Gift Tax, Dept cannot claim tax under both Gift Tax Act and Income Tax Act.
In view of this position well settled by the Supreme Court, it may be appropriate that the incidence of double taxation on the same value is avoided by the CBDT issuing necessary clarification or in framing the Rules for valuation by the transferor appropriately.