IN THE ITAT MUMBAI BENCH ‘I’
Income-tax Officer-21(1)(2), Mumbai
Ms. Indira R. Shete
IT APPEAL NO. 342 (MUM.) OF 2010
[ASSESSMENT YEAR 2006-07]
JULY 18, 2012
N.K. Billaiya, Accountant Member
This appeal by the Revenue is directed against the order of Ld. CIT(A)-32 dt. 22.10.2009 for assessment year 2006-07.
2. The effective grounds of appeal raised by the Revenue are as under:
1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs. 6,19,26,831/-made in respect of Long Term Capital Gains.
2. (i) The Ld. CIT(A) has erred in treating this transaction as parallel to Sec. 45(5) of the I.T. Act as the facts of the case are different and Sec. 45(5) is applicable only in respect of cases where there is compulsory acquisition of capital assets under any law.
(ii) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in not treating the entire transaction as capital gains in this asst. years thereby ignoring the settled legal position that capital gains is attracted even in case of part performance of the contract/agreement.
3. The only additional ground raised by the Revenue reads as under:
“The Ld. CIT(A) has erred in to allow relief to the assessee relying upon certain additional evidence which was not submitted before the AO. This consists of copy of Termination Agreement dt. 26.3.2009 which was furnished to the CIT(A) as per rule 46A, the CIT(A) ought to have entertained the said additional evidence after allowing the AO a reasonable opportunity to examine such evidence filed by the assessee which was not done. Thus, the order of CIT(A) is not in consonance with the mandatory requirement of Rule 46A.”
4. Briefly stated the facts of the case are that the assessee hold 1,03,500/- equity shares out of the 3,00,000 equity shares of Rs. 10 each in the share capital of Unisol Infraservices Pvt. Ltd. (UIPL). The entire shareholding of UIPL belonged to the members of Shete family and the holding of the assessee works out to 34.50%. For the year under consideration, the assessee filed return of income on 27.6.2006 declaring total income at Rs. 3,57,280/- which included Long Term Capital Gain arising on sale of UIPL shares at Rs. 58,57,206/- and claimed exemption in respect thereof in view of the investment made in Capital Gain Bonds issued by Small Industries Development Bank of India (SIDBI). During the course of assessment proceedings, the assessee produced the copy of agreement for sale from which the Assessing Officer found that the Shete family has agreed to sell the entire holding of UIPL to Radhakrishna Hospitality Services Pvt. Ltd. (RHSPL). As per the agreement, the transfer date was determined not to be later than 28.2.2006. However, as per the Minutes of the meeting of the UIPL held on 17.2.2006, the Board of Directors have endorsed the transfer of the shares to RHSPL on 17.2.2006 which has been taken as the date of transfer. As the transfer took place in the financial year 2005-06 relevant to assessment year 2006-07 which is the year under consideration, the AO went on to compute the capital gain tax arising out of such transfer.
4.1 The AO noted that the sale consideration for the sale of shares of UIPL is to be received by the Shete family as follows:
(i) Initial sale considering being a sum of Rs. 2,70,00,000/-, less debt, plus cash, as on the completion date and
(ii) Deferred sale consideration, being a variable as formulated in the agreement.
4.2 The AO found that as per Clause 3.2 of the agreement of sale, the consideration for transfer of shares is the aggregate of the initial consideration and the deferred consideration being capped at Rs. 20,00,00,000/- for the Shete family. According to the AO, the total consideration agreed upon is Rs. 20 crores and the assessee’s share in the shares transferred was at 34.5%, the assessee’s share of the net consideration was taken at Rs. 6.90 crores. Based on this sale consideration, the AO worked out the Long Term Capital Gain at Rs. 6.19 crores and added to the returned income and completed the assessment.
5. The assessee questioned this mode of computation before the Ld. CIT(A). The main contention before the Ld. CIT(A) was that the AO has wrongly interpreted clause 3.2 of the agreement for sale and purchase of shares of UIPL. The assessee submitted that the deferred consideration as per clause 3.2 of this agreement is to be determined in the subsequent years as per the formula contained in the clause 3.4. The assessee further submitted that the formula for computing the deferred consideration is based on the multiple of average profit for the two preceding years less debt plus cash minus the consideration already paid. It was argued by the assessee that the accrual of the sale consideration is to take place in the subsequent years on various dates as per the agreement i.e. 30.6.2007, 30.6.2009 and so on till 30.6.2011. It was argued that the initial consideration and the deferred consideration arising to the Shete family in subsequent years has been capped at Rs. 20 crores which is the maximum amount that could be received as consideration for sale of shares but at the same time it is not the final consideration agreed upon. It was accordingly submitted before the Ld. CIT(A) that except for the initial consideration paid by RHSPL to the Shete family, no part of deferred consideration has either accrued or is received by the Shete family during the year ended 31st March, 2006 i.e. the year under consideration and therefore it was finally submitted before the Ld. CIT(A) that the computation of Capital Gains made by the AO is illegal and invalid.
5.1 After considering the submissions, Ld. CIT(A) held that only the initial consideration has been received by the Shete family and as the deferred consideration depended upon future event of which neither the assessee nor the AO was aware at the time of assessment, therefore the question of bringing an imaginary consideration of Rs. 20 crores to tax cannot be upheld in law. The Ld. CIT(A) was convinced that the sum of Rs. 20 crores is the maximum consideration that can be received or accrued to the members of Shete family and the same cannot be taken to be the consideration for transfer of shares. The Ld. CIT(A) further observed that the transaction has ultimately been closed in the year 2009 and the actual consideration to the Shete family has crystallised at Rs. 4.81 crores as per copy of Termination Agreement dt. 26.3.2009. The Ld. CIT(A) further observed that the assessee has declared capital gains in the subsequent years in which the deferred consideration has been received and has not claimed any deduction in those years towards cost of acquisition or improvement. While deciding the appeal, the Ld. CIT(A) also considered the submission of the assessee that out of four cases of the members of the Shete family, the assessments in case of two members have been completed u/s. 143(3) of the Act in which the capital gains arising on sale of UIPL shares under the same agreement declared in the return of income of the concerned assesses has been accepted. The Ld. CIT(A) was of the view that the principles of consistency also demanded that capital gains arising on sale of shares of UIPL in the case of assessee be also computed on the same lines. Finally, the Ld. CIT(A) held that in view of the facts and circumstances of the case, the additions made in respect of Long Term Capital gains are to be deleted.
6. Aggrieved by the order of Ld. CIT(A), Revenue is in appeal before us. The Ld. Departmental Representative submitted that there is no dispute so far as transfer of shares and the effective date of transfer of shares are concerned. The only dispute relates to the total sale consideration which has been rightly taken at Rs. 20 crores by the AO as per Clause 3.2 of the Agreement for Sale and Purchase of shares of UIPL.
7. The Ld. Counsel for the assessee rebutted the submission of the Ld. DR and submitted that the consideration referred by Ld. DR is the maximum consideration which the Shete family was ought to have received and is not the total sale consideration as alleged by the Revenue. The Counsel further argued that as per the agreement, only initial consideration has been provided whereas the deferred consideration is to be calculated as per the formula given in the said agreement. The Counsel further relied upon the provisions of Sec. 45(5) of the Act and stated that the law has taken care of future consideration as per the provisions of Sec. 45(5) and therefore any increase in the consideration in future would be taken care of by the provisions of Sec. 45(5) of the Act.
8. We have considered the rival submissions and perused the orders of lower authorities. It is an undisputed fact that the Shete family has agreed to transfer the entire holding of UIPL to RHSPL. The effective date of transfer has been accepted as 17th February, 2006 which is well within the year under consideration. The main contention of the assessee is that she is liable for capital gain tax only on the amount of consideration actually received by her and not on future consideration which would depend upon future events. First let us consider the provisions of Sec. 45(1) which states that
“Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 54, 54B, 54D, 54Em 54EA, 54EB, 54F, 54G and 54H be chargeable to income tax under the head “Capital Gains” and shall be deemed to be the income of the previous year in which the transfer took place”.
9. From the perusal of Section 45(1), it appears that it is a deeming section where any gain arising from the transfer of a capital asset effected during the previous year shall be deemed to be the income of the previous year in which the transfer took place and it no where says that the gain is actually received in the year. In the light of the provisions of Sec. 45(1), the transfer of shares of UIPL have been effected in the previous year i.e. 2005-06 relevant for the year under consideration. Now all that has to be seen is whether the entire consideration arising out of such transfer can be taxed for the year under consideration or only that consideration which has been received during the year can be brought to capital gain tax. Let us take an example suppose ‘A’ agrees to sell his property to ‘B’ for a consideration of Rs. 1 crore. As per their agreement, ‘A’ to receive Rs. 20 lacs on the date of agreement and balance in installments in subsequent years depending upon the profitability from the said property i.e., the payment of consideration is deferred depending upon some future events. ‘A’ gives the possession of the property to ‘B’ to his enjoyment. Going by the logic of the Counsel, in this example the consideration which could be liable to capital gain tax would be only Rs. 20 lacs whereas the right to receive the total consideration has already accrued to ‘A’. In the light of the provisions of Sec. 45(1) being a deeming provision, the entire consideration on the transfer of property is to be taken for consideration during the year in which the transfer is effective, irrespective of the fact that the payment of the consideration may have been deferred by the parties, because any contrary view will frustrate the legislative intent. Therefore, in our considered view, the entire sale consideration accrued to the assessee would be taxed in A.Y. 2006-07. The Ld. Counsel for the assessee further referred and relied upon the provisions of Sec. 45(5) of the Act. From the perusal of Sec. 45(5), which is operative from assessment 1988-89, it appears that two conditions are to be satisfied for the application of that Sec. 45(5) i.e.
(i) Capital gains must arise from the transfer of a capital asset by way of compulsory acquisition under any law, and
(ii) The compensation for such transfer is enhanced or further enhanced by any Court, Tribunal or other authority.
Unless both these conditions concur, there is no question of application of Sec. 45(5) of the Act.
10. Clause 5 has been inserted to sec. 45 to mitigate the hardship to the tax payers whose capital assets are acquired by the government bodies compulsorily under the land acquisition act or any other law, and when the compensation is in dispute and can be decided only by courts or tribunals in some future date. This enactment relates to the actions of the government bodies over which the assessees do not have any control and the legislative intent cannot be extended to transactions between private parties or between an assessee and government body, where the terms of agreements can be decided mutually. Further Sec. 45(5)(b) will be attracted only when the assessee receives the enhanced compensation in pursuance of final award/order of a court, Tribunal or other authority increasing the compensation. The provisions enacted for recomputation of capital gains in case of reduction in compensation received were inserted with effect from 1.4.2004. Clause (c) of Sec. 45(5) envisages a situation where in the assessment for any year–the capital gain arising from the transfer of a capital asset is to be computed by taking the compensation or consideration referred to in clause (a) of Sec. 45(5) or as the case may be, enhanced compensation or consideration referred to in clause (b) of Sec. 45(5) and subsequently such compensation or consideration is reduced by any Court, Tribunal or other authority. In such a situation such assessed capital gain of that year shall be recomputed by taking the compensation or consideration as so reduced by such court, Tribunal or other authority to be the full value of the consideration. For giving effect to such recomputation, the provisions of Sec. 155(16) have been enacted with effect from 1.4.2004.
11. The apprehension of the counsel, that in the instant case the sale consideration may even get reduced as it depends upon future events, is taken care of by the Hon’ble Madras High court in the case of T.V. Sundaram Iyengar & Sons Ltd. v. CIT  37 ITR 26 wherein the Hon’ble Court observed :
“If it subsequently happens that the money is not actually received, that would be a capital loss arising in the year when the money became irrecoverable. Even if we suppose that the assessees found it difficult to receive in full the price for which they transferred their assets to the Southern Roadways Ltd., and that in consequence they decided to accept paid up shares in the transferee company, that would be a capital loss which arose outside the accounting year, and, therefore, cannot be taken notice of for the relevant accounting year”
12. In the light of the above discussion, we do not find any logic or reason in Counsel’s submission that this case is covered by provisions of Sec. 45(5) of the Act as it refers to transfer of a capital asset by way of compulsory acquisition under any law. We also reject the submission that only the consideration which is received in the year can be taken for consideration for computing the capital gains tax, it is clear from the provisions of Sec. 45(1) , being a deeming provision any gain which has arisen during the year has to be taken for consideration irrespective of the fact that the transferor may receive the sale consideration in subsequent years. Further, the observation of the Ld. CIT(A) that in family members cases, for the capital gains arising out of the transfer of shares, the return of income have been accepted by the department under scrutiny assessment, cannot be accepted under the principles of consistency as we are not bound to follow the decisions of the authorities which are inconsistent with the provisions of section 45(1) of the Act.
13. The Ld. Counsel for the assessee also referred to the case of Raju Shete which has been decided by the ITAT, Mumbai ‘D’ Bench in IT Appeal Nos. 2902/M/2011 & 2904/M/2011 for assessment year 2006-07 and submitted that the Tribunal has accepted the capital gains as returned by the assessee. We find that in the said decision, the Tribunal was deciding on the applicability of the provisions of Sec. 263 vis-a-vis the applicability of the said section on the facts of the case.
14. However, we are not going into the merits of this case as we find that the CIT[A] has admitted certain additional evidence in violation of the provisions of Rule 46A without affording any opportunity to the AO and has decided the appeal on the basis of the Termination Agreement dt. 26.3.2009 which was not before the AO and this has also been challenged by the Revenue as per the additional ground of appeal. We find that the Ld. CIT(A) has grossly erred in not giving any liberty to the AO to consider the said Termination Agreement. Therefore, following the principles of natural justice and fair play, we restore this issue back to the files of the AO. Now that the entire consideration has been crystalised, The AO is directed to examine/verify the termination agreement, and after being satisfied, recompute the capital gains tax liability in the light of the provisions of sec 45(1) discussed here in above, after giving a reasonable opportunity of being heard to the assessee.
15. In the result, the appeal filed by the Revenue alongwith the additional grounds of appeal, is allowed for statistical purposes.