Full value of consideration cannot be substituted by market value unless there is a proof for extra consideration

IN THE ITAT MUMBAI BENCH ‘G’

Nariman Point Building Services & Trading (P.) Ltd.

versus

Commissioner of Income-tax, Chennai III

IT Appeal No. 798 (Chny.) of 2011

[Assessment year 2006-07]

July 25, 2012

ORDER

Vijay Pal Rao, Judicial Member

This appeal by the assessee is directed against the order dated 22/03/2011 of Commissioner of income tax passed under section 263 of the IT Act for the assessment year 2006-07.

2. The assessee has raised various grounds in this appeal; however, the only issue arises for our consideration and adjudication is whether in the facts and circumstances of the case, the Commissioner is justified to invoke his revisionary powers under section 263 and even otherwise the impugned order is not sustainable as opposed to be the law as well as facts and circumstances of the case.

3. The brief facts arising from the records leading to the controversy are as under:

3.1 The assessee company filed its return of income on 27/11/2006 which was later on revised on 31/03/2008. In the revised return of income, the assessee admitted capital gain arising from sale of 25962 shares of M/s Indian Express Newspaper (Mumbai) Ltd to Shri Vivek Goenka at the rate of Rs. 105/- per share. The capital gain was offered at Rs. 27,26,010/- which was accepted by the Assessing Officer while completing the assessment under section 143 (3) on 26/12/2008. Subsequently, from the examination of assessment records, the CIT noticed from the schedule “investment in shares and debentures” to the balance sheet that Rs. 105/- per share was the book value of the shares and in the immediate preceding year relevant to the assessment year 2005-06, the assessee sold the shares of the same company at Rs. 15,000/- per share. Thus, the CIT observed that capital gain offered by the assessee on the basis of book value of sale is not tandem with the sale price adopted in the assessment year 2005-06. Since the Assessing Officer had not examined this fact of the issue, it is felt by the CIT that the assessment order dated 26/12/2008 is erroneous and prejudicial to the interest of the revenue. Accordingly, show cause notice under section 263 of IT Act was issued to the assessee.

3.2 The assessee filed reply to the show cause notice and also filed the required details before the CIT. The CIT was not satisfied with the reply of the assessee and held that the assessment order is erroneous and prejudicial to the interest of the revenue because the Assessing Officer has accepted the capital gain returned by the assessee without attempting to determine the correct capital gain in the light of fact that the same shares were sold in the earlier previous year at a price of Rs. 15,000/- per share. Accordingly, the CIT set aside the assessment order on this issue with the direction to the Assessing Officer to examine the factual matrix of the issue.

4. Before us, the learned A.R. of the assessee has submitted that the face value of the share is Rs. 100/- per share and the same were sold at Rs. 105/- per share. He has referred the computation of income and submitted that the assessee has offered capital gain of Rs. 27,26, 010/- arising from sale of 25962 shares at rate of Rs. 105/- per se. He has further submitted that the assessee has also filed the working of long term capital gain along with the return of income and therefore, all the relevant details were filed before the Assessing Officer. Since the assessee offered capital gain arising from the shares of the same company for the assessment year 2005-06, which was examined by the Assessing Officer and accepted; therefore, the capital gain offered for the assessment year under consideration was not a new issue before the Assessing Officer; but the same was also examined in the assessment year 2005-06. Accordingly, the learned A.R. has submitted that the claim of the assessee was allowed by the Assessing Officer after considering the details and working of capital gain as filed by the assessee and hence the Assessing Officer applied his mind while passing the assessment order. The learned A.R. has vehemently argued that when the Assessing Officer has taken a view while passing the assessment order under section 143(3) of the Act, then the CIT cannot take a different view. He has further submitted that the Shares sold in the earlier year were acquired in the year ending 31/03/98 at the cost of Rs. 10,000 per share. Those shares were identifiable and distinct lot of shares; whereas the shares which were sold during the year under consideration were allotted as bonus, which had no cost of acquisition and therefore, cannot be compared to the sale price of other shares, which were acquired at the rate of Rs.10,000 per share. He has pointed out that in the meeting of Board of Directors of Indian Express Newspaper (Bombay) Ltd held on 17/06/98, 50,000 shares of that company were allotted to the assessee as a bonus shares. Out of this bonus shares, 25962 shares were sold to Shri Vivek Goenka on 31st March 1998 for a total consideration of Rs. 27,26,010/- at Rs. 105/- per share.

4.1 Even otherwise, the net worth of Indian Express Newspaper (Bombay) Ltd was negative. He has referred section 2(29A) of Companies Act and submitted that the net worth means “the sum total in the paid-up capital and free reserves after deducting the provisions or expenses as may be prescribed.” As per explanation to section 2(29A) of Companies Act for the purpose of this clause “free reserves” means “all reserves created out of the profits and share premium account but does not include reserves created out of revaluation of assets, write back of depreciation provision and amalgamations.” Thus, the learned A.R. has submitted that for the purpose of net worth, the capital reserves are to be considered excluding the reserves created out of revaluation of asset. He has also referred the definition of net worth as per Securities and Exchange Board of India (issue of Capital and Disclosure Requirements) Regulations 2009 and submitted that the revaluation reserves are reduced from the reserves and surplus for the purpose of net worth. He has also referred the balance sheet of Indian Express Newspaper (Mumbai) Ltd and submitted that the net worth of the said company is a negative, if the revaluation of the asset is reduced. The learned A.R. of the assessee then took us to the schedule 5 to the balance sheet showing the investment and submitted that the assessee has valued the shares at Rs. 105/- per share whereas the shares which were having distinct numbers and acquired by the assessee at the rate of Rs. 10,000 per share were valued differently. Since the shares in question were issued as a bonus shares, the therefore, the assessee valued the same at book value as no cost of acquisition was incurred by the assessee.

4.2 The learned A.R. of the assessee has further submitted that section 52 of IT Act has been omitted from the statute with effect from 1/4/88 and thereafter there is no provision under which the Assessing Officer can adopt the market price of the shares sold by the assessee. In support of his contention he has relied upon the decision of honourable jurisdictional High Court in case of CIT v. Texspin Engg. & Mfg. Works [2003] 263 ITR 345/129 Taxman 1 (Bom.) and submitted that the expression ‘full value of consideration’ received/accruing under section 48 can not be the market value of the capital asset on the date of transfer. Section 48 does not empower the Assessing Officer to take the market value as the full value of consideration as in case of 45(4). The learned A.R. has pointed out that the appeal filed by the revenue against the decision of Hon’ble High Court has been dismissed by the honourable Supreme Court wide decision dated 4/2/2005 in SLP civil number 5676 of 2004.

4.2.1 The learned A.R. has also relied upon the decision of honourable Calcutta High Court in case of CIT v. Smt. Nandini Nopany [1998] 230 ITR 679 as well as decision of this Tribunal in case of Rupee Finance & Management (P.) Ltd. v. Asstt. CIT [2008] 22 SOT 174 (Mum.). Thus, the learned A.R has contended that when the Assessing Officer cannot adopt the market price as full value of consideration, then the Commissioner cannot direct the Assessing Officer to consider the market price of the shares for computation of capital gains. The learned A.R. has also relied upon the decision of honourable Madras High Court in case of CIT v. A.S. Jayakumar [1995] 215 ITR 422 and decision of honourable Supreme Court in case of CIT v. G.M. Mittal Stainless Steel (P.) Ltd. [2003] 263 ITR 255/130 Taxman 67 and submitted that the full value of consideration can not be the market value of the capital asset on the date of transfer but it shall mean price bargain for by the parties to the transaction.

4.3 The learned A.R. has pointed out that the honourable Madras High Court has held that unless the proof of extra consideration paid by the purchaser over and above what is stated in the sale deed, section 52 (2) of the IT Act cannot be invoked and such a enquiry would not serve any purpose. The learned A.R of the assessee has further submitted that as held by the honourable Calcutta High Court in case of Smt. Nandini Nopany (supra) that no inference can be drawn that the assessee concealed certain facts and received the difference of the value by a fraudulent means; when no evidence direct or indirect to show such design and no such finding by the Assessing Officer. The learned A.R. has further submitted that the Commissioner has not brought on record anything to show the extra money received by the assessee.

4.4 On the other hand the learned D.R has submitted that no enquiry was made by the Assessing Officer and therefore, the assessment was framed without application of mind on this issue. He has relied upon the decision of honourable Supreme Court in case of Addl. CIT v. Gurjargravures (P.) Ltd. [1978] 111 ITR 1 and submitted that the honourable Supreme Court has held that “what ‘consideration’ by the Income-tax Officer does not mean incidental or collateral examination of any matter by the Income-tax Officer in the process of assessment. There must be something in the assessment order to show that the Income tax Officer applied his mind to the particular subject-matter or the particular source of income with a view to its taxability or to its non-taxability and not to any incidental connection. “He has also relied upon the decision of honourable Madras High Court in case of CIT v. Revathi Agencies [1997] 226 ITR 554/92 Taxman 575. The learned D.R. has further submitted that in all the decisions relied upon by the assessee, the bonafide and genuineness of the transaction was not doubted by the Assessing Officer as there was no allegation of understatement of consideration. Therefore, the said decisions are not applicable in the facts of the case in hand. He has relied upon the impugned order of Commissioner of income tax.

5. We have considered the rival submissions and carefully perused the relevant material as well as the decisions relied upon by either of the parties. Though the assessment order passed under section 143(3) does not indicate or suggest that the Assessing Officer made any enquiry on the issue which is subject matter of order under section 263; however, while adjudicating the issue of disallowance under section 40(a)(ia), the Assessing Officer has disallowed the claim of deduction by following the disallowance made in the assessment year 2005-06. Thus, it shows that the Assessing Officer has considered the assessment order for the assessment year 2005-06 and was aware about the disallowances and the issues involved in the assessment year 2005-06. There is no quarrel on the point that if the Assessing Officer has not made any enquiry and thereby has not applied his mind while framing the assessment order, then the CIT has the jurisdiction under section 263 to revise such an assessment, if the same is erroneous and prejudicial to the interest of revenue.

5.1 In the case in hand the Commissioner has proceeded on the premises that the Assessing Officer should have verified the market value of the shares of the Indian Express Newspaper (Bombay) Ltd on the date of sale. The relevant findings of the CIT in para 7 and 8 of the impugned order are as under:

“7. The submissions have been considered. Full details have been filed before me for the first time, which were not filed before the AD. It is clear from the record that the A.O did not bring on record and examine all material necessary for a proper decision on the issue. The A.O., in the least, ought to have verified the market value of the shares of IENB / IENM as on the date of sale by the assessee company to Shri. Vivek Goenka at Rs.105/- per share. To this extent, the assessment is erroneous. In this connectiorL, it is to be noted that the Hon’ble Delhi High Court in the Gee Vee Enterprises v. Addl. CIT (99 ITR 375) has held that when the circumstances required, it is obligatory on the part of the ITO to further investigate the facts stated in the returns and failure to make such an enquiry would amount to the assessment order being classified as erroneous, within the meaning of Sec.263. The assessment is also prejudicial to the interests of the revenue, since, the A.O. has accepted the capital gains returned by the assessee without attempting to determine the correct capital gains in the light of the fact that the same shares were sold in the earlier previous year at a price of Rs.10,000/- each, as against Rs.105/- per share which is the sale price during the current year.

8. In the fitness of things, it is considered necessary to allow the AD to have an opportunity to examine the details filed before me along with the accompanying statements. The AO should also examine the factual matrix of the case, in the light of the evidence. The assessee would be free to produce documentary and other evidence to establish its stand. The AO is therefore directed to examine the issue afresh and pass an order according to law, after affording adequate and reasonable opportunity to the assessee to explain its case. The assessment is therefore set aside on this issue.”

5.2 It is clear from the impugned revision order that the Commissioner has not doubted the actual consideration received by the assessee. Even, there is no indication of any material or expression of his view that the assessee has received more consideration than what has been shown from the sale of shares in question. When there is no indication of understatement of sale consideration by the assessee, then the market value of the shares on the date of transfer can not be construed as full value of consideration under section 48 of the IT Act. The expression ‘full value’ as per section 48 means the whole price without any deduction whatsoever and for computation of capital gains, the deductions are permitted as per section 48; therefore, section 48 does not have any reference to the market value of the asset but it refers only to the consideration received or accruing as agreed between the parties to the transaction. There is no doubt that the Assessing Officer has the powers and jurisdiction to examine and verify the fact, if the Assessing Officer has doubted that the assessee has understated the sale consideration. But when the bonafide of the transaction and the actual sale consideration received by the assessee has not been suspected, then for the purpose of computation of capital gains, the full value of consideration can not be substituted by market price or value of the capital asset as on the date of transfer. It is not a case of the Commissioner that the assessee has understated the sale consideration and actually received more sale consideration than shown by the assessee; therefore, in the absence of any inference by the Commissioner that the assessee has concealed the actual sale consideration, the capital gain cannot be computed by taking the full value consideration as market value as on the date of transfer. On this point, there are series of decisions of honourable Supreme Court as well as honourable High Court as relied upon by the learned A.R. of the assessee.

6. The honourable jurisdictional High Court in case of Texspin Engg. & Mfg. Works (supra) has held at page number 354 & 355 as under:

“Now, in the present case, it is argued on behalf of the Department before the Tribunal, for the first time, that in this case, on the vesting of the properties of the erstwhile firm in the limited company, there was a transfer of capital assets and, therefore, it was chargeable to income-tax under the head “Capital gains” as, on such vesting, there was extinguishment of all right, title and interest in the capital assets qua the firm. We do not find any merit in this argument. In the present case, we are concerned with a partnership firm being treated as a company under the statutory provisions of Part IX of the Companies Act. In such cases, the company succeeds the firm. Generally, in the case of a transfer of a capital asset, two important ingredients are : existence of a party and a counter-party and, secondly, incoming consideration qua the transferor. In our view, when a firm is treated as a company, the said two conditions are not attracted. There is no conveyance of the property executable in favour of the limited company. It is no doubt true that all properties of the firm vest in the limited company on the firm being treated as a company under Part IX of the Companies Act, but that vesting is not consequent or incidental to a transfer. It is a statutory vesting of properties in the company as the firm is treated as a limited company. On the vesting of all the properties statutorily in the company, the cloak given to the firm is replaced by a different cloak and the same firm is now treated as a company, after a given date. In the circumstances, in our view, there is no transfer of a capital asset as contemplated by section 45(1) of the Act. Even assuming for the sake of argument that there is a transfer of a capital asset under section 45(1) because of the definition of the word “transfer” in section 2(47)(iii), even then we are of the view that the liability to pay capital gains tax would not arise because section 45(1) is required to be read with section 48, which provides for mode of computation. These two sections are required to be read together as the charging section and the computation section constitute one package. Now, under section 48 it is laid down, inter alia, that the income chargeable under the head “Capital gains” shall be computed by deducting from the full value of the consideration received or accrued as a result of the transfer, the cost of acquisition of the asset and the expenditure incurred in connection with the transfer. Section 45(4) is mutually exclusive to section 45(1). Section 45(4) categorically states that where there is a transfer by way of distribution of capital assets and where such transfer is due to dissolution or otherwise of the firm, the Assessing Officer was entitled to treat the market value of the asset on the date of the transfer as full value of the consideration received. This latter part of section 45(4) is not there in section 45(1). Therefore, one has to read the expression “full value of the consideration received/accruing” under section 48 de hors section 45(4) and if one reads section 48 with section 45(1) de hors section 45(4) then the expression “full value of consideration” in section 48 cannot be the market value of the capital asset on the date of transfer. In such a case, we have to read the said expression in the light of the two judgments of the Supreme Court in the case of CIT v. George Henderson and Co. Ltd [1967] 66 ITR 622 and in the case of CIT v. Gillanders Arbuthnot and Co. [1973] 87 ITR 407 in which it has been held that the expression “full value of the consideration” does not mean the market value of the asset transferred, but it shall mean the price bargained for by the parties to the transaction. It has been further held that the consideration for the transfer of a capital asset is what the transferor receives in lieu of the assets he parts with, viz., money or money’s worth, and, therefore, the very asset transferred or parted with cannot be the consideration for the transfer and, therefore, the expression “full value of the consideration” cannot be construed as having a reference to the market value of the asset transferred and that the said expression only means the full value of the things received by the transferor in exchange for the capital asset transferred by him. In the circumstances, even if we were to proceed on the basis that vesting in the company under Part IX constituted transfer under section 45(1), still the assessee ought to succeed because the firm can be assessed only if the full value of the consideration is received by the firm or if it accrues to the firm. In the present case, the company had allotted shares to the partners of the erstwhile firm, but that was in proportion to the capital of the partners in the erstwhile firm. That allotment of shares had no correlation with the vesting of the properties in the limited company under Part IX of the Act. Lastly, section 45(1) and section 45(4) are mutually exclusive. Under section 45(4) in cases of transfer by way of distribution and where such transfer is as a result of dissolution, the Department is certainly entitled to take the full market value of the asset as full value of consideration provided there is transfer by distribution of assets. In this case, we have held that there is no such transfer by way of distribution and, therefore, section 45(4) is not applicable. This deeming provision, regarding full value of consideration, is not there in section 45(1) read with section 48. If one reads section 45(1) with section 48, it is clear that the former is a charging section and if that section is applicable, the computation has to be done under section 48, which only refers to deductions from the full value of consideration received or accruing. Section 48 does not empower the Assessing Officer to take the market value as the full value of consideration as in the case of section 45(4). In the circumstances, even if we were to hold that vesting amounts to transfer, the computation is not possible because it has been laid down in the above judgment of the Supreme Court that full consideration cannot be construed to mean the market value of the asset transferred. The Legislature, in its wisdom, has amended only section 45(4) by which the market value of the asset on the date of the transfer is deemed to be the full value of consideration. However, such amendment is not there in section 45(1).”

7. Similarly, the honourable Madras High Court in case of A.S. Jayakumar (supra) has held that unless there is a proof for extra consideration paid by the purchaser over and above what is stated in the sale deed, section 52(2) of the I T Act cannot be invoked.

8. In view of the above discussions as well as the decision of honourable Supreme Court as well as honourable High Court, we hold that the market price of the shares cannot be taken as full value consideration for the purpose of computation of capital gain as per section 48 and accordingly, the directions given by the Commissioner for verifying the market value of the shares in question, are contrary to the settled proposition of law and hence, liable to be set aside. Accordingly, we set aside the impugned revision order passed by the Commissioner of Income Tax.

9. In the result, the appeal of the assessee is allowed.