Reliance Communications Infrastructure Ltd. Vs CIT; (Mumbai) 40 DTR 186
Background:- Reliance Communications Infrastructure Ltd. (“RCom”) transferred shares of Reliance Info comm Ltd. (RIL) worth INR. 50 crores at face value (INR.1) to one of the promoters (market value of shares being INR. 53.7).As per the promoter, the shares were not transferred but were pledged against a loan of INR 50 crores advanced to RCom.
RCom’s case was selected for scrutiny and assessment was completed under section 143(3) of the Income Tax Act, 1961 (ITA). The Commissioner of Income-tax (CIT) revised the order of the Assessing Officer (AO) holding that there was an actual transfer of shares by way of sale or extinguishment of right and it is not a case of pledge only. The CIT held that there was a transfer of shares and the market value of the shares was INR 2,685 crores and the same is to be adopted as full consideration to work out the short term capital gains in place of INR 500 crores.
Issues before the Mumbai Tribunal:- Whether the CIT erred in holding that the shares pledged by RIL amounts to transfer of such shares as envisaged in section 2(47) of the ITA and that in such a case the fair value of the shares so pledged is the consideration for such transfer.
Contention of RCom
- RCom contends that RIL?s shares were not transferred from RCom to the promoter. Even if it is assumed that there had been transfer of shares RCom had received only INR 50 crores from the promoter. It is a settled law that the capital gains cannot be computed on the money which was never accrued or received. Accordingly, the capital gains will be NIL.
- The annual accounts reflected that the advance received from the promoter was a loan. If indeed it had been a transfer of shares this would have been reflected in the annual accounts.
- As per the Indian Contract Act, 1872 and various decisions elaborating on the concept of pledge, merely because the shares were dematerialized from the account of RCom to the promoter, it cannot be concluded that the transfer is a sale.
- The loan was actually repaid after certain period and hence there was no sale of shares but only a transaction of pledge.
- Since the CIT is himself not sure whether it is a case of sale or extinguishment of right, he cannot conclude authoritatively that the AO‘s order is erroneous.
Contention of the Revenue
- It is undisputed that the shares were dematerialized from RCom?s account to the promoter and it is sufficient
to come to the conclusion that there was an absolute transfer in respect of INR 50 crores shares of RIL. - The promoter was the managing director of the company and it was not necessary for him to take any security against the loan as he was well versed with the financial position of the company.
Ruling of the Tribunal
- The CIT has not discussed the nature of transaction reflected in the audited annual report.
- Full value of consideration cannot be construed as market value. Instead it is the price bargained for by the parties to the sale. There is no provision to substitute sale consideration declared by assessee with market value save provisions of section 50C of the ITA which are applicable only to land and building.
Conclusion:-An important proposition reiterated by this ruling is that market value cannot be substituted for full value of consideration. However it may be noted that in view of the new provisions of section 56(viia) of the ITA introduced by Finance Act 2010, all the transactions involving transfer of shares of closely held companies by a firm or a closely held company would be taxable (at fair market value) if the same is without consideration or for inadequate consideration. The Government has since then notified the Income-tax (Second Amendment) Rules, 2010 effective from 1 October 2009, for the determination of „fair market value? of property other than immovable property as on the valuation date i.e. the date on which the property is received.
Source: Reliance Communications Infrastructure Ltd. Vs CIT (Mumbai)40 DTR 186
