The Income Tax Appellate Tribunal, Hyderabad bench in a recent ruling held that Fair Market Value cannot be substituted for full value of consideration in estimating the Capital Gains under the provisions of Income Tax Act, 1961.
The assessee company is an investment company. The assessee-company transferred 18,18,180 equity shares in Silicon Builders to M/s Classic Realty Pvt. Ltd., during the assessment year 2010-11, for a consideration of Rs.50,00,00,000. These shares were acquired by it during AY’s 2008-09 and 2009-10 at a cost of Rs 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. The assessee, as evidenced by a Share Purchase agreement and passing on the consideration through banking channels , adopted Rs.843.24 per share, as against the actual price of Rs.275,.
The assessee filed its return of income for the AY 2010-11 on 15/10/2010 declaring loss of Rs. 8,20,77,710/-. However, the AO completed the assessment u/s 143(3) of the Income-tax Act, 1961 by making an addition of Rs. 97,18,78,900/- as long term capital gains” on sale of shares of assessee company, in Silicon Builders. The AO has adopted the Fair Market Value (FMV) at ITA No. 405 /H/16 G2 Corporate Services Ltd. and valued the shares of Silicon builders, adopting the value of M/s. Bharathi Cement Corporation P Ltd., Shares at Rs 671.20 per share.
The assessee, though approached the CIT(A) on appeal by contending that fair market value cannot be substituted for full value of consideration and that there is no charging mechanism to tax the difference of fair value and full value. However, the CIT(A) quashed the original order by observing that ‘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 the AO to substitute the fair market value for the full value of consideration. . Therefore, the revenue approached the Appellate Tribunal for relief.
The Tribunal observed that sub-section (2) of section (2) of section 52 can be invoked only where the consideration for the transfer has been understated by the ITA No. 405 /H/16 G2 Corporate Services Ltd. The division bench, based on the decision in Rupee Finance & Management (P) Ltd. (2008) 22 SOT 174 (Mum); (2009) 120 ITD 539 (Mum) upheld the order of the CIT(A) and directed the Assessing Officer to delete the addition made by him on account of long term capital gains, since the decision of the CIT(A) is in consonance with the decision of the ITAT.
Read the full text of the order below.
