Understatement of Consideration must be established before taking Market Value of Share Capital Asset as Full value of Consideration: Delhi HC [Read Judgment]

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In Arjun Malhotra vs. Commissioner of Income Tax, the Delhi High Court held that the market value of the shares quoted in the stock exchange on 5th May, 1998 cannot be taken indirectly invoking an omitted provision i.e. Section 52 of the Income Tax Act, 1961 as a basis for computing capital gains under Section 48 of the Income Tax Act.

In the instant case the assessee-appellant, had filed a revised income of Rs.2.33 Crores in 1999 for the Year 1998-99. The return of income for the year 1999-2000 was filed as Rs.24.24 Lacs. For the year 1998-2000 the assessee had disclosed transfer consideration of Rs.5 Crores on sale of one lakh equity shares of NIIT to M/s. Glad Investment Pvt. Ltd. Transfer date provided was 14th August 1997. A claim of deduction under Section 54F of Rs. 5 Crores on account of having purchased immovable property for Rs.10.75 Crores on 8th August 1998 was made.

The Assessing Officer (A.O) found that the actual transfer took place on 30th September 1998 i.e. in the subsequent AY 1999-2000. the Assessing Officer held that income from capital gains from transfer/sale of one lakh equity shares of NIIT would be assessable in the AY 1999-2000 and accordingly claim for deduction under Section 54F would be considered in the said year. The A.O also found that the Directors of M/s.GIPL were the immediate family members of the assessee and the consideration for transferring the shares was not by way of cash but by way of 5 lakh 5% non-cumulative preference share of Rs.100 each, issued by GIPL to the assessee on 25th August 1997. These preference shares were redeemed on 31st July, 1998 for Rs.5 Crores.

The Assessing Officer held that the assessee had backdated the transaction of transfer of shares as the market price of NIIT shares in September, 1998 had arisen and increased to around Rs.1300/- to Rs.1400/- per share as against Rs.450/- per share on 14th August, 1997. In case, one lakh NIIT shares had been sold at the market price in September, 1998, they would have exceeded the purchase value of the immovable property. He concluded that non-cumulative preference shares were not allotted and was a sham and a cover up to show that the transfer was on 14th August, 1997 to justify sale price of Rs.450/-, when the fair market value of each share of NIIT prevailing on the date of transfer, i.e. 30th September, 1998 was Rs.1300/- to Rs.1400/-. The Assessing Officer took the date of sale/transfer for the purpose of capital gains as 5th May, 1998, i.e. the date when the shares were released by Deutsche Bank AG to M/s GIPL on the instructions of the assessee. He observed that the full value of the consideration received by the assessee as a result of transfer was unknown as it was not a bona fide transfer. What was the bargain price could not be ascertained as the transaction was not at arm’s length for M/s GIPL was a family-controlled company of the assessee.

The market price of NIIT shares on National Stock Exchange on 5th May, 1998 was Rs.1493/-Accordingly, the Assessing Officer computed the value of capital gains as Rs.14.93 Crores. Deduction under Section 54F in respect of purchase of House No.5, Golf Links, New Delhi for Rs.10.75 Crores was allowed and the balance amount of Rs.4,18,00,000/- was treated as long term capital gains. After series of appeals, the matter finally came to the High Court against the decision of the Tribunal which held that the market value of the shares quoted in the stock exchange on 5th May, 1998 can be taken as a basis for computing capital gains under Section 48 of the Act.

The Bench comprising of Justice Sanjiv Khanna and Justice Prathiba M. Singh observed “We have also referred to K.P. Verghese (supra) to elucidate that the legal ratio propounded with reference to then applicable Section 52 of the Act would be against the Revenue even if the said Section was applicable. It is obvious that when Section 52 of the Act itself was not applicable, the Assessing Officer could not have substituted the actual sale consideration received by the Assessee with another figure stating that this was the fair market value. The aforesaid discussion would also take care of the argument that M/s GIPL had paid for foreign travel of the assessee. The fact that M/s GIPL had incurred any such expenditure would not be a ground and reason to substitute the actual consideration received with the figure relying upon the market quotation of the share as the fair market value. Decision of the tribunal to this extent is set aside and reversed. Tribunal was not correct in holding that the market value of the shares quoted in the stock exchange on 5th May, 1998 can be taken as a basis for computing capital gains under Section 48 of the Act.”

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