2011 (8) TMI 1085 - AT - Income Tax

Computation of Capital Gain - Market value should be considered or not? - Assessee adopted lower price of Rs. 0.26 against the quotation of Bombay stock exchnage. Assessee contended that there is no provision in the Income tax to consider market value for the purpose of computing the capital gain - HELD THAT - As per section 48 capital gain has to be worked out after reducing the cost of acquisition of capital asset along with cost of improvement thereto and the expenses incurred on transfer of a capital asset from full value of the consideration received or accruing as a result of the transfer of the capital asset. There is no reference to the market value of the capital asset transferred in section 48 or in any other section except section 50C which is applicable only in case of sale of landed property. Ratio in the decision of COMMISSIONER OF INCOME TAX-II VERSUS GIRISH DAMJIBHAI PATEL 2011 (3) TMI 1593 - GUJARAT HIGH COURT is this that for the purpose of working out capital gain the sale consideration received by the assessee or accrued sale consideration has to be adopted because there is no reference in section 48 to the market value of the asset for the purpose of computing the capital gain. In that judgment reference has been made to section 45(2) also where it is specified that market value of the asset in question has to be considered where there is conversion by the owner of the capital asset into stock in trade but it was held that provision of section 45(2) are not applicable in the case of sale of capital asset and the same is applicable where there is conversion of capital asset into stock in trade. Also in the present case reasons for adoption of lower price of Rs. 0.26 per share against the quotation at Bombay Stock Exchange of Rs. 1.52 per share is also given by assessee. Respectfully following this judgment and considering the facts of present case we are of the considered opinion that for the computation of capital gain in the present case the A.O. shall work out the capital gain/capital loss on the basis of consideration received by the assessee and not on the basis of alleged market value of the shares sold by the assessee. We direct the A.O. accordingly -Decision in favour of Assessee.

Summary

Issues:
1. Computation of capital gain based on market value of shares.
2. Applicability of section 48 of the Income Tax Act.
3. Interpretation of legal provisions for computing capital gain.
4. Comparison with relevant judicial precedents.

Issue 1: Computation of capital gain based on market value of shares:
The appellant contested the reduction of business loss claimed on the sale of shares by the Assessing Officer (AO) based on the market value of the shares. The AO argued that the sale price of shares at Rs. 0.26 per share was significantly lower than the market value of Rs. 1.52 per share, indicating a potential personal benefit to the directors. The appellant argued that there was no provision in the Income Tax Act to consider market value for computing capital gain, citing the introduction of section 50C applicable to land or building sales only. The Tribunal referenced a judgment by the Hon'ble Gujarat High Court emphasizing that section 48 of the Act does not mention market value, thus directing the AO to compute capital gain based on the consideration received by the assessee, not the market value of the shares.

Issue 2: Applicability of section 48 of the Income Tax Act:
Section 48 of the Income Tax Act stipulates the computation of capital gain by deducting the cost of acquisition and improvement of the capital asset from the consideration received for the transfer. The Tribunal highlighted that section 48 does not refer to the market value of the asset transferred, except for section 50C applicable to land transactions. The judgment of the Hon'ble Gujarat High Court further reinforced the requirement to base capital gain computation on the consideration received, not the market value, in line with the provisions of section 48.

Issue 3: Interpretation of legal provisions for computing capital gain:
The Tribunal analyzed the legal provisions governing the computation of capital gain, emphasizing the importance of considering the consideration received for the transfer of the capital asset. The Tribunal clarified that the absence of a specific provision referencing market value in section 48 indicated that capital gain should be determined based on actual consideration received, irrespective of the type of capital asset involved. The Tribunal rejected the argument that the type of asset (quoted shares) altered the legal position, asserting that the legal principle remained consistent regardless of the asset type.

Issue 4: Comparison with relevant judicial precedents:
The Tribunal compared the facts of the case with previous judicial decisions, including the judgment of the Hon'ble Gujarat High Court and the Hon'ble apex court's ruling in Mcdowell & Co. Ltd. vs. C.T.O. The Tribunal distinguished the applicability of these judgments based on the specific circumstances of the case, emphasizing that the facts did not suggest tax avoidance or evasion. By aligning with the judgment of the Hon'ble Gujarat High Court, the Tribunal directed the AO to compute capital gain based on the consideration received by the assessee, dismissing the argument for using market value in the computation.

In conclusion, the Tribunal allowed the appeal of the assessee, directing the AO to compute capital gain based on the consideration received for the transfer of shares, in accordance with the provisions of section 48 and the judicial precedent set by the Hon'ble Gujarat High Court.