2011 (9) TMI 48 - AT - Income Tax

Capital gain - Sale value of unquoted share to closely held company - Held that - The main dispute is regarding fixation of price of shares sold. The Assessing Officer did not accept the mode of fixation of sale price by assessee and, therefore, estimated the sale consideration. The fixation of price i.e. saleable price of unquoted shares depends upon the net assets of the company. - The price of unquoted shares is always amenable to manipulation by the closed persons to avoid taxability of the gain on the transfer by fixing price in a manner that it suits the most. The value of shares as per NAV method is most appropriate method of valuation in such circumstances. The revenue authorities under such circumstances are entitled to question the correctness of price fixation in order to find out the real intention of the assessee. Assessing Officer was of the opinion that fixation of sale price was done with ulterior motive to claim loss and, thus, was not bonafide. In order to find out whether the transactions were bonafide or not, we have to examine whether the shares were sold at a price more than the book value or not. - Matter remanded back for verification for finding out the book value.

Issues Involved:
1. Determination of the sale value of unquoted shares.
2. Computation of Long Term Capital Loss versus Long Term Capital Gain.

Detailed Analysis:

1. Determination of the Sale Value of Unquoted Shares:

The primary issue was whether the CIT(A) was correct in holding the sale value of unquoted shares at Rs.2,41,57,700/- instead of Rs.4,00,00,000/- as considered by the Assessing Officer (A.O.). The A.O. observed that the shares were sold to group companies at prices not based on market value since there was no market for unquoted shares. The A.O. concluded that the prices were manipulated to create a loss after taking indexation benefits. The CIT(A) deleted the addition made by the A.O. for several reasons:

- No visible enquiry challenged the physical process of the transaction.
- The A.O. did not dispute that shares were sold above book value.
- Purchase transactions were accepted as bona fide in the years of purchase.
- Not all investments lead to a positive return.
- The A.O. did not provide any basis for estimating the sale price of the shares.
- No evidence suggested that the sale consideration was understated by the assessee.
- The CIT(A) followed precedents from the Delhi High Court, emphasizing that the sale consideration should be the amount actually received or accrued.

2. Computation of Long Term Capital Loss versus Long Term Capital Gain:

The second issue was whether the CIT(A) was correct in holding that the sale of unquoted shares resulted in a Long Term Capital Loss of Rs.1,30,96,496/- instead of a capital gain of Rs.27,45,865/- as determined by the A.O. The A.O. did not accept the sale price fixation by the assessee and estimated the sale consideration, leading to a capital gain. The CIT(A) deleted the addition, citing reasons such as the lack of evidence by the A.O. to show that the sale consideration was understated and the absence of any basis for the A.O.'s estimation.

The Tribunal considered the submissions and the records, noting that the main dispute was the fixation of the share price. The Tribunal highlighted that the value of unquoted shares is amenable to manipulation and that the taxing authorities are entitled to question the correctness of the price fixation to determine the true intention of the assessee. The Tribunal referred to the decision in Edward Keventer (P) Ltd. vs. DCIT, which allows taxing authorities to penetrate the veil of transactions to ascertain the truth.

The Tribunal also considered the Supreme Court's decision in K.P. Varghese vs. ITO, which stated that the market value could not be substituted for the actual sale consideration in bona fide transactions. However, in this case, the A.O. believed that the sale price fixation was not bona fide. The Tribunal noted that the A.O. had not provided the book value of the shares and had no basis for adopting Rs.4.00 crore as the sale consideration. Therefore, the Tribunal restored the matter to the A.O. to ascertain the book value of the shares and determine if the sale price was above the book value. If the book value was less than the sale price, no addition would be called for.

Conclusion:

The appeal of the Department was allowed for statistical purposes, with the matter being remanded to the A.O. to determine the actual book value of the shares. If the book value was found to be less than the sale price, no addition would be required. The order was pronounced on 08.09.2011.

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