2016 (8) TMI 70 - AT - Income Tax

Addition representing long term capital gains on sale of shares - AO has adopted the Fair Market Value (FMV) at ₹ 843.24 per share, as against the actual price of ₹ 275 adopted by the assessee, as evidenced by a Share Purchase agreement and passing on the consideration through banking channels - Held that - The approach of the Assessing Officer as well as the CIT(A) is against the legal precedents on the issue. Thus we direct the Assessing Officer to adopt the full value of consideration as received by the assessee on sale of shares of M/s. Silicon Builders at cost to be the full consideration for computation of capital gains on such sale. Additions correctly deleted - Decided in favour of assessee

Summary

Issues Involved:
1. Validity of the addition of ?97,18,78,900/- by the AO representing long-term capital gains on the sale of shares.
2. Whether the fair market value (FMV) can be substituted for the full value of consideration in computing capital gains.
3. Whether the transaction was a sham to benefit the promoters of Bharathi Cement Corporation.

Issue-wise Detailed Analysis:

1. Validity of the Addition of ?97,18,78,900/- by the AO:
The primary issue in this appeal is the AO's addition of ?97,18,78,900/- as long-term capital gains on the sale of shares of Silicon Builders by the assessee company. The AO adopted the FMV of ?843.24 per share instead of the actual price of ?275 per share declared by the assessee. The AO's calculation was based on the value of shares of M/s Bharathi Cement Corporation P Ltd., which were held by Silicon Builders. The AO's rationale was that the shares of Silicon Builders were impregnated with the value of Bharathi Cement's shares, thus justifying the higher valuation.

2. Substitution of Fair Market Value for Full Value of Consideration:
The assessee contested the AO's action, arguing that the fair market value cannot be substituted for the full value of consideration received. The CIT(A) supported this argument, stating that specific provisions in the Income-tax Act, such as sections 50C and 50D, allow for such substitution only under certain circumstances. For the assessment year 2010-11, no provision allowed the AO to substitute FMV for the full value of consideration. The CIT(A) emphasized that the 'full value of consideration' and 'fair market value' are distinct terms in the Act, and the latter cannot replace the former unless explicitly permitted by the Act.

3. Allegation of Sham Transaction:
The AO alleged that the transaction was collusive, aimed at benefiting the promoters of Bharathi Cement Corporation, as the shares were transferred to a company promoted by Sri Y.S. Jagan Mohan Reddy. The AO argued that the transaction was not a pure sale and should consider the market value of the shares of Bharathi Cement Corporation. However, the CIT(A) and the ITAT found no evidence to support the AO's claim that the assessee received any amount over and above the declared ?275 per share. The ITAT cited precedents, including the Supreme Court's ruling in CIT vs. George Henderson, which held that the 'full value of consideration' refers to the actual amount received, not the market value of the asset transferred.

Conclusion:
The ITAT upheld the CIT(A)'s decision, directing the AO to accept the capital gains based on the actual consideration received. The ITAT reiterated that the AO could not substitute the FMV for the full value of consideration in the absence of specific provisions in the Act for the relevant assessment year. The appeal by the revenue was dismissed, affirming that the transaction's declared consideration should be used for computing capital gains. The judgment emphasized the legal distinction between 'full value of consideration' and 'fair market value' and the necessity of explicit legislative authority to substitute one for the other in tax computations.