2022 (3) TMI 620 - HC - Income Tax

Capital gain - Assets transferred under scheme of demerger - transfer of all the assets and liabilities under the telecom undertaking to ICL without any consideration - whether demerger under the said scheme should not be treated as a transfer for the purposes of Section 45 and be taxed as capital gain? - ITAT set aside the order of the CIT(A) and come to a conclusion that one of the ingredients for computation for capital gains is consideration and since no consideration has been paid or received by assessee no capital gains would be proposed to be of assessee - HELD THAT - We cannot find error with the conclusion of the ITAT that since there is no consideration for transfer of a capital asset, the capital gains computation mechanism fails and thus no capital gains tax can be levied on such transfer. In the case of transfer of capital asset, what can be taxed in the hands of the seller under the Act is real or actual gain that accrues/arises from transfer of the assets and hence, in absence of any sale consideration (resultant profit from such transfer) no notional gain can be imputed in the hands of the seller to tax such transfer. 7. Even the Assessing Officer taking the revaluation of assets in Indus as valuation for transfer of undertaking is incorrect. The Assessing Officer has failed to understand that carrying out such revaluation and passing accounting entry by assessee in its books of account does not represent any consideration whatsoever received from ICL or any third person towards transfer taken by ICL. We have to also note that Section 50D of the Act which provides for fair market value deemed to be full value of consideration in certain cases has been inserted by the Finance Act, 2012. For the Assessment Year 2013-14 Section 50D provides for consideration where the consideration received or accruing as a result of the transfer of a capital asset by an assessee is not ascertainable or cannot be determined. Even that cannot be applied because in the subject case it relates to assessment year 2010-11. Tribunal has not committed any perversity or applied incorrect principles to the given facts - No substantial question of law.

Summary

Issues:
1. Whether the ITAT was correct in holding that a sum is not liable to capital gains tax as a short term capital gain.
2. Whether the ITAT was correct in holding that no liability arose under the Income Tax Act due to a demerger.
3. Any other question to be added by the Assessing Officer.

Analysis:

Issue 1:
The appellant, a subsidiary of a telecom company, underwent a demerger transferring assets and liabilities to its holding company without consideration. The Assessing Officer questioned this demerger as a transfer for capital gains tax purposes. The CIT(A) upheld this view, but the ITAT reversed it, emphasizing the absence of consideration, a crucial element for capital gains taxation. The High Court agreed with the ITAT, stating that without consideration, the capital gains computation mechanism fails, precluding the levy of capital gains tax on the transfer.

Issue 2:
The Assessing Officer considered the revaluation of assets in a separate entity as part of the consideration for the demerger, leading to a capital gains tax proposal. However, the High Court noted that revaluation entries in the appellant's books did not constitute consideration received from the holding company. The court highlighted that the real gain from a transfer should be taxed, and without actual consideration, no notional gain can be imposed for taxation. Additionally, the court pointed out that Section 50D, dealing with fair market value as consideration, was inapplicable to the assessment year in question.

Conclusion:
The High Court found no error in the ITAT's decision, emphasizing the absence of consideration as a key factor in determining capital gains tax liability. The court dismissed the appeal, stating that no substantial question of law was raised, and the appellant's case lacked merit. The judgment provides clarity on the taxation aspects of demergers and the significance of consideration in capital gains assessments.