2024 (1) TMI 484 - AT - Income Tax

Computation of LTCG - FMV determination - unlisted equity shares held by the Assessee in the J.V. Company - Appellant had obtained two valuation reports for determining the FMV of the equity shares - i) Valuation report as per the RBI Guidelines for FEMA purpose and ii) Valuation Report as per Rule 11UA of Income Tax Rules 1962, for the purpose of computing Capital Gains under Income Tax Act - AO held that FMV of the same share of the same company on the same date cannot be valued at multiple prices and proposed to tax difference between sales consideration computed using Rs 178.12 per share as sale price and cost of acquisition as Long Term Capital Gain taxable @ 10% and remaining portion of sales consideration paid to the Appellant was treated as income from other sources and taxed @ 40% - HELD THAT - Based on a reading of Section 50CA of the Act, it is clear that where the actual sale consideration on transfer of unlisted equity shares is less than the fair market value of such shares determined as per the NAV method, the actual sales consideration shall get substituted with the deemed sales consideration as determined in accordance with NAV method. In the facts of the Assessee, the unlisted equity shares held by the Assessee in the J.V. Company were sold at a price of Rs. 233 per share, which was higher than the fair market value determined in accordance with NAV method i.e. INR 178.12 per share. Hence, we hold that the revenue authorities erred on facts and in law in not appreciating that the provisions of Section 50CA of the Act are not applicable in the case of the Assessee since the Assessee had sold shares in excess of fair market value as determined in accordance with Rule 11UAA of the Rules. The same proposition is also affirmed by the Coordinate Bench of ITAT, Mumbai in the case of Nearby Pte. Ltd. Vs ACIT 2023 (8) TMI 1410 - ITAT MUMBAI held that since the full value of consideration received by the assessee is more than the fair market value, there is no need to tinker with the full value of consideration declared by the assessee. Appeal of the assessee is allowed.

Summary

Issues involved:
The judgment involves issues related to reclassification of income nature and consequent tax rate, valuation of share price, charging income under different sections of the Income Tax Act, tax withholding certificate approval, tax liability computation, tax chargeability under India-Germany DTAA, fair market value determination, interest levying, and penalty proceedings initiation.

Reclassification of Income Nature and Tax Rate:
The assessee appealed against the order of the AO regarding the reclassification of income nature and tax rate from 10% to 40%. The grounds raised included errors in considering the full value of consideration for the sale of shares, misinterpretation of Section 50CA of the Act, charging income under Section 56(2)(x), and ignoring tax withholding certificate approval. The Tribunal held that the provisions of Section 50CA were not applicable as the shares were sold above fair market value determined under Rule 11UAA.

Valuation of Share Price:
The Assessing Officer proposed to tax the difference in sales consideration at different prices as long-term capital gain and income from other sources. The Tribunal noted that the sale price was negotiated above the minimum floor price under Section 50CA and within the ceiling price as per FEMA. The AO's decision to consider the value determined under Rule 11UAA as the selling price was deemed incorrect.

Charging Income under Income Tax Act:
The AO charged income under Section 56(2)(x) without specifying the applicable sub-clause and under Section 56(2)(x) as the property was not received at less than fair market value. The Tribunal found errors in the AO's application of these sections and held that the provisions were not applicable due to the sale being above fair market value.

Tax Withholding Certificate Approval:
The AO erred in charging income despite the tax liability being approved by the revenue authorities through a tax withholding certificate. The Tribunal noted this error and considered it in favor of the assessee.

Tax Liability Computation:
The AO's computation of tax liability was challenged by the assessee, citing approval through a tax withholding certificate. The Tribunal considered this argument and found in favor of the assessee regarding the tax liability computation.

Tax Chargeability under India-Germany DTAA:
The AO failed to consider the tax chargeability under the India-Germany DTAA, specifically under Article 21 and Article 13. The Tribunal noted these errors and considered the DTAA provisions in favor of the assessee.

Fair Market Value Determination:
The Tribunal analyzed the fair market value determination under Section 50CA and Rule 11UAA, concluding that the provisions were not applicable as the shares were sold above the fair market value determined under Rule 11UAA.

Interest Levying and Penalty Proceedings:
The AO erred in levying interest under Section 234A and 234B and initiating penalty proceedings under Section 270A. The Tribunal found these actions to be incorrect as there was no default in furnishing the return of income and no under-reporting of income.

Conclusion:
The Tribunal allowed the appeal of the assessee, emphasizing errors in the reclassification of income nature and tax rate, valuation of share price, charging income under different sections, tax withholding certificate approval, tax liability computation, tax chargeability under India-Germany DTAA, fair market value determination, interest levying, and penalty proceedings initiation. The judgment was pronounced in favor of the assessee on 28/12/2023.