The provisions of section 50C are not applicable in case of sale of shares of a property holding company

[CA DEV KUMAR KOTHARI]

Relevant links and references:

Section 50C of the Income-tax Act, 1961.

Irfan Abdul Kader Fazlani Versus Assistant Commissioner of Income-tax, Central Circle-44, Mumbai, 2013 (2) TMI 350 (ITAT MUMBAI)

Company and shareholders:

It is well settled that a company and its shareholders are different persons. It has been held that even in case of fully owned of Government Company, the company is different from government and it cannot be called a department of government. Even a fully owned state Government company will be liable to pay local tax imposed by concerned state government and it cannot deny liability for the reason that the state government owns full share capital. Likewise a fully owned company of central Government will also be liable to pay income-tax to the Central Government though entire share capital is held by the Central Government.

Similarly a private limited company is distinct from its shareholders. Even a person may beneficial hold entire share capital of a company, in that case also property of company will not be property of 100% shareholder.

A company and its shareholders are distinct persons. A company's property, liabilities, incomes, losses, etc., are not those of its shareholders. The contract between a company and its shareholders is governed by the memorandum and articles of association of the company, and the prospectus or other document constituting terms and conditions of issue of shares or other securities.

Number of shareholders has increasing and they are widespread not only within India but also abroad. The gap between a Company's management and shareholders is also widening and in any case is capable of widening on changes in circumstances.

Therefore, when a person or group of persons transfer say even hundred percent share capital of company, he transfers only shares and not the property. This is because the shares are only what the shareholder owns. The property is owned by company and not by shareholder.

Selling of property can only be by company and it will be decision of company and not of shareholders. A shareholder can transfer his shares independent of other shareholders.

The property owned by company cannot be transferred by shareholders though with transfer of shares control over company may go to the transferee of shares, but property will remain property of company.

Case before Tribunal:

Case before Tribunal came as to whether invocation of the provisions of section 50C is possible when shareholders transfer shares of a company which owned an immovable property.

The relevant ground before the Tribunal was as follows:

“1. On the facts and circumstances of the case and in law the Ld CIT (A) erred in confirming invocation of the provisions of section 50C of the Income Tax Act, 1961 even though the document for sale of shares of M/s. Kamala Mansion P. Ltd. was not required to be registered with stamp authorities and in determining the sale value at Rs. 4,12,16,5000/- against agreement value of Rs. 3,46,71,609/- while working out the capital gain on sale of shares of M/s. Kamala Mansion P. Ltd. The purchasers of the shares of the company are not relatives of the Directors / Shareholders of the company nor they have any business relationship with the Directors / Shareholders or any associates thereof. As per the Tribunal one of relevant core issue to be considered and decided was

Whether the provisions of section 50C of the Income Tax Act, 1961 apply to the fact of this case in which shares have been transferred.

Facts of the case relevant to this article about S. 50C are analyzed as follows:

The assessee is a shareholder in M/s. Kamala Mansion Pvt. Ltd (KMPL).

Assessee owns 306 shares of M/s. KMPL who had total issued 3813 shares. Thus stake of one of assessee/ appellant before Tribunal was 8.02%.

There are another shareholders also who have also sold shares.

Assessee and other shareholders of KMPL sold their shares.

KMPL owns immovable property namely two flats ie 1901B and 2001B in a building known

as Om Vikas Apartments situated at Walkeshwar Road, Mumbai-26.

The said flats are regularly given on rent and the rent is declared by the assessee (sic. Added by author – it should be KMPL the owner company) as ‘income from the house property’.

Assessee sold his 306 shares for a sum of Rs. 37,51,369/- and earned the long term capital gains for which assessee made computation is follows:

“Sale value of 306 shares of Kamala Mansion Pvt. Ltd. Rs.27,82,458/-

Less: Indexed cost of shares

Purchase cost (1986-87)…… 30,500/-

Cost Inflation index for the Year of purchase……………… 140/-

Sale ie 2006-07 519/-

Indexed cost of the shares sold…………………. Rs. 1,13,238/-

Taxable long term capital gain on sale of shares. Rs. 26,69,220/-“

View of Assessing officer (AO):

The AO rejected the above computation. He considered this as a case of sale of immovable property and not sale of shares.

He invoked provisions of section 50C and accordingly considered market value of property as consideration accruing to shareholders and took proportionate of market value for the assessee and assessment was completed determining the sale consideration of property at Rs.4,67,45,000/- as per computation given here under:

“Considering the sale as sale of property as discussed above and applying the Provisions of Sec. 50C for the same ……… Rs. 4,12,16,500/-

Add: Additional payment received from the purchaser

Reckoned as additional consideration in view of the above

Discussion …….. Rs. 55,28,500/-

Total Sale consideration …… Rs. 4,67,45,000/-

The AO took the sum of Rs. 55,28,500/- as part of consideration for shares / value of property being an amount paid by the transferor (sic. it should be transferee) for clearing the liabilities of the company vis-à-vis the Directors.

The AO adopted proportionate of market value of property / consideration accruing and for 306 shares he took Rs. 37,51,369 for the same and arrived at the capital gains of Rs.36,38,131/- in place of Rs 27,82,458/- returned by the assessee.

The AO concluded that by engineering the sale of the shares of all other shareholders of the company ie M/s. KMPL, the assessee effectively transferred the immovable property belonging to the assessee, therefore, it is an indirect way of transferring the immovable properties ie flats no 1901B and 2001B, for lesser consideration and, therefore, the provisions of section 50C of the Act have application to the facts of the case and consequently, AO applied the guidelines prices of the flats and worked out the capital gains. Further, AO treated this case as an eligible case for piercing of corporate veil.

From observations of the Tribunal it appears that after hearing the assessee made a revised computation as follows:

“The capital gains would be worked out as follows:

Sale consideration apportioned to the assessee as

Discussed above …. Rs. 37,51,369/-

Less: Indexed cost of the cost of acquisition

of the property, as discussed above … Rs. 1,13,238/-

Taxable capital gain …. Rs.36,38,131/-“

Proceeding before the CIT(A):

Assessee preferred appeal before the CIT(A) and during hearing reiterated the submissions that this is a case of transfer of shares in a company and not the case of transfer of the flats as alleged by the AO. That there is no occasion for registering the transfer of the shares before the State Registration Authorities envisaged in section 50C of the Act.

Referring to the provisions of section 50C of the Act, assessee submitted that the shares are not registered at the time of transfer in view of the d-mat procedures by the Stamp Duty Authorities of the State Government and the capital asset-share transferred is by no means constitute part of the land or building or the both, and therefore, the provisions of section 50C have no application.

The CIT (A) rejected these contentions and proceeded to confirm the addition made by the AO by invoking the provisions of section 50C. CIT (A) confirmed the view of the AO that this is a case of transfer of immovable property though the shares were capital assets transferred.

CIT (A) opined that the facts indicate that what is apparent is not real and this is a case of transfer of piece of real estate in order to circumvent section 50C of the Act and the applicability of registration laws etc and that this is a fit case for lifting of the corporate veil.

Arguments before ITAT:

Dr. Shivaram, Ld Counsel for the assessee narrated the facts of the case.

He argued that the provisions of section 50C has no application to the facts of this case.

The capital assets transferred here are the shares of the company and not the land or building or the both.

Provisions of section 50C are the deemed provisions and the meaning of the same cannot be extended as the deemed provision has to be strictly interpreted. as held in a judgment in the case of Commissioner of Income-tax Vs Shrishakti Trading Co., 1993 (9) TMI 78 - BOMBAY High Court.

Ld Counsel filed written submissions narrating the legal submissions mentioning that the expression “full value of consideration” received or accruing as a result of the transfer as fully explained by various decision which are as follows.

1. CIT vs. George Henderson & Co. Ltd., 1967 (4) TMI 18 - SUPREME Court

2. CIT vs. Gillanders Arbuthnot & Co., 1972 (9) TMI 13 - SUPREME Court

3. Rupee Finance & Management P.Ltd. vs. ACIT 2007 (2) TMI 240 - ITAT BOMBAY-J-Affirmed by Bombay High Court ITA No.1208 dated 20.10.2008.

4. Vishal P. Mehata vs. DCIT ITA No. 3586/Mum/2009,dated 26.10.2010 (AY 2007-2008)

The provisions of section 50C are not applicable as the agreement is for the sale of shares which are to be registered** to the Stamp Duty Authorities and placed reliance on the following decisions.

1. Carlton Hotels P. Ltd. vs. ACIT (2009) 122 TTJ 475 (Luck)

2. Ran Mal Bhansali vs. ACIT, 2011 (12) TMI 374 - ITAT, Jodhpur

3. Navneet Kumar Thakkar vs. ITO, 2007 (3) TMI 317 - ITAT JODHPUR

4. Smt. Vijay Laxmi Bhadhha vs.ITO (2009) 20 DTR (JP) (Tri) 365

                                     (** Not to be registered- per author)

The expression “assessable” is substituted in section 50C of the Act to enable the AO to adopt the same valuation even though agreement for sale of immovable property is not registered and no stamp duty is adjudicated. The Finance (No.2) Act, 2009 w.e.f 1.10.2009 was relied in this regard.

Further, referring to the lifting of corporate veil as mentioned by the Revenue Authorities, Ld Counsel submitted the following arguments.

“(i) KMPL is a separate legal entity distinct from its shareholders.

(ii) As per Supreme Court in Vodafone International Holding BV vs. UOI, 2012 (1) TMI 52 - SUPREME COURT OF INDIA for corporate veil to be lifted revenue has to look at the transaction as a whole and not adopt a dissecting approach (para 68 page 37)

(iii) In the facts of the present case, considering various circumstances as under, corporate veil has been wrongly lifted.

a. KMPL was incorporated 38 years back

b. Property was purchased approximately 20 years back and after several years of incorporation.

c. Rental income from property was taxed in the hands of KMPL.

d. From the above fact of holding shares in company for such a long period it is clear that company as not incorporated as a colourable device or a subterfuge with the sole motive to acquire property for its sale under the garb of sale of shares.

The property was exploited by KMPL for several years.

e. Share purchase agreement is not found non genuine.

f. Purchasers are not related party.

g. Shares are valued as per NAV method and immovable property is valued as per registered values report.

h. Immovable asset continue to be in the name of KMPL”

The Departmental Representative relied on orders of the AO and CIT (A) and argued stating that this is a case of tax evasion and there is a need for piercing of corporate veil which rightly done by the AO. Ld CIT-DR is of the view that the order of the CIT (A) should be confirmed.

Observations and order of the Tribunal ( about section 50C) Tribunal considered arguments of both the parties and orders of the authorities below and material available on record.

Tribunal found that there is no dispute on the facts and therefore, the dispute relates to the applicability of provisions of section 50C of the Act.

For examining the validity of the applicability of the said provisions, Tribunal considered provisions of S. 50C which is also reproduced in the order.

On consideration of section 50C Tribunal noticed that Prima facie, the said section refers to the expressions ie “capital asset, being land or building or both”, “assessed” (“assessable” does not apply to the AY in question), “capital asset, being land or building or both”, “deemed to be the full value of the consideration” etc.

“full value of the consideration” (FVC) and it is a deemed definition. Accordingly, when the assessee transfers a capital asset being land or building or both, for a consideration lesser than the value adopted, assessed by any authority of a State Government, the value so adopted or assessed shall be deemed to the ‘full value consideration’ for the purpose of computing capital gains u/s 48 of the Act.

The expression “assessable” has inserted into the statute for perspective application w.e.f. 1.10.2009 whereas the assessment year under consideration is 2007-08 and 2008-09.

The capital assets that are covered under the provisions are land or building or both.

Expression “transfer” shall have to be a direct transfer as defined u/s 2(47) of the Act which does not include the tax planning adopted by the assessee.

It is settled issue that the provisions of section 50C are deemed provisions and, therefore, the same have to be interpreted strictly in accordance with the spirit of the provisions. In the instant case, what is transferred by the assessee are the shares in the company and not the land or building or both.

Assessee does not have full ownership on the flats which are owned by the company.

The transfer of shares was never a part of the assessment of the Stamp duty Authorities of the State Government.

The company was deriving income, taxable under the head ‘income from property’ for more than a decade.

The expression “assessable” is inserted in section 50C (1) of the Act is not relevant for the impugned assessment years.

In such circumstances, the AO’s decision to invoke the provisions of section 50C to the tax planning adopted by the assessee is not proper and it does not have the sanction of the provisions of IT Act.

In conclusion the Tribunal held that the provisions of section 50C are deemed provisions which are required to be strictly interpreted, it is not covered by the expressions of the present case. Therefore, Tribunal opined that order of the CIT (A) is required to be reversed with a direction to the AO to allow the claim of the assessee.

Accordingly, ground no.1 raised by the assessee was allowed.

Views of author:

The order of the Tribunal about applicability of section 50C is correct and deserves to be accepted by revenue. However, in some paragraph Tribunal has referred to tax planning, adopted by assessee. Author feels that there was no case of tax planning. The shareholders sold shares and for determining fair value of shares they had also valued properties held by company at current valuation report obtained from registered valuers. A person will sell shares at best available price, and for bargaining the same assessee had made reasonable efforts to show fair value to the buyer. The buyers are not related person. There is no case of revenue that assessee got some extra and undisclosed consideration for shares. Therefore, there seems no case of tax planning.

Regarding amendment to include “assessable value”, the Tribunal has rightly observed that the amendment is not applicable to the assessment year in question. The amendment is applicable w.e.f. 01.10.2009.

Author wants to add that the amendment will not be applicable in case of transfer of shares. The section 50C, even after this amendment will apply only to transfer of land and /or building and not to transfer of Shares as was the case before the Tribunal. The effect of amendment is that after amendment, even when registration of transfer of any capital asset being land and / or building has not taken place, the AO can adopt the applicable assessable value, as if the transfer is registered. And for that purpose the AO can adopt valuation adopted by Registration authorities.