2012 (7) TMI 530 - HC - Income Tax

Justification on taxability under the head capital gain u/s 45 - Share Purchase Agreement - assessee contested the entire amount was yet to be received by the assessee - Held that - Considering the deeming fiction contained in section 45(1) it is held that the whole of consideration accruing or arising or received in different years is chargeable under the head capital gains in the year in which the transfer of shares has taken place - no material on the record or in the agreement suggesting that even if the entire consideration or part is not paid the title to the shares will revert to the seller. In that sense the controlling expression of transfer in the present case is conclusive as to the true nature of the transaction. The fact that the appellant assessee adopted a mechanism in the agreement that the transferee would defer the payments would not in any manner detract from the chargeability when the shares were sold. The tenor of the Tribunal s order is that the entire income by way of capital gains is chargeable to tax in the year in which the transfer took place. This is what is stated in Section 45(1). Merely because the agreement provides for payment of the balance of consideration upon the happening of certain events it cannot be said that the income has not accrued in the year of transfer - against assessee.

Issues Involved:
1. Whether the amount of Rs. 26,25,000, which was yet to be received by the assessee, was subject to tax under the head "capital gains" under Section 45 of the Income Tax Act.
2. Interpretation of Sections 45 and 48 of the Income Tax Act concerning the timing and recognition of capital gains.
3. Applicability of precedents and case laws cited by the assessee.

Issue-wise Detailed Analysis:

1. Taxability of Rs. 26,25,000 as Capital Gains:
The primary issue was whether the amount of Rs. 26,25,000, which was yet to be received by the assessee, should be taxed as capital gains under Section 45 of the Income Tax Act. The appellant had divested its shareholding in Orion Dialog Pvt. Ltd. through a Share Purchase Agreement (SPA) dated 15.2.2006, with a total consideration of Rs. 86.25 lakh for 1500 shares. The appellant received Rs. 60 lakh in the year of transfer, while the balance was payable over the next two years, contingent upon certain conditions.

The Assessing Officer (AO) held that the entire income accruing to the assessee was reckonable as capital gains. The Commissioner of Income Tax (Appeals) (CIT(A)) reversed this, stating that the part of the consideration payable in the future did not constitute income for the relevant assessment year. However, the Income Tax Appellate Tribunal (ITAT) allowed the revenue's appeal, holding that the entire sale consideration, including the amount payable in the future, was liable to be taxed as capital gains in the year of transfer.

2. Interpretation of Sections 45 and 48:
The ITAT's decision was based on the interpretation of Sections 45 and 48. Section 45(1) states that profits or gains arising from the transfer of a capital asset in the previous year shall be chargeable to income tax under the head "capital gains" and shall be deemed to be the income of the year in which the transfer takes place. Section 48 deals with the mode of computation of capital gains, starting with the full value of the consideration received or accruing as a result of the transfer.

The Tribunal emphasized that Section 45 is a charging section, and the capital gains are chargeable in the year of transfer, irrespective of the year of accrual or receipt. The Tribunal held that the entire consideration, including the amount payable in the future, should be taxed in the year of transfer due to the deeming fiction in Section 45(1).

3. Applicability of Precedents and Case Laws:
The assessee cited several precedents, including the Supreme Court's decision in CIT Vs. B C Srinivasa Shetty and other cases like CIT Vs. Bharat Petroleum Corporation and CIT Vs. Ashokbhai Chimanbhai. The ITAT discussed these cases but found them distinguishable or not directly applicable to the facts of the present case.

For instance, in CIT Vs. Ashokbhai Chimanbhai, the Supreme Court distinguished between income "received" and income "accruing" or "arising." However, the Tribunal noted that Section 45 contains a fiction that profits and gains arising from the transfer of a capital asset shall be deemed to be the income of the previous year in which the transfer takes place. Therefore, the full value of consideration received or accruing in any year as a result of the transfer shall be taxed in the year in which the transfer takes place.

Similarly, in CIT Vs. Bharat Petroleum Corporation, the court held that income accrues when the assessee gets a legal right to enforce the amount against the debtor. However, the Tribunal held that by the fiction in Section 45(1), income accruing or received in different years is chargeable in the year in which the transfer takes place.

The Tribunal also distinguished the case of Anurag Jain, where the payment for consideration of shares was interlinked with the performance of the assessee and not the company whose shares were transferred. In the present case, the payment of additional consideration depended on the performance of the company, not the assessee.

Conclusion:
The Tribunal concluded that the entire consideration of Rs. 86.25 lakh was chargeable to tax as capital gains in the year of transfer, as per Section 45(1). The High Court agreed with the Tribunal's reasoning, stating that the capital assets were transferred on a particular date, and there was no material suggesting that the title to the shares would revert to the seller if the entire consideration or part was not paid. The appeal was dismissed, and it was held that no substantial question of law arose for consideration.

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