2012 (10) TMI 81 - AT - Income Tax

Tax on Long Term Capital Gain - sale of shares - The overall consideration was Rs. 86.25 lakh. - in this year a sum of Rs. 60.00 lakh only was received. The balance was to be received in three succeeding years - the whole of the cost has been claimed by the assessee while computing capital gains by taking the sale consideration at Rs. 60.00 lakh. The question is - whether, the whole of the sale proceeds of Rs. 86.25 lakh or only a sum of Rs. 60.00 lakh is liable to be considered for the purpose of levy of capital gains? Held that - Tax on Long Term Capital gain is chargeable to tax in the year in which income accrues, arises or received and is deemed to accrue, arise or received - As decided in case of CIT VS . Bharat Petroleum Corporation 1990 (11) TMI 23 - CALCUTTA HIGH COURT Calcutta High Court income accruing in different years or received in different years is chargeable in the year in which transfer takes place. Further in the case of Ashokbhai Chimanbahi 1964 (10) TMI 11 - SUPREME COURT income is taxable when it accrues, arises or is received and full value of consideration received or accruing in any year as a result of transfer of the capital asset shall be taxed in the year in which transfer takes place in favour of Revenue.

Summary

Issues Involved:
1. Deletion of addition of Rs. 26.25 lakh by CIT (Appeals) on account of long-term capital gain (LTCG).
2. Interpretation of provisions in sections 45(1) and 48 of the Income Tax Act regarding the timing and computation of capital gains.

Issue-wise Detailed Analysis:

1. Deletion of Addition by CIT (Appeals):
The revenue contested that CIT (Appeals) erred in deleting the addition of Rs. 26.25 lakh made by the AO on account of LTCG. The AO found that the assessee sold 1500 shares of Orion Dialog Private Limited to Essar Investments Ltd. for Rs. 5,750 per share, totaling Rs. 86.25 lakh. However, the assessee declared only Rs. 60.00 lakh as the sale consideration for computing LTCG. The AO argued that as per section 45(1), the entire sale consideration of Rs. 86.25 lakh should be considered for the purpose of computing capital gains since the transfer of shares and the agreement occurred in the same year.

2. Interpretation of Sections 45(1) and 48:
The CIT (Appeals) held that only the amount of Rs. 60.00 lakh, which accrued and was received in the year of transfer, should be taxed. The CIT (Appeals) referred to section 48, which starts with the determination of the full value of consideration received or accruing as a result of the transfer of the capital asset. Since the additional consideration was contingent on future events and had not accrued or been received, only Rs. 60.00 lakh was taxable in the year of transfer. The CIT (Appeals) also noted that the tax rates for capital gains were the same in the succeeding years, implying no revenue loss.

Arguments and Findings:
The senior DR argued that under section 45(1), all profits or gains from the transfer of a capital asset are chargeable in the year of transfer, regardless of whether part of the consideration is received later. The assessee's counsel cited previous rulings (Anurag Jain, In re and Anurag Jain v. AAR) to argue that income accrues only when a legal right to receive the amount exists.

Tribunal's Analysis:
The Tribunal examined sections 45 and 48, noting that section 45(1) creates a fiction that capital gains are deemed to be the income of the year in which the transfer takes place. Section 48, which deals with the mode of computation, must be read in conjunction with section 45(1). The Tribunal referenced past decisions (CIT v. Ashokbhai Chimanbhai and CIT v. Bharat Petroleum Corpn. Ltd.) to support the view that income is taxable when it accrues, arises, or is received, or is deemed to accrue or arise by fiction.

Distinguishing Case Law:
The Tribunal distinguished the case of Anurag Jain, where contingent payments were linked to the performance of the assessee and not the company whose shares were transferred. In the present case, the additional consideration depended on the performance of Orion Dialog, not the assessee.

Conclusion:
The Tribunal concluded that under the deeming fiction of section 45(1), the entire consideration of Rs. 86.25 lakh is chargeable to tax in the year of transfer. The assessee's case did not fall under any exceptions to section 45(1). Consequently, the Tribunal agreed with the AO's assessment and set aside the order of the CIT (Appeals), restoring the AO's order to tax the full consideration of Rs. 86.25 lakh as capital gains in the year of transfer.

Result:
The appeal was allowed, and the AO's order was restored.