2020 (1) TMI 913 - AT - Income Tax

Computation of capital gains - value of consideration for the purpose of computation - HELD THAT - Value of the assets taken over by the company should be considered as the full value of consideration for the purpose of computation of capital gains under the Act. In this case, the full value of consideration is ₹ 2,70,69,200/-. This is also, the cost of acquisition of assets. As the cost of acquisition and the full value of consideration received on sale are the same figure, no capital gains has accrued or was received by the assessee. Thus, the addition under the head capital gains is hereby deleted. Correct head of income - capital gain or Income from other sources - AO valuing the shares received by the assessee from M/s. J.S. Tradex Pvt. Ltd. under Rule 11UA r.w.s. 56(2)(vii)(c) - HELD THAT - When the assessee has been allotted certain shares as consideration for property transfer, then the question of value of those shares by invoking Section 56(2)(vii)(c) of the Act, does not arise. When a value is fixed for a share allotted, it reflects the market value of the asset transferred. It is not the case of the Assessing Officer that the assessee has not valued the assets while transferring the same to the company. What is to be considered is that this exchange/barter is on a particular date. When the exchange was on 27/03/2012 and when the shares were allotted on 27/03/2012, the Assessing Officer seeks to value the already allotted shares on 31/03/2012 i.e., after allotment of 40,000 equity shares at a premium of ₹ 400/- per share which gave the company premium of ₹ 1,56,00,000/-. This is not permissible. Such method of computation is not laid down under any provision of the Act. Thus, the same is not in accordance with law. In view of the above discussion, we delete, both the addition made under the head Capital Gain as well as under the head income from other sources on the issue of transfer. Addition u/s 14A r.w.r. 8D - HELD THAT - set aside to the file of the Assessing Officer for fresh adjudication, in accordance with law. The Assessing Officer shall apply the judgment of the Special Bench of the ITAT in the case ACIT v. Vireet Investments (P) Ltd. 2017 (6) TMI 1124 - ITAT DELHI and take into account only those investments which are dividend yielding with respect to disallowance u/s 14A r.w.r. 8D. In the result, Ground No. 3 is allowed for statistical purposes. Suppression of closing stock being gold - HELD THAT - Disallowance deleted as the total closing stock of gold which was transferred is ₹ 1.99 Crores and this addition, is miniscule and not supported with cogent evidence.

Summary

Issues Involved:
1. Denial of benefit under Section 47(xiv) of the Income Tax Act.
2. Computation of short-term capital gains and income from other sources.
3. Disallowance under Section 14A read with Rule 8D.
4. Alleged suppression of closing stock value.

Issue-wise Detailed Analysis:

1. Denial of Benefit under Section 47(xiv):

The assessee, engaged in trading gold, transferred his business to a private limited company, M/s. J.S. Tradex Pvt. Ltd., and claimed non-transfer under Section 47(xiv) of the Act, asserting no capital gains tax liability. The Assessing Officer (AO) denied this benefit, citing non-fulfillment of the third mandatory condition under Section 47(xiv), which requires that the sole proprietor does not receive any consideration other than by way of allotment of shares in the company. The AO thus treated the transaction as a transfer, taxable under capital gains and alternatively under Section 56(2)(vii)(c) as income from other sources. The ITAT upheld the AO's decision, affirming that the transaction is a transfer and exigible to capital gains.

2. Computation of Short-term Capital Gains and Income from Other Sources:

The AO computed the short-term capital gains at ?1,24,54,080/- by considering the Fair Market Value (FMV) of shares at ?51.51 per share, instead of the face value of ?10 per share. The ITAT, however, found that the computation methodology adopted by the AO lacked legal sanction. It held that the full value of consideration should be ?2,70,69,200/-, the same as the cost of acquisition, resulting in no capital gains. The ITAT also rejected the AO's valuation of shares as of 31/03/2012, emphasizing that the valuation should be on the date of transfer, i.e., 27/03/2012. Consequently, the addition under both capital gains and income from other sources was deleted.

3. Disallowance under Section 14A read with Rule 8D:

The assessee contested the disallowance made under Section 14A read with Rule 8D. The ITAT set aside this issue to the AO for fresh adjudication, directing the AO to apply the judgment of the Special Bench of the ITAT in the case of ACIT v. Vireet Investments (P) Ltd., and to consider only those investments which yield dividend income.

4. Alleged Suppression of Closing Stock Value:

The AO alleged that the assessee transferred closing stock of gold at a lower price than the market value, resulting in a suppression of ?1,38,690/-. The ITAT found this addition to be minuscule and unsupported by cogent evidence, especially given the total stock-in-trade transferred was ?1.99 Crores. Thus, the disallowance of ?1,38,690/- was deleted.

Conclusion:

The ITAT allowed the appeal of the assessee, deleting the additions under capital gains and income from other sources, setting aside the disallowance under Section 14A for fresh adjudication, and deleting the addition for alleged suppression of closing stock value.