2020 (12) TMI 160 - AT - Income Tax

Computation of Long Term Capital Gains - Applicability of provisions of section 50C - CIT-A directing AO to adopt the valuation of the properties made by the DVO vis- -vis the value of the shares transferred for the purpose of computation of Long Term Capital Gains - HELD THAT - In the present facts, of the case we note that Company had no rights to sell superstructure. Company is permitted only to sublet or sublease or assign or nominate any portions thereof falling to its share to one or more parties in one or more than one deeds for the period of lease. We have also perused Scheme of allotment by the Esteem Arcade Pvt. Ltd., wherein, the members enrolled under this scheme would be allotted commercial space/unit There was an embargo on assessee to sell their units as it emanates from there scheme adopted by the company. Authorities below have disputed or doubted the scheme of company under which the assessee could only transfer the shares and or deposits held in the company which is subject to fulfilment of certain conditions. There is nothing on record to substantiate the allegation of intention to avoid tax in the guise of transfer of shares. Ld.CIT(A) on one hand holds that there was no transfer of Capital Asset, whereas on the other hand, refers to DVO report to allege tax avoidance by assessee. Ld.CIT(A) once rejected application of sec.50C cannot rely on DVO report to hold that assessee adopted a colourable device to avoid tax. Facts in present case are different as compared to facts considered in M/S CARLTON HOTEL PVT LTD 2017 (1) TMI 1471 - ALLAHABAD HIGH COURT . In our view, assessee cannot blow hot and cold at the same time. There is no documentary evidence brought on record by authorities below to establish such allegation. We note that individual members cannot enjoy the units allotted in respect of shares and deposits held with the company beyond a period of 85 years starting from 11/07/2002. We also note that number of units held by a particular member is proportionate with 12 times the face value of shares as security deposit in order to get entitlement of enjoyment of the unit to be allotted. Further clause 11 of the scheme allows a member to sell or dispose of his/her shares along with deposits subject to payment of full amount due to the company towards shares/or deposit in accordance with the rules and regulations subject to Articles of Association of the company. - Decided in favour of assessee.

Summary

Issues Involved:
1. Applicability of Section 50C of the Income Tax Act.
2. Validity of the reference to the District Valuation Officer (DVO).
3. Allegation of the transfer of shares as a colorable device to avoid tax.
4. Entitlement to the benefit of indexation.
5. Charging of interest under sections 234B and 234C of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Applicability of Section 50C of the Income Tax Act:
The core issue was whether Section 50C, which deals with the valuation of capital assets for the purpose of computing capital gains, was applicable. The assessee argued that Section 50C was not applicable as she sold shares in a company, not land or buildings. The CIT(A) concurred, stating that Section 50C applies only to capital assets being land or building or both, not to shares. This interpretation aligns with the purpose of Section 50C, which is to counter suppression of sale consideration in the sale of immovable properties.

2. Validity of the Reference to the District Valuation Officer (DVO):
The CIT(A) directed the AO to adopt the valuation of properties made by the DVO for computing long-term capital gains, despite initially agreeing that Section 50C was not applicable. This was contradictory because if Section 50C was not applicable, the reference to the DVO itself was improper. The Tribunal noted this inconsistency and emphasized that the CIT(A) could not rely on the DVO report if Section 50C was deemed inapplicable.

3. Allegation of the Transfer of Shares as a Colorable Device to Avoid Tax:
The CIT(A) alleged that the transfer of shares was a colorable device to avoid tax, based on the DVO report. However, the Tribunal found no documentary evidence to substantiate this allegation. It referred to the Karnataka High Court's decision in Bhoruka Engineering Inds. Ltd vs DCIT, which held that transferring shares instead of land to avoid tax is a valid legal transaction and not a colorable device if done within the legal framework. The Tribunal concluded that the CIT(A) could not allege tax avoidance without concrete evidence.

4. Entitlement to the Benefit of Indexation:
The lower authorities did not grant the benefit of indexation to the assessee. However, given that the Tribunal concluded the transaction was a valid transfer of shares and not land or buildings, the benefit of indexation should be considered in computing the capital gains.

5. Charging of Interest under Sections 234B and 234C of the Income Tax Act:
The assessee contested the interest charged under sections 234B and 234C, arguing that the calculation was not in accordance with the law. The Tribunal did not specifically address this issue in detail, as the primary focus was on the applicability of Section 50C and the validity of the DVO reference.

Conclusion:
The Tribunal allowed the appeal, agreeing with the assessee that Section 50C was not applicable and that the CIT(A) erred in relying on the DVO report. It emphasized that the transfer of shares was a legitimate transaction and not a colorable device to avoid tax. The Tribunal also noted that the CIT(A) could not simultaneously reject the application of Section 50C and rely on the DVO report to allege tax avoidance. The appeal was allowed in favor of the assessee, and the grounds raised were accepted.

Order Pronounced:
The appeal filed by the assessee was allowed, and the order was pronounced in the open court on 28th August 2020.