2013 (2) TMI 350 - AT - Income Tax

Transfer of shares not subject to Section 50C for property ownership. Capital gains exclude liabilities. Indexation issue dismissed.

Irfan Abdul Kader Fazlani Versus Assistant Commissioner of Income-tax, Central Circle-44, Mumbai

The Tribunal held that Section 50C of the Income Tax Act does not apply to the transfer of shares in a company owning immovable property, as shares are ... Invocation of the provisions of section 50C - assessee is a shareholder in company along with other shareholders and sold his shares for a consideration - Held that:- Section 50C provides for meaning of the '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. 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)which does not include the tax planning adopted by the assessee. In the light of the above legal interpretation of section 50C in the instant case, what 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. 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, order of the CIT(A) is required to be reversed with a direction to the AO to allow the claim of the assessee - in favour of assessee. Addition on additional consideration of money paid by the transferees to the company who utilized the same for repayment of loans of the company to its Directors - Held that:- The entries in the books of accounts vividly suggests that the transferees infused the money in the accounts of the company and the company repaid the liabilities of the Directors and it is not the case of the transferees paying additional consideration directly to the transferors of the shares i.e. capital assets. Therefore, considering the book entries the allegations of the AO do not have sustainable strength. Therefore, Income tax Authorities have fallen into error zone in deeming the loan repayments as an additional sale consideration - in favour of assessee. Issues Involved1. Applicability of Section 50C of the Income Tax Act, 1961.2. Inclusion of additional consideration in the sale consideration.3. Indexation of the cost of the property while computing capital gains.4. Lifting of the corporate veil.Detailed AnalysisIssue 1: Applicability of Section 50C of the Income Tax Act, 1961The primary issue was whether the provisions of Section 50C, which pertain to the transfer of capital assets being land or building, apply to the transfer of shares in a company owning immovable property. The Tribunal held that Section 50C does not apply to the transfer of shares because the shares are not directly assessed by the Stamp Duty Authorities and the capital asset transferred is not land or building. The Tribunal emphasized that Section 50C is a deemed provision and must be interpreted strictly. Since the assessee transferred shares and not the immovable property itself, Section 50C was deemed inapplicable. Consequently, the Tribunal reversed the CIT(A)'s order and directed the AO to allow the assessee's claim.Issue 2: Inclusion of Additional Consideration in the Sale ConsiderationThe second issue was whether the additional amount paid by the transferees to the company for clearing its liabilities should be included in the sale consideration for computing capital gains. The Tribunal found that the payment of Rs. 55,28,500/- was made by the transferees to the company, which then repaid its directors' loans. This transaction was between the transferees and the company, not directly involving the assessee. Therefore, the Tribunal concluded that this amount should not be considered as additional sale consideration for the assessee. The Tribunal agreed with the assessee's argument and allowed the ground.Issue 3: Indexation of the Cost of the PropertyThis issue was raised without prejudice to the primary issue regarding the applicability of Section 50C. Given that the Tribunal decided in favor of the assessee on the applicability of Section 50C, the question of indexation of the cost of the property became academic. Consequently, the Tribunal dismissed this ground as academic.Issue 4: Lifting of the Corporate VeilThe Tribunal addressed the Revenue's argument for lifting the corporate veil, which was based on the assertion that the transfer of shares was an indirect way of transferring immovable property to evade taxes. The Tribunal noted that the company (KMPL) was a separate legal entity, distinct from its shareholders, and had been in existence for many years. The company had been deriving rental income from the property, which was taxed under 'income from property'. The Tribunal found no evidence that the company was used as a colorable device to evade taxes. Therefore, the Tribunal held that lifting the corporate veil was not justified in this case.ConclusionThe Tribunal concluded that the provisions of Section 50C do not apply to the transfer of shares in a company owning immovable property. The additional consideration paid by the transferees to the company for clearing its liabilities should not be included in the sale consideration for computing capital gains. The issue of indexation became academic due to the decision on Section 50C. Lastly, the Tribunal found no grounds for lifting the corporate veil. Accordingly, the appeals were partly allowed in favor of the assessees.