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.

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 ... Deemed full value of consideration under section 50C - transfer of shares versus transfer of immovable property - strict interpretation of deemed provisions - lifting of corporate veil - additional consideration and infusion of funds into companyDeemed full value of consideration under section 50C - transfer of shares versus transfer of immovable property - strict interpretation of deemed provisions - Section 50C does not apply to the transfer of shares in the assessee's cases and cannot be invoked to treat the flats owned by the company as the transferred capital asset. - HELD THAT: - The Tribunal examined the language of section 50C and noted that it applies to a capital asset being land or building or both and operates as a deemed definition of full value of consideration when such an immovable property is transferred. For the assessment years in question the expression 'assessable' (added later) is not relevant. What was transferred in these cases were shares of the companies which owned the flats; the assessee did not have direct ownership of the flats. Since section 50C is a deemed provision it must be strictly construed and cannot be extended to cover an indirect or tax-planned transfer of shares merely because the underlying company owns immovable property. The Tribunal therefore held that the AO and CIT(A) erred in invoking section 50C and in treating the transactions as transfer of immovable property. This conclusion led to reversal of the authorities' adoption of stamp valuation of the flats for computing the assessees' capital gains (paras 11-12). [Paras 12]Reversed the invocation of section 50C; claim of the assessee to be allowed.Additional consideration and infusion of funds into company - transfer of shares versus receipt of dues from company - Amounts infused by purchasers into the company and used to repay the company's loans to its directors do not constitute additional sale consideration to the transferors and cannot be treated as part of sale consideration for computing capital gains. - HELD THAT: - The Tribunal considered the nature of the transaction and the accounting entries placed on record. The money was infused by the transferees into the company and the company repaid its liabilities to the directors; the transferors merely received their dues from the company. There was no evidence that the transferees paid the amount directly to the transferors as part of the share consideration. On this factual and accounting basis the AO's treatment of the repayments as additional sale consideration was unsustainable and the addition was held to be erroneous (para 13-14). [Paras 14]Addition of the amount treated as additional consideration is deleted; ground allowed.Indexation of cost where section 50C inapplicable - The contention on substitution of indexed cost of immovable property for computing capital gains was rendered academic and not adjudicated on merits because section 50C was held inapplicable. - HELD THAT: - The Tribunal observed that having decided that section 50C did not apply to these share transfers, the question of substituting indexed cost of the property for computing capital gains arising from an asserted transfer of immovable property became purely academic. Therefore no substantive decision on indexation was required (para 15). [Paras 15]Ground dismissed as academic.Final Conclusion: The appeals are partly allowed: invocation of section 50C to the share transfers is reversed and additions on account of infusion/repayment treated as additional sale consideration are deleted; the indexation contention is dismissed as academic. 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.