2014 (6) TMI 462 - AT - Income Tax

Tribunal upholds fair market value principle in capital gains calculation, rules in favor of assessee

The Tribunal dismissed the appeal filed by the Assessing Officer, affirming the First Appeal Authority's order in favor of the assessee. The case revolved ... Computation of capital gain – AO’s power to substitute the value of consideration in place of sale consideration - Held that:- .Once it is found that shares are sold at a particular price it is not possible for AO to disturb the figure,without bringing material facts that contradict the calculation made by the assessee. In our opinion FAA has analysed the provisions of capital gain tax in right perspective. There is no doubt that in certain circumstances, sale-price of shares can be substituted by the AO for determining the capital gains/loss. But, in the case under consideration those circum -stances were missing. Relying upon Commissioner Of Income-Tax, West Bengal, And Another Versus George Henderson And Co. Ltd. [1967 (4) TMI 18 - SUPREME Court], capital gain/loss arising on sale of shares has to be treated in a special manner. Act provides different treatments for sale of shares and exchange /otherwise transfer of shares – Decided against Revenue. Issues involved:1. Substitution of value of consideration in place of sale consideration for computing capital gains.Detailed Analysis:Issue 1: Substitution of value of consideration in place of sale consideration for computing capital gainsThe case involved an appeal challenging the order of the CIT(A)-27, Mumbai, where the Assessing Officer (AO) had substituted the value of consideration in place of the sale consideration shown by the assessee while computing capital gains. The assessee firm, engaged in sub-contracting diamond business, had filed its return of income declaring a total loss. The AO determined the total income, resulting in a long-term capital loss on the sale of shares. The AO adopted a different value for the shares without any basis, leading to a recalculated long-term capital loss.Upon appeal, the First Appeal Authority (FAA) held that the AO's action of substituting the consideration value without evidence was not in accordance with the law. The FAA emphasized that the provisions of the Income Tax Act provided for the computation of capital gains based on the full value consideration received, and in this case, there was no evidence to suggest that the shares were transferred for a consideration more than what was stated. The FAA referred to relevant legal precedents and ultimately deleted the addition made by the AO.During the hearing, the Departmental Representative argued that the shares were exchanged, not sold, and thus the AO correctly adopted the Fair Market Value (FMV) for calculating capital gains. However, the Authorized Representative contended that the transactions were sales, not exchanges, and the AO had no justification for substituting the share price. The Tribunal, after considering the arguments, found that the AO had adopted a price without any basis and failed to provide material contradicting the assessee's calculations. The Tribunal upheld the FAA's decision, emphasizing the principles of fair market value and full consideration in determining capital gains on the sale of shares.In conclusion, the Tribunal dismissed the appeal filed by the AO, affirming the FAA's order and deciding the effective ground of appeal against the AO in favor of the assessee.This detailed analysis of the judgment addresses the issue of the substitution of the value of consideration in place of the sale consideration for computing capital gains, providing a thorough examination of the facts, legal arguments, and the Tribunal's decision.