TaxTMI 
TaxTMI 
2013 (7) TMI 443
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....vestment of Rs. 240.35 lakhs during the year in different investments. Assessee also has given loans to its subsidiaries in which its Directors are interested. Since all the borrowings and receipts are through common bank account, the AO has come to the conclusion that borrowed funds have been utilised for the purpose of investments. Accordingly, invoking provisions of section 14A he disallowed an amount of Rs. 32,00,358/-. He also disallowed an amount of Rs. 53,52,463/- under section 36(1)(iii) in addition to the disallowance under section 14A. The learned CIT(A), after considering the detailed submissions made by the assessee, however, considered the disallowance so made on the reason that Rule 8D is to be applied retrospectively following the decision of the ITAT Special Bench in the case of Daga Capital & Management Co. Pvt. Ltd. vide ITA No. 8057/Mum/2003 dated 20.10.2008. Accordingly he confirmed the disallowance. However, he has given relief with reference to indirect administrative expenses. 5. It was the submission that no disallowance under section 14A is required both under principles of law and also on the facts. Under the principles of law, it was the submission tha....
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....ly, AO did not consider any amount for disallowance under section 14A. With reference to the own funds the following details were placed on record: - Particulars Year ended March 31, 2005 (Rs. In Lacs) Year ended March 31, 2004 (Rs. In Lacs) Share Capital Advance against equity Reserve and Surplus 2038.26 - 1767.37 4287.6 2875 - Total 3805.63 7162.6 Less: Debit Bal. in P&L Account -3768.37 Net Own Funds 3805.63 3394.23 Total Tax Free Investments 234.75 471.5 6. Since the own funds are to the extent of Rs. 38.05 crores and the investments being Rs. 2.34 crores, question of disallowance does not arise. It was submitted, both on facts and on legal principles, no disallowance under section 14A is required. 7. The learned D.R., however, relied on the orders of the AO and the CIT(A). 8. We have considered the issue and examined the facts placed on record. As per the findings of the AO in A.Y. 2004-05, the investments made in two companies are out of borrowed funds on which no interest was paid. The finding of the AO is as under: - "The major investment made this year was in PMP Components P. Ltd. ....
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....apital gains in stead of long term capital loss worked out by the assessee. The brief facts of the issue are that the assessee purchased shares of its subsidiary company M/s PMP Components Pvt. Ltd. at Rs. 18.10 per share on November 27, 2003. Shares of Rs. 22,50,750/- at a cost of Rs. 4,07,38,575/- were purchased in the transaction. Subsequently the assessee, during the impugned assessment year, sold all the shares held as investment to M/s. High Mercantile Company P. Ltd. (HMPL), M/s. Surewin Trading Co. P. Ltd. (STPL) and M/s. Supersoft Mercantile Co. P. Ltd. (M/s. Spirax Marshall Pvt. Ltd. (SMPL) at a price of Rs. 17.99 with a loss of Rs. 0.11 paise per share. In the computation of income, due to indexation of cost of acquisition, the actual loss claimed was at Rs. 17,34,376/-, which was claimed as long term capital loss to be carried forward as it could not be set off during the year. The AO was of the opinion that the said sale of shares is not a genuine sale and disallowed the loss on the ground that sale is made to related parties to evade tax. Further, he redetermined the sale price of such shares on the basis of (a) book value, (b) price as mentioned at d-mat Bank A/c of ....
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....adopting the value of shares at Rs. 56.03 per share. The assessee is aggrieved on the above. 13. It is the submission of the learned counsel that the AO does not have any powers to substitute the 'fair market value' as against the 'full value of consideration' received by the assessee. He referred to the provisions of section 45, 48 and erstwhile section 52 to submit that the AO has no powers to disturb the 'full value of consideration' while computing the capital gains to substitute for 'fair market value'. He also relied on the Coordinate Bench decision in the case of MGM Shareholders Benefit Trust in ITA No. 316/Mum/2009 dated 26.11.2009 wherein on similar issue of revaluation of sale price ITAT did not approve the action of the AO. He further placed on record the de-mat statement of HDFC bank wherein the price per share was shown at Rs. 10/- to submit that the value adopted and relied by the AO was not correct. 14. The learned D.R., however, relied to the order passed by the AO as they are also in appeal on the same issue and reiterated the facts, methodology adopted by the assessee and the decision in the case of McDowell & Co. to submit t....
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....tain circumstances but it does not empower the AO to substitute the 'fair market value' to 'full value of consideration'. These two words, 'full value of consideration' and 'fair market value ' are differently used in the Income Tax Act and fair market value cannot be substituted in place of full value of consideration, unless it is specifically empowered by the Act. The AO has also wrongly relied on section 2(22B)(i), which is as under: "the fair market value, in relation to a capital assets, means - (i) the price that the capital asset would ordinarily fetch on sale in the open market on the relevant date". This fair market value substitution is applicable only to the situation where the AO is empowered to determine the fair market value under the Act. As far as computation of capital gains on sale of shares are concerned under section 48 it does not empower the AO to substitute the fair market value for the full value of consideration. 16. The Hon'ble Supreme Court in CIT vs. George Henderson and Co. Ltd. (1967) 66 ITR 622 (SC) on the issue that the market value of the shares which were allotted at Rs. 136/- per share was Rs. 620/- per shar....
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....nsideration" and "fair market value of the capital asset transferred" and it is provided that if certain conditions are satisfied as mentioned in the first proviso to section 12B(2), the market value of the asset transferred, though not equivalent to the full value of the consideration for the transfer, may be deemed to be the full value of the consideration. To give rise to this fiction the two conditions of the first proviso are(1) that the transferor was directly or indirectly connected with the transferee , and(2) that the transfer was effected with the object of avoidance or reduction of the liability of the assessee under section 12B. If the conditions of this proviso are not satisfied the main part of section 12B(2) applies and the Income-tax Officer must take into account the full value of the consideration for the transfer." 17. In CIT vs. Gillanders Arbuthnot & Co. (1973) 87 ITR 407 (SC) Their Lordships after applying the principles enunciated in George Henderson and Co. Ltd. supra has observed and held as under ( page 419):- "Now let us see what is the impact of section 12B(2) on the transaction? Under that provision, the amount of capital gains has to be com....
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....ay be deemed to be the full value of the consideration. To give rise to this fiction the two conditions of the first proviso are(1) that the transferor was directly or indirectly connected with the transferee , and(2) that the transfer was effected with the object of avoidance or reduction of the liability of the assessee under section 12B. If the conditions of this proviso are not satisfied the main part of section 12B(2) applies and the Income-tax Officer must take into account the full value of the consideration for the transfer." Applying the principles enunciated in that decision we think that the full value of the sale price received by the assessee was only rupees seventy- five lackhs. That being so, the capital gains made by the company were Rs. 27,04,772 as held by the High Court." 18 In K.P.Varghese vs. ITO (1981) 7 Taxman 13(SC); (1981) 131 ITR 597 (SC) it has been held vide para 15 and 18 as under:- "15. It is, therefore, clear that sub-section (2) cannot be invoked by the revenue unless there is understatement of the consideration in respect of the transfer and the burden of showing that there is such understatement is on the revenue. Once it is es....
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....ceived in respect of the transfer. xxxxxx xxxxxx xxxxxxxx 18. We must, therefore, hold that sub-section (2) of section (2) of section 52 can be invoked only where the consideration for the transfer has been understated by the assessee or, in other words, the consideration actually received by the assessee is more than what is declared or disclosed by him and the burden of proving such understatement or concealment is on the revenue. This burden may be discharged by the revenue by establishing facts and circumstances from which a reasonable inference can be drawn that the assessee has not correctly declared or disclosed the consideration received by him and there is understatement or concealment of consideration in respect of the transfer. Sub-section (2) has no application in case of an honest and bona fide transaction where the consideration received by the assessee has been correctly declared or disclosed by him, and there is no concealment or suppression of the consideration........... " 19. In Rupee Finance & Management (P) Ltd. (2008) 22 SOT 174 (Mum); (2009) 120 ITD 539 (Mum) it has been held in penultimate para of the order that:- "As already he....
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....r these circumstances the difference cannot be brought to tax under the head 'Capital gains'. We fully agree with these findings and the appeals filed by the revenue fail." 20. In view of the principles laid down above, we cannot uphold the orders of the AO and the CIT(A) in redetermining the full value of consideration by adopting the fair market value. Since the provisions of the Act does not provide for substitution of the values and the said provisions for substitution provided under the Act is not applicable to the facts of the case, we cannot approve the action of the AO in revaluing the sale price. Similar view was taken by the Coordinate Bench in the case of MGM Shareholders Benefit Trust (supra) wherein the ITAT ultimately did not approve the substitution of sale price on the facts of that case. The final finding in para 41 is as under:- "41. There is no quarrel on the principle of law laid down in the other decisions relied on by ld. D.R. However, in view of the principles enunciated by the Hon'ble Supreme Court, in the above decisions referred in para 31 to 36 and the Tribunal decision in para 37 of this order we are of the view that the full valu....
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....m capital gains. This issue is related to ground No. 2 in assessee's appeal. For the reasons stated therein, we hold that the AO has no powers to substitute the value other than what the assessee has received as full value of consideration. In view of this the ground raised by the Revenue does not survive. Accordingly the same is rejected. 25. Ground No. 2 pertains to addition of Rs. 13.25 crores on account of forfeiture of shares made by the AO. The issue arises as under:- In the assessment order, the AO has noted that the assessee company had shown that an advance against equity of Rs. 28.75 crores has been settled by making payment of Rs. 15.50 crores and the balance Rs. 13.25 crores has been cancelled and transferred to General Reserve. The AO has noted that the forfeiture of shares would result as Income from other sources under section 56(1) as the entire transaction has been structured in a way so that the company is benefited and also its related parties and all the while by evading taxes. He has further noted that section 56 has a very wide and encompassing scope. It covers every income and has no scope of letting out anything. As such the waiver of loan is....
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....tion by holding as under: - "7.3 I have duly considered the submission of the A.R. and I find that the share application money was a capital receipt when it was received in the initial stage. The share application money was forfeited in order to restructure the capital of the company, then also the nature of the receipt cannot be changed from capital to revenue. It is not correct to say that all sorts of receipt are taxable in the hands of the assessee u/s. 56. Capital receipts are not taxable as Income from Other Sources. Since it is not an income or revenue receipt, section 28(iv) also is not applicable, as only revenue receipt can be taken as income u/s. 28(iv). It is also clear that forfeiture of share application money is not casual or non recurring receipt and hence not taxable u/s. 10(3). Although the share application money was forfeited under the scheme of capital restructuring as provided by the Bombay High Court, the same is capital in nature and not taxable in the hands of the assessee. The A.O. is directed to delete this addition. This ground of appeal is allowed." 28. After considering the rival contentions, we do not see any reason to interfere with the f....