By TIOL News Service

Facts of the case:

For the AY 1998-99:

The assessee is an individual, had filed his return for the relevant AY, which was again revised on 29th June, 1999. In the course of the assessment period, the AO noted that under the head 'long term capital gain', the assessee had disclosed transfer consideration of Rs.5 Crores on sale of one lakh equity shares of NIIT to M/s Glad Investment Pvt. Ltd. on 14th August, 1997. The assessee had claimed deduction u/s 54F on account of having purchased immovable property on 8th August, 1998. However, the AO held that the said shares were sold and transferred to M/s GIPL on 30th September, 1998 i.e., in the subsequent AY 1999-2000. After referring to the term 'transfer' in relation to capital assets, the AO held that income from capital gains from transfer/sale of one lakh equity shares of NIIT would be assessable in the AY 1999-2000. Accordingly, the assessee's claim would be considered in the AY 1999-2000.

For the AY 1999-2000:

The assessee had filed his return for the relevant AY declaring income. During the assessment proceeding, the AO held that the transaction of sale/transfer of shares to M/s GIPL was not on arm's length. The assessee's father and spouse were the directors of M/s GIPL and shares of M/s GIPL were held by the assessee's wife, children, parents. Further, the investment companies were operating from the the assessee's residence. As per the NIIT's records, the transfer of shares in favour of M/s GIPL was made on 30th September, 1998, more than a year after the agreement was signed between the assessee and GIPL. The M/s GIPL paid the transfer consideration by way of 5 lakh 5% non-cumulative preference shares of Rs.100/- each which were issued to the assessee on 25th August, 1997 and were redeemed on 31st July, 1998 for Rs.5 Crores. The AO also found that M/s GIPL had failed to file annual accounts and balance sheets with RoC till the passing of the assessment order. The assessee's explanation for such delay was rejected by the AO. However, the AO held that the assessee had backdated the transaction of transfer of shares as the market price of NIIT shares in September, 1998 were increased. If one lakh NIIT shares were sold at the market price in September, 1998, they would have exceeded the purchase value of the immovable property which was bought by the assessee. During the relevant AY 1999-2000, the assessee had sold 65,552 equity shares of NIIT to M/s GIPL resulting in capital gains of Rs.5,87,09,331/-. Further, as per return for the AY 1998-99, M/s GIPL had a book loss and any profit in future on sale of the transferred NIIT shares would be adjusted against such accumulated book loss.

Notices u/s 131 were issued to NIIT so as to investigate the genuiness of the transaction. The said investigation had revealed that the assessee had lodged 76,000 and 24,000 equity shares which were sold to M/s GIPL on 14th August, 1997 with Deutsche Bank AG on 22nd August, 1997 and 25th September, 1997, respectively. Again, these shares were transferred in the name of the said bank on 28th August, 1997 and 29th September, 1997 respectively. Since, the value of the shares were more than the instruction issued by the RBI, the same were transferred to M/s GIPL by the bank on 30th September, 1998. The AO held that the letter dated 14th August, 1997 was received before 5th May, 1998. In reply to the summons u/s 131, M/s GIPL had accepted that as per the provisions of the Companies Act, 1956, they had not filed Form 2 with the RoC. Accordingly, the AO concluded that non-cumulative preference shares were not allotted and was a sham. Further, the AO observed that the shares were pledged on 20th August, 1997 with Deutsche Bank AG by the assessee as his own property. Accordingly, transfer deeds for shares on 10th September, 1997 and 14th August, 1997, made in favour M/s GIPL were sham documents. Similarly, the AO held that the agreement to sell dated 14th August, 1997 was a pretence and allotment of 5 lakh 5% non-cumulative shares of M/s GIPL were not proven. The AO took the date of sale/transfer for the purpose of capital gains wherein, he observed that the full value of the consideration received by the assessee were not a bona fide transfer. M/s GIPL had financed assessee's foreign trips without any reason hence, there was a possibility that M/s GIPL might have compensated the assessee for shares purchased. Accordingly, the AO computed the value of capital gains and deduction claimed u/s 54F towards purchase of house was allowed and the balance amount was treated as LTCG. On appeals, the assessee was not granted relief by the CIT(A).

the High Court held that,

++ we fail to fathom how the Tribunal had distinguished the decision of K.P. Varghese solely and entirely on the ground that in the present case the transaction was not at arm's length. K.P. Varghese's case holds that sub-sections (1) and (2) relate to transactions, which were not at arm's length between related parties and third parties respectively, but the two provisions were integrally connected inasmuch as they would apply when there was evidence and material to show that the consideration declared and disclosed was under-stated and not the actual consideration received by the assessee. Only when the said pre-condition was satisfied, the AO was entitled to treat the FMV as the full value of consideration. Difference between the consideration actually received and market value of consideration by itself would not justify invoking the said Section. The said ratio has been followed by the Supreme Court in the case of CIT vs. Shivakami Company Private Limited, which observes that the provision would apply only when there was consideration and which consideration actually received was more than the consideration disclosed or declared. Further, onus was on the Revenue to prove under-statement of the said consideration. Sec. 52 was not meant to apply to tax capital gains on the basis that the assessee might have gained or could have gained a higher price which in fact was not received;

++ Sec. 52 was omitted by Finance Act, 1987 w.e.f. 1st April, 1988. The said provision, therefore, was not applicable in the AY 1999-2000. We have referred to the said judgment in K.P. Verghese as this judgment was referred to and distinguished by the Tribunal in the disputed order. We have also referred to K.P. Verghese to elucidate that the legal ratio propounded with reference to then applicable Sec. 52 would be against the Revenue even if the said Section was applicable. It is obvious that when Sec. 52 itself was not applicable, the AO could not have substituted the actual sale consideration received by the Assessee with another figure stating that this was the FMV. The said discussion would also take care of the argument that M/s GIPL had paid for foreign travel of the assessee. The fact that M/s GIPL had incurred any such expenditure would not be a ground and reason to substitute the actual consideration received with the figure relying upon the market quotation of the share as the FMV;

++ the difference between the FMV and the actual consideration declared could have been taxed as gift under the Gift Tax Act, 1958 which was applicable till 1st August, 1998. However, for some reason which Revenue is unable to explain, provisions of the Gift Tax Act, 1958 were not invoked and applied. Thus, what was apparent and simple to adopt and tax the under-statement of FMV, was strangely ignored and allowed to lapse. Addition was made, indirectly invoking Sec. 52, which provision was not in the Statute, and which provision as per Judicial pronouncement in K. P. Vergese could not have been invoked;

++ the assessee had acquired non-cumulative preference shares on transfer of 100000 equity shares of NIIT. This is not in debate or doubt. This is not the case of the Revenue that the market value of the non-cumulative preference equity shares were issued by M/s GIPL were of a higher value. Non-cumulative preference shares did not have right of conversion. Non-cumulative preference equity shares were redeemed at par during the relevant period and payment of Rs. 5,00,00,000/- was received. Accordingly, the substantial question of law in ITA No. 405/2005 is answered in favour of the assessee and against the Revenue. Decision of the Tribunal to this extent is set aside and reversed. Tribunal was not correct in holding that the market value of the shares quoted in the stock exchange on 5th May, 1998 can be taken as a basis for computing capital gains u/s 48.

(See 2018-TIOL-772-HC-DEL-IT)