Market value of shares quoted in stock exchange can not be taken as a basis for computing capital gains under Section 48 of the Income Tax Act
ABCAUS Case Law Citation:
ABCAUS 2297 (2018) (04) HC
Important Case Laws Cited/relied upon by the parties
K.P. Verghese versus Income Tax Officer, Ernakullum and Another, [1981] 131 ITR 597 (SC)
Commissioner of Income Tax, Calcutta versus Gillanders Arbuthnot and Company, [1973] 87 ITR 407 (SC)
Commissioner of Income Tax, Madras versus Shivakami Company Private Limited, [1986] 159 ITR 71 (SC)
The petitioner assessee was aggrieved by the order of the Income Tax Appellate Tribunal (ITAT) in taking the market value of the shares quoted at the stock exchange as the basis for computing the capital gains under Section 48 of the Income Tax Act, 1961 (the Act). In other words, the issue raised was whether the Assessing Officer (AO) could have changed the actual sale consideration with the market price.
The Assessing Officer had on the basis of the fair market value had increased the total sale consideration and the appeals filed by the assessee were dismissed by the Commissioner of Income Tax (Appeals).
The Hon’ble High Court observed that section 48 of the Act which deals with computation of income chargeable under the head “capital gains” refers to the full value of consideration received or accruing as a result of transfer of a capital asset. It states that from the full value of consideration received or accruing, deduction would be allowed in respect of expenditure incurred wholly and exclusively in connection with the transfer and cost of acquisition of asset and cost of any improvement thereto.
It was further observed that interpretation of expression “full value of the consideration received or accruing” had come up for consideration before the Hon’ble Supreme Court. In that case the Assessing Officer (AO) had treated the difference per share as income arising from sale of shares treating the market price per share as full value of consideration. The Supreme Court did not agree with the Revenue and held that “full value of the consideration” cannot be construed as the market value but as the price bargained for by the parties to the sale. The ratio was followed in another case by the Supreme Court.
The Hon’ble High Court observed that in the said above decisions of the Supreme Court, the proviso to Section 12B(2) of the Income Tax Act, 1922, which was incorporated as Section 52 of the 1961 Act was not examined. Though section 52 was omitted by Finance Act, 1987, it provided for substituting fair market value (FMV) of the capital asset on the date of the transfer between connected persons where AO had reason to believe that the transfer was effected with the object of avoidance or reduction of the liability of the assessee.
However, the Hon’ble Supreme Court in yet another case while interpreting Section 52 held that an under-statement of consideration in respect of the transfer than what was actually received must be shown. Under-statement of consideration cannot be assumed because the fair market value was higher than the amount received. Higher fair market value by itself cannot be a ground and reason to assume and hold that there was under-statement of consideration. It was held that the section applied to cases where there was actual under-statement, in the sense that the income/consideration paid was in fact higher and more than declared.
Following the above ratio, the Hon’ble Supreme Court in a subsequent decision observed that the section 52 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. Section 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.
The Hon’ble High Court stated thus that the legal ratio propounded by the Supreme Court with reference to then applicable Section 52 of the Act would be against the Revenue even if the said Section was applicable. It was obvious that when Section 52 of the Act 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 fair market value.
Accordingly, the substantial question of law was answered in favour of the assessee and against the Revenue. Decision of the tribunal to this extent was set aside and reversed. It was held that the Tribunal was not correct in holding that the market value of the shares quoted in the stock exchange could be taken as a basis for computing capital gains under Section 48 of the Act.
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