Section 50C of the IT Act does not apply to transfer of immovable property held through company

CLR Editorial Notes: The case refers to an assessee holding shares of a company which in turn owned flats in Mumbai. The shares of the company were sold by the assessee and capital gains were assessed on the same. The Assessing Office & Commissioner IT (Appeals) held that by due to the sale of shares in the company, the assessee had effectively transferred the immovable property belonging to them and hence it was an indirect way of actually transferring the immovable properties which were in the form of flats owned in the said building. This thus ˜pierced the corporate veil˜, and thus invokes section 50C. The AO computed the capital gains using the stamp duty value provided on the flats. The assessee appealed to the Tribunal, which HELD that the Section 50C applies only to the transfer of a capital asset, being land or building or both, assessed by any authority of a State Government for stamp duty purposes. The expression transfer has to be a direct transfer as defined u/s 2(47) which does not include the tax planning adopted by the assessee. ITAT disposed the case in favour of the appellant stating the said section 50C does not apply to this case.

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IN THE INCOME TAX APPELLATE TRIBUNAL

MUMBAI BENCH ˜I™, MUMBAI

BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER AND

SHRI D. KARUNAKARA RAO, ACCOUNTANT MEMBER

	I.T.A. NO.8831/M/2011 (AY: 2007-2008)
	I.T.A. NO.8832/M/2011 (AY: 2008-2009)
	Shri Irfan Abdul Kader Fazlani,		Vs.		ACIT, Central Circle-44,
	21 A Nirmal, Nariman Point,				6th Floor, Aayakar Bhavan,
	Mumbai 400 021.				Mumbai 400 020.
	PAN: AAAP18703Q
	(Appellant)				(Respondent)
	I.T.A. NO.8835/M/2011 (AY: 2007-2008)
	I.T.A. NO.8836/M/2011 (AY: 2008-2009)
	Shri Iqbal Abdul Kader Fazlani,		Vs.		ACIT, Central Circle-44,
	21A, Nirmal Nariman Point,				6th Floor, Aayakar Bhavan,
	Mumbai 400 021.				Mumbai 400 020.
	PAN: AAP18704K
	(Appellant)				(Respondent)
	I.T.A. NO.8850/M/2011 (AY: 2008-2009)
	I.T.A. NO.8851/M/2011 (AY: 2007-2008)
	Shri Imran Yunus Fazlani,		Vs.		ACIT, Central Circle-44,
	21 A Nirmal, Nariman Point,				6th Floor, Aayakar Bhavan,
	Mumbai 400 021.				Mumbai 400 020.
	PAN: AAAP18703Q
	(Appellant)				(Respondent)
	Appellant by			:		Shri K. Shivaram & Paras S. Savla
	Respondent by			:		Shri P.K. Shukla, CIT-DR
Date of Hearing: 19.12.12					Date of order:		02.1.2013
		O R D E R
Per BENCH:

There are six appeals under consideration involving three assessees namely Shri Irfan Abdul Kader Fazlani, Iqbal Abdhul Kader Fazlani and Shri Imran Yunus Fazlani. Considering the commonness in the grounds raised in all the appeals of the assessees, they are being clubbed and adjudicated in this composite order. For the sake of convenience, we shall take up ITA No.8831/M/2011 filed by Irfan Abdul

Kader Fazlani is against the order of CIT (A)-38, Mumbai dated 14.09.2011 for the AY 2007-2008 and the grounds raised in this appeal are reproduced as under:

1. On the facts and circumstances of the case and in law the Ld CIT (A)erred in confirming invocation of the provisions of section 50C of the Income Tax Act, 1961 even though the document for sale of shares of M/s. Kamala Mansion P. Ltd. was not required to be registered with stamp authorities and in determining the sale value at Rs. 4,12,16,5000/- against agreement value of Rs. 3,46,71,609/- while working out the capital gain on sale of shares of M/s. Kamala Mansion P. Ltd. The purchasers of the shares of the company are not relatives of the Directors / Shareholders of the company nor they have any business relationship with the Directors / Shareholders or any associates thereof.

2. On the facts and circumstances of the case and in law the Ld CIT (A) erred in confirming addition of Rs. 55,28,500/- to the sale consideration being separate payment to the company for repayment of loan taken by the company for purchase of property.

3. Without prejudice on the facts and circumstances of the case and in law the Ld CIT (A) erred in not considering the ground of the appellant to substitute indexed cost of the immovable property while computing capital gains on sale of immovable property.

4. Each of the above grounds of the appeal is without prejudice to one another.

2. There are two core issues raised in the grounds for our consideration and they are: if the provisions of section 50C of the Income Tax Act, 1961 apply to the fact of this case and secondly, if the ˜sale consideration™ includes the amounts infused into the company™s accounts for discharging the liabilities of the company qua its directors.

3. Briefly stated the relevant facts of the case are that the assessee is a shareholder in M/s. Kamala Mansion Pvt. Ltd (KMPL). Along with other shareholders of this company, the assessee sold his shares to Mrs. Rekha Gunwant Ashok Shah and M/s. Suraj Limited for a consideration. The transferors are also to infuse a sum of Rs. 55,28,500/- into the company for the purpose of clearing the company™s loans to its directors. M/s. KMPL owns two flats ie 1901B and 2001B in a building known as Om Vikas Apartments situated at Walkeshwar Road, Mumbai-26 and the said flats are regularly given on rent and the rent is declared by the assessee as ˜income from the house property™. Otherwise, M/s. KMPL issued 3813 shares and assessee owns 306   shares out of them. Assessee sold these shares for a sum of Rs. 37,51,369/-and earned the long term capital gains and relevant computation is as under:

	Sale value of306 sharesof Kamala Mansion
	Pvt. Ltd.							Rs.27,82,458/-
		Less:	Indexed cost of shares
			Purchase cost (1986-87)¦¦				30,500/-
			Cost Inflation index for the
			Year of purchase¦¦¦¦¦¦				140/-
			Sale ie 2006-07				519/-
	Indexed cost of the shares sold¦¦¦¦¦¦¦.							Rs. 1,13,238/-
	Taxable long term capital gain on sale of shares.							Rs. 26,69,220/-
4.	AO	rejected	the	above	computation	and	assessment	was	completed

determining the sale consideration at Rs.4,67,45,000/- as per computation given

here under:
Considering the sale as sale of property as discussed above
and applying the Provisions of Sec. 50C for the same ¦¦¦		Rs. 4,12,16,500/-
Add: Additional payment received from the purchaser
Reckoned as additional consideration in view of the above
Discussion	¦¦..	Rs.	55,28,500/-
Total Sale consideration	¦¦	Rs. 4,67,45,000/-

4.1. Rs. 4,12,16,500/- refers to the sale consideration of the immovable property and invoking the provisions of section 50C of the Act. Further, the sum of Rs. 55,28,500/- refers to an amount paid by the transferor for clearing the liabilities of the company vis-à-vis the Directors. Proportionately, the sale consideration for assessee™s share of 306 shares works out to Rs. 37,51,369/-. AO adopted the same for arriving at the capital gains of Rs.36,38,131/- in place of Rs 27,82,458/-returned by the assessee. The long term capital gains arrived at by the assessee on account of all these transfer of shares works out to Rs. 36,38,131/-. Brief computation is as under:

The capital gains would be worked out as follows:
Sale consideration apportioned to the assessee as
Discussed above	¦.	Rs. 37,51,369/-
Less: Indexed cost of the cost of acquisition
of the property, as discussed above	¦	Rs. 1,13,238/-
Taxable capital gain	¦.	Rs.36,38,131/-

5. Finally, AO concluded that by engineering the sale of the shares of all other shareholders of the company ie M/s. KMPL, the assessee effectively transferred the property belonging to the assessee, therefore, it is an indirect way of transferring the immovable properties ie flats no 1901B and 2001B, for lesser consideration and, therefore, the provisions of section 50C of the Act have application to the facts of the case and consequently, AO applied the guidelines prices of the flats and worked out the capital gains. Further, AO treated this case as an eligible case for piercing of corporate veil.

6. During the first appellate proceedings ie CIT (A), assessee reiterated the submissions that this is a case of transfer of shares in a company and not the case of transfer of the flats as alleged by the AO. It was submitted that there is no occasion for registering the transfer of the shares before the State Registration Authorities envisaged in section 50C of the Act. Referring to the provisions of said section 50C of the Act, assessee submitted that the shares are not registered at the time of transfer in view of the d-mat procedures by the Stamp Duty Authorities of the State Government and the capital asset-share transferred is by no means constitute part of the land or building or the both, and therefore, the provisions of section 50C have no application. Regarding the additional consideration by way of discharging of the liabilities of the Directors, assessee mentioned that the transferees introduced funds into the company and the company repaid its liabilities vis-à-vis the directors and therefore, it is the case of the appropriation of the funds of the company. After hearing the contention of the assessee, CIT (A) rejected the same and proceeded to confirm the addition made by the AO on both the accounts ie invoking the provisions of section 50C as well as additional consideration given by the transferee for clearing the loans of the Directors. CIT (A) confirmed the view of the AO that this is a case of transfer of immovable property though the shares were capital assets transferred. CIT (A) is of the opinion that the facts indicate that what is apparent is not real and this is a case of transfer of piece of real estate in order to circumvent section 50C of the Act and the applicability of registration laws etc and he is of the opinion that this is a fit case for lifting of the corporate veil. On the issue of additional consideration, the CIT (A) is of the opinion that since the assessee failed to bring any material to support the contention as to how the part of the consideration is received from the transferor as to exclude from the overall in the context of the present arrangement of additions on account of additional consideration is sustainable.

7. Before us, Dr. Shivaram, Ld Counsel for the assessee narrated the facts of the case and argued stating that the provisions of section 50C has no application to the facts of this case. As per Ld Counsel, the capital assets transferred here are the shares of the company and not the land or building or the both. Provisions of section 50C are the deemed provisions and the meaning of the same cannot be extended as the deemed provision has to be strictly interpreted as held in a judgment in the case of Commissioner of Income-tax Vs Shrishakti Trading Co. (Bom) reported in 207 ITR 442. Ld Counsel filed written submissions narrating the legal submissions mentioning that the expression full value consideration received or accruing as a result of the transfer as fully explained by various decision which are as follows.

1.  CIT vs. George Henderson & Co. Ltd (1967) 66 ITR 622 (SC)

2.  CIT vs. Gillanders Arbuthnot & Co (1973) 87 ITR 407 (SC)

3.  Rupee Finance & Management P.Ltd. vs. ACIT (2009)120 ITD 539 (Mum) ITAT -Affirmed by Bombay High Court ITA No.1208 dated 20.10.2008. Vishal P. Mehata vs. DCIT ITA No. 3586/Mum/2009, dated 26.10.2010 (AY 2007-2008)

8.  Further, as per Ld Counsel, the provisions of section 50C are not applicable as the agreement is for the sale of shares which are to be registered to the Stamp Duty Authorities and placed reliance on the following decisions.

1. Carlton Hotels P. Ltd. vs. ACIT (2009) 122 TTJ 475 (Luck)
2. Ran Mal Bhansali vs. ACIT (2012) 143 TTJ (Jd) (UO) 65
3. Navneet Kumar Thakkar vs. ITO (2008) 298 ITR 42 (AT) (JP)
4. Smt. Vijay Laxmi Bhadhha vs.ITO (2009) 20 DTR (JP) (Tri) 365

9. The expression assessable is substituted in section 50C of the Act to enable the AO to adopt the same valuation even though agreement for sale of immovable property is not registered and no stamp duty is adjudicated. The Finance (No.2) Act, 2009 w.e.f 1.10.2009 was relied in this regard. Regarding additional consideration issue, Ld Counsel mentioned that the same is illegal as the market value becomes lesser if full value consideration also includes the additional consideration which is against the provisions of section 50C. Further, referring to the lifting of corporate veil as mentioned by the Revenue Authorities, Ld Counsel submitted the following arguments.

(i) KMPL is a separate legal entity distinct from its shareholders.

(ii) As per Supreme Court in Vodafone International Holding BV vs. UOI (2012) 341 ITR 1 (SC) for corporate veil to be lifted revenue has to look at the transaction as a whole and not adopt a dissecting approach (para 68 page 37)

(iii) In the facts of the present case, considering various circumstances as under, corporate veil has been wrongly lifted.

a.    KMPL was incorporated 38 years back

b.    Property was purchased approximately 20 years back and after several years of incorporation.

c.    Rental income from property was taxed in the hands of KMPL.

d.    From the above fact of holding shares in company for such a  long period it is clear that company as not incorporated as a  colourable device or a subterfuge with the sole motive to acquire property for its sale under the garb of sale of shares. The property was exploited by KMPL for several years. 

e.    Share purchase agreement is not found non genuine.

 f.     Purchasers are not related party.

g.    Shares are valued as per NAV method and immovable property is valued as per registered values report.

h.    Immovable asset continue to be in the name of KMPL

 10. On the other hand, Ld DR for the Revenue relied on both the orders of the AO and CIT (A) and argued stating that this is a case of tax evasion and there is a need for piercing of corporate veil which rightly done by the AO. Ld CIT-DR is of the view that the order of the CIT (A) should be confirmed.

11.         We have heard both the parties, perused the order of the Revenue and the material available before us. There is no dispute on the facts and therefore, the dispute relates to the applicability of provisions of section 50C of the Act. For examining the validity of the applicability of the said provisions, we proceed to examine relevant provisions and the provisions of section 50C of the Act read as follows.

Section 50C. (1) Where the consideration received or accruing as a resultof the transfer by an assessee of a capital asset, being land or building or both, is less than the value adopted or assessed [or assessable] by any authority of a State Government (hereafter in this section referred to as the “stamp valuation authority”) for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed [or assessable] shall, for the purposes of section 48, be deemed to be the full value of the consideration received or accruing as a result of such transfer¦¦

12.    Prima facie, the above section refers to the expressions ie capital asset, being land or building or both, assessed (assessable does not apply to the AY in question), capital asset, being land or building or both, deemed to be the full value of the consideration etc. The above sub-section provides for meaning of thefull value of the consideration (FVC) and it is a deemed definition. Accordingly, when the assessee transfers a capital asset being land or building or both, for a consideration lesser than the value adopted, assessed by any authority of a State Government, the value so adopted or assessed shall be deemed to the ˜full value consideration™ for the purpose of computing capital gains u/s 48 of the Act. The expression assessable has inserted into the statute for perspective application w.e.f 1.10.2009 whereas the assessment year under consideration is 2007-08 and 2008-09. The capital assets that are covered under the provisions are land or building or both. Expression transfer shall have to be a direct transfer as defined u/s 2(47) of the Act which does not include the tax planning adopted by the assessee. It is settled issue that the provisions of section 50C are deemed provisions and, therefore, the same have to be interpreted strictly in accordance with the spirit of the provisions. In the light of the above legal interpretation of section 50C of the Act, we need to examine the facts of the present case. In the instant case, what transferred by the assessee are the shares in the company and not the land or building or both. Assessee does not have full ownership on the flats which are owned by the company. The transfer of shares was never a part of the assessment of the Stamp duty Authorities of the State Government. The company was deriving income, taxable under the head ˜income from property™ for more than a decade. The expression assessable is inserted in section 50C (1) of the Act is not relevant for the impugned assessment years. In such circumstances, the AO™s decision to invoke the provisions of section 50C to the tax planning adopted by the assessee is not proper and it does not have the sanction of the provisions of IT Act.

The provisions of section 50C are deemed provisions which are required to be strictly interpreted, it is not covered by the expressions of the present case. Therefore, we are of the opinion that order of the CIT (A) is required to be reversed with a direction to the AO to allow the claim of the assessee. Accordingly, ground no.1 raised by the assessee is allowed.

13. Ground no.2 relates to the additional consideration of money of Rs 55,28,500/- paid by the transferees to the company, who utilized the same for repayment of loans of the company to its Directors. On finding that the transferees paid the said amount to the company in the context of the transfer of shares and the beneficiaries are the Directors of the company, AO made an addition of Rs 55,28,500/- at the time of computation of the chargeable capital gains. But AO ignored the basic fact that the transaction of payment of Rs 55,28,500/- took place between the transferee and the assessee-company and the assessee only received his dues from the company. The dues received by the assessee cannot be equated with the additional sale consideration. Ld DR relied on the orders of the Revenue.

14.         We have heard the parties and perused the orders of the Revenue and the papers filed before us. The entries in the books of accounts vividly suggests that the transferees infused the money in the accounts of the company and the company repaid the liabilities of the Directors and it is not the case of the transferees paying additional consideration directly to the transferors of the shares ie capital assets. Therefore, considering the book entries placed before us, the allegations of the AO do not have sustainable strength. Therefore, Income tax Authorities have fallen into error zone in deeming the loan repayments as an additional sale consideration. We agree with the arguments of Ld Counsel. Accordingly, ground no.2 raised by the assessee is allowed.

15.         Ground no.3 relates to indexation of the cost of the value of property while computing the capital gains on sale of immovable property. This ground is raised without prejudice to the issue discussed on ground no.1. From the above, it is evident that we have decided this issue in favour of the assessee on the ground of inapplicability of provisions of section 50C of the Act. Therefore, the adjudication of this ground no.3 becomes academic and the same is therefore dismissed as academic.

16.    In the result, appeal of the assessee is partly allowed.

I.T.A. NO.8832/M/2011 (AY: 2008-2009)

17.         This appeal filed by the assessee named Shri Irfan Abdul Kader Fazlani is against the order of CIT (A)-38, dated 14.9.2011 for the assessment year 2008-2009. Grounds raised in this appeal revolve around the issue of applicability of provisions of section 50C of the Act to the full value consideration received by the assessee on transfer of shares of other company named M/s Blue Diamond Realtors P. Ltd and also on the issue of taxation of additional consideration of Rs. 94,08,637/.Of course, there are other issues relating to indexation and also deeming long term capital gains as short term capital gains. In principle, the issues raised in this appeal are identical to the ones adjudicated by us vide ITA NO.8831/M/2011. In said decision above, we have held that the provisions of section 50C will not apply to the sale of the shares transferred by the assessee on the ground that provisions of section 50C deals with transfer of land or building or both and therefore, the said provisions have no application to the facts of the instant case as the said provisions, being deemed provisions have to be interpreted strictly. We have also held that it is not a fit case for lifting of corporate veil. Considering the commonness of the facts, the above said decisions apply to the appeal under consideration too. Accordingly, grounds raised by the assessee in this appeal are partly allowed.

18.         In the result, appeal of the assessee is partly allowed.

I.T.A. NO.8835/M/2011 (AY: 2007-2008)

19. This appeal filed by the assessee named Shri Iqbal Abdul Kader Fazlani is against the order of CIT (A)-38, dated 14.9.2011 for the AY 2007-2008. Grounds raised in this appeal revolve around the issue of applicability of provisions of section 50C of the Act to the full value consideration received by the assessee on transfer of shares of other company named M/s Kamala Mansion P. Ltd., and also on the issue of taxation of additional consideration of Rs. 55,28,500/-. Of course, there are other issues relating to indexation and also deeming long term capital gains as short term capital gains. In principle, the issues raised in this appeal are identical to the ones adjudicated by us vide ITA NO.8831/M/2011. In said decision above, we have held that the provisions of section 50C will not apply to the sale of the shares transferred by the assessee on the ground that provisions of section 50C deals with transfer of land or building or both and therefore, the said provisions have no application to the facts of the instant case as the said provisions, being deemed provisions have to be interpreted strictly. We have also held that it is not a fit case for lifting of corporate veil. Considering the commonness of the facts, the above said decisions apply to the appeal under consideration too. Accordingly, grounds raised by the assessee in this appeal are partly allowed.

20.    In the result, appeal of the assessee is partly allowed.

I.T.A. NO.8836/M/2011 (AY: 2008-2009)

21. This appeal filed by the assessee named Shri Iqbal Abdul Kader Fazlani is against the order of CIT (A)-38, dated 14.9.2011 for the assessment year 2008-2009. Grounds raised in this appeal revolve around the issue of applicability of provisions of section 50C of the Act to the full value consideration received by the assessee on transfer of shares of other company named M/s Blue Diamond RealtorsP. Ltd., and also on the issue of taxation of additional consideration of Rs.94,08,637/-. Of course, there are other issues relating to indexation and also deeming long term capital gains as short term capital gains. In principle, the issues raised in this appeal are identical to the ones adjudicated by us vide ITA NO.8831/M/2011. In said decision above, we have held that the provisions of section 50C will not apply to the sale of the shares transferred by the assessee on the ground that provisions of section 50C deals with transfer of land or building or both and therefore, the said provisions have no application to the facts of the instant case as the said provisions, being deemed provisions have to be interpreted strictly. We have also held that it is not a fit case for lifting of corporate veil. Considering the commonness of the facts, the above said decisions apply to the appeal under consideration too. Accordingly, grounds raised by the assessee in this appeal are partly allowed.

22.    In the result, appeal of the assessee is partly allowed.

I.T.A. NO.8850/M/2011 (AY: 2008-2009)

23.         This appeal filed by the assessee named Shri Imran Yunus Fazlani is against the order of CIT (A)-38, dated 16.9.2011 for the assessment year 2008-2009. Grounds raised in this appeal revolve around the issue of applicability of provisions of section 50C of the Act to the full value consideration received by the assessee on transfer of shares of other company named M/s Blue Diamond RealtorsP. Ltd., and also on the issue of taxation of additional consideration of Rs.94,08,637/-. Of course, there are other issues relating to indexation and also deeming long term capital gains as short term capital gains. In principle, the issues raised in this appeal are identical to the ones adjudicated by us vide ITA NO.8831/M/2011. In said decision above, we have held that the provisions of section 50C will not apply to the sale of the shares transferred by the assessee on the ground that provisions of section 50C deals with transfer of land or building or both and therefore, the said provisions have no application to the facts of the instant case as the said provisions, being deemed provisions have to be interpreted strictly. We have also held that it is not a fit case for lifting of corporate veil. Considering the commonness of the facts, the above said decisions apply to the appeal under consideration too. Accordingly, grounds raised by the assessee in this appeal are partly allowed.

24.         In the result, appeal of the assessee is partly allowed.

I.T.A. NO.8851/M/2011 (AY: 2007-2008)

25.         This appeal filed by the assessee named Shri Imran Yunus Fazlani is against the order of CIT (A)-38, dated 16.9.2011 for the assessment year 2007-2008. Grounds raised in this appeal revolve around the issue of applicability of provisions of section 50C of the Act to the full value consideration received by the assessee on transfer of shares of other company named M/s Kamala Mansions P.Ltd., and also on the issue of taxation of additional consideration of Rs. 55,28,500/-.Of course, there are other issues relating to indexation and also deeming long term capital gains as short term capital gains. In principle, the issues raised in this appeal are identical to the ones adjudicated by us vide ITA NO.8831/M/2011. In said decision above, we have held that the provisions of section 50C will not apply to the sale of the shares transferred by the assessee on the ground that provisions of section 50C deals with transfer of land or building or both and therefore, the said provisions have no application to the facts of the instant case as the said provisions, being deemed provisions have to be interpreted strictly. We have also held that it is not a fit case for lifting of corporate veil. Considering the commonness of the facts, the above said decisions apply to the appeal under consideration too. Accordingly, grounds raised by the assessee in this appeal are partly allowed.

26.         In the result, appeal of the assessee is partly allowed Order pronounced in the open court on this 2^nd  day of January, 2013.

	Sd/-	Sd/-
(I.P. BANSAL)		(D. KARUNAKARA RAO)
JUDICIAL MEMBER		ACCOUNTANT MEMBER
Date :  2.1.2013
At :Mumbai

Copy To:

1. The Appellant.
2. The Respondent.
3. The CIT (A), Concerned.
4. The CIT concerned.
5. The DR I, Bench, ITAT, Mumbai.
6. Guard File.

By Order

Assistant Registrar

ITAT, Mumbai Benches, Mumbai