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Income Tax Appellate Tribunal, ‘G‘ BENCH
Before: SHRI B.R. BASKARAN & SHRI RAHUL CHAUDHARY
आदेश / O R D E R PER B.R. BASKARAN (A.M):
The Revenue has filed this appeal challenging the order dated 27/03/2015 passed by ld. CIT(A)-17, Mumbai and it relates to A.Y.2010- 11. The Revenue is aggrieved by the decision of the ld. CIT(A) in granting relief to the assessee on the following two issues:-
M/s. Zoetis India Ltd. (Earlier known as M/s. Pfizer Animal Health India Ltd.) (a) Addition made u/s.50C of the Act in respect of transfer of leasehold rights in land and building (b) Addition to long term capital gain by adopting sale consideration under NAV method as against DCF method adopted by the assessee. 2. The facts relating to the case are stated in brief. The assessee company is engaged in the business of manufacturing and trading of animal healthcare products.
The first issue relates to addition made by AO u/s. 50C of the Act. The AO noticed that the assessee had purchased leasehold rights in a property located in Plot No. B-37 and B-38, SIPCOT Industrial Park at Irungattukottai, Tamil Nadu having an extent of 2.00 acres from M/s. Alved Pharma & Food Pvt. Ltd. on 31/03/2009 at a cost of Rs.33.36 lakhs. Subsequently, on 01/04/2009, the assessee company transferred the above said leasehold rights to RCPL Ltd. for the very same consideration of Rs.33.36 lakhs as per Modified Lease Deed dated 24/04/2009. Thus, the assessee did not make any gain or loss in these transactions. The AO, however, noticed that the value determined for stamp duty purposes for the above said leasehold rights was shown as Rs.60 lakhs in the lease deed. He accordingly, assessed difference of Rs.27.36 lakhs as capital gain by invoking the provisions of Section 50C of the Act. The ld. CIT(A) deleted the same and hence, the Revenue has filed this appeal.
We notice that the AO has invoked the provisions of sec.50C for taking the sale consideration at Rs.60.00 lakhs. The asset that has been transferred by the assessee is leasehold right in land and building. The Hon‟ble Jurisdictional Bombay High Court in the case of M/s. Zoetis India Ltd. (Earlier known as M/s. Pfizer Animal Health India Ltd.) CIT vs. Greenfield Hotels and Estates Pvt. Ltd. (2016) 389 ITR 68 has held that the provisions of Section 50C will not be applicable while computing capital gains on transfer of leasehold rights in land and building. In the instant case, the capital gain of Rs.27.36 lakhs has arisen only on account of adopting of stamp duty value in terms of Section 50C of the Act. Since, Section 50C of the Act is held to be not applicable on transfer of leasehold rights, the decision renderd by ld. CIT(A) gets support from the binding decision rendered by Hon‟ble Bombay High Court. Accordingly, the AO was not justified in invoking provisions of Section 50C for determining capital gain arising on transfer of lease hold rights in land and building. Accordingly, we do not find any reason to interfere with the decision of Ld CIT(A) rendered on this issue.
The next issue relates to determination of capital gain by substituting the value of sale consideration by adopting NAV method. The facts relating to the same are stated in brief. M/s. RFCL Ltd is a company incorporated under the Companies Act and it had a Vetnex division which dealt in animal healthcare products. The said division was demerged and transferred to the assessee. On account of the same, the various assets were obtained by the assessee, which also included 180 shares of an overseas company named RCFL B.V, Netherlands. In the demerger process, the above said shares were transferred to the assessee at a book value of Rs.19.92 Crores.
Subsequently, another company M/s. Pfizer Pharmaceuticals India Pvt. Ltd. was desired of taking over Indian operations of the assessee. One of the conditions put in that connection was that the assessee should dispose of its overseas investment held in foreign companies.
M/s. Zoetis India Ltd. (Earlier known as M/s. Pfizer Animal Health India Ltd.) Accordingly, vide Share Purchase Agreement dated 16/11/2009, the assessee transferred 180 shares of RCFL B.V, Netherlands to RCFL Limited for a consideration of Rs.11.65 Crores, which resulted in a loss of Rs.12.99 crores. Accordingly, the assessee declared capital loss of Rs.12.99 Crores.
During the course of assessment proceedings, the AO noticed that the assessee has followed Discounted Cash Flow (DCF) for determining the sale consideration of 11.65 crores. The AO took the view that the DCF methodology suffers from certain infirmities. He also expressed the view that it may be a colourable device adopted by the assessee to show more loss. He further took the view that the Net Asset Value (NAV) method is an appropriate method. Accordingly, the AO computed the fair value of share of RCFL B V Netherlands under NAV method at Rs.19.37 crores. Accordingly, the AO computed the capital loss by substituting the sale consideration of Rs.11.65 crores with Rs.19.37 crores.
The Ld CIT(A) held that the transaction is not colourable device and it is carried out on commercial considerations. He further held that it is not permissible for the AO to change the method of valuation without having any material on record to prove that the method is faulty. He further observed that the sale consideration has been approved by RBI and hence it is imperative for the AO to accept the same. He also observed that there is no material brought on record by the AO to show that the assessee has received more than the stated amount of sale consideration. Accordingly, the Ld CIT(A) held that the valuation adopted by the assessee cannot be discarded on conjectures and surmises. The Ld CIT(A) noticed that the AO has M/s. Zoetis India Ltd. (Earlier known as M/s. Pfizer Animal Health India Ltd.) computed value of shares under NAV method by adopting book value of assets on standalone basis. He took the view that the share value has to be computed on consolidated basis and accordingly computed the value of shares, which worked out to Rs.8.49 crores. Accordingly, the Ld CIT(A) held that on merits also, there is no requirement to disbelieve the sale consideration disclosed by the assessee.
We heard the parties on this issue and perused the record. We notice that the assessee has raised certain legal contentions before Ld CIT(A) and also before us. The said legal contentions as given in the written submissions are extracted below:-
“3.14. Without prejudice to the above, the assessee submits that the actual consideration received on sale of shares cannot be substituted with a notional consideration:
3.14.1 Section 45 of the Act is the charging section for capital gains arising on transfer of capital assets. Section 48 of the Act provides for the mode of computation of capital gains, as per which, the cost of acquisition (or indexed cost, as the case may be) and the expenditure incurred wholly and exclusively in connection with the transfer of a capital asset are deducted from the full value of the consideration received or accruing as a result of the transfer, to arrive at the amount chargeable under the head „capital gains‟. Relevant extract of section 48 of the Act is reproduced hereunder:-
“Mode of computation. 48. The income chargeable under the head "Capital gains" shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely: (emphasis supplied)
3.14.2 It is submitted that the expression "full value of consideration" has to be construed as the actual consideration received or accruing as a result of the M/s. Zoetis India Ltd. (Earlier known as M/s. Pfizer Animal Health India Ltd.) transfer of the capital asset. In the present case, the AO has not disputed the amount of sale consideration received by the appellant. There is no allegation whatsoever that the appellant had received or had accrued more than the stated amount of sales consideration. Further, the Reserve Bank of India has approved the said transaction after taking into consideration the relevant transactional documents, including the impugned valuation report dated 22/07/2009 issued by Deloitte Huskins & Sells. Still, the L AO has substituted the actual consideration with notional consideration calculated purportedly on the basis of the NAV method, which is in violation of the provisions of section 48 of the Act and therefore, the action of the Ld. AO is bad in law. Kind reference to the RBI's approval is drawn to page 185 of the paperbook.
3.14.3 Further it is a well settled position in law that the AO cannot subject to tax any notional income unless there are specific provisions in relation thereto, allowing the substitution of the actual consideration with notional consideration 3.14.4 There are specific deeming provisions in the Act which, in certain circumstances, permit the AO to substitute a notional amount of sale consideration instead of the actual consideration while computing capital gains. For instance, section 50C of the Act provides for adoption of stamp duty value of the capital asset being land or building or both in place of the actual sales consideration, if the stamp duty value is higher than the actual consideration. Similarly, section 45(2), 45(3), 45(4) of the Act provides for adopting fair market value instead of the actual consideration in certain specified scenarios, for the purpose of computing capital gains.
3.14.5 However, at the relevant point of time, there was no provision in the Act to substitute the full value of consideration on sale of shares with any notional consideration or the fair market value. In fact, section 5OCA of the Act, which deals with substitution of the actual consideration on sale of unquoted shares with the fair market value of such share, was inserted vide the Finance Act, 2017 and was specifically made applicable with effect from April 2018 for the assessment year 2018-19 and onwards.
M/s. Zoetis India Ltd. (Earlier known as M/s. Pfizer Animal Health India Ltd.) 3.14.6 In this regard, attention is invited to the Memorandum to the Finance Act, 2017, which also acknowledges that prior to the insertion of section 50CA, capital gain was computed by taking into account the amount of full value of consideration received or accrued on transfer of a capital asset Relevant extract from the Memorandum is reproduced hereunder:-
"Fair Market Value to be full value of consideration in certain cases Under the existing provisions of the Act, income chargeable under the head "Capital gains" is computed by taking into account the amount of full value of consideration received or accrued on transfer of a capital asset. In order to ensure that the full value of consideration is not understated, the Act also contained provisions for deeming of full value of consideration in certain cases such as deeming of stamp duty value as full value of consideration for transfer of immovable property in certain cases. In order to rationalise the provisions relating to deeming of full value of consideration for computation of income under the head "capital gains", it is proposed to insert a new section 50CA to provide that where consideration for transfer of share of a company (other than quoted share) is less than the Fair Market Value (FMV) of share determined in accordance with the prescribed manner, the FMV shall be deemed to be the full value of consideration for the purposes of computing income under the head "Capital gains" This amendment will take effect from 1st April, 2018 and will, accordingly, apply in relation to the assessment year 2018-19 and subsequent assessment years (Emphasis supplied)” In support of the above submissions, assessee has relied upon the decision rendered by the co-ordinate bench of Mumbai in the case of Morarjee Textiles Ltd vs. ACIT (ITA No.1979/Mum/2009).
In our view, the addition made by the AO is liable to be deleted on the above said legal contentions. When there is no provision in the Act to substitute Full value of consideration for computing Capital gain during the relevant point of time, then there is no scope for the AO to modify the full value of consideration without bringing any material on record which would compel such modification. Hence, we are of the opinion that the view taken by Ld CIT(A) on this issue does not require interference for the reasons mentioned by him and also on the legal
M/s. Zoetis India Ltd. (Earlier known as M/s. Pfizer Animal Health India Ltd.) propositions discussed above. Accordingly, we uphold the order of Ld CIT(A) on this issue also.
In the result, the appeal filed by the revenue is dismissed.
Order pronounced on 28/12/2022 by way of proper mentioning in the notice board.