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Income Tax Appellate Tribunal, ‘C’ BENCH : BANGALORE
Before: SHRI A.K GARODIA & SMT. BEENA PILLAI
ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal has been filed by assessee against order dated 05/12/2016 passed by Ld. CIT (A)-5, Bangalore for assessment year 2007-08 on following grounds of appeal: “1. The order of the learned Commissioner of Income-tax (Appeals) passed under Section 250 of the Act in so far as it is against the Appellant is opposed to law, weight of evidence, probabilities, facts and circumstances of the Appellant's case.
2. The appellant denies herself liable to be assessed over and above the income returned by her of Rs. 1,96,35,600/- under the facts and circumstances of the case.
3. The learned CIT (A) having held that the provisions of section 50C of the Act is not applicable to the case of the appellant and ought to have deleted the additions made by the learned assessing officer under section 50C of the Act and instead he directed the learned assessing officer to adopt the valuation of the properties made by the DVO vis-á-vis the value of the shares transferred for the purpose of computation of Long Term Capital Gains on the facts and circumstances of the case.
4. The learned CIT(A) failed to appreciate that the reference made by the learned assessing officer to DVO itself is not proper and ought not to have directed the learned assessing officer to adopt the value arrived at by the DVO for the purposes of sale of shares under the facts and circumstances of the case. 5. The CIT (A) failed to appreciate that the reference to the District Valuation Officer with regard to the valuation of the commercial complex is not justified in taw under the facts and circumstances of the case. 6. The lower authorities failed to appreciate that there is transfer of shares held by the Appellant during the impugned assessment year and not capital assets being land or buildings or both as held by the lower authorities on the facts and circumstances of the case. 7. The learned CIT (A) was not justified in alleging that the transfer of shares by the Appellant during the impugned assessment year as a colourable device to avoid tax on the facts and circumstances of the case. 8. Without prejudice the learned CIT (A) failed to appreciate that tax planning is permissible in the eyes of law as held by various Courts in the Country and also by the Hon'ble Apex Court in the case of IJOl Vs. Azadi Bachao Andolan, 263 ITR 706 (SC). 9. The lower authorities were not justified in not giving the benefit of indexation under the facts and circumstances of the case. 10. The appellant denies herself liable to be charged to interest under section 234B and 234C of the Act and further the calculation of interest under section 234B and 234C of the Act is not in accordance with law since the rate, method of calculation, quantum is not discernable from the order of assessment on the facts and circumstance of the case. 11. The Appellant craves leave to add, alter, substitute and delete any or all of the grounds of appeal
urged above.
12. For the above and other grounds to be urged during the hearing of the appeal the Appellant prays that the appeal be allowed in the interest of equity and justice.”
Brief facts of the case are as under:
2. Assessee is an individual and filed return of income on 31/10/2007 declaring total income of Rs.1,96,35,600/-. The return was processed under section 143(1), and subsequently notice under section 143 (2) was issued to assessee. In response to statutory notice, representative of assessee appeared before Ld. AO and filed requisite details. Ld.AO observed that, assessee invested substantial amount of money towards purchase of 4 shops in shopping complex by the name Esteem Arcade, at the intersection of Race Course Road and Kumara Krupa Road Bangalore. It was noted that, said project was completed during previous year relevant to assessment year under consideration, and assessee sold 4 shops owned by her. Assessee declared long- term gain on sale of shares in company M/s Esteam Arcade Pvt.Ltd. Ld.AO observed that shares in the company owned by assessee had specific interest in demarcated shops in Esteem Arcade Building developed by the company. Ld.AO was of the opinion that the sale consideration shown by assessee was much less than the value attracted under section 50C of the Act. Accordingly assessee was called upon to explain liability under section 50C with guidance value adopted by stamp valuation authorities. Assessee in response submitted that the said properties did not attract stamp duty as assessee only sold shares in the company M/s Esteem Arcade Pvt.Ltd.
3. Ld. AO, accordingly worked out capital gain arising from sale of 4 shops at Rs.53,39,040/-as against Rs.11,64,598/-adopted by assessee. The capital gain on sale of 4 shops was worked out pending receipt of DVO report.
4. Aggrieved by addition made by Ld.AO, assessee preferred appeal before Ld. CIT (A).
5. It was submitted that, as appeal was pending before Ld.CIT (A), DVO report was received.
Based on submissions of assessee, Ld.CIT (A) observed as under: “7.2 Section 50C of the Act provides that if the consideration received or accruing is less than the value adopted or assessed or assessable by the stamp valuation authority of the State Government for such transfer then the value so adopted or assessed or assessable shall be deemed to be the full value of consideration and the capital gains will be computed accordingly. The phraseology of section 50C of the Act clearly provides that it would apply only to "a capital asset, being land or building or both". The moot question is as to whether such expression would cover the transfer of a capital asset being leasehold rights in land or building and the shares in a company. There cannot be a dispute to the proposition that the expression land by itself cannot include within its fold leasehold right in land also. So however, every kind of a 'capital asset' is not covered within the scope of section 50C of the Act for the purposes of ascertaining the full value of consideration. In fact, the heading of section itself provides that it is "Special provision for full value of consideration in certain cases". Therefore, there is a significance to the expression "a capital asset, being land or building or both" contained in section 50C of the Act. The significance is that only capital asset being land or building or both are covered within the scope of section 50C of the Act, and not all kinds of capital assets. 7.3 The purpose of introducing section 5OC of the Act was to counter suppression of sale consideration of sale of immovable properties. Before insertion of section 50C of the Act to the statute, there are lot of litigations as to consideration shown in document conveying title and payment of stamp duty. To overcome the litigations, the provision of section 50C of the Act has been inserted to the statute w.e.f. 1.6.2003 wherein it is made mandatory to adopt value u/s 50C of the Act for the purpose of determination of consideration. A proviso to section 50C of the Act has been inserted by the Finance Act, 2016 wet. 1.4.2017 to resolve the genuine and intended hardship, in the case in which the date of agreement to sale is prior to the date of sale and market value of the property as on the date of agreement to sale and date of sale deed is different. 7.4 In the case of Irfan Abdul Kader Fazlani Vs. ACIT the Hon’ble Mumbai Tribunal has held that 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 under section 2(47) of the Act which does not include the tax planning adopted by the assessee. In the instant case, what transferred by the assessee were the shares in the company and not the land or building or both. Assessee did not have full ownership on the flats which were 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 to 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 Assessing Officer's decision to invoke the provisions of section 500 to the tax planning adopted by the assessee was not proper and it did not have the sanction of the provisions of IT Act.”
7. Further Ld.CIT(A), referring to DVO report, came to the conclusion that, real intention of assessee was to adopt a colourable device to avoid tax in guise of transfer of shares. Ld.CIT(A) relied upon decisions of Hon’ble Supreme Court in case of McDowell & Co Ltd vs CTO reported in 154 ITR 148 and Union of India vs Azadi the Bachao Andolan reported in (2003) 132 taxman 373. Ld.CIT (A), thus, based on DVO report upheld capital gains computed in accordance with value adopted by DVO.
Aggrieved by order of Ld.CIT(A), assessee is in appeal before us now. 9. At the outset, Ld.AR submitted that, provisions of section 50C is not applicable to present facts of the case, as, has been held by Ld.CIT(A). He submitted that, Ld.CIT(A), thereafter proceeded to direct Ld.AO to compute capital gains based on value adopted by DVO in the report, which was subsequently made available. It has been submitted that, identical situation arose before Hon’ble Karnataka High Court, in case of Bhoruka Engineering Inds.Ltd vs DCIT reported in (2013) 36 Taxmann.com 82. He submitted that Hon’ble jurisdictional High Court held that, “If the shareholders chooses to transfer the lands and part with the land to purchase of shares, it would be a valid legal transaction in law and merely because they were able to avoid payment of tax, it cannot be said to be a colourable device or a sham transaction or an unreal transaction.” On the contrary, Ld.Sr.DR placed reliance on decision of Hon’ble Allahabad High Court in case of CIT Lucknow vs.Carlton Hotel(P) Ltd., reported in (2017) 88 Taxmann.com 257. She submitted that the ratio in this case is squarely applicable to the present facts of the case. 11. We have perused submissions advanced by both sides in light of records placed before us. Assessee acquired certain shares and placed certain amount of deposits in a company called M/s Esteem Arcade Pvt. Ltd. Assessee was thus entitled to beneficial enjoyment of certain portion of property in the building constructed by said company, to the extent of shares held by her, which was submitted to be in accordance with scheme of the company. Details of units allotted, pursuant to shares held and deposits made by assessee are as under:
Date of Unit Area in No. Of Cost of Deposit Total Agreement Allotted Sqft Shares Shares (Rs.) (Rs.) Cost
S-4 16,56,000 17,94,000 14.11.2003 1,220 1,380 1,38,000 G- 10 13,63,700 18.6.2004 889 1,049 1,04,900 12,58,800 G – 11 14.8.2004 450 450 45,000 5,40,000 5,85,000
G - 4 14,84,400 16,08,100 28.2.2005 1,077 1,237 1,23,700 TOTAL 4,116 4,11,600 49,39,200 53,50,800
It is to be noted that, land on which company constructed building, was leasehold land and not a freehold land. In the lease agreement it is also been agreed that company would be constructing superstructure and the same would be utilised in accordance with the scheme of the Company, and that, the Company had no rights to sell the superstructure. It is also been noted that, certain portions of area would belong to the said company until the expiry of lease period, and hence, there could not be any absolute transfer of properties. Assessee placed lease agreement entered into by Company with Indian Red Cross Society, dated 11/07/2001 at page 12 to 30 of paper book. Assessee also entered into agreement with the Company, wherein, she is a partner in respect of 4 units allotted to her under the scheme of company, based holding of specific No. of shares and also specific amount of deposit with the company.
13. Subsequently, assessee sold her shares to 4 different buyers. Copies of the agreements have been placed at page 109 -130 of paper book. The details of sale of shares and deposit are as under: Name of the Unit Allotted SaIe Value for Receipt for To ta l Surplus Shares Deposits R e ce ip t Buyer
20,01,000 2,07,000 M.Bhavana S-4 3,45,000 16,56,000
12,58,800 17,30,850 3,67,150 Bhatia Et Others G- 10 4,72,050
7,42,500 1,57,500 Bhatia Et Others G – 11 2,02,5C0 5,40,000 4,32,950 14,84,400 20,41,050 Ratanchand G - 4 5,56,650 Total 65,15,400 11,64,600 15,76,200 49,39,200 14. Ld. CIT (A) agreed with contention of assessee that provisions of section 50 C are not applicable to the present facts of the case.
15. However Ld. CIT (A) proceeded on footing that is a colourable device to avoid tax, based on the DVO report that was received after the assessment proceedings. We note that, Ld.CIT (A) was of the opinion that, provisions of section 50 C (2) cannot be invoked in the present facts of the case, then how could he referred to DVO report. We note that , assessee was entitled to beneficial enjoyment of the alleged units, so long as she remained a shareholder of the company, and was holding required amount of deposits with the company. It is also an admitted fact that, assessee transferred only shares and deposits to the buyers.
We refer to decision of Hon’ble Karnataka High Court in case of, Bhoruka engineering Inds. Ltd vs DCIT (supra), wherein Hon’ble court observed as under: “24. In the instant case, the assessee is holding the shares in BFSL from 01.10.1984. Therefore, it is a long term Capital asset. The transaction has taken place subsequent to 28.09.2004 as such the second condition is fulfilled. They have paid the security transaction tax to Magadha Stock Exchange. Where all these three conditions stipulated under Section 10(38) of the Act are fulfilled, the assessee is entitled to the benefit flowing therefrom i.e., the income from such transfer shall, not be included in the total income of the assessee for the previous year. Merely because if a registered sale deed has been executed by BFSL selling the land in favour of DFL-CDL in which event capital gain should have been paid on the sale consideration, is no reason to hold that when a shareholder of BFSL transfer his share for a consideration, after complying with the legal requirements, is not entitled to the benefit of tax exemption. All the authorities are carried away by this aspect: of the matter and because the assessee was able to avoid payment of income tax, consequently the Department was deprived of the tax, they have come to the conclusion that it is a colourable device and tax planning to avoid payment of tax. The assessee by resorting to such a tax planning, has taken advantage of the benefit of the law or the loopholes in the law, which had enured to his benefit. After seeing how this loophole has been exploited within four corners of the law, it is open to the Parliament to amend the law plugging the loophole. However, by any judicial interpretation we cannot read into the Section, which was not intended to, by the Parliament at the time of enacting this provision. The language employed in Section 10(38) of the Act is simple and unambiguous and it makes no distinction between the transfer of share of company with an immovable asset and movable asset, instead of executing a sale deed in respect of the immovable property by the company, which is owning the land. If the shareholder chooses to transfer the lands and part with the land to the purchaser of the shares, it would be a valid legal transaction in law and merely because they were able to avoid payment of tax, it cannot be said to be a colourable device or a sham transaction or an unreal transaction.”
In the present facts, of the case we note that Company had no rights to sell superstructure. Company is permitted only to sublet or sublease or assign or nominate any portions thereof falling to its share to one or more parties in one or more than one deeds for the period of lease. We have also perused Scheme of allotment by the Esteem Arcade Pvt. Ltd., wherein, the members enrolled under this scheme would be allotted commercial space/unit on following terms and conditions: “Scheme for allotment of office space / Commercial space (units) to share holders in the building proposed to be constructed on the property beiiNo.26, Race Course Road, Bangalore - 560 00 Ito be enjoyed by the Share Holders for a period of 85 years on Lease basis commencing from 11 .07.2002.
The Company has registered 67% undivided Leasehold rights in the property situated at No.26, Race Course Road, Bangalore starting from 11.07.2002 with a right to put up the building and use the same for a period of 85 years. The said document has been registered as document No. 1481 dated 11.7.2002 and stored in C.D. No. G.N.S.R.8. The original of the document is available for inspection between the office hours in the Registered Office of the Company.
A building comprising of Offices and shops shall be constructed on the aforesaid property bearing No. 26, Race Course Road, Bangalore, belonging to the company as per corporation approved plan. The extend of built area belonging to the company is approximately 35,000 Sq. Ft. and the balance area belongs to Lessors i.e. Indian Red Cross Society The scheme is in respect of the building belonging to Company only and not applicable to the balance area belonging to Indian Red Cross Society.
The super-built area of each unit is computed taking into account the circulation area, service area and common area which is drafted by MIs. Zachariah Consultants, Architects.
The Members be enrolled under the scheme for the purpose of allotment of commercial space / units on the following terms and conditions - a. The members shall hold as many equity shares in the capital of the company, in respect of each commercial space unit as enclosed in annexure. The members, if they have not already acquired the required shares shall acquire the same and shall pay towards share capital as and when calls are made on them if the same have already not been paid. b. Each member shall pay an amount equal to Twelve times the face value of - the share as security deposit in order to get the entitlement of the enjoyment of the unit to be allotted to him/her. The same is payable on demand by the company. c. The total value of the shares & deposit to be held by the member for each unit is found in the annexure enclosed herewith.
d. The Board shall have discretion in varying the above deposit amount. The above deposit amount shall be paid in such instalments as may be specified by the Board. The Board shall have full discretion in the above matter and may specify different instalments for different members. e. The deposit shall be adjusted against the assets of the Company at the expiry of lease period of 85 years. The Company can modify the scheme of adjustment of deposits only if so resolved by the members in the general meting by 2/3rd majority to take advantage of fiscal laws of the country from time to time. f. In the event of any member ceasing to be a member of the company other than by way of death, insolvency, transfer or operation of law then and in that event the Company shall refund the proportionate deposit to the extent of the unexpired period of lease.
Each member shall be entitled to the possession and enjoyment of unit / Commercial space allotted to him pursuant to the above scheme together with full right to possess, enjoy, let-out and realize the rent there from. The Member shall alone be entitled to rent or other consideration received for Parting with possession or granting license to outsiders in respect of his / her / their units and the company shall not be entitled thereto; 6. The Member shall be bound to contribute towards the common expenses of the company and for the maintenance of the super structure, such amounts as the Board of Directors of the company may determine from time to time.
The member shall also- keep a maintenance deposit of such amount as the company decides in a general meeting.
8. The Member shall be liable to pay the corporation tax and other levies that may be levied on the unit/commercial space granted to him.
The Member shall pay deposit and pro-rata charges to KEB, BWSSB and other agencies for securing service connection of electricity, water and other connections, if demanded by the company after the approval of the members in General meeting.
The company shall execute the deeds in terms of the scheme conferring necessary rights on the Member.
The Member shall be entitled to sell or dispose of his shares as well as the deposits after the payment of the full amount due to the company toward shares and /or deposit, in accordance with rules and regulations subject to the Articles of Association of the company.
12. The company shall have lien on the shares and deposit amount of the member in respect of all the monies due and outstanding from the Member to the Company.
The Member shall comply with the terms of the Memorandum of Association and Articles of Association of the Company.
The Company shall have discretion in varying the deposit amount payable or the instalment. This right is vested in the Company till such time all the shares are allotted.
The company shall have right to amend the plans and construct such additional area for which the member hereby agrees to the same. 16. The Member shall be subject to such restrictions in the enjoyment of the unit as may be set forth from time to time by the company in the interest of the share holder/members of the company. 17. The member shall also have such rights in respect of his units as may be specified by the company from time to time. 18. The member shall not be entitled to alter the structure of the unit allotted to him. However, he shall be entitled to fix movable fixtures and partitions, Air conditioner etc., within his unit. 19. Each Member shall join the execution of deed and documents required by the company and shall bear stamp duty and other expenditure involved in granting allotment of the unit. 20. A unit/commercial space allotted shall absolutely belong to the Member for his/her enjoyment and such right is heritable, provided the legal heirs continue to hold the shares and deposit. 21. The shares and relevant deposit shall always go with a specific unit/commercial space and the transfer thereof shall be done simultaneously to the same person in whom the right of enjoyment of that unit is vested. No transfer of Deposit without the shares being transferred in favour of any person is possible under article No.7 of Articles of Association of the Company. 22. The Municipal taxes payable shall be paid by the Company after collection from shareholders based on the assessment done by the Corporation in respect of each of the units. The individual unit owners shall pay the additional taxes, if any determined by the concerned authorities in respect of their units. 23. Building shall revert back to the original land lord i.e. M./s. INDIAN RED )SS SOCIETY after lapse of 85 years in terms of lease deed dated P72002. (and as per laws prevalent at that time ) 24. Any lease deed executed by individual members of the Company or unit holder shall not be binding on the Company, if it is executed beyond a period of 85 years starting from 11.07.2002. 25. The individual unit owners / shareholders shall hand over their respective units back to the Company on or before 11.07.2087. 26. The independent car parks (i.e. car parks not attached with any unit) allotted to individual members shall not be sold to any other person other than the existing member of the Company. 27. The Company has a liability to pay a sum of Rs.2,00,000/- every year to M/s Indian Red Cross Society and this liability to pay the rent has been taken over by the Company itself and the same is not collected from the shareholders. Further this liability of Rs.2,00,000/- shall be paid by the shareholder, to whom unit No.G - 3 has been allotted. The amount collected for this particular unit has been discounted accordingly.”
We note that there was an embargo on assessee to sell their units as it emanates from there scheme adopted by the company. Authorities below have disputed or doubted the scheme of company under which the assessee could only transfer the shares and or deposits held in the company which is subject to fulfilment of certain conditions.
We have perused decision of Hon’ble Allahabad High Court relied upon by Ld.CIR.DR. Fact in that case was that assessee therein had transferred a land of which he was an unauthorized occupant in view of sec.2 of Transfer of Property Act 1882. Assessee could not hold the land as a part of ‘Capital Asset’ and therefore assessee therein had disclosed the value of land to be ‘Nil’ in books of account. Thereafter assessee on substantial lapse of time, possessed the land with execution of Feehold Deed. Hon’ble Court also noted that the market value of the land was determined based on conversion charges paid and that assessee had nothing on record to show that free hold conversation were founded on market value of the land at the time of execution of such conversion Deed. Hon’ble Court under such circumstance held applicability of sec.50C. 21. There is nothing on record to substantiate the allegation of intention to avoid tax in the guise of transfer of shares. Ld.CIT(A) on one hand holds that there was no transfer of Capital Asset, whereas on the other hand, refers to DVO report to allege tax avoidance by assessee. Ld.CIT(A) once rejected application of sec.50C cannot rely on DVO report to hold that assessee adopted a colourable device to avoid tax. Facts in present case are different as compared to facts considered by Hon’ble Allahabad High Court. In our view, assesee cannot blow hot and cold at the same time. There is no documentary evidence brought on record by authorities below to establish such allegation. 22. We note that individual members cannot enjoy the units allotted in respect of shares and deposits held with the company beyond a period of 85 years starting from 11/07/2002. We also note that number of units held by a particular member is proportionate with 12 times the face value of shares as security deposit in order to get entitlement of enjoyment of the unit to be allotted. Further clause 11 of the scheme allows a member to sell or dispose of his/her shares along with deposits subject to payment of full amount due to the company towards shares/or deposit in accordance with the rules and regulations subject to Articles of Association of the company. Accordingly grounds raised by assessee stands allowed. In the result, appeal filed by assesee stands allowed. Order pronounced in the open court on 28th Aug, 2020. Sd/- Sd/- (A.K GARODIA) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 28th Aug, 2020.