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Income Tax Appellate Tribunal, DELHI BENCH ‘D’, NEW DELHI
Before: Sh. C. N. PrasadDr. B. R. R. Kumar
ORDER
Per Dr. B. R. R. Kumar, Accountant Member:
The present appeal has been filed by the assessee against the order dated 28.07.2023 passed by the AO u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961.
Following grounds have been raised by the assessee:
“GROUNDS PERTAINING TO RECLASSIFICATION OF THE NATURE OF INCOME AND CONSEQUENT TAX RATE FROM 10% TO 40%: 1.1 On the facts and circumstances of the case and in law, the Ld. AO/DRP has erred in considering the “lull value of consideration” at Rs. 39,54,26,400/- towards the sale of shares by ignoring an unambiguous language of the provisions of Section 48 of the Act relating to computation of capital gains. 1.2 On the facts and circumstances of the case and in law, Ld. AO/DRP has erred in their understanding that Section 50CA of the Act, read with Rule 11UAA of the Income-tax Rules, 1962 (‘Rules’), provides an upper limit
BITO-Lagertechnik Bittmann GmbH for the valuation of share price considered for computing capital gains under the Act. 1.3 On the facts and circumstances of the case and in law, Ld. AO/DRP has erred in charging income amounting to INR 12,18,33,600 to tax under Section 56(2)(x)(a) of the Act [without specifying the applicable sub-clause of Section 56(2)(x)] as: (a) the sum of money in the Appellant case has not been received ‘without consideration’, but such money has been admittedly received as consideration towards the sale of shares and therefore beyond the ambit of sub-clause (a) of Section 56(2)(x); and (b) the Appellant has admittedly not ‘received’ any immoveable property or ‘property’ as defined in the Explanation below Section 56(2)(x) and therefore beyond the ambit of sub-clause (b) and sub-clause (c) of Section 56(2)(x). 1.4 On the facts and circumstances of the case and in law, the Ld. AO/DRP has erred in charging income amounting to INR 12,18,33,600 to tax under Section 56(2)(x) of the Act as such incidence of tax arises only where any property is received at less than the aggregate fair market value. In this case, neither the Assessee is the recipient of the property nor is the property transferred at less than the fair market value. 1.5 On the facts and circumstances of the case and in law, the Ld. AO/DRP has erred in considering the fact that the computation of tax liability arising to the Assessee on the sale of shares was already approved by the revenue authorities vide tax withholding certificate no. 1AB0819HPY issued on 21 September 2019 to the deductor (i.e., Nilkamal Ltd.) u/s 197 of the Act. 1.6 On the facts and circumstances of the case and in law, the Ld. AO/DRP has erred in ignoring that the income cannot be chargeable to tax in India under the head ‘income from other sources’, as per Article 21 of the India-Germany DTAA. 1.7 On the facts and circumstances of the case and in law, the Ld. AO/DRP has failed to consider the fact that as per Article 13 of the India-Germany DTAA, entire gains rising on the transfer of shares in India should be BITO-Lagertechnik Bittmann GmbH chargeable as ‘capital gains’ income and no further restriction regarding the method of computation of such income has been specified therein unlike the Act. 1.8 On the facts and circumstances of the case and in law, the Ld. AO/DRP has erred in alleging that the fair market value of the same share of the same company on the same date cannot be valued at multiple prices, completely ignoring the fact that the difference in share price was on account of – (a) the deeming fiction created under the Act for determination of “fair market value” for the limited purpose of Section 50CA of the Act; and (b) consequently, differences in the method of valuation that were adopted. 1.9 On the facts and circumstances of the case and in law, Ld. AO has erred in passing the Order dated 28 July 2023 under Section 143(3) r.w.s. 144C(13) of the Act. OTHER GROUNDS: 2. On the facts and circumstances of the case and in law, Ld. AO/DRP has erred in levying interest u/s 234A of the Act where there is no default in furnishing a return of income before the prescribed due date.
3. On the facts and circumstances of the case and in law, Ld. AO/DRP has erred in levying consequential interest u/s 234B of the Act.
4. On the facts and circumstances of the case and in law, Ld. AO/DRP has erred in initiating penalty proceedings under Section 270A of the Act, citing a case of ‘under-reporting of income in consequence of misreporting’, ignoring the fact that the entire income has been duly reported while furnishing the return of income; there is no income addition in the assessment order (only reclassification of nature of income and tax rate).”
The assessee is a company incorporated in Germany and is a tax resident of Germany. During the Year, the assessee was engaged in manufacturing & selling storage, packing & shelves systems, and plastic containers. The assessee had a 50:50 joint
BITO-Lagertechnik Bittmann GmbH venture with Nilkamal Limited. The Joint Venture Company was called M/s Nilkamal Bito Storage Systems Private Limited (“J.V. Company”). The assessee sold 100% stake in the J.V. Company to Nilkamal Limited for a total consideration of Rs.51,73,35,000/- at a value of Rs.233/- per share. The assessee claimed the cost of acquisition amounting to Rs.22,15,50,000/- and offered the difference of Rs.29,57,85,000/- to Capital Gains tax as per the applicable provision of the Income-tax Act, 1961.
For the subject transaction, the Appellant had also obtained a Lower Deduction Certificate dated 22 August 2019. In the relevant assessment year, the Appellant had obtained two valuation reports for determining the FMV of the equity shares - i) Valuation report as per the RBI Guidelines for FEMA purpose and ii) Valuation Report as per Rule 11UA of Income Tax Rules’1962, for the purpose of computing Capital Gains under Income Tax Act.
The Assessing Officer held that FMV of the same share of the same company on the same date cannot be valued at multiple prices and proposed to tax difference between sales consideration computed using Rs 178.12 per share as sale price and cost of acquisition as Long Term Capital Gain taxable @ 10% and remaining portion of sales consideration paid to the Appellant was treated as income from other sources and taxed @ 40%.
Aggrieved, the assessee filed objections before the ld. DRP who affirmed the draft order of the AO.
BITO-Lagertechnik Bittmann GmbH 7. Before us, the ld. AR reiterated the arguments taken up before the revenue authorities and the ld. DR supported the orders of the authorities below.
Heard the arguments of both the parties and perused the material available on record.
The pertinent facts are that,
The assessee sold its total stake in the J.V. Company to its Indian J.V. partner, Nilkamal Ltd for a total consideration of Rs.51,73,35,000/- @ Rs.233/- per share and offered the resulting long-term capital gains to tax under the Act.
For the purposes of RBI / FEMA, the assessee obtained a report from M/s SSPA & Co., Chartered Accountants. As per this report, the value of shares on Comparable Companies Multiple Method under market approach (‘CCM’) was determined at Rs. 242.21 per share.
For the purposes of determining the value of the unquoted shares under Section 50CA / Rule 11UAA, a valuation report from M/S Jagdish V Rajgor & Co, Chartered Accountants was obtained who determined the value @ Rs. 178.12 per share based on NAV method.
The sale of above unquoted shares was effected at a negotiated price of Rs. 233 per share, which is more than minimum floor price under Section 50CA and within the ceiling price as per FEMA.
BITO-Lagertechnik Bittmann GmbH The AO held that the value determined as per Rule 11UAA of the Rules, Rs. 178.12 per share shall be construed as selling price in the sale transaction between the Assessee and the buyer.
Consequently, the AO held that the remaining portion of the sale consideration paid to the Assessee i.e., the difference between Rs. 233 and Rs. 178.12 was held to be taxable as “income from other sources”.
Section 50CA of the Act reads as under: “Where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being share of a company other than a quoted share, is less than the fair market value of such share determined in such manner as may be prescribed, the value so determined shall, for the purposes of section 48, be deemed to be the full value of consideration received or accruing as a result of such transfer”
Rule 11UAA envisages, Rule 11UAA of the Rules, the fair market value of an unquoted equity share of a company shall be determined as per Rule 11UAA, which provides for NAV method.
Based on a reading of Section 50CA of the Act, it is clear that where the actual sale consideration on transfer of unlisted equity shares is less than the fair market value of such shares determined as per the NAV method, the actual sales consideration shall get substituted with the deemed sales consideration as determined in accordance with NAV method. In the facts of the Assessee, the unlisted equity shares held by the Assessee in the J.V. Company were sold at a price of Rs. 233 per share, which was higher than the fair market value
BITO-Lagertechnik Bittmann GmbH determined in accordance with NAV method i.e. INR 178.12 per share. Hence, we hold that the revenue authorities erred on facts and in law in not appreciating that the provisions of Section 50CA of the Act are not applicable in the case of the Assessee since the Assessee had sold shares in excess of fair market value as determined in accordance with Rule 11UAA of the Rules. The same proposition is also affirmed by the Co- ordinate Bench of ITAT, Mumbai in the case of Nearby Pte. Ltd. Vs ACIT [ITA No. 1607/Mum/2022] held that since the full value of consideration received by the assessee is more than the fair market value, there is no need to tinker with the full value of consideration declared by the assessee.