The Income Tax Appellate Tribunal [ITAT] (Mumbai) Tirupati Developers v/s. ACIT ITA No. 2628/Mum/2023 dated 16.01.2024.
Income from Capital Gains not applicable to Assessee who is in the business of Property Redevelopment.
1. The assessee is a partnership firm engaged in the business of builders and developers. The assessee filed the return of income for assessment year 2018-19 declaring income at nil. The case was selected for scrutiny since specific information was received from sub registrar office that the assessee has sold immovable property on 29.07.2017 for consideration of Rs.10,00,000/- whereas the market value of the said property is Rs.40,42,000.
2. Assessing officer added difference amount under Section 50C of the Income Tax Act (“the Act”), alleging that the assessee sold a property at a value lower than its stamp duty value/Market Value. However, assessee contended that that the consideration received was solely for additional space sold to a society member, not for the entire flat.
3. The agreement between the assessee and Sterling Co-operative Housing Society clarified that the consideration of Rs.10,00,000 was specifically for additional carpet area of 125 sq. fts., not for the entire flat. Despite this, the assessing officer proceeded to make the addition under Section 50C of the Act based on a misunderstanding of the transaction.
4. Relying on the judgement of the Hon’ble Bombay High Court wherein it was held that income from the redevelopment project falls under Profit and Gains from Business and Profession (PGBP) and not under capital gains.
5. The ITAT ruled in favour of the assessee. It held that the addition made under section 50C of the Act was unjustified as the consideration was for additional space and not for the entire property. Moreover, since the assessee’s income from the re-development project falls under PGBP, Section 50C of the Act does not apply.
Conclusion:
This decision sets an important precedent, clarifying the scope of Section 50C of the Act in transactions involving builders and developers. It highlights the importance of accurately interpreting agreements and considering the nature of income while applying tax provisions.
High Court of Himachal Pradesh Pr. Commissioner of Income Tax-1, Chandigarh v/s M/s I.A. Hydro Energy (P) Limited (ITA No. 4 of 2024)
Implication of Section 56(2)(viib) of the Income-tax Act,1961 on conversion of Loan to Equity and Choice of Valuation method with Assessee.
The assessee-company was engaged in the business of generation and distribution of hydroelectricity. The company was incorporated through the conversion of a partnership firm into a company. Upon conversion, all partners of the firm became shareholders of the company. As per the agreement, unsecured loans of the erstwhile partners were converted into equity shares issued at a premium.
The case was selected for scrutiny assessment and the Assessment was completed under section 143(3) of the Income-tax Act, 1961 (‘the Act’). Addition was made by the Assessing Officer (AO) under section 56(2) (viib) of the Act, because according to AO, taxpayer had issued equity shares at a premium, in excess of the fair-market value of shares as per rule 11UA(2) of the Income-tax Rules, 1962 (Rules). Further it was alleged that assessee’s valuation report using the Discounted Cash Flow (DCF) method was bogus as there was no correlation with the actual affairs of the company.
Order passed by AO was challenged by assessee before The Commissioner of Income-tax (Appeals) [CIT(A)] and The Income-tax Appellate Tribunal (ITAT) wherein it was held that assessee did not receive any consideration on account of issuance of shares and also held that AO was not authorized to pick and choose a particular method of valuation of shares, as such an option is available with the taxpayer.
On further appeal before Hon’ble High Court against the order passed by the ITAT, the court dismissed Revenue’s appeal.
Conclusion:
The law is fairly settled that the addition regarding the share capital can be made only if there is actual receipt of consideration and not otherwise. Moreover, the option to value share either by Net Asset Value (NAV) or DCF method lies with the assessee issuing shares.
High Court of Telangana Ayodhya Rami Reddy Alla vs Principal Commissioner of Income-Tax (Central) Writ Petition No. 46510 and 46467 of 2022
Tax Avoidance and invocation of General Anti Avoidance Rule (GAAR).
The assessee purchased certain shares of a company named Ramky Estate and farms limited (REFL). After few days the REFL issued bonus shares in the ratio of 1:5. Pursuant to the issuance of such bonus shares, the value of each share was reduced to 1/6th of its original value. Thereafter (within a short span of time), the taxpayer sold the original shares to another company named Advisory Services Limited (ADR). The sale of REFL share to ADR resulted in short-term capital loss as per the provisions of the Act. While filing the return of income, the taxpayer had set-off the short-term capital loss incurred on the above transaction against the long-term capital gains realized on another transaction of sale of shares of Ramky Enviro Engineers Limited (REEL).
During the assessment proceedings, the Assessing Officer (AO) sought to treat the transaction of sale of the original shares as an ‘impermissible avoidance arrangement’ as per the provisions of GAAR. Assessee argued that these transactions fell under Section 94(8) of the Income Tax Act,1961 (‘the Act’) which deals with bonus stripping for mutual fund units and not shares. However, the Revenue contended that the transactions were designed to avoid tax and invoked GAAR.
The Telangana High Court dismissed the writ petitions filed by the assessee, upholding the invocation of GAAR by the Revenue. The Court relied on various judicial precedents, including the Supreme Court’s decisions in the cases of Union of India v. Shiv Dayal Soin & Sons (P) Ltd. and Mc Dowell & Co. Ltd. v. CTO wherein the Apex Court held that the tax planning must be within the framework of law and should not involve colorable devices. Hon’ble Telangana Court provided a detailed analysis of both legal arguments and the facts of the case. Following were the rationales behind the decision:
- Substance over form: The court emphasized the principle of substance over form, noting that the transactions lacked commercial substance and were solely designed to evade tax.
- GAAR vs. SAAR: The court rejected the petitioner’s argument that GAAR could not be invoked due to the existence of Specific Anti-Avoidance Rules (SAAR) provisions. It clarified that GAAR can override SAAR when the latter is insufficient to address the impermissible avoidance arrangement. The applicability of either GAAR or SAAR would be determined on a case-by-case basis, according to the court.
- Commercial substance: The court found that the series of transactions, including the issuance and sale of bonus shares, were arranged without any genuine business purpose. The entire arrangement was seen as a mechanism to create artificial losses and avoid tax liabilities.
Conclusion:
This ruling emphasizes the stringent approach of Indian courts towards tax avoidance schemes. It highlights the judiciary’s support for the Revenue’s use of GAAR to reduce tax avoidance arrangements that lack commercial substance. This decision clarifies that taxpayers cannot rely solely on SAAR provisions to shield impermissible avoidance arrangements from scrutiny under GAAR.
In summary, the Telangana High Court’s judgment highlights the importance of having a commercial rationale for any transaction. This ruling provides a clear directive for both taxpayers and tax authorities on the application of anti-avoidance rules in India.
Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion, advice or recommendation.
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