* IN THE HIGH COURT OF DELHI AT NEW DELHI
Reserved on: 12th December, 2017
Date of decision: 20th April, 2018
+ INCOME TAX APPEAL Nos. 405/2005 & 406/2005
ARJUN MALHOTRA ..... Appellant
Through: Mr. Ved Jain &Mr.Pranjal Srivastava,
Advocates.
versus
COMMISSIONER OF INCOME TAX .... Respondent
Through Mr. Zoheb Hossain, Sr. Standing
Counsel for the Revenue
INCOME TAX APPEAL No. 389/2007
DIRECTOR OF INCOME TAX, NEW DELHI .... Appellant
Through Mr. Zoheb Hossain, Sr. Standing
Counsel for the Revenue
versus
ARJUN MALHOTRA ..... Respondent
Through: Mr. Ved Jain &Mr.Pranjal Srivastava,
Advocates.
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MS. JUSTICE PRATHIBA M. SINGH
SANJIV KHANNA, J.:
ITA Nos.405/2005 and 406/2005 have been filed by an individual,
Arjun Malhotra impugning common order dated 29th January, 2004 passed
by the Income Tax Appellate Tribunal (hereinafter referred to as ,,the
tribunal) deciding ITA Nos.1433/Del/2002 and 1434/Del/2002 relating to
ITA Nos. 405/2005, 406/2005 & 389/2007 Page 1 of 26
Assessment Years (AY, for short) 1998-99 and 1999-2000, respectively.
The afore-stated appeals were admitted for hearing vide order dated 15th
July, 2005 on the following substantial questions of law:-
ITA No. 406/2005
"(1) Whether the Income Tax Appellate Tribunal was
correct in law in holding that shares owned by the appellant
at NIIT were not transferred in the assessment year 1998-99
but were transferred on 05.05.1998 (Assessment Year 1999-
2000) when the same were delivered by the bankers to the
purchasers (Glad Investment Pvt. Ltd.)?
(2) Whether the Income Tax Appellate Tribunal was
correct in concluding that on the alleged date of sale of
shares, i.e., 14.08.1997, the assessee owned a residential
house in Mussoorie and, therefore, was not entitled to
exemption u/s 54F of the Income Tax Act, 1961?
ITA No. 405/2005
(3) Whether the Income Tax Appellate Tribunal was
correct in taking the market value of the shares quoted at the
stock exchange on 05.05.1998 as the basis for computing
the capital gains under Section 48 of the Income Tax Act?"
2. ITA No.389/2007 filed by the Director of Income Tax, i.e. the
Revenue, relates to AY 1999-2000 and impugns order dated 23rd June, 2006
passed by the tribunal in Appeal No.1167/Del/2005 deleting/cancelling
penalty for concealment of income under Section 271(1)(c) of the Income
Tax Act, 1961 (for short ,,the Act). This appeal , vide order dated 16th July,
2008, was directed to be listed along with ITA Nos.405/2005 and 406/2005
without a substantial question of law being framed.
ITA Nos. 405/2005, 406/2005 & 389/2007 Page 2 of 26
3. The assessee for the AY 1998-99 had filed his return of income of
Rs.2,33,89,820/- on 15th September, 1998. The income was revised to
Rs.2,33,49,680/- vide revised return filed on 29th June, 1999.
4. For the AY 1999-2000, the assessee had filed its return of income on
29th June, 1999 declaring income of Rs.24,24,010/-.
5. In the returns of income for the AY 1998-99, under the head ,,long
term capital gain the assessee had disclosed transfer consideration of Rs.5
Crores on sale of one lakh equity shares of NIIT to M/s Glad Investment
Pvt. Ltd. (,,M/s GIPL for short). Date of transfer declared was 14th August,
1997. The assessee had claimed deduction under Section 54F of Rs.5
Crores on account of having purchased immovable property 5, Golf Links,
New Delhi for Rs.10.75 Crores on 8th August, 1998.
6. The Assessing Officer vide assessment order dated 27 th March, 2001
for the AY 1998-99 held that one lakh equity shares of NIIT were not sold
and transferred to M/s GIPL vide agreement dated 14th August, 1997. The
transfer was on 30th September, 1998 i.e., in the subsequent AY 1999-2000.
After referring to the term ,,transfer in relation to capital a ssets as defined in
Section 2(47) of the Act and Section 45(1) of the Act which states that
profits and gains from transfer of the capital assets shall be deemed to be the
income of the previous year in which the transfer takes place, the Assessing
Officer held that income from capital gains from transfer/sale of one lakh
equity shares of NIIT would be assessable in the AY 1999-2000 and
accordingly claim for deduction under Section 54F would be considered in
the said year. Total taxable income was assessed at Rs.2,38,02,380/- on
ITA Nos. 405/2005, 406/2005 & 389/2007 Page 3 of 26
account of certain additions with which we are not concerned.
7. Assessment Order for the AY 1999-2000 referred to the assessment
order for the AY 1998-99 and the findings recorded therein. It was held that
the transaction of sale/transfer of shares to M/s GIPL was not on arms
length and through any broker or through stock exchange. Father and spouse
of the assessee were the directors of M/s GIPL and shares of M/s GIPL were
held by the assessees wife, children, parents and investment companies
operating from the assessees residence. Registered office of M/s GIPL was
same as assessees residence. The transfer of shares in favour of M/s GIPL
in the statutory records of NIIT was made on 30th September, 1998, more
than a year after the purported agreement dated 14th August, 1997 between
the assessee and GIPL. Consideration was not paid by M/s GIPL in cash,
but by way of 5 lakh 5% non-cumulative preference shares of Rs.100/- each,
purportedly issued by GIPL to the assessee on 25th August, 1997. These
preference shares were redeemed on 31st July, 1998 for Rs.5 Crores. M/s
GIPL had failed to file annual accounts and balance sheets for the year
ending 31st March, 1998 with Registrar of Companies till the passing of the
assessment order. Explanation given by the assessee for the delay in actual
issue of preference shares etc. was rejected by the Assessing Officer. On the
other hand, the Assessing Officer held that the assessee had backdated the
transaction of transfer of shares as the market price of NIIT shares in
September, 1998 had arisen and increased to around Rs.1300/- to Rs.1400/-
per share as against Rs.450/- per share on 14th August, 1997. In case, one
lakh NIIT shares had been sold at the market price in September, 1998, they
would have exceeded the purchase value of the immovable property 5, Golf
ITA Nos. 405/2005, 406/2005 & 389/2007 Page 4 of 26
Links, New Delhi of Rs.10.75 Crores. During the AY 1999-2000, the
assessee had sold 65,552 equity shares of NIIT to M/s GIPL on 2nd April,
1998 for Rs.5,89,96,800/- resulting in capital gains of Rs.5,87,09,331/-.
Further, M/s GIPL had a book loss of Rs.1,63,10,300/- as per return for the
AY 1998-99 and any profit in future on sale of the transferred NIIT shares
would be adjusted against this accumulated book loss.
8. Assessment Order records that to investigate, whether this was a case
of legitimate tax planning or tax evasion and whether the transaction was
genuine, notices under Section 131 of the Act were issued to NIIT. Further,
investigation had revealed that the assessee had lodged 76,000 and 24,000
equity shares statedly sold to M/s GIPL on 14th August, 1997 with Deutsche
Bank AG on 22nd August, 1997 and 25th September, 1997, respectively.
Subsequently, these shares were transferred in the name of the said bank on
28th August, 1997 and 29th September, 1997 respectively. Thereafter,
Deutsche Bank AG had transferred these shares to M/s GIPL on 30th
September, 1998. Copies of the transfer deeds executed by the assessee in
favour of Deutsche Bank AG were filed and taken on record. NIITs record
had revealed that one lakh shares were transferred by the assessee to
Deutsche Bank AG on the aforestated dates and then by Deutsche Bank AG
to M/s GIPL on 30th September, 1998. Deutsche Bank AG vide letter dated
17th March, 2001 had stated that loan of Rs.2 Crores was extended by the
Deutsche Bank AG to M/s GIPL on 10th September, 1997, and 1 Lakh
equity shares were pledged with them by the assessee. As the value of the
shares pledged was more than Rs.5 lakhs, in terms of the instruction issued
by the Reserve Bank of India, these equity shares were physically
ITA Nos. 405/2005, 406/2005 & 389/2007 Page 5 of 26
transferred in the name of the bank. Subsequently, the bank had released the
shares in favour of M/s GIPL on the instructions of the assessee vide letter
dated 14th August, 1997 that he had agreed to sell the shares to M/s GIPL.
Accordingly, Deutsche Bank AG was authorized to release the shares and
transfer the shares in favour of M/s GIPL once the loan secured against the
pledge of shares was settled by M/s GIPL. Deutsche Bank AG were unable
to give the exact date on which the letter dated 14 th August, 1997 was
received by them as the letter did not bear acknowledgement seal or receipt
stamp, which was unusual as accepted by Mr. R.P. Verma, Head of Loan
Administration. The shares were released by the bank to M/s GIPL on 5th
May, 1998. Assessing Officer observed and held that this letter dated 14th
August, 1997 must have been received before 5th May, 1998. M/s GIPL in
response to the summons under Section 131 of the Act had accepted that
they had not filed Form 2 with the Registrar of Companies which was
required to be filed within 30 days of allotment of shares under the
provisions of the Companies Act, 1956. M/s GIPL could not answer,
whether any dividend was paid on the preference shares allotted to the
assessee.
9. Upon exhaustive and detailed examination, the Assessing Officer
concluded that non-cumulative preference shares were not allotted and was a
sham and a cover up to show that the transfer was on 14th August, 1997 to
justify sale price of Rs.450/-, when the fair market value of each share of
NIIT prevailing on the date of transfer, i.e. 30 th September, 1998 was
Rs.1300/- to Rs.1400/-. The Assessing Officer observed that the shares
were pledged vide Guarantee and Memorandum of Pledge dated 20th
ITA Nos. 405/2005, 406/2005 & 389/2007 Page 6 of 26
August, 1997 with Deutsche Bank AG by the assessee and not by M/s GIPL.
If the shares were the property of M/s GIPL, these shares could not have
been pledged by the assessee as his own property. Accordingly, transfer
deeds for 24,000 shares on 10th September, 1997 and for 76,000 shares 14th
August, 1997, in favour M/s GIPL were sham documents. Similarly, there
was no evidence of allotment and redemption of non-cumulative preference
shares of Rs.5 Crores, which were sham transactions. Assessing Officer
held that Agreement to Sell dated 14 th August, 1997 was a pretence and
allotment of 5 lakh 5% non-cumulative shares of M/s GIPL was not proven.
10. The second part of the assessment order relates to the legal effect of
having not established that the transfer of one lakh NIIT shares had taken
place on 14th August, 1997. Assessing Officer took the date of sale/transfer
for the purpose of capital gains as 5th May, 1998, i.e. the date when the
shares were released by Deutsche Bank AG to M/s GIPL on the instructions
of the assessee. He observed that the full value of the consideration received
by the assessee as a result of transfer was unknown as it was not a bona fide
transfer. What was the bargain price could not be ascertained as the
transaction was not at arms length for M/s GIPL was a family controlled
company of the assessee. M/s GIPL had financed assessees foreign trips
without any cause or reason. Thus, there was a possibility that M/s GIPL
might have compensated the assessee for shares purchased and hence there
was no alternative but to estimate the sale consideration. Market price of
NIIT shares on National Stock Exchange on 5th May, 1998 was Rs.1493/-, as
stated vide letter dated 19th March, 2001 of NIIT in respect to notice under
Section 131 of Act. Accordingly, the Assessing Officer computed the value
ITA Nos. 405/2005, 406/2005 & 389/2007 Page 7 of 26
of capital gains as Rs.14.93 Crores. Deduction under Section 54F in respect
of purchase of House No.5, Golf Links, New Delhi for Rs.10.75 Crores was
allowed and the balance amount of Rs.4,18,00,000/- was treated as long
term capital gains. In other words, the Assessing Officer assumed the
transfer price of each share of NIIT as Rs.1,493/-, instead of Rs.500/- per
share.
11. Appeals filed by the assessee were dismissed by the Commissioner of
Income Tax (Appeals) vide orders dated 13th March, 2002.
12. Tribunal by common order dated 29th January, 2004 has dismissed the
second appeals filed by the assessee. Tribunal in the impugned order has
referred to the expression ,,sale defined in Section 4 of the Sales of Goods
Act, 1930 to hold that sale would take place on transfer of title in the goods
from the seller to the buyer, and where transfer of property in the goods
would take place at a future time or was subject to some condition to be
fulfilled, the contract would not be a contract for sale, but an agreement for
sale. As per Section 2(47) of the Act, the word ,,transfer includes any
transaction whether by way of becoming a member or acquiring shares in a
cooperative society, a company or other association of member or by way of
agreement or arrangement or any other manner whatsoever which had the
effect of transferring or enabling enjoyment of any immovable property.
Movable goods could be transferred from the seller to the buyer, irrespective
of the fact whether transfer documents were executed or not, when sale
consideration was paid. Specific reference was made to the agreement dated
14th August, 1997 between the assessee and M/s GIPL to the effect that the
purchaser was to acquire the shares free from all lien and encumbrances
ITA Nos. 405/2005, 406/2005 & 389/2007 Page 8 of 26
with benefit of accumulated profits and right to all dividends etc., for
consideration of Rs.5 Crores. The agreement had also stated that upon
signing of the agreement, the assessee as seller would deliver to the
purchaser, i.e. M/s GIPL, share certificates with duly executed instruments
and that, M/s GIPL shall allot 12.5% preference shares to the assessee to be
redeemed at par. The clauses were not adhered to and complied with. The
assessee had retained possession of the shares that were later pledged with
Deutsche Bank AG as collateral security for grant of loan of Rs.2 Crores to
M/s GIPL vide pledge document executed on 20th August, 1997. These
shares were then transferred in the name of the bank on 10th September,
1997 in lieu of the loan advanced to M/s GIPL. Documents produced by
Deutsche Bank AG prove and conclude that the shares were delivered to the
bank by the assessee on 20th August, 1997 and transferred in the name of the
bank on 10th September, 1997. Therefore, the assessee would not have
written an earlier letter dated 14th August, 1997 to the Deutsche Bank AG
that he had offered one lakh shares of NIIT as a collateral security for grant
of loan to M/s GIPL.
13. On the question of sale consideration, it was observed that there was
no question of allotment of preference shares till delivery of shares and the
preference shares were allegedly allotted to the assessee on 25th August,
1997 and later redeemed on 31st July, 1998 against payment of Rs.5 Crores
by M/s GIPL to the assessee. There was no evidence to prove allotment of
preference shares on 14th August, 1997, except book entries. As per Section
75 of the Companies Act, M/s GIPL was required to file details of allotment
of preference shares with numbers, nominal amount, names and addresses of
ITA Nos. 405/2005, 406/2005 & 389/2007 Page 9 of 26
the allottees within 30 days to the Registrar of Companies. Balance sheet of
M/s GIPL as on 31st March, 1998 had not been filed with the Registrar of
Companies till completion of assessment, i.e. 7th March, 2001, though it was
stated that the audit was completed and finalized on 1 st September, 1998.
14. Thus, the tribunal observed that 1,00,000 NIIT shares were transferred
on 5th May, 1998 when the bankers had handed over the shares to M/s GIPL
in the period relevant to the AY 1999-2000.
15. Tribunal thereafter examined the issue whether the assessee would be
entitled to exemption under Section 54F of the Act in the AY 1998-1999 as
the assessee was also owner of a residential house in Mussoorie. The
assessee had claimed having sold the house to one Sarabjeet Singh for Rs.4
Lakhs on 20th July, 1997 and had relied upon an agreement to sell. Tribunal
held that the agreement to sell was not executed on stamp paper applicable
to the State of Uttar Pradesh and was not attested by "marginal" witnesses.
The assessee had received Rs.2 Lakhs as advance money and professed that
he had delivered the possession but there was no evidence that the cheque of
Rs.2 Lakhs was honoured. Sale proceeds of Rs.1,99,490/- and Rs.99,650/-
were credited in the account of the assessee on 4th August, 1997 and 12th
September, 1997, respectively, which was after 20th July, 1997, i.e. the date
on which the assessee had statedly handed over vacant possession. The
assessee, during the course of the proceedings, had also produced copy of
sale deed executed on 24th September, 1997 in respect of property known as
"Swaran Kutir" with garage for Rs.1,70,000/-. The sale proceeds were paid
through cheque of Rs.1 Lakh on 2nd August, 1997 and Rs.70,000/- in cash at
the time of execution of sale deed. This it was stated would not indicate
ITA Nos. 405/2005, 406/2005 & 389/2007 Page 10 of 26
handing over of physical possession of the property to the buyer on 20 th
July, 1997. The second deed with regard to the "main building of Harnam
Niwas and kitchen" was not filed. It was observed that in view of the fact
that the assessee had not been able to show that actual possession of the
property was handed over to the purchaser on or before purchase of the
immovable property in Golf Links, the assessee was not entitled to
exemption under Section 54F of the Act.
16. Lastly, the tribunal considered the question of sale consideration.
Shares of NIIT were quoted in the stock exchange and therefore the market
rate on 5th May, 1998 should be adopted to work out the sale consideration.
Decision in the case of K.P. Verghese versus Income Tax Officer,
Ernakullum and Another, [1981] 131 ITR 597 (SC) was distinguished on
the ground that ratio expounded related to transaction between strangers and
when genuineness of the transaction was not doubted, though there was
dispute with regard to the sale consideration. In such cases, it was observed,
that onus was on the Revenue to prove that the consideration received was
over and above the amount actually paid. In the present case, once the
document, i.e. the agreement to sell dated 14th August, 1997 was ignored,
the authorities had to work out the sale consideration on the basis of market
value as the parties were connected and the transaction was not at arms
length. M/s GIPL had, for one reason or the other, provided money and
undertaken all visits of the assessee. The sale consideration shown was not
the real consideration and the only option left with the Assessing Officer
was to work out the real consideration and adopt the market rate of the
shares on the date of transfer. Exact finding and observation, read:-
ITA Nos. 405/2005, 406/2005 & 389/2007 Page 11 of 26
"18. Once it is held that the shares were transferred in the
assessment year 1999-2000. The next question comes "what
would be its sale consideration?" Having given a thoughtful
consideration to the rival submissions on this issue, we are of
the view that to determine the sale consideration of the NlIT
shares, we have to revert back to the sale agreement of the
shares dated 14th August, 1997 according to which the
assessee had agreed to sell 1,00,000 NlIT shares to M/s. Glad
Investment (P) Ltd. for a sum of Rs. 5 Crores and the same
was paid to the assessee in the form allotment of preferential
shares to the assessee, which would be redeemed at par at the
discretion of the Board. This sale agreement has already been
examined by us alongwith the other documents executed by
the assessee in the fore-going paras and we finally held that
these shares were not sold by the assessee through the
aforesaid agreement dated 14.8.97 and all these documents
were prepared by the assessee with the intention to bring this
sale transaction within the financial year 1997-98 relevant to
the assessment year 1998-99. Once it has been held that this
agreement is not a valid agreement, sale consideration of the
shares cannot be determined on the basis of this agreement.
In these circumstances the sale consideration can only be
determined on the basis or its market value when these shares
were in fact sold and transferred in favour of Glad Investment
(P) Ltd. It has already been held in the fore-going paras that
the actual transfer of shares in favour of Glad Investment (P)
Ltd. was effected only on 5.5.1998 when the shares were
transferred by the bankers in favour or Glad Investment (P)
Ltd. As such, we have to determine the value of the sale
consideration of 1,00,000 NIIT shares as on 5.5.98. Since, the
shares are quoted at the exchange, the rates of shares as on
05.05.98 should be adopted to work out the value of shares
and its sale consideration. On perusal of the orders of the
lower authorities, we find that the assessing officer has
adopted the rates of NIIT shares as on 5.5.1998 as quoted on
stock exchange.
ITA Nos. 405/2005, 406/2005 & 389/2007 Page 12 of 26
19. We have also carefully examined the judgment of the apex
court in the case of K.P Verghese (supra) and we find that the
judgment was rendered in a context when the transaction was
entered between the strangers and the genuineness of the
transaction was not doubted and the dispute was with regard to
the sale consideration. In those type of case their Lordships of
the apex court have held that the onus is upon the revenue to
prove that over an above the sale consideration have passed
from the buyer to the seller. But in the instant case the
genuineness of the document on the basis of sale consideration
was claimed was doubted in the light of other documentary
evidence of the assessee and it was finally held that the
agreement to sell was not genuine documents on the basis of
which sale consideration can be determined. Once this
document is ignored, one has to work out the sale
considerations on the basis of the market value. Moreover, in
the instant case, it has already been held that the assessee and
the buyer are closely connected and the transaction is proved
to be at arms length. It is also evident from the record that the
assessee has been drawing substantial amount from M/s Glad
Investment (P) Ltd. on one reason or the other and he has also
undertaken the foreign visits at the cost of the buyer i.e. Glad
Investment (P) Ltd. It means what has been shown as a sale
consideration by the assessee is not the real consideration and
in these circumstance only one option left with the assessing
officer to work out the real sale consideration is to adopt the
market rate of shares as on the date of transfer. Since he has
adopted that rate quoted at the stock exchange and worked out
the capital gain, we find no infirmity in his action which was
later on approved by the Commissioner of Income tax
(Appeals). Accordingly, these issues are decided against the
assessee."
17. The first two questions of law raised in ITA No. 406/2005 relating to
Assessment Years 1998-99 are primarily factual. Counsel for the appellant,
during the course of arguments, had not pressed the said questions.
ITA Nos. 405/2005, 406/2005 & 389/2007 Page 13 of 26
However, in the written submissions filed by the appellant it was asserted
that the findings of the tribunal on both the questions was perverse and,
therefore, require interference. On the first question, it was submitted that
the tribunal has ignored two crucial facts, which were also noticed by the
Assessing Officer. Firstly, Deutsche Bank AG had vide letter dated 17 th
March, 2001 confirmed having received the letter dated 14 th August, 1997
written by the assessee for release of the shares directly to M/s GIPL. Copy
of the said letter has been enclosed with the written submissions. Reference
was made to the contents of the letter dated 14 th August, 1997, which was
addressed to the Manager, Deutsche Bank, AG. Submissions state that the
letter was duly received and could not have been ignored even if the receipt
stamp of the bank was missing. Secondly, the Assessing Officer had called
for transfer deeds, which were dated 14th August, 1997 and were received
by NIIT on 22nd August, 1997.
18. We would deprecate and would not accept written submissions raising
grounds and issues, which were not pressed at the time of oral hearing.
Further, documents and papers cannot be filed with the written submissions.
These documents are not part of the appeal record. In case fresh documents
or papers were to be filed, recourse by filing an application under Order XLI
Rule 27 of the Code of Civil Procedure or permission to file was required
and mandated. We therefore, reject and not take into consideration the
factual contention that the transfer deeds were received by NIIT on 22nd
August 1997, which contention even otherwise is rather strange, if not
incongruous for Deutsche Bank AG has stated that the assessee, i.e. Arjun
Malhotra, had deposited the said shares as security with the bank on 10 th
ITA Nos. 405/2005, 406/2005 & 389/2007 Page 14 of 26
September, 1997 for a loan of Rs.2 Crores which was extended to M/s
GIPL. If the shares had been deposited by the assessee with NIIT on 22 nd
August, 1997, then the shares would not have been pledged by the assessee
as security with Deutsche Bank AG on 10th September, 1997. Shares were
certainly not pledged by M/s GIPL. This is undisputed. The letter
purportedly dated 14th August, 1997 also appears to be back dated for the
first paragraph of the letter states that "I had provided the 100,000 shares of
NIIT as collateral security for grant of loan to Glad Investments. Shares are
currently registered in your name". The shares were pledged with the bank
on 10th September, 1997 and this fact was acknowledged and accepted in the
letter dated 17th March, 2001. Therefore, it should be accepted that the letter
though dated 14th August, 1997 was in fact issued after the shares pledged
were registered in the name of M/s GIPL, sometimes after 10th September,
1997. The findings recorded by the tribunal as to the date of transfer are
primarily based on facts. In view of the aforesaid discussion, substantial
question No. 1 in ITA No. 406/2005 is answered against the appellant-
assessee and in favour of the Revenue.
19. With regard to the second question raised for Assessment Year 1998-
99, again findings by the tribunal are factual. The appellant-assessee has not
placed on record any document or material referred to in the impugned order
or the orders of the authorities to establish and show that the conclusion
drawn was wrong and contrary to material on record. In fact, had the
Assessing Officer not treated the shares as transferred in the AY 1999-2000,
the appellant-assessee would not have been entitled to benefit under Section
54F of the Act on sale of 100000 NIIT shares to M/s GIPL as per the
ITA Nos. 405/2005, 406/2005 & 389/2007 Page 15 of 26
findings approved and recorded by the tribunal i.e., the assessee being owner
of an existing house.
20. In view of the aforesaid position, substantial question No. 2 in ITA
No. 406/2005 is answered against the appellant-assessee and in favour of the
Revenue.
21. This brings us to the last issue and the substantial question of law in
ITA No. 405/2005, which was the only issue argued by the counsel for the
appellant-assessee. The question raised relates to substitution of the sale
consideration with the market value of the shares quoted at the stock
exchange on 5th May, 1998 as the fair market value of the shares. In other
words, the issue raised is whether the Assessing Officer could have changed
the actual sale consideration of Rs.500/- per share of NIIT, with the market
price of Rs.1,493/- per share of NIIT as on 5th May, 1998. The Assessing
Officer had on the basis of the fair market value increased the total sale
consideration from Rs.5,00,00,000/- to Rs.14,93,00,000/-.
22. Section 48 of the Act deals with computation of income chargeable
under the head "capital gains". The relevant portion of Section 48 reads as
under:-
"48. Mode of computation.--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: --
(i) expenditure incurred wholly and exclusively in
connection with such transfer;
ITA Nos. 405/2005, 406/2005 & 389/2007 Page 16 of 26
(ii) the cost of acquisition of the asset and the cost of
any improvement thereto;"
Section 48 refers to the full value of consideration received or
accruing as a result of transfer of a capital asset. It states that from the full
value of consideration received or accruing, deduction would be allowed in
respect of expenditure incurred wholly and exclusively in connection with
the transfer and cost of acquisition of asset and cost of any improvement
thereto. The provisos relate to benefit in the form of index cost of
improvement, etc. with which we are not concerned and, hence, no reference
is being made. Interpretation of expression "full value of the consideration
received or accruing" had come up for consideration before the Supreme
Court in Commissioner of Income Tax, West Bengal and Another versus
George Henderson and Company Limited, [1967] 66 ITR 622 (SC) in
which pari materia provision in the form of Section 12B of the Income Tax
Act, 1922 was examined and interpreted. In the said case, shares had been
transferred for consideration of Rs.136/- per share when the market value on
the date of transfer was Rs.620/- per share. The Assessing Officer had
treated the difference of Rs.484/- per share as income arising from sale of
shares treating the market price of Rs.620/- per share as full value of
consideration. The Supreme Court did not agree with the Revenue and held
that actual consideration had to be taken into account and not the market
price. It was observed as under:-
"4. For the reasons already stated, we are of the opinion that
the expression "full value of the consideration" cannot be
construed as the market value but as the price bargained for
by the parties to the sale. The dictionary meaning of the word
ITA Nos. 405/2005, 406/2005 & 389/2007 Page 17 of 26
"full" is "whole, or entire, or complete" (Shorter Oxford
English Dictionary). The word "full" has been used in this
section in contrast to "a part of the price". Consequently, the
words "full price" mean "the whole price". Clause (2) of
Section 12-B itself clearly suggests that if no deductions are
made as mentioned in sub-clause (ii) thereof, then that
amount represents the full value of the consideration or the
full price. In other words, when deductions are made as
specified in sub-clauses (i) and (ii), then that amount does
not represent the full value. The expression "full value"
means the whole price without any deduction whatsoever
and it cannot refer to the adequacy or inadequacy of the price
bargained for. Nor has it any necessary reference to the
market value of the capital asset which is the subject-matter
of the transfer."
The ratio was followed in Commissioner of Income Tax, Calcutta
versus Gillanders Arbuthnot and Company, [1973] 87 ITR 407 (SC).
23. The aforesaid two decisions did not examine the proviso to Section
12B(2) of the Income Tax Act, 1922, which was incorporated as Section 52
of the Act, i.e. Income Tax Act, 1961. Subsequently, the first proviso was
numbered as sub-section (1) with insertion of sub-section (2) with effect
from 1st April, 1964. However, Section 52 was deleted/omitted by Finance
Act, 1987 with effect from 1st April, 1988 in view of the judgment of the
Supreme Court explaining both sub-sections 1 and 2, in the case of K.P.
Varghese (supra), Section 52 of the Act before its omission was as under:-
"52. (1) Where the person who acquires a capital asset
from an assessee is directly or indirectly connected with
the assessee and the Income Tax Officer has reason to
believe that the transfer was effected with the object of
avoidance or reduction of the liability of the assessee
under Section 45, the full value of the consideration for
ITA Nos. 405/2005, 406/2005 & 389/2007 Page 18 of 26
the transfer shall, with the previous approval of the
Inspecting Assistant Commissioner, be taken to be the
fair market value of the capital asset on the date of the
transfer.
(2) Without prejudice to the provisions of sub-section
(1), if in the opinion of the Income Tax Officer the fair
market value of a capital asset transferred by an assessee
as on the date of the transfer exceeds the full value of
the consideration declared by the assessee in respect of
the transfer of such capital asset by an amount of not
less than 15 per cent of the value declared, the full value
of the consideration for such capital asset shall, with the
previous approval of the Inspecting Assistant
Commissioner, be taken to be its fair market value on
the date of the transfer."
Interpreting sub-section (1) to Section 52 in K.P. Varghese (supra), it
was held that the said provision applies where an assessee transfers a capital
asset in respect of which (i) the transferee was a person directly or indirectly
connected with the assessee; and (ii) the Assessing Officer has reasons to
believe that the transfer was given effect with the object of avoid or reduce
liability of the assessee to tax on capital gains. When the two conditions
were satisfied, the fair market value of the capital asset on the date of
transfer was to be taken as the full value of consideration for taxing capital
gains. On the second contention, it was held that an under-statement of
consideration in respect of the transfer than what was actually received must
be shown. Under-statement of consideration cannot be assumed because the
fair market value was higher than the amount received. Higher fair market
value by itself cannot be a ground and reason to assume and hold that there
was under-statement of consideration. It was only when there was under-
ITA Nos. 405/2005, 406/2005 & 389/2007 Page 19 of 26
statement of consideration i.e., when consideration actually received was
higher and more than actually declared, that the fair market value of the
capital asset on the date of transfer was to be taken as the full value of
consideration. Therefore, under-statement should be first established and
then the Assessing Officer could take the fair market value of the share
capital asset as the full value of consideration. The exact words used by the
Supreme Court read as under:-
"7. The first consideration to which we must refer is the
object and purpose of the enactment of Section 52 sub-
section (2). Prior to the introduction of sub-section (2),
Section 52 consisted only of what is now sub-section (1).
This sub-section provides that where an assessee transfers a
capital asset and in respect of the transfer two conditions are
satisfied, namely, (i) the transferee is a person directly or
indirectly connected with the assessee and (ii) the Income
Tax Officer has reason to believe that the transfer was
effected with the object of avoidance or reduction of the
liability of the assessee to tax on capital gains, the fair
market value of the capital asset on the date of the transfer
shall be taken to be the full value of consideration for the
transfer and the assessee shall be taxed on capital gains on
that basis. The second condition obviously involves
understatement of the consideration in respect of the transfer
because it is only by showing the consideration for the
transfer at a lesser figure than that actually received that the
assessee can achieve the object of avoiding or reducing his
liability to tax on capital gains. And that is why the marginal
note to Section 52 reads: "Consideration for the transfer in
cases of understatement". But, it must be noticed that for the
purpose of bringing a case within sub-section (1), it is not
enough merely to show understatement of consideration but
it must be further shown that the object of the understatement
was to avoid or reduce the liability of the assessee to tax on
capital gains. Now it is necessary to bear in mind that when
ITA Nos. 405/2005, 406/2005 & 389/2007 Page 20 of 26
capital gains are computed by invoking sub-section (1) it is
not any fictional accrual or receipt of income which is
brought to tax. Sub-section (1) does not deem income to
accrue or to be received which in fact never accrued or was
never received. It seeks to bring within the net of taxation
only that income which has accrued or is received by the
assessee as a result of the transfer of the capital asset. But
since the actual consideration received by the assessee is not
declared or disclosed and in most of the cases, if not all, it
would not be possible for the Income Tax Officer to
determine precisely what is actual consideration received by
the assessee or in other words how much more consideration
is received by the assessee than that declared by him, sub-
section (1) provides that the fair market value of the property
as on the date of the transfer shall be taken to be the full
value of the consideration for the transfer which has accrued
to or is received by the assessee. Once it is found that the
consideration in respect of the transfer is understated and the
conditions specified in sub-section (1) are fulfilled, the
Income Tax Officer will not be called upon to prove the
precise extent of the undervaluation or in other words, the
actual extent of the concealment and the full value of the
consideration received for the transfer shall be computed in
the manner provided in sub-section (1). The net effect of this
provision is as if a statutory best judgment assessment of the
actual consideration received by the assessee is made, in the
absence of reliable materials."
Supreme Court held that the scope of sub-section (1) to Section 52
was extremely limited, and applied when the transferees were directly or
indirectly connected with the assessee and to cases where there was actual
under-statement, in the sense that the income/consideration paid was in fact
higher and more than declared. Interpreting sub-section (2) and not
accepting the strict literal construction, it was held that sub-section (2)
would apply only when the consideration in respect of transfer was under-
ITA Nos. 405/2005, 406/2005 & 389/2007 Page 21 of 26
stated by the assessee by 15% and in that event the Assessing Officer could
take the market value instead of the consideration declared or disclosed by
the assessee as the full value of consideration received or accrued. Sub-
Section (2) would not apply where the consideration declared or disclosed
by the assessee was the actual consideration received by it, but this actual
consideration was less than the fair market value. Where the assessee had
declared truly and correctly the consideration received by him, sub-section
(2) would not apply and cannot be invoked to substitute the actual
consideration received with the fair market value of the consideration.
24. In view of the aforesaid discussion and pronouncement of law in K.P.
Varghese (supra), we fail to fathom how the tribunal had distinguished the
said decision solely and entirely on the ground that in the present case the
transaction was not at arms length (see paragraphs 18 and 19 of the order of
the tribunal quoted above in paragraph 16). K.P. Varghese (supra) case
holds that sub-sections (1) and (2) relate to transactions, which were not at
arms length between related parties and third parties respectively, but the
two provisions were integrally connected inasmuch as they would apply
when there was evidence and material to show that the consideration
declared and disclosed was under-stated and not the actual consideration
received by the assessee. Only when the said pre-condition was satisfied,
the Assessing Officer was entitled to treat the fair market value as the full
value of consideration. Difference between the consideration actually
received and market value of consideration by itself would not justify
invoking the said Section. The aforesaid ratio has been followed by the
Supreme Court in Commissioner of Income Tax, Madras versus Shivakami
ITA Nos. 405/2005, 406/2005 & 389/2007 Page 22 of 26
Company Private Limited, [1986] 159 ITR 71 (SC), which observes that the
provision would apply only when there was consideration and which
consideration actually received was more than the consideration disclosed or
declared. Further, onus was on the Revenue to prove under-statement of the
said consideration. Section 52 was not meant to apply to tax capital gains on
the basis that the assessee might have gained or could have gained a higher
price which in fact was not received. Reference can be also made to
Commissioner of Income Tax, Bombay versus M/s Godavari Corporation
Limited, [1993] 200 ITR 567 (SC) and judgments of this Court in CIT
versus Dinesh Jain, HUF, [2013] 352 ITR 629 (Del) and Commissioner of
Income Tax versus Late Sh. Gulshan Kumar (Decd.) through L.R., [2002]
257 ITR 703 (Del).
25. As noted above, Section 52 of the Act was omitted by Finance Act,
1987 with effect from 1st April, 1988. The said provision, therefore, was not
applicable in the Assessment Year 1999-2000. We have referred to the
aforesaid judgment in K.P. Verghese (supra) as this judgment was referred
to and distinguished by the tribunal in the impugned order. We have also
referred to K.P. Verghese (supra) to elucidate that the legal ratio propounded
with reference to then applicable Section 52 of the Act would be against the
Revenue even if the said Section was applicable. It is obvious that when
Section 52 of the Act itself was not applicable, the Assessing Officer could
not have substituted the actual sale consideration received by the Assessee
with another figure stating that this was the fair market value. The aforesaid
discussion would also take care of the argument that M/s GIPL had paid for
foreign travel of the assessee. The fact that M/s GIPL had incurred any such
ITA Nos. 405/2005, 406/2005 & 389/2007 Page 23 of 26
expenditure would not be a ground and reason to substitute the actual
consideration received with the figure relying upon the market quotation of
the share as the fair market value.
26. It is not that the Revenue was remediless in the present case. The
difference between the fair market value and the actual consideration
declared could have been taxed as gift under the Gift Tax Act, 1958 which
was applicable till 1st August, 1998. However, for some reason which
Revenue is unable to explain, provisions of the Gift Tax Act, 1958 were not
invoked and applied. Thus, what was apparent and simple to adopt and tax
the under-statement of fair market value, was strangely ignored and allowed
to lapse. Addition was made, indirectly invoking Section 52, which
provision was not in the Statute, and which provision as per Judicial
pronouncement in K. P. Vergese (supra) could not have been invoked.
27. We had repeatedly adjourned the matter to enable the counsel for the
Revenue to ascertain and justify how the fair market value could be
substituted for the consideration declared as the transaction in the present
case was certainly not at arms length and subterfuge was adopted. Counsel
for the Revenue, after due deliberation had expressed his inability to justify
the said substitution stating that there was a gap or lacuna, which was
rectified by statutory amendments subsequently. However, reference was
made to the Calcutta High Court judgment in Mrs. A. Ghosh versus
Commissioner of Income Tax, West Bengal-II, [1983] 141 ITR 45 (Cal).
In the said case, the assessee had acquired debentures, which were
subsequently exchanged by exercising option to acquire fully paid up equity
shares. The acquired equity shares were sold. Dispute arose as to the cost
ITA Nos. 405/2005, 406/2005 & 389/2007 Page 24 of 26
of acquisition of the equity shares. It was held that cost to acquire the
debentures cannot be treated as the cost of acquisition of equity shares for
acquisition of the debenture with the right to conversion for acquisition of
shares and acquisition of equity shares were two different goods. We would
not go into the said aspect or ratio and pronounce our opinion on the same
for this is not the issue arising in the present case. The Calcutta High Court
was not examining the same factual background. The Calcutta High Court
was examining issue of the cost of acquisition of the equity shares. The
appellant-assessee had acquired non-cumulative preference shares on
transfer of 100000 equity shares of NIIT. This is not in debate or doubt.
This is not the case of the Revenue that the market value of the non-
cumulative preference equity shares were issued by M/s GIPL were of a
higher value. Non-cumulative preference shares did not have right of
conversion. Non-cumulative preference equity shares were redeemed at par
during the relevant period and payment of Rs.5,00,00,000/- was received.
28. Accordingly, the substantial question of law in ITA No. 405/2005 is
answered in favour of the assessee and against the Revenue. Decision of the
tribunal to this extent is set aside and reversed. Tribunal was not correct in
holding that the market value of the shares quoted in the stock exchange on
5th May, 1998 can be taken as a basis for computing capital gains under
Section 48 of the Act.
29. In view of the aforesaid finding on the substantial question of law
framed in ITA No. 405/2005, we are not required to frame any substantial
question of law in ITA No. 389/2007 filed by the Revenue impugning the
order deleting/cancelling penalty for concealment of income under Section
ITA Nos. 405/2005, 406/2005 & 389/2007 Page 25 of 26
271(1)(c) of the Act. The said appeal would be treated as dismissed.
30. Appeals are disposed of, with no order as to costs.
-sd-
(SANJIV KHANNA)
JUDGE
-sd-
(PRATHIBA M. SINGH)
JUDGE
APRIL 20, 2018
Pk/VKR
ITA Nos. 405/2005, 406/2005 & 389/2007 Page 26 of 26
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