50C is not applicable where property is indirectly sold by way of trf of shares – Mum ITAT


Shri Irfan Abdul Kader Fazlani vs ACIT I.T.A. NO.8831/M/2011 (Mum ITAT)

Background:

Assessee is a shareholder in M/s. Kamala Mansion Pvt. Ltd (KMPL). Along with other shareholders of this company, the assessee sold his shares for a consideration of Rs. 37.51 lakhs and capital gains were offered on that basis. KMPL owns two flats in a building known as Om Vikas Apartments situated at Walkeshwar Road, Mumbai and the said flats are regularly given on rent and the rent is declared by KMPL as ‘income from the house property’. Assessee sold his 306 shares for a sum of Rs. 37,51,369/­ and earned  long term capital gains.

AO held that by engineering the sale of the shares of all other shareholders of M/s. KMPL, the assessee effectively transferred the immovable property belonging to the assessee, therefore, it is an indirect way of transferring the immovable properties for lesser consideration and, therefore, the provisions of section 50C of the Act have application to the facts of the case and consequently, AO applied the guideline prices of the flats and worked out the capital gains. Further, AO treated this case as an eligible case for piercing of corporate veil. He accordingly ‘pierced the corporate veil, invoked s. 50C and computed the capital gains by adopting the stamp duty value of the flats.

Assessee’s contentions:

  • The capital assets transferred are the shares of the company and not the land or building or the both.
  • Section 50C creates a deeming fiction and the meaning of the same cannot be extended as the deemed provision has to be strictly interpreted as held in a judgment in the case of CIT v Shrishakti Trading Co. 207 ITR 442 (Bom)
  • Supreme Court in Vodafone International Holding BV vs UOI (2012) 341 ITR 1 (SC) held that for a corporate veil to be lifted, revenue has to look at the transaction as a whole and will not adopt a dissecting approach
  •  Property was purchased approximately 20 years back (and after several years of incorporation). Rental income of property was taxed in the hands of KMPL
  • Purchasers of the shares are not related party
  • Shares are valued as per NAV method which is appropriate in the instant case. Further, immovable assets continue to be in the name of KMPL

Revenue Arguments:

  • What is apparent is not real and this is a case of transfer of piece of real estate in order to circumvent section 50C of the Act and the applicability of registration laws etc.
  • This is a fit case for lifting of the corporate veil.

HELD:

  • S. 50C applies only to the transfer of a “capital asset, being land or building or both”, “assessed” by any authority of a State Government for stamp duty purposes.
  • The expression “assessable” has inserted into the statute with prospective application w.e.f 1.10.2009 whereas the assessment year under consideration is 2007-08 and 2008-09.
  • Expression “transfer” shall have to be a direct transfer as defined u/s 2(47) of the Act which does not include the tax planning adopted by the assessee. It is settled issue that the provisions of section 50C are deemed provisions and, therefore, the same have to be interpreted strictly in accordance with the spirit of the provisions.
  • The subject matter of transfer is shares in a company and not land or building or both. The assessee did not have full ownership on the flats which are owned by the company.
  • The transfer of shares was never a part of the assessment of the Stamp duty Authorities of the State Government. Also, the company was deriving income which was taxable under the head ‘income from property’ for more than a decade.
  • Consequently, the action of the AO & CIT(A) to invoke s. 50C to the tax planning adopted by the assessee is not proper and does not have the sanction of the provisions of the Act.

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