Allowance for recalculating capital gains using a lesser value of consideration when selling stock shares

Fact and issue of the case

The captioned appeal has been filed by the Revenue challenging the impugned order dated 25/11/2021, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals)–54, Mumbai, [“learned CIT(A)”], for the assessment year 2009–10

The present appeal is delayed by 130 days. At the time of the hearing, the learned Departmental Representative (“learned DR”) by referring to the authorisation memo submitted that the copy of the impugned order was received on 16/12/2021, and the last date for filing of appeal, in this case, was 14/02/2022. By placing reliance upon the order dated 10/01/2022, passed by the Hon’ble Supreme Court, in M.A. no.21 of 2022, in M.A. no.665 of 2021, in Suo-Motu Writ Petition (Civil) no.3 of 2020, the learned DR submitted that the limitation period for filing the appeal was extended upto 29/05/2022, and the Revenue filed the present appeal on 27/05/2022. Thus it was prayed that the present appeal be heard on merits. The learned Authorised Representative (“learned AR”) did not raise any objection against the prayer for condonation of delay. In view of the above, since the present appeal has been filed within the extended time granted by the Hon’ble Supreme Court during the Covid period, therefore there is no delay in filing the present appeal and we proceed to decide the same on merits

In its appeal, the Revenue has raised the following grounds:–

On the face and in the circumstances of the case and in law, the learned CIT(A) erred in directing to compute the capital gains considering Rs. 25,00,000 as total consideration received for sale of equity shares of Shivalik Land Development Limited to Virasat Agro Foods Private Limited as against Rs. 10,00,00,000 shown by the assessee in its return of come

On the facts and in the circumstances of the care and in law, the learned CIT(A) erred in holding that the re-negotiated sales consideration of Rs. 23,00,000/- for sale shares of Shivalik Land Development Limited to Virasat Agro Foods Private Limited as genuine, without appreciating the cost of the land held by Shivalik Land Development Limited which was mortgaged to the assessee company vide Mortgage Deed dated 12.12 2008

The Applicant craves to leave, to add to amend and/or to alter any of the ground of appeal, if need be. The appellant craves leave to amend or alter any grounds or add a new ground, which may be necessary

The only grievance of the Revenue is against the recomputation of capital gains by considering the lower value of consideration for the sale of equity shares than the consideration initially agreed among the parties

The brief facts of the case pertaining to this issue are: The assessee is a company engaged in the business of real estate projects, advisory, construction, and development of real estate projects. For the year under consideration, the assessee filed its return of income on 29/09/2009, declaring total income at Rs. 22,98,44,928. In its return of income, the assessee also offered the capital gains on the transfer of shares of its wholly-owned subsidiary, i.e. Shivalik Land Development Ltd, considering the full value of consideration at Rs.10 crore. The return of income filed by the assessee was selected for scrutiny. Vide assessment order dated 26/12/2011, passed under section 143(3) of the Act, the income of the assessee was determined at Rs.27,28,75,510, after making disallowance under section 14A of the Act. In its appeal before the learned CIT(A), the assessee raised an additional ground of appeal relating to a recomputation of capital gains on the sale of shares of its wholly-owned subsidiary by revising the sale consideration from Rs.10 crore to Rs.25 lakh, on the basis that the parties have entered into Settlement Deed and Supplementary Share Purchase Agreement, whereby the total consideration of the sale of shares of the wholly-owned subsidiary company was reduced to Rs.25 lakh. The learned CIT(A) vide order dated 27/01/2014, rejected the request of the assessee to admit the additional ground of appeal. In further appeal, the Co–ordinate Bench of the Tribunal vide order dated 28/08/2017, set aside the matter on this issue to the file of the Assessing Officer (“AO”) to verify the genuineness of the claim of the assessee that sale consideration has been reduced from Rs. 10 crore to Rs. 25 lakh and decide this issue de novo

Observation of the court

We have considered the rival submissions and perused the material available on record. In the present case, on 28/07/2006, the assessee acquired 50,000 shares of Rs.10 each, being 100% share capital of Shivalik Land Development Ltd. M/s Padmini Technologies Ltd was the owner of land admeasuring 11.42 acres situated in the revenue estate of village Kherki Daula, Distt Gurgaon. M/s Padmini Technologies Ltd approached the assessee for obtaining financial help to obtain a commercial license from the DTCP, Haryana in respect of the said land. Accordingly, the assessee through its wholly-owned subsidiary, i.e. Shivalik Land Development Ltd, had entered into Development Agreement dated 01/03/2007, with M/s Padmini Technologies Ltd. The assessee gave a loan of Rs.30 crore to its wholly-owned subsidiary as financial help. This amount of Rs.30 crore was invested by the wholly-owned subsidiary company as a licence fee for obtaining a commercial license in respect of the above-mentioned land with DTCP as per the Development Agreement. As there was a change of business plan, the assessee decided to discontinue the investment in the said land. On the request by M/s Padmini Technologies Ltd, Shivalik Land Development Ltd. made an application dated 16/04/2008, for withdrawal of licence applications and sought a refund of license fee from DTCP, Haryana. Thereafter, M/s Padmini Technologies Ltd approached the assessee and the wholly-owned subsidiary to take back the withdrawal application and find another investor. Accordingly, a new investor, M/s Virasat Agro Foods Private Limited was founded by the assessee and its wholly-owned subsidiary company. The assessee had entered into Share Purchase Agreement dated 04/12/2008, with M/s Virasat Agro Foods Private Limited to sell the shares of Shivalik Land Development Ltd. for a total consideration of Rs.10 crore. Capital gain, from the aforesaid share purchase transaction, was offered by the assessee while filing its return of income

As per the assessee, since LOI was not issued by the authorities, therefore as per the aforesaid clause the assessee could have encashed the cheque on 31/07/2009. However, as noted above the said cheque was returned unpaid due to insufficient funds, and therefore the assessee initiated proceedings under section 138 of the Negotiable Instrument Act. Nothing has been brought on record by the Revenue to show that the valuation of shares of Shivalik Land Development Ltd. is Rs.10 crore and therefore the computation of capital gains in the hands of the assessee should be done accordingly. As noted from the documents available on record, the parties agreed to a consideration of Rs.10 crore on the basis of circumstances as existing on 04/12/2008. However, subsequently, when the title of the subject land itself was found to be not clear and shrouded by litigation, the purchaser not only initiated the legal action against the seller of the land but also, on the other hand, entered into a Settlement Deed to close the transaction of sale of shares of Shivalik Land Development Ltd at Rs.25 lakh, which was already paid to the assessee. No other allegation has been made by the Revenue in the present case. Further, the Revenue has not doubted any leg of the transaction, and their plea is only limited to the revaluation of shares. There is also nothing to prove that the entire consideration of Rs.10 crore was received by the assessee and therefore the capital gains as initially offered by the assessee be upheld. Thus, in view of the peculiar facts and circumstances of the present case, we find no infirmity in the impugned order in directing the AO to recompute the capital gains on the transfer of shares of Shivalik Land Development Ltd by taking the total sale consideration at Rs.25 lakh. As a result, the grounds raised by the Revenue are dismissed