India: Consideration For Transfer Cannot Be Replaced By Fair Market Value By Invoking Provisions Of Section 50D Unless The Same Is Indeterminate Or Unascertainable

Last Updated: 4 September 2018
Article by SKP  

Recently, the Ahmedabad Tribunal in case of Gujarat Fluorochemicals Ltd1 held that the full value consideration, to compute capital gain under a slump sale transaction, cannot be replaced with Fair Market Value (FMV) of the assets transferred by involving provisions of Section 50D.

The ruling also covers certain additional grounds. However, this alert focusses purely on the aspect as to whether the tax authorities can replace the consideration of transfer by adopting the FMV of assets.

Facts of the case

  • M/s Inox Renewable Ltd (IRL) was a 99.98% subsidiary of the taxpayer company. The taxpayer company sold its entire wind energy business to IRL for a lump sum consideration of INR 10 million on 30 March 2012.
  • In the course of the revenue audit, the Assessing Officer (AO) observed that two days after the alleged transaction, i.e., on 1 April 2012, IRL got revalued and considered FMV of the assets at INR 4,378 million. The AO invoked the newly inserted Section 50D in the Income Tax Act (IT Act) which became effective from the financial year 2012-13.
  • Section 50D provided that if the consideration for the transfer of a capital asset is not ascertainable or cannot be determined, then the capital gain would be computed by adopting FMV of the capital asset.
  • Based on the above provision of law, the AO by making a reference to a large number of documents and circumstances, held the date of transfer to be in the financial year 2012-13 and replaced the consideration of INR 10 million for transfer by FMV by invoking provisions of Section 50D.

Issue before the Tribunal

  • Amongst other issues, one of the main issues was whether in view of Section 50D, FMV of the asset could replace the sale consideration?

Taxpayer's Contention:

  • The counsel for the assessee placed reliance on several rulings2 including that of the Apex Court and argued that there was no provision permitting replacement of the full value of consideration agreed upon between the parties.
  • With respect to the applicability of Section 50D, he pointed out that the said section can be invoked only in the circumstances where the consideration of transfer is not ascertainable or cannot be determined and not where the tax department feels that the consideration is on the lower side.
  • In support of his argument, the counsel placed reliance on the ruling of the Bombay High Court (HC) in the case of CIT vs Morarjee Textiles Ltd wherein the court laid the below principles:

    • In cases where the genuineness was not disputed with any evidence, it was not open to discard the documents and/or transaction on the basis of some supposed object/intent;
    • Power under Section 50D of the Act is only to be exercised if the Assessing Officer comes to a finding that the consideration received is not ascertainable or cannot be determined.

It is also pertinent to note that the Bombay HC in the above case referred to the decision of the Co-ordinate Bench of the Tribunal in the case of MGM Shareholders Benefit Trust3 disregarding the substitution of full value consideration by FMV which decision has been accepted by the Revenue, as no appeal from the same has been filed by the Revenue.

Tribunals ruling

  • The Tribunal observed that in this case, there is a stated or agreed consideration of INR 10 million in the agreement itself.
  • In the absence of any finding by the AO or the DRP that the consideration was not ascertainable or cannot be determined, following the principles laid by the Bombay High Court in the case of Morarjee Textiles, the Tribunal held that provisions of Section 50D cannot be invoked in the present case.
  • It further noted that section 50B itself provides that any revaluation has to be ignored. Considering the same it ruled that, even if it is to be construed for the sake of arguments that transaction has taken place in the financial year 2012-13, then also the AO cannot replace the sale consideration disclosed by the assessee as per Section 50D with FMV.

SKP's comments

This ruling not only confirms the limited applicability of provisions of Section 50D but also reaffirms the position that the consideration for transfer as is agreed between the parties cannot be replaced unless there is an explicit provision made by the law.

It also reiterates that it is not open for the tax authorities to discard the documents and/or transaction on the basis of some supposed object/intent without pointing out any evidence to substantiate that the transaction was not genuine. At the same time, it is pertinent to note that an equal onus lies with the assessee to substantiate the genuineness of the transaction and its commercial nexus.

Footnotes

1 ITA No.805/Ahd/2017 and ITA No.2744/Ahd/2017

2 CIT vs Gaurangibiben S. Shodhan, 367 ITR 238 (Guj HC), CIT vs George Henderson and Co Ltd (66 ITR 622 - Supreme Court); CIT vs M/s Morarjee Textiles Ltd (tax appeal no.738 of 2014.-Bom HC) etc.

3 Income Tax Appeal No.316/Mum/2009

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Sign Up
Gain free access to lawyers expertise from more than 250 countries.
 
Email Address
Company Name
Password
Confirm Password
Position
Industry
Mondaq Newsalert
Select Topics
Select Regions
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions