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.


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.

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