The Delhi High Court has held that the AO can ascertain the Fair Market Value of the shares if it doubts the valuation.
The division bench of Justice Yashwant Varma and Justice Ravinder Dudeja stated that the AO even if it were doubting the valuation of M/s INMAC, the statute itself empowered it to undertake an exercise to ascertain the Fair Market Value of the shares. That exercise was never undertaken.
Issue Raised
Whether the ITAT has erred on the facts and in the law by deleting the addition of Rs. 10,57,89,1251/- made on account of non-genuine transaction by ignoring the discrepancies of the valuation report of the M/s AstroA wani, a loss making company?
Facts
The dispute itself pertains to the acquisition of shares of M/s Astro Awani Networks Limited (M/s Astro Awani) at INR 46.55 by the respondent-assessee. The shares were sold after 13 months to the subsidiary of the assessee, namely, M/s NDTV Emerging Markets BV at INR 544.38. It is this which led to the Assessing Officer (AO) doubting the genuineness of the transaction.
The AO chose not to accept the valuation report which was submitted by M/s INMAC and ultimately came to hold that no prudent businessman would have paid the price at which transfer was effected.
When the matter reached the Tribunal, it had essentially reversed the decision of the AO as well as the Commissioner of Income Tax (Appeals), while resting its decision on two CBDT Circulars dated 29 February 2016 and 16 May 2016.
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Circular dated 29 February 2016
Section 2(14) of the Income-tax Act, 1961defines the term “capital asset” to include property of any kind held by an assessee, whether or not connected with his business or profession, but does not include any stock-in-trade or personal assets subject to certain exceptions.
As regards shares and other securities, the same can be held either as capital assets or stock-in- trade/ trading assets or both. Determination of the character of a particular investment in shares or other securities, whether the same is in the nature of a capital asset or stock-in-trade, is essentially a fact-specific determination and has led to a lot ot uncertainty and litigation in the past.
2. Over the years, the courts have laid down different parameters to distinguish the shares held as investments from the shares held as stock-in-trade. The Central Board of Direct Taxes (‘CBDT) has also, through Instruction No. 1827, dated August 31, 1989 and Circular No.4 of 2007 dated June 15, 2007, summarized the said principles for guidance of the field formations.
3. Disputes, however, continue to exist on the application of these principles to the facts of an individual case since the taxpayers find it difficult to prove the intention in acquiring such shares/securities. In this background, while recognizing that no universal principal in absolute terms can be laid down to decide the character of income from sale of shares andsecurities (Le. whether the same is in the nature of capital gain or business income), CBDT realizing that major part of shares/securities transactions takes place in respect of the listed ones and with a view to reduce litigation and uncertainty in the matter, in partial modification to the aforesaid Circulars, further instructs that the Assessing Officers in holding whether the surplus generated from sale of listed shares or other securities would be treated as Capital Gain or Business Income, shall take into account the following
- Where the assessee itself, irrespective of the period of holding the listed shares and securities, opts to treat them as stock-in-trade, the income arising from transfer of such shares/securities would be treated as its business income,
- In respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer, if the assessee desires to treat the income arising from the transfer thereof as Capital Gain, the same shall not be put to dispute by the Assessing Officer. However, this stand, once taken by the assessee in a particular Assessment Year, shall remain applicable in subsequent Assessment Years also and the taxpayers shall not be allowed to adopt a different/contrary stand in this regard in subsequent years;
- In all other cases, the nature of transaction (i.e. whether the same is in the nature of capital gain or business income) shall continue to be decided keeping in view the aforesaid Circulars issued by the CBDT.
It is, however, clarified that the above shall not apply in respect of such transactions in shares/securities where the genuineness of the transaction itself is questionable, such as bogus claims of Long Term Capital Gain / Short Term Capital Loss or any other sham transactions.
It is reiterated that the above principles have been formulated with the sale objective of reducing litigation and maintaining consistency in approach on the issue of treatment of income derived from transfer of shares and securities. All the relevant provisions of the Act shall continue to apply on the transactions involving transfer of shares and securities .
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Circular Dated 02 May 2016
Regarding characterisation of income from transactions in listed shares and securities, Central Board of Direct Taxes (CBDT) had issued a clarificatory Circular no. 6/2016 dated 29th February, 2016, wherein with a view to reduce litigation and maintain consistency in approach in assessments, it was instructed that income arising from transfer of listed shares and securities, which are held for more than twelve months would be taxed under the head ‘Capital Gain’ unless the tax-payer itself treats these as its stock-in-trade and transfer thereof as its business income. It was further stated that in other situations, the issue was to be decided on the basis of existing Circulars issued by the CBDT on this subject. 2. Similarly, for determining the tax-treatment of income arising from transfer of unlisted shares for which no formal market exists for trading, a need has been felt to have a consistent view in assessments pertaining to such income. It has, accordingly, been decided that the income arising from transfer of unlisted shares would be considered under the head ‘Capital Gain’, irrespective of period of holding, with a view to avoid disputes/litigation and to maintain uniform approach.
It is, however, clarified that the above would not be necessarily applied in the situations where:
- the genuineness of transactions in unlisted shares itself is questionable; or
- the transfer of unlisted shares is related to an issue pertaining to lifting of corporate veil; or
- the transfer of unlisted shares is made along with the control and management of underlying business and the Assessing Officer would take appropriate view in such situations.
The above may be brought to the notice of all for necessary compliance.”
Conclusion
The court noted that the circulars themselves factor various exceptions in which case the valuation of the transactions may itself be open to doubt. Notwithstanding the aforesaid, we note that before the AO itself, the Balance Sheet of M/s Astro Awani had been placed and it showed that although its income at the time of acquisition of the stock was Nil, by the time the sale transaction came to be entered into, it had income/turnover of USD 39,96,607/-.
“In our notwithstanding the said entity having shown an ”operating” profit or loss, the same would not have detracted from the valuation which was proffered,” the court said while dismissing the appeal.
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Case Details
Case name: ACIT Versus New Delhi Television Ltd.
Citation: ITA 806/2023
Court: Delhi High Court
Decision Date: 08/08/2024
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