Sunday, December 1, 2013

Section 50C of ITA not applicable to transfer of Immovable Property held through Co.

In Irfan Abdul Kader Fazlani vs. ACIT (ITAT Mumbai) (Entire order available here) the assessee was the shareholder of a company called Kamala Mansion Pvt. Ltd (KMPL). KMPL owned flats in a building known as Om Vikas Apartments, located at Walkeshwar Road, Mumbai- 400 026. The assessee sold the shares for a sum of approximately  Rupees Thirty Seven Lakhs and Fifty One Thousand Only and capital gains were offered on that basis. The AO & CIT(A) held that by the sale of shares in the company, the assessee had in actual fact transferred the immovable property belonging to him, and it was merely an indirect way of transferring the flats, for lesser consideration

On these grounds the AO & CIT held that on the facts of that case, the provisions of section 50C of the Income Tax Act would apply and as a result, the AO worked out the capital gains by applying the guidelines prices of the flats and. Also, the AO held that it was a fit case for piercing of the corporate veil. On appeal by the assessee to the Tribunal, partly allowed the appeal and held that:

S. 50C applies only “where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both, is less than the value adopted or assessed by any authority of a State Government for the purpose of payment of stamp duty in respect of such transfer.” (Entire Act available here.)

The expression "transfer" has to be a direct transfer as defined u/s 2(47) which does not include the tax planning adopted by the assessee.
Section 2 (47) of the Income Tax has been reproduced below:

“"transfer", in relation to a capital asset, includes,— (i)  the sale, exchange or relinquishment of the asset ; or(ii)  the extinguishment of any rights therein ; or(iii)  the compulsory acquisition thereof under any law ; or(iv)  in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment ;[or][(iva)  the maturity or redemption of a zero coupon bond; or][(v)  any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882) ; or(vi)  any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property.[Explanation 1].—For the purposes of sub-clauses (v) and (vi), "immovable property" shall have the same meaning as in clause (d) of section 269UA.][Explanation 2.—For the removal of doubts, it is hereby clarified that "transfer" includes and shall be deemed to have always included disposing of or parting with an asset or any interest therein, or creating any interest in any asset in any manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily, by way of an agreement (whether entered into in India or outside India) or otherwise, notwithstanding that such transfer of rights has been characterised as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India;]”

The provisions of Section 50C are deemed ones and thus, they have to be interpreted strictly. On the facts of Irfan Abdul Kader Fazlani vs. ACIT, since the object of the transfer was shares in a KMPL and not land or building or both, the assessee did not have complete ownership of the flats which were owned by the KMPL. Transfer of shares was not a part of the assessment of the Stamp duty Authorities of the State Government. Also, KMPL was deriving income which was taxable under the head `income from property' for more than 10 years.

Thus, on appeal, it was held that the AO & CIT(A)erred in invoking section 50C of the Income Tax Act to the tax planning adopted by the assessee as doing so was not in accordance with the Act.


Keywords: property, Property tax, income tax act, 1961, Taxation, income tax tribunal, Assessee, section 50c, Transfer of shares, stamp duty

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