Introduction
In the case, Trak Services (P) Ltd v. Income Tax Officer[i] involves an appeal against the order of the Commissioner of Income-tax (Appeals) concerning the Assessment Year 2009-10. The dispute centres around the calculation of long term capital gain (‘LTCG’) by the assessee from the transfer of shares of M/s Axis IT&T Ltd. The Assessing Officer (‘AO’) contested the declared sale price, arguing for a higher market rate on the transfer date. In its decision the Income Tax Appellate Tribunal, Delhi (‘ITAT-Delhi’) emphasized the significance of the agreed sale price in the Share Purchase Agreement (‘SPA’) dated 11.01.2008 and the absence of evidence supporting fraudulent intent, ultimately ruling in favour of the assessee.
Brief facts
On 28.04.2008, Trak Services (P) Ltd. (‘Assessee Company’) engaged in a significant transaction involving the sale of 15,38,460 shares of M/s Axis IT&T Ltd., declaring a LTCG of approximately Rs. 1.30 crores.
For the abovementioned transaction, the Assessee Company reported the sale price of the shares at Rs. 13.50 per share. Notably, on the transfer date of 28.04.2008, the market value of these shares stood at Rs. 20.50 per share, as M/s Axis IT&T Ltd.’s shares were quoted in the market. It is important to note that the share transfer was an off-market transaction.
·The AO raised questions regarding the Assessee Company’s rationale for adopting a share value of Rs. 13.50 as opposed to the actual market value of Rs. 20.50 per share on the date of the transaction. This inquiry was part of the AO’s responsibility to ensure the accuracy and integrity of the tax assessment process.
Issue
The crux of the issue in this case concerns the appropriate basis for calculating LTCG on the transferred shares. The question before the ITAT-Delhi was whether the LTCG should be computed based on the market value of the shares, quoted at Rs. 20.50 per share, or according to the price agreed upon in the SPA, which was Rs. 13.50 per share. This determination was crucial as it significantly impacted the taxable income from the sale of shares and, consequently, the tax liability of the Assessee Company.
Held
The ITAT-Delhi decisively ruled that the additions made by the AO were untenable, based on the following considerations:
The SPA unambiguously stipulated that the shareholders agreed to sell their shares at a pre-determined price of Rs. 13.50 per share. This agreement was in full compliance with the Securities Exchange Board of India (‘SEBI’) regulations, and all necessary approvals were duly obtained.
The SPA explicitly confirmed the absence of any related party transactions, with payments being made as per the agreed terms.
The transaction in question was an off-market transaction involving listed shares held by the Assessee Company as an investment, as recorded in the balance sheet. The SPA, executed on 11.01.2008, set the share transfer price at Rs. 13.50 per share, mirroring the rate on the agreement’s date.
Additionally, the shareholders, owning 61% of the subscribed and fully paid-up share capital, held the unequivocal right to sell their shares, which were free of any liens, charges, or encumbrances.
Consequently, the ITAT-Delhi concluded that the AO's valuation as of 28.04.2008 was speculative and lacked a factual basis. Moreover, the ITAT-Delhi, referencing established legal precedents, stressed that unless the AO can present evidence of fraudulent intent by the assessee, the terms of an agreement should generally be upheld. In this case, no evidence of malfeasance by the Assessee Company was presented by the AO.
Our Analysis
The ITAT’s decision, in this case, is firmly rooted in established legal principles that prioritize the agreed sale price in the SPA as the definitive value of consideration for tax purposes. This ruling reinforces the principle that, in the absence of concrete evidence indicating fraud or misrepresentation, the bona fide nature of the transaction must be respected. This not only highlights the importance of adhering to the contracted transaction values in the computation of capital gains, especially in the context of off-market transactions but also sets a precedent for the interpretation and valuation of assets in similar fiscal disputes. The decision further elucidates the burden of proof required to contest declared values in such transactions, emphasizing the need for clear evidence of malfeasance to override agreed-upon prices.
End Note
[i] (2023) 106 ITR (Trib) (SN) 58
Authored by Anshi Bhatia, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.