Asset sale at a discount to not attract capital gains tax

[N.Sukumar]

MUMBAI: In a ruling that will help corporates planning to transfer
capital assets to other companies at a cost price less than the market
price, the Mumbai tax tribunal has held that tax cannot be levied on
the capital gains that never accrued. The tribunal ruled against the
income tax department’s order that considered the difference between
the transaction value and the prevailing market price as capital gains
and levied tax on it.

This particular case involved shares transaction among two group
companies of Essel at the cost price. The Mumbai Income Tax Appellate
Tribunal (ITAT) held that the difference between the cost price and
the prevailing market price cannot be construed as capital gains, if
the shares were transferred at the cost price. In this case, the
appellant is an investment company Rupee Finance & Management.

Under an MOU between the group companies, shares of a group company
were transferred to another group company at a cost price. The cost
price was less than the market price. The I-T department disregarded
the transfer price and levied capital gains tax on the difference
between market price and the cost price of shares. ITAT held that
capital gains that never accrued in reality to a tax payer cannot be
brought under capital gains tax. For computing capital gains, the
transfer price of the capital asset is what the transferor actually
receives for the assets that he transfers and it cannot include
prevailing market price of asset which was never received by the
taxpayer.

The tribunal observed that capital gain is to be computed as the
difference between full value of consideration received or accruing as
the result of the transfer of capital asset and not the fair value of
capital asset so transferred.

The decision is significant as it will have a bearing on companies who
for various reasons, transfer capital assets within the group
companies at the cost price and not necessarily at the market price.
For real estate, there are statutory provisions in the I-T Act in
section 50C to regard the stamp duty value of the property as full
value of consideration for computing capital gains unless the actual
transfer value is more than such value.

“This is an important ruling. So long as the transaction is bonafide
and not a colourable device for tax avoidance, it would be only fair
for the tax authorities not to dispute such transaction value to bring
the difference between the cost price and market price to capital
gains taxation,” said Sanjay Sanghvi, tax director at law firm Khaitan
& Co said.

N.Sukumar
Research Analyst