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Dear friends, we know that the actual Sale Consideration of Capital Assets forms the basis for computation of Capital Gain Tax and calculated as per provisions of Section 48. But in some cases, the legislature has provided the adoption of the 'Fair Market Value (FMV), as Full Value of Consideration.

There was a dispute in the calculation of Capital Gain Tax earlier in cases where capital Assets transferred were self-generated, self-acquired etc. or in cases where sale consideration is not determinable, those transactions were not considered and transfer and no capital gain was charged. There are various cases of restructuring, business re-organization, amalgamation, acquisition, transfer of goodwill, loom hours, tenancy rights, stage carrying permits etc., transfer of these were not considered as transfer and hence no Capital Gain Tax leviable.

There are various Advance Rulings relating to specific situations of 'Transfer' of 'Capital Assets'. The provisions of Section 50D has been introduced to nullify the above Advance Rulings.

Finance Act, 2012 has introduced Section 50D deeming the 'FAIR MARKET VALUE' as the Full Value of consideration in certain circumstances.

Section 50D of the Income Tax Act - An Analysis

SECTION 50D: Fair Market Value deemed to be Full Value of Consideration in Certain cases

'Where the consideration received or accruing as a result of transfer of a Capital Asset by an assessee is not ascertainable or cannot be determined the, for the purpose of computing income chargeable to tax as Capital Gains, the Fair Market Value of the said asset shall be deemed to be Full Market Value of consideration received or accruing as a result of such transfer.'

MAIN OBJECTIVE OF INTRODUCTION OF SECTION 50D

'The existing provisions of the Income-tax Act provide that on the transfer of a capital asset, capital gains are calculated as the difference between the sale consideration and the cost of acquisition.

It is proposed to insert a new Section 50D so as to provide that where the consideration received or accruing as a result of the transfer of a capital asset by an assessee, is not ascertainable or cannot be determined, then, for the purpose of computing income chargeable to tax as capital gains, the fair market value of the said asset on the date of transfer shall be deemed to be the full value of the consideration received or accruing as a result of such transfer.

This amendment will take effect from 1st April, 2013 and will, accordingly, apply in relation to the assessment year 2013-2014 and subsequent assessment years.'

 

LET'S DISCUSS SOME JUDICIAL DECISION BEFORE INTRODUCTION OF SECTION 50D

1. Amiantit International Holding Limited, Ind. Re [2010] 189 Taxman 149/322 ITR 678(AAR-New Delhi)

The applicant was an investment company holding 70% shares of AFIIL (Indian company engaged in manufacturing of glass, storage tank etc.). Another company named Amitech Cyprus Holding Limited (ACHL) was 100% subsidiary of applicant company i.e. AIHL. The applicant (AIHL) for more efficient working decided to split into two companies one for business in Europe and on for business in Asia and therefore proposed to transfer shares of AFIIL (Indian Company) to ACHL without any consideration.

it was observed by AAR (Authority for Advance Rulings) that the possibility of applicant-transferor improving its overall business by virtue of re-organisation and the mere possibility or chance of the applicant making better returns in the near or distant future as a consequence of re-organisation can hardly be regarded as consideration accruing or arising to the transferor when he has not right to receive a definite or an ascertainable amount or benefit from the transferee.

A capital gains cannot arise on the basis of uncertain and indefinite contingencies or hypothetical and imaginary estimations.it cannot be ascertained as to whether there is any valuable consideration that has accrued or arisen to the transferor and how could it be calculated to ascertain Capital Gain Tax.

It was held that the charging Section 45 and Computational Section 48 are not applicable in a situation where the consideration for transfer is not capable of being valued in definite term or it is unascertainable as on the date occurrence of Taxable Event.

2. Goodyear Type & Rubber Co., In re [2011] 199 Taxman 121/344 ITR 69(AAR-New Delhi)/ (2011)

The revenue treated the creation of better business environment as consideration for transfer of shares of the applicant company to its wholly owned subsidiary and alleged the applicant for treaty-shopping for avoidance of tax.

It was held that the profit or gain envisaged by Section 45 is not something which ambivalent or indeterminable and cannot be estimated on notional or hypnotical basis. There must exist a casual nexus between the transferor of capital asset and profit or gain accruing to or received by the assessee.

3. Dana Corporation, in re [2020]186 Taxman 187/321 ITR 178(AAR-New Delhi)

For the overall interest of the business transferred the entire assets and the entire liabilities to its successor company. The revenue contended that transfer of asset and liabilities amounts to transfer and is chargeable to capital gain tax. The applicant has contended in this case that the transfer was held for ease of doing business and for better administration of assets and liabilities for future profits or gain. The future profits or gains will not be ascertainable at this stage. The AAR has ruled in favour of the applicant.

POSITION WHERE COST OF ACQUISITION IS NOT DETERMINABLE

Prior to amendments brought by the Finance Act, 1987, similar position existed with respect to determination of 'Cost of Acquisition' of various kind of assets. There were different judgments of different courts on this matter and it was interpreted that in case of 'Cost of Acquisition', of a 'capital Asset' such as;

i) Goodwill
ii) Trade Mark
iii) Copyrights
iv) Brand Name
v) Tenancy rights, etc., if not determinable /ascertainable, the computation machinery of provisions fails and no capital gain can be said to result and therefore, there was not Capital gain Tax liable on the 'Transfer' of such assets.

The legislature by amending Section 55 by Finance Act, 1987 and onwards wherein it was provided that in relating to a capital asset being Goodwill of a business or Trade mark or Brand Name associated with the business or a right to manufacture or tenancy rights or process any article or thing or right to carry on business or loom hours etc, which is not acquired by the assessee by way of purchase at a price shall be taken to be NIL.

It means that in case of transfer of such assets under above circumstances, the entire Sale Consideration shall be Capital Gain arising from transfer of such Capital Asset, as the Cost of Acquisition in this case will be considered as NIL.

 

Note: Please note that the provisions of amended Section 55(2) provide determination of Cost of Acquisition only for intangible assets and no other asset.

To address above lacuna provisions of Section 50D was introduced by Finance Act, 1987 for determination of Cost of Acquisition, in cases where Cost of Acquisition is not ascertainable /determinable on transfer of such Capital Asset. As we have read it provides that where Sale Consideration is not determinable /ascertainable, providing that in such cases Fair Market value of such asset on the date of transfer shall be deemed to be the Sale Consideration of Asset.

SALIENT FEATURES OF THE PROVISION OF SECTION 50D

a) There must be transfer of a Capital Asset; for applicability of this section the asset transferred must be in nature of Capital Asset and not business asset or stock in trader etc., the Capital Assets transferred must be covered under definition of Capital Assets under provisions of Section 2(47) of the Act, 1961. The transfer must be definite and absolute transfer and not a limited or contingent transfer.

b) Consideration for such transfer is not ascertainable or cannot be determined; the consideration of Capital Asset transferred must be not ascertainable/determined. Provisions are applicable in such case also where in an agreement between parties the Sale Consideration mentioned as NIL, but it is a debatable issue.

c) The Capital Gain on such transfer shall be chargeable to tax in the previous year in which transfer of Capital Asset takes place irrespective of the fact whether sale consideration is received or not. Please note that Actual Realization of Sale Consideration is not relevant for the determination of liability to pay capital gain tax.

d) For computing Capital gain tax, the Fair Market Value of asset at the date of transfer shall be considered as Sale Consideration.

WHAT IS FAIR MARKET VALUE OF ASSET

Section 2(22B) of the Act,1961 defines FMV as Fair Market value of a Capital Asset means-

i) The price that the Capital Asset would ordinarily fetch on sale in the open market on the relevant date;

ii) Where the price referred to in sub-section(i) is not ascertainable, such price as may be determined in accordance with the rules made under this Act.

NOTE: WE SHALL DISCUSS AFFECTS OF PROVISIONS OF SECTION 50D IN CASE OF JOINT DEVELOPMENT AGREEMENTS IN OUR NEXT ARTICLE.

CONCLUSION

Section 50D is a further attempt by the legislature to dilute the concept of Actual Sale Consideration for computing capital gains. Situations where sale consideration is not ascertainable or cannot be determined, are those cases where apparently there is no exchanged between the seller and the buyer. When there is no Sale Consideration ascertainable or determinable the provisions of deeming Section 50D are applicable and Sale Consideration will be considered as Fair Market value of the capital asset at the date of transfer. This deeming provision is not in line with provisions of Section 48 of the Act,1961. The main purpose of the introduction of Section 50D is to check and prohibit freebies distributed by large business corporations to unrelated or strangers to avoid payment of tax.

Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness, and reliability of the information provided, the author assumes no responsibility, therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws and take appropriate advice of consultants. The user of the information agrees that the information is not professional advice and is subject to change without notice. The author assumes no responsibility for the consequences of the use of such information.


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Category Income Tax, Other Articles by - CS Deepak Pratap Singh 



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