The case revolves around the recharacterization of a transaction by the Income Tax Department of India, involving Sangita Kshetry[1] (‘the Assessee’) and others with the Assessing Officer (AO) and the Dispute Resolution Panel (DRP). The key issue is whether a sale of shares in a private company (UEM India Pvt. Ltd.) should be treated as a sale of shares (long-term capital gains) or as a sale of underlying assets of the company (short-term capital gains). The tribunal ruled that the “lookthrough” approach adopted by the AO to treat the sale of shares as the sale of the company’s assets was incorrect and unsupported by law.
Here is a detailed summary of the facts, arguments, key findings, and precedents from the case as elaborated in the document:
Facts of the Case
- The Assessee, a senior citizen and US tax resident, sold 5,74,418 shares of UEM India Pvt. Ltd. to Toshiba Corporation for INR 14.25 crore.
- The sale price per share was INR 248.12, determined by a formula in the Shareholders Agreement (SHA).
- The Assessee declared the gain as long-term capital gain and returned income accordingly.
- After acceptance of the original return, reassessment proceedings were initiated under Section 148 of the Income Tax Act based on information that the transaction was a sale of underlying assets, not shares.
- The AO computed short-term capital gains using a “lookthrough” approach and adopted a total capitalized value of INR 484.13 crores (value of the company in perpetuity) for the calculation, rejecting the declared sale price.
- The DRP upheld the reassessment order and computed addition to income accordingly.
Argument posed by the Assessee are as under:
- The reassessment proceedings were illegal, void, and based on a change of opinion.
- The approval given under Section 151 for reassessment was mechanical and without independent application of mind.
- The issuance of the reassessment notice violated CBDT circulars.
- The AO wrongly considered the Assessee and Toshiba as related parties.
- The actual sale price was determined by the SHA formula, not by Discounted Cash Flow (DCF) valuation.
- The AO’s approach was self-contradictory and arbitrary in rejecting the valuation report.
- The transaction was a sale of shares (capital assets), not sale of underlying assets; thus, Section 50 (relating to depreciable assets) was not applicable.
- The valuation method and substituted sale consideration by the AO were incorrect and without legal basis.
- Reference to the Departmental Valuation Officer was unwarranted and time-barred.
Key Findings of the Tribunal
- The reassessment was valid as it was based on new information not available during the original assessment, not merely a change of opinion.
- The approval under Section 151 was upheld as based on independent application of mind.
- The reassessment was not violative of applicable CBDT circulars.
- The SHA clearly showed the transaction was for sale of shares to Toshiba, a third party, at a price agreed by formula.
- The “lookthrough” approach adopted by the AO to treat a sale of shares as a sale of underlying assets was erroneous and had no statutory basis.
- Shares sold were capital assets, not depreciable assets, so Section 50 and related provisions were inapplicable.
- The valuation method adopted by the AO (taking the company’s total capitalized value in perpetuity) for computing full value of consideration was not correct for the assessment year.
- The Departmental Valuation Officer’s report was neither received nor relied upon, making that aspect academic.
- The sale consideration agreed upon in the SHA should be accepted unless evidence of excess payment over agreed price is found.
- Several judicial precedents were cited supporting these views, including the Supreme Court judgment in Vodafone International Holdings B.V.[2].
- The tribunal directed the deletion of short-term capital gains addition and upheld the long-term capital gain declaration of the Assessee.
This elaborate judgment emphasizes the principle that tax authorities cannot disregard the legal substance of a genuine transaction between unrelated parties unless there is clear statutory authority or convincing evidence. The “lookthrough” approach to recharacterize sale of shares as sale of assets without statutory backing or proof is impermissible.
The case highlights critical thresholds for reopening assessments, the limits of reassessment on mere change of opinion, and proper valuation norms in share sale transactions for capital gains tax computation.
This ruling is instructive for taxpayers, tax authorities, and legal practitioners concerning recharacterization and reassessment issues in the Indian Income Tax framework. It robustly defends taxpayer rights against unwarranted reassessment and valuation rigour in share sale transactions.
For detailed discussion, please feel free to contact devadhaantu@devadhaantu.in
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[1] Sangita Kshetry [ITA No.1876/Del/2023]
[2] Vodafone International Holdings B.V. v. Union of India and Ors. (2012) 341 ITR 1 (SC)
