Facts of the Case

  • The assessee, Arjun Malhotra, sold 1,00,000 shares of NIIT to M/s Glad Investment Pvt. Ltd. and declared the date of transfer as 14.08.1997.
  • He claimed exemption under Section 54F after investing in a residential property at Golf Links, New Delhi.
  • The Assessing Officer (AO) found that:
    • The shares were actually transferred only on 05.05.1998, when they were released by the bank to the buyer.
    • The transaction was not at arm’s length and involved a closely related entity.
    • Consideration of ₹5 Crores was not genuine and market value was significantly higher.
  • AO recomputed capital gains using market value (~₹1493/share) instead of declared price (₹500/share).
  • Penalty proceedings under Section 271(1)(c) were also initiated.

Issues Involved

  1. Whether the date of transfer of shares was 14.08.1997 or 05.05.1998?
  2. Whether the assessee was eligible for exemption under Section 54F?
  3. Whether the AO could substitute declared sale consideration with fair market value under Section 48?
  4. Whether penalty under Section 271(1)(c) was justified?

Petitioner’s Arguments (Assessee)

  • Transfer was completed on 14.08.1997 based on agreement and intention.
  • Consideration of ₹5 Crores was genuine and paid via preference shares.
  • Claimed valid exemption under Section 54F.
  • AO wrongly substituted actual consideration with market value without statutory backing.

Respondent’s Arguments (Revenue)

  • Transfer actually occurred on 05.05.1998, when shares were delivered by the bank.
  • Agreement dated 14.08.1997 was sham and backdated.
  • Transaction was between related parties and not genuine.
  • Market value should be adopted due to manipulation of consideration.
  • Penalty justified due to concealment of income.

Court Order / Findings

1. Date of Transfer

  • The Court upheld that transfer took place on 05.05.1998, not on 14.08.1997.
  • Delivery of shares is essential to complete transfer.

2. Section 54F Exemption

  • Assessee failed to prove sale of another residential property before purchase.
  • Hence, exemption under Section 54F was denied.

3. Substitution of Sale Consideration (Section 48)

  • Court held:
    • Actual consideration must be taken, not market value.
    • Reliance placed on K.P. Varghese case principle.
    • Market value substitution is not permissible unless understatement is proved.

4. Penalty under Section 271(1)(c)

  • Tribunal had deleted penalty.
  • Revenue’s appeal did not succeed.

Important Clarification by Court

  • Fair Market Value cannot replace actual consideration merely because:
    • Transaction is between related parties, or
    • Market value is higher.
  • Burden lies on Revenue to prove understatement of consideration.
  • Section 52 (old provision allowing substitution) had already been deleted, thus not applicable.

Sections Involved

  • Section 2(47) – Definition of Transfer
  • Section 45 – Capital Gains
  • Section 48 – Computation of Capital Gains
  • Section 54F – Exemption on Investment in Residential Property
  • Section 271(1)(c) – Penalty for Concealment

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2018:DHC:2606-DB/SKN20042018ITA4052005.pdf

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