CAPITAL GAINS

According to the Mumbai Income Tax Appellate Tribunal (ITAT) 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.

The appellant, an investment company, under an MOU between the group companies, transferred shares of a group company to another group company at a cost price, which was less than the market price. The Income Tax department disregarded the transfer price and levied capital gains tax on the difference between market price and the cost price of shares.

Overturning the order of the IT department, the ITAT held that capital gains which had never actually accrued to a tax payer, cannot be brought under capital gains tax. For computing capital gains, the transfer price of the capital asset is that which the transferor actually receives for the assets that he transfers. It cannot include prevailing market price of asset which was never received by the taxpayer. Hence, 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.