Sec. 48 of the Act deals with the methodology to compute capital gains. Section 48 provides that the income chargeable under the head “Capital gains” shall be computed, by deducting cost of acquisition/improvement and expenditure incurred wholly and exclusively in connection with transfer from the full value of the consideration received or accruing as a result of the transfer of the capital asset
The word ‘full value of consideration’ has not been defined in the Act, except for certain specific circumstances (Sec. 50C, Sec. 50D, Sec. 50CA etc.). No specific methodology for arriving at full value of consideration has been prescribed under the Act for conversion of company into LLP.
Various judicial decisions have analysed the meaning of the term, ‘full value of consideration’. These decisions are discussed below:
CIT v George Henderson and Co. Ltd [1967] 66 ITR 622 (SC) – The Assessee had transferred shares to Giridharilal Mehta on 1.04.1946, at the book value of Rs. 136 per share, though the market value of those shares on that date was admittedly Rs. 620 per share. The AO brought difference to tax.
The Supreme Court deleted the additions and held that
“It is manifest that the consideration for the transfer of capital asset is what the transferor receives in lieu of the asset he parts with, namely, money or money’s worth and, therefore, the very asset transferred or parted with cannot be the consideration for the transfer. It follows that the expression “full consideration” in the main part of section 12B(2) cannot be construed as having a reference to the market value of the asset transferred but the expression only means the full value of the thing received by the transferor in exchange for the capital asset transferred by him. The consideration for the transfer is the thing received by the transferor in exchange for the asset transferred and it is not right to say that the asset transferred and parted with is itself the consideration for the transfer. The main part of section 12B(2) provides that the amount of a capital gain shall be computed after making certain deductions from the “full value of the consideration for which the sale, exchange or transfer of the capital asset is made”. In case of a sale, the full value of the consideration is the full sale price actually paid.”
The SC held that “we are of the opinion that the expression “full value of the consideration” cannot be construed as the market value but as the price bargained for by the parties to the sale. The dictionary meaning of the word “full” is “whole or entire, or complete” (Shorter Oxford English Dictionary). The word “full” has been used in this section in contrast to “a part of the price”. Consequently, the words “full price” mean “the whole price”. Clause (2) of section 12B itself clearly suggests that if no deductions are made as mentioned in sub-clause (ii) thereof, then that amount represents the full value of the consideration or the full price. In other words, when deductions are made as specified in sub-clauses (i) and (ii), then that amount does not represent the full value. The expression “full value” means the whole price without any deduction whatsoever and it cannot refer to the adequacy or inadequacy of the price bargained for. Nor has it any necessary reference to the market value of the capital asset which is the subject-matter of the transfer.”
CIT v. Gillanders Arbuthnot & Co. [1973] 87 ITR 407 (SC) – The SC held that with respect to ‘full value of the consideration for which sale is made’, the Supreme Court observed that in the case of sale for a price, there is no question of any market value unlike in the case of an exchange. Therefore, in cases of sales, all that one has to see is what is the consideration bargained for.
In CIT v. Smt. Bilquis Jahan Begum [1984] 150 ITR 508 (AP) the Hon’ble Court held that “The expression “full value of the consideration received as a result of the transfer of the capital asset” occurring in section 48 represents the full sale price actually paid. The sale price actually received is not subject to any artificial deduction except by those specified in section 48″. Therefore, only deductions specified in Sec. 48 can be reduced while computing capital gains chargeable to tax.