2004 (1) TMI 702 - HC - Income Tax

Summary

Issues:
1. Whether the receipt of a certain amount by the assessee was a consideration for transfer, resulting in capital gains?
2. Whether the transaction between the two shareholder groups amounted to a transfer or a corporate division?
3. Whether the Tribunal's decision to set aside the assessment and refer the matter to CBDT was correct?

Analysis:
1. The case involved a company, a subsidiary, and two groups of shareholders. A memorandum of agreement was entered into for dividing the companies, where the assessee transferred shares to one group in exchange for a sum of money. The Income Tax Officer (ITO) treated this amount as consideration for transfer, resulting in capital gains. The assessee argued it was a composite transaction to equalize profitability, not a transfer. The CIT(A) upheld the capital gains assessment, but the Tribunal disagreed, considering the transaction a peculiar case of genuine hardship. The Tribunal set aside the assessment, directing the assessee to approach the CBDT for relief.

2. The Tribunal viewed the transaction as an arrangement to divide management between shareholder groups, with no change in total shareholdings or rights. The revenue contended that the amount received by the assessee should be considered as consideration. The Tribunal found it to be a case of partition among existing shareholders rather than a transfer to new owners. The Tribunal's decision to refer the matter to CBDT for relief was based on the unique nature of the transaction.

3. Upon examining the agreement and submissions, the High Court confirmed the Tribunal's decision. The Court held that the transaction did not result in a taxable event as the subsidiary company was wholly-owned by the holding company at the time of transfer. The Court agreed with the Tribunal's view that the transaction was more of an inter se arrangement among shareholders for dividing companies, akin to a partition. The Court endorsed the Tribunal's direction to approach the CBDT for finalizing the matter, concluding that the Tribunal's decision did not warrant interference.

In conclusion, the High Court upheld the Tribunal's decision, emphasizing the unique nature of the transaction and the need for relief under section 119(2)(b) from the CBDT.