2012 (6) TMI 64 - HC - Income Tax

Sale of hotel development rights - Capital gains - Section 45 read with section 47(v) - transfer of the capital assets from a wholly-owned subsidiary company to its holding company - held that - The term subsidiary or wholly owned subsidiary have not been be defined in the Act i.e. the Income Tax Act. Therefore, reference is to be made to the other Acts and in this case, the Companies Act. Effect of the violation of Section 49 and 187C of the Companies Act is one aspect but the other issue, which has to be examined, is the evidentiary value and the effect when no such declaration was initially made and the subsequent filing of the declaration is disputed and contested. As per the case of the appellant, material and evidence found during the search and subsequent enquiries had revealed that the respondent assessee was not a 100% subsidiary of Sunair Hotels Ltd. It is, therefore, the contention of the appellant that the assessment order dated 9th February, 1998 does not help or protect the respondent assessee as the said order had proceeded on the basis of premise and assumption that the respondent assessee was not a 100% subsidiary of Sunair Hotels Ltd. This aspect will be examined by the tribunal.

Issues Involved:
1. Deletion of the addition of Rs. 21 crores made by the Assessing Officer under Section 45 read with Section 47(v) of the Income Tax Act, 1961.
2. Whether the impugned order passed by the Income Tax Appellate Tribunal is perverse.

Detailed Analysis:

Issue 1: Deletion of the Addition of Rs. 21 Crores
The primary issue revolves around the applicability of Section 47(v) of the Income Tax Act, 1961, which exempts capital gains tax for transfers of capital assets between a wholly owned subsidiary and its holding company. The Assessing Officer (AO) rejected the respondent assessee's claim that it was a wholly owned subsidiary of Sunair Hotels Ltd., thereby denying the tax exemption.

Key Findings by the AO:
- The AO found that the respondent assessee had seven individual shareholders, none of whom were Sunair Hotels Ltd.
- There was no evidence to support the claim that these shareholders were nominees of Sunair Hotels Ltd.
- Documents and statements obtained during the search operation and post-search investigation contradicted the claim of the respondent assessee.
- The AO noted discrepancies such as the absence of declarations under Section 187C of the Companies Act and forged signatures on forms.

Reversal by the First Appellate Authority:
- The Commissioner of Income Tax (Appeals) found the AO's reliance on certain statements (e.g., Robin Gupta's) unreliable.
- The appellate authority emphasized that the investment in the share capital was made by Sunair Hotels Ltd., as reflected in the books of both companies.
- It was concluded that procedural lapses under the Companies Act should not affect the applicability of Section 47(v) of the Income Tax Act.

Tribunal's Decision:
- The tribunal upheld the findings of the first appellate authority, stating that the AO had not provided sufficient evidence to counter the claim that the shareholders were nominees of Sunair Hotels Ltd.
- The tribunal noted that the payment towards the share capital was made by Sunair Hotels Ltd., thus fulfilling the conditions under Section 47(v).

Issue 2: Perversity of the Tribunal's Order
The Revenue argued that the tribunal's order was perverse, meaning it was irrational or unsupported by evidence.

Contentions by the Revenue:
- The Revenue highlighted that Sunair Hotels Ltd. was not a registered shareholder and that the seven shareholders were individuals.
- It was argued that the tribunal ignored significant evidence, including statements and documents obtained during the search operation.
- The Revenue also pointed out procedural violations under the Companies Act, such as the late filing of declarations and forged signatures.

Contentions by the Respondent Assessee:
- The respondent assessee argued that the findings of the first appellate authority and the tribunal were based on substantial evidence.
- It was contended that procedural lapses under the Companies Act should not affect the tax exemption under Section 47(v).
- The respondent also argued that the block assessment proceedings were void as no evidence of undisclosed income was found during the search.

High Court's Observations:
- The High Court found that several issues and contentions raised by both parties were not adequately addressed by the tribunal.
- The tribunal's findings were factually incorrect in several instances, particularly regarding the payment for shares and the role of the shareholders.
- The High Court emphasized that the onus was on the respondent assessee to prove that the shareholders were nominees of Sunair Hotels Ltd.

Conclusion and Remand:
- The High Court concluded that the tribunal's order was perverse and based on incorrect factual findings.
- The case was remanded to the tribunal for a thorough re-examination of the issues, including the applicability of Section 47(v) and the procedural violations under the Companies Act.
- The tribunal was directed to consider all relevant evidence and contentions raised by both parties.

Directions:
- The parties were directed to appear before the Assistant Registrar of the Tribunal on a specified date for further proceedings.

Summary:
The High Court found that the tribunal's order in favor of the respondent assessee was perverse and based on incorrect factual findings. The case was remanded to the tribunal for a thorough re-examination of the issues, including the applicability of Section 47(v) of the Income Tax Act and procedural violations under the Companies Act. The tribunal was directed to consider all relevant evidence and contentions raised by both parties.

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