2013 (9) TMI 972 - HC - Income Tax

Applicability of Gift tax on transfer of shares to 100% subsidiary company Held that - Under Section 47(iv) of the Income Tax Act, for the purpose of capital gains, the transfer of capital asset between the holding company to subsidiary company is not treated as a transfer. But the relevance of Section 47 of the Income Tax Act has to be seen only in the background of the provisions relating to the charge on capital gains under Section 45 that given the inclusive definition on transfer under Section 2(47), but for Section 47, these transactions would certainly attract Section 45. Thus, this Section would not apply to a case where no capital gain is involved. When one reads the definition of transfer of property appearing under Section 2(xxiv) of the Gift Tax Act, it would reveal that any transaction entered into by any person with intent thereby to diminish directly or indirectly the value of his own property and to increase the value of the property of any other person is also included within the meaning of transfer of property. It is not denied by the assessee that by transfer of shares held by the holding company, there is a diminution in the asset held by the holding company. Even though learned counsel for the assessee immediately replied that ultimately the assessee company is the owner of 100% owned subsidiary company, still, being two different entities, no any justifiable ground to extend the provisions of Income Tax Act to the assessment under the Gift Tax Act for the purpose of understanding the definition of transfer of property as available under the Gift Tax Act - When two companies are treated as two different entities and when the facts are clear, there arises no necessity for lifting the corporate veil to know the nature of transactions or the existence of two entities Decided against the Assessee.

Summary

Issues:
1. Whether the transmission of shares to a wholly owned subsidiary company amounts to a transfer and involves a deemed gift?
2. Whether the difference between the book value and market value of shares constitutes a deemed gift?
3. Whether the corporate veil should be lifted to determine if there was a transfer?

Issue 1: Transmission of Shares to Wholly Owned Subsidiary Company

The Tax Case Revision pertains to the assessment year 1994-95 under the Gift Tax Act. The holding company transferred shares to its wholly owned subsidiary company at book value. The Gift Tax Officer assessed the difference between market value and actual consideration as a deemed gift, which the assessee disputed citing Section 47(iv) of the Income Tax Act. The Commissioner of Income Tax (Appeals) upheld the assessment, considering the transaction as a deemed transfer under Section 47A(1)(i) of the Income Tax Act. The Tribunal affirmed the assessment, emphasizing that even with 100% shareholding, the two companies are distinct entities, rejecting the plea to lift the corporate veil. The Tribunal's decision was based on the Calcutta High Court ruling in GIFT TAX OFFICER v. VENESTA FOILS LIMITED.

Issue 2: Difference Between Book Value and Market Value

The Tribunal noted that the transfer of shares at a price below market value attracted Section 4(1)(a) of the Gift Tax Act. The Tribunal rejected the assessee's argument that no transfer occurred due to 100% shareholding, as the assessee had claimed capital loss. The Tribunal emphasized that the transaction was subject to Gift Tax Act provisions, not Income Tax Act, and dismissed the plea to lift the corporate veil. The Tribunal's decision was supported by the Calcutta High Court ruling in GIFT TAX OFFICER v. VENESTA FOILS LIMITED.

Issue 3: Lifting the Corporate Veil

The assessee contended that the corporate veil should be lifted to consider the transaction between the holding and subsidiary companies as not a transfer. The Revenue argued that despite 100% ownership, the companies were separate legal entities, justifying the application of Section 4 of the Gift Tax Act. The Court rejected the plea to lift the corporate veil, stating that the transaction diminished the holding company's asset value, falling under the definition of "transfer of property" in the Gift Tax Act. The Court dismissed the appeal, emphasizing the independence of the subsidiary company and the inapplicability of Income Tax Act provisions to Gift Tax Act assessments.

In conclusion, the High Court upheld the Tribunal's decision, rejecting the assessee's claims regarding the transfer of shares to its wholly owned subsidiary company. The Court affirmed the application of Gift Tax Act provisions, emphasizing the distinct legal status of the two companies and dismissing the need to lift the corporate veil. The judgment clarified the definitions of transfer of property under the Gift Tax Act and highlighted the significance of market value in determining deemed gifts involving share transactions.