2017 (6) TMI 833 - HC - Income Tax

Capital gains tax - eligible transfer - transaction of transfer of shares by the assessee company in pursuance of family arrangement - assessee/company has a corporate veil - Held that - in the present case, we are not concerned with the members of Mohota family who were parties to the family settlement, but with transfer of share done by the Company incorporated under the Companies Act having separate/independent corporate existence, perpetual succession and common seal. This Company is independent and distinct from it s members. The rationale for Section 47(v) of the Act in excluding a transfer of the entire share capital of a subsidiary to it s holding company which owns 100% of it s shares from being considered a transfer. In the present facts, we are not concerned with transfer between holding and subsidiary companies. It is not the case of the appellant that Section 47 of the Act is applicable. Further, lifting of corporate veil at the instance of the assessee would mean that it is denying it s corporate existence. This, after taking advantage of the separate existence of a Company under the Act. Therefore, after having incorporated the Limited Company and given it separate existence from it s share holders, it is not open to the Company to urge Please ignore my separate existence and look at the persons behind me. If that be so, the Appellant/Company must opt for voluntarily winding up and then the shares being allotted to the individual members on liquidation would be governed by the family arrangement/settlement. Thus the Tribunal was correct in holding that the transaction of transfer of shares by the independent corporate entity was assessable to capital gain tax. - Decided in favour of the respondent/revenue and against the appellant/assessee

Summary

Issues Involved:
1. Whether the transaction of transfer of shares by the assessee company in pursuance of a family arrangement amounted to a transfer and was exigible to capital gains tax.
2. Whether the transfer of shares by the assessee company, being incidental and in consequence of the allotment and control of management of companies in pursuance of a family arrangement, took the transaction out of the purview of Section 2(47) of the Income Tax Act, 1961.
3. Whether the corporate veil of the assessee company makes the transfer of shares assessable to capital gains tax, even though such a transaction is in pursuance of a family arrangement.

Issue-wise Detailed Analysis:

1. Transfer of Shares and Capital Gains Tax:
The core issue was whether the transfer of shares by the assessee company, in pursuance of a family arrangement, constituted a transfer liable to capital gains tax. The Tribunal, CIT(A), and the Assessing Officer all held that the transfer of shares by the company was a transfer within the meaning of Section 2(47) of the Income Tax Act, 1961, and thus, was subject to capital gains tax. The Tribunal emphasized that the company, being a separate legal entity distinct from its shareholders, could not benefit from the family settlement that applied to individual family members. The court upheld this view, stating that the company’s obligation under the law as a separate legal entity must be complied with, regardless of the family arrangement.

2. Applicability of Section 2(47) of the Income Tax Act, 1961:
The appellant argued that the transfer of shares was incidental to the family arrangement and should not be considered a transfer under Section 2(47). However, the court noted that the company, as an independent entity, was not a party to the family settlement. The court reiterated that the family arrangement could only apply to the members of the family who were parties to it, not to the company. Therefore, the transfer of shares by the company fell within the ambit of Section 2(47) and was assessable to capital gains tax.

3. Corporate Veil and Assessment to Capital Gains Tax:
The appellant contended that the corporate veil should be lifted to recognize the real nature of the transaction and the persons behind it. They argued that the transfer of shares was merely an adjustment of rights within the family and no consideration was received by the company. The court, however, held that lifting the corporate veil is generally permitted to prevent injustice, such as tax evasion, but not for the benefit of the assessee. The court cited precedents emphasizing that a company is a distinct legal entity separate from its shareholders and that shareholders have no interest in the company’s property. The court concluded that the company could not deny its corporate existence to avoid tax obligations. The court also noted that the consideration for the transfer of shares was determined and accepted by the family members managing the company, thus reinforcing the tax liability.

Conclusion:
The court dismissed the appeal, affirming that the transaction of transfer of shares by the company was assessable to capital gains tax. The substantial questions of law were decided in favor of the respondent/revenue and against the appellant/assessee. The court emphasized the principle that a company, once incorporated, must comply with its legal obligations as a separate entity, irrespective of any family arrangements involving its shareholders.