2009 (9) TMI 14 - HC - Income Tax

Transfer of share holding amalgamation succession Section 2(24) and 170(1) - An agreement was entered into by the erstwhile share-holders and management of the company on 14.3.1993 agreeing to transfer the shares and the management to a new set of share-holders w.e.f. 31.3.1993. It was also agreed that the liabilities of the company were to be borne by the outgoing group of Directors/shareholders Held that - that a limited liability company is a distinct legal entity separate from its shareholder. Change in the shareholders of the company does not change the legal identity of the company. A limited liability company is thus different from a partnership-firm because while a company is distinct from its shareholders and directors a partnership firm is not different from its partners and it is not a distinct legal entity. Since the assessee is a limited liability company change in the ownership of its shares will have no effect on the legal identity of the company Capital gain is not chargeable in the hands of company it does not amounts to succession.

Summary

Issues:
1. Whether the transfer of all assets and liabilities of a company due to a change in management and shareholding attracts capital gains tax.
2. Whether the sale of 100% shareholding of a company constitutes a 'transfer' under the Income-tax Act, 1961, and is subject to Capital Gains Tax.

Analysis:
1. The case involved an appeal regarding the chargeability of capital gains tax on the transfer of assets and liabilities of a closely held company due to a change in management and shareholding. The Assessing Officer contended that the company was liable to pay capital gains tax as there was a change in directors/shareholders and the company's total liabilities exceeded the consideration received for the shares. However, the Commissioner, Income Tax (Appeals) and the ITAT rejected this argument, stating that the transfer of shares did not amount to succession within the meaning of Section 170(1) of the Income Tax Act. The court examined the definition of succession and ownership transfer in light of relevant case law and held that for Section 170 to apply, there must be a transfer of ownership, which was not the case here.

2. The court further analyzed the definition of 'transfer' under Section 2(47) of the Act and emphasized that even if the transfer of shares amounted to a transfer of capital assets, Section 170 would not apply as it pertains to the transfer of a business from one assessee to another. The court highlighted that a company is a separate legal entity from its shareholders, and a change in shareholding does not alter the company's legal identity. Referring to a judgment on amalgamation of companies, the court distinguished between individual shareholders and the company itself, asserting that Section 170 did not apply to the company in this case.

3. Drawing on the judgment of the Allahabad High Court, the court reiterated that a company's legal identity remains unchanged despite changes in share ownership. It emphasized the distinction between a limited liability company and a partnership firm, stating that the former maintains a separate legal entity from its shareholders. Consequently, the court dismissed the appeal, ruling in favor of the assessee and holding that the change in shareholding did not affect the legal identity of the company. The court found no merit in the appeal and answered both questions in favor of the assessee, concluding the judgment without costs.