2020 (7) TMI 663 - HC - Income Tax

Entitled for exemption u/s 47(v) with respect to the transfer of land - Holding company - determination of 100% subsidiary company where 25 shares held by 6 nominees - Tribunal holding that assessee is entitled for exemption under Section 47(v) - whether Tribunal correctly held that whole of the share capital of the assessee/subsidiary company is held by the holding company viz. M/s.Simpson Co Ltd., even though 25 shares were held by persons other than the holding company? - HELD THAT - Section 47 of the Act deals with transaction not regarded as transfer. Section 47(v) of the Act states that nothing contained in Section 45 of the Act shall apply to any transfer of capital asset by subsidiary company to the holding company if (a) the whole of the share capital of the subsidiary company is held by the holding company, and (b) the holding company is an Indian company. The fact that the company is an Indian company is not disputed. The dispute raised by the Revenue is that whole of the share capital of the subsidiary company is not held by the holding company as there are six individual shareholders. Total number of shares are 80 lakhs, out of which, 79,99,975 shares are held by the holding company. This fact is also not disputed by the Revenue. The remaining 25 shares are held by six individuals. The explanation offered by the assessee is that under the Companies Act, a public limited company should have a minimum of seven shareholders. The individuals are nominees of the holding company and they have no individual right, which facts were also not disputed. Therefore, on facts, it has to be held that whole of the share capital of the subsidiary company is held by the holding company in the instant case. The reliance placed on the decision PAPILION INVESTMENTS (P.) LTD. 2009 (8) TMI 832 - BOMBAY HIGH COURT merits acceptance wherein more or less identical factual situation was taken into consideration and it was held that the beneficial ownership of the holding company is to be taken note of and a proper interpretation is not given to the facts, as it would render the provisions of Section 47(v) of the Act redundant we hold that the order passed by the Tribunal does not call for any interference - Decided against revenue.

Summary

Issues Involved:
Interpretation of Section 47(v) of the Income Tax Act, 1951 regarding exemption for transfer of land to a holding company, determination of shareholding criteria for exemption, consideration of nominee shareholders, relevance of Companies Act provisions, and comparison of Section 47(iv) and Section 47(v) requirements.

Issue 1: Exemption under Section 47(v) for land transfer
The case involved the interpretation of Section 47(v) of the Income Tax Act regarding exemption for the transfer of land to a holding company. The Revenue contested the eligibility of the assessee for exemption under this section due to the presence of nominee shareholders holding a small portion of shares. The court analyzed the purpose of Section 47 and upheld the Tribunal's decision in favor of the assessee, emphasizing the requirement that the whole share capital of the subsidiary company must be held by the holding company to qualify for the exemption.

Issue 2: Shareholding criteria for exemption
Another key issue was the determination of the shareholding criteria for exemption under Section 47(v). The Revenue argued that the presence of nominee shareholders invalidated the claim of 100% shareholding by the holding company. However, the court considered the explanation provided by the assessee, highlighting that the nominee shareholders had no individual rights and were holding shares on behalf of the holding company. The court concluded that, based on the Companies Act requirements and the factual scenario, the holding company effectively held the entire share capital of the subsidiary company.

Issue 3: Nominee shareholders and Companies Act provisions
The relevance of nominee shareholders and the provisions of the Companies Act in determining share ownership was a significant aspect of the case. The court acknowledged the minimum shareholder requirement for a public limited company and the role of nominees in holding shares on behalf of the holding company. By considering the beneficial ownership and legal interpretation, the court aligned with the decision in a similar Bombay High Court case, emphasizing the importance of not rendering Section 47(v) redundant based on technicalities.

Issue 4: Comparison of Section 47(iv) and Section 47(v) requirements
A comparative analysis of the requirements under Section 47(iv) and Section 47(v) was undertaken to assess the distinction between the provisions. The court highlighted the absence of the term 'nominees' in Section 47(v) and the specific criteria mandating the entire share capital to be held by the holding company. By emphasizing the purpose and intent behind Section 47 exemptions, the court rejected the Revenue's argument and upheld the Tribunal's decision in favor of the assessee.

In conclusion, the High Court of Madras dismissed the Revenue's appeal, affirming the Tribunal's decision regarding the assessee's eligibility for exemption under Section 47(v) of the Income Tax Act. The court's detailed analysis focused on the shareholding structure, nominee shareholders, Companies Act provisions, and the legislative intent behind the exemption provisions, ultimately upholding the assessee's position based on the factual and legal considerations presented in the case.