1993 (6) TMI 110 - AT - Income Tax

Summary

Issues Involved:
1. Exigibility to tax of Rs. 6,80,000 as long-term capital gains.
2. Application of the McDowell & Co. Ltd. v. CTO principle.
3. Interpretation of Section 47(iv) and Section 47A of the Income Tax Act.
4. Bona fide nature of the transaction and commercial expediency.
5. Subsidiary company's financial and operational status.

Detailed Analysis:

1. Exigibility to Tax of Rs. 6,80,000 as Long-Term Capital Gains:
The primary issue in this appeal is whether the amount of Rs. 6,80,000 realized by the assessee company on the transfer of shares of Citurgia Biochemicals Ltd. (CBL) to its subsidiary Nesvile Trading Pvt. Ltd. (NTPL) is exigible to tax as long-term capital gains. The assessee argued that the capital gain is not taxable under Section 47(iv) of the Income Tax Act, which exempts certain transfers between parent and subsidiary companies from being considered as transfers for tax purposes.

2. Application of the McDowell & Co. Ltd. v. CTO Principle:
The Revenue applied the principle laid down by the Supreme Court in McDowell & Co. Ltd. v. CTO, which states that colorable devices cannot be part of tax planning and must be exposed for what they really are. The Revenue contended that the transaction was a dubious method to avoid tax, invoking the McDowell principle to argue that the tax advantage was not legitimate.

3. Interpretation of Section 47(iv) and Section 47A of the Income Tax Act:
Section 47(iv) exempts transfers of capital assets between a parent company and its wholly-owned subsidiary from being considered as transfers for the purpose of capital gains tax, provided that the parent company holds the entire share capital of the subsidiary and that the subsidiary is an Indian company. The Revenue argued that the case falls under the ambit of Section 47A, which was introduced to withdraw such exemptions if certain conditions are not met within eight years of the transfer.

4. Bona Fide Nature of the Transaction and Commercial Expediency:
The assessee argued that the transaction was bona fide and driven by commercial expediency, not by a desire to avoid tax. It was submitted that the dominant motive was to maintain the group ownership percentage in the investee company in view of an imminent merger. The assessee contended that the course beneficial to the assessee should be adopted and that no colorable device was used to reduce tax liability.

5. Subsidiary Company's Financial and Operational Status:
The Revenue highlighted that NTPL had a share capital of only Rs. 500, held by two individuals from the same group, and had no business activity. The subsidiary company had no funds of its own to purchase the shares and relied on a call deposit provided by the assessee company. After the transfer, NTPL ceased to be a subsidiary of the assessee company when the latter declined an offer of rights shares, which were then picked up by another associate concern.

Judgment:
The Tribunal reviewed the facts and the legal precedents, including the McDowell & Co. Ltd. case and the interpretation of Section 47(iv) and Section 47A. It concluded that the transfer of shares was a device to avoid tax. The Tribunal noted that NTPL had no independent financial standing and relied entirely on the assessee company for funds to purchase the shares. The subsequent actions, including the decline of rights shares by the assessee company, further indicated that the transaction was structured to avoid tax.

The Tribunal upheld the Revenue's application of the McDowell principle, stating that the transaction fell within the ambit of the ratio laid down by the Supreme Court in McDowell & Co. Ltd. The appeal of the assessee was dismissed, and the amount of Rs. 6,80,000 was deemed exigible to tax as long-term capital gains.

Conclusion:
The Tribunal dismissed the appeal, holding that the transaction was a colorable device to avoid tax and fell within the scope of the McDowell & Co. Ltd. ruling. The capital gains were deemed taxable, and the assessee's arguments were rejected.