2017 (4) TMI 302 - SC - Income Tax

Liability to pay tax for capital gains - Held that - It is not in dispute that M/s Annamalaiar Textiles (P) Ltd. did not pay any amount to the shareholders who ultimately got the shares transferred in their names. The respondent was holding 100 per cent shares of M/s Annamalaiar Textiles (P) Ltd., before it was transferred to Group B. No payment was made to the shareholders belonging to Group B and, therefore, the question of there being any capital gains at the hands of the respondent herein does not arise. Needless to mention that the transaction of payment of ₹ 42.45 lakhs had been subjected under the Gift Tax Act and the Department cannot claim both under the Gift Tax Act and also levy tax under the Income Tax Act.

Summary

Issues:
1. Interpretation of tax liability on a payment made between two groups of shareholders in holding and subsidiary companies.

Analysis:
The Supreme Court examined a case involving a payment of ?42.45 lakhs made by a subsidiary company to its holding company. The payment was made as part of an agreement where one group of shareholders (Group A) acquired all shares in the holding company, while the other group (Group B) received 100% shares in the subsidiary company. The assessing officer treated this payment as capital gains, considering both companies were now fully owned by either Group A or Group B. The Commissioner of Income Tax (Appeals) upheld this decision, but the Income Tax Appellate Tribunal later set it aside, directing the Income Tax Officer to finalize the assessment based on directions from the Central Board of Direct Taxes. The High Court of Madras also upheld the Tribunal's decision.

The main issue before the Supreme Court was whether the payment of ?42.45 lakhs constituted capital gains for the holding company. The Court noted that the subsidiary company did not make any payment to the shareholders who received the transferred shares. Since no payment was made to the shareholders of Group B, the Court concluded that there was no capital gains liability for the holding company. Additionally, the Court highlighted that the transaction had already been examined under the Gift Tax Act, and it was deemed inappropriate for the Department to pursue both gift tax and income tax on the same transaction.

In conclusion, the Supreme Court found no merit in the Civil Appeal and dismissed it. The Court's decision clarified that the payment made by the subsidiary company to the holding company did not attract capital gains tax liability for the holding company, given the absence of payments to the shareholders of Group B.