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2018 (3) TMI 427 - AT - Income TaxTransfer of capital asset by a company to its subsidiary company - Long term capital gain v/s long term capital loss - whether there is a valid transfer? - Held that - The undisputed fact is that M/s. Emami Realty Ltd is a 100% subsidiary of M/s.Emami Infrastructure Ltd, the assessee herein. M/s.Emami Rainbow Niketan Pvt. Ltd is in turn a 100% subsidiary of M/s. Emami Realty Ltd. In other words, this is a second step down 100% subsidiary of the assessee. The issue is whether the provisions of section 45(iv)(a)(b) is applicable to a second step down subsidiary. They are divergent views on this issue We prefer to follow the decision in the case of Petrosil Oil Co. Ltd 1998 (7) TMI 63 - BOMBAY High Court we have to hold that the transaction in question cannot be regarded as transfer in view of provisions of section 47(iv) of the Act, as it is a transfer of capital asset by a company to its subsidiary company and as a second step down 100% subsidiary company is also as subsidiary of the assessee company under the Companies Act 1956 as the term subsidiary company has not been defined under the Income-tax Act, 1961. Hence we hold that the transaction of sale of shares of M/s. Zandu Realty by the assessee to M/s. Emami Rainbow Niketan Ltd is not regarded as a transfer in view of Sec.47(iv) of the Act. Hence, the question of computing either capital loss or capital gain does not arise. Thus, the assessee is not entitled to carry forward the capital loss of ₹ 25 crores as claimed. Therefore, the ground nos. 2 & 3 raised by the assessee in the appeal are dismissed and Ground No. 4 is allowed.
Issues Involved:
1. Whether the CIT-A was justified in confirming the AO's determination of long-term capital gain at ?29,05,83,769/- against the assessee's claim of long-term capital loss of ?25,05,20,775/-. 2. Whether the transaction in question qualifies as a transfer under section 47(iv) of the Income Tax Act. 3. Whether the AO can substitute the sale consideration of shares with the fair market value (FMV) as computed by him. Issue-wise Detailed Analysis: 1. Determination of Long-Term Capital Gain vs. Long-Term Capital Loss: The assessee, a company, filed its return of income for the A.Y. 2010-11 declaring a total income of ?88,79,544/-. The AO determined the total income at ?29,99,30,657/- after examining the sale of 2,86,329 equity shares of Zandu Realty Ltd. The assessee claimed a long-term capital loss of ?25,05,20,775/- based on the sale consideration of ?60,12,90,900/- and the cost of acquisition ?85,05,20,775/-. The AO found discrepancies in the sale price and determined the long-term capital gain at ?29,05,83,769/- by considering the average market price of ?3989.80 per share as on 31-03-2010. The AO rejected the assessee's valuation based on a report by SSKM Corporate Advisory Pvt. Ltd. and concluded that the sale price was not at arm's length due to the related party transaction. 2. Applicability of Section 47(iv) of the Income Tax Act: The assessee argued that the transaction should not be regarded as a transfer under section 47(iv) of the Act, as it involved a transfer to a 100% subsidiary. The CIT-A rejected this claim, stating that the benefit of section 47(iv) is not available for transfers to a subsidiary of the subsidiary company, referencing the Gujarat High Court decision in Kalindi Investments Pvt. Ltd. The ITAT, however, preferred the Bombay High Court's decision in Petrosil Oil Co. Ltd., which considered a second step-down subsidiary as a subsidiary under the Companies Act. Thus, the ITAT concluded that the transaction is not regarded as a transfer under section 47(iv) of the Act. 3. Substitution of Sale Consideration with Fair Market Value: The AO substituted the sale consideration with the FMV of ?3989.80 per share, arguing that the market price on the stock exchange is the fair value. The CIT-A upheld this view, citing that the shares were sold at a significantly lower price to a related party, and the provisions of section 45(2A) were not applicable as the shares were acquired on demerger. However, since the ITAT concluded that the transaction is not regarded as a transfer under section 47(iv), the issue of substituting the sale consideration with FMV became academic and was not adjudicated. Conclusion: The ITAT held that the transaction of sale of shares to the second step-down 100% subsidiary is not regarded as a transfer under section 47(iv) of the Act. Consequently, the assessee's claim of capital loss cannot be allowed, and the AO's computation of capital gain based on FMV is rendered academic. The appeal of the assessee is allowed in part, dismissing the ground related to capital loss and allowing the ground related to the nature of the transfer. Order Pronounced: The appeal of the assessee is allowed in part, with the decision delivered on 28-02-2018.
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