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TMI Blog2018 (3) TMI 427X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - I.T.A No. 880/Kol/2014 - - - Dated:- 28-2-2018 - Shri J. Sudhakar Reddy, Accountant Member And Shri S.S. Viswanethra Ravi, Judicial Member For The Appellant : Shri R.N. Bajoria, Sr. Counsel, ld. AR For The Respondent : Shri Avinash Mishra, CIT, ld.DR ORDER Shri S.S.Viswanethra Ravi, JM: This appeal by the Assessee is directed against the order dt. 03-03-2014 of the Commissioner of Income Tax (Appeals)-XII, Kolkata for A.Y 2010-11. 2. The only issue is to be decided as to whether the CIT-A justified in confirming the order of AO in determining the long term capital gain at ₹ 29,05,83,769/- against the claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4044.00 3950.00 3965.00 3989.80 6. The AO also found that the assessee had sold shares of M/s. Zandu Realty Ltd at the price ranging from ₹ 6200 per share on 23- 12-2009 to ₹ 4390 share on 11.02.2010. Accordingly, show cause notice dt:18-01-2013 was issued to assessee seeking explanation why the sale price per share of Zandu Realty Ltd should not be taken at ₹ 3989.80 being the average price traded at NSE as on 31-03- 2010 against sale price of ₹ 2100 per share taken by the assessee. In response to which, vide letter dt:11-02-2013 the assessee submitted as under:- It has been submitted by the assessee company that market price of listed shares are driven by various market forces, some of which can be calculated while some others cannot be calculated. While referring to the sale price of a traded share over a period of time one should also notice the trend in the price of the share each day i.e. whether the trend is a falling trend or a rising trend and also how this price reacts to the investors activities on purchase and sale, number of shares traded in the market, Number of d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... These decisions laid down the principles of taxation of deemed capital gain which is discussed here in reference to the given case: a. The Hon'ble Supreme Court in case of K.P. Varghese vs Income Tax Officer in {1981} 311TR 597 has held as follows: The provisions of deemed income can be invoked only where the consideration for transfer has been understated by the assessee or in other words, the consideration actually received by the assessee is more than what is declared or disclosed by him and the burden of proving such understatement or concealment is on the revenue. It cannot be applied in case of an honest and bonafide transaction where the consideration received by the assessee has been correctly declared or disclosed by him, and there is no concealment or suppression of the consideration. b. Similar view was also upheld by Calcutta High Court in case of CIT', West Bengal vs Hari Charan Shyam Sundar Pvt. Ltd. in 159 ITR 703 (1986). in this case shares were sold at ₹ 120 per share by the assessee company to close relatives of its members and shareholders. However the AO held a view that fair market value of shares was ₹ 167 per. share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion No. 648/C8DT dated 24-06-1974 (copy enclosed) directing the Assessing Officers to keep in mind the assurance given by the Finance Minister while introducing sec 52 in the Income Tax Act and that the provisions of said section shall not be invoked in case of bonafide transactions. The Minister of Finance had made the following observation in respect of the provisions of section 52(2) of the Act during his reply to the debate in the Lok Sabha at the time of clause by clause consideration of the Finance Bill, 1964: Today, practically every transaction of the sale of property is for much lower figure than what is actually received. The deed of registration mentions a particular amount, the actual money that passes is considerably more. It is to deal with these classes of sales that this amendment has been drafted - It does not aim at perfectly bona fide transaction but essentially related to the day-to-day occurrences that are happening before our eyes in regard to the transfer of property. I think, this is one of the key sections that should help us to defeat the free ploy of unaccounted money and cheating of the Government. The principle of taxation laid down in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n its two demat account as follows: Demat Account Nos. Number of Shares purchased A/c No 1201060001387516 (hereinafter Account 1) 2,38,578 Ac No 10026664 (hereinafter Account 2) 3,17,058 Out of 2,38,578 shares in Account 1; 1,13,733 shares were transferred to Account 2 on 15-10-2008 and hereafter purchases were made in Account 2 on and from that date. 1,11,134 shares of Zandu were sold from Account 1 on 23-12-2009 and remaining balance of 13,711 shares in Account 1 was transferred to Demat Account No. 1201060001730169 (hereinafter Account 3) of the assessee. Demat Account 2 had received l,13,733 shares from Demat Account 1 and had market purchases of 3,17,058 shares totaling to 4,30,791 shares of Zandu which was transferred in its entirety to Demat Account (Account 3) of Emami Infrastructure Ltd. Therefore Demat Account 3 had two credit entries on 29-12-2009 on account of shares received from two demat accounts of Emami Ltd. as stated above: From Demat Account Nos. Number of Shares purcha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the stock exchange is the fair market value of the shares on any particular given day. In this case average price of the shares of M/s., Zandu Reality Ltd. was ₹ 3989.80 on 31.03.2010. Hence, fair market value of shares was ₹ 3989.80 as on 31.- 3.2010. ii) It is noticed that in the case of take-over of the companies or for the buyback of shares as well, the price quoted on the stock exchange on a particular day is considered for giving an offer to the shareholders for purchase of their shares. iii) It is further seen that the assessee company has sold these shares to its related party M/s. Emami Rainbow Niketan Pvt. Ltd. which is its 100% step down subsidiary. Hence, selling price of the shares of MI5. Zandu Reality Ltd. has not been at arms length price. iv) The valuer M/s. SSKM Corporate Advisory Pvt. Ltd. had determined the price at ₹ 2100 per share based on (a) discounting cash flow method (b) market quoted value method (c) underlined asset valiue method. The assessee has calcu1ated the expected price of the said shares at ₹ 1418 in its arithmetical calculation based on various permutations and combinations. There is a huge variance b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m of the assessee is misplaced and has no merit. Once the assessee is claiming the transfer of the said shares from the demerged company to the resulting company i.e. the assessee company as tax neutral as per section 47(vib) read with 2(19AA) r the provisions of section 45 (2A) have no applicability in the case of the assessee. Further, as per the provisions of sec 45 (2A) the transfer of shares held by the depository on behalf of the client will not be taxed in the hands of the depository but will be taxed in the hands of the beneficial owner of the said shares. In this case, the date of transfer has been claimed to be the appointed date as per the scheme of arrangement approved by the High Court. The cost of acquisition of the shares has to be the cost shown in the books of account of the demerged company immediately before the demerger. The value of the said shares in the hands of the demerged company has been worked out at ₹ 2975/ share. Hence the cost of acquisition of 286329 shares of Zandu Realy Ltd. is taken at ₹ 85,18/11,675/- as shown by the assessee in its return of income. In view of the above discussion, long term capital gain from the off-market sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hange, the shares of Zandu Reality Ltd were sold on 31.3.2010 then there would have been steep fall in the price of share is incorrect. There is separate provision for block deal of shares in stock exchange. As per the bye-law of stock exchange with the prior intimation to stock exchange the block deal of share can be transacted at the market rate prevailing on the date of deal. This provision of block deal applies even to the 'promoters share provided the share transfer is as per law. The question of valuing the shares as per valuation report arises only if the shares are not quoted on stock exchange. Hence, I am of the view that the shares were correctly valued by the AO by taking average purchase price of 'the share on stock exchange on the date of sale. ii) In the case of Vodafone International Holding BV vs. Union of India 341 ITR 1 the Hon'ble Supreme Court has explained it's earlier decision in the case of McDowell Company Ltd. reported in 154 ITR 148 and has held that there is no conflict between the ratio of McDowell viz-a-viz Azadi Bachao and Mathuram Agarwal. Accordingly the colourable device made with the object of avoidance of tax without any co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 2,975/-. The sub-section (iii) of section 2( 19 AA) relied by the AR provides as under :- ( iii) The property and liabilities of the undertaking' or undertakings being transferred by the demerged company are transferred at Values appearing in its books of accounts immediately before the demerger. From the bare reading of the above sub-section it is evident that the assets are deemed to be transferred at book value. Since in the present case, it is not in dispute that the Emami Ltd. has purchased the share of Zandu Reality Ltd @ 2975/- hence, the cost price in the case of the appellant will be ₹ 2975/- per share. As regard the applicability section 45(2A) read with CBDT Circular No. 768 dated 24.6.1998 and Circular No. 704 dated ----, relied upon by the appellant, I am of the opinion that the section and Circulars are applicable if the assessee has purchased shares from time to time at different rate. Since, in the instant case of the appellant, it has acquired all the shares of Zandu Reality Ltd at the time of demerger, hence the average price per share as per books of Emami Ltd has to be taken. Accordingly, this submission of the AR is also found ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re is no justification for invoking clauses (c) of sub-section (1) of section 4 of the 1956 Act while interpreting the provisions of clauses (iv) and (v) of section 47. Since in the case of the appellant, it has sold shores to Emami Rainbow Niketan Pvt. Ltd which is a subsidiary of Emami Realty Ltd a 100% subsidiary of the appellant company, hence the decision of Gujarat High Court in the case of Kalindi Investment P Ltd (Supra) is squarely applicable to the c:aseof the appellant. Section 47(iv) and (v) covers only the immediate subsidiary company of the holding company. The Hon'ble Gujrat High Court in the case cited supra has held that there is no justification for transplanting the definition of 'holding company' under the Companies Act into the provisions of section 47 automatically. Further, sections 47 A, 49(3) and proviso to sec. 47 (ivJ, (v), provide for withdrawal of exemption or non-availability of exemption in certain circumstances as below: a. If at any time before the expiry of eight years from the date of transfer of a capital asset between holding company and its wholly owned subsidiary company, such capital asset is converted by the transfe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll apply to the following transfers:- ( iv)any transfer of a capital asset by a company to its subsidiary company ( a) the parent company or its nominees hold the whole of the share capital of the subsidiary company, and ( b) the subsidiary company is an Indian Company. b) The second issue is, if we come to conclusion that the transaction in question is not covered u/s. 47(iv) of the Act, then whether the computation of capital gains as made by the AO and confirmed by the ld. CIT(A) is correct or not and whether the AO can substitute the sale consideration of the shares sold with the F.M.V as determined by him? 12. If, we come to our conclusion that this is not transfer, than the assessee s claim that it had incurred long term capital loss and the same has to be carried forward, cannot be allowed. Similarly, the capital gain computed by the AO based on fair market value computed by him and substituted for the sale consideration agreed to by the seller and buyer has to be cancelled. 13. We first consider whether there is a transfer, in view of section 47(iv) of the Act. The undisputed fact is that M/s. Emami Realty Ltd is a 100% subsidiary of M/s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etrosil Oil Company Ltd. vs Commissioner Of Income-Tax on 22 September, 1993 Indian Kanoon three other angles propounded by Mr. Dastur. 85. I am, however, unable to accept the view that for the purposes of Paragraph F not only the assessee but the parent company/companies must also be domestic companies. A reading of Paragraph F does show that the rates of tax applicable therein are applicable to a domestic company . The reference to domestic company in the beginning is to the assessee. By virtue of section 2(6) (a) of the Finance (No. 2) Act, 1971, one has to go to section 108 of the Income-tax Act to determine whether a company is a company in which the public are interested. It is clear that section 108 of the Income-tax Act does not limit its applicability to a domestic company . Section 108 does not provide in clause (a) that it is to apply only to a domestic company. On the contrary, it applies to any company. Similarly, clause (b) of section 108 does not provide that it applies to a subsidiary of a domestic company. Thus, under section 108(a) a company could be a company in which the public are substantially interested even though it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut addition of any words to either, if it is held that the parent company/companies need not be domestic company/companies. It is settled law that if two interpretations are possible, then the one which harmonises must be accepted. It will, therefore, have to be held that so long as the assessee is a domestic company , it could be a company in which Petrosil Oil Company Ltd. vs Commissioner Of Income-Tax on 22 September, 1993 Indian Kanoon the public are substantially interested, even if the parent company/companies is/are not domestic company/companies. 88. In this view of the matter, it will have to be held that the assessee is domestic company in which the public are substantially interested Accordingly, the first question is answered as above. 89 14. Applying the above decision of the Hon ble Bombay High Court in the case of supra, 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 ..... 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