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TMI Blog2001 (10) TMI 41X X X X Extracts X X X X X X X X Extracts X X X X ..... as incurred on account of transaction between the parent company and the subsidiary company and hence the same was disallowable under section 47(iv)(a) of the Act in spite of the fact that the assessee-company did not hold all the share capital of Ambernath Investments Pvt. Ltd.?" The facts leading to this reference are as under: The assessee is a private limited company (the company) earning dividend and interest income from its activities of making or holding investments and financing industrial enterprises. It maintains its books of account on mercantile system of accounting. For the assessment year under consideration, i.e., 1975-76, for which the accounting period ended on March 31, 1975, the assessee-company filed its return of income declaring total loss of Rs. 3,02,858. The total loss included an amount of Rs. 1,26,201 claimed by the assessee to have been incurred on account of short-term capital loss. At the assessment proceedings, the Income-tax Officer, noted that during the accounting period the assessee had sold its 2,300 shares of Sarabhai Management Corporation Ltd. a private limited company, on January 20, 1975, to its subsidiary company, viz., Ambernath Investm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal did not express any opinion on the second ground which had appealed to the Commissioner of Income-tax (Appeals). In this reference both the questions have been referred at the instance of the assessee only. We have heard Mr. R.K. Patel, learned counsel for the assessee, and Mr. B.B. Naik, learned counsel for the Revenue. Although two separate questions are referred, the basic controversy between the parties is a narrow one. The transaction of sale of shares by the assessee-company to Ambernath Investments Pvt. Ltd. is held out by the assessee-company as a transfer which resulted in capital loss. According to the Revenue, section 45 provides for tax on capital gains arising on transfer of asset but in the facts of this case, there was no transfer of an asset in the first place because the transaction in question was covered by the provisions of section 47(iv) of the Income-tax Act read with section 4(1) of the Companies Act, 1956. The relevant provisions of the Income-tax Act, reads as under: "45. Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections..., be chargeable to income- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a) of section 47(iv) was also not attracted. Of course, there is no dispute about the fact that Ambernath Investments Pvt. Ltd. is an Indian company. The Tribunal erred in invoking the provisions of the Companies Act, 1956, for applying section 47(iv) to the facts of the instant case. Mr. Patel, vehemently submitted that section 4(1) of the Companies Act commences with the words "for the purposes of this Act" and that, therefore, the definition of 'holding company" contained in the aforesaid provision cannot be applied for the purposes of section 47(iv) of the Income-tax Act which is a different enactment altogether. Because the transaction in question resulted in capital loss, the Revenue had held that it was not a transfer but if the transaction had resulted in capital gain, the Revenue would have canvassed the other way round to rope in the income as taxable by treating it as a transfer of capital asset outside the purview of section 47(iv) and for that purpose the Revenue would have contended that Ambernath Investments Pvt. Ltd. was not the immediate subsidiary of the assessee-company. On the other hand, Mr. B.B. Naik, learned counsel for the Revenue, has submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urpose of levy of capital gains. For instance, any distribution of capital assets on the total or partial partition of a Hindu undivided family is not to be treated as a transfer for the purpose of capital gains. So also, any distribution of capital assets on the dissolution of a firm, or association of persons is not to be treated as a transfer for the purpose of capital gains. Similarly, any transfer, in a scheme of amalgamation of a capital asset by the amalgamating company to the amalgamated company is also not be treated as a transfer for the purpose of capital gains, subject to compliance with certain conditions. The same section provides that, transfer of a capital asset by a holding company to its Indian subsidiary company or by a subsidiary company to its Indian holding company is not to be treated as a transfer for the purposes of capital gains. The words "any transfer of a capital asset by a company to its subsidiary company" would as per the ordinary grammatical construction contemplate only the immediate subsidiary company of the holding company as the holding company holds the share capital only of its immediate subsidiary company. If the Legislature while enactin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompanies Act, 1956, for giving a more expanded definition of a holding company to subject more companies to regulatory control under the Companies Act. On the other hand, the object underlying section 47 of the Income-tax Act, is to lay down exceptions to the legal provision (section 45) for taxing gains on transfer of capital assets. The general rule is to construe the exceptions strictly and not to give them a wider meaning. In this view of the matter, we have no hesitation in expressing our view that the Tribunal was not justified in law in treating Ambernath Investments Pvt. Ltd. as a subsidiary company of the assessee-company for the purposes of clause (iv) of section 47 of the Income-tax Act, 1961. Before giving our final answer to the questions referred to us, we may deal with the submission of Mr. Naik for the Revenue that even if Ambernath Investments Pvt. Ltd. is not to be treated as a subsidiary of the assessee-company, the Commissioner of Income-tax (Appeals) had given a second ground for upholding the order of the Income-tax Officer for disallowing the short-term capital loss arising on account of sale of shares by the assessee-company to Ambernath Investment Pvt. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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