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TMI Blog2016 (10) TMI 1326X X X X Extracts X X X X X X X X Extracts X X X X ..... ed ('ICL'), its holding company, no liability arose under the Income-tax Act, 1961 ('Act'); Ground no. 2 - Demerger of telecom undertaking not chargeable to tax 3. failed to appreciate that in order to levy capital gains tax it is a condition precedent that the alleged profit! gain must arise from the transfer of a capital asset, which condition is not satisfied in the present case; 4. without prejudice to above grounds, erred in treating the demerger of telecom undertaking by the Appellant as a transfer chargeable to tax under the head 'Capital gains' under Section 45 of the Act, without appreciating the fact that a. demerger of a telecom undertaking, without any consideration is a valid lawful business arrangement which is a gift for the purposes of the Section 47(iii) of the Act and hence, not a taxable transfer for the purposes of Section 45 of the Act, by virtue of specific exemption prescribed under Section 47(iii) of the Act; b. without prejudice, transfer of the telecom undertaking being a transfer by a wholly owned subsidiary company to the Indian holding company is not a transfer for the purposes of Section 45 of the Act, by virtue of speci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tally incorrect fact that the Appellant has itself considered the revalued amount of retained asset, as full value of consideration for transfer of telecom 11. erred in proceeding on absurd/ irrelevant proposition that the said Scheme approved by the Hon'ble High Courts of Bombay and Gujarat is under the Companies Act, 1956, which is in clash with the Act; 12. without prejudice to the above, not appreciating the fact that the imputed consideration, if any, should be restricted to the value of the demerged undertaking and cannot be absurdly computed with reference to the fair value of an unrelated investment asset; Ground no. 4 - Demerger of telecom undertaking not a slump sale under Section 2(42C) of the Act 13. erred in affirming that demerger of the telecom undertaking by the Appellant to ICL, pursuant to the said Scheme, without any consideration, constitutes slump sale under Section 2(42C) of the Act and consequently liable to tax under Section 50B of the Act; 14. failed to appreciate that transfer pursuant to a Court approved demerger scheme, which is without any consideration, does not qualify as a 'sale' and hence, is not in the nature of 'slump sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rms of scheme assessee also revalued its investment in Indus, an asset separate from demerged undertaking and business restructuring reserve was created. During the course of scrutiny assessment, the AO issued a notice asking the assessee to show cause as to Why the demerger under the said "Scheme should not be treated as a 'transfer' for the purposes of Section 45 of the Act and be taxed as 'capital gains'. In response to the above, the assessee made detailed submissions before the learned AO stating that there was no consideration for demerger of undertaking therefore, no capital gains accrued in the hands of assessee. However, not convinced with the submissions of the assessee A.O. held that demerger was a slump sale u/s.50B and computed the short term capital gain considering the revaluation of the investment in Indus as full value of the consideration and adopted the cost of acquisition u/s.50B and determined the short term capital gain in the hand of the assessee. Further A.O also disallowed deduction for the unamortized Iicense fees of Rs. 9.47 crores claimed by the assessee u/s.35ABB(2) of the Act on the ground that the same was already considered while comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... never intended by s. 45 to be the subject of the charge. This inference flows from the general arrangement of the provisions in the Income-tax Act, where under each head of income the charging provision is accompanied by a set of provisions for computing the income subject to that charge. The character of the computation provisions in each case bears a relationship to the nature of the charge. Thus the charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section. Otherwise one would be driven to conclude that while a certain income seems to fall within the charging section........" 5. Further reliance was placed on the decision of Hon‟ble Supreme Court in the case of PNB Finance Ltd., 307 ITR 75, wherein it was held as under :- 17. As regards applicability of s. 45 is concerned, three tests are required to be applied. In this case, s. 45 applies. There is no dispute on that point. The first test is that the charging section and the computation provisions are inextricably linked. The ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e must be the true value, not any artificial value which parties for any purpose may assign to a particular capital asset. A hypothetical benefit cannot be taxed under sec. 45 of the IT Act. 8. The Authority of Advance Ruling in the case of Amiantit International Holding Ltd., 322 ITR 678, has also held as under :- "It is not possible to identify or pinpoint anything which has the characteristics of profit or gain or any consideration which is capable of being valued in praesenti. The income in the sense of profit and gain should be real but not hypothetical income. The income may be in cash or in kind and need not necessarily be pecuniary in nature. Even then, the alleged consideration for which the shares are to be transferred should be capable of being evaluated on commercial and accounting principles. The possibility of applicant-transferor improving its overall business by virtue of re-organization and the mere possibility or chance of the applicant making better returns in the near or distant future as a consequence of reorganization can hardly be regarded as a consideration accruing or arising to the transferor when it has no right to receive a definite or an ascertainabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntend that the value of individual assets including transferred shares which forms part of the total enterprise i.e., $ 3563 (millions) constitutes consideration for the transfer. I am unable to accept this extreme contention. These statements in the Annual Report of DHC do not in any way support the proposition that a definite or agreed consideration has been received by the applicant in transferring the shares of the Indian companies to its subsidiaries and thereby the applicant made a profit or gain by transferring the shares. Shares may have been notionally valued for the purpose of preparing the financial statements or to facilitate the reorganization process. For that reason, it cannot be reasonably said that the book value or the market value of the shares really represents the consideration for the transfer or the profit arising from the transfer. In this context, it is clarified by the applicant (vide written submissions dated 10-8-2009) that the sum of $3563 (millions) represents the value of reorganized entity, namely, DHC and has nothing to do with the value of assets and liabilities of the entity under reorganization i.e., DC and that the reorganization value has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 131 ITR 597, have broadly laid down the following principles for invoking of provisions of the erstwhile section 52 of the Act. As per the principles so laid down if the shares are sold at a value lower than the market price and there is no evidence direct or inferential, that the assessee had received the difference between the value actually received and market value of shares sold, then actual price received for the sale should be considered as full value of consideration. The capital gains tax is not a tax on what might have been received. The actual price received by the assessee may be less than the fair market value. Capital gains tax was intended to tax the gain of the assessee, not what the assessee might have gained. Unless there is evidence that more than what was stated was received, no higher price can be taken to be the basis for computation of capital gains. Thus, even under the erstwhile Section 52 of the Act, which provided power to the assessing officer to consider the fair market value in those cases where consideration is understated, only the price agreed between the parties i.e. the actual price at which the shares are sold and not the fair market value of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cified provisions. 14. Reliance was placed on the decision of Dev Kumar Jain, 309 ITR 240, wherein the Hon‟ble Delhi High Court had an occasion to consider the scope of the full value of consideration and ruled that the full value of consideration and fair market value under Section 55A of the Act are two different concepts and the assessing officer cannot substitute full value of consideration by fair market value on his own. The Hon‟ble Court held as under :- "7. We find that a Division Bench of this Court in the case of CIT Vs. Smt. Nilofer I. Singh, 309 ITR 233(Delhi) dated August 27, 2008, in ITA No.154/2008 has held that the provisions of section 55A of the Act apply only where the Assessing Officer is required to ascertain the fair market value of a capital asset. In a case where capital gains have to be brought to tax the provisions of sections 45 and 48 of the Act come into play. Section 45(IA) of the Act provides that any profit or gains arising from the transfer of asset affected in the previous year shall be chargeable to income tax under the head "Capital gains". It stipulates that capital gains shall be computed by deducting from the full value of consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness Restructuring Reserve. This fact is vident from clause 11.3 of the Court approved scheme of Arrangement becoming effective the assessee would revalue its investments in Indus and create the Business Restructuring Reserve. Hence, creation of such a reserve is a result of a unilateral action by the assessee. Further, as is evident from Scheme of Arrangement, the AO has misinterpreted in the intent of clause 11.3 and ignored the fact that no consideration was paid by ICL to the assessee towards de-merger of its telecom undertaking. The AO has failed to understand that the Business Restructuring Reserve created in the books of the assessee was merely an accounting entry passed in the books of assessee on account of revaluation of its investment and that, the amount representing an accounting entry could not be deemed to be the value of consideration for transfer of the telecom undertaking by the assessee. We found that the fair valuation of the investments by the assessee in its books cannot by any stretch of imagination be considered as a consideration received by the assessee from ICL for de-merger of its telecom undertaking. 16. In view of the above, it was contended before lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning of section 45 read with section 2(47). 19. It was also contention of assessee before lower authorities that there is no nexus between transfer of telecom undertaking by the assessee and revaluation of the investment in Indus except that both the transactions are independent transactions arising from the Scheme of Arrangement. Hence, as no consideration has accrued to the assessee on account of the said de-merger no profit or gain can be said to have accrued or received by the assessee. 20. In view of the above discussion, the said Business Restructuring Reserve so created by assessee on account of revaluation of investment in entity, cannot be treated as consideration in the hands of the assessee for transfer of Bihar Telecom Undertaking from assessee to ICL. In absence of any consideration for de-merger of the telecom undertaking i.e. transfer of capital asset, the machinery provisions under section 48 of the Act would fail, and thus, no capital gains would be applicable on such transfer. Capital gains tax liability is to be determined with reference to the full value of consideration accruing to or received by the transferor. In the present case, since no consideration had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion pursuant to a Scheme of Arrangement ("Scheme‟) u/s 391 to 394 of the Companies Act, 1956 approved by the Hon‟ble Gujarat High Court and Hon‟ble Bombay High Court. Since there is no consideration for transfer of a capital asset, the capital gains computation mechanism fails and thus, no capital gains tax can be levied on such transfer and the same cannot be termed as "Sale‟. Reliance was placed on (i) B.C.Srinivasa Setty (1981) (128 ITR 294) (SC); (ii) Amiantit International Holdings Ltd., In Re(2010)(322 ITR 678)(AAR) (iii) PNB Finance Ltd vs CIT (307 ITR 75) (SC) (iv) Dana Corporation vs DIT (321 ITR 178) (AAR) (v) Goodyear Tire and Rubber Co. In Re (2010)(334 ITR 69) (AAR)and (vi) Avaya Global Connect (122 TTJ 300) 26. As per learned AR, capital gains are to be computed having regard to the full value of consideration received / accrued to the assessee i.e., price agreed between parties and not on the national or fictional income or fair market value of the asset on the date of transfer. Reliance placed on (i) KP Varghese vs ITO (131 ITR 597) (SC) (ii) CIT vs George Henderson & Co., (66 ITR 622) (iii) Gillianders Arbuthnot (SC) (87 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iven by the preference share holders to the scheme of de-merger and for which no shares were required to be issued to them. 35. Learned AR also vehemently argued that de-merger is also not chargeable under Section 47 (v). Since in the instant case, transfer was by a wholly owned subsidiary company to the Indian holding company, the same cannot be recorded as transfer by virtue of specific exemption prescribed under Section 47 (v) of the Act. Attention was invited to the fact that the entire equity share capital of the assessee is held by Idea, which is an Indian company. 36. Our attention was also invited to the scheme of arrangement and Financial Statements for the year ended 31 March 2010 amply demonstrated that no consideration was received by the assessee or any person on account of the transfer of the telecom undertaking. The said transfer is not a "slump sale‟ and hence, not chargeable to tax under Section 50B of the Act. In this context, reliance was placed on the decision of Hon‟ble Bombay High Court in the case of Bharat Bijlee, wherein it was held that presence of a monetary consideration / price is a pre-requisite for a transfer to be treated as a "saleR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sets as full value of consideration, for transfer of undertaking. Since, there was a consideration, transfer of undertaking cannot be treated as a "gift‟. 40. As per learned DR, assessee had not satisfied the conditions of demerger, hence, it is not eligible for capital gains u/s. 47(vib). 41. We have considered rival contentions and carefully gone through the orders of the authorities below and the documents placed on record to which our attention was invited during the course of hearing. We had also deliberated on the judicial pronouncements referred by lower authorities in their respective orders as well as cited by learned AR and DR during the course of hearing before us in the context of factual matrix of the case. From the record we found that during relevant Assessment Year, the assessee filed a Scheme of Arrangement under Section 391 to 394 of the Companies Act, 1956, with the Hon'ble High Courts of Gujarat and Bombay for de-merger of its telecom undertaking, being the business undertaking engaged in provision of telecom services in Bihar telecom service area, to its holding company ICL., Under the Scheme of Arrangement, the assessee transferred all the assets an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied due to failure of the computation mechanism. 43. In case of B.C.Srinivasa Setty (supra) Hon‟ble Supreme Court observed as under:- Section 45 is a charging section. For the purpose of imposing the charge, Parliament has enacted detailed provisions in order to compute the profits or gains under that head. No existing principle or provision at variance with them can be applied for determining the chargeable profits and gains. All transactions encompassed by section 45 must fall under the governance of its computation provisions. A transaction to which those provisions cannot be applied must be regarded as never intended by section 45 to be the subject of the charge. This inference flows from the general arrangement of the provisions in the Income-tax Act, where under each head of income the charging provision is accompanied by a set of provisions for computing the income subject to that charge. The character of the computation provisions in each case bears a relationship to the nature of the charge. Thus, the charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ever and it cannot refer to the adequacy or inadequacy of the price bargained for between the parties. Similar view has been taken by Hon'ble jurisdictional Mumbai Tribunal in the case of Rupee Finance & Management Ltd vs ACIT 22 SOT 174 , wherein the Tribunal has held that in absence of a specific enabling provision in the Act, there can be no notional taxation w.r.t fair market value. The said decision has been approved by Hon'ble Bombay High court. 46. In view of the above, it is amply clear that the full value of consideration has to be taken based on the price that has been commercially agreed between the parties and cannot be imputed on a notional basis. 47. Following decisions also support our view. (i)Baijnath Chaturbhui vs CIT (31 ITR 643)(Bom HC) (ii)Goodyear Tire and Rubber Co. (334 ITR 69)(AAR) (iii) Poona Electricity Co. Ltd. vs CIT (571TR 521) The same idea was expressed in different words in CIT vs Shoorji Vallabhdas & Co Ltd. (46 ITR 144)(SC) (iv) Amiantit International Holding Ltd (322 ITR 678)(AAR) (v) Dana Corporation (321 ITR 178)(AAR) (vi) KP Varghese vs ITO (1311TR 597)(SC) (vii) CIT v Shivakami Company P. Ltd. [1986] (159 ITR 71) (SC) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assed in the books of the Appellant on account of revaluation of its investment and that, the amount representing an accounting entry could not be deemed to be the value of consideration for transfer of the telecom undertaking by the assessee. The fair valuation of the investments by the assessee in its books cannot by any stretch of imagination be considered as a consideration received by the assessee from ICL for de-merger of its telecom undertaking. The creation of such a reserve only represents an accounting entry passed by the assessee in its books of account and does not represent any consideration whatsoever received from ICL or any third person towards transfer of the telecom undertaking to ICL. Further, in case of any consideration being received or paid, there have to be atleast two parties and given that in the instant case the reserve was created on account of a unilateral action by the assessee, the same cannot be treated as a consideration received from ICL. It is unimaginable to assume that creation of reserve in the books of the assessee on account of revaluation of its own investments is the consideration paid by ICL. The Business Restructuring Reserve merely repre ..... X X X X Extracts X X X X X X X X Extracts X X X X
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