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TMI Blog2023 (5) TMI 1036X X X X Extracts X X X X X X X X Extracts X X X X ..... ts meaning from The Companies Act which includes equity and preference capital both. It is also because wherever legislature wanted particular percentage of particular share capital qua voting right, etc same is provided in those sections, such as Section 47 (xiii) and (xiv) of the Act. Similarly section 2(22) and section 40 A of the Income tax Act provides for beneficial ownership of shares. Section 47 (iv) exempts transfer of capital assets from Holding company to subsidiary company only where share capital in its entirety is held by holding company. Plain meaning of the words of the section clearly suggest so. We find that the requirement of holding the whole of the share capital applies to both the types of share capital i.e. equity share capital and preference share capital. As apparent that entire issued and paid-up share capital of the subsidiary company should be held by holding company or its nominees for claiming exemption from capital gains under this clause. There are different shareholders of preference share capital other than the holding company and holding company only holds along with its nominees, 100 % equity shares of the transferee company. Therefore, according ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s under:- "On the facts and circumstances of the case and law, the Ld. CIT(A) has erred in excluding the comparable M/s Axis Integrated Systems Limited without appreciating the fact that Business Support Services and Management Services are highly skill-based services and by no stretch of imagination BSS and MSS can be treated as low-end services." 06. At the time of hearing both the parties were heard and both the parties pointed out that this comparable was considered by the co-ordinate Bench in earlier years in ITA No.1547/Mum/2016 for A.Y. 2010-11, ITA No.2733/Mum/2017 for A.Y. 2011-12 and ITA No.5842/Mum/2017 for A.Y. 2012-13 vide order dated 28th September, 2018, wherein at paragraph no.163, the above comparable company was considered as under:- "163. With regard to Axis Integrated Systems Ltd, we notice that the said company is providing services in respect of regulatory and licensing requirements by liasioning with Government and regulatory authorities. On the other hand, the assessee is providing back office support services, which are mostly internal services. Accordingly, the learned CIT (A) has held that M/s Axis Integrated Systems Ltd is providing high end servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le of equity and preference shares was not covered by the exception under section 47(iv) of the Act. Your Appellant reserves the right to add, amend, alter or vary all or any of the above grounds of appeal as they or their representatives may think fit." 011. According to ground no.6, the assessee claims and submits that i. Assessee has incurred long term capital loss arising on sale of equity and preference shares of M/s. Reliance Exploration and Production DMCC (REP DMCC), to its subsidiary company M/s. Reliance Industrial Investments and Holdings Ltd ('RIIHL), Which was claimed as exempt u/s 47 (iv) of the Act. ii. It was erroneous understanding that the above said transactions is falling within the exception to definition of ' Transfer' u/s 47(iv) of the Income-tax Act, 1961 (the Act). iii. Assessee does not hold whole of the share capital of its subsidiary company. It only holds 100 % equity shares capital of that company but does not hold any preference share of that company. 012. The brief facts of the case shows that assessee transferred a capital asset as under :- i. Reliance Exploration and Production DMCC is a Multi Commodity centre under the DMC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oration and production DMCC purchased and cancelled 11,02,500 5% noncumulative compulsorily convertible preference shares of AED 1000/- each at par aggregating US$ 30 crores (AED 110,25,00,000) as per board resolution and shareholder resolution dated 17 July 2012. ix. Thus, assessee was left with 13,79,816 5% noncumulative compulsorily convertible preference shares as well as 1,76,200 equity shares of the above company. 013. On 28/3/2013 assessee sold all these preference and equity shares to Reliance Industrial Investments And Holdings Ltd. 13,79,816 preference shares were sold for 1,376,94,45,097/- and 1,76,200 equity shares were sold for 167,35,54,903/-. The assessee incurred long-term capital loss on sale of 5% noncumulative compulsorily convertible preference shares amounting to ₹ 7,505,778,350/- and on equity shares loss of ₹ 1,787,683,109 was incurred. 014. These shares i.e. capital assets were sold to Reliance industrial Investments and Holdings Limited which is Indian subsidiary company of the Assessee. However :- i. Assessee considered that Reliance Industrial Investments And Holdings Ltd is 100% subsidiary of the assessee company as it holds 14,75,04,40 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rn Of 9% Noncumulative Optionally Convertible Preference Shares serial number Name of the shareholder Number of shares held as at 31/3/2012 As at 31 three 2013 1 Reliance Petro investments Ltd 9,00,500 9,00,500 2 Reliance KG exploration and production is private limited 51,750 Nil 3 Reliance retail finance limited 5,05,000 5,05 ,000 Total 14,57,250 14,05,500 iv. has also issued 10% noncumulative optionally convertible preference shares of ₹ 10/- each which were as under:- Serial number Name of preference shareholder Number of preference shares held as As at 31/3/2013 1 Reliance Petro investments Ltd 1200 1200 2 Reliance polyolefin Ltd 1,49,020 1,49,020 v. Thus, the issued subscribed and paid-up capital of Reliance Industrial Investments And Holdings Ltd as on 31 March 2012 and 31st of March 2013 is as under:- Serial Number Type of share capital Number of shares held as on 31/3/2013, 31/3/2012) Share capital as at 31/3/2013 (In Lakh Rs) Share capital as at 31/3/2013 (In Lakh Rs) 1 Equity Share of ₹ 10 each fully paid 14,75,04,400 147,50 147,50 2 9% noncumulative optionally convertible preference shares of ₹ 10 ea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessee holds only 100% of the equity share capital of its subsidiary. However, it does not hold any of the preference share capital of its subsidiary company. 021. Apparently Reliance Industries Ltd, does not hold any of the 2 types of preference shares issued by Reliance industrial investments and Holdings Ltd i.e. (1) 9% non-cumulative optional convertible preference shares of ₹ 10 each and (2) 10% noncumulative optionally convertible preference shares of ₹ 10 each. 022. Assessee submitted shareholding pattern of the subsidiary company as on 31/3/2012 and 31/3/2013 of equity share and preference share holding by submitting the duly certified Annual Return Of the company furnished before the Ministry of corporate affairs. Audited annual accounts of the subsidiary company as on 31/3/2013 filed, shows capital structure of the company as per 'note number (1) share capital' that assessee is only holding 100 % equity share capital of Reliance Industrial Investments And Holdings Ltd. 023. Two different companies hold 9% noncumulative optionally convertible preference shares of ₹ 10 each fully paid in the ratio of (1) Reliance Retail Finance Limited- 35.93% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l convertible preference shares of ₹10 each fully paid up were also held by Reliance Petro Investments Ltd. Thus, though Reliance Industries Ltd. Assessee holds 100% equity share capital of Reliance Industrial Investment and Holdings Ltd but it does not hold preference share capital of the Reliance Industrial Investment and Holdings Ltd. Thus, it does not hold the "whole of the share capital" of the subsidiary company. Accordingly, conditions prescribed under Section 47(iv) (a) of the Act is not satisfied. Therefore, Provisions of Section 45 are triggered and, any profit or gain arising on the sale of the shares of Reliance Exploration and Production DMCC to Reliance Industrial and Holdings Ltd is chargeable to tax under the head capital gains. 030. Though in the return of income, it was submitted that as the Provisions of Section 47(iv) of the Act are triggered the capital gain or loss is not chargeable under Section 45 of the Act; hence, it was not treated as chargeable but claimed as exempt loss. However, the claim is made that as Reliance Industries does not hold 'whole of the share capital of the subsidiary company', the Provisions of Section 47(iv) of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of winding up. Thus, assessee company is not holding even a single preference shares of (1) 9% noncumulative optionally convertible preference shares of ₹ 10 each fully paid up, and (2) 10% noncumulative optionally convertible preference shares of ₹ 10 each fully paid up, but it holds 100 % equity shares of ₹ 10 each fully paid up. In these circumstances, only question is that can an assessee company be said to be holding the 'whole of share capital' of the subsidiary company to which capital assets are transferred. 033. According to us, the 'share capital' includes equity as well as preference shares both. Because, the share capital is deriving its meaning from The Companies Act which includes equity and preference capital both. It is also because wherever legislature wanted particular percentage of particular share capital qua voting right, etc same is provided in those sections, such as Section 47 (xiii) and (xiv) of the Act. Similarly section 2(22) and section 40 A of the Income tax Act provides for beneficial ownership of shares. 034. Section 47 (iv) exempts transfer of capital assets from Holding company to subsidiary company only where sh ..... X X X X Extracts X X X X X X X X Extracts X X X X
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