Madras H.C : The transmission of shares by the appellant to its wholly owned subsidiary company would amount to transfer and that there was a deemed gift involved therein

High Court Of Madras

New Ambadi Estates (P.) Ltd. vs. JCIT, Special Range –I

Assessment Year : 1994-95

Section : 4, 47

Mrs. Chitra Venkataraman And Ms. K.B.K. Vasuki, Jj.

Tc (Revision) No.1080 Of 2004

August 13, 2013

ORDER

Mrs. Chitra Venkataraman, J. – The above Tax Case Revision is filed at the instance of the assessee as against the order of the Income Tax Appellate Tribunal for the assessment year 1994-95. The above Tax Case Revision was admitted on the following substantial questions of law:—

“1. Whether on the facts and in the circumstances of the case the Income Tax Appellate Tribunal was right in law in holding that the transmission of shares by the appellant to its wholly owned subsidiary company would amount to transfer and that there was a deemed gift involved therein?

2. Whether on the facts and in the circumstances of the case the Appellate Tribunal was right in law in holding that difference between the book value of the shares and the market value would be a deemed gift?

3. Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in not lifting the corporate veil and thereby holding that there was a transfer?”

2. The assessment is under the provisions of the Gift Tax Act. It is stated that the assessee is a holding company. During the course of assessment year 1994-95, the assessee company transferred shares held by M/s. EID Parry (India) Limited and M/s. Tube Investments of India Limited to its wholly owned subsidiary company at book value. Noting that the shares were quoted shares and were sold at the price less than the market value quoted as on the date of sale, the difference between the market value and the actual consideration was sought to be assessed as deemed gift under the provisions of the Gift Tax Act. The assessee company contended that being a transfer from holding company to its subsidiary company, there was no transfer within the meaning of Section 47(iv) of the Income Tax Act. In the circumstances, there could be no deemed gift arising in this case. However, the Gift Tax Officer rejected the said contention and assessed the difference as deemed gift.

3. Aggrieved by the same, the assessee went on appeal before the Commissioner of Income Tax (Appeals). The first Appellate Authority held that the subsidiary company was doing business in purchase and sale of shares and the shares purchased were treated as stock-in-trade in the hands of the subsidiary company. Hence applying the provisions of Section 47A(1)(i) of the Income Tax Act, the transaction was treated as deemed transfer. Considering the difference in the value between the market value and actual consideration, the difference was held as assessable under the Gift Tax Act. The Commissioner of Income Tax (Appeals) pointed out to the decision S.R. Chockalingam Chettiar v. CGT [1968] 70 ITR 397 (Mad.) and held that when the consideration received by the assessee was far less than the market value, Section 4 of the Gift Tax Act stood attracted. The issue raised in the appeal was not relating to Income Tax Act, but one under the Gift Tax Act. Consequently, the provisions of Gift Tax Act alone would apply. Thus, the appeal filed by the assessee was rejected.

4. Aggrieved by the same, the assessee went on further appeal before the Income Tax Appellate Tribunal. The Tribunal pointed out that the assessee transferred its rights at Rs.5/- per share as against the market value of Rs.28/- per share as quoted in the Madras Stock Exchange as on 3.9.1993. By transferring the rights to the group company at the price less than the market value, the assessee company claimed short term capital loss and attempted to claim benefit of avoiding gift tax as well. Since the rights were transferred for inadequate consideration, the transactions were squarely covered by Section 4(1)(a) of the Gift Tax Act. The Tribunal pointed out that there was no dispute that the transfer was made to the wholly owned subsidiary company. Merely because the assessee was having the entire share of the subsidiary company, it could not be held that both the companies were one and the same. In so holding, the Tribunal rejected the assessee’s prayer for lifting the corporate veil. In respect of the contention raised by the assessee that by reason of 100% share holding in the subsidiary company there could be no transfer at all, the Tribunal held that when the assessee itself had claimed capital loss, there could be no question of claiming economic unity among the two companies. Thus, the question of lifting the corporate veil did not arise in this case. Thus, the Tribunal rejected the assessee’s contention placing reliance on the decision of the Calcutta High Court GTO v. Venesta Foils Ltd. [1980] 124 ITR 660.

5. Subsequent to the dismissal of the claim by the Tribunal, it is seen that the assessee filed MP before the Tribunal for correcting certain errors in paragraph 13 of the order passed in the main appeal regarding the Tribunal’s holding that the assessee had claimed capital loss on the transfer of shares to the subsidiary company. By order dated 30.7.2004 in MP. No. 237/Mds/2003 deleting the said paragraph, the Tribunal nevertheless reconfirmed its original view that the transaction in question attracted the provisions of the Gift Tax Act, that the transaction of the assessee company was not one of the transactions included under Section 45 of the Gift Tax Act to claim non-liability. It however pointed out that it was not known whether the Assessing Officer had adopted the market value determined under the Income Tax Act. Though Schedule II of the Gift Tax Act provided for the method of valuation for the purpose of gift tax, yet, if any fair market value was fixed in the Income Tax proceedings, the same had also to be taken into consideration while determining the deemed gift. Aggrieved by the order made in the main appeal filed by the assessee, the present appeal is filed before this Court by the assessee.

6. Learned counsel appearing for the assessee submitted that considering the fact that the transactions were between wholly owned subsidiary company and the holding company, the same could not be treated as transfer even as per Section 47(iv) of the Income Tax Act. He submitted that even though technically there are two entities, yet, factually, the interest of the holding company being 100% in the subsidiary company, the Tribunal ought to have followed the decision of the Calcutta High Court Venesta Foils Ltd.’s case (supra) Thus, the Tribunal committed a serious error in not lifting the corporate veil to know the actual state of affairs and in not considering Section 47(iv) of the Income Tax Act. When there is no transfer, the question of deemed gift, in any event, did not arise for consideration.

7. Countering the claim of the assessee, learned Standing Counsel appearing for the Revenue pointed out that even assuming that there was no capital loss, the fact remained that the holding company and the subsidiary company, for all practical purpose and legal consequences being two different entities, the transfer of shares by the holding company to the subsidiary company being at the value far below the market price, rightly the Assessing Officer invoked Section 4 of the Gift Tax Act. Pointing out to the definition of ‘transfer of property’ as appearing in Section 2(xxiv) of the Gift Tax Act and read in the context of Section 45 of the Income Tax Act providing for transactions excluded from the provisions of Gift Tax Act and the present transaction between the holding company and the subsidiary company not being of one such excluded transaction, rightly the assessment was made on the assessee adopting the market value. He further pointed out that even going by the Schedule II of the Gift Tax Act in the case of quoted shares, when the quotation as on the date of the transaction is available at the Stock Exchange, no exception could be taken to the order of the Officer adopting the market value. He pointed out that even though the Revenue had not come on appeal as against the order of the Tribunal, particularly as regards the direction to the Assessing Officer to determine the value as had been taken under the Income Tax Act, the fact remained that in the case of transaction relating to quoted shares, Schedule II under the Gift Tax Act would be a relevant one. We agree with the submission of the learned Standing Counsel appearing for the Revenue. The definition of “transfer of property” as contained in Section 2(xxiv) of the Gift Tax Act reads as follows:—

” ‘transfer of property’ means any disposition, conveyance, assignment, settlement, delivery, payment or other alienation of property and, without limiting the generality of the foregoing, includes—

(a) the creation of a trust in property.

(b) the grant or creation of any lease, mortgage, charge, easement, licence, power, partnership or interest in property.

(c) the exercise of a power of appointment whether general, special or subject to any restrictions as to the persons in whose favour the appointment may be made of property vested in any person, not the owner of the property, to determine its disposition in favour of any person other than the donee of the power; and

(d) any transaction entered into by any person with intent thereby to diminish directly or indirectly the value of his own property and to increase the value of the property of any other person;”

8. Given the fact that in law, a subsidiary company, even if 100% wholly owned by the holding company, is an independent entity and given the fact that the assessee itself recognised that the transfer of shares to the subsidiary company is at the value noted in the books of accounts of the assessee company, we do not find any justifiable ground to accept the plea of the company based on Section 47 of the Income Tax Act. It is no doubt true that under Section 47(iv) of the Income Tax Act, for the purpose of capital gains, the transfer of capital asset between the holding company to subsidiary company is not treated as a transfer. But the relevance of Section 47 of the Income Tax Act has to be seen only in the background of the provisions relating to the charge on capital gains under Section 45 that given the inclusive definition on transfer under Section 2(47), but for Section 47, these transactions would certainly attract Section 45. Thus, this Section would not apply to a case where no capital gain is involved. Contrary to the assertion of the assessee herein, when one reads the definition of ‘transfer of property’ appearing under Section 2(xxiv) of the Gift Tax Act, it would reveal that any transaction entered into by any person with intent thereby to diminish directly or indirectly the value of his own property and to increase the value of the property of any other person is also included within the meaning of transfer of property. It is not denied by the assessee that by transfer of shares held by the holding company, there is a diminution in the asset held by the holding company. Even though learned counsel for the assessee immediately replied that ultimately the assessee company is the owner of 100% owned subsidiary company, still, being two different entities, we do not find any justifiable ground to extend the provisions of Income Tax Act to the assessment under the Gift Tax Act for the purpose of understanding the definition of ‘transfer of property’ as available under the Gift Tax Act. Further, as rightly pointed out by the Tribunal, when two companies are treated as two different entities and when the facts are clear, there arises no necessity for lifting the corporate veil to know the nature of transactions or the existence of two entities. In the circumstances, we reject the third question of law raised in this Tax Case Revision.

9. As far as the applicability of the decision of the Calcutta High Court Venesta Foils Ltd. case (supra) is concerned, we do not think that it would be proper to read a single sentence out of context, as the said decision was arrived at based on the facts narrated therein. Thus, the decision of the Calcutta High court has no bearing to the facts herein. The Calcutta High Court pointed out that in the assessment made on the capital gains on the sale of shares of the holding company to the subsidiary company, the Income Tax Officer accepted the value as given by the assessee. However, the Self Same Officer, functioning as a Gift Tax Officer, took a different view as to the valuation of the property to assess the difference in value as declared gift. Thus the question therein is totally different from the question raised in this case. We do not find any justifiable ground to accept the argument advanced based on the decision of the Calcutta High Court to answer the question raised before this Court in favour of the assessee. Consequently, we reject the prayer of the assessee.

10. As far as first question of law in respect of transaction to be held as a transfer or not is concerned, the transaction has to be seen in the context of provisions of the Gift Tax Act and not under the provisions of Income Tax Act. As regards deemed gift, as rightly pointed out by learned Standing Counsel appearing for the Revenue, as on the date of sale when the market value of the quoted shares was available, we do not find any need for the Tribunal to direct the Authorities below to consider the valuation in terms of the Income Tax proceedings. Though this question, as such, is not canvassed by the Revenue, yet, when the entire order is before us for consideration and the error noted in the order is contrary to the provisions of the Act, there is no hesitancy on the part of this Court to correct the error while giving proper direction in the matter of valuation of shares for the purpose of considering the deemed gift assessment. In the circumstances, we dismiss the above Tax Case (Revision). No costs.

[Citation : 358 ITR 360]