Karnataka H.C : The transfer of shares by the appellant to another limned company would amount to sale of immovable property held by the company whose shares were sold by the appellant-company and the capital gains arising on such sale of shares will be liable to be assessed as capital gains arising on the sale of the property, is perverse and arbitrary

High Court Of Karnataka

Bhoruka Engineering Inds. Ltd. vs. DCIT, Circle -11 (2)

Assessment Year : 2006-07

Section : 4, 10(38), 45

Kumar And B. Manohar, JJ.

IT Appeal No. 120 Of 2011

April  9, 2013

JUDGMENT

N. Kumar, J. – This appeal is filed against the order passed by the Tribunal dismissing the appeal preferred by the assessee against the order of the lower authorities who have held that the assessee is liable to pay capital gain tax for the lands sold during 2005.

2. Bhoruka Steel Limited (BSL) was incorporated in the year 1969. It had a mini steel plant for the manufacture of billets and rolled products at Bangalore. It commenced its commercial production in 1972 and set up a refractory plant at Bangalore. They also set up a stevedoring division in Chennai in the year 1988-89, mainly to handle import of shredded scrap. They also took over the assets and liabilities of Bangalore Wire Road Mill, a division of Transport Corporation of India in 1991. The company became a sick industrial company within the meaning of SICA. The company’s case was first heard by BIFR on 9.2.1996 when IDBI was appointed as Operating Agency. A scheme came to be formulated for the rehabilitation of the BSL. The said scheme envisaged, inter alia, closure of the unviable steel division, sale of surplus assets and OTS of institutions/Canara Bank’s/debenture holders’ existing dues. One of the means by which the finance is to be raised was by way of sale of surplus fixed assets for a sum of Rs. 1,560 Lakhs. Accordingly, fixed assets (land, building and machinery) were proposed to be sold for estimated realization of Rs. 1,560 Lakhs, 50% of which representing Rs. 780 Lakhs each being received during 2000-01 and 2001-02. The book value of assets to be sold was Rs. 1,218 Lakhs as on 31.3.1998. The company had 37 acres of land in Bangalore, out of which 7 acres was proposed to be retained for refractory division and the balance 30 acres along with” building and structure therein were proposed to be disposed of. An asset sale committee (ASC) was constituted comprising one representative each of the company, OA, Canara Bank, GoK and the BIFR’s special director. The ASC would oversee and supervise the sale of identified surplus assets (including 30 acres land at Whitefield Road, Bangalore, Steel Melting Shop and Wire Road Mill) in a transparent manner. In case of any delay/ shortfall in realization of the expected amount of Rs. 1,560 Lakh from sale of assets, the promoters would be required to bridge the gap by inducting interest free funds from their own sources.

3. One M/s R.K. Makhija and Company, Registered Valuers were entrusted with the job of valuing 30 acres which is to be sold. The said valuers vide their valuation report dated 15.3.2002 valued the said land at Rs.25 Lakhs per acre. IDBI, the Monitoring Agency and AAIFR accepted the valuation of M/s Makhija at Rs.25 Lakhs per acre while approving the Rehabilitation Scheme. One Aeekay Enterprises offered Rs. 20 Lakhs per acre for purchase of the said land. However, in the meeting held on 8.7.2002 the committee resolved that the offer of Rs.20 Lakhs per acre by Aeekay Enterprises was low and the company may release’ advertisement in Economic Times, Mumbai and New Delhi as the land was ideally suited for large complexes like Multiplex/IT Park, etc., It was made clear that, if no worthwhile offer was received within 10 days from the date of release of advertisement, then the company had no other alternative but to request the promoters/group companies to purchase the land with the price not less than Rs. 25 lakhs per acre. Thereafter, the company was directed to issue paper notification inviting tenders for purchase of the said land. Accordingly, in Economic Times, Bangalore and Mumbai a paper publication was issued.

4. In the meeting held on 29.7.2002 a decision was taken to offer the land first to the promoters/sister companies jointly or severally with the reserve price of Rs. 25 Lakhs per acre on the condition that the dues of the secured creditors and others as per the rehabilitation, scheme are cleared by 31.12.2002 to enable them to release the title-deeds and issuing “No Due Certificate” to the company. The committee also authorized Mr. R.C. Purohit, Managing Director to take up the matter with the promoters and bring a final proposal on the above lines before the next Asset Sale Committee Meeting, failing which the committee will have no option but to sell the land at the highest offer received and the promoters will have to make up the shortfall from their own sources as provided in the scheme. In the meeting held on 16.12.2002 of the Asset Committee the Chairman informed the committee that the company had received an offer from Bhoruka Financial Services Limited (BFSL), a public limited company and also one of the group Companies offered to purchase 30 acres of land standing in the name of the company at Whitefield Road, Bangalore, for a total consideration of Rs. 750 Lakhs, i.e., Rs. 25 Lakhs per acre. The offerer deposited an advance of Rs. 75 Lakhs being 10% of the total consideration along with the offer. After some discussion, the committee approved the sale of. 15 acres of land at Whitefield Road, Bangalore to BFSL/its nominee/s for a total consideration of Rs. 375 Lakh. Accordingly, the said amount was paid and the said land measuring 15 acres was sold in favour of BFSL under two registered sale deeds dated 16.6.2004 and 30.6.2004.

5. The assessee-company is a limited company whose shares are quoted in the stock exchange. The assessee is holding shares in BFSL. The assessee and other promoter shareholders are holding 98.73% shares in BFSL, whereas the public shareholders are holding the remaining shares. The assessee was holding the shares in BFSL for more than a decade. BFSL was a financial company engaged in the business of investments. BFSL has purchased 15 acres of land under the aforesaid two sale deeds for a consideration of Rs. 3.75 crore which was then prevailing market consideration which was accepted for the purpose of Section 50C of the Income-tax Act (for short hereinafter referred to as ‘the Act’). Thereafter, the assessee in the financial year related to the relevant assessment year 2006-07 sold its shareholdings in BFSL to the extent of 45,350 shares for a net consideration of Rs. 20,29,08,626/- after paying Security Transaction Tax, Service Tax, etc., The sales were executed through a registered stock broker on a recognized stock exchange namely M/s Magadh Stock Exchange Association. The shares were sold to DLF Commercial Developers Limited. The assessee claimed the gain on sale of shares as exempt from taxation under Section 10 (38) of the Act.

6. The assessing authority proposed to bring to tax the gain arising on the sale of the shares as short term capital gain on sale of the immovable property by holding that the transaction was virtually for sale of the immovable property to DLF-CDL and the sale of shares was only a device to escape from taxation. The shareholders of BFSL by selling the shares to DLFCDL vested the immovable property in DLFCDL and it is the device to transfer the immovable property to DLFCDL and the property having been held by BFSL for a period of less than 36 months and therefore the capital gains is required to be’ computed as a short term capital gains .and consequently the appellant was liable to be taxed accordingly. The assessing authority held that the transaction was a colourable device and virtually the immovable property had been transferred for consideration and the appellant was liable to tax on the short term capital gams on sale of immovable property as determined. The assessing authority relied on the judgment of the Apex Court in the case of Mc.Dowell & Co. Ltd. v. CTO [1985] 154 ITR 148/22 Taxman 11.

7. Aggrieved by the aforesaid order, the assessee preferred an appeal to the Commissioner of Income Tax (Appeals). However, the Commissioner did not find any merit in the appeal and accordingly he dismissed the appeal.

8. Aggrieved by the said order, the assessee preferred an appeal to the Tribunal. The Tribunal held that, even though BEIL, BFSL and Bhoruka Steels Limited are all controlled by the same interest group of Agarwal family as common shareholders which is very prominent in the entire course of transaction involved in the present appeal. They had entered into an agreement on 20.7.2005 with DLF-CDL to sell the shares in BFSL to that company, DLF-CDL. The assessee, its group of individuals together held 1,88,850 equity shares representing 98.73% of fully paid-up equity capital of BFSL. Therefore, it follows that the assessee along with its group owned all the assets and properties of BFSL even though those assets and properties are technically held in the name of BFSL as an independent corporate entity, once this corporate veil is pierced, which is within the powers of the revenue authorities they were of the view that the assets of BFSL were held and de facto owned by the assessee-company and its group. BFSL, a company since long in existence was engaged only in financial services relating to the investments of assessee group. The property was purchased from another associate concern Bhoruka Steels Limited for a consideration of Rs. 3.75 crore. The said property now has become the property of DLF-CDL where 98.73% in BFSL were transferred to DLF-CDL on sale. DLF-CDL which is a real estate company by purchasing 98.73% of shares in BFSL has in fact acquired the ownership : and possession of the landed property which was purchased by BFSL for an amount of Rs. 3.75 crore just a few months back. DLF-CDL had acquired the shares of BFSL for a consideration of Rs. 89,28,36,500/-. The substance of the transaction is apparent now. Bhoruka Steels Limited sells its landed property to its associate concern BFSL for a consideration of Rs. 3.75 crore and immediately thereafter the shares in BFSL are sold and transferred to DLF-CDL for a consideration of more than Rs. 89 crore. If the formalities of the transactions and the legal nature of the corporate bodies are ignored for a moment, the stark fact coming to surface is that the assessee’s group has sold the property belonging to one of its concern to DLF-CDL for a consideration of more than Rs. 89 crore through the medium of sale and transfer of shares which property was purchased for Rs. 3.75 crore and thereby made attempt to avoid payment of short-term capital gains tax. If this is not a colourable device, then what would be a colourable device? Therefore, it held the series of transactions were well planned scheme so as to transfer valuable landed properties to DLF-CDL without attracting corresponding liability of tax. The whole transaction has been arranged in a sequential manner with M/s Bhoruka Steels Limited selling its landed property to BFSL for a nominal value of Rs.3.75 crore. BFSL never before doing any business other than financial services purchases the land for Rs. 3.75 crore; immediately thereafter the assessee company and its entire group holding 98.73% of shares in BFSL selling the shareholding to DLF-CDL for a consideration of Rs. 89,28,36,500/- without attracting any levy of taxation. This episode has been made possible by getting away from Bangalore Stock Exchange and going to Magadh Stock Exchange to carry out the sale transaction of shares and by paying STT for claiming exemption from long-term capital gains arising on sale of shares under Section 10(38) of the Act. Therefore, they recorded a finding that it is a case of colourable device to evade payment of taxation on short-term capital gains. Therefore, the Tribunal declined to interfere with the order passed by the Commissioner of Income Tax. It is against the said order, the assessee is in appeal.

9. This appeal was admitted on 15.6.2011 to consider the following substantial questions of law:-

“1. Whether the finding of the Tribunal that the transfer of shares by the appellant to another limned company would amount to sale of immovable property held by the company whose shares were sold by the appellant-company and the capital gains arising on such sale of shares will be liable to be assessed as capital gains arising on the sale of the property, is perverse and arbitrary?

2. Whether the finding of the Tribunal that the appellant is not entitled to benefit of exemption under Section 10(38), is contrary to law?”

10. The learned senior counsel appearing for the assessee assailing the impugned orders passed by the authorities as well as the Tribunal contended that, the authorities proceeded on the basis that the assessee has sold an immovable property and therefore the assessee is liable to pay capital gain based on such sale of immovable property. The assessee is only a shareholder in BFSL. It is BFSL who” has purchased the immovable property under registered sale deeds. Therefore, assessee is not the owner of the immovable property. However, the assessee has transferred his shares for a valuable consideration of Rs.4,490/- per share. The income derived from such share would not fall within the total income of the assessee in view of Section 10(38) of the Act. The assessee ‘is a shareholder in BFSL from the year 1984 and therefore the assessee was incorporated prior to that date. Neither the assessee company nor BFSL are companies which came into existence as a part of the scheme to purchase the land in question and evade payment of tax as sought to be made out by the authorities. The authorities seem to have been carried away by the fact that, before sale of shares, the BFSL sold away all its other assets and it is only thereafter the shareholders of BFSL have entered into an agreement to sell their shares in favour of DFL. In the agreement there is a reference to the immovable property which according to the authorities is proof of the colourable device adopted by the assessee to evade payment of tax. Even if the veil is lifted and if these companies are looked into, the assessee is formed somewhere in the year 1971, BFSL came into existence in 1984 and Bharuka Steels which owned this property became a sick industry only somewhere in the year 1996 and the revival scheme by the BFSL was formed in 2000 and it is in pursuance of the same, excess land 30 acres belonging to Bharuka Steel was sold and in such sale one of the sister concern has purchased this property. None of these facts could be termed as unreal. They are all events which have happened in normal course, are legal and even the same is not disputed by the department. It is only the factum of stripping of all the assets before the shareholders sold the shares, according to them constitute a colourable device to evade tax which in the facts of this case cannot be accepted and therefore he submits the three authorities have wrongly applied the law in McDowell’s case and thus the order requires to be set aside and the assessee should be given the benefit of Section 10(38) of the Act.

11. Per contra, the learned counsel for the revenue supporting the impugned order contends that, the law laid’ down by the Apex Court in McDowell is not diluted in the subsequent judgment in the case of Azadi Bachao Andolan. In fact it is reiterated in the latest judgment of the Apex Court in Vodafone’s case. Once it is demonstrated the purpose of this transaction is to avoid payment of tax then it constitutes a colourable scheme and the authorities have lifted the veil and moreover appreciated the series of transactions wherein the property which is worth Rs. 89 crore is sought to be transferred for a consideration of Rs. 7 crore by the medium of transferring of shares to claim exemption under Section 10(38) of the Act and therefore he submits the order passed by the authorities are valid and legal and does not call for any interference.

12. From the material on record, it is clear the 30 acres of land in White Field belong to Bhoruka Steel Limited (BSL). It became a sick industrial company. Before BIFR, a scheme was formulated. The IDBI was appointed as Operating Agency. In terms of the scheme formulated, Assets Sale Committee was constituted. They took steps to bring the’ property for sale. The minimum price was fixed for Rs. 25 lakh per acre. Most of its shares which were held by Sri. S.N. Agarwal and his family members, either in their individual capacity or as partners of the concerns, which belong to Bhoruka Group. They purchased the property under two registered sale deeds dated 16.06.2004 and 30.06.2004 for a consideration of Rs. 3.75 crore. The assessee-company is a shareholder of M/s. BFSl. In the balance sheet as on 31.03.2005, the value of the land is shown as 4.21 crore which is inclusive of development expenses on the land. The promoters of M/s. BFSL were having 1,98,850 equity shares whereas 2,550 shares were held by other public shareholders. The Promoters of M/s. BFSL sought permission from SEBI to exempt them from making public announcement in respect to sale of 1,98,850 equity shares to M/s. DLF-CDL, New Delhi. They disclosed the rate of Rs. 2,400/- per share for the purpose of selling the shares to DLF-CDL. The shares were listed in the Bangalore Stock Exchange. It hardly got traded. The last quoted value of this share was Rs.5/- in the year 1985. During the financial year 2004-05, M/s. BFSL sold all the listed equity shares. Accordingly, the investments which were worth Rs.4.61 crore as on 31.03.2004 got reduced to Rs. 3.85 crore as on 31.03.2005. These investments as on 31.03.2005 were equity shares of M/s. Bhoruka Power Corporation Limited. M/s. BFSL systematically reduced its investments except that of the land which it purchased from M/s. Bhoruka Steel Limited. As on 31.03.2004, there was no fixed asset in the Company. It had only Rs. 4.61 crore of investments and Rs. 4.65 crore of loans and advances as on 31.03.2004. On 16.06.2004 and 30.06.2004, M/s. BFSL acquired land of 15 acres for Rs. 3.75 crore from M/s. Bhoruka Steel Limited. During the financial year 2004-05, M/s. BFSL sold all listed equity shares and during financial year 2005-06, it sold the remaining shares held by it as investments. The unsecured loans which were at Rs.1.48 crore as on 31.03.2005 have reduced to NIL as on 30.06.2005. As on 30.06.2005 apart from land, bank accounts, cheques receivable or payable, there was no asset in BFSL. A comparative study of Balance Sheet as on 31.03.2004, 31.03.2005 and 30.06.2005 makes it clear that the Directors and Promoters of M/s. BFSL disposed off all the other assets held by M/s. BFSL except land before the shares were sold to M/s. DLFCDL. The intention of the Directors and Promoters of M/s. BFSL is to transfer the underlying asset, being land to the buyer company M/s. DLFCDL. M/s. DLFCDL could not have bought the shares of M/s. BFSL at a substantial rate of Rs. 4,490/- per share.’ The area where the land is situated has huge commercial value. It shows M/s. DLFCDL purchased the shares of M/s. BFSL keeping in views the value of the underlying asset being land at Whitefield. The transaction was structured in such a way that the Promoters and Directors, holding the shares of the Company, M/s. BFSL, sold their shareholdings to M/s. DLFCDL and receive the consideration. The assessee-company has sold 45,350 shares during the month of August 2005 for a consideration of Rs. 20,29,08,626/-. The cost of these shares is Rs. 3,59,077/-. The net consideration is Rs. 20,25,49,549/-. It is in the background of undisputed facts according to the Assessing Authority, if one were to lift the corporate veil and understand the true nature of the transaction in commercial sense, M/s. DLFCDL has made the payment not to just buy the shares’ of M/s. BFSL but to acquire the underlying asset. The shares of the Company are listed in the Bangalore Stock Exchange. Without making full and complete efforts to transact through Bangalore Stock Exchange, it has chosen to carry out the transaction from Magadh Stock Exchange. The unusual attempts of the assessee-company finally culminated in selling a non-competitive stock for Rs. 4,490/- per share by stripping out all the assets and investments of M/s. BFSL, except the land, it was reduced to a shell company. The shell company was used to transfer a real asset and promoters took the fruits \of the transaction. M/s. BFSL and its promoters, made deliberate attempt to structure deal to avoid tax implications. Relying on the judgment of the McDowell & Co. case (supra) wherein it is held that the position of law is that if substance attracts tax, the form can be ignored by the tax collector. Following the well settled principle, the Assessing Authority held that the substance of the transaction of the assessee-company is that the land was transferred in the form of sale of shares. The shareholders to the extent of their ‘ share become the owners of this land in the company. The” land was transferred to M/s. DLFCDL by way of above circuitous transaction. The land has to be held for a period of 36 months as a long term capital asset, since the land was sold during August 2005, the gains arising to the assessee-company would be short terms capital gain.

13. The Appellate Authority affirmed the said findings of the Assessing Authority. However, the Tribunal was of the view the transaction m question was a colourable device to avoid payment of short term capital gain tax. In the light of the aforesaid undisputed facts, the question arises for consideration is:

“Whether the transfer of shares by the assessee in M/s. BFSL within effect would have the effect of M/s. DLFCDL which acquire the lands becoming entitled to the immovable property to the extent of 15 acres is a colourable device to avoid payment of income-tax?”

14. The income-tax authorities have relied on the judgment of the Apex Court in the case of McDowell & Co. Ltd.(supra) and in particular relied on the judgment of Chinnappa Reddy. J., to the following effect:

“We think that time has come for us to depart from the Westminster [1936] AC 1 Principle as emphatically as the British Courts have done and to dissociate ourselves from the observations of Shah, J., and similar observations made elsewhere. The evil consequences of tax avoidance are manifold. First there is substantial loss of much needed public revenue, particularly in a welfare State like ours. Next there is the serious disturbance caused to the economy of the Country by the piling up of mountains of black money, directly causing inflation. Then there is “the large hidden loss” to the community (as pointed out by Master Wheatcraft in 18 Modern Law Review 2009) by some of he best brains in the Country being involved in the perpetual war waged between the tax-avoider and his expert team of advisers, lawyers and accountants on one side and the tax-gatherer and his perhaps not so skilful, advisers on the other side. Then again there is the “sense of injustice and-inequality which tax avoidance arouses in the breasts of those who are unwilling or unable to profit by it”. Last but not the least is the ethics (to be precise, the lack of it) of transferring the burden of tax liability to the shoulders of the guideless, good citizens from those of the “artful dodgers”. It may, indeed, be difficult for lesser mortals to attain the state of mind of Mr. Justice Holmes, who said: “Taxes are what we pay for civilized society. I like to pay taxes. With them I buy civilization”. But, surely, it is high time for the judiciary in India too to part its ways from the principle of Westminster [1936] AC 1 and the alluring logic of tax avoidance. We now live in a welfare state whose financial needs, if backed by the law, have to be respected and met. We must recognize that there is behind taxation laws as much moral sanction as behind any other welfare legislation and it is a pretence to say that avoidance of taxation is not unethical and that it stands on no less moral plane than honest payment of taxation. In our view, the proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is such that the judicial process may accord its approach to it”.

15. The Apex Court subsequently had an occasion to consider this judgment, in the case of Union of India v. Azadi Bachao Andolan AIR 2004 SC 1107. In the aforesaid decision, after referring to the entire catena of cases up-to-date including the aforesaid Constitution Bench judgment as well as the opinion expressed in the said judgment by Justice Chinnappa Reddy, the Apex Court held as under:

‘146. With respect, therefore, we are unable to agree with the view that Duke of Westminster is dead, or that its ghost has been exorcised in England. The House of Lords does not seem to think so, and we agree with respect. In our view, the principle in Duke of Westminster is very much alive and kicking in the country of its birth. And as far as this country is concerned, the observations of Shah, J. in CIT v. Raman are very much relevant even today”.

“153. The Constitution Bench reiterated the observations in Bank of Chettinad Ltd. v. CIT, quoting with approval the observations of Lord Russel of Killowen in IRC v. Duke of Westminster and the observations of Lord Simonds in Russell v. Scott”.

“154. It thus appears 10 us that not only is the principle in duke of Westminster alive and kicking in England, but it also seems to have acquired judicial benediction of the Constitutional Bench in India, notwithstanding the temporary turbulence created in the wake of McDowell.”

“We are unable to agree with the submission that an act which is otherwise valid in law can be treated as non est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interests, as perceived by the respondents”.

Though the words : “sham” and “device” were loosely used in connection with the incorporation under the Mauritius law, we deem it fit to enter a caveat here. These words are not intended to be used as magic mantras or catch-all phrases to defeat or nullify the effect of a legal situation.’

16. This Court had an occasion to consider the aforesaid judgments in the case of State of Karnataka v. Videocon International Ltd. in STRP No.4/2000 in its judgment dated 14.07.2010, wherein it has observed as under:

“33. From the aforesaid discussion, it is clear that there is no inconsistency or deviation in the approach to the interpretation of the taxation law in England, America as well as in India. It is now well settled that a Citizen is entitled to arrange his affairs as not to attract taxes imposed by the State, so far as he can do so within the law. Every man is entitled to order his affairs in such a manner that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure the said result, his ingenuity is to be respected and he cannot be compelled to pay an increased tax. He may legitimately claim the advantage of any express terms or of any omissions that he can find in his favour in taxing statutes. His legal right so to dispose of his capital and income as to attract upon himself the least amount of tax is fully recognized. The law does not oblige a trader to make the maximum profit that he can out of his trading transactions. The legal right of taxpayer to decrease the amount of what otherwise would be his taxes, or altogether to avoid them by means which the law permits, cannot be doubted. The basic proposition underlining this taxation law is that any taxpayer is entitled so as to order his affairs in such a manner as to see that his liability to tax is as low as possible. If the taxpayer is in a position to carry through a transaction in two alternative ways, one of which will result in liability to tax and the other of which will not, is at liberty to choose the latter and to do so effectively in the absence of any specific tax avoidance provision. The fact that the motive for a transaction may be to avoid tax does not invalidate it unless a particular enactment so provides. Every person is entitled to so arrange his affairs as to avoid taxation but the arrangement should be real and genuine and not a sham or make-believe. A taxpayer may resort to a device to divert the income before it accrues or arises to him. Effectiveness of the device depends not upon considerations of morality, but on the operation of the Income-Tax Act. Colourable devices cannot be part of tax planning. A tax-saving motivation does not justify the taxing authorities or the Courts in nullifying or disregarding a taxpayer’s otherwise proper and bona fide choice among courses of action. Legislative injunction in taxing statutes may not, except on peril of penalty, be violated, but it may lawfully be circumvented. Tax planning may be legitimate provided it is within the framework of law. The intention of the legislature in a taxation statute is to be gathered from the language of the provisions particularly where the language is plain and unambiguous. In a taxing Act, it is not possible to assume any intention or governing purpose of the statute more than what is stated in the plain language”.

17. Recently, these judgments fell for consideration before the Apex Court in the case of Vodafone International Holdings B.V. v. Union of India [2012] 341 ITR 1/204 Taxman 408. After referring to the aforesaid two’ judgments of the Apex Court at Paragraph No.64, it has been held as under:

“64. The majority judgment in Mc.Dowell held that “Tax planning may be legitimate provided it is within the framework of law” (paragraph 45). In the latter part of paragraph 45, it held that “colourable devices cannot be a part of tax planning and it is wrong to encourage or entrain entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods” It is the obligation of every citizen to pay the taxes without resorting to subterfuges. The above observations should be read with paragraph 46 where the majority holds “on this aspect, one of us, Chinnappa Reddy J. has proposed a separate and detailed opinion with which we agree”. The words “this respect” express the majority’s agreement with the judgment of Reddy J. only in relation to tax evasion through the use of colourable devices and by resorting to dubious methods and subterfuges. Thus, it cannot be said that all tax planning is illegal / illegitimate / impermissible Moreover, Reddy J. himself says that he agrees with the majority. In the judgment of Reddy J. there are repeated references to schemes and devices in contradistinction to “legitimate avoidance of tax liability.” In our view, although Chinnappa Reddy J. makes a number of observations regarding the need to depart from the Westminster and tax avoidance – these are clearly only in. the context of artificial and colourable devices. Reading McDowell, in the manner indicated hereinabove, in cases of treaty shopping and / or tax avoidance, there is no conflict between McDowell and Azadi Bachao or between McDowell and Mathuram Agrawal.”

18. Justice K.S. Radhakrishnan J., who has written a separate but a concurring opinion dealing with the question whether McDowell calls for re-consideration has observed as under:

“Revenue cannot tax a subject without a statute to support and in the course we also acknowledge that every taxpayer is entitled to arrange his affairs so that his taxes shall be as low as possible and that he is not bound to choose that pattern which will replenish the treasury. Revenue’s stand that the ratio laid down in McDowell is contrary to what has been laid down in Azadi Bachao Andolan, in our view, is unsustainable and, therefore, call for no reconsideration by a larger Bench.”

19. In view of the judgment of the Apex Court in Vodafone, it is held that “tax planning may be legitimate provided it is within the framework of law”. “Colourable devices cannot be a part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid payment of tax by resorting to dubious methods”. It is an obligation of every citizen to pay the taxes without resorting to subterfuges. Therefore, though all tax planning is illegal / illegitimate / impermissible, the revenue cannot tax a subject without a statute to support and in the course we also acknowledge that every taxpayer is entitled to arrange his affairs so that his taxes shall be as low as possible and that he is not bound to choose that pattern which will replenish the treasury. A Citizen may legitimately claim the advantage of any express : terms or of any omissions that he can find in his favour in taxing statutes. His legal right so to dispose of his capital and income as to attract upon himself the least amount of tax is fully recognized. The legal right of taxpayer to decrease the amount of what otherwise would be his taxes, or altogether to avoid them by means which tire law permits, cannot be doubted. If the taxpayer is in a position to carry through a transaction in two alternative ways, one of which will result in liability to tax and the other of which will not, is at liberty to choose the latter and to do so effectively in the absence of any specific tax avoidance provision. The fact that the motive for a transaction may be to avoid tax does not invalidate it unless a particular enactment so provides. A tax-saving motivation does not justify the taxing authorities or the Courts in nullifying or disregarding a taxpayer’s otherwise proper and bona fide choice among courses of action. Tax planning may be legitimate provided it is within the framework of law. The intention of the legislature in a taxation statute is to be gathered from the language of the provisions particularly where the language is plain and unambiguous. In a taxing Act, it is not possible to” assume any intention or governing purpose of the statute more than what is stated in the plain language. Therefore, as long as the arrangement of the assessee to avoid payment of tax do not contravene any statutory provision and is achieved within the four corners of law, it cannot be found fault with. If the transaction in question is sham or colourable and entered into with the sole intention of evading payment of tax, then such a transaction would not have any legitimacy. Therefore, a colourable device cannot be a part of tax planning. Therefore, in each case, the transaction in question and the material on record has to be carefully examined to find out whether the transaction is “sham” or “unreal” or “colourable device” to evade payment of tax.

20. In the instant case, as set out above, according to the revenue, on the day the assessee transferred their share from BFSL, the only property which was available in BFSL was this land. Before transfer of the shares, the BFSL has systematically reduced this investment except that of the land instead of trading its shares through BSE. The shares were” traded through Magadh Stock Exchange. In the agreement entered into for transfer of shares, reference is only made to the sale of the land. Therefore, what was attempted to for transfer of shares is nothing but the transfer of immovable property. On the date of transfer, BFSL has become a Shell company. Therefore, it was a deliberate structural device to avoid tax implications. The grievance is, the property which was purchased for 3.75 crore was sold to a consideration of Rs. 89,28,36,500/-, the assessee share being Rs. 20,29,08,626/- without paying capital gain tax. From these facts, it is clear DLFCDL paid the market value and purchased the shares from the assessee. Therefore, the transaction of shares is not a nominal one. It is not a sham transaction. It is a real transaction for valuable consideration. The effect of the transaction is DLFCDL having acquired the shares became entitled to enjoy the asset of the company which was held by BFSL. For effecting the said transfer, instead of trading those shares through Bangalore Stock Exchange, it was traded through Magadh Stock Exchange. The material on record shows no trading activities took place in the BSE to the’ relevant period. The attempt on the part of the assessee to trade their shares through other Stock Exchange was not fulfilled. But they were able to trade the said shares through Magadh Stock Exchange was fulfilled though the trading licence of Magadh Stock Exchange had been suspended earlier, subsequently it was revoked and after such revocation, the assessee traded the shares through Magadh Stock Exchange and therefore, the requirements of selling has been complied with. For each share, the assessee wanted permission from SEBI without being made available to the open public at a price of Rs. 2,250/-. When it is traded through Magadh Stock Exchange, each share has fetched a sum of Rs. 4,290/- and BFSL admittedly has paid Rs. 89,28,36,500/- for the entire extent of 15 acres of land for which, a sum of Rs. 20,29,08,626/- being the share value of the assessee. In the light of these undisputed facts, it cannot be said that the transfer of share by the assessee to BFSL was a colourable device to avoid payment of tax. If BFSL has sold the shares by executing a registered sale deed and received the sale consideration, then, BFSL ought to have paid capital gains on the said consideration. That is one mode through which BFSL-could have sold the property belonging to it. The law also provides for transfer of shares by the shareholders and this route the assessee has adopted in the instant case. By transferring 98.3% of shares held by the shareholders, virtually, the complete control of the company has been handed over to the BFSL and they have received the consideration for the shares held by them, may be proportionate to the value of the land on the date of transfer. But that does not make the transaction “colourable” or “unreal” or “sham.”

21. Section 10 of the Act deals with incomes which do not form part of total income. Section 10 provides that in computing total income of a previous year of any person, any income falling within any of the following clause shall not be included.

22. Clause (38) of Section 10 of the Income-tax Act on which reliance is placed reads as under:

“10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included—

(38) any income arising from the transfer of a long-term capital asset, being an equity share in a company or a unit of an equity oriented fund where—

(a) the transaction of sale of such equity share or unit is entered into on or after the date on which Chapter VII of the Finance (No. 2) Act, 2004 comes into force; and

(b) such transaction is chargeable to securities transaction tax under that Chapter :

Provided that the income by way of long-term capital gain of a company shall be taken into account in computing the book profit and income-tax payable under Section 115JB.

Explanation.—For the purposes of this clause, equity oriented fund” means a fund—

(i) where the investible funds are invested by way of equity shares in domestic companies to the extent of more than [sixty-five] per cent of the total proceeds of such fund; and

(ii) which has been set up under a scheme of a Mutual Fund specified under clause (23D) :

Provided that the percentage of equity shareholding of the fund shall be computed with reference to the annual average of the monthly averages of the opening and closing figures;”

23. A reading of the aforesaid provision makes it clear that if the conditions mentioned therein are satisfied, the income arising from such transfer would not form part of the total income of the assessee. In other words, it is exempted from payment of tax. The condition to be satisfied are as under:

(a) It should be a transfer of long term capital asset, being a equity share in a company.

(b) Sale of such equity share should be on or after chapter 7 of the Finance Act 2/2007 came into force. It is with effect from 29.08.2004.

(c) the said transaction is chargeable to Securities Transaction tax under the chapter.

24. In the instant case, the assessee is holding the shares in BFSL from 01.10.1984. Therefore, it is a long term Capital asset. The transaction has taken place subsequent to 28.09.2004 as such the second condition is fulfilled. They have paid the security transaction tax to Magadha Stock Exchange. Where all these three conditions stipulated under Section 10(38) of the Act are fulfilled, the assessee is entitled to the benefit flowing therefrom i.e., the income from such transfer shall, not be included in the total income of the assessee for the previous year. Merely because if a registered sale deed has been executed by BFSL selling the land in favour of DFL-CDL in which event capital gain should have been paid on the sale consideration, is no reason to hold that when a shareholder of BFSL transfer his share for a consideration, after complying with the legal requirements, is not entitled to the benefit of tax exemption. All the authorities are carried away by this aspect: of the matter and because the assessee was able to avoid payment of income tax, consequently the Department was deprived of the tax, they have come to the conclusion that it is a colourable device and tax planning to avoid payment of tax. The assessee by resorting to such a tax planning, has taken advantage of the benefit of the law or the loopholes in the law, which had enured to his benefit. After seeing how this loophole has been exploited within four corners of the law, it is open to the Parliament to amend the law plugging the loophole. However, by any judicial interpretation we cannot read into the Section, which was not intended to, by the Parliament at the time of enacting this provision. The language employed in Section 10(38) of the Act is simple and unambiguous and it makes no distinction between the transfer of share of company with an immovable asset and movable asset, instead of executing a sale deed in respect of the immovable property by the company, which is owning the land. If the shareholder chooses to transfer the lands and part with the land to the purchaser of the shares, it would be a valid legal transaction in law and merely because they were able to avoid payment of tax, it cannot be said to be a colourable device or a sham transaction or an unreal transaction.

25. As set out above, the transaction is real, valuable consideration is paid, all legal formalities are complied with and what is transferred is the shares and not the immovable property. The finding of the Assessing Authority that it is a transfer of immovable property is contrary to law and contrary to the material on record. They committed a serious error in proceeding on the assumption that the effect of transfer of share is transfer of immovable property and therefore, if the veil of the company is lifted what appears to them is transfer of immovable property. Such a finding is impermissible in law. Unfortunately, three authorities committed the very same mistake which is ex facie, illegal, contrary to settled legal position and therefore, requires to be setaside. In that view of the matter, we pass the following order:

(a) Appeal is allowed.

(b) The impugned order passed by all the three authorities is hereby set aside.

(c) The substantial question of law is answered in favour of the assessee and against the revenue.

Parties to bear their own costs.

[Citation : 356 ITR 25]