By TIOL News Service

KOLKATA, MARCH 14, 2018: THE ISSUE BEFORE THE TRIBUNAL IS - Whether transaction of sale of shares by a principal to its wholly owned subsidiary, will amount to transfer within the meaning of Section 47(iv), so as to attract capital gains tax. NO IS THE ANSWER.

Facts of the case:

The Assessee-company, engaged in developing real estate projects, had filed its return for the relevant AY declaring its total income. In the course of assessment proceeding, the AO noted that Assessee had claimed long term capital gain on account of sale of Zandu Realty Ltd's equity shares. After examining the factual matrix, the AO noted that the said sale transaction was off market transaction hence, notices u/s 143(2) and 142(1) were issued. In reply, the Assessee had furnished requisite details and explanation supporting its claim. The Assessee submitted that the said shares were sold to M/s. Emami Rainbow Niketan Pvt. Ltd i.e., a 100% subsidiary of Assessee's subsidiary in accordance with the decision of the Board of Directors and the valuation report of M/s. SSKM Corporate Advisory Pvt. Ltd. Further, the AO had also verified the price of shares of M/s. Zandu Realty through the website of National Stock Exchange(NSE). Later, the AO also found that the Assessee had sold shares of M/s. Zandu Realty Ltd at a huge price variance between the quoted price in NSE and the off-market selling price as shown by the Assessee. Accordingly, the AO determined the LTCG and thereby, passed the assessment order. On appeal, the CIT(A) confirmed the AO's order.

Tribunal held that,

++ the undisputed fact is that M/s. Emami Realty Ltd is a wholly owned subsidiary of the Assessee. M/s. Emami Rainbow Niketan Pvt. Ltd is in turn a wholly owned subsidiary of M/s. Emami Realty Ltd. In other words, this is a second step down 100% subsidiary of the Assessee. The Bombay High Court in the case of Petrosil Oil Co.Ltd held that: "....If the intention of the Legislature was that not only the Assessee but its parent company/companies should be domestic company/companies, then the Legislature would have had to specifically so provide. In that case the Legislature could not/would not have, by virtue of section 2(6) (a) imported sec. 108. To avoid the conflict, one would have to add words to sec. 108(b) to restrict a subsidiary to be a subsidiary of a domestic company. Where the Legislature intentionally omits to do so, the court cannot add words. This is particularly so when it is possible to harmonise both, without addition of any words to either, if it is held that the parent company/companies need not be domestic company/companies....";

++ this Tribunal hold that the transaction in question cannot be regarded as transfer in view of provisions of sec. 47(iv), as it is a transfer of capital asset by a company to its subsidiary company and as a second step down 100% subsidiary company is also as subsidiary of the Assessee under the Companies Act 1956 as the term 'subsidiary company' has not been defined under the Income Tax Act. This Tribunal prefers to follow the decision of the Bombay High Court in the case of Petrosil Oil Co. Ltd wherein, it was held that a second step down 100% subsidiary is also covered by the provision of Sec. 47(iv), as this is the letter and spirit of the enactment. Hence, respectfully following the same, this Tribunal held that the transaction of sale of shares of M/s. Zandu Realty by the Assessee to M/s. Emami Rainbow Niketan Ltd is not regarded as a transfer in view of Sec.47(iv). Hence, the question of computing either capital loss or capital gain does not arise. Thus, the Assessee is not entitled to carry forward the capital loss of Rs.25 crores as claimed.

(See 2018-TIOL-384-ITAT-KOL)