M/S. New Ambadi Estates Private Limited Tiam House Annex Ii Floor v. The Joint Commissioner Of Income Tax Special Range – I 121 Nungambakkam High Road Chennai 600 034

In the High Court of Judicature at MadrasDated: 13.08.2013 CoramThe Honourable Mrs.JUSTICE CHITRA VENKATARAMANandThe Honourable Ms.JUSTICE K.B.K.VASUKI M/s. New Ambadi Estates Private LimitedTiam House Annex II FloorNo. 2, Jehangir StreetChennai 600 001 .... Petitioner/Appellant.Vs. The Joint Commissioner of Income TaxSpecial Range – I121 Nungambakkam High RoadChennai 600 034.... Respondent/Respondent. Tax Case Revision to revise the order of the Income Tax AppellateTribunal, 'B' Bench, Chennai dated 23.4.2003 in G.T.A.No. 4/ Mds/2000 for the assessment year 1994-95 against the order of theCommissioner of Income Tax [Appeals] V, 121, Mahatma Gandhi Road,Chennai 600 034 dated 30.5.2000 and made in GTA.No.1/99-2000 andagainst the order of the Joint Commissioner of Income Tax, SpecialRangeI,Chennai34dated05/01/2000andmadeinP.A.No./G.I.R:AAACN1078JFor Petitioner :Mr.M.P.Senthil KumarFor Respondent :Mr.N.V.Balaji The above Tax Case Revision is filed at the instance of theassessee as against the order of the Income Tax Appellate Tribunalfor the assessment year 1994-95. The above Tax Case Revision wasadmitted on the following substantial questions of law:-"1. Whether on the facts and in the circumstancesof the case the Income Tax Appellate Tribunal wasright in law in holding that the transmission ofshares by the appellant to its wholly ownedsubsidiary company would amount to transfer andthat there was a deemed gift involved therein? https://hcservices.ecourts.gov.in/hcservices/ 2. Whether on the facts and in the circumstancesof the case the Appellate Tribunal was right inlaw in holding that difference between the bookvalue of the shares and the market value would bea deemed gift? 3. Whether on the facts and in the circumstancesof the case, the Appellate Tribunal was right innot lifting the corporate veil and thereby holdingthat there was a transfer?" 2. The assessment is under the provisions of the Gift Tax Act. Itis stated that the assessee is a holding company. During the courseof assessment year 1994-95, the assessee company transferred sharesheld by M/s.EID Parry (India) Limited and M/s.Tube Investments ofIndia Limited to its wholly owned subsidiary company at book value.Noting that the shares were quoted shares and were sold at the priceless than the market value quoted as on the date of sale, thedifference between the market value and the actual consideration wassought to be assessed as deemed gift under the provisions of the GiftTax Act. The assessee company contended that being a transfer fromholding company to its subsidiary company, there was no transferwithin the meaning of Section 47(iv) of the Income Tax Act. In thecircumstances, there could be no deemed gift arising in this case.However, the Gift Tax Officer rejected the said contention andassessed the difference as deemed gift. 3. Aggrieved by the same, the assessee went on appeal before theCommissioner of Income Tax (Appeals). The first Appellate Authorityheld that the subsidiary company was doing business in purchase andsale of shares and the shares purchased were treated as stock-in-trade in the hands of the subsidiary company. Hence applying theprovisions of Section 47A(1)(i) of the Income Tax Act, thetransaction was treated as deemed transfer. Considering thedifference in the value between the market value and actualconsideration, the difference was held as assessable under the GiftTax Act. The Commissioner of Income Tax (Appeals) pointed out to thedecision reported in 70 ITR 397 – S.R.CHOCKALINGA CHETTIAR v. CIT andheld that when the consideration received by the assessee was farless than the market value, Section 4 of the Gift Tax Act stoodattracted. The issue raised in the appeal was not relating to IncomeTax Act, but one under the Gift Tax Act. Consequently, the provisionsof Gift Tax Act alone would apply. Thus, the appeal filed by theassessee was rejected. 4. Aggrieved by the same, the assessee went on further appealbefore the Income Tax Appellate Tribunal. The Tribunal pointed outthat the assessee transferred its rights at Rs.5/- per share asagainst the market value of Rs.28/- per share as quoted in the MadrasStock Exchange as on 3.9.1993. By transferring the rights to the https://hcservices.ecourts.gov.in/hcservices/ group company at the price less than the market value, the assesseecompany claimed short term capital loss and attempted to claimbenefit of avoiding gift tax as well. Since the rights weretransferred for inadequate consideration, the transactions weresquarely covered by Section 4(1)(a) of the Gift Tax Act. The Tribunalpointed out that there was no dispute that the transfer was made tothe wholly owned subsidiary company. Merely because the assessee washaving the entire share of the subsidiary company, it could not beheld that both the companies were one and the same. In so holding,the Tribunal rejected the assessee's prayer for lifting the corporateveil. In respect of the contention raised by the assessee that byreason of 100% share holding in the subsidiary company there could beno transfer at all, the Tribunal held that when the assessee itselfhad claimed capital loss, there could be no question of claimingeconomic unity among the two companies. Thus, the question of liftingthe corporate veil did not arise in this case. Thus, the Tribunalrejected the assessee's contention placing reliance on the decisionof the Calcutta High Court reported in (1980) 124 ITR 660 – GIFT TAXOFFICER v. VENESTA FOILS LIMITED. 5. Subsequent to the dismissal of the claim by the Tribunal, itis seen that the assessee filed MP before the Tribunal for correctingcertain errors in paragraph 13 of the order passed in the main appealregarding the Tribunal's holding that the assessee had claimedcapital loss on the transfer of shares to the subsidiary company. Byorder dated 30.7.2004 in MP.No. 237/ Mds/ 2003 deleting the saidparagraph, the Tribunal nevertheless reconfirmed its original viewthat the transaction in question attracted the provisions of the GiftTax Act, that the transaction of the assessee company was not one ofthe transactions included under Section 45 of the Gift Tax Act toclaim non-liability. It however pointed out that it was not knownwhether the Assessing Officer had adopted the market value determinedunder the Income Tax Act. Though Schedule II of the Gift Tax Actprovided for the method of valuation for the purpose of gift tax,yet, if any fair market value was fixed in the Income Taxproceedings, the same had also to be taken into consideration whiledetermining the deemed gift. Aggrieved by the order made in the mainappeal filed by the assessee, the present appeal is filed before thisCourt by the assessee. 6. Learned counsel appearing for the assessee submitted thatconsidering the fact that the transactions were between wholly ownedsubsidiary company and the holding company, the same could not betreated 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 thesubsidiary company, the Tribunal ought to have followed the decisionof the Calcutta High Court reported in (1980) 124 ITR 660 – GIFT TAXOFFICER v. VENESTA FOILS LIMITED. Thus, the Tribunal committed aserious error in not lifting the corporate veil to know the actual state of affairs and in not considering Section 47(iv) of the IncomeTax Act. When there is no transfer, the question of deemed gift, inany event, did not arise for consideration. state of affairs and in not considering Section 47(iv) of the IncomeTax Act. When there is no transfer, the question of deemed gift, inany event, did not arise for consideration. 7. Countering the claim of the assessee, learned Standing Counselappearing for the Revenue pointed out that even assuming that therewas no capital loss, the fact remained that the holding company andthe subsidiary company, for all practical purpose and legalconsequences being two different entities, the transfer of shares bythe holding company to the subsidiary company being at the value farbelow the market price, rightly the Assessing Officer invoked Section4 of the Gift Tax Act. Pointing out to the definition of 'transfer ofproperty' as appearing in Section 2(xxiv) of the Gift Tax Act andread in the context of Section 45 of the Income Tax Act providing fortransactions excluded from the provisions of Gift Tax Act and thepresent transaction between the holding company and the subsidiarycompany not being of one such excluded transaction, rightly theassessment was made on the assessee adopting the market value. Hefurther pointed out that even going by the Schedule II of the GiftTax Act in the case of quoted shares, when the quotation as on thedate of the transaction is available at the Stock Exchange, noexception could be taken to the order of the Officer adopting themarket value. He pointed out that even though the Revenue had notcome on appeal as against the order of the Tribunal, particularly asregards the direction to the Assessing Officer to determine the valueas had been taken under the Income Tax Act, the fact remained that inthe case of transaction relating to quoted shares, Schedule II underthe Gift Tax Act would be a relevant one. We agree with thesubmission 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 orinterest in property. (c) the exercise of a power of appointment whethergeneral, special or subject to any restrictions asto the persons in whose favour the appointment maybe made of property vested in any person, not theowner of the property, to determine itsdisposition in favour of any person other than thedonee of the power; and(d) any transaction entered into by any personwith intent thereby to diminish directly orindirectly the value of his own property and to increase the value of the property of any otherperson;. (a) the creation of a trust in property. (b) the grant or creation of any lease, mortgage,charge, easement, licence, power, partnership orinterest in property. (c) the exercise of a power of appointment whethergeneral, special or subject to any restrictions asto the persons in whose favour the appointment maybe made of property vested in any person, not theowner of the property, to determine itsdisposition in favour of any person other than thedonee of the power; and(d) any transaction entered into by any personwith intent thereby to diminish directly orindirectly the value of his own property and to increase the value of the property of any otherperson;. 8. Given the fact that in law, a subsidiary company, even if 100%wholly owned by the holding company, is an independent entity andgiven the fact that the assessee itself recognised that the transferof shares to the subsidiary company is at the value noted in thebooks of accounts of the assessee company, we do not find anyjustifiable ground to accept the plea of the company based on Section47 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, thetransfer of capital asset between the holding company to subsidiarycompany is not treated as a transfer. But the relevance of Section 47of the Income Tax Act has to be seen only in the background of theprovisions relating to the charge on capital gains under Section 45that given the inclusive definition on transfer under Section 2(47),but for Section 47, these transactions would certainly attractSection 45. Thus, this Section would not apply to a case where nocapital gain is involved. Contrary to the assertion of the assesseeherein, when one reads the definition of 'transfer of property'appearing under Section 2(xxiv) of the Gift Tax Act, it would revealthat any transaction entered into by any person with intent therebyto diminish directly or indirectly the value of his own property andto increase the value of the property of any other person is alsoincluded within the meaning of transfer of property. It is not deniedby the assessee that by transfer of shares held by the holdingcompany, there is a diminution in the asset held by the holdingcompany. Even though learned counsel for the assessee immediatelyreplied that ultimately the assessee company is the owner of 100%owned subsidiary company, still, being two different entities, we donot find any justifiable ground to extend the provisions of IncomeTax Act to the assessment under the Gift Tax Act for the purpose ofunderstanding the definition of 'transfer of property' as availableunder the Gift Tax Act. Further, as rightly pointed out by theTribunal, when two companies are treated as two different entitiesand when the facts are clear, there arises no necessity for liftingthe corporate veil to know the nature of transactions or theexistence of two entities. In the circumstances, we reject the thirdquestion of law raised in this Tax Case Revision. 9. As far as the applicability of the decision of the CalcuttaHigh Court reported in (1980) 124 ITR 660 – GIFT TAX OFFICER v.VENESTA FOILS LIMITED is concerned, we do not think that it would beproper to read a single sentence out of context, as the said decisionwas arrived at based on the facts narrated therein. Thus, thedecision of the Calcutta High court has no bearing to the factsherein. The Calcutta High Court pointed out that in the assessmentmade on the capital gains on the sale of shares of the holdingcompany to the subsidiary company, the Income Tax Officer accepted 9. As far as the applicability of the decision of the CalcuttaHigh Court reported in (1980) 124 ITR 660 – GIFT TAX OFFICER v.VENESTA FOILS LIMITED is concerned, we do not think that it would beproper to read a single sentence out of context, as the said decisionwas arrived at based on the facts narrated therein. Thus, thedecision of the Calcutta High court has no bearing to the factsherein. The Calcutta High Court pointed out that in the assessmentmade on the capital gains on the sale of shares of the holdingcompany 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 thevaluation of the property to assess the difference in value asdeclared gift. Thus the question therein is totally different fromthe question raised in this case. We do not find any justifiableground to accept the argument advanced based on the decision of theCalcutta High Court to answer the question raised before this Courtin favour of the assessee. Consequently, we reject the prayer of theassessee. 10. As far as first question of law in respect of transaction tobe held as a transfer or not is concerned, the transaction has to beseen in the context of provisions of the Gift Tax Act and not underthe provisions of Income Tax Act. As regards deemed gift, as rightlypointed out by learned Standing Counsel appearing for the Revenue, ason the date of sale when the market value of the quoted shares wasavailable, we do not find any need for the Tribunal to direct theAuthorities below to consider the valuation in terms of the IncomeTax proceedings. Though this question, as such, is not canvassed bythe Revenue, yet, when the entire order is before us forconsideration and the error noted in the order is contrary to theprovisions of the Act, there is no hesitancy on the part of thisCourt to correct the error while giving proper direction in thematter of valuation of shares for the purpose of considering thedeemed gift assessment. In the circumstances, we dismiss the aboveTax Case (Revision). No costs. bg Sd/-Asst. Registrar./true copy/Sub Asst. Registrar. To 1. The Assistant Registrar, The Income Tax Appellate Tribunal, 'B' Bench, Rajaji Bhavan, III Floor, Besant Nagar, Chennai 90. 2. The Commissioner of Income Tax (Appeals)-V 121 Nungambakkam High Road Chennai 600 034. 3. The Joint Commissioner of Income Tax Special Range – I, Chennai 600 034. 1 CC To M/s.Philip George, Advocate SR NO.42603 1 CC To Mr.N.V.Balaji , Advocate SR NO.42447 ug[co]gp/18.9 TC(R).No.1080 of 2004