3 Section 47(iv) – Transaction of transfer of shares by a company to its second step down 100% subsidiary cannot be regarded as ‘transfer’ in view of the provisions of section 47(iv) of the Act. A second step down subsidiary company is also regarded as subsidiary of the assessee company under Companies Act, 1956 as the term ‘subsidiary company’ has not been defined under the Act.

FACTS
The assessee filed its return of income declaring therein a total income of Rs. 88,79,544. In the return of income, the assessee also claimed that it has incurred a long term capital loss of Rs. 25,05,20,775 which it carried forward. The Assessing Officer (AO), assessed the total income of the assessee to be Rs. 29,99,30,657.

During the previous year under consideration, on 31.3.2010, the assessee sold 2,86,329 shares of Zandu Realty Ltd., at the rate of Rs. 2100 per share, to Emami Rainbow Niketan Pvt. Ltd., a 100% subsidiary of the assessee’s subsidiary viz. Emami Realty Ltd. The sale was in accordance with the decision taken by the Board of Directors on 23.3.2010 and also in accordance with the valuation report of SSKM Corporate Advisory Pvt. Ltd.

The Assessing Officer found that the assessee had sold shares of Zandu Realty Ltd. at a price ranging from Rs. 6200 per share on 23.12.2009 to Rs. 4390 per share on 11.2.2010. He asked the assessee to show cause why the sale price per share of Zandu Realty Ltd. should not be taken at Rs. 3989.80 being the average price traded at NSE as on 31.3.2010 against the sale price of Rs. 2100 per share taken by the assessee.

The AO held that he found the explanation of the assessee to be not acceptable. Considering the huge price variance between the quoted price in NSE and the off-market selling price shown by the assessee he held that when the shares are traded in stock exchange the best way to determine the selling price of a share is the price quoted in the stock exchange. Accordingly, he determined the long term capital gain to be Rs. 29,05,83,769, by considering the sale price to be Rs. 3989.80 per share as against Rs. 2100 per share taken by the assessee, as against the claim of loss of Rs. 25,05,20,775 shown by the assessee in the return of income.

Aggrieved, the assessee preferred an appeal to CIT(A) who confirmed the action of the AO by relying on the ratio of the decision of Gujarat High Court in the case of Kalindi Investments Pvt. Ltd. vs. CIT (256 ITR 713)(Guj.)

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal noted that the assessee sold equity shares of Zandu Realty Ltd. to Emami Rainbow Niketan Pvt. Ltd based on price of shares determined by Corporate Advisory Pvt. Ltd.  It also noted that the buyer Emami Rainbow Niketan is a 100% subsidiary of Emami Realty Ltd. Emami Realty Ltd. is a 100% subsidiary of Emami Infrastructure Ltd, the assessee. The Tribunal observed that the two issues which arise for its adjudication are –

(i)    whether there is a transfer of shares in view of the provisions of section 47(iv) of the Act; and

(ii)    if the transaction in question is not covered by section 47(iv) of the Act, then whether the computation of capital gains as made by the AO and confirmed by the CIT(A) is correct or not and whether the AO can substitute the sale consideration of the shares sold with FMV as determined by him?

The Tribunal observed that if it comes to the conclusion that this is not a transfer then the assessee’s claim that it had incurred a long term capital loss and same has to be carried forward cannot be allowed. Similarly, capital gain computed by the AO based on fair market value computed by him and substituted for the sale consideration agreed to by the seller and buyer has to be cancelled.

The Tribunal noted that the transfer is to a second step down 100% subsidiary of the assessee. The issue is whether provisions of section 47(iv)(a)(b) are applicable to a second step down subsidiary. It noted the following two divergent views on this issue –

(i)    the Bombay High Court in the case of Petrosil Oil Co. Ltd. vs. CIT (236 ITR 220)(Bom.) has, in the context of provisions of section 108 of the Act, held that a 100% owned sub-subsidiary of a 100% owned subsidiary would be a subsidiary within the meaning of section 4(1)(c) of the Companies Act and also within the meaning of section 108(a) of the Act;

(ii)    the Gujarat High Court has in the case of Kalindi Investments Pvt. Ltd. (256 ITR 713)(Guj) held that there is no justification for invoking clause (c) of sub-section (1) of section 4 of the 1956 Act while interpreting the provisions of clauses (iv) and (v) of section 47.

Applying the decision of the Bombay High Court (supra), the transaction in question cannot be regarded as a transfer in view of provisions of section 47(iv) of the Act, as it is a transfer of a capital asset by a company to its subsidiary company and as a second step down 100% subsidiary company is also a subsidiary of the assessee company under the Companies Act, 1956 as the term ‘subsidiary company’ has not been defined under the Income-tax Act.

Upon going through the two judgments, the Tribunal held that it prefers to follow the decision of the Bombay High Court in the case of Petrosil Oil Co. Ltd. (supra) as in its view a second step down 100% subsidiary is also covered by the provision of section 47(iv) of the Act, as this is the letter and spirit of the enactment.

Following the decision of the Bombay High Court in the case of Petrosil Oil Co. Ltd. (supra), the Tribunal held that the transaction of sale of shares of Zandu Realty by assessee to Emami Rainbow Niketan Ltd. is not regarded as transfer in view of section 47(iv) of the Act. Hence, the question of computing either the capital loss or capital gain does not arise. The Tribunal held that the assessee is not entitled to carry forward the capital loss of Rs. 25 crore as claimed.

This ground of appeal of assessee was dismissed.