Month: November

ISSUE FOR DISCUSSION

Section 80AC of the Income Tax Act, 1961 (“the Act”) provides that, from assessment year 2018-19 onwards, where any deduction is admissible under Part C of Chapter VI-A (including section 80P), the deduction shall not be allowed unless the assessee furnishes a return of income on or before the due date specified under section 139(1) of the Act.

Section 143(1)(a) provides for certain adjustments when processing the return of income. Clause (v) of that section, as it stood from AY 2018-19 to AY 2020-21, provided for disallowance of deduction claimed under sections 10AA, 80-IA, 80-IB, 80-IC, 80-ID or 80-IE, if the return was furnished beyond the due date prescribed under section 139(1). With effect from AY 2021-22, the scope of the disallowance is widened. It now provides for disallowance of deduction claimed under section 10AA or Part C of Chapter VI-A under specified circumstances.

The issue has arisen before the Tribunal for the periods from AY 2018-19 to AY 2020-21, whether belated filing of return of income could attract disallowance of deduction claimed under any of the sections of Part C of Chapter VI-A, such as under section 80P, while processing the return of income under section 143(1)(a). In other words, whether an adjustment can be made by disallowing a deduction claimed, under one of the sections of chapter VI-A, which is otherwise not specified explicitly in section 143(1)(a). While the Mumbai bench of the Tribunal has taken the view that such adjustment could be made by the AO, the Rajkot, Chandigarh and Nagpur benches have taken a contrary view, holding that such adjustment could not be made under section 143(1)(a) while processing the return of income.

JANKI VAISHALI CO-OP HOUSING SOCIETY’S CASE

The issue first came up before the Mumbai bench of the Tribunal in the case of Janki Vaishali Co-op Housing Society Ltd, in ITA No 944/MUM/2024, order dated 31.10.2022.

The assessee filed its return of income for AY 2018-19, which was due on 31st October 2018, on 24th December 2018, claiming deduction under section 80P(2)(d) of ₹ 2,96,681, in respect of interest earned from co-operative banks. The assessee’s return was processed under section 143(1), disallowing the assessee’s claim of deduction under section 80P(2)(d) by invoking the provisions of sub-clause (v) of clause(a) of s. 143(1) of the Act .

The CIT(A) dismissed the assessee’s appeal, on the ground that since the income tax return was filed beyond the due date under section 139(1), the benefit of deduction under section 80P could not be allowed to the assessee.

Before the Tribunal, on behalf of the assessee, it was argued that section 80AC as applicable for assessment year 2018-19 had no application in respect of deduction claimed under section 80P. It was also claimed that the provisions of section 80AC were only applicable in respect of deductions claimed under sections 80IA, 80IB, 80IC, 80ID and 80IE. The provisions of section 80AC were amended by the Finance Act 2018 with effect from 1 April 2018 to include all deduction claims under part C of Chapter VI-A. It was therefore claimed (though incorrectly) that deduction under section 80P was not covered by section 80AC.

On behalf of the Department, it was argued that the assessee had filed its return of income beyond the due date, and hence was not eligible for deduction under section 80P, in light of the provisions of section 80AC.

The Tribunal observed that it was undisputed that the assessee had filed its return of income beyond the due date of filing the return of income under section 139(1) for the assessment year 2018-19. The solitary reason for denying benefit of deduction under section 80P was that the return filed by the assessee for the relevant assessment year was beyond the due date.

The Tribunal examined the provisions of section 80AC prior to the amendment made by the Finance Act 2018, and post such amendment. It observed that perusal of the unamended provision would show that there was no restriction for claiming deduction under section 80P. The restriction was then limited only to the specified sections mentioned in section 80AC. It further observed that the scope of the section was enlarged by the Finance Act of 2018 to include all deductions admissible under part C of Chapter VI-A – Deduction in Respect of Certain Incomes.

The Tribunal noted that the substituted section with effect from 1 April 2018 would be applicable to assessment year 2018-19, and in respect of deductions claimed under section 80P as well. Since the substituted provisions of section 80AC would be applicable for the relevant assessment year, the Tribunal held that the CIT(A) had rightly rejected the appeal of the assessee.

The Tribunal accordingly rejected the appeal of the assessee, holding that the disallowance of deduction under section 80 P was justified.

AMBARADI SEVA SAHKARI MANDAL’S CASE

The issue came up again before the Rajkot bench of the Tribunal in the case of Ambaradi Seva Sahkari Mandali Ltd vs. Dy CIT, ITA No 186/RJT/2022 decided on 10 February 2023, along with Dhareshwar Seva Sahakari Mandali Ltd vs. Dy CIT, ITA No 197/RJT/2022, Shree Sanaliya Seva Sahakari Mandli Ltd vs. Addl DIT, ITA N0 204/RJT/2022, and Amrutpur Seva Sahakari Mandali Ltd vs. Addl DIT, ITA N0 203/RJT/2022 all cases pertaining to assessment year 2019-20.

The assessee was a co-operative society registered under the Mumbai Co-operative Societies Act, 1925, with the object and activities of providing credit facilities to its members, as well as providing facilities to members for purchase of agricultural implements, seeds, livestock or other articles for agricultural activities.

The original return of income for the year was filed on 30 November 2020, declaring total income of ₹ NIL, after claiming deduction of ₹ 18,20,276 under section 80P. The assessee received a communication under section 143(1)(a) from CPC dated 8th December 2020, proposing adjustment under section 143(1)(a) to the returned income, for denial of deduction of ₹ 18,20,276 claimed under section 80P. It was stated in the notice by the CPC that the assessee had made an incorrect claim by way of deduction under section 80P, which was capable of adjustment under section 143(1)(a)(ii), as the return of income was not filed within the due date.

The assessee filed a response in reply to the communication under section 143(1)(a), stating that the return of income was filed under section 139(4), and that the provisions of section 143(1)(a)(b) did not provide for denial of deduction under section 80P, even when the return of income was not filed within the time limit as per section 139(1). Therefore, the assessee claimed that the denial of deduction under section 80P vide intimation under section 143 (1) was not valid in law. The assessee also submitted that the said adjustment could not be called a prima facie adjustment. The assessee thereafter received an intimation under section 143(1) dated 22nd December 2020, denying deduction under section 80P, and determining total income at ₹18,20,276.

The CIT(A) upheld the prima facie adjustments applying the provisions of section 80AC(ii). He held that since the above amended provisions were effective from 1st April 2018, and as the return was filed beyond the due date mentioned in section 139(1), the disallowance of deduction under section 80P was correctly made. He therefore dismissed the appeal of the assessee.

Before the Tribunal, on behalf of the assessee, it was submitted that the return was not filed as per section 139(1), but was within the time limit of due date under section 139(4). Therefore, the rejection of return could not be the criteria. It was further argued that a debatable issue in respect of prima facie adjustment could not be considered by disallowing the claim under section 80 P, which was available to the assessee.

It was submitted on behalf of the assessee that the decision of the Madras High Court in the case of Veerappampalayam Primary Agricultural Co-operative Credit Society Ltd vs. DyCIT 321 CTR (Mad) 163, which was relied upon by the CIT(A), was not applicable in the present case as the Kerala High Court, in the case of Chirakkal Service Co-operative Bank Ltd vs. CIT 384 ITR 490, specifically stated that in cases where returns had been filed, the question of exemption or deductions referable to section 80P would definitely have to be considered and granted if eligible. In that case, the Kerala High Court specifically observed that the Tribunal was not justified in denying deduction under section 80P. Reliance also placed on behalf of the assessee on the decisions of the Tribunal in the cases of Lanjani Co-operative Agri Service Society Ltd vs. DyCIT 146 taxmann.com 468 (Chd) and Medi Seva Sahakari Mandali Ltd vs. Addl DIT, ITA No 38/RJT/2022, order dated 31st October 2022.

On behalf of the revenue, it was argued that the Madras High Court had given a categorical finding that it was an administrative order, and the adjustment was properly done by the AO, as the return was filed beyond the due date under section 139(1). It was submitted that the returns in all the four cases had been filed beyond the due date of their filing as per the date specified in section 139(1). It was further submitted that the CPC was justified in processing the returns of income under section 143(1)(a)(ii), disallowing the claim of deduction under section 80P, as the returns were not filed within the due date.

It was further contended on behalf of the revenue that the only remedy to the solution lay in the machinery provisions of the Act, rather than seeking regular remedy, through resort to section 119(2)(b), which enabled an assessee to approach the CBDT for seeking relief in such matters. Section 119 did not give powers to appellate authorities in such cases.

Reliance was further placed on behalf of the revenue on the decision of the Madras High Court in Veerappampalayam Primary Agricultural Co-Operative Society Ltd (supra), where the court had decided the matter in favour of the revenue holding that prima facie adjustment under section 143(1)(a) was possible. The High Court had observed that the provisions of section 80AC(ii) were very clear in the sense that any deduction claimed under Part C of Chapter VIA would be admissible only if the return of income was filed within the prescribed due date, that the date of filing of the return of income would be apparent from the return itself, that the AO could draw an inference whether the return was filed within the statutory limit prescribed under section 139(1), which was basically a mechanical exercise and within the scope of section 143(1)(a)(ii). Reliance was also placed on the decision of the Mumbai Tribunal in the case of Janki Vaishali Co-operative Housing Society Ltd (supra).

Reliance was also placed by the revenue on the decision of the Supreme Court in the case of Prakash Nath Khanna vs. CIT 135 Taxman 327 (SC), wherein the Supreme Court had held that the time within which the return was to be furnished was indicated only in sub-section (1) of section 139 and not in sub-section (4), and therefore a return filed under section 139(4) would not dilute the fact that the return was filed after the due date. It was argued that the Kerala High Court had not considered this Supreme Court decision, nor had it considered the machinery provisions of section 119(2)(b).

The Tribunal noted the fact that though the return was not filed before the due date specified under section 139(1), it was filed prior to the due date under section 139(4). It noted the decision of the Kerala High Court in the case of Chirakkal Service Co-operative Bank Ltd (supra), where the Kerala High Court had observed that denial of exemption under section 80P merely on the ground of belated filing of return by the assessee was not justified.

The Tribunal observed that the decision of the Madras High Court in the case of Veerappampalayam Primary Agricultural Co-Operative Society Ltd (supra) would not be applicable in the case before it, as whether the assessee therein had filed the return of income beyond the due date under section 139(4) or not had not been taken into account by the Court. According to the Tribunal, the issue was squarely covered by the decision of the Kerala High Court.

The Tribunal therefore allowed the appeals of the assessees.

This decision of the Rajkot bench of the Tribunal has been followed by the same bench in Lunidhar Seva Sahkari Mandali Ltd vs. AO (CPC) 200 ITD 14, by the Chandigarh bench of the Tribunal in the case of Chaplah Co-operative Agricultural Service Society Ltd vs. ITO, 38 NYPTTJ 1292 (Chd) and by the Nagpur bench of the Tribunal in the case of Somalwar Academy Education Societies Employees Co-op. Credit Society, ITA No 17/Nag/2023 dated 18.9.2025.

OBSERVATIONS

The issue moves in a narrow compass. While s. 80AC provides for disallowance of a deduction claimed under any of the sections of chapter VIA of the Act w.e.f A.Y. 2018-19, the provisions of s. 143(1)(a) permit adjustment to the returned income for the relevant period only in respect of those deductions specified in s. 143(1)(a) namely, s. 10AA, 80-IA, 80-IB, 80-IC, 80-ID or 80-IE, and not all those which are specified in chapter VI–A. There is no dispute that a claim made under a belated return of income would be disallowed in an assessment if made under s. 143(3) or any other applicable provisions; the dispute is limited to the issue whether such a deduction claimed in a belated return of income during the relevant period, can be disallowed in processing the return of income under the powers of the AO vested at the relevant time under s. 143(1)(a) permitting him to make the authorised adjustments. The larger issue about the possibility of disallowance at all even in cases of regular assessment where the return of income is belatedly filed under s.139(4) is not tested or examined here.

An important aspect of the decision of the Mumbai bench requires to be noted that the Mumbai bench, in deciding the issue before it, examined the provisions of s. 80AC without examining he applicability of the provisions of s. 143(1(a)(v) at all. Had it done so, or had the distinction between the two been brought to its notice, we are sure that the decision could not have been what has been delivered. Even where it is granted that the provisions of s. 80AC did permit the disallowance by an AO, the issue that was before the bench was whether the said provisions of s.80AC could be applied in determining the total income under s.143(1) by making adjustments that were limited to those specified in sub-clause(v) of clause(a).

Before the Rajkot bench, the revenue had placed significant reliance on the Madras High Court decision in Veerappampalayam’s case(supra). This was a writ petition, where the Madras High Court, while dismissing the writ petition, observed:

“The conduct of the petitioners is also relevant. Not only have the returns been filed belatedly but the petitioners have also chosen not to co-operate in the conduct of assessment. They are admittedly in receipt of the defect notices from the CPC, but have not bothered to respond to the same. The writ petitions have themselves been filed belatedly and after the elapse of more than six to eight months from the dates of impugned orders, in all cases. It is only when the Revenue has initiated proceedings for recovery by attachment of bank accounts have the petitioners approached this Court. This factor also strengthens my resolve that these are not matters warranting interference in terms of Article under section 226 of the Constitution of India, quite apart from the decision that I have arrived at on the legal issue.”

Therefore, that decision of the Madras High court was found by the Rajkot bench to be significantly influenced by the inaction of the petitioners in Veerappaamalayam’ case, and the petitioner in that case belatedly approaching the Court. Besides, as observed by the Rajkot bench of the Tribunal, from the facts before the Madras High Court, it was not clear whether the returns were filed within the time specified under section 139(4). The Rajkot bench chose to hold that the ratio of the Madras High court decision was applicable to the peculiar facts of the case before the court.

On the other hand, the Rajkot bench derived support from the decision of the Kerala High Court in the case of Chirakkal Service Co-operative Bank Ltd (supra) that dealt with the period prior to amendment of section 80AC itself. The Kerala High Court observed as under:

“18. Questions B and C relate to denial of exemption on ground referable to belated filing of return, that is to say, returns filed beyond the period stipulated under section 139(1) or section 139(4), as the case may be, as well as section 142(1) or section 148, as the case may be. There are no cases among these appeals where returns were not filed. There are cases where claims have been made along with the returns and the returns were filed within time. Still further, there are cases where returns were filed belatedly, that is to say, beyond the period stipulated under sub-section 1 or 4 of section 139; and, there are also returns filed after the period with reference to sections 142(1) and 148 of the IT Act.

19. Section 80A(5) provides that where the assessee fails to make a claim in his return of income for any deduction, inter alia, under any provision of Chapter VIA under the heading “C.-Deductions in respect of certain incomes”, no deduction shall be allowed to him thereunder. Therefore, in cases where no returns have been filed for a particular assessment year, no deductions shall be allowed. This embargo in section 80A(5) would apply, though section 80P is not included in section 80AC. This is so because, the inhibition against allowing deduction is worded in quite similar terms in sections 80A(5) and 80AC, of which section 80A(5) is a provision inserted through the Finance Act 33/2009 with effect from 1.4.2013 after the insertion of section 80AC as per the Finance Act of 2006 with effect from 1.4.2006. This clearly evidences the legislative intendment that the inhibition contained in sub-section 5 of section 80A would operate by itself. In cases where returns have been filed, the question of exemptions or deductions referable to section 80P would definitely have to be considered and granted if eligible.

20. Here, questions would arise as to whether belated returns filed beyond the period stipulated under section 139(1) or section 139(4) as well as following sections 142(1) and 148 proceedings could be considered for exemption. If those returns are eligible to be accepted in terms of law, going by the provisions of the statute and the governing binding precedents, it goes without saying that the claim for exemption will also stand effectuated as a claim duly made as part of the returns so filed, for due consideration.

21. When a notice under section 142(1) is issued, the person may furnish the return and while doing so, could also make claim for deduction referable to section 80P. Not much different is the situation when pre-assessment enquiry is carried forward by issuance of notice under section 142 (1) or when notice is issued on the premise of escaped assessment referable to section 148 of the IT Act. This position notwithstanding, when an assessment is subjected to first appeal or further appeals under the IT Act or all questions germane for concluding the assessment would be relevant and claims which may result in modification of the returns already filed could also be entertained, particularly when it relates to claims for exemptions. This is so because the finality of assessment would not be achieved in all such cases, until the termination of all such appellate remedies. Under such circumstances, the Tribunal was not justified in denying exemption under section 80P of the IT Act on the mere ground of belated filing of return by the assessee concerned. A return filed by the assessee beyond the period stipulated under section 139(1) or 139(4) or under section 142(1) or section 148 can also be accepted and acted upon provided further proceedings in relation to such assessments are pending in the statutory hierarchy of adjudication in terms of the provisions of the IT Act. In all such situations, it cannot be treated that a return filed at any stage of such proceedings could be treated as non est in law and invalid for the purpose of deciding exemption under section 80P of the IT Act.”

The Mumbai bench of the Tribunal, while dealing with the provisions of section 80AC, did not consider the aspect of whether the disallowance of the deduction under section 80P was permissible under section 143(1)(a), particularly the fact that sub-clause (v) of clause(a) of sub-section(1) of section 143, as it then stood, permitted the adjustments only in respect of those specifically referred sections 10AA, 80IA, 80IB, 80IC, 80ID and 80IE, for disallowance of deduction if the return was filed beyond the due date specified under section 139(1). The provisions of section 143(1)(a) were specifically modified only with effect from AY 2021-22, to amend clause (v) to include all deductions under part C of Chapter VIA – disallowance of deduction claimed under section 10AA or under any of the provisions of Chapter VIA under the heading C- Deductions in respect of Certain Incomes, if the return is furnished beyond the due date specified under sub-section (1) of section 139. This amendment in s. 143(1)(a)(v), to match the language of section 80AC, was made by the Finance Act 2021 with effect from AY 2021-22. The amendment is not made retrospectively applicable. Therefore, it appears that the intention before the amendment was only to cover the then specified sections for adjustment under section 143(1)(a) till AY 2020-21, and not to include deduction under section 80P for such adjustment.

It may be noted that subsequently the CBDT issued circular No. 13 of 2023 dated 26 July 2023, directing the Chief Commissioners of Income Tax/Directors-General of Income Tax to admit and deal on merits with applications for condonation of delay from co-operative societies claiming deduction under section 80P, for assessment years from AY 2018-19 to AY 2022-23. The circular laid down criteria for dealing with such applications, which required verification of whether the delay was caused due to circumstances beyond the control of the assessee, whether there was a delay in getting the accounts audited by statutory auditors appointed under the respective state law, and whether there was any other issue indicating tax avoidance or tax evasion.

In our opinion had the Mumbai bench examined the apparent contrast between the provisions of s. 80AC and the provisions of s. 143(1)(a)(v), as then applicable for assessment year 2018-19, it would have surely appreciated the glaring difference between the language and the scope of the two provisions and would have held that the power of the AO under s. 143(1)(a) to make adjustment was limited to the sections specified in clause(v) thereof and not to all the claims made under part C of the Chapter VI-A of the Act. Therefore, the better view of the matter seems to be the one taken by the Rajkot, Chandigarh and Nagpur benches of the Tribunal, that the deduction under section 80P could not have been disallowed while processing the return under section 143(1)(a) for the assessment years up to 2021-22, in spite of the amendment in s. 80AC made w.e.f assessment year 2018-19. Even for the subsequent assessment years, the better and beneficial view would be to not deny and disallow the deduction claimed under any of the provisions of chapter VI-A where the return of income is filed belatedly but before the due date specified under section 139(4).

BCAJ Admin

ISSUE FOR CONSIDERATION

Any transfer of a capital asset by a company to its subsidiary company, subject to compliance of the specified conditions, is not regarded as a “transfer” under section 47(iv) of the Income Tax Act (“ACT”). Likewise, a transfer of a capital asset by a subsidiary company to the holding company is not regarded as a transfer under section 47(v). A company is defined by section 2(17) and includes an Indian company and a company in which, the public are substantially interested is defined by section 2(18) of the Act and includes the subsidiary company of a company in specified cases. An Indian company is defined by section 2(26) of the Act. The terms or expressions ‘subsidiary company’ or ‘holding company’ are not defined under the Income Tax Act. These terms, however, are defined under sections 2(46) and 2(87) of the Companies Act, 2013. (Section 4 of the Companies Act, 1956). The definition of a subsidiary company under the Companies Act includes a step-down subsidiary or sub-subsidiary, ie. a subsidiary of a subsidiary company.

An issue has arisen under the income tax law as to whether a step-down subsidiary is a subsidiary for the purposes of sections 47(iv) and (v) of the Act, and therefore, whether the transfer to or from such a subsidiary is regarded as a case of ‘no transfer’ for the purposes of section 2(47) of the Act; in other words, whether the capital gains on such a transfer is exempt from taxation.

The Gujarat High Court has held that a transfer of capital asset by a holding company, to its step-down subsidiary, is not covered by the provisions of section 47(iv) of the Act while the Bombay High Court, in the context of erstwhile section 108 r.w.s. 104 of the Act has held that a subsidiary included the subsidiary of a subsidiary. Recently, the Kolkata bench of the Income Tax Appellate Tribunal, following the decision of the Bombay High Court, has held that a transfer by a holding company to its step-down subsidiary is a case of transfer that is not regarded as a transfer. The Gujarat High Court in deciding the issue has specifically dissented from the decision of the Bombay High Court.

PETROSIL OIL CO. LTD.’S CASE

The issue under consideration first arose in the case of Petrosil Oil Co. Ltd. vs. CIT, 236 ITR 220 before the Bombay High Court in the context of the erstwhile section 108 r.w.s 104 of the Act.

In the said case, the assessee-company incorporated under the Companies Act, 1956 in India was a wholly owned subsidiary of a company incorporated in United Kingdom (UK company), which itself was also a subsidiary of another company based and registered in the United States of America holding its 100 per cent shares (US Company was one in which the public were substantially interested). Section 104 of the Act provided for the levy of additional tax on undistributed income of a closely held company under certain circumstances. Section 108 provided for the relief from such tax (a) to any company in which the public are substantially interested; or (b) to a subsidiary company of such company if the whole of the share capital of such subsidiary company has been held by the parent company or by its nominees throughout the previous year.”

In the course of assessment, a controversy arose in regard to the appropriate tax rate of income-tax applicable to the assessee-company. The question arose whether the company could be considered a domestic company in which the public are substantially interested. The AO did not accept the contention of the assessee that the assessee-company, being a wholly owned subsidiary of another company which in turn was a subsidiary of another company in which the public were substantially interested, then by virtue of section 108, having been incorporated by reference in definition of ‘a company in which public were substantially interested’ in then s.2(18), it should be deemed to be a company in which public were substantially interested.

The Appellate Commissioner decided in favour of the assessee holding that a subsidiary of a subsidiary also fell within the ambit of clause (b) of section 108 if it satisfied the requirements prescribed therein. The Tribunal was however, of the view that section 108, did not cover a case of sub-subsidiary and decided the appeal before it against the assessee.

On reference, there being a point of difference between the two judges of the Division Bench – one judge holding that to qualify as a ‘company in which the public are substantially interested’ not only the assessee-company but also its parent company / companies must also be domestic company, while the other judge held that the assessee in question was a company in which public was substantially interested in as much as the holding company was the subsidiary of a company which was a company in which public was substantially interested, the case was referred to the Third Judge.

In response, the company, in the context of the relevant issue, submitted that;

•  The U.S. company fell within section 2(18)(b)(B)(i)(d); as 100 per cent of the shares of the U.K. company were held by the U.S. company, the U.S. company and U.K. company were one and the same; then the assessee would fall within section 2(18)(b)(B)(i)(c); a 100 per cent owned subsidiary of a 100 per cent owned subsidiary should be considered as a subsidiary.
•  Under section 4(1)(c) of the Companies Act, a company was deemed to be a subsidiary of another if it was a subsidiary of any company which was the subsidiary of the other; a sub-subsidiary which fulfilled the requirement of section 108(b) would be a subsidiary under section 108(b); in that case 100 per cent of the shares of the assessee were held by the U.K. company whose shares were held by the US holding company, and the assessee, thus, fulfilled the requirement of section 108(b).
•  Reliance was placed upon the case of Howrah Trading Co. Ltd. vs. CIT 36 ITR 215 (SC), wherein the question was whether a person, who had purchased shares in a company under blank transfer forms and in whose name the shares had not been registered in the books of the company, was or was not a shareholder within the meaning of section 18(5). The Supreme Court, whilst deciding this question, held that under the Indian Companies Act, the expression ‘shareholder’ denoted no other person except a member. The Supreme Court held that no valid reason existed why the word ‘shareholder’ as used in section 18(5) should mean a person other than the one denoted by the same expression in the Indian Companies Act. The Supreme Court was, thus, importing the definition of the term ‘shareholder’ as used in the Companies Act into the Income-tax Act.
•  The definition under section 4(1)(c) of the Companies Act must be imported into section 108; even on the doctrine of lifting of corporate veil, it would be found that 100 per cent of the shares of the assessee-company were held by the U.K. company and 100 per cent of the shares of the U.K. company were held by a U.S. company; it must, therefore, be held that the sub-subsidiary was also a subsidiary of the U.S. company and fell within section 108(b).

On behalf of the revenue department, in the context of the relevant issue, it was submitted that section 108(b) applied only to such companies whose entire share capital was held by a company falling under section 108(a); the definition of the expression ‘subsidiary company’ under the Companies Act could not be incorporated into section 108; neither of the two conditions prescribed under section 108(b) were satisfied by the assessee-company; the assessee was not a subsidiary of the U.S. company and, therefore, was not a subsidiary of a company falling within section 108(a); a sub-subsidiary could not be treated as a subsidiary for the purposes of section 108(b); the assessee was, thus, not a company in which the public were substantially interested.

On due consideration of the rival submissions, the court held that;

•  The Income-tax Act nowhere defined what was a ‘subsidiary company’. The Finance (No. 2) 1971 Act also did not define what was a ‘subsidiary company’
•  There would be a dichotomy if the assessee-company were to be a subsidiary company of the U.S. company for the purposes of the Companies Act but were deemed not to be a subsidiary of the U.S. company for the purposes of the Act.
•  The meaning given to the term ‘subsidiary company’ under section 4(1)(c) of the Companies Act must be imported into section 108. Of course, the further condition laid down under section 108(b) must also be fulfilled. Thus, a sub-subsidiary would be a subsidiary under section 108(b) if the whole of its share capital had been held by the parent company or its nominees throughout the previous year.
•  If that meaning was incorporated, then it was very clear that the assessee was a subsidiary within the meaning of section 108(b). This was so because, admittedly, the U.S. company was a company in which the public are substantially interested and fell within section 108(a). A 100 per cent owned sub-subsidiary of a 100 per cent 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(b) of the Companies Act. The assessee fulfilled the condition of section 108(b) in as much as, throughout the previous year, 100 per cent of its share capital was held by the U.K. company. Throughout the previous year, 100 per cent of the share capital of the U.K. company was held by the U.S. company. The U.K. company was, thus, a nominee of the U.S. company. The assessee would, thus, be a subsidiary within the meaning of section 108(b).
•  Once the definition of the expression ‘subsidiary company’ appearing in section 4(1) of the Companies Act was imported to find out the true meaning of the word ‘subsidiary company’ in clause (b) of section 108, it would have to be read in the context of the requirements of clause (b) of section 108. In other words, ‘subsidiary company’ in section 108 could be understood to mean a subsidiary company as defined in section 4(1) of the Companies Act, which met the further requirements of clause (b) of section 108, viz., if the whole of the share capital of such subsidiary company had been held by the parent company or by its nominees throughout the previous year. If company ‘A’ held 100 per cent of the shares of a subsidiary company ‘B’ which held 100 per cent of the shares of another company ‘C’, under the Companies Act, Company ‘A’ could be said to be holding 100 per cent of the shares of company ‘C’ also. In conclusion section 2(6)(a) of the Finance Act, read with section 108(b), covered the case of a subsidiary company which was a subsidiary of a subsidiary company falling therein, if it also met the requirements mentioned in that clause.

KALINDI INVESTMENT (P.) LTD.’S CASE

The issue again came up for consideration before the Gujarat High Court in the case of Kalindi Investment (P.) Ltd. vs. CIT, 256 ITR 713 in the context of section 47(iv) of the Act.

In the said case, the facts were that one Kaveri Investments (P.) Ltd. was a wholly-owned  subsidiary of the assessee company. Ambernath Investments (P.) Ltd. was a wholly-owned subsidiary of Kaveri Investments (P.) Ltd. As such, Ambernath Investments (P.) Ltd. was a step-down subsidiary of the assessee company.

The assessee, a private limited holding company, was earning dividend and interest income from its activities of making or holding investments and financing industrial enterprises. It maintained its books of account on mercantile system of accounting. For the assessment year under consideration, i.e., 1975-76, for which the accounting period ended on 31^st March, 1975, the assessee-company filed its return of income declaring total loss of ₹3,02,858. The total loss included an amount of ₹1,26,201 claimed by the assessee to have been incurred on account of short-term capital loss.

At the assessment proceedings, the ITO noted that during the accounting period the assessee had sold its 2,300 shares of Sarabhai Management Corpn. Ltd., a private limited company, on 20^th January, 1975, to its subsidiary company, viz., Ambernath Investments (P.) Ltd. Co. for ₹13,600 only at the rate of ₹6 per share. The said shares had been purchased by the assessee-company on 30^th July,1973, for ₹1,38,345 at the rate of ₹60.15 per share. The difference of ₹1,24,545 was claimed by the company as short-term capital loss occasioned as a result of transfer of the said shares by it to Ambernath Investments (P.) Ltd. The ITO rejected the assessee’s claim on the ground that the transferee-company, i.e., Ambernath Investments (P.) Ltd. was a subsidiary company of the assessee-company and, therefore, the case was clearly covered by the provisions of section 47(iv) of the Income-tax Act, 1961 (‘the Act’).

The CIT(A) and the tribunal confirmed the finding of both the lower authorities that the provisions of section 47(iv) were attracted. For this purpose, the Tribunal relied on the definitions of ‘holding company’ and ‘subsidiary company’ as given in section 4 of the Companies Act, 1956.

At the instance of the assessee company the following question was referred by the Tribunal for opinion of the Gujarat Hogh Court:

“1…………….

2. Whether the Tribunal was justified in interpreting various relevant provisions of various Acts such as sections 45, 47(iv)(a), 2(17), 2(26) of the Act as well as section 4, etc., of the Companies Act, 1956, while arriving at the conclusion that the loss in question was incurred on account of transaction between the parent company and the subsidiary company and, hence, the same was disallowable under section 47(iv)(a) of the Act in spite of the fact that the assessee-company did not hold all the share capital of Ambernath Investments (P.) Ltd. ?”

The company contended before the court that:

•  Section 47(iv) contemplated transfer of a capital asset by a holding company to its subsidiary company and that since Ambernath Investments (P.) Ltd. was not a subsidiary company of the assessee-company, there was no question of applying section 47(iv). The assessee-company did not hold the whole of the share capital of Ambernath Investments (P.) Ltd. and, therefore, clause (a) of section 47(iv) was also not attracted. Of course, there was no dispute about the fact that Ambernath Investments (P.) Ltd. was an Indian company.
•  The Tribunal erred in invoking the provisions of the Companies Act, for applying section 47(iv) to the facts of the instant case. Section 4(1) of the Companies Act, commenced with the words ‘For the purposes of this Act’, and therefore the definition of ‘holding company’ contained in the aforesaid provision could not be applied for the purposes of section 47(iv) which is a different enactment altogether.
•  Because the transaction in question resulted into capital loss, the revenue had held that it was not a transfer, but if the transaction had resulted into capital gain, the revenue would have canvassed the other way around to rope in the income as taxable, by treating it as a transfer of capital asset outside the purview of section 47(iv). For that purpose, the revenue would have contended that Ambernath Investments (P.) Ltd. was not the immediate subsidiary of the assessee-company.

On the other hand, the Revenue, submitted that:

•  When the Act itself did not contain any definitions of ‘holding company’ and ‘subsidiary company’, and the Companies Act was a special enactment for companies, there was nothing wrong on the part of the Tribunal in relying on the definition of ‘holding company’ contained in section 4 of the Companies Act, more particularly, when the assessee held the entire share capital of Kaveri Investments (P.) Ltd. and Kaveri Investments (P.) Ltd., in turn, held the entire share capital of Ambernath Investments (P.) Ltd. The provisions of section 4(1)(c), read with illustration thereof were clearly applicable in the facts of the instant case.
•  In any event of the matter, the Commissioner (Appeals) had also given another ground for holding that there was no capital loss and, therefore, also the finding given by the Tribunal is not required to be disturbed.

Having heard the learned counsels for the parties, the court observed that;

•  although revenue’s first submission appeared to be prima facie attractive, there was no justification for transplanting the definition of ‘holding company’ under the Companies Act into the provisions of section 47 automatically. The Companies Act had been enacted to consolidate and amend the law relating to companies and certain other associations.
•  Various regulatory provisions contained in the Companies Act were meant to make the companies accountable for their activities to the authorities as well as to the shareholders and creditors.
•  In order to ensure that a company having controlling interest in another company did not escape the liabilities of the other company, section 4(1) gave an expanded definition of a ‘holding company’.
•  On the other hand, the Income-tax Act was a taxing statute for taxing the Income under various heads and subject them to levy of tax. Capital gains was one such head. Section 45 provided that any profits or gains arising from the transfer of a capital asset effected in the previous year shall be chargeable to income-tax under the head ‘Capital gains’ and shall be deemed to be the income of the previous year in which the transfer took place. Since there could be borderline transactions, the Legislature has taken care to provide in section 47 that certain transfers shall not be considered as transfers for the purpose of levy of capital gains. For instance, any distribution of capital assets on the total or partial partition of an HUF was not to be treated as a transfer for the purpose of capital gains. So also, any distribution of capital assets on the dissolution of a firm, or an AOP was not to be treated as a transfer for the purpose of capital gains. Similarly, any transfer, in a scheme of amalgamation of a capital asset by the amalgamating company to the amalgamated company was also not be treated as a transfer for the purpose of capital gains, subject to compliance with certain conditions.
  • The same section provided that, transfer of a capital asset by a holding company to its Indian subsidiary company or by a subsidiary company to its Indian holding company was not to be treated as a transfer for the purposes of capital gains.
•  The words ‘any transfer of a capital asset by a company to its subsidiary company’ would, as per the ordinary grammatical construction, contemplate only the immediate subsidiary company of the holding company as the holding company held the share capital only of its immediate subsidiary company.
•  If the Legislature, while enacting the Act, intended that the provisions of section 4 of the Companies Act should apply to a holding or a subsidiary company under section 47, there was nothing to prevent the Legislature from making such an express provision. The question was when that was not done, whether the provisions of section 4(1)(c) of the Companies Act were required to be read into section 47(iv) and (v) by necessary implication.
•  Section 4 of the Companies Act made it clear that the expanded definition of ‘holding company’ was applicable for the purposes of the Act. The Legislature gave an expanded definition of ‘holding company’ for the purposes of the Companies Act with the object to make the companies more accountable to the authorities, shareholders and creditors, With emphasis on ‘control’ of one company over another, the definition of ‘holding company’ under the Companies Act clearly indicated control over the composition of the Board of Directors or holding more than half in nominal value of equity share capital of the other company, which was sufficient to treat the two companies in question as a holding company and a subsidiary company.
•  On the other hand, the Legislature has provided different criteria for dealing with a holding company and a subsidiary company in the matter of tax in capital gains on transfer of assets between such companies. The Act has carved out a smaller number of holding and subsidiary companies for the purposes of section 47(iv) and (v). The wider definition of a ‘holding company’ with emphasis on ‘control’ as the guiding factor was not adopted in clauses (iv) and (v) of section 47. It was specifically provided that the parent company or its nominees must hold the whole of the share capital of the company.
•  The Legislature while enacting the Act, therefore, made a clear departure from the definition of ‘holding company’ as contained in the Act. In this view of the matter, there was no justification for invoking clause (c) of sub-section (1) of section 4 while interpreting the provisions of clauses (iv) and (v) of section 47, which laid down two specific conditions for applicability of the said clauses, and which were quite different from the criteria laid down in sub-section (1) of section 4 of the Companies Act, 1956, for giving a more expanded definition of a ‘holding company’ to subject more companies to regulatory control under the Companies Act. On the other hand, the object underlying section 47 was to lay down exceptions to the legal provision (section 45) for taxing gains on transfer of capital assets. The general rule was to construe the exceptions strictly and not to give them a wider meaning.

In this view of the findings, the Gujarat High Court had no hesitation in expressing the view that the Tribunal was not justified in law in treating Ambernath Investments (P.) Ltd. as a subsidiary company of the assessee-company for the purposes of clause (iv) of section 47 of the Income-tax Act.

OBSERVATIONS

The relevant provisions of the Income-tax Act are sections 2(17), 2(18), 2(26), 2(47), 45 and 47. Sections 47(iv) and (v) read as: “47. Transactions not regarded as transfer. –Nothing contained in section 45 shall apply to the following transfers:-

(i) …

(ii) …

(iii) …

(iv) any transfer of a capital asset by a company to its subsidiary company, if-

a. the parent company or its nominees hold the whole of the share capital of the subsidiary company, and

b. the subsidiary company is an Indian company;

(v) any transfer of a capital asset by a subsidiary company to the holding company, if-

a. the whole of the share capital of the subsidiary capital is held by the holding company, and

b. the holding company is an Indian company:”

The relevant provision of the Companies Act, 1956 is section 4(1) which reads as;

“Meaning of ‘holding company’ and ‘subsidiary’:

“4(1). For the purposes of this Act, a company shall, subject to the provisions of sub-section (3), be deemed to be subsidiary of another if, but only if,-

a. that the other controls the composition of its Board of Directors; or

b. that other-

(i) ******

(ii) . . . holds more than half in nominal value of its equity share capital; or

c. the first-mentioned company is a subsidiary of any company which is that other’s subsidiary.”

The Illustration below sub-section (1) of section 4 reads as under:

“Company B is a subsidiary of company A, and company C is a subsidiary of company B. Company C is a subsidiary of company A, by virtue of clause (c) above. If company D is a subsidiary of company C, company D will be a subsidiary of company B and consequently also of company A, by virtue of clause (c) above, and so on.”

The terms “subsidiary company” and “holding company”, as noted earlier, are not defined in the Income Tax Act. These terms are, however, defined under section 4(1)(c) of the Companies Act 1956, now sections 2(46) and 2(87) of the Companies Act, 2013. On a bare reading of the definitions provided by the Companies Act, it is clear that 100 per cent subsidiary company of a 100 per cent subsidiary company of a holding company is also regarded as a subsidiary of the holding company. In other words, a step-down subsidiary is treated as a subsidiary of the holding company for the purposes of the Companies Act.

The Gujarat High Court, while examining the issue in the context of section 47 has held that the meaning of the term “subsidiary” for the purposes of section 47 of the Income Tax Act should be gathered from the ordinary understanding of the term and the provisions of the Companies Act should not be imported for assigning the meaning to a subsidiary under the Income Tax Act. In view of the Gujarat High Court, the meaning provided by the Companies Act should not be relied upon in interpreting the provisions of Income Tax Act.

A subsidiary company and a holding company are companies incorporated and registered under the Companies Act and derive their existence from the Companies Act. In the circumstances, it is natural and logical to rely on the meaning supplied by the Companies Act, especially where the term subsidiary company is not defined under the Income Tax Act. It is a settled position in law, to gather the meaning of an undefined term used in the Income Tax Act from any other enactment where such term is defined, more so where the definition is under an enactment under which the entity is born, and is the principal enactment that governs and regulates such an entity. In modern days, it is usual for the legislature, while enacting a new law, to specifically clarify the situation, by providing for a clear right to refer to another enactment for gathering the meaning of an undefined term. The rule of harmonious construction also supports an interpretation that avoids absurdity of limiting the understanding of the term subsidiary company to the Income Tax Act alone. It would create an absurdity where a step-down subsidiary is treated as a subsidiary under the parent enactment governing the companies but is not treated so under the Income Tax Act. The provisions of the General Clauses Act also support such a view. In fact, the legislature was aware that the terms under consideration are not defined under the Income Tax Act and therefore intended that the meaning of such terms would be gathered from the Companies Act that regulates the functioning of such companies.

The Supreme Court in the case of Paresh Chandra Chatterjee vs. State of Assam, AIR 1962, SC 167 confirmed this Rule of Interpretation in the following words;

“Sections 23, 24 and 25 [of the Land Acquisition Act, 1894], lay down the principles for ascertaining the amount of compensation payable to a person whose land has been acquired. We do not see any difficulty in applying those principles for paying compensation in the matter of requisition of land. While in the case of land acquired, the market value of the land is ascertained, in the case of requisition of land, the compensation to the owner for depriving him of his possession for a stated period will be ascertained. It may be that appropriate changes in the phraseology used in the said provisions may have to be made to apply the principles underlying those provisions.” (p. 171).”

It was further observed: “If instead of the word ‘acquisition’ the word ‘requisition’ is read and instead of the words ‘the market value of the land’ the words ‘the market value of the interest in the land’ of which the owner has been deprived are read, the two sub-sections of the section can, without any difficulty, be applied to the determination of compensation for requisition of a land. So too, the other sections can be applied”. (p. 171)

In the case of Howrah Trading Co. Limited vs. CIT 36 ITR 215, the Supreme Court held that in gathering the meaning of the word ‘shareholder’ not defined u/s 18(5) of the Indian Income Tax Act 1992, a complete reliance should be placed on the definition of the term ‘shareholder’ under the Indian Companies Act 1913. It held that “no valid reason existed why “shareholder” as used in section 18(5) of the Act should mean a person other than the one denoted by the same expression in the Indian Companies Act 1913.

Again, the same court in the case of CIT vs. Shantilal (P.) Ltd., 144 ITR 57 (SC) held that “there is no reason why the sense conveyed by the law relating to contract should not be imported into the definition “speculative transaction” under Income Tax Act.”

No particular benefit is sought to be provided by adopting this Rule of Interpretation, which, in any event, cuts either way, as has happened in some of the cases where the loss arising on transfer of capital asset to the subsidiary company was not allowed for set-off, in as much as the income, if any, on such a transfer would have been exempt from tax.

Recently, in the case of Emami Infrastructure Ltd vs. ITO, 91 taxmann.com 62 (Kolkata), the ITAT held that a transfer to a step-down subsidiary by a holding company was a case of a transfer not regarded as a transfer u/s 2(47) of the Act.

The better view, therefore, is that the meaning of the terms ‘subsidiary’ and ‘holding’ companies should be gathered from the Companies Act, as long as they are not defined under the Income Tax Act, more so where the meaning supplied is contextual.

BCAJ Admin