JUDGEMENT
R.M. Mehta, Accountant Member -
(1.)THIS appeal is directed against the order of the CIT (Appeals) and the issue under consideration is the addition of a sum of Rs. 1,02,001 made under the head "Long term capital gain" as also the allowability of a loss of Rs. 160 under the head "Short term capital gain ".The aforesaid transactions arose out of the sale of certain shares by the appellant company to its wholly owned subsidiary companies.
(2.)The I.T.O. on a perusal of the return of income came across the following note in Part III of the return:
The assessee during the year under consideration has sold away shares held by it in various companies at a book value to its subsidiary companies whose whole of the share capital is held by the assessee. It is therefore, submitted that capital gains if any, is not includible in computation of total income, in view of provisions of Section 47(iv) of the Act.
On making further inquiries the following facts emerged:
(1) The appellant during the year under consideration purchased the entire share capital of five companies which thereby became its wholly owned subsidiaries. This entailed a total investment of Rs. 35,000.
(2) That shares of various Joint Stock Companies including those of Shri Ambica Mills Ltd. were sold to the 5 subsidiaries at book value although the market value was considered to be much higher.
(3) That in the process the appellant company transferred a major part of its investment in shares to the subsidiaries.
(4) That at the end of 30-6-1984 relevant to A.Y. 1985-86 the appellant was not holding any shares in the companies which were in the A.Y. under consideration its wholly owned subsidiaries.
(5) That the funds to purchase the shares at book value were provided by the appellant company to the subsidiaries in the form of loans.
(6) That the subsidiary companies were formed primarily with the intention of transferring the shares held by the appellant company to various "family trusts".
(7) That these companies were promoted by various persons who were shareholders in the appellant company, their family members, friends and employees of the appellant company and its connected companies.
(8) That by passing three resolutions on the same day viz. 13-6-1983 the appellant company not only increased the equity capital of the five subsidiaries by subscribing to their right share issues, but also transferred the shares of various companies held by it at book value to these subsidiaries and also provided funds for the purchase.
(9) The act of not subscribing to the right shares offered by the subsidiaries on 28-11-1983 on the ground of inadequate funds specially when the amount involved was only Rs. 52,500 and the market value of the investments held by these subsidiaries was more than 1.3 crores and the cash and bank balances on that date were Rs. 73,211.
(10) The sale on 28-11-83 of all but one share at par (Rs. 100 each) of the subsidiaries to the H.K. Family Trust Nos. 3, 5, 7 & 9 which were discretionary trusts, the beneficiaries, being persons who had a substantial interest in the appellant company.
(11) The sale of one share each of the five subsidiaries at par for a sum of Rs. 500 on 29-6-1984 to Ansumati Investment (P.) Ltd.
On the basis of the aforesaid facts the ITO opined that an elaborate exercise had been carried out by the assessee company to avoid capital gains tax. According to him, the provisions of Section 52(1) were squarely attracted. After issuing a show-cause notice to the assessee and receiving its reply the ITO subjected to tax a sum of Rs. 1,02,001 as "long term capital gain". He also allowed as a deduction a loss of Rs. 160 under the head "Short term capital gain". The relevant reasons recorded by the ITO for his action are extracted as follows:
33. In the present case, there is not the slightest doubt regarding understatement of the full value of consideration received on the transfer of capital asset, namely, shares because market value of quoted shares was more than five to six times, the book value at which shares were transferred. The sale by the transferee subsidiary companies of the same shares within a short period at a much higher price proves beyond doubt that transfer of shares by Cloth Traders Ltd. to five subsidiary companies was with the object of avoidance or reduction of the liability of the assessee company to tax on capital gains. In view of the above position show-cause notice was issued to the assessee company on 24-2-1987.
34. The assessee company's reply dated 2nd March, 1987 refers in some detail to Supreme Court decision in case of K.P. Varghese reported in 131 ITR at page 597.
The case of K.P. Varghese v. ITO [1981] 131 ITR 597 (SC) really deals with Section 52(2) only. However there is discussion regarding Section 52(1) also. The Honourable Judges have observed on page 607 that, once it is found that the consideration in respect of transfer is understated and conditions specified in Sub-section 52(1) are fulfilled, the ITO will not be called upon to prove the specific extent of concealment. In the present case, there is not the slightest doubt that consideration declared was far below the market price of shares on the date of transfer. In the present case, purchase of controlling number of shares of five subsidiary companies by group of persons at a throw away price of Rs. 100 per share on the pretext that offer of right shares were not accepted by holding company because of shortage of funds, when the same company can advance as loan to the same subsidiaries, about Rs. 30 lakhs, does not require any further proof that series of transactions entered into by holding company, subsidiary companies and trusts were not "bona fide" transactions. The actual price realised on sale of shares within a period of few months by subsidiary companies now controlled by family trusts is further proof that previous transactions were not "bona fide" commercial transactions. But for these series of transactions the capital gains of more than Rs. 78 lakhs (Even when the price of certain scripts had fallen considerable during the intervening period) would have been earned by the holding company, namely Cloth Traders Ltd. There cannot be a better case for invoking provisions of Section 52(1) of the Act. From the detailed discussion of facts stated before applicability of Section 52(1) is already established which requires that the computation of capital gains arising on the transfer of shares within reference to its market value as on the date of transfer in respect of quoted shares and on the basis of value of assets including shares, on the date of transfer in respect of unquoted shares should be made for determining the tax on capital gains.
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36. However, assessee's following submission in its letter dated 2nd March, 1987 is required to be dealt with:-
It is submitted that the shares were transferred by the company at the cost of acquisition and therefore in fact there was no capital gain and therefore, there is no justification in invoking provisions of Section 47(iv) and provisions of Section 47 A does not arise. You will please appreciate that the provisions of the said section are required to be bring in operation when an assessee has earned capital gain and the same is required to be deleted in accordance with the provisions of Section 45 of the Income-tax Act. It is submitted that we did not derive any capital gain on transfer of the shares and therefore, the provisions of Section 45 are not at all applicable and accordingly the sections which have been referred to by you in your letter will not apply to the facts of our case.
37. The reference to Section 47(iv) is made by assessee in its note No. 5 of Part III notes. The provisions of Section 52(1) are required to be invoked when capital gains chargeable under Section 45 are avoided or reduced by the assessee by selling the asset at a price which was the cost price or a little higher price but positively at a price much below the known or ascertainable selling price. Assessee's mention of Section 47(iv) in the notes presupposes the possibility of determination of capital gains. By this section, namely, Section 47(iv) transfer by holding company to wholly owned subsidiary company was not to be regarded as transfer for the purposes of Section 45. When no capital gains can be determined because of the applicability of Section 47 (iv), then the provisions of Section 47 A are applicable in the circumstances narrated therein i.e. when the holding company ceases to hold the whole of the share capital of the subsidiary company within a period of eight years from the date of transfer of capital asset referred to in Section 47(iv) of the Act. Section 47A provides that in such circumstances, the amount of profits or gains not charged under Section 45, by virtue of pro visions of Section 47(iv) shall be deemed to be income chargeable under the head 'Capital gains' of the previous year in which such transfer took place. Applicability of Section 45, cannot be avoided by simple device of an understatement of consideration received or receivable on transfer of a capital asset
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40. In the present case we have seen that the assessee company avoided payment of capital gains on transfer of shares by creating 100% subsidiary companies transferring shares to such companies at book value, when market value of such shares was five to six times, losing control over the subsidiary companies by not subscribing to issue of right shares, thereby ceasing to hold the whole of the share capital of the subsidiary companies and then selling the shares of the subsidiary companies at par when even the reduced breakup value on the basis of value of quoted shares held by such subsidiaries was higher.
41. Fit case for proceedings under Section 271(1 )(c)-of the Act.
The series of transactions described above are not 'bona fide' transactions when considered as a whole in view of Supreme Court decision of McDowell & Co. Ltd. reported in 154 ITR at page 154. The subsidiary companies controlled by four H.K. Family Trusts which are discretionary trusts have ultimately sold the shares at a substantial profits but in the returns filed for A.Y. 1985-86, these subsidiary companies have claimed losses from sale of shares, though as per books substantial profits have been earned from the sale of such shares. The series of transactions was nothing but an elaborate scheme of tax avoidance and therefore proceedings for concealment are initiated under Section 271(l)(c) of the Act. When the return of income for A. Y. 1984-85 was filed on 29-6-1984 the assessee company was aware that subsidiary companies had ceased to be 100% subsidiary companies of Cloth Traders Ltd. and when revised return was filed on 27-2-85 the company had already known that Section 47A was applicable to the facts of the case, but no mention of these relevant facts was made by the assessee company, while filing the revised return for A.Y. 1984-85, which amounts to furnishing inaccurate particulars of ..taxable income by deliberately making false claims of deductions and/or exemptions etc.
Computation of Capital Gains on Transfer of Original and Bonus Shares
42. It is observed that M/s. Cloth Traders Ltd. has not sold the entire holding of certain scripts. It is further observed that some of the shares sold are shares which were purchased and some of the shares sold were bonus shares received from time to time. There are several judgments of different High Courts regarding computing 'cost of acquisition' for original shares and bonus shares.
The assessee company has claimed that cost of acquisition of bonus shares should be taken to be the average cost of shares including bonus shares i.e. total amount actually paid should be divided by total number of shares including purchased shares and bonus shares. The assessee company has also exercised the option given under Section 55 to substitute 1-1-64 price in respect of shares held by it earlier to 1-1-64 for the purpose of calculating 'capital gains' arising if any on the transfer of shares to subsidiaries.
(3.)THE CIT (Appeals) confirmed the action of the ITO on an identical line of reasoning.