Emami Infrastructure Ltd vs. ITO (ITAT Kolkata)

(i) The case of the assessee was that it sold equity shares of M/s. Zandu Realty to M/s. Emami Rainbow Niketan Pvt. Ltd, based on the price of the shares determined by SSKM Corporate Advisory P.Ltd. M/s. Emami Rainbow Niketan is a 100% subsidiary of M/s. Emami Realty Ltd. M/s. Emami Realt Ltd is a 100% subsidiary of M/s. Emami Infrastructure Ltd, the assessee herein.

(ii) Therefore, two issues arise for our adjudication. These are:-

(a) The first issue is, whether there is a transfer of share in view of provisions of section 47(iv) of the Act.

Section 47 of the Act provides certain category of transactions, which are not regarded as transfer for the purpose of section 45 of the Act. Transactions not regarded as transfer Section 47(iv)(a), (b): Section 47. Nothing contained in section 45 shall apply to the following transfers:-

(iv)any transfer of a capital asset by a company to its subsidiary company (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.

(b) The second issue is, if we come to conclusion that the transaction in question is not covered u/s. 47(iv) of the Act, then whether the computation of capital gains as made by the AO and confirmed by the ld. CIT(A) is correct or not and whether the AO can substitute the sale consideration of the shares sold with the F.M.V as determined by him?

If, we come to our conclusion that this is not transfer, than the assessee’ s claim that it had incurred long term capital loss and the same has to be carried forward, cannot be allowed. Similarly, the 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.

(iii) We first consider whether there is a transfer, in view of section 47(iv) of the Act. The undisputed fact is that M/s. Emami Realty Ltd is a 100% subsidiary of M/s.Emami Infrastructure Ltd, the assessee herein. M/s.Emami Rainbow Niketan Pvt. Ltd is in turn a 100% subsidiary of M/s. Emami Realty Ltd. In other words, this is a second step down 100% subsidiary of the assessee.

The issue is whether the provisions of section 45(iv)(a)(b) is applicable to a second step down subsidiary.

They are divergent views on this issue. The Hon’ble Bombay High Court in the case of Petrosil Oil Co.Ltd Vs. CIT reported in 236 ITR 220 (Bom.) held as under:-

“In this case, the Income-tax Act nowhere defines what is a “subsidiary company”. The Finance (No. 2) Act also does not define what is 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 Income-tax Act. I am in agreement with the view expressed by my brother Dr. Saraf J., that the meaning given to the term “subsidiary company” under section 4(1)(c) of the Companies Act must be imported into section 108 of the Income-tax Act. 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 has been held by the parent company or its nominees throughout the previous year.

84. If that meaning is incorporated then it is very clear that the assessee is a subsidiary within the meaning of section 108(b) of the Income-tax Act. This is so because, admittedly, the U.S. company is a company in which the public are substantially interested and falls 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 Income-tax Act. The assessee fulfils the condition of section 108(b) inasmuch 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 is thus a nominee of the U.S. company. The assessee would thus be a subsidiary within the meaning of section 108(b). In this view of the matter, it is not necessary to consider the three other angles propounded by Mr. Dastur.

85. I am, however, unable to accept the view that for the purposes of Paragraph F not only the assessee but the parent company/companies must also be domestic companies. A reading of Paragraph F does show that the rates of tax applicable therein are applicable to a “domestic company”. The reference to “domestic company” in the beginning is to the assessee. By virtue of section 2(6) (a) of the Finance (No. 2) Act, 1971, one has to go to section 108 of the Income-tax Act to determine whether a company is a company in which the public are interested. It is clear that section 108 of the Income-tax Act does not limit its applicability to a “domestic company”.

Section 108 does not provide in clause (a) that it is to apply only to a domestic company. On the contrary, it applies to “any” company. Similarly, clause (b) of section 108 does not provide that it applies to a subsidiary of a domestic company. Thus, under section 108(a) a company could be a company in which the public are substantially interested even though it is not a “domestic company”. If that be so then a “subsidiary” under section 108(b) could be a “subsidiary” of a company which is not a domestic company. As stated above, the definition of a “subsidiary” under section 4(1)(c) includes a “sub-subsidiary”.

As stated above the definition of “subsidiary” under the Companies Act must be imported into the Income-tax Act. Thus, even a sub-subsidiary would be a “subsidiary” under section 108(b). Such “subsidiary” may be a “sub-subsidiary” of a company which is not a domestic company. That under section 108 a company need not be a domestic company is also clear from the circular of the Central Board of Direct Taxes and from section 2(17) of the Income-tax Act. The authority in Indo-Nippon Chemical Co. Ltd.’s case [1986] 161 ITR 635 (Bom), also supports this view.

86. Thus the Legislature was well aware that a company can be a company in which the public are substantially interested by being a subsidiary or a sub-subsidiary of a company which is not a domestic company. Knowing this the Legislature, in Paragraph F, has only provided that the assessee is to be a domestic company. 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 section 108 of the Income-tax Act. In that case, the Legislature would have in clause I(1) of paragraph F provided words to the effect “where the company and its parent company/companies is/are domestic company/companies in which the public are substantially interested”. The Legislature has purposely omitted to do so and the court cannot add words.

87. If it is held that the words “domestic company” in the opening part to clause I of Paragraph F govern the entire clause I, then there would be conflict between clause I and section 108 of the Income-tax Act. To avoid that conflict one would have to add words to section 108(b) of the Income tax Act 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. It is settled law that if two interpretations are possible, then the one which harmonises must be accepted.

It will, therefore, have to be held that so long as the assessee is a “domestic company”, it could be a company in which the public are substantially interested, even if the parent company/companies is/are not domestic company/companies.

88. In this view of the matter, it will have to be held that the assessee is domestic company in which the public are substantially interested Accordingly, the first question is answered as above.”

(iv) Applying the above decision of the Hon’ble Bombay High Court in the case of supra, we have to hold that the transaction in question cannot be regarded as transfer in view of provisions of section 47(iv) of the Act, 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 company under the Companies’ Act 1956 as the term ‘subsidiary company’ has not been defined under the Income-tax Act, 1961.

(v) Hon’ble Gujarat High Court in the case of Kalindi Investments Pvt. Ltd reported in 256 ITR 713 held as follow:-

“The Legislative has taken case to provide in section 47 of the Income-tax Act, 1961, that certain transfers shall not be considered as transfers for the purpose of levy of capital gains. Section 47 of the Income –tax Act provides 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 is not 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 according to the ordinary grammatical construction, contemplate only the immediate subsidiary company of the holding company as the holding company holds the share capital only of its immediate subsidiary company. The companies for the purpose of section 47(9v) and (v). The wider definition of a holding company with emphasis on “control” as the guiding factor is not adopted in clauses(iv) and (v) of section 47.

It is 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 Income-tax Act therefore made a clear departure from the definition of holding company as contained in the Companies Act. Hence, there is no justification for invoking clauses (c) of sub-section (1) of section 4 of the 1956 Act while interpreting the provisions of clauses (iv) and (v) of section 47.”

(vi) This judgment was followed and applied by the ld. CIT(A). If the above proposition of law laid down by the Hon’ble High Court of Gujarat is applied to the facts of this case, then we have to come to our conclusion that the transaction in question does not fall within the ambit of provisions of section 47(iv) of the Act.

(vii) After going through the two judgments referred above, we prefer to follow the decision of the Hon’ble High Court of Bombay in the case of Petrosil Oil Co. Ltd as in our 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.

(viii) Hence, respectfully following the decision of the Hon’ble High Court of Bombay in the case of supra, we hold 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) of the Act. 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.