1989 (11) TMI 68 - AT - Income Tax

Issues Involved:
1. Addition of Rs. 1,02,001 under "Long term capital gain".
2. Allowability of a loss of Rs. 160 under "Short term capital gain".
3. Applicability of Section 52(1) of the Income Tax Act.
4. Interpretation and applicability of Section 47(iv) and Section 47A.
5. Alleged tax avoidance scheme.
6. Validity of transactions and their acceptance by the department.
7. Consideration of market value vs. book value in share transactions.

Detailed Analysis:

1. Addition of Rs. 1,02,001 under "Long term capital gain":
The appellant company sold shares to its wholly-owned subsidiaries at book value, which was significantly lower than the market value. The ITO added Rs. 1,02,001 as "long term capital gain," alleging that the transactions were designed to avoid capital gains tax. The CIT (Appeals) upheld this addition. The Tribunal examined the facts and found no evidence of extra consideration beyond the stated amount, concluding there was no motive to avoid tax. Consequently, the addition of Rs. 1,02,001 was deleted.

2. Allowability of a loss of Rs. 160 under "Short term capital gain":
The ITO allowed a deduction of Rs. 160 as a loss under "Short term capital gain". The Tribunal, in line with its conclusion that the provisions of section 52(1) were not applicable, directed that this loss should stand withdrawn.

3. Applicability of Section 52(1) of the Income Tax Act:
Section 52(1) was invoked by the ITO, which allows the ITO to substitute the market value of a capital asset for the stated consideration if the transaction aims to avoid or reduce tax liability. The Tribunal found that the transactions were genuine, and there was no understatement of consideration or receipt of extra consideration. The Tribunal concluded that the provisions of Section 52(1) were not applicable.

4. Interpretation and applicability of Section 47(iv) and Section 47A:
The appellant argued that the transactions were exempt under Section 47(iv), which excludes transfers of assets between a holding company and its wholly-owned subsidiaries from being considered as transfers for capital gains purposes. The ITO countered that Section 47A would apply if the holding company ceased to hold the entire share capital of the subsidiary within eight years. The Tribunal found that the appellant did not derive any capital gain from the transactions, thus Section 47(iv) was applicable, and the provisions of Section 47A were not triggered.

5. Alleged tax avoidance scheme:
The ITO alleged that the series of transactions constituted a scheme to avoid capital gains tax, referencing the Supreme Court's decision in McDowell & Co. Ltd. The Tribunal found no evidence of a scheme or device to avoid tax, noting that the transactions were genuine and all entities involved were accepted by the department. The Tribunal concluded that the decision in McDowell & Co. Ltd. was not applicable.

6. Validity of transactions and their acceptance by the department:
The Tribunal noted that all transactions between the appellant and its subsidiaries, as well as subsequent transactions involving trusts, were accepted by the department. There was no allegation of extra consideration received by the appellant. The Tribunal emphasized that the transactions were genuine and there was no motive to avoid tax.

7. Consideration of market value vs. book value in share transactions:
The ITO substituted the book value of the shares with their market value, alleging that the shares were sold at a significantly lower price to avoid tax. The Tribunal found that the appellant had not received any extra consideration beyond the book value and that the transactions were genuine. The Tribunal concluded that the substitution of market value was not justified.

Conclusion:
The Tribunal allowed the appeal, directing the ITO to delete the addition of Rs. 1,02,001 and withdraw the loss of Rs. 160, concluding that the provisions of section 52(1) were not attracted. The transactions were found to be genuine, and there was no evidence of tax avoidance or understatement of consideration.

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