TMI Blog2010 (2) TMI 123X X X X Extracts X X X X X X X X Extracts X X X X ..... be placed by Revenue would amount to reading words into S.92 - the transfer pricing provisions in Chapter X are not attracted. ACHL is not obliged to withhold tax under S.195 of I.T.Act - 817/2009 - - - Dated:- 23-2-2010 - PRESENT Mr. Justice P.V. Reddi and Mr. J. Khosla,JJ. Present for the Applicant: Mr.Percy Pardiwalla, Ms.Aarti Sathe, Mr.Pierre Sommereigns, Mr.Vijay Dhingra, Mr. Aditya Patkar, JJ. Present for the Department: Mr.T.N.Chopra, Mr. Shivendra Kumar Singh, Mr.G.Gurusamy. RULING This application is filed by a non-resident Company under Section 245Q(1) of the Income-tax Act 1961 (hereafter referred to as IT Act). The following facts are stated in the application: 2. The applicant (hereafter referred to as AIH) is a company incorporated in the Kingdom of Bahrain. AIH is an investment company having investments in various Asian, European as well as Latin American companies. AIH is owned 99% by South Arabian Amiantit Company ("SAAC"), listed on the Saudi Stock Exchange and 1% by a trustee acting on behalf of SAAC. Amiantit Fiberglass Industries (India) Private Limited ("AFIIL") is an Indian company engaged in the production of glass reinforced po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares at par value of Rs.10/- each in AFIL. The Group has gone and is going thorough a reorganization process which includes, inter alia, holding of participation in the Subsidiary in the Company. Within the framework of the reorganization of Amiantit Group of Companies, the contributor proposes to contribute the shares in the Subsidiary to the Company by means of a contribution. 7. The main operative clauses of the draft Contribution agreement are: 3.1. The Contributor does hereby transfer and set over unto the Company, and the Company does hereby accept, as of the Effective Date, all of the Contributor's present and future right, title and interest in, under and with respect to the Contributed shares. 3.2. The Contributor will at any time and from time to time, after the Effective Date, execute and deliver such further instruments of conveyance and/or transfer and take such other action as and when reQuested by the Company as may be necessary to convey and transfer to the Company good title in, and possession of, the Contributed Shares. All the rights, benefits, interests and burdens of the Contributed shares will be for the account of the Company as of the Effective da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision under Section 45 stands excluded. In the application, stress was laid on the second aspect i.e, the transfer being in the nature of gift. However, in the course of hearing, arguments were advanced by the learned counsel for the applicant on both the points. 14. The Revenue contends that the charge under section 45 is squarely attracted and that the mere fact that money consideration has not passed would not put the transfer out of the domain of section 45. The purported transfer is not without consideration and it is not gratis; it is based on business considerations aimed at deriving certain financial advantages as a part of reorganization process. Though the proposed contribution of shares has been given the form of gift, there is in substance no gift because, in ultimately analysis, the donor will not be poorer to the extent of assets he parted with. It is contended that the expression 'gift' has to be assigned the meaning which it has under the general law, i.e. T.P. Act. In the view we have taken, there is no need for us to discuss whether Section 47(iii) is also attracted in the instant case. 15. We shall, before proceeding further, refer to the relevant provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely: (i) expenditure incurred wholly and exclusively in connection with such transfer ; (ii) the cost of acQuisition of the asset and the cost of any improvement thereto. 16. The expression 'income' includes profits and gains (vide section 2(24). 17. Leaving apart the controversy whether Section 47(iii) is attracted, the answer to the Question can be found within the realm of Sections 45 and 48. The relevant Questions which need to be answered for resolving the controversy are: (i) Did any profit or gain arise from the transfer of capital asset (in the form of shares of AFIL)? (ii) Is it possible to identify or Quantify the value of the consideration received or accruing to the applicant as a result of the transfer? It is obvious that these Questions are based on the language of sections 45 and 48 respectively. In our view, the answer to these Questions could only be in the negative. We reach this conclusion by interpreting the language employed in the charging provision (Section 45) as well as the computation provision (section 48), drawing sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T vs. Ashokbhai Chimanbhai [1965] 56 ITR 42. 22. Broadly speaking, 'gains' is really the eQuivalent of profits (vide Mersey Docks Board vs Joseph Lucas (VIII App.cases, 891, H.L). However, as observed by the Rajasthan High Court in the case of CIT vs. Hycon India Ltd. (308 ITR 251) the word 'gain' is not limited to pecuniary gain unlike 'profits', though profit includes an element of gain. 23. It is clarified in more than one decision that ' income' is a more general term than profits or gains and the expression income is not limited by the words "profits and gains" (Vide the observations of Privy Council in Raja Bahadur Kamakshya Narain Singh vs CIT(11 ITR 513 at 522 ). 24. In Poona Electricity Co. Ltd. vs CIT 57 ITR 521 the Supreme Court clarified that "income tax is a tax on real income i.e. the profits arrived at on commercial principles subject to the provisions of the Income-tax Act". The same idea was expressed in different words in CIT vs Shoorji Vallabhdas Co Ltd. (46 ITR 144). It was said that income-tax is a levy on income. "No doubt, the income-tax Act takes into account two points of time at which the liability to tax is attracted, viz. the accrual of the incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 27. In CIT vs Ashokbhai Chimanbhai (Supra), J.C. Shah, J. observed that the words accruing and arising are used to contra-distinguish the word "receive". "Income is said to be received when it reaches the assessee: when the right to receive the income becomes vested in the assessee, it is said to accrue or arise". 28. In CIT vs Ahmedbhai Umarbhai Co. 18 ITR 472 which is a decision of a five Judge bench of the Supreme Court, M.C. Mahajan, J observed at page 496 thus- "Whether the words "derive" and "produce" are or are not synonymous with the words "accrue" or "arise" it can be said without hesitation that words "accrue" and "arise" though not defined in the Act are certainly synonymous and are used in the sense of "bringing in as a natural result." Strictly speaking, the word "accrue" is not synonymous with "arise", the former connoting the idea of growth or accumulation and the latter of the growth or accumulation with a tangible shape so as to be receivable. There is a distinction in the dictionary meaning of these words, but throughout the Act they seem to denote the same idea or ideas very similar and the difference only lies in this that one is more appropriate when ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er. This is the stand taken at page 11-12 of written submissions of Revenue's counsel. Thus, the full value of consideration for the transfer of shares is sought to be deduced from the overall objectives of reorganization and the resultant changes in investment. It is not explained how they can be evaluated in terms of money or to borrow the words of P.N. Bhagwati, J in 56 ITR 152, how they are capable of being turned to pecuniary account. Viewed from another angle, has the transferor acquired any right to receive an identifiable and monetarily convertible benefit though not money from the transferee? Is there anything concrete or definite which the transferee gives or makes over to the transferor as a Quid pro Quo for the receipt of shares? The answers to all these Questions could only be in the negative. One has to grope in darkness to find valuable consideration for the transfer. By transferring the Indian Company shares to its 100% subsidiary, the applicant, in our view, will derive no profit and make no gain. Nothing in the form of money or money's worth or nothing capable of being turned into money will accrue or arise to the applicant on the date of transfer. Therefore, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n enunciated in the above passage and the test laid down by the learned judges in the above case, we have no hesitation in holding that no consideration would accrue or arise to the applicant by the transfer of shares and the applicant cannot be said to have derived any profit or gain from the transaction. We may add that if the 'consideration' is such that it is incapable of being valued in definite terms or it remains unascertainable on the date of occurrence of taxable event, the Question of applying Section 45 read with section 48 of the IT Act does not arise. 34. In the case of K.P. Varghese vs ITO (SC) 131 ITR 597, the Supreme Court laid stress on the words "full value of the consideration received or accruing" and observed what in fact never accrued or was never received cannot be computed as capital gains under section 48. Considering the inter-play between sub-section (2) of section 52 and section 48, the Supreme Court further observed - "Moreover, if sub-s.(2) is literally construed as applying even to cases where the full value of the consideration in respect of the transfer is correctly declared or disclosed by the assessee and there is no understatement of the cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld that if the set-off of loss was not permissible owing to the fact that the income or profits of the subseQuent years were from a non-taxable source, there would be no point in allowing the loss to be carried forward. We do not see how this decision is of any relevance at all in deciding the issue. The observations made in a totally different context are sought to be pressed into service. The decision does not in any way support the contention of the Revenue's counsel that if capital loss resulted to the applicant by reason of transfer of shares with 'nil' consideration, still, he must be deemed to have made some profit or gain. 38. The learned counsel for Revenue also referred to the decision of Punjab Haryana High Court in Shreyans Industries Ltd. vs Jt. Commissioner of IT 57 ITR 521. In that case, the assessee sustained a loss on account of transfer of land to the Forest department in lieu of the use of forest land for laying the drainage system. The assessing officer treated the loss as capital loss whereas according to the assessee, it should have been allowed as business loss. The Tribunal upheld the view of assessing officer and the High Court affirmed the order of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ken care of by Section 92 and other related provisions in Chapter X. It must be noted that the income chargeable under the Act is divided into various heads under Section14. The heads of income specified in that Section are .. The income in the present case, if at all, is traceable to 'Capital gains' which is one of the heads of income. If by application of the provisions of Section 45 read with Section 48 which are integrally connected with each other, the income cannot be said to arise, Section 92 of the Act does not come to the aid of Revenue, even though it is an international transaction. The expression 'income' in Section 92 is not used in a sense wider than or different from its scope and connotation elsewhere in the Act. Section 92 obviously is not intended to bring in a new head of income or to charge the tax on income which is not otherwise chargeable under the Act. The interpretation sought to be placed by Revenue would amount to reading words into S.92. I have, therefore no hesitation in rejecting the Revenue's contention. In the case of Vanenburg Group B.V., In re[289 ITR Pg 464 at 472], this Authority while referring to the provisions in Chapter X, observed: "Thes ..... X X X X Extracts X X X X X X X X Extracts X X X X
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