TMI Blog2013 (7) TMI 543X X X X Extracts X X X X X X X X Extracts X X X X ..... for transfer of shares by the shareholders and this route the assessee has adopted in the instant case - By transferring 98.3% of shares held by the shareholders, virtually, the complete control of the company has been handed over to the BFSL and they have received the consideration for the shares held by them, may be proportionate to the value of the land on the date of transfer. But that does not make the transaction “colourable” or “unreal” or “sham.” - security transaction tax to Magadha Stock Exchange. Where all these three conditions stipulated under Section 10(38) of the Act are fulfilled, the assessee is entitled to the benefit flowing there from. If the share holder chooses to transfer the lands and part with the land to the purchaser of the shares, it would be a valid legal transaction in law and merely because they were able to avoid payment of tax, it cannot be said to be a colourable devise or a sham transaction or an unreal transaction - Decided in favour of assessee. - ITA No.120 of 2011 - - - Dated:- 9-4-2013 - N Kumar And B Manohar, JJ. For the Appellant : Sri Jehangir D.J Mistri, Sr. Counsel for Sri. S.Parthasarathi, Sri Mallaharao K., Adv For the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ap by inducting interest free funds from their own sources. 3. One M/s R.K. Makhija and Company, Registered Valuers were entrusted with the job of valuing 30 acres which is to be sold. The said valuers vide their valuation report dated 15.3.2002 valued the said land at Rs.25 Lakhs per acre. IDBI, the Monitoring Agency and AAIFR accepted the valuation of M/s Makhija at Rs.25 Lakhs per acre while approving the Rehabilitation Scheme. One Aeekay Enterprises offered Rs.20 Lakhs per acre for purchase of the said land. However, in the meeting held on 8.7.2002 the committee resolved that the offer of Rs.20 Lakhs per acre by Aeekay Enterprises was low and the company may release advertisement in Economic Times, Mumbai and New Delhi as the land was ideally suited for large complexes like Multiplex/IT Park, etc., It was made clear that, if no worthwhile offer was received within 10 days from the date of release of advertisement, then the company had no other alternative but to request the promoters/group companies to purchase the land with the price not less than Rs.25 lakhs per acre. Thereafter, the company was directed to issue paper notification inviting tenders for purchase of the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r short hereinafter referred to as the Act ). Thereafter, the assessee in the financial year related to the relevant assessment year 2006-07 sold its shareholdings in BFSL to the extent of 45,350 shares for a net consideration of Rs.20,29,08,626/- after paying Security Transaction Tax, Service Tax, etc., The sales were executed through a registered stock broker on a recognized stock exchange namely M/s Magadh Stock Exchange Association. The shares were sold to DLF Commercial Developers Limited. The assessee claimed the gain on sale of shares as exempt from taxation under Section 10 (38) of the Act. 6. The assessing authority proposed to bring to tax the gain arising on the sale of the shares as short term capital gain on sale of the immovable property by holding that the transaction was virtually for sale of the immovable property to DLFCDL and the sale of shares was only a devise to escape from taxation. The share holders of BFSL by selling the shares to DLFCDL vested the immovable property in DLFCDL and it is the devise to transfer the immovable property to DLFCDL and the property having been held by BFSL for a period of less than 36 months and therefore the capital gains is r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs.89,28,36,500/-. The substance of the transaction is apparent now. Bhoruka Steels Limited sells its landed property to its associate concern BFSL for a consideration of Rs.3.75 crores and immediately thereafter the shares in BFSL are sold and transferred to DLF-CDL for a consideration of more than Rs.89 crores. If the formalities of the transactions and the legal nature of the corporate bodies are ignored for a moment, the stark fact coming to surface is that the assessee s group has sold the property belonging to one of its concern to DLF-CDL for a consideration of more than Rs.89 crores through the medium of sale and transfer of shares which property was purchased for Rs.3.75 crores and thereby made attempt to avoid payment of short-term capital gains tax. If this is not a colourable device, then what would be a colourable device? Therefore, it held the series of transactions were well planned scheme so as to transfer valuable landed properties to DLF-CDL without attracting corresponding liability of tax. The whole transaction has been arranged in a sequential manner with M/s Bhoruka Steels Limited selling its landed property to BFSL for a nominal value of Rs.3.75 crores. BF ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rporated prior to that date. Neither the assessee company nor BFSL are companies which came into existence as a part of the scheme to purchase the land in question and evade payment of tax as sought to be made out by the authorities. The authorities seem to have been carried away by the fact that, before sale of shares, the BFSL sold away all its other assets and it is only thereafter the shareholders of BFSL have entered into an agreement to sell their shares in favour of DFL. In the agreement there is a reference to the immovable property which according to the authorities is proof of the colourable device adopted by the assessee to evade payment of tax. Even if the veil is lifted and if these companies are looked into, the assessee is formed somewhere in the year 1971, BFSL came into existence in 1984 and Bharuka Steels which owned this property became a sick industry only somewhere in the year 1996 and the revival scheme by the BFSL was formed in 2000 and it is in pursuance of the same, excess land 30 acres belonging to Bharuka Steel was sold and in such sale one of the sister concern has purchased this property. None of these facts could be termed as unreal. They are all event ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shareholders. The Promoters of M/s.BFSL sought permission from SEBI to exempt them from making public announcement in respect to sale of 1,98,850 equity shares to M/s.DLFCDL, New Delhi. They disclosed the rate of Rs.2,400/- per share for the purpose of selling the shares to DLFCDL. The shares were listed in the Bangalore Stock Exchange. It hardly got traded. The last quoted value of this share was Rs.5/- in the year 1985. During the financial year 2004-05, M/s.BFSL sold all the listed equity shares. Accordingly, the investments which were worth Rs.4.61 Crores as on 31.03.2004 got reduced to Rs.3.85 Crores as on 31.03.2005. These investments as on 31.03.2005 were equity shares of M/s.Bhoruka Power Corporation Limited. M/s.BFSL systematically reduced its investments except that of the land which it purchased from M/s.Bhoruka Steel Limited. As on 31.03.2004, there was no fixed asset in the Company. It had only Rs.4.61 Crores of investments and Rs.4.65 Crores of loans and advances as on 31.03.2004. On 16.06.004 and 30.06.2004, M/s.BFSL acquired land of 15 acres for Rs.3.75 Crores from M/s.Bhoruka Steel Limited. During the financial year 2004-05, M/s.BFSL sold all listed equity shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vs- CTO (1985) 154 ITR 148 wherein it is held that the position of law is that if substance attracts tax, the form can be ignored by the tax collector. Following the well settled principle, the Assessing Authority held that the substance of the transaction of the assessee-company is that the land was transferred in the form of sale of shares. The shareholders to the extent of their share become the owners of this land in the company. The land was transferred to M/s.DLFCDL by way of above circuitous transaction. The land has to be held for a period of 36 months as a long term capital asset, since the land was sold during August 2005, the gains arising to the assessee-company would be short terms capital gain. 13. The Appellate Authority affirmed the said findings of the Assessing Authority. However, the Tribunal was of the view the transaction in question was a colorable device to avoid payment of short term capital gain tax. In the light of the aforesaid undisputed facts, the question arises for consideration is: Whether the transfer of shares by the assessee in M/s.BFSL within effect would have the effect of M/s.DLFCDL which acquire the lands becoming entitled to the immov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is such that the judicial process may accord its approach to it . 15. The Apex Court subsequently had an occasion to consider this judgment in the case of Union of India and another vs- Azadi Bachao Andolan and another [AIR 2004 SC 1107]. In the aforesaid decision, after referring to the entire catena of cases up-to-date including the aforesaid Constitution Bench judgment as well as the opinion expressed in the said judgment by Justice Chinnappa Reddy, the Apex Court held as under: 146. With respect, therefore, we are unable to agree with the view that Duke of Westminster is dead, or that its ghost has been exorcised in England. The House of Lords does not seem to think so, and we agree with respect. In our view, the principle in Duke of Westminster is very much alive and kicking in the country of its birth. And as far as this country is concerned, the observations of Shah, J. in CIT v. Raman are very much ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... legal right of tax payer to decrease the amount of what otherwise would be his taxes, or altogether to avoid them by means which the law permits, cannot be doubted. The basic proposition underlining this taxation law is that any tax payer is entitled so as to order his affairs in such a manner as to see that his liability to tax is as how as possible. If the tax payer is in a position to carry through a transaction in two alternative ways, one of which will result in liability to tax and the other of which will not, is at liberty to choose the latter and to do so effectively in the absence of any specific tax avoidance provision. The fact that the motive for a transaction may be to avoid tax does not invalidate it unless a particular enactment so provides. Every person is entitled to so arrange his affairs as to avoid taxation but the arrangement should be real and genuine and not a sham or make-believe. A tax payer may resort to a device to divert the income before it accrues or arises to him. Effectiveness of the device depends not upon considerations of morality, but on the operation of the Income-Tax Act. Colourable devices cannot be part of tax planning. A tax-saving motivatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... devices. Reading Mc.Dowell, in the manner indicated hereinabove, in cases of treaty shopping and / or tax avoidance, there is no conflict between Mc.Dowell and Azadi Bachao or between Mc.Dowell and Mathuram Agrawal. 18. Justice K.S.Radhakrishnan J., who has written a separate but a concurring opinion dealing with the question whether Mc.Dowell calls for re-consideration has observed as under: Revenue cannot tax a subject without a statute to support and in the course we also acknowledge that every tax payer is entitled to arrange his affairs so that his taxes shall be as low as possible and that he is not bound to choose that pattern which will replenish the treasury. Revenue s stand that the ratio laid down in Mc.Dowell is contrary to what has been laid down in Azadi Bachao Andolan, in our view, is unsustainable and, therefore, call for no reconsideration by a larger Bench. 19. In view of the judgment of the Apex Court in Vodafone, it is held that tax planning may be legitimate provided it is within the frame work of law . Colourable devices cannot be a part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid payment o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the material on record has to be carefully examined to find out whether the transaction is sham or unreal or colourable device to evade payment of tax. 20. In the instant case, as set out above, according to the revenue, on the day the assessee transferred their share from BFSL, the only property which was available in BFSL was this land. Before transfer of the shares, the BFSL has systematically reduced this investment except that of the land instead of trading its shares through BSE. The shares were traded through Magadh Stock Exchange. In the agreement entered into for transfer of shares, reference is only made to the sale of the land. Therefore, what was attempted to for transfer of shares is nothing but the transfer of immovable property. On the date of transfer, BFSL has become a Shell company. Therefore, it was a deliberate structural device to avoid tax implications. The grievance is, the property which was purchased for 3.75 Crores was sold to a consideration of Rs.89,28,36,500/-, the assessee share being Rs.20,29,08,626/- without paying capital gain tax. From these facts, it is clear DLFCDL paid the market value and purchased the shares from the assessee. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a previous year of any person, any income falling within any of the following clause shall not be included. 22. Clause (38) of Section 10 of the Income-tax Act on which reliance is placed reads as under: 10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included - .. .. (38) any income arising from the transfer of a longterm capital asset, being an equity share in a company or a unit of an equity oriented fund where - (a) the transaction of sale of such equity share or unit is entered into on or after the date on which Chapter VII of the Finance (No. 2) Act, 2004 comes into force; and (b) such transaction is chargeable to securities transaction tax under that Chapter : Provided that the income by way of long-term capital gain of a company shall be taken into account in computing the book profit and income-tax payable under Section 115JB.. Explanation. - For the purposes of this clause, "equity oriented fund" means a fund - (i) where the investible funds are invested by way of equity shares in domestic companies to the extent of more than [sixty-f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exploited within four corners of the law, it is open to the Parliament to amend the law plugging the loophole. However, by any judicial interpretation we cannot read into the Section, which was not intended to, by the Parliament at the time of enacting this provision. The language employed in Section 10(38) of the Act is simple and unambiguous and it makes no distinction between the transfer of share of company with an immovable asset and movable asset, instead of executing a sale deed in respect of the immovable property by the company, which is owning the land. If the share holder chooses to transfer the lands and part with the land to the purchaser of the shares, it would be a valid legal transaction in law and merely because they were able to avoid payment of tax, it cannot be said to be a colourable devise or a sham transaction or an unreal transaction. 25. As set out above, the transaction is real, valuable consideration is paid, all legal formalities are complied with and what is transferred is the shares and not the immovable property. The finding of the Assessing Authority that it is a transfer of immovable property is contrary to law and contrary to the material on rec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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