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B.A. Mohota Textiles Traders Pvt. Ltd. Versus The Deputy Commissioner of Income-tax, Special Range-2, The Commissioner of Income-tax

Capital gains tax - eligible transfer - transaction of transfer of shares by the assessee company in pursuance of family arrangement - assessee/company has a corporate veil - Held that:- in the present case, we are not concerned with the members of Mohota family who were parties to the family settlement, but with transfer of share done by the Company incorporated under the Companies Act having separate/independent corporate existence, perpetual succession and common seal. This Company is indepen .....

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mean that it is denying it's corporate existence. This, after taking advantage of the separate existence of a Company under the Act. Therefore, after having incorporated the Limited Company and given it separate existence from it's share holders, it is not open to the Company to urge “Please ignore my separate existence and look at the persons behind me.“ If that be so, the Appellant/Company must opt for voluntarily winding up and then the shares being allotted to the individual members on liqui .....

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ndents JUDGMENT ( Per M. S. Sanklecha, J. ) 1. This appeal under Section 260A of the Income Tax Act, 1961 (Act) challenges the order dt.23.4.2002 of the Income Tax Appellate Tribunal, Nagpur (Tribunal) relating to Assessment Year 1995-96. 2. This appeal was admitted on 23 March, 2007 on the following substantial questions of law : a) Whether in the facts and circumstances of the case and in law the Tribunal was right in holding that the transaction of transfer of shares by the assessee company i .....

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ances of the case and in law merely because the assessee/company has a corporate veil, will it make the transfer of shares by it assessable to capital gains tax even though such transaction is in pursuance of family arrangement ? 3. It is agreed between the parties that Question (a) above brings out the real controversy between the parties, Questions (b) and (c) are mere facets of Question (a). 4. This appeal relates to A.Y. 1995-96. 5. The brief facts leading to this appeal are as under : (a) T .....

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and differences arose between three groups of Mohota family i.e. Groups A, B and C. Consequently, with a view to settle the differences between them and restore family peace and harmony, it was decided by the three groups to refer their dispute by an agreement dt.15.1.1994 to the sole arbitration of Mr. Justice S.W.Puranik. The scope of reference to the Arbitration were as under : (a) Allotment and/or division of properties mentioned in schedule 'B' and related matters; (b) Allotment, ma .....

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ove Award distributed the properties belonging to Mohota family amongst it's three groups. The Appellant/assessee was allotted to Group 'B'. M/s.R.S.Rekchand Mohota Spinning and Weaving Mills Ltd. and M/s. Vaibhav Textiles Pvt. Ltd. were allotted to Groups 'A' and C' collectively. (d) Thus, the settlement inter alia required members of Group 'B' (Mr.Gwaldas Mohta group), who were in control of appellant/assessee, to transfer the shares held by the appellant/assess .....

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ms of the Award transferred 25,650 shares held by it in M/s.Rekhchand Mohta Spinning and Weaving Mills Ltd. and 1,22,000 shares held by it in M/s. Vaibhav Textiles Pvt. Ltd. to the members of the family of Group 'A' and Group 'C'. (f). On 30.11.1995, the appellant/assessee filed return of income for the Assessment Year 1995-96 declaring an income of ₹ 58.35 Lakhs. During the Assessment proceedings, the appellant/assessee contended that transfer of shares in M/s.Rekhchand Mo .....

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rate legal entity distinct from it's share holders, cannot be as part of family settlement/arrangement. Thus, transfer of shares done by independent entity such as the Appellant/assessee would not be covered by the 'Family Settlement' and consequently, brought the transfer of 25,650 shares for consideration of ₹ 225/- per share of M/s.Rekhchand Mohota Spinning and Weaving Mills Ltd. and 1,22,000 shares for consideration of ₹ 10/- per share of M/s.Vaibhav Textiles Pvt. Ltd .....

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the family who are parties to the settlement. In this case, the appellant/assessee was a Company incorporated under the Companies Act having a distinct and independent entity from it's share holders. Thus, while holding that the Award dt.30.4.1994 is a family settlement, the same can only be applied to members of Mohota family, who were party to the proceedings before the Arbitrator and not to a Limited Company such as Appellant/Company. Therefore, notwithstanding the fact that the Appellant .....

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order dtd. 23 April, 2003 upheld the view of the lower Authorities by holding that a family settlement would not amount to transfer as it only recognizes pre-existing rights. However, it held that the Appellant/assessee (even if controlled by members of a family), on incorporation as a Limited Company becomes a separate legal entity and the members who own shares in the Company and the Company are in law different persons. It held that there exists a veil between the members of the Company and t .....

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ort of the appeal submits as under : (a) It is undisputed position as settled by the Apex Court that a family settlement/arrangement would not give rise to any transfer. The transfer of shares by the Appellant/assessee was in pursuance of and to give effect to the family arrangement as reflected in the Award dt.30.4.1994. There was no choice with the Appellant/assessee not to transfer the shares and such transfer of shares cannot be seen de hors the family arrangement. Thus, it is submitted that .....

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he fair market value attributed to the shares by the Arbitrator was only for ascertaining and adjusting the rights of the parties to reach a family settlement. 8. As against this, Mr.Mohta, learned Counsel appearing for the Revenue submits as under : a) The appellant/assessee is a Company incorporated under the Companies Act having a separate and independent existence, different from that of it's share holders/members. Thus, the distinction between the incorporated Company and it's membe .....

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llant/assessee of it's shares in M/s.R.S.Rekhchand Mohota Spinning and Weaving Mills Ltd. and M/s. Vaibhav Textiles Pvt. Ltd. to members of Groups 'A' and 'C' is a transfer within the meaning of Section 2(47) of the Act. It does not fall under any of the exclusions provided in Section 47 of the Act. Thus, the impugned order dated 23 April, 2002 calls for no interference. 9. We have considered the rival submissions. There is no dispute before us that a family arrangement/settl .....

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es to the family settlement, but with transfer of share done by the Company incorporated under the Companies Act having separate/independent corporate existence, perpetual succession and common seal. This Company is independent and distinct from it's members. In fact, this principle dates back to the decision of House of Lords in Saloman .vs. Saloman & Co. Ltd., 1897 AC 22. Our Court in T.R. Pratt (Bombay) Ltd. vs. E.D. Sassoon and Co. Ltd., AIR 1936 (Bombay) 62 has observed as under : A .....

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orporate entity is where it is used for tax evasion. A classic illustration of this is found In Re. Dinshaw Maneckjee Petit, AIR 1927 (Bombay) 371, where the Court lifted the corporate veil as it found that the Company in this case was formed by the assessee purely and simply as a means of avoiding super tax and that the Company was nothing more than the Assessee himself. It did no business but was created purely and simply as a legal entity to ostensibly receive dividends and interest and hande .....

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nore the corporate existence of the Appellant. This lifting of the corporate veil is not allowed when it is not for the benefit of the Revenue. The Apex Court in the case of M/s. Bacha F. Guzdar vs. CIT, 27 ITR 1 has inter alia observed that A shareholder has no interest in the property of the Company...... It has only a right to participate in the profits of the Company as and when the Company decides to divide them. The Company is a juristic person and is distinct different from it's share .....

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ekhchand Mohota Spinning and Weaving Mills Ltd. and M/s. Vaibhav Textiles Pvt. Ltd. as rightly held by the Authorities under the Act. 11. The submission of learned Counsel Mr.Thakkar that the entire transaction should be looked at wholistically bearing in mind the purpose and object of the settlement as recorded in the Arbitration Award dt.30.4.1994 so as to settle the dispute between members of the family and it was to achieve aforesaid objective that the shares in the appellant/assessee were d .....

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it. But once a Company comes into existence under the provisions of the Companies Act and it is considered to be an independent entity, then it's obligation under the law as a separate legal entity has to be complied with and settlement arrived at between it's members cannot discharge the appellant/assessee from complying with it's obligations under the Law. It was also contended that the Appellant/assessee had no volition in transferring the shares. This submission overlooks the fac .....

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377; 10/- per share by the Arbitrator was only for the purposes of adjustment of rights amongst the parties. This submission overlooks the fact that the Arbitration Order annexed to the decree (Page 62 of the Appeal memo) itself records that the shares in M/s.R.S.Rekhchand Mohota Spinning and Weaving Mills Ltd. and M/s. Vaibhav Textiles Pvt. Ltd. are to be transferred at a consideration of ₹ 225/- and ₹ 10/- per share respectively. Thus, the consideration has been determined and acce .....

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olding company. The question which arose for consideration before the Calcutta High Court was whether an amalgamation between holding and subsidiary Companies would amount to transfer of capital asset in terms of Section 45 r/w. 2 (47) of the Act. The Calcutta High Court specifically referred to Section 47 of the Act and in particular, to Section 47, sub-clause (v) of the Act to hold that a transfer by a subsidiary company to the holding Company of the whole of it's share capital will not be .....

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