TMI Blog1989 (11) TMI 68X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. On making further inquiries the following facts emerged : (1) The appellant during the year under consideration purchased the entire share capital of five companies which thereby became its wholly owned subsidiaries. This entailed a total investment of Rs. 35,000. (2) That shares of various Joint Stock Companies including those of Shri Ambica Mills Ltd. were sold to the 5 subsidiaries at book value although the market value was considered to be much higher. (3) That in the process the appellant company transferred a major part of its investment in shares to the subsidiaries. (4) That at the end of 30-6-1984 relevant to A.Y. 1985-86 the appellant was not holding any shares in the companies which were in the A.Y. under consideration its wholly owned subsidiaries. (5) That the funds to purchase the shares at book value were provided by the appellant company to the subsidiaries in the form of loans. (6) That the subsidiary companies were formed primarily with the intention of transferring the shares held by the appellant company to various "family trusts". (7) That these companies were promoted by various persons who were shareholders in the appellant company, their fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company on 24-2-1987. 34. The assessee company's reply dated 2nd March, 1987 refers in some detail to Supreme Court decision in case of K.P. Varghese reported in 131 ITR at page 597. The case of K. P. Varghese v. ITO [1981] 131 ITR 597 (SC) really deals with section 52(2) only. However there is discussion regarding section 52(1) also. The Honourable Judges have observed on page 607 that, once it is found that the consideration in respect of transfer is understated and conditions specified in sub-section 52(1) are fulfilled, the ITO will not be called upon to prove the specific extent of concealment. In the present case, there is not the slightest doubt that consideration declared was far below the market price of shares on the date of transfer. In the present case, purchase of controlling number of shares of five subsidiary companies by group of persons at a throw away price of Rs. 100 per share on the pretext that offer of right shares were not accepted by holding company, because of shortage of funds, when the same company can advance as loan to the same subsidiaries, about Rs. 30 lakhs, does not require any further proof that series of transactions entered into by holding co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certainable selling price. Assessee's mention of section 47(iv) in the notes presupposes the possibility of determination of capital gains. By this section, namely, section 47(iv) transfer by holding company to wholly owned subsidiary company was not to be regarded as transfer for the purposes of section 45. When no capital gains can be determined because of the applicability of section 47(iv), then the provisions of section 47A are applicable in the circumstances narrated therein i.e. when the holding company ceases to hold the whole of the share capital of the subsidiary company within a period of eight years from the date of transfer of capital asset referred to in section 47(iv) of the Act. Section 47A provides that in such circumstances, the amount of profits or gains not charged under section 45, by virtue of provisions of section 47(iv) shall be deemed to be income chargeable under the head 'Capital gains' of the previous year in which such transfer took place. Applicability of section 45, cannot be avoided by simple device of an understatement of consideration received or receivable on transfer of a capital asset. 38. ............................... 39. ................ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uting 'cost of acquisition' for original shares and bonus shares. The assessee company has claimed that cost of acquisition of bonus shares should be taken to be the average cost of shares including bonus shares i.e. total amount actually paid should be divided by total number of shares including purchased shares and bonus shares. The assessee company has also exercised the option given under section 55 to substitute 1-1-64 price in respect of shares held by it earlier to 1-1-64 for the purpose of calculating 'capital gains' arising if any on the transfer of shares to subsidiaries." 4. The CIT (Appeals) confirmed the action of the ITO on an identical line of reasoning. 5. It is in the aforesaid circumstances that the present appeal has been preferred to the Tribunal. The learned counsel for the assessee advanced lengthy arguments but for purposes of disposing of the present appeal it would be appropriate to summarise these arguments. These are as follows : (1) That the onus was on the Revenue to prove that extra consideration over and above what had been stated and received had changed hands between the parties. (2) That although the decision of the Supreme Court in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot only subjected to tax in the hands of the appellant company but a corresponding deduction had been allowed to these subsidiary companies in their tax assessments. (14) That the appellant company held shares of various Joint Stock Companies aggregating 51.78 lacs (book value) and the shares disposed of to the subsidiary companies amounted to Rs. 28 lacs and odd the balance remaining with the assessee company being Rs. 23 lacs and odd. In other words the entire shareholding had not been diluted. (15) That in case the shares had in fact been sold at market value the appellant company was entitled to exemption under section 47(iv). (16) That the law did not prohibit the formation of subsidiary companies and in the present case the department had not only accepted the status of the assessee as a parent company but also the status of the other companies as subsidiary companies and completed the tax assessments accordingly. (17) That the figure as reflected in the approval sought from the Government under the M.R.T.P. Act be accepted in view of proviso (b) to section 52. (18) That the rate of interest charged from the subsidiary companies on the amounts advanced to them was t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1987] 168 ITR 472 (Guj.). The learned counsel for the assessee finally made an impassioned plea for the acceptance of the viewpoint canvassed by him and the deletion of the addition made by the I.T.O. 6. The learned DR on the other hand strongly supported the orders of the authorities below. His subsequent arguments were in fact a reiteration of those as had weighed with the authorities below in rejecting the viewpoint put forth by the appellant company. He however highlighted the following : (a) That 50% of the investments in shares by the appellant company had ultimately found their way into the hands of various trusts whose beneficiaries were shareholders in the appellant company. (b) That the capital gain was reduced to a figure of Rs.1 lac and odd only as a result of the assessee exercising the option under section 55. (c) That the various decisions of the Gujarat High Court relied upon by the assessee's counsel were prior to the decision of the Supreme Court in the case of McDowell Co. Ltd. and that this would not advance the assessee's case in any manner. (d) That the note in the original return of income as also the revised return vis-a-vis section 47(iv) was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t been a transfer of shares with a high market value from the appellant company to its subsidiaries and the ultimate control of these subsidiaries coming under various Trusts in which the shareholders of the company and their relatives were the beneficiaries. This however did not appear to be so after the facts of the case were analysed in detail and as would be apparent from the discussion in the paras that follow :-- 11. The ITO in this case invoked the provisions of section 52(1) which prior to their omission stood as under : "(1) Where the person who acquires a capital asset from an assessee is directly or indirectly connected with the assessee and the I.T.O. has reason to believe that the transfer was effected with the object of avoidance or reduction of the liability of the assessee under section 45, the full value of the consideration for the transfer shall, with the previous approval of the Inspecting Assistant Commissioner, be taken to be the fair market value of the capital asset on the date of the transfer." 12. It is clear that the applicability of the aforesaid provisions presupposes an object to avoid or reduce the liability of an assessee under section 45. Let ..... X X X X Extracts X X X X X X X X Extracts X X X X
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