TMI Blog1993 (6) TMI 110X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be stretched beyond its true limits. In regard to the transfer of shares revenue cannot put any condition and the course beneficial to the assessee should be adopted. The tax advantage was available by virtue of the provisions laid down in the statute. No colourable device was adopted to reduce the tax liability. The dominant object of the transfer was not tax saving, incidence of taxation, resulting in tax saving is only consequential. McDowell principle can be applied only to dubious devices resulting in avoiding of tax. 4. It was argued that the transaction of sale of shares of the impending amalgamated company, by the assessee company was a bona fide transaction. It cannot be construed to be 'sham" or "collusive". The assessee in fact, realised not only the price for the shares sold but also the separate loan granted earlier to the transferee. It, therefore, realised market value of an asset which if not sold before its impending merger would have been completely lost by way of cancellation of such shares on merger. Therefore, commercial expediency was the dominant motive behind the transaction. In view of imminent merger, maintaining the group ownership percentage in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany chargeable under the head 'capital gains' of the year in which the transfer took place. It was therefore contended that the case of the assessee comes clearly within the ambit of the ratio laid down by the apex court in the case of McDowell Co. Ltd. He also relied on some precedents. 6. We have heard the rival submissions in the light of material placed before us and precedents relied upon. Section 47 prescribes as under : "47. Nothing contained in section 45 shall apply to the following transfers : (iv) any transfer of capital asset by a company to its subsidiary company if--- (a) the parent company or its nominee hold the whole of the share capital of the subsidiary company, and (b) the subsidiary company is an Indian company." Assessee company satisfied both the conditions and claimed that capital gain in question was not exigible to tax. Revenue rejected the claim of the assessee. The ratio of the McDowell Co. Ltd.'s case was applied in view of the following facts : (i) The capital of the subsidiary (NTPL) was only Rs. 500 i.e., five equity shares of Rs. 100 each. (ii) The subscribers were Mrs. G. K. Batlivala and Mr. K. C. Harogan, two executives of Bomb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection it was observed : "It scarcely lies in the mouth of the taxpayer who plays with fire to complain of burnt fingers". The march of law against tax avoidance scheme continued and came significant departure from the Westminster's and Fisher Executor's principle. Lord Atkin who himself dissented in the Duke of Westminster's case observed in United Australia Ltd. v. Barclays Bank Ltd. [1940] 4 All ER 20 : "When these ghost of the past stand in the path of justice, clankering their medieval chains, the proper course for the judge is to pass through them undeterred". 9. In W. T. Ramsay Ltd. v. IRC [1982] AC 300 (HL), the House of Lords had to consider a scheme of tax avoidance which consisted of a series of combination of transactions each of which was individually genuine, but the result of all which was avoidance of tax. Lord Wilberforce, with great force observed : "Given that a document or transaction is genuine, the court cannot go behind it to some supposed underlying substance. This is the well known principle of Duke of Westminster. This is a cardinal principle, but it must not be overstated or overextended. The significance of Ramsay as turning point in the interpretation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ' of the previous year in which such transfer took place'." 11. The scope of the amended section was explained in the notes on clauses as under : "Clause 13 seeks to insert a new section 47A in the Income-tax Act, relating to withdrawal of exemption from capital gains in certain cases. Under clause (iv) of section 47 of the Income-tax Act, capital gain arising from the transfer of a capital asset by a company to its wholly-owned subsidiary company is exempted from tax. Similarly, under clause (v) of section 47, capital gain arising from the transfer of a capital asset by the subsidiary company to the holding company is also exempt from tax. Exemption under these provisions is allowed only if the transferee company is an Indian company. The proposed new section seeks to provide that, if at any time before the expiry of eight years from the date of transfer of a capital asset referred to in section 47(i) or (v), such capital asset is converted by the transferee company into, or is treated by it as, stock-in-trade of its business; or the parent company (or its nominee) or, as the case may be, the holding company ceases to hold the whole of the share capital of the subsidiary compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... three trust deeds together and see 'the game of the hidden purpose' behind these trust deeds which were, in fact, for the sole and exclusive benefit of the assessee. He drew our attention to the observations of justice Chinnappa Reddy, with which other learned judges of the Full Bench agreed in McDowell Co. Ltd. v. CTO [1985] 154 ITR 148 (SC). He invited us to hold that having regard to the taxing statute, the tax avoidance device should be exposed. Justice Chinnappa Reddy has noticed the change in judicial attitude to tax avoidance devices. Justice Reddy mentioned that in the country of its birth, the principles of Westminster, of condoning tax avoidance have been given a decent burial. In that very country, the phrase 'tax avoidance' is no longer condoned or looked upon with sympathy. It is true that tax avoidance in an underdeveloped or developing economy should not be encouraged on practical as well as ideological grounds. One would wish, as noted by Reddy, J., that one could get the enthusiasm of Justice Holmes that taxes are the price of civilization and one would like to pay that price to buy civilization. But the question which many ordinary taxpayers very often, in a cou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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