TMI Blog2001 (3) TMI 250X X X X Extracts X X X X X X X X Extracts X X X X ..... al but the only grievance of the Revenue is against CIT(A)'s deleting the addition, made by the AO, on account of capital gains on transfer of certain shares held by the assessee-companies, details of which are set out in the subsequent paragraph of this order. We, therefore, deem it expedient to take up all these grounds together for disposal. 3. Briefly stated, undisputed material facts of the case are that the General Electric Company plc UK (hereinafter referred to as GEC plc) is a holding company of the Associated Electric Industries Ltd., UK (hereinafter referred to as AEI Ltd.) and the English Electric Company Limited, UK (hereinafter referred to as EEC Ltd.). The shareholdings of three companies inter alia included holdings of equity shares in certain Indian companies as under: ---------------------------------------------------------------- Sl. Name of No of Name of the Indian % of capital No. foreign equity company held by the company shares foreign company ---------------------------------------------------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stand, a reference was made to s. 45(3) of the Act. It was submitted that the GEC plc had entered into an agreement, said to be dt. 22nd March, 1989, with the Compagnie Generale d' Electricite (hereinafter referred to as CGE), a France based multinational corporation, to merge the businesses that were formerly being managed by GEC Power Systems Ltd., with those of CGE-managed through its subsidiary Alsthom (We find that although reference to an agreement was made but, despite specific requisition by the AO, the assessee avoided submitting a copy of the agreement 'on the ground that the same is voluminous'). It was further stated that this agreement was effective 1st April, 1989, and, pursuant to this agreement, a new company by the name of GEC Alsthom NV was formed on 29th June, 1989 in which GEC plc Group, as well as CGE Group, were to hold equal shares at all times. In the background of these submissions, the assessee placed reliance on judgments of Hon'ble Karnataka High Court in the case of CIT vs. Master Raghuvir Trust (1984) 40 CTR (Kar) 163: (1985) 151 ITR 368 (Kar). of Hon'ble Supreme Court in the case of Sunil Siddarthbhai vs. CIT (1985) 49 CTR (SC) 172 : (1985) 156 ITR 50 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which merger is said to have taken place vide agreement between GEC plc and CGE France) has no relevance for the purpose of computation of capital gains. Coming to the case laws cited by the assessee, the AO observed that facts of Master Raghuvir Trust's case were not in pari materia with the facts of these cases. It was also stated that the ratio of Sunil Siddarthbhai's case in no longer good law, in view of the specific amendments in the statute by introducing s. 45(3) of the Act. Similarly, judgments in the case of Madura Mills Co. Ltd. and Gopal Jain Co.'s were found to be not relevant since these cases pertained to certain expressions in the Stamps Act and Companies Act, respectively. The learned AO also observed that s. 45(3) is only one segment of the charging section Mid admittedly not applicable in this case. By implication, he held that merely because a transaction is not covered by s. 45(3) of the Act, it cannot be construed as outside the ambit of section taxable capital gains under s. 45 as a whole. In substance, the AO held that transfer of shares by assessee-companies to G.E. Alsthom NV has given rise to a transaction resulting in 'capital gains' under the scheme o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... effect that (i) the law is settled that there is no tax liability where shares have been subscribed in money's worth, as in the present case; (ii) object behind the whole exercise of transfer of shares was merger of an entire division of the multinational corporation of two groups and, therefore, there is no price received in such a case in commercial sense, as held by Supreme Court in CIT vs. Mugnee Ram Bangur Co. (1965) 57 ITR 299 (SC), Syndicate Bank Ltd. vs. CIT (1985) 45 CTR (Kar) 68 : (1985) 155 ITR 681 (Kar) and Sunil Siddarth Bhai vs. CIT; (iii) in view of art. 13 of the DTAA between India and Netherlands, capital gains arising on account of said transfer were exempt from taxation in India as appellant group was operating in the Netherlands through a number of subsidiaries and associated companies and these companies were liable to tax in the Netherlands and the GEC plc UK was accordingly resident in the Netherlands according to the convention; and (iv) since, as per CBDT Circular No. 333 dt. 2nd April, 1982 (1982) 30 CTR (TLT) 18 : (1982) 137 ITR (St) 1, in case of conflict between IT Act and the provisions of DTAA, the effect is to be given to the DTAA, the AO should hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of shares said to have been allotted by the GEC Alsthom NV. Under these circumstances, the AO had no option but to take the stock exchange quoted rates as on the date of transfer. It was further stated that even this value is bound to be less than market value of shares because when transfer of controlling holdings takes place, the share prices invariably shoot up. The relevant date for the stock exchange quotation, according to the learned Departmental Representative, is the date on which the transfer takes place and, therefore, no fault can be found with the AO's taking the quoted value at the time of actual transfer of shares. The learned authorised representative further submitted that the provisions of Indo-Netherlands DTAA are not applicable in the present case and, therefore, the provisions of the IT Act will prevail, Coming to the 'no-objection certificate' issued by the AO, it was pointed out that such a certificate cannot substitute assessment order and issuance of certificate is an administrative exercise to safeguard the interests of Revenue. In any case, the assessee's statement that the certificate was issued under s. 162(2) was mischievous and entirely incorrect on f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of shares it can be said that any consideration has passed from GEC Alsthom NV to GE Group. It was then suggested that by allotment, there is no appropriation of the capital of the company and the question of any consideration flowing from the GEC Alsthom NV does not arise as this aspect of the matter needs to be considered in the background of merger of two companies. Dr. Pal strongly relied upon reported judgments in the cases of Secretary, Board of Revenue vs. Madura Mills Co. Ltd. and Shri Gopal Jalan, Co. vs. Calcutta Stock Exchange 1964 AIR 250 SC : 33 Comp Cases 862 in support of the propositions that (i) issue of shares by allotment cannot amount to transfer of property; and that (ii) allotment of shares implies the creation of shares by appropriation, out of unappropriated share capital, to a particular person. It was thus submitted that since GEC Alsthom NV allotted new shares to GEC plc, such an issuance of shares cannot be treated as transfer and, therefore, there is no question of any capital gain. Our attention was invited to the assessee's claim that the transfer of shares will not result in the capital gain as the same is in respect of a world-wide merger as a res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applicable to the persons who are not physically residents of Netherlands or India, and pointed out that transfer of shares of Indian company was completed in Netherlands when GEC Alsthom NV executed the instrument of transfer and received the share certificates. It is further submitted that the DTAA with the Netherlands defines a resident of Netherlands as including a legal person which is liable to tax under the laws of Netherlands by reason of its place of management or other criterion of similar nature. Our attention is then invited to the fact that GEC plc has been carrying on business in the Netherlands through a number of subsidiaries and is being taxed in the Netherlands on the dividend income. On the strength of these submissions, it was submitted that for the purpose of this DTAA, GEC plc is to be treated as a resident of Netherlands and will be entitled to benefit of art. 13(5) of the Indo-Netherlands DTAA. In support of the proposition that DTAAs must prevail over the IT Act in case there is any inconsistency or repugnance between the DTAA and the IT Act, the learned counsel then referred to judgments of Hon'ble Calcutta High Court in CIT vs. Davy Ashmore India Ltd. (19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provisions in relevant DTAAs, and taken into account the note filed by the learned counsel, at the time of concluding his submissions, before us. 12. We find that under s. 9(1)(i) of the IT Act, 1961, any income accruing or arising, whether directly or indirectly, inter alia, through the transfer of a capital asset situated in India, shall be deemed to accrue or arise in India. In our view, therefore, it is clear that when a capital asset is situated in India, regardless of the residential status of the transferor or the transferee; capital gains arising on its transfer would be deemed to be income arising or accruing in India and would, therefore, be taxable in India. With regard to this fundamental proposition regarding taxability in India per se, the assessee's contention is that in view of the provisions of Art. 13(5) of the Indo-Netherlands DTAA, the capital gains, even if any, arising on transfer of shares in question, are solely taxable in the Netherlands and that, for the purpose of aforesaid treaty provision, the assessee-companies are tax residents of the Netherlands. 13. We will first take up the provisions of the Indo UK DTAA. It is not in dispute that the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he following extracts from CIT(A)'s order to highlight case of the assessee regarding coverage by the Indo-Netherlands DTAA: "..... GEC plc has been carrying on business in the Netherlands through a number of subsidiaries and is being taxed in the Netherlands on dividend income. Accordingly, for the purpose of Convention, GEC plc is to be treated as a resident of the Netherlands and will be entitled to the benefit of art. 13 of the Convention with Netherlands." The learned counsel has also highlighted this claim in the written note filed by him. It would, therefore, appear that the claim of the assessee-companies is that merely because these companies are paying taxes on some dormant incomes from Netherlands these companies are entitled to- be treated as "residents of Netherlands' and accordingly, their capital gains cannot be subject to Indian tax laws in view of art. 13 of the Indo-Dutch DTAA. 16. Art. 4(1) of the Indo-Dutch DTAA clearly provides that "for the purpose of this Convention, the term 'resident of one of the states' means any person who, under the laws of that state, is liable to taxation therein by reasons of his domicile, residence, place of management or any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame kind as specified. In other words, the general expression is to be read as 'comprehending only things of the same kind as that designated by preceding particular expressions, unless there is something to show that wider sense was intended. In the case before us, the principle of ejusdem generis have been incorporated in the text of the treaty provision itself, 'any other criterion' referred to in the treaty has to be restricted to the genus of three earlier expressions i.e. domicile, residence and place of effective management. The key question, therefore, is whether 'earning of dividends earned from the Netherlands' can be said to belong to the same genus to which 'domicile, residence and place of effective management' belong? No. doubt, as observed by Dr. Klaus Vogel in his Commentary to the Double Taxation Conventions, the term 'other criterion of similar nature' makes clear that the enumerated criterion of domestic law which attracts tax liability are no more than examples for the rule, but Dr. Vogel has further stated that, "The term should be understood to mean any locality-related attachment that attracts residence-type taxation." [Klaus Vogel on Double Taxation Conventi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO, assessee-companies avoided producing a copy of the agreement on the ground that the same is voluminous, and that the assessee-companies had nothing to say when AO asked questions about the exact number of shares said to have been allotted to the assessee-companies, by the GE Alsthom NV, in lieu of the shares transferred to this new company. We have also noticed that this case was fixed for hearing before the Tribunal on more than half a dozen occasions, and costs were also imposed on the assessee for repeatedly seeking adjournments, and yet the assessee did not deem it necessary to file any paper, barring extracts from Indo-Dutch DTAA, in support of facts claimed by them. It is also not in dispute that assessee-companies did not even produce copy of agreement or details of shares issued by GE Alsthom NV, before the CIT(A) as well. We see no rationale in CIT(A)'s accepting the bland statements made by the assessee and without even bothering to seek elementary information in support of facts claimed by the assessee. On merits also, and even assuming that the facts claimed by the assessee actually existed, we see little support for the legal proposition advanced by the distin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is capital asset of the assessee that is subject-matter of assessment and that the transfer of such capital asset should give rise to gains accruing or arising to the assessee. The capital asset belonging to the assessee-companies, in these cases, consisted of the shares held in Indian companies which have been, beyond dispute, transferred to GE Alsthom NV, and, because in consideration thereof, shares have been allotted to the assessee-companies by the GE Alsthom NV, gains have also accrued and arisen to the assessee-companies. It is, therefore, clear that transfer of capital assets of the assessee-companies, i.e. shares held in certain Indian companies, has taken place and that, in consideration of transfer of these shares, assessee-companies have also been issued the shares in GE Alsthom NV. It is also clear that the 'consideration' has clearly passed from GE Alsthom NV to GE plc Group companies. In this view of the matter, we are unable to agree with Dr. Pal that it is necessary to examine whether or not issuance of fresh shares by GE Alsthom NV constitutes transfer under s. 2(47) of the Act. As far as shares issued by GE Alsthom NV are concerned, these shares constitute 'consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed decisions, the statutes concerned are quite different from the provisions of the Act with which we are concerned in this reference". Hon'ble Court went on to observe that, "it is pertinent to note that in the reported decisions, which are cited on behalf of the assessee, the Courts were not concerned with the interpretation of the definition of the expression 'transfer' contained in s. 2(47) of the Act which has a very wide meaning and cannot be narrowed down by referring to the provisions of other statutes which are quite different and are applicable in different contexts." 22. Respectfully following the above discussed esteemed views of Hon'ble Bombay High Court, as articulated through Justice U.T. Shah (as he then was), we hold that the learned CIT(A) erred in law in holding that there is no capital gains tax liability when shares are subscribed in money's worth, and that the learned CIT(A)'s reliance, on reported judgments in the cases of Secretary Board of Revenue vs. Madura Mills Co. Ltd. and Shri Gopal Jalan Co. vs. Calcutta Stock Exchange, was wholly misplaced. 23. We may also mention that in the aforementioned case of CIT vs. Tata Iron Steel Co. Ltd., Hon'ble Bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to a share interest. However, Hon'ble Supreme Court further observed that corresponding credit entry in partner's capital account is made merely for the purpose of adjusting the rights of partners inter se when partnership is dissolved or a partner retires, and that the aforesaid credit entry does not evidence any debt due by the firm to the partner. It was in this background that Hon'ble Supreme Court came to the conclusion that, in such circumstances, it cannot be said that any income or gains accrues to the assessee in true commercial sense which a businessman would understand as real income or gain. Hon'ble Supreme Court finally came to a conclusion that since de facto there is no 'consideration' in this case, such a transaction does not give rise to taxable capital gain. 27. We have noticed that the aforementioned judgment relates to the case of a firm which is qualitatively distinct from the case of a company; a partner's capital account is, in our considered view, not at all comparable with a shareholder's capital in the company. Unlike a partnership firm, a company is entity distinct from its members. In the case of a firm, as held by the Hon'ble Supreme Court in Sunil Si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ratio of Sunil Siddarthbhai's case, with which we are in complete agreement, we are of the view that ratio of this case has no application to the cases before us. In our considered view, proximate and material reason of Hon'ble Supreme Court's coming to the conclusion that such a transaction is outside the ambit of taxable capital gain (i.e. an entry to the credit of partner, for bringing in any person capital asset, is merely for adjusting the rights of partners inter-se when partnership is dissolved or when a partner retires) is absent in the facts of the case before us. We, therefore, decline to approve CIT(A)'s reliance on the cases of Mugnee Ram Bangur Co., Syndicate Bank, and Sunil Siddarthbhai, in treating the transaction in question as outside the ambit of taxable capital gains. 28. We next come to assessee's claim that in view of the provisions of s. 45(3), any transfer by a person to a company or a co-operative society of which that person is a member, cannot result in capital gains exigible to tax. Sec. 45(3) does not provide for any exemption but it is a charging section which lays down that gains arising from the transfer of capital asset by a person to a firm or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee is coverage by s. 47(iii) which-provides that nothing contained in s. 45 will apply to the transfer of any capital asset, under a gift, or will, or an irrevocable trust. There is nothing before us to establish that the shares held by the assessee-companies were transferred under an irrevocable, trust. It is fairly well settled in law that once it is clear that a receipt is taxable in nature but the claim of the assessee is that the receipt in question is covered by the exception clauses, onus is on the assessee to prove that the receipt is covered by the exception clause. Hon'ble Supreme Court has, in the case of Dr. K. George Thomas vs. CIT (1985) 49 CTR (SC) 204 : (1985) 156 ITR 412 (SC) observed that the burden is on the Revenue that the receipt is of a taxable nature, though once a receipt is found to be of taxable nature, whether if comes under exemption or not, it is for the assessee to establish. In the case before us, therefore, the onus is on the assessee to establish that the transfer of shares must be considered to have been held under an irrevocable trust' is not supported by any evidence at all. We have carefully examined facts of the case and we are o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plied restriction on the quantum of tax liability that can be worked on the transactions in respect of which the NOC was issued. 32. We have also noticed that the 'no objection certificate1 issued by the Revenue authorities have nothing to do with s. 162(2) of the Act which only applies to the cases of representative assessee's vicarious liability. The NOC in question was admittedly issued at the instance of the assessee itself and, accordingly, assessee's reliance on s. 162(2) is devoid of any legally sustainable basis. 33. We have noticed that the assessee-companies have been evasive about complete details of transaction and have not given any information at all about the quantum of 'consideration' received on transfer of shares in question. It is under these circumstances that the learned AO had to adopt stock exchange quotations as the basis of estimating the consideration. Even during the course of hearing before us, the assessee-companies have not been forthcoming about further details either about the number of shares issued by GEC Alsthom NV or about any other details about 'consideration' received by them. Keeping in view all these factors, we confirm the action of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Dy. CIT (1995) 126 CTR (Cal) 69 : (1995) 212 ITR 496 (Cal), notices under s. 143(2) having been once issued, the AO is indeed denuded of the powers to issue intimation under s. 143(1)(a) of the Act and, consequently, the intimation issued under s. 143(1)(a) is a legal nullity. When the intimation itself is a legal nullity, it cannot substitute the regular assessment order. In any event and leaving aside this judicial pronouncements, one thing further to be noticed is that intimation under s. 143(1)(a) is given without prejudice to the provisions of s. 143(2). As observed by Hon'ble Delhi High Court in the case of Mahanagar Telephone Nigam Ltd. vs. Chairman, CBDT (2000) 162 CTR (Del) 554 : (2000) 246 ITR 173 (Del), 'though technically the intimation issued was deemed to be a demand notice under s. 156 that did not per se preclude the right of the AO to proceed under s. 143(2)'. Hon'ble Delhi High Court has opined that this right to proceed under s. 143(2) is preserved and is not taken away merely because an intimation under s. 143(1)(a) is issued by the AO. It has been categorically held by the Hon'ble High Court that the intimation under s. 143(1)(a) cannot be treated as order of a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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