2013 (7) TMI 543 - HC - Income Tax

High Court overturns Tribunal decision, grants tax exemption for share transfer

M/s BHORUKA ENGINEERING INDS LTD Versus THE DEPUTY COMMISSIONER OF INCOME TAX, BANGALORE

The High Court ruled in favor of the appellant, overturning the Tribunal's decision. It held that the transfer of shares did not amount to the sale of ... Exemption u/s 10(38) - Sale of shares - Tribunal held it is a case of colourable device to evade payment of taxation on short-term capital gains - Held that:- DLFCDL paid the market value and purchased the shares from the assessee - Therefore, the transaction of shares is not a nominal one. It is not a sham transaction. It is a real transaction for valuable consideration. The effect of the transaction is DLFCDL having acquired the shares became entitled to enjoy the asset of the company which was held by BFSL - For effecting the said transfer, instead of trading those shares through Bangalore Stock Exchange, it was traded through Magadh Stock Exchange - For each share, the assessee wanted permission from SEBI without being made available to the open public. If BFSL has sold the shares by executing a registered sale deed and received the sale consideration, then, BFSL ought to have paid capital gains on the said consideration. That is one mode through which BFSL could have sold the property belonging to it. The law also provides 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. Issues Involved:1. Whether the transfer of shares by the appellant to another limited company amounts to the sale of immovable property held by the company whose shares were sold.2. Whether the appellant is entitled to the benefit of exemption under Section 10(38) of the Income Tax Act.Detailed Analysis:Issue 1: Transfer of Shares as Sale of Immovable PropertyThe Tribunal found that the transfer of shares by the appellant to another company amounted to the sale of immovable property held by the company whose shares were sold. The Tribunal noted that the assessee and its group owned all the assets and properties of BFSL. The property was purchased from Bhoruka Steels Limited for Rs. 3.75 crores and later sold to DLF-CDL for Rs. 89.28 crores. The Tribunal held that the series of transactions were a well-planned scheme to transfer valuable landed properties to DLF-CDL without attracting corresponding tax liability, thus constituting a colorable device to evade tax.The High Court, however, disagreed with this conclusion. It emphasized that the transaction was real, valuable consideration was paid, and all legal formalities were complied with. The transfer involved shares and not the immovable property directly. The Court noted that the transaction was structured within the legal framework and did not contravene any statutory provisions. The Court held that the finding of the Assessing Authority that it was a transfer of immovable property was contrary to law and the material on record.Issue 2: Entitlement to Exemption Under Section 10(38)The appellant claimed exemption under Section 10(38) of the Income Tax Act for the gain on the sale of shares. The assessing authority proposed to tax the gain as short-term capital gain on the sale of immovable property, alleging that the transaction was a device to escape taxation. The Commissioner of Income Tax (Appeals) and the Tribunal upheld this view, citing the McDowell & Co. vs CTO case, which addressed tax avoidance through colorable devices.The High Court analyzed the conditions under Section 10(38) and found that the appellant met all the necessary criteria:1. The shares were long-term capital assets.2. The transaction occurred after the relevant date.3. Securities Transaction Tax was paid.The Court referred to various precedents, including the Vodafone case, which clarified that tax planning within the framework of law is legitimate. The Court held that the transaction was not a sham or colorable device but a legitimate arrangement, and the appellant was entitled to the benefit of Section 10(38). The Court emphasized that judicial interpretation cannot read into the section what was not intended by the Parliament and that the language of Section 10(38) is clear and unambiguous.Conclusion:The High Court allowed the appeal, set aside the orders of the lower authorities, and answered the substantial questions of law in favor of the assessee, affirming that the transfer of shares did not amount to the sale of immovable property and that the appellant was entitled to the exemption under Section 10(38) of the Income Tax Act. The Court reiterated that tax planning within the legal framework is permissible and that the transaction in question was neither a sham nor a colorable device.