Parent company's capital gains from land sale to 100% subsidiary exempt under section 47(iv), excess tax refunded

ITAT Delhi held that capital gains from sale of land by parent company to its 100% subsidiary was exempt under section 47(iv) and wrongly offered to tax. The Tribunal rejected revenue's objection that new claims cannot be raised before ITAT without filing revised return, citing SC precedents in NTPC and Goetze cases. ITAT allowed assessee's cross-objection, directed AO to exclude capital gains from taxable income and refund excess tax paid. However, interest under section 244A was denied for the period from filing date to determination date as delay was attributable to assessee's incorrect declaration.

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The core legal issues considered in this appeal pertain to the taxability of capital gains arising from the sale of a capital asset (land) by a parent company to its 100% Indian subsidiary, the admissibility of certain expenses claimed as cost of improvement, and the procedural propriety of raising a new ground of appeal before the Tribunal via Rule 27 and cross objections.

First, whether the sale of land by the assessee to its wholly owned Indian subsidiary qualifies as a 'transfer' chargeable to tax under section 45 of the Income Tax Act, 1961, or is excluded from the definition of transfer under section 47(iv) of the Act.

Second, the validity of disallowing expenses claimed by the assessee, specifically the cost of stamp duty and interest paid, in computing the capital gains arising from the sale.

Third, the procedural question of whether the assessee can raise for the first time before the Tribunal the claim that the capital gains declared and taxed were not taxable at all due to the provisions of section 47(iv), despite having declared the gains in the original return and not raising this ground before the Assessing Officer (AO) or Commissioner of Income Tax (Appeals) [CIT(A)].

Regarding the first issue, the relevant legal provisions are sections 45 and 47 of the Income Tax Act. Section 45 imposes tax on capital gains arising from the transfer of a capital asset. Section 47 enumerates certain transfers which shall not be regarded as transfers for the purposes of section 45. Clause (iv) of section 47 specifically excludes from the definition of transfer any transfer of a capital asset by a company to its subsidiary company, provided the parent company or its nominees hold the entire share capital of the subsidiary, and the subsidiary is an Indian company.

The assessee sold land held as a capital asset to its wholly owned Indian subsidiary for Rs. 35.58 crores and declared long-term capital gains of approximately Rs. 12.97 crores in its return of income. The AO disallowed certain expenses and recomputed the capital gains at a higher figure. The CIT(A) deleted the additions made by the AO. The Revenue appealed, challenging the deletion of disallowances and the acceptance of the expenses claimed.

During the appellate proceedings, the assessee filed an application under Rule 27 of the ITAT Rules and cross objections contending that the transaction was not taxable at all under section 45 because it fell within the exclusion under section 47(iv). The assessee argued that the capital gains were inadvertently declared and taxed, and the AO was duty-bound to assess the correct income. The AO's report, filed subsequently, agreed with the assessee's contention that the conditions of section 47(iv) were satisfied, and therefore the capital gains were not taxable.

The Tribunal examined the facts and found that the assessee was an Indian company holding 100% share capital of the subsidiary, which was also an Indian company. The sale deed, audited financial statements, and Ministry of Corporate Affairs records confirmed this relationship. The Tribunal held that the transfer was covered by the exemption under section 47(iv), and thus the capital gains were not chargeable to tax under section 45.

The AO objected to the late raising of this claim before the Tribunal, noting it was not raised during assessment or before the CIT(A) and was contrary to the stand taken in the original return. The AO contended that the issue should not be entertained unless allowed under Rule 29 of the ITAT Rules. The Tribunal rejected this objection, holding that the facts concerning the related party nature of the transaction were already on record before the AO and CIT(A), and no new evidence was introduced. Therefore, the claim was not a new fact but a legal issue arising from existing facts, which the Tribunal could consider.

The AO also relied on the Supreme Court decision in Goetze (India) Ltd. v. CIT, which restricts the acceptance of new claims by the AO unless made by filing a revised return within the time allowed. The Tribunal distinguished this principle, citing authoritative Supreme Court rulings including NTPC v. CIT and Wipro Finance Ltd. v. CIT, which clarify that the Tribunal's powers under section 254 are broad and allow entertaining fresh claims or legal issues for the first time before it, even if inconsistent with the original return, provided the facts are on record. The Tribunal therefore allowed the assessee's claim that the capital gains were not taxable.

Regarding the disallowance of expenses claimed as cost of stamp duty and interest, the Tribunal observed that the CIT(A) had deleted the additions made by the AO. Since the cross objection allowing the non-taxability of capital gains was accepted, the Revenue's appeal challenging the deletion of these disallowances became infructuous and was dismissed.

The Tribunal also considered the applicability of CBDT Circular No.14 XL-35 dated 11.04.1955, which directs tax authorities to assist taxpayers in claiming reliefs they are entitled to but may have omitted to claim. The Tribunal held that since the capital gains were inadvertently offered to tax, the AO was obliged to correct the assessment to reflect the correct tax liability. The Tribunal relied on a recent decision of the Delhi High Court which held that the Revenue can tax only income falling within the Act's ambit, and misclassification by the assessee does not make such income taxable.

On the question of refund and interest, the Tribunal noted that the assessee was entitled to refund of the tax paid on the wrongly declared capital gains. However, since the assessee had declared the gains and paid tax thereon, and only belatedly claimed the non-taxability, interest under section 244A was not allowable for the period from 01.04.2016 until the date of determination of refund. The Tribunal directed the AO to give effect to the order expeditiously and pay interest on any delay thereafter, as per Board instructions.

In conclusion, the Tribunal allowed the cross objections filed by the assessee, holding that the sale of the land to its wholly owned Indian subsidiary was not a transfer taxable under section 45 due to the exclusion in section 47(iv). The Tribunal dismissed the Revenue's appeal challenging the deletion of disallowances related to expenses. The Tribunal also condoned the delay in filing the cross objections, finding the explanation bona fide and reasonable.

Key holdings include the following verbatim excerpts:

"The capital gains amounting to Rs. 12,97,20,753/- on the sale of the land... to its 100% subsidiary... was not taxable in view of provisions of section 47(iv) of the Act and was wrongly offered to tax by the assessee..."

"The power of the Tribunal under section 254 of the Income-tax Act... is to entertain for the first time a point of law provided the fact on the basis of which the issue of law can be raised before the Tribunal... The decision does not in any way relate to the power of the Assessing Officer to entertain a claim for deduction otherwise than by filing a revised return."

"Officers of the Department must not take advantage of ignorance of an assessee as to his rights... it is one of their duties to assist a taxpayer in every reasonable way, particularly in the matter of claiming and securing reliefs..."

"The Revenue can seek to levy tax only on income which falls within the ambit of the Act. Merely because the assessee placed the income under a wrong head, cannot possibly make it amenable to imposition of tax."

The Tribunal's final determinations were that the capital gains declared on the sale to the wholly owned subsidiary were not taxable, the Revenue's appeal was dismissed, the cross objections were allowed, and the AO was directed to refund the tax paid on the said gains without interest for the delay period attributable to the assessee's own erroneous declaration.

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