TaxTMI 
TaxTMI 
2010 (3) TMI 112
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....he following is the summary of facts stated in the application. The applicant is a company incorporated under the laws of Luxembourg, having its registered office in Luxembourg. It is the holding company of its wholly owned subsidiary Anandeya Zinc Oxides Pvt. Ltd. ('Anandeya' in short), an Indian company. It purchased 15,49,500 shares of Rs. 10/- each or 99.96% of the shares of M/s Anandeya and the balance 500 shares of Rs. 10/- each were purchased by its nominee, Umicore Finance, Belgium. It entered into a Share Purchase Agreement with the five shareholders holding the entirety of shares in Anandeya on 17.2.2008. Anandeya was also a party to it. Thus, the applicant purchased the entire share holdings in Anandeya and the transfer of shares was completed by 12th August, 2008. Anandeya thus became the wholly owned subsidiary of the applicant. 2.1 Anandeya, the wholly owned subsidiary of the applicant, was incorporated as a private limited company on 13.09.2005 under Part-IX, and more particularly section 565 of the Indian Companies Act, 1956. All the assets and liabilities of the partnership firm-Anandeya Oxides that had been carrying on business w.e.f. 30.1....
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....rs, the question of paying capital gains tax would never have arisen. However, in view of the transfer of shares before the expiry of 5 years, the condition in clause (d) of proviso to section 47(xiii) has been violated, prima facie giving rise to the liability on the part of the said Company to pay capital gains tax. The parties to the Share Purchase Agreement have entertained a doubt in this regard and stipulated a condition in the Agreement that the Indian company shall pay Rs. 50 lacs to the income-tax department as advance payment towards the possible liability of capital gains arising in the A.Y. 2009-10 and furnish proof of payment to the sellers, namely, the shareholders. 3. It is the contention of the applicant that the registration of the firm as a Company under Part-IX of the Companies Act and the consequent vesting of assets in the Company did not amount to transfer nor any capital gain had arisen within the meaning of section 45 read with section 48 of the Income-tax Act and therefore irrespective of the violation of the condition laid down in clause(d) of the proviso to section 47(xiii), the liability to pay capital gains cannot be fastened on the company, namely, ....
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....y as incorporated under this Act for all the estate and interest of the company therein. 6. Section 575 has been highlighted by the counsel for the applicant to contend that there is a statutory vesting of property on registration. It may be noticed here that the expression 'Company' occurring in section 565 and other provisions has been construed to be a group, assembly or association of persons but not a company registered under the Act. A partnership firm is also treated as a Company for the purposes of registration under Part-IX of the Companies Act. This interpretation has been given by the Andhra Pradesh High Court in the case of V.P. Rao v/s Sri Ramanuja Ginning & Rice Factory [(1986) 60 Companies Cases 568 at page 580], having regard to the context and other provisions of Part-IX of the Companies Act. 7. Coming to the provisions of Income-tax Act, sections 45, 47, 47A and 48 need to be referred to. Section 45(1) is the main charging section. Capital gains. 45. (1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H, b....
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....e (xiii) in the present form was enacted by the Finance Act of 2001 in substitution of the previous clause. 7.1 Section 47(xiii) specifically excludes certain categories of transfer from the purview of capital gains taxation, but it is subject to the fulfillment of the conditions laid down in clauses (a) to (d). For our purpose clause (d) is relevant. All the three conditions i.e. (a) to (c ) are satisfied in the instant case. The first part of clause (d) is also satisfied. However, the requirement in the second part of clause (d) i.e. shareholding of fifty percent or more should continue to be as such for a period of 5 years from the date of succession has not been fulfilled in the instant case by reason of the transfer of shares by the Indian company to the applicant before the expiry of 5 years. 7.2 Then, the effect of transgression of the conditions laid down in the proviso to clause (xiii) is set out in section 47A(3) which reads thus: 47A Withdrawal of exemption in certain cases. (1) & (2) xx xx xx xx xx xx xx xx xx (3) Where any of the conditions laid down in the proviso to clause (xiii) or the proviso to clause (xiv) of section 47 are not complied with....
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....he learned Judges of the Bombay High Court while dealing with Section 45 have given the legislative background for introducing Section 47(xiii) and the basic postulates of this provision in the following words:- "This clause was inserted with effect from April 1, 1999. Therefore, we are not concerned with the amendment. However, it provides a clue to the legislative intent. In our opinion, this clause has been introduced with effect from April 1, 1999, in order to encourage more and more firms become limited companies. It also indicates the difference between transfer and transmission. Basically, when a firm is treated as a company under Part IX, it is a case similar to transmission. This is amply made clear by clause (xiii) of section 47, which states that where a firm is succeeded by a company in the business, the transaction shall not be treated as a transfer. Now, this amendment has been made in section 47 in view of the controversy arising on section 45(1)read with section 2(47)(ii)." Though during the relevant year with which the High Court was concerned, this provision was not there, the scope and objective of the provision was explained thus. 10. Simultaneous with ....
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....y ascertaining the networth of the company which is the same as that of the firm as per the audited account as on the date of conversion (i.e., 13/9/2005). Even then, did the partners/shareholders derive any profit or gain in the transaction? Can it be said that by getting the shares the value would not be anything more than the partners' proprietary interest in the firm, the partners of the firm (assuming that they are transferors) have made any profit or gain in the transaction? These are the crucial questions for which the answer could only be in the negative. 11.1 Shares allotted to the partners of the extinct firm consequential to the registration of the firm as a company did not, in our view, give rise to any profit or gain. By receiving such shares the value of which is nothing more than the value of the sum total of their interest in the firm or the worth of their shareholding in the firm, no gain is made. They have not become richer to any extent. The rise in the share value in course of time does not have a bearing on the intrinsic worth of shares at the point of time when conversion/ succession took place. In a transaction involvin....
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....Officer was entitled to treat the market value of the asset on the date of the transfer as full value of the consideration received. This latter part of section 45(4) is not there in section 45(1). Therefore, one has to read the expression "full value of the consideration received/accruing" under section 48 de hors section 45(4) and if one reads section 48 with section 45(1) de hors section 45(4) then the expression "full value of consideration" in section 48 cannot be the market value of the capital asset on the date of transfer. In such a case, we have to read the said expression in the light of the two judgments of the Supreme Court in the case of CIT vs. George Henderson and Co. Ltd. (1967) 66 ITR 622 and in the case of CIT vs. Gillanders Arbuthnot and Co. (1973) 87 ITR 407 in which it has been held that the expression "full value of the consideration" does not mean the market value of the asset transferred, but it shall mean the price bargained for by the parties to the transaction. It has been further held that the consideration for the transfer of a capital asset is what the transferor receives in lieu of the assets he parts with, viz., money or money's worth, and, therefore....
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.... similar to the present case. A firm by name Texspin Engg and Mfg. Works was converted into a Limited Company during the year 1996-97 under Part IX of the Companies Act. The assessing officer took the view that there was a transfer of capital assets by way of dissolution of the firm and therefore the profits or gains from such transfer became chargeable to tax under Section 45(4) of the Act. Further, for the purposes of Section 48 of the Act, the assessing officer computed the capital gains on the difference between the market value and the written-down value of the assets transferred to the Company (vested in the Company). The High Court examined the issue both from the stand point of Section 45(4) and Section 45(1) read with Section 48 of the Act and answered the questions in favour of the assessee and against the Revenue. 11.4 The reasoning of the High Court in the passages extracted above applies in all fours to the present case. 12. On the other aspect, namely, whether there was transfer, the decision in Texspin case is again directly in point. The following observations of the learned Judges may be noted: "Now, in the present case, it is argued on behalf of the Depar....