TaxTMI 
TaxTMI 
2010 (2) TMI 123
X X X X Extracts X X X X
X X X X Extracts X X X X
....roduction of glass reinforced polyester pipes, storage tanks etc. AIH holds 70% of eQuity capital of AFIIL and these shares are held as investments in physical form. Amitech Cyprus Holding Limited ("ACHL") is a company incorporated in Cyprus and is a 100% subsidiary of AIH. ACHL is an investment company and holds shares of various other group entities. The only income received by AIH from AFIIL is dividend. AIH does not have any other source of income from India. 3. AIH proposes to restructure the group and split AIH into two companies, one owning the business carried on in Europe (represented by investments made in operating companies incorporated in Europe) and the other owning business carried on in Asia, North Africa & Latin America (represented by investments made in operating companies incorporated in India, North Africa & Latin America). 4. As a part of the restructuring process, by end of 2009, AIH (the applicant) proposes to hold all international investments relating to pipe manufacturing through ACHL (Cyprus). This is mainly due to the following factors: • * Cyprus belongs to European Commission and enjoys the credibility of Western Europe direct....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nterests and burdens of the Contributed shares will be for the account of the Company as of the Effective date. 4. The Contribution is made free of consideration and therefore the company is not due at the Effective Date and shall not be due at any time in the future to compensate the Contributor for the Contribution. 8. In reply to the Query raised by the Revenue, the Managing Director of applicant has certified that "there is no transfer by ACHL or on its behalf or at its behest, of any shares, to AIH i.e, the applicant. 9.. The following Questions are formulated by the applicant for seeking advance ruling from this Authority: 1) On the facts and circumstances of the case, whether the applicant is liable to tax in India in relation to the proposed contribution of shares of AFIIL? 2) On the facts and circumstance of the case, whether the proposed contribution of shares by AIH to ACHL attracts the transfer pricing provisions of section 92 to 92F of the ITA? 3) On the facts and circumstances of the case, whether ACHL, the recipient company, is reQuired to withhold tax in accordance with the provisions of section 195 of the Act? 4) On the facts and circumstances ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Section 47(iii) is also attracted in the instant case. 15. We shall, before proceeding further, refer to the relevant provisions of IT Act: Section 45. Capital gains (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, be chargeable to income-tax under the head "Capital gains", and shall be deemed to be the income of the previous year in which the transfer took place. [(1A) Notwithstanding anything contained in sub-section (1), where any person receives at any time during any previous year any money or other assets under an insurance from an insurer on account of damage to, or destruction of, any capital asset, as a result of - (i) flood, typhoon, hurricane, cyclone, earthQuake or other convulsion of nature ; or (ii) riot or civil disturbance; or (iii) accidental fire or explosion ; or (iv) action by an enemy or action taken in combating an enemy (whether with or without a declaration of war), then, any profits or gains arising from receipt of such money or other assets shall be chargeable to income-tax under the h....
X X X X Extracts X X X X
X X X X Extracts X X X X
....usion by interpreting the language employed in the charging provision (Section 45) as well as the computation provision (section 48), drawing support from binding precedents. 18. It is settled law that the charging section relating to capital gains and the computation provisions together constitute an integrated code. All transactions encompassed by section 45 must fall under the governance of its computation provision. When there is a case to which the computation provision cannot be at all applied, it is not intended to fall within the charging section [Vide the observations of Supreme Court in CIT vs B.C. Srinivasa Setty [1981] (128 ITR 294) - a decision which has been constantly followed till date]. Therefore, it is permissible, perhaps, imperative to read both the provisions together to test the correctness of the contentions advanced. For this purpose, we have to explore the scope and meaning of the expressions 'profits' and 'gains' and 'accrue' and 'arise' in the light of decided cases. 19. In Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1, the Supreme Court having stated that the expression 'profits and gains' has to be understood in its commercial sense, approvingly referr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y on income. "No doubt, the income-tax Act takes into account two points of time at which the liability to tax is attracted, viz. the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book keeping, an entry is made about a hypothetical income, which does not materialize". 25. We shall now look to the meaning of the expressions 'accrue or arise'. The dicta of Mukherji, J. in Rogers Pyatt Shellac vs Secretary of State for India (ILR 52 Cal 1) has been Quoted with approval in a series of decisions of the Supreme Court (Vide E.D. Sassoon & Co. vs. CIT (26 ITR 27) etc.)- "Now what is income? The term is nowhere defined in the Act.... In the absence of a statutory definition we must take its ordinary dictionary meaning............ The word clearly implies the idea of receipt, actual or constructive. The policy of the Act is to make the amount taxable when it is paid or received either actually or constructively. 'Accrues', 'arises' and 'is received' are three distinct items. So far as receiving of income is concerned, there can be no difficulty; it conveys a clear and definite....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eaning of these words, but throughout the Act they seem to denote the same idea or ideas very similar and the difference only lies in this that one is more appropriate when applied to a particular case." 29. In the context of sections 45 and 48, the expression 'arising' employed therein may very well comprehend actual receipt of income. At the same time, the primary meaning of these words as connoting a 'right to receive' still holds good. 30. In the light of above analysis of the expressions 'profits and gains' and 'accruing or arising', we have to examine the issue that has presented itself in the instant case. 31. Viewed from any angle, we are unable to perceive as to how any profit or gain has accrued or arisen to the applicant by virtue of the transfer of shares to its subsidiary company. It is not possible to identify or pinpoint anything which has the characteristic of profit or gain or any consideration which is capable of being valued in praesenti. As pointed out earlier, the income in the sense of profit and gain should be real but not hypothetical income. We may take it that the income may be in cash or in kind and need not necessarily be pecuniary in nature. As....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o gain. Nothing in the form of money or money's worth or nothing capable of being turned into money will accrue or arise to the applicant on the date of transfer. Therefore, the contention of the Revenue has to be rejected. 32. The exposition of law in the case of Acharya D.V. Pande vs CIT56 ITR 152 is Quite instructive. The Question in that case was whether the household expenses defrayed out of the funds of the institution of which the assessee was the Acharya can be considered to be his income. The following observations of P.N. Bhagwati J, speaking for the Division Bench of Gujarat High Court (at page 165) are Quite apposite in deciding the issue in the present case: "But, howsoever broad may be the connotation of the word ' income', one thing is clear that income for tax purposes must be money or money's worth. It is not necessary that income must be received in cash. It may also be received in kind but that must represent money's worth, that is, something which is capable of being converted in terms of money. As observed by Lord Halsbury L.C. In Tennant v. Smith(1892) AC 150; 3 Tax Cas.158, "income" includes anything capable of being turned into money from its own natur....
X X X X Extracts X X X X
X X X X Extracts X X X X
....plying even to cases where the full value of the consideration in respect of the transfer is correctly declared or disclosed by the assessee and there is no understatement of the consideration, it would result in an amount being taxed which has neither accrued to the assessee nor been received by him and which from no view-point can be rationally considered as capital gains or any other type of income. It is well settled rule of interpretation that the court should as far as possible avoid that construction which attributes irrationality to the Legislature. Besides, under entry 82 in List I of the Seventh Schedule to the Constitution, which deals with "Taxes on income other than agricultural income" and under which the IT Act, 1961 has been enacted, Parliament cannot "choose to tax as income an item which in no rational sense can be regarded as a citizens's income or even receipt. Sub-section (2) would, therefore, on the construction of the revenue, go outside the legislative power of Parliament." 35. If the Revenue's contention is to be accepted, the situation would more or less be the same as pointed out in the above decision and it would lead to irrational results. It is ther....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... capital loss whereas according to the assessee, it should have been allowed as business loss. The Tribunal upheld the view of assessing officer and the High Court affirmed the order of the Tribunal. Thus, the character of loss - whether it was capital loss or business loss, was the issue in that case. 39. The following observation of the High Court in the above case indicates that the test to be applied is the same as that formulated by Bhagwati J in the Gujarat decision: "The Tribunal has rightly observed that the said right can be assessed in monetary value which would be the consideration for the transfer of capital asset." 40.In the light of foregoing discussion, the 1st Question is answered in the negative. Question No. 2 41.. It is contended by the Revenue that "once transfer of capital asset by the applicant is admitted to be an international transaction by virtue of section 92B(1) of the Act, it goes without saying that transfer pricing provisions would be applicable for computation of income having regard to the arm's length price". It is further submitted that "there is scope for manipulation of consideration in the transfer of shares and accordingly the v....