UTV SOFTWARE COMMUNICATIONS LTD, MUMBAI V. ACIT 11(1), MUMBAI

ITA 85/MUM/2012

• Counselvise Citation: [2015] 134 COUNSELVISE.COM (IT) 1922 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 11 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-12-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: F
• Next Hearing Date: 24-12-2013
• Assessment Year: 2006-2007
• Appeal Filed On: 05-01-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: N V NADKARNI
• Assessee Lawyers: FAROKH V IRANI
• Keywords: Capital asset; Permanent establishment; Question of law; Cost of acquisition; Wholly owned subsidiary

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL F BENCH, MUMBAI BEFORE SHRI N.K . BILLAIYA, ACCOUNTANT MEMBER AND SHRI PAWAN SINGH, JUDICIAL MEMBER / I .T.A. NO .85/MUM/2012 ( / ASSESSMENT YEAR :2006 - 07 UTV SOFTWARE COMMUNICATIONS LTD., 1 ST FLOOR, BLDG NO. 14, SOLITAIRE CORPORATE PARK, GUTRU HARGOVINDJI MARG, CHAKALA, ANDHERI (E), MUMBAI - 400 093 / VS. THE ACIT 11(1), AAYAKAR BHAVAN, MUMBAI - 400 020 ./ ./ PAN/GIR NO. : AAACU 4122G ( / APPELLANT ) .. ( / RESPONDENT ) / APPELLANT BY: SHRI FAROKH V. IRANI / RESPONDENT BY: SHRI N.V. NADKARNI / DATE OF HEARING : 16 .1 2 . 2015 / DATE OF PRONOUNCEMENT : 16 .1 2 .2015 / O R D E R PER N.K. BILLAIYA, AM: THIS APPEAL BY THE ASSESSEE IS PREFERRED AGAINST THE ORDER OF THE LD. CIT(A) - 3, MUMBAI DATED 30.11.2011 PERTAINING TO ASSESSMENT YEAR 2006 - 07. 2. THE SOLE GRIEVANCE OF THE ASSESSEE READS AS UNDER: THE LD. CIT(A) HAS ERRED IN TREATING THE SALE OF SHARES OF 100% SUBSIDIARY BY THE APPELLANT AS A SLUMP SALE U/S. 2(42C) AND CHARGING THE CAPITAL GAINS ON SUCH TRANSFER AS LONG TERM CAPITAL GAINS U/S. 50(B). HE OUGHT TO HAVE KNOWN THAT WHERE CAPITAL ITA. NO. 85/M/2012 2 ASSETS COM PRISE OF SHARES COMPUTATION HAS TO BE DONE AS PER SEC. 48 BY TAKING THE COST OF ACQUISITION AS PROVIDED THEREIN. 3. ON IDENTICAL SET OF FACTS, THE TRIBUNAL (THE SAME COMBINATION OF AM AND JM) HAS CONSIDERED SIMILAR ISSUE INITA NO. 3148/M/2013 IN ASSESSE ES OWN CASE FOR A.Y. 2007 - 08 WHERE THE GROUND WAS AS UNDER: BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN TREATING THE SALE OF SHARES BY THE APPELLANT OF ITS JOINT VENTURE COMPANY, UNITED HOME ENTERTAINMENT LT D.(UHEL), AS TRANSFER OF AN UNDERTAKING ( I.E. SLUMP SALE U/S. 2(42C) OF THE ACT) AND HENCE, DETERMINING THE CAPITAL GAIN TAX LIABILITY U/S. 50B, INSTEAD OF SECTION 48 OF THE ACT AS COMPUTED BY THE APPELLANT. 4. AS MENTIONED ELSEWHERE ON IDENTICAL SET OF FACTS, THE TRIBUNAL HELD AS UNDER: 8.5. ASSUMING, YET NOT ACCEPTING THIS TRANSACTION TO BE A SLUMP SALE, THE CONSIDERATION SHOULD HAVE BEEN RECEIVED BY UHEL AND NOT THE ASSESSEE BECAUSE IT IS UHEL WHICH HAS BEEN TRANSFERRED AND BEING A DISTINCT LEGAL ENTITY IS ENTITLED FOR THE SALE CONSIDERATION OF ITS TRANSFER. HOWEVER, THIS IS NOT THE CASE SINCE THE SHARES WERE TRANSFERRED BY THE ASSESSEE, ASSESSEE RECEIVED THE SALE CONSIDERATION. 8.6. SHAREHOLDERS RIGHT HAS BEEN EXPLAINED IN DETAIL BY THE HONBLE SUPREME COURT IN THE CASE OF MRS. BACHA F. G UZDAR (SUPRA) AND THE OBSERVATIONS OF THE HONBLE SUPREME COURT READ AS UNDER: THAT A SHAREHOLDER ACQUIRES A RIGHT TO PARTICIPATE IN THE PROFITS OF THE COMPANY MAY BE READILY CONCEDED BUT IT IS NOT POSSIBLE TO ACCEPT THE CONTENTION THAT THE SHAREHOLDER ACQUIRES ANY INTEREST IN THE ASSETS OF THE COMPANY. THE USE OF THE WORD 'ASSETS' I N THE PASSAGE QUOTED ABOVE ITA. NO. 85/M/2012 3 CANNOT BE EXPLOITED TO WARRANT THE INFERENCE THAT A SHAREHOLDER, ON INVESTING MONEY IN THE PURCHASE OF SHARES, BECOMES ENTITLED TO THE ASSETS OF THE COMPANY AND HAS ANY SHARE IN THE PROPERTY OF THE COMPANY. A SHAREHOLDER HAS GOT NO INTEREST IN THE PROPERTY OF THE COMPANY THOUGH HE HAS UNDOUBTEDLY A RIGHT TO PARTICIPATE IN THE PROFITS IF AND WHEN THE COMPANY DECIDES TO DIVIDE THEM. THE INTEREST OF A SHAREHOLDER VIS - A - VIS THE COMPANY WAS EXPLAINED IN THE SHOLAPUR MILLS CASE**. THAT JUDGMENT NEGATIVES THE POSITION TAKEN UP ON BEHALF OF THE APPELLANT THAT A SHAREHOLDER HAS GOT A RIGHT IN THE PROPERTY OF THE COMPANY. IT IS TRUE THAT THE SHAREHOLDERS OF THE COMPANY HAVE THE SOLE DETERMINING VOICE IN ADMINISTERING THE AFFAIRS OF THE COMPA NY AND ARE ENTITLED, AS PROVIDED BY THE ARTICLES OF ASSOCIATION, TO DECLARE THAT DIVIDENDS SHOULD BE DISTRIBUTED OUT OF THE PROFITS OF THE COMPANY TO THE SHAREHOLDERS BUT THE INTEREST OF THE SHAREHOLDER EITHER INDIVIDUALLY OR COLLECTIVELY DOES NOT AMOUNT T O MORE THAN A RIGHT TO PARTICIPATE IN THE PROFITS OF THE COMPANY. THE COMPANY IS A JURISTIC PERSON AND IS DISTINCT FROM THE SHAREHOLDERS. IT IS THE COMPANY WHICH OWNS THE PROPERTY AND NOT THE SHAREHOLDERS. 8.7. THIS VIEW IS FURTHER FORTIFIED BY THE DECIS ION OF THE HONBLE HIGH COURT OF BOMBAY IN THE CASE OF BROOKE BOND INDIA LTD (SUPRA) WHEREIN, INTER ALIA, ONE OF THE CONTENTION BEFORE THE HONBLE HIGH COURT WAS THAT THE AGREEMENT IS ILLEGAL AND UNENFORCEABLE AS IT IS CONTRARY TO SEC. 293(1)(A) OF THE COM PANIES ACT. THE OBSERVATIONS OF THE HONBLE HIGH COURT READS AS UNDER: THE FIRST CONTENTION IS THAT, U/S. 293(1)9A), THE BOARD OF DIRECTORS OF THE FIRST DEFENDANTS, A PUBLIC COMPANY, IS PROHIBITED FROM SELLING, LEASING OR OTHERWISE DISPOSING OF THE WHOLE, OR SUBSTANTIALLY THE WHOLE OF THE UNDERTAKING OF THE COMPANY AND, HENCE, THE AGREEMENT WAS ULTRA VIRES POWER OF THE BOARD OF DIRECTORS OF THE FIRST DEFENDANTS. IT IS CONTENDED THAT THE PLAINT MAKES IT CLEAR THAT WHAT IS AGREED TO BE SOLD IS THE F OOD DIVISION OF THE FIRST DEFENDANTS AND HENCE, WHAT IT AGREED TO BE SOLD TO ITA. NO. 85/M/2012 4 THE PLAINTIFFS IS A SUBSTANTIAL PART OF THE FIRST DEFENDANTS UNDERTAKING. THERE IS NO CONSENT OBTAINED TO THIS SALE FROM THE FIRST DEFENDANT COMPANY IN GENERAL MEETING. HENCE, THE AGREEMENT IS CLEARLY PROHIBITED U/S. 293(1)(A), AS WHAT HAS BEEN AGREED TO WAS COMPLETELY BEYOND THE PALE OF THE POWERS OF THE BOARD OF DIRECTORS OF THE FIRST DEFENDANTS. 8.8. IT WOULD NOT BE OUT OF PLACE TO REFER TO THE FOLLOWING OBSERVATIONS OF TH E HONBLE SUPREME COURT IN THE CASE OF VODAFONE INTERNATIONAL HOLDINGS (SUPRA). A CONTROLLING INTEREST IS AN INCIDENT OF OWNERSHIP OF SHARES IN A COMPANY, SOMETHING WHICH FLOWS OUT OF THE HOLDING OF SHARES. A CONTROLLING INTEREST IS, THEREFORE, NOT AN IDE NTIFIABLE OR DISTINCT CAPITAL ASSET INDEPENDENT OF THE HOLDING OF SHARES. THE CONTROL OF A COMPANY RESIDES IN THE VOTING POWER OF ITS SHARE HOLDERS AND SHARES REPRESENT AN INTEREST OF A SHAREHOLDER WHICH IS MADE UP OF VARIOUS RIGHTS CONTAINED IN THE CONTRA CT EMBEDDED IN THE ARTICLES OF ASSOCIATION. THE RIGHT OF A SHAREHOLDER MAY ASSUME THE CHARACTER OF A CONTROLLING INTEREST WHERE THE EXTENT OF THE SHAREHOLDING ENABLES THE SHAREHOLDER TO CONTROL THE MANAGEMENT. SHARES, AND THE RIGHTS WHICH EMANATE FROM THEM , FLOW TOGETHER AND CANNOT BE DISSECTED. THE TAX CONSEQUENCES OF A SHARE SALE WOULD BE DIFFERENT FROM THE TAX CONSEQUENCES OF AN ASSET SALE. A SLUMP SALE WOULD INVOLVE TAX CONSEQUENCES WHICH COULD BE DIFFERENT FROM THE TAX CONSEQUENCES OF A SALE OF ASSETS ON ITEMIZED BASIS 8.9. IN THE VERY SAME ORDER, THE HONBLE SUPREME COURT FURTHER HELD THAT THE SUBJECT MATTER OF THE TRANSACTION WAS THE TRANSFER OF THE SHARE IN CGP (A COMPANY INCORPORATED IN CAYMAN ISLANDS). CONSEQUENTLY, THE INDIAN TAX AUTHORITY HAD NO TERRITORIAL TAX JURISDICTION TO TAX THE OFFSHORE TRANSACTION. 8.10. IN THE VERY SAME ORDER AGAIN THE HONBLE SUPREME COURT HELD AS UNDER: THAT THE TRANSACTION IN QUESTION WAS ONE OF OUTRIGHT SALE BETWEEN TWO NON - RESIDENTS OF A CAPITAL ASSET (SHARE) OUTSIDE INDIA. THE ITA. NO. 85/M/2012 5 TRANSACTION WAS ENTERED INTO ON PRINCIPAL TO PRINCIPAL BASIS. THEREFORE, NO LIABILITY TO DEDUCT TAX AT SOURCE AROSE. FURTHER, THERE WAS NO ASSIGNMENT OF PRICE FOR EACH RIGHT, CONSIDERED BY THE REVENUE TO BE A CAPITAL ASSET IN THE TRANSACTION. IN THE ABSE NCE OF A PERMANENT ESTABLISHMENT PROFITS WERE NOT ATTRIBUTABLE TO INDIAN OPERATIONS. THE DEPARTMENT HAD FAILED TO ESTABLISH ANY CONNECTION WITH SECTION 9(1)(I) . UNDER THE CIRCUMSTANCES, SECTION 195 WAS NOT APPLICABLE. 8.11 A SIMILAR VIEW HAS ALSO BEEN T AKEN BY THE HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF BHORUKA ENGINEERING INDUS. LTD (SUPRA). THE LANGUAGE EMPLOYED IN SECTION 10(38) OF THE ACT IS SIMPLE AND UNAMBIGUOUS AND IT MAKES NO DISTINCTION BETWEEN THE TRANSFER OF SHARE OF COMPANY WITH AN I MMOVABLE ASSET AND MOVABLE ASSET, INSTEAD OF EXECUTING A SALE DEED IN RESPECT OF THE IMMOVABLE PROPERTY BY THE COMPANY, WHICH IS OWNING THE LAND. IF THE SHAREHOLDER CHOOSES TO TRANSFER THE LANDS AND PART WITH THE LAND TO THE PURCHASER OF THE SHARES, IT WOU LD 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 DEVICE OR A SHAM TRANSACTION OR AN UNREAL TRANSACTION. AS SET OUT ABOVE, THE TRANSACTION IS REAL, VALUABLE CONSIDERATION IS PAID, ALL LEGAL FORMALITIES ARE COMPLIED WITH AND WHAT IS TRANSFERRED IS THE SHARES AND NOT THE IMMOVABLE PROPERTY. THE FINDING OF THE ASSESSING AUTHORITY THAT IT IS A TRANSFER OF IMMOVABLE PROPERTY IS CONTRARY TO LAW AND CONTRARY TO THE MATERIAL ON REC ORD. THEY COMMITTED A SERIOUS ERROR IN PROCEEDING ON THE ASSUMPTION THAT THE EFFECT OF TRANSFER OF SHARE IS TRANSFER OF IMMOVABLE PROPERTY AND, THEREFORE, IF THE VEIL OF THE COMPANY IS LIFTED WHAT APPEARS TO THEM IS TRANSFER OF IMMOVABLE PROPERTY. SUCH A F INDING IS IMPERMISSIBLE IN LAW. UNFORTUNATELY, THE THREE AUTHORITIES COMMITTED THE VERY SAME MISTAKE WHICH IS EX FACIE, ILLEGAL, CONTRARY TO THE SETTLED LEGAL POSITION AND, THEREFORE, REQUIRES TO BE SET ASIDE. IN THAT VIEW OF THE MATTER, WE PASS THE FOLLOW ING ORDER : (A) THE APPEAL IS ALLOWED. ITA. NO. 85/M/2012 6 (B) THE IMPUGNED ORDER PASSED BY ALL THE THREE AUTHORITIES IS HEREBY SET ASIDE. (C) THE SUBSTANTIAL QUESTION OF LAW IS ANSWERED IN FAVOUR OF THE ASSES SEE AND AGAINST THE REVENUE. 8.12. IN THE LIGHT OF THE AFOREMENTIONED OBSERVATIONS OF THE HONBLE SUPREME COURT/HIGH COURTS AND ALSO CONSIDERING THE PROVISIONS OF SEC. 50B AND SEC. 2(42C) OF THE ACT, IN OUR CONSIDERED OPINION WHAT THE ASSESSEE HAS TRANSFERRED IS THE SHARES IN UHEL AND THIS TRANSFER OF SHARES CANNOT BE CONSIDERED TO BE A SLUMP SALE OF AN UNDERTAKING WITHIN THE PROVISIONS OF SEC. 2(42C) OF THE ACT, THEREBY MAKING THE APPLICABILITY OF THE PROVISIONS OF SEC. 50B OF THE ACT INAPPLICABLE. 5. CONSIDERING THE FACTS IN TOTALITY, W E SET ASIDE THE ORDER OF THE LD. CIT(A) AND DIRECT THE AO TO ACCEPT THE TRANSACTION AS SHOWN RETURNED BY THE ASSESSEE. 6. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT AT THE TIME OF HEARING ON 16 TH DECEMBER , 2015 . SD/ - SD/ - ( PAWAN SINGH ) (N.K. BILLAIYA) /JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI ; DATED : 16 TH DECEMBER , 2015 . . ./ RJ , SR. PS ITA. NO. 85/M/2012 7 / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A) - 4. / CIT 5. , , / DR, ITAT, MUMBAI 6. / GUARD FILE . / BY ORDER, //TRUE COPY// / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI