India: The transfer of fixed assets by the subsidiary to its 99.99% holding company is not a taxable transfer
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Section 45 of the Income Tax Act 1961 (Computer Act) taxes all profits or gains resulting from the transfer of fixed assets under the heading âcapital gainsâ. However, article 47 of the IT law lists certain transactions which should not be considered as a transfer for the purposes of article 45 of the IT law and therefore not taxable. One of the operations specified is the transfer of fixed assets by a subsidiary to its holding company subject to the following conditions:
- the entire share capital of the subsidiary is held by the holding company; and
- the holding company is Indian Company
The provisions of the Companies Law of 2013 (as well as of the old Companies Law of 1956) provide that a company must be considered as a public limited company with at least 7 shareholders. Thus, a sole proprietorship (as a shareholder) cannot hold all of the share capital of a public limited company. Therefore, a question arises as to whether, in the event of a transfer of fixed assets by a public limited company to its 99.99 per cent Indian holding company, would satisfy the above conditions and, therefore, such transfer should not not to be considered a transfer for the purposes of section 45 of the Information Technology Act. ?
Recently, the High Court of the Honorable Madras1 had the opportunity to consider the aforementioned matter. At BDO India, we have summarized the High Court ruling and provided our feedback on the impact of that ruling.
Facts of the matter
The taxpayer, a public limited company, transferred part of its land (considered as fixed asset) to its Indian holding company for INR 37.5 million and subsequently treated said transaction as covered by section 47 ( v)2 of the IT law. As a result, the taxpayer did not offer the gains resulting from the sale of the land to tax. The tax authorities reopened the case under Article 148 of the IT Law on the grounds that the taxpayer had wrongly claimed the benefit of Article 47 (v) of the IT Law. The tax authorities observed that of the taxpayer’s 80 lakh shares, 25 shares were held by the holding company candidates. As a result, the tax authorities denied the benefit of Section 47 (v) of the Computer Law and taxed the entire winnings. While the first appeal authority endorsed the action of the tax authorities, the tax court granted relief to the taxpayer by finding that the six natural persons did not hold 25 shares individually but as agents of the taxpayer ; these actions were considered to comply with the provisions of the Companies Act 1956. Consequently, the tax authorities appealed to the Madras High Court (Madras HC).
High Court decision
Madras HC, at the time of rendering its verdict, observed that the following facts are not in dispute:
- Of the taxpayer’s 80 lakh shares, 25 shares were held by six people who were appointed by the taxpayer’s holding company.
- These six natural persons had no rights as shareholders and that their holding was for and on behalf of the holding company.
The taxpayer argued that as a public limited company there should be at least seven shareholders, as required by the Companies Act. However, the tax authorities have argued that the language used in the provisions of Article 47 (iv)2 and section 47 (v) of the Computing Act are separate. The expression “or its agents” is not present in article 47 (v) of the law on information technologies and, consequently, the taxpayer cannot claim the transfer of land as not subject to the tax. capital gains tax although the said transfer has been made between the subsidiary and its holding company.
Madras HC observed that Article 47 of the Information Technology Law deals with transactions which are not considered a transfer and therefore require a teleological interpretation, otherwise the said provision would become redundant. The total number of shares of the taxpayer is 80 lakhs, of which 79.99,975 shares were held by the Indian holding company. The remaining 25 shares were held by six people. The explanation given by the taxpayer was that under company law a public limited company should have a minimum of seven shareholders. These people were figureheads for the Indian holding company and had no rights, nor were these facts disputed by the tax authorities. Therefore, HC concluded that all of the taxpayer’s share capital was owned by the holding company in this case. Therefore, the HC ruled that the exemption provided for in Section 47 (v) of the IT Act would be available to the taxpayer.
The HC also relied on the decision of the High Court of the Honorable Bombay in the Papilion Investments Private Limited case.3 in which the Bombay High Court ruled that:
âActually, there cannot be a company in India that has less than two members, i.e. shareholders. Now the requirement of Article 47 (v) is that all of the capital The share capital of the subsidiary must be owned by the holding company The entire share capital owned by the holding company is certainly not the same as all the share capital held in the name of the holding company. In fact, this situation is an impossibility legal in India. In case one is to assume that all of the share capital of the subsidiary is to be held in the name of the holding company, there can be no situation where Article 47 (v) This is certainly not an interpretation which can be called ut res magis valeat quam pereat, ie making the law effective rather than making it redundant. Supreme Court, in CIT Vs. Teja Singh (35 ITR 408), a construction which results in making a disp Unnecessary position should be avoided. For this reason alone, the interpretation requested by the tax authorities must be rejected. “
Bearing in mind the purposive interpretation and following the decision of the High Court of the Honorable Bombay, the High Court of the Honorable Madras rendered a favorable ruling in favor of the taxpayer. Although the provision of Section 47 (v) of the Information Technology Act does not contain the phrase âor its nomineesâ, in India it is legally impossible to directly own all of the share capital of the company. ‘a subsidiary (being a limited liability company or a limited liability company). Therefore, if an Indian holding company appoints persons (who are usually their key employees) to hold the minimum capital of its subsidiary (being a limited liability company or a limited liability company) as nominee (without any control), this decision would then support the position of the taxpayer when the tax authorities are inclined to levy a capital gains tax on the sole ground that all of the share capital of this subsidiary is not directly held by the holding company Indian.
1 CIT v Shardlow India Ltd [Tax Case No. 485 of
2 Article 47: No provision of Article 45 applies to the following transfers:
(iv) any transfer of a fixed asset by a company to its subsidiary, ifâ
(a) the parent company or its agents own all the share capital of the subsidiary, and
(b) the subsidiary is an Indian company;
(v) any transfer of a fixed asset by a subsidiary to the holding company, ifâ
a) the entire share capital of the subsidiary is held by the holding company, and
(b) the holding company is an Indian company:
Provided that nothing contained in clause (iv) or clause (v) applies to the transfer of an asset made after the 29th day of February, 1988, as stock-in-trade.
3 CIT vs M / s Papilion Investments Private Limited
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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