• Jul
  • 08
  • 2013

S. 10(38) Sale of land through sale of shares by company holding only land is valid

Bhoruka Steel Limited (BSL) was incorporated in the year  1969. The company became a sick industrial company within the meaning of SICA.It was proposed that 30 acres of land along with building and structure to be disposed of. The valuers vide their valuation report dated 15.3.2002 valued the said land at Rs.25 Lakhs per acre. The company had received an offer from Bhoruka Financial Services Limited (BFSL), a public limited company and also one of the group Companies offered to purchase 30 acres of land for Rs.25 Lakhs per acre. Land measuring 15 acres was sold in favour of BFSL.

The assessee held 98.73% shares in Bhoruka Financial Services Limited (BFSL). In AY 2005-06 BFSL purchased a plot of land from a group sick company called Bhoruka Steels Ltd for Rs.3.75 crores which was accepted to be the prevailing market price u/s 50C. BFSL was a shell company with no assets other than the said land. In AY 2006-07 the assessee sold its shareholding in BFSL to DLF Commercial Developers Ltd for a net consideration of Rs. 20 crore. As the sale of shares was executed through the Magadh Stock Exchange and STT was paid, the assessee claimed that the gain on sale of shares was exempt u/s 10 (38). The AO, CIT(A) and Tribunal rejected the assessee’s claim on the basis that the assessee, BFSL and Bhoruka Steels were all controlled by common shareholders and that the scheme to first sell the land to BFSL and then to sell the shares of BFSL was devised with the sole purpose of avoiding tax on the capital gains which would have arisen if the land had been sold directly. It was held that the formalities of the transaction and the legal nature of the corporate bodies had to be ignored by lifting the corporate veil and the transaction had to be taxed as a sale of the land.

The High Court held that what is transferred is the shares and not the immovable property and set aside the order of Tribunal, CIT(A) and the AO. Consequently, gain on sale of shares being long term capital gain, exemption under Section 10(38) of the Act was allowed. In view of the decision of the Supreme Court in the case of Vodafone International Holdings B.V., it is held that ‘tax planning may be legitimate provided it is within the frame work of law’. Though all tax planning is impermissible, the tax department cannot tax a subject without a statute to support and in the course it has also been acknowledged that every taxpayer is entitled to arrange his affairs so that his taxes shall be as low as possible and that he is not bound to choose that pattern which will replenish the treasury.

The legal right of the taxpayer to decrease the amount of what otherwise would be his taxes, or altogether to avoid them by means which the law permits, cannot be doubted. As long as the arrangement of the taxpayer to avoid payment of tax do not contravene any statutory provision and is achieved within the four corners of law, it cannot be found fault with.If the transaction in question is sham or colorable and entered into with the sole intention of evading payment of tax, then such a transaction would not have any legitimacy. Therefore, in each case, the transaction in question and the material on record has to be carefully examined to find out whether the transaction is ‘sham’ or ‘unreal’ or ‘colourable device’ to evade payment of tax.The transaction of shares is not a nominal one. It is not a sham transaction.Though the trading license of Magadh Stock Exchange had been suspended earlier, subsequently it was revoked and after such revocation, the taxpayer traded the shares through Magadh Stock Exchange and therefore, the requirements of selling has been complied with.Just because the taxpayer was able to avoid payment of tax, it cannot be said to be a colorable device or a sham transaction or an unreal transaction.The transaction is real, valuable consideration is paid, all legal formalities are complied with and what is transferred is shares and not 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 record.

The taxpayer by resorting to such a tax planning, has taken advantage of the benefit of the law or the loopholes in the law. After seeing how this loophole has been exploited within four corners of the law, it is open to the Parliament to amend the law plugging the loophole. However, by any judicial interpretation we cannot read into the Section, which was not intended to, by the Parliament at the time of enacting this provision.Mere argument that execution of a registered sale deed by BFSL for selling the land would have resulted in payment of capital gain, is no reason to hold that shareholder selling shares in BFSL is not entitled to the benefit of tax exemption.The language employed in Section 10(38) of the Act is simple and unambiguous and it makes no distinction between transfer of share of company with an immovable asset and movable asset, instead of executing a sale deed in respect of immovable property by the Company, which owns the land.Where all the three conditions stipulated under Section 10(38) of the Act, i.e.(a) transfer of long term capital asset, (b) transfer after 29 September 2004 and (c) payment of STT, are fulfilled, the taxpayer is entitled to the benefit flowing there from i.e., the income from such transfer shall not be included in the total income of the taxpayer for the previous year.

SOURCE- M/S BHORUKA ENGINEERING INDS. LTD V/s. THE DEPUTY COMMISSIONER OF INCOME TAX (KARNATKA HIGH COURT), Date of Judgment: 9-Apr-2013, Case Number: ITA 120/2011

Sandeep Kanoi

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