Applicability of proviso to section 47(iv) of IT Act in case of transfer of capital asset by a company to its wholly owned subsidiary
Where no due date is fixed for payment of commission, it does not accrue till the accounts of the company are finalized and the amount of commission is ascertained; it is only after the accounts of the company are finalized and the commission amount is ascertained that it becomes receivable by and payable to the director.
HIGH COURT OF CALCUTTA
CIT v. Coats of India Ltd. , Appeal No. ITA No. 119 of 2005, Dated: September 6, 2008
Therefore, there cannot be a formula which had no connection with the value of the individual assets and the liabilities. The price was determined that of the business and therefore, there is no question of picking up any portion of such price and charging its capital gains. It appears to us that before transfer of the company,
the said company had issued subscribed share capital and the original share certificates were produced before the CIT (Appeals). The company had transferred a business undertaking as a whole which was a capital asset in itself, that is the contention of Mr. Bhowmick before us. We have also considered the aspect which has been decided by the Learned Tribunal land the CIT (Appeals). The CIT has held that the price was approved by the High court and did not have any relation with the value of the assets of the undertaking. It further appears that in respect of the grievance of the Assessing Officer that transfer of the undertaking including transfer of stock-in-trade also, the CIT (Appeals) has observed that no portion of the
price could be attributed to stock-in-trade. The Assessing Officer had brought to capital gains tax the transfer of good will treating the good-will as a capital asset rat her than stock-in-trade. The CIT (Appeals), therefore, observed that the proviso to section 47(iv) has no application to the present case. The CIT (Appeals) granted relief to the assessee by holding as under:-
i. It was the entire packaging coating undertaking which was transferred in consideration of a slump price of Rs. 29,89,87,000/ – and no price was fixed item-by-item in respect of the different assets belonging to the undertaking.
ii. In view of the decision of the Supreme Court in CIT – versus – B. C. Srinivasa Setty (supra) as no cost of
acquisition can be conceived for the undertaking, the consideration received on transfer of the packaging coatings business by the assessee cannot be subjected to capital gains tax. Therefore, the AO was wrong in assuming that the amount of Rs. 19,14,55, 804/- credited in capital reserve was received on account of goodwill.
iii. Further, even assuming that the amount of Rs. 19,14,55,804/ – is on account of transfer of goodwill, the same cannot be brought to tax as the transaction enjoys exemption under section 47(iv) of the I.T.Act as explained earlier in this order. The addition of Rs. 19,14,55,804/ – is therefore deleted in full. The appellant accordingly gets relief of Rs. 19,14,55,804/ -
The learned Tribunal after taking into account all such facts as well as the order so passed by the CIT (Appeals) came into conclusion that the fundamental question in the present case which needs to be considered is whether there was a `transfer’ of a `capital asset’ during the year. After taking such into account, the Learned Tribunal held that from the facts as are brought on record, CCIPL was 100% subsidiary of the respondent company and the said company was an Indian company. In the said factual circumstances, provisions of section 47(iv) were applicable in respect of transfer of business undertaking. After considering all these facts, the Learned Tribunal held as follows:
“……………..In the impugned assessment order, the AO has mentioned that provisions of section 47(iv) were not applicable in view of proviso to section 47(v). on careful scrutiny of the contention. Under the approved scheme of arrangement, the respondent had transferred the entire packaging Coating business. Such business undertaking itself constituted distinct `capital asset’ U/s 2(14) of the Act. For transfer of the said capital asset consideration was not determined with reference to individual asset but the consideration was determined with reference to capitalized value of the said business. In our opinion, the proviso to section 47(v) and (iv) is applicable, only if, in the hands of the “transferee” the capital asset on its transfer constitutes “stock-in-trade” . Nothing was brought on record by the revenue authorities at any stage to substantiate that such Packaging Coating business on its transfer was accounted in the books, of CCIPL as “stock-in-trade” . Having regard to the facts on record therefore, we are fully satisfied that since the entire paid up capital of CCIPL as on 31-12-1997 was held by the respondent, the transfer of the undertaking was squarely covered by the provisions of section 47(iv) and therefore, no income under the head capital Gains was assessable in A. Y. 1998-99. For the reasons as aforesaid we therefore, uphold the order of the CIT (A) deleting the addition of Rs. 19,14,55,804/ -
In the result, we do not find that there is any illegality or irregularities in respect of the order so passed by the Learned Tribunal and we express the same view as has been expressed by the Learned Tribunal and uphold the order.