For S.47(v), share capital of the subsidiary need not be “held” in the name of the holding company

S. 47 (v) provides that a transfer of a capital asset by a subsidiary company to its holding company shall not be regarded as a “transfer” if the whole of the share capital of the subsidiary company is held by the holding company. The assessee transferred shares to its subsidiary and claimed exemption from capital gains u/s 47 (v). The AO denied exemption on the ground that as two shares of the said subsidiary were held by a director of the assessee and not by the assessee itself, the shares were not “wholly held” by the holding company and s. 47 (v) did not apply. The Tribunal upheld the plea of the assessee. On appeal by the Revenue, the High Court upheld the order of the Tribunal and upheld the following findings: 

(a) Though s. 47 (v) refers to shares being “wholly held”, a strict or mechanical interpretation should not be adopted. A construction must be adopted which makes the statute effective rather than redundant. It must be construed having regard to the object and purpose which the legislature had in view in enacting the provision. K.P. Varghese 131 ITR 597 (SC) andTeja Singh 35 ITR 408 (SC) followed.

(b) Under the Companies Act it is not possible for a company to have less than two shareholders. The requirement of s. 47(v) that the whole of the share capital of the subsidiary company should be held by the holding company is certainly not the same thing as the whole of the share capital being held in the name of the holding company. If one proceeds on the basis that the entire share capital of the subsidiary company should be held in the name of the holding company, there cannot be any situation in which s. 47(v) can apply. That interpretation makes the statutory provision redundant. If the holding company has a beneficial ownership over the entire share capital, s. 47 (v) applies.

Note: The decision of the Tribunal is in ACIT vs. Papillon 4 SOT 304 (Mumbai)

FULL TEXT OF THE JUDGEMENT

IN THE HIGH COURT OF JUDICATURE AT BOMBAY

ORDINARY ORIGINAL CIVIL JURISDICTION

INCOME TAX APPEAL NO.226 OF 2006

 1. Heard learned Counsel for the parties.

2. The Tribunal, in paragraph No.9 of its order, has recorded a categorical finding, which reads as under:

9. In the case before us, and in view of the provisions of the Companies Act, 1956, it is not possible for the PFIPL to have less than two shareholders. As a matter of fact, there cannot be any company in India which has less than two members i.e. shareholders. Now the requirement of Section 47(v) is that the whole of the share capital of the subsidiary company should be held by the holding company. The whole of the share capital being held by the holding company is certainly not the same thing as whole of the share capital being held in the name of the holding company. In fact, that situation is a legal impossibility in India. In case one is to proceed on the basis that entire share capital of the subsidiary company should be held in the name of the holding company, there cannot be any situation in which section 47(v) can apply. That is certainly not an interpretation which can be termed as ut res magis valeat quam pereat, i.e. to make the statute effective rather than making it redundant.As held by Hon’ble Supreme court, in the case of CIT Vs. Teja Singh (35 ITR 408), a construction which results in rendering a provision redundant must be avoided. For this reason alone, the interpretation canvassed by the revenue is to be rejected.

3. Having seen the finding recorded by the Tribunal, no fault can be found with the view taken by the Tribunal. In this view of the matter, appeal stands dismissed for want of substantial question of law with no order as to costs.