DEPUTY COMMISSIONER OF INCOME TAX (LARGE TAXPAYER UNIT) - 2, MUMBAI vs. RELIANCE INDUSTRIES LTD, MUMBAI

Subsequently, the co-ordinate Bench vide order dated 3 January 2022 disposed off Miscellaneous Application no. 113 & 114/Mum/2021 in both the above appeals.

MA No. 113/Mum/2021 was filed in wherein it was found that ground no.36 was not adjudicated, wherein inclusion of comparable of Axis Integrated Systems Limited was challenged. Therefore, ground no.36 of Revenue’s appeal was recalled for fresh adjudication.

In MA no.114/Mum/2021, is in Mum/2017, the co-ordinate bench held that assessee has raised an additional ground no.6 that remains to be adjudicated. Accordingly, the co-ordinate Bench recalled the order for adjudicating the additional ground no.6.

Thus, In only issue is to adjudicate ground no.36 of the appeal of learned Dy. Commissioner of Income Tax, large taxpayer unit-2, Mumbai in which is as under:-

At the time of hearing both the parties were heard and both the parties pointed out that this comparable was considered by “163. With regard to Axis Integrated Systems Ltd, we notice that the said company is providing services in respect of regulatory and licensing requirements by liasioning with Government and regulatory authorities. On the other hand, the assessee is providing back office support services, which are mostly internal services. Accordingly, the learned CIT (A) has held that M/s Axis Integrated Systems Ltd is providing high end services and hence it cannot be taken as comparable, since the assessee is providing low end support services. Further, the ld AR contended that the Transfer Pricing Officer has selected this company on cherry picking basis, which is not in accordance with the intention/ objective of Indian transfer pricing regulations. In view of the above, we agree with the view taken by ld CIT (A) that M/s Axis Integrated Systems Ltd should be excluded.”

In view of above facts, we do not have any hesitation in holding that, (i) in absence of any change in the facts and circumstances in the case, (ii) as well as functional profile of the assessee and the comparable company, i.e. Axis Integrated Systems Limited, remaining the same, respectfully following the decision of the co-ordinate Bench, we hold that Axis Integrated Systems Limited should be excluded from the

In the result, ground no.36 of the appeal of the learned Assessing Officer in Mum/2017 is dismissed.

Now, we come to the additional ground no.6, raised by the assessee in of assessee.

Ground no.6 reads as under:-

On 28/3/2013 assessee sold all these preference and equity shares to Reliance Industrial Investments And Holdings Ltd. 13,79,816 preference shares were sold for 1,376,94,45,097/– and 1,76,200 equity shares were sold for 167,35,54,903/–. The assessee incurred long-term capital loss on sale of 5% noncumulative compulsorily convertible preference shares amounting to ₹ 7,505,778,350/– and on equity shares loss of ₹ 1,787,683,109 was incurred.

These shares i.e. capital assets were sold to Reliance industrial Investments and Holdings Limited which is Indian subsidiary company of the Assessee. However :-

As per the order of the co-ordinate Bench in MA No. 114/Mum/2021, additional ground 6 was raised on 16 March 2019 and above loss was claimed as chargeable to tax, but same was left to be adjudicated in the original appellate order of the coordinate bench. As those grounds were not adjudicated, we are supposed to adjudicate the same.

Before us, the assessee has placed the annual accounts of Reliance Industrial Investment and Holding company as on 31 March 2013. It was shown that this company

Thus, it was submitted that 'whole of the share capital' which comprises of both the equity share capital and preferential capital of Reliance Industrial Investments Holdings Ltd was not held by the assessee company, Reliance Industries Ltd and therefore the benefit of provisions of section 47 (iv) of the act is not applicable to the above transaction. Therefore, profit or gain arising on the sale of above shares would be treated as per normal capital gain provisions.

The learned Departmental Representative submitted that no such claim was before the learned Assessing Officer or before the learned CIT (A) but Assessee raised it first time before the ITAT. The above claim should not be allowed. It was further stated that whole of the share capital shall only mean the equity share capital in the above company. The holding of preference share capital by other entities does not exclude the Reliance Investment and Holdings Ltd from the definition of subsidiary company.

We have carefully considered the rival contention and perused the details produced before us. According to section 47 of the income tax act, the provision of section 45 does not apply to certain specified transfer. According to clause (iv) of section 47of The Act, it is provided that if there is a transfer of a capital asset by a company to its an Indian subsidiary company, and parent company along with its nominees, hold the whole of the share capital of the subsidiary company, then, transfer of such capital asset shall not be chargeable to tax under the head capital gain in terms of provisions of section 45 of The Income Tax Act.

Undisputedly, in case before us there is a transfer of a capital asset by assessee to its subsidiary company, which is also an Indian company. Thus, there is no dispute that Reliance industrial investments holding company Ltd is a subsidiary company of reliance

Apparently Reliance Industries Ltd, does not hold any of the 2 types of preference shares issued by Reliance industrial investments and Holdings Ltd i.e. (1) 9% non-cumulative optional convertible preference shares of ₹ 10 each and (2) 10% noncumulative optionally convertible preference shares of ₹ 10 each.

Assessee submitted shareholding pattern of the subsidiary company as on 31/3/2012 and 31/3/2013 of equity share and preference share holding by submitting the duly certified Annual Return Of the company furnished before the Ministry of corporate affairs. Audited annual accounts of the subsidiary company as on 31/3/2013 filed, shows capital structure of the company as per 'note number (1) share capital' that assessee is only holding 100 % equity share capital of Reliance Industrial Investments And Holdings Ltd.

Two different companies hold 9% noncumulative optionally convertible preference shares of ₹ 10 each fully paid in the ratio of (1) Reliance Retail Finance Limited- 35.93%, (2) Reliance Petro Investments Ltd -64.07%. Further, 1200 10% noncumulative optionally convertible preference shares of ₹ 10 each fully paid are held by Reliance Petro Investments Ltd. In addition, 1,49,020 10 % noncumulative optionally convertible preference shares of ₹ 10 each fully paid are held by Reliance Polyolefin's Ltd.

Undoubtedly, the shareholders holding preference share capital are the fellow subsidiary companies.

These fellow subsidiary companies are not the nominees of the assessee but are holding shares on their own account.

Assessee has sold equity shares and preference shares, which are the capital asset of the assessee company to its wholly owned subsidiary company namely Reliance Industrial Investment and Holdings Ltd.

Reliance Industrial Investment and Holdings Ltd is an Indian company as provided under Section 2(26) of the Act, as it was formed and registered under the Companies Act 1956 of the Act.

Reliance Industries Ltd, assessee, holds undisputedly 100% equity share capital of Reliance Industrial Investment And Holdings Ltd. However, Reliance Industrial Investment and Holdings Ltd has issued two different types of non-cumulative optionally convertible preference shares of ₹10 each fully paid up. Balance sheet of the Reliance Industrial Investment and Holdings Ltd. was produced and it was shown that it has 14,57,250, 9% non cumulative optional convertible preference shares of ₹10 each fully paid up which are redeemable at the end of 7 years from the date of allotment at a price of ₹2,000/- per share. It was submitted that 96.55% of the shares as on 31st march, two different companies namely Reliance Retail Finance Ltd and Reliance Petro Investments Ltd. hold those shares. Further, Reliance Industrial Investment and holdings Ltd has issued 1,49,020/-, 10% non-cumulative convertible preference shares of ₹10 each fully paid up which are held by Reliance polyolefin Limited. It has also issued 1200, 10% non-cumulative optional convertible preference shares of ₹10 each fully paid up were also held by Reliance Petro Investments Ltd. Thus, though Reliance Industries Ltd. Assessee holds 100% equity share capital of

Though in the return of income, it was submitted that as the Provisions of Section 47(iv) of the Act are triggered the capital gain or loss is not chargeable under Section 45 of the Act; hence, it was not treated as chargeable but claimed as exempt loss. However, the claim is made that as Reliance Industries does not hold ‘whole of the share capital of the subsidiary company’, the Provisions of Section 47(iv) of the Act are not satisfied and hence, the capital loss arising to the assessee on this transaction is not exempt loss.

Share capital includes 'equity and preference share capital' both. There is no reference of holding of only equity share capital in that section. Therefore, the capital loss arising to the assessee on sale of shares by assessee to its subsidiary company are eligible capital loss of the assessee. Wherever the statute wanted to include each clause of the capital or type of the capital, or any condition attached such shareholding it has provided accordingly. Provisions of Section 86 of the Companies Act 2013 provides that share capital of the company limited by shares shall be of two kinds only i.e. Equity share capital and preference share capital and the 'whole of the share capital' should include holding of equity share capital and preference share capital both.

Provisions of section 47 (iv) of the Act, exempts the capital gain on transfer of capital asset by holding company to its Indian subsidiary company only if the holding company along with its nominees holds

According to us, the 'share capital' includes equity as well as preference shares both. Because, the share capital is deriving its meaning from The Companies Act which includes equity and preference capital both. It is also because wherever legislature wanted particular percentage of particular share capital qua voting right, etc same is provided in those sections, such as Section 47

Section 47 (iv) exempts transfer of capital assets from Holding company to subsidiary company only where share capital in its entirety is held by holding company. Plain meaning of the words of the section clearly suggest so. Therefore, we find that the requirement of holding the whole of the share capital applies to both the types of share capital i.e. equity share capital and preference share capital. Thus, it is apparent that entire issued and paid-up share capital of the subsidiary company should be held by holding company or its nominees for claiming exemption from capital gains under this clause.

In the present case before us, there are different shareholders of preference share capital other than the holding company and holding company only holds along with its nominees, 100 % equity shares of the transferee company. Therefore, according to us the conditions of section 47 (iv) of the act are not satisfied and if any capital gain or loss arising on transfer of a capital asset by the assessee company to its subsidiary company, is chargeable to tax under the provisions of section 45 of the act.

In nutshell, assessee is not eligible for exemption of section 47 (iv) of the act as we hold that transactions of the transfer of capital asset by the holding company to its subsidiary company is to be regarded as 'transfer'. Therefore we direct the learned assessing officer to hold that capital gain or loss arising to the assessee on transfer of shares to its subsidiary company is not tax-exempt under section 47 (iv) of the act.

We also find that before the learned assessing officer there is no occasion to compute the capital gain or loss arising on the transfer of the above shares. Accordingly, we direct the assessee to substantiate sale consideration, cost of acquisition and indexed cost of acquisition before the learned assessing officer and its computation of capital

In the result, additional ground number 6 raised by the assessee which is held by the coordinate bench in miscellaneous application order as not decided is now adjudicated and allowed.

Accordingly, appeal of the learned assessing officer to the extent of ground restored by the miscellaneous application is dismissed and appeal of the assessee to the extent of additional ground no 6 restored by the coordinate bench, is allowed.