Commissioner of Income Tax

ITA 562/2008 Page 1 of 38

* IN THE HIGH COURT OF DELHI AT NEW DELHI

ITA No. 562 of 2008

Reserved on: 24th May,2012 %

Date of Decision: 1st June, 2012

Commissioner of Income Tax

....Petitioner Through Mr. N.P. Sahni, Sr. Standing Counsel with

Mr. Ruchesh Sinha, Advocate.

Versus

Sunaero Limited

….Respondent

Through Dr. Rakesh Gupta with Ms. Rani Kiyala, Advs.

CORAM: HON’BLEMR. JUSTICE SANJIV KHANNA HON'BLE MR. JUSTICE R.V. EASWAR

SANJIV KHANNA, J.

Revenue in this appeal under Section 260A of the Income Tax Act, 1961 (Act, for short) impugns order dated 26th October, 2007, passed by the Income Tax Appellate Tribunal (tribunal, for short) in the case of Sunaero Limited, the respondent assessee. The appeal arises from the block assessment order for the period 1st April, 1990 to 21st November, 2000, as the respondent assessee was subject to search and seizure operation on 21st November, 2000. 2. We are required to decide the following substantial questions of law, which were framed vide order dated 11th November, 2011:- “(i) Whether the Income Tax Appellate Tribunal was right in deleting the addition of Rs.21 crores made by 2012:DHC:3789-DB

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the Assessing Officer under Section 45 read with Section 47(v) of the Income Tax Act, 1961?

(ii) Whether the impugned order passed by the Income Tax Appellate Tribunal is perverse?”

Sunair Hotels Ltd. was granted the rights to develop a hotel at Bangla Sahib Road by the New Delhi Municipal Corporation (NDMC) in 1970. However, due to some differences that developed between the two, the development rights were cancelled. Sunair Hotels Ltd. incorporated another group company, the respondent assessee herein, and vide letter dated 16th September 1993, wrote to the NDMC to substitute its name with that of the respondent assessee. During the pendency of this request, in the year 1993- 94, Sunair Hotels Ltd. transferred its development rights to the respondent assessee for NIL consideration. However, the NDMC refused to transfer the licensee rights in the name of the respondent assessee. During the year 1994- 95, the respondent assessee transferred the hotel development rights back to Sunair Hotels Ltd. for a consideration of 21 crores.

The respondent assessee in the return filed for the assessment year 1995-96, had shown capital gain of Rs.21 crores on transfer of hotel development rights to Sunair Hotels Ltd., but the same was claimed to be exempt from capital gains tax under Section 47(v) of the Act. 4A. Section 47(v) of the Act reads as under:- 2012:DHC:3789-DB

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“47. Transactions not regarded as transfer.—Nothing contained in Section 45 shall apply to the following transfers:— xxxx

(v) any transfer of a capital asset by a subsidiary company to the holding company, if— (a) the whole of the share capital of the subsidiary company 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) shall apply to the transfer of a capital asset made after the 29th day of February, 1988, as stock-in- trade;”

A reading of the said provision shows that it applies when a wholly owned subsidiary transfers its capital assets for consideration to the holding company. Consideration received by the wholly owned subsidiary company in such cases is not liable to capital gains tax. A subsidiary company has been defined in Section 4 of the Companies Act, 1956 (Companies Act, for short) as:- “4. Meaning of “holding company” and “subsidiary”.—

(1) For the purposes of this Act, a company shall” subject to the provisions of sub-section (3), be deemed to be a subsidiary of another if, but only if,— (a) that other controls the composition of its Board of directors; or (b) that other— (i) where the first-mentioned company is an existing company in respect of which the holders of preference shares issued before the commencement of this Act have the same voting rights in all respects as the holders of equity shares, exercises or controls more than half of the total voting power of such company; 2012:DHC:3789-DB

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(ii) where the first-mentioned company, is any other company, holds more than half in nominal value of its equity share capital; or] (c) the first mentioned company is a subsidiary of any company which is that other's subsidiary.

Illustration Company B is a subsidiary of Company A, and Company C is a subsidiary of Company B. Company C is a subsidiary of Company A, by virtue of clause (c) above. If Company D is a subsidiary of Company C, Company D will be a subsidiary of Company B and consequently also of Company A, by virtue of clause (c) above; and so on.

(2) For the purposes of sub-section (1), the composition of a company's Board of directors shall be deemed to be controlled by another company if, but only if, that other company by the exercise of some power exercisable by it at its discretion without the consent or concurrence of any other person, can appoint or remove the holders of all or a majority of the directorships; but for the purposes of this provision that other company shall be deemed to have power to appoint to a directorship with respect to which any of the following conditions is satisfied, that is to say— (a) that a person cannot be appointed thereto without the exercise in his favour by that other company of such a power as aforesaid; (b) that a person's appointment thereto follows necessarily from his appointment as director2 [* * *] or manager of, or to any other office or employment in, that other company; or (c) that the directorship is held by an individual nominated by that other company or a subsidiary thereof.

(3) In determining whether one company, is a subsidiary of another— (a) any shares held or power exercisable by that other company in a fiduciary capacity shall be treated as not held or exercisable by it; 2012:DHC:3789-DB

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(b) subject to the provisions of clauses (c) and (d), any shares held or power exercisable— (i) by any person as a nominee for that other company (except where that other is concerned only in a fiduciary capacity); or (ii) by, or by a nominee for, a subsidiary of that other company, not being a subsidiary which is concerned only in a fiduciary capacity; shall be treated as held or exercisable by that other company; (c) any shares held or power exercisable by any person by virtue of the provisions of any debentures of the first-mentioned company or of a trust deed for securing any issue of such debentures shall be disregarded; (d) any shares held or power exercisable by, or by a nominee for, that other or its subsidiary [not being held or exercisable as mentioned in clause (c)] shall be treated as not held or exercisable by that other, if the ordinary business of that other or its subsidiary, as the case may be, includes the lending of money and the shares are held or the power is exercisable as aforesaid by way of security only for the purposes of a transaction entered into in the ordinary course of that business.

(4) For the purposes of this Act, a company shall be deemed to be the holding company of another if, but only if, that other is its subsidiary.

(5) In this section, the expression “company” includes any body-corporate, and the expression “equity share capital” has the same meaning as in sub-section (2) of Section 85. (6) In the case of a body corporate which is incorporated in a country outside India, a subsidiary or holding company of the body corporate under the law of such country shall be deemed to be a subsidiary or holding company of the body corporate within the meaning and for the purposes of this Act also, whether the requirements of this section are fulfilled or not.

2012:DHC:3789-DB

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(7) A private company, being a subsidiary of a body corporate incorporated outside India, which, if incorporated in India, would be a public company within the meaning of this Act, shall be deemed for the purposes of this Act to be a subsidiary of a public company if the entire share capital in that private company is not held by that body corporate whether alone or together with one or more other bodies corporate incorporated outside India.”

The Assessing Officer in the block assessment order dated 29th November, 2002, held that the assessee was not a wholly owned subsidiary of Sunair Hotels Ltd. He observed that during the course of search operations, material/documents seized contradicted the claim of the respondent assessee, that it was a wholly owned subsidiary of Sunair Hotels Ltd. It was in fact a wrong claim. The respondent assessee had seven registered individuals as shareholders and Sunair Hotels Ltd. was not a holder of even a single share.

During the course of block assessment proceedings, the respondent assessee claimed that it was wholly owned subsidiary of Sunair Hotels Limited and that the seven shareholders were nominees of Sunair Hotels Limited and not shareholders in their individual right. The entire expenditure for incorporation of the company, as well as investment in the subscribed share capital of Rs.7,000/-, was made by the holding company in the names of the seven shareholders. The Assessing Officer rejected the said contention observing that material unearthed during the search operation under Section 132 of the Act, and 2012:DHC:3789-DB

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during the post search investigation, elucidated that the respondent asssessee was not a wholly owned subsidiary of Sunair Hotels Limited as claimed. He specifically examined and rejected the two contentions of the respondent being (i) that the shareholders were nominees of Sunair Hotels Limited and were not shareholders in their individual capacity and (ii) that the entire investment in the share capital of Rs. 7,000/- was made by Sunair Hotels Limited, i.e. the holding company, recording the following reasons:- (i) Share Certificate of 100 shares of Rs.10/- each, allotted on 23rd October, 1993, were in the names of the individual shareholders. The share certificates do not show that the shareholders were nominees of Sunair Hotels Limited. (ii) The Memorandum and Articles of Association submitted by the respondent assessee, along with the reply dated 29th August, 2002 did not state that the respondent assessee was a wholly owned subsidiary of Sunair Hotels Ltd. and that the shares were subscribed by Sunair Hotels Limited. (iii) No declaration was made under Section 187C of the Companies Act, that the seven shareholders were nominees of Sunair Hotels Limited. It is obligatory to file a declaration in the prescribed form under Section 187C of the Companies Act. 2012:DHC:3789-DB

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(iv) Prescribed forms under Section 187C of the Companies Act were filed with the