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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI A. K. GARODIA & SMT. BEENA PILLAI
IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH : BANGALORE BEFORE SHRI A. K. GARODIA, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER
ITA Nos.1783 and 1784/Bang/2018 Assessment year : 2014-15 M/s. Acciona Wind Energy Deputy Commissioner of Income Tax Private Limited, (International Taxation), No. 402, Tower - C, 4th Floor, Vs. Circle 1(1), Millenia Tower, No.1 & 2, BMTC Building, Murphy Road, Ulsoor, 80 Feet Road, Koramangala, Bengaluru-560 008. Bengaluru-560 095. PAN : AAFCA 9045 F APPELLANT RESPONDENT Assessee by : Shri. Ajay Roti, CA Revenue by : Shri. Guruprasad, Addl. CIT DR Date of hearing : 08.11.2019 Date of Pronouncement : 20.12.2019 O R D E R Per A. K. Garodia, Accountant Member Both these appeals are filed by the assessee and are directed against two separate orders of learned CIT(A)-12, Bengaluru, both dated 08.03.2018, for the same Assessment Year 2014-15. Out of these two appeals, one appeal is arising in course of proceedings under section 201(1) and the other appeal arising in course of proceedings under section 201(1A) of the Income Tax Act, 1961 (‘the Act’). Both these appeals were heard together and are being disposed of by way of this common order for the sake of convenience.
ITA Nos. 1783 and 1784/Bang/2018 Page 2 of 10 2. First, we take up the assessee’s appeal in ITA No.1783/Bang/2018 which is arising in course of proceedings under section 201(1) of the Act. The grounds raised by the assessee in this appeal are as under:-
The order passed by the learned Commissioner of Income Tax (Appeals) ['CIT(A)'] - 12, is bad in law. Transaction of buyback of shares is covered under section 47(iv) of the Act 2. The learned CIT(A) has erred in law to conclude that section 46A of the Act is a charging provision for gains arising from buy-back of shares and would prevail over the general provision of section 45 of the Act for taxation of capital gains arising on transfer of capital asset. 3. The learned CIT(A) ought to have appreciated that the definition of income under section 2(24) of the Act includes gains chargeable under section 45 of the Act and therefore erred in law to conclude that gains arising on buy-back of shares is taxable under section 46A of the Act and not under section 45 of the Act which is the charging section to bring capital gains to tax under the Act. 4. The learned CIT(A) has erred in law by concluding that section 47 of the Act is limited in its application only to section 45 of the Act and does not apply to buy-back of shares to which provisions of section 46A of the Act also applies. 5. The learned CIT(A) has erred in law by providing that buy-back of shares is not one of the modes of transfer covered under section 47(iv) of the Act since it results in extinguishment of the capital so transferred which offends the provisions of section 47A of the Act which in turn presumes existence of the capital asset. 6. The learned CIT(A) ought to have appreciated that section 47A of the Act does not have a specific requirement for the capital asset to be in existence post the transfer of such asset. Further, there is no provision under the Act which states that the capital asset is to be in existence for bringing the gains arising therefrom to tax under the Act. Satisfaction of condition for availing exemption under section 47(iv) of the Act
ITA Nos. 1783 and 1784/Bang/2018 Page 3 of 10 7. The learned CIT(A) has erred in denying the benefit of section 47(iv) of the Act on the ground that the entire share capital of the Appellant is not held by M/s. Acciona Energia International S.A. Spain, without appreciating that is not possible under the Companies Act. 1956 that one entity can hold the entire share capital of a private company. 8. The learned CIT(A) ought to have appreciated that one share held by M/s. Acciona Energia S.A. Spain, in Appellant was to comply with the conditions of the Companies Act, 1956 that a private company should have minimum two shareholders. 9. The learned CIT(A) ought to have appreciated that but for the requirement of the Companies Act. 1956. all the shares in the Appellant are held by M/s. Acciona Energia International S.A., Spain from which the Appellant had bought back shares. 10. The learned CIT(A) has erred in law by denying the benefit of section 47(iv) of the Act to the Appellant on the basis of a condition which is impossible to perform. 3. In the course of hearing, it was submitted by learned AR of the assessee that para No. 5.9 on page No.10 of the order of the CIT(A) is relevant wherein learned CIT(A) has proceeded on this basis that the transaction of buy back of shares is not covered under section 47(iv) of the Act because as per learned CIT(A), this section i.e., section 47(iv) is in the context of other modes of transfer as contained in section 2 (47) of the Act such as sale, exchange, conversion of stock into trade and transaction involving buy back of shares is distinct on such other modes as it relates into the capital share so transferred. He further submitted that as per learned CIT(A), section 46A is applicable in the present case which is regarding capital gain on purchase by company of its own shares or other specified securities. In this regard, he submitted that section 46A is not a charging section and charging section is section 45 and therefore section 47(iv) is applicable in the present case. He placed reliance on the judgment of Hon’ble Bombay High Court rendered in the case of Cadell Wvg. Mill Co. (P.) Ltd., Vs. CIT as reported in 116 Taxmann 77 (Bom). He filed a copy of this judgment and pointed out that para 11 of this
ITA Nos. 1783 and 1784/Bang/2018 Page 4 of 10 judgment is relevant. As against this, learned DR for the Revenue supported the order of CIT(A). He submitted that section 46A is a charging section and, in this regard, he placed reliance on the Tribunal order rendered in the case of Goldman Sachs (India) Securities (P.) Ltd., Vs. ITO (International Taxation) as reported in 70 taxmann.com 46 (Mumbai – Trib.). He submitted a copy of this Tribunal order. He also submitted that otherwise also, section 47(iv) is not applicable because as per this section, the parent company or its nominees should hold the whole of the share capital of the subsidiary company whereas in the present case, the parent company is holding only 99.99% of shares of the subsidiary company and in this regard, our attention was drawn to para No.8.1 of the order passed by the AO under section 201(1) of the IT Act and it was pointed out that the assessee has contended that in the present case, although it was pointed out by the assessee that the transaction is covered by section 47(iv) of the Act but as per the AO, the admitted facts are contradictory to the statement because it is undisputed that the parent company M/s. Acciona Energia International S.A, Spain holds only 99.99% of the shares of the subsidiary company and the remaining shares being 0.01% is held by another company M/s. Acciona Wind Energy Pvt. Ltd. He has noted this argument of the assessee also that for all practical purposes, the parent company are to be considered as holding the whole of the share capital of the subsidiary company.
In the rejoinder, it was submitted by learned AR of the assessee that in India, there should be minimum two shareholders and hence, no person or company can hold 100% shares. He placed reliance on the judgment of Hon’ble Bombay High Court rendered in the case of CIT Vs. Papilion Investments (P.) Ltd., as reported in 206 taxman 142 and pointed out that in this case, it was held by Tribunal in that case that since two shareholders are required in India to form a company, entire share capital of a subsidiary company cannot be held in the name of the holding company and if this view
ITA Nos. 1783 and 1784/Bang/2018 Page 5 of 10 is taken then there cannot be a situation in which section 47(iv) of the Act can apply and therefore, this cannot be a correct interpretation and this finding of the Tribunal is approved by Hon’ble Bombay High Court by holding that there is no substantial question of law.
We have considered the rival submissions. First of all, we reproduce the provisions of clause iv of section 47. This reads as under:-
“47(iv) any transfer of a capital asset by a company to its subsidiary company, if- (a) the parent company or its nominees hold the whole of the share capital of the subsidiary company, and (b) the subsidiary company is an Indian company;” from the above provisions of section 47(iv) of the Act, it is seen that it is not a requirement of this section that parent company should hold the entire share capital of the subsidiary company in its own name because this section requires that a whole of the shares should be held by the parent company or its nominees. Hence, even if there are two or more shareholders and the other shareholder is different than the parent company then also requirement of this section can be complied with if other shareholder/s is/are a nominee/s of the parent company. This is not the case in the present case that the other shareholder i.e., M/s. Acciona Energia SA, Spain is a nominee of the parent company M/s. Acciona Energia International S.A, Spain. The judgment cited by learned AR of the assessee having been rendered in the case of CIT Vs. Papilion Investments (P.) Ltd., (supra) is not applicable. Moreover, in that case, 2 shares out of shares issued and subscribed were held by assessee company with a person, who was Director of the assessee company and this was the only objection in that case that entire shares were not held by the parent company in its own name and hence, it appears that in that case, the requirement of section 47(iv) was being satisfied because the remaining shares were held jointly by the assessee company along with its Director.
ITA Nos. 1783 and 1784/Bang/2018 Page 6 of 10 6. We have seen that section 47(iv) of the Act is not applicable in the present case for this reason that the parent company is not holding whole of the share capital of the subsidiary company along with its nominees. But still, we feel it proper to decide the second aspect of the matter as to whether section 46A of the Act is applicable in the present case or not. We find that first important section regarding chargeability of capital gains is section 45 which is the section regarding profit or gains arising from the transfer of the capital asset. Section 46A has been inserted by the Finance Act, 1999 w.e.f. 1st April, 2000 and as per this section, gain arising to the shareholder on buy back of shares by company of its own shares or other specified securities is chargeable to tax as deemed capital gain. For ready reference, we reproduce section 46A also. This reads as under:-
“After section 46 of the Income-tax Act, the following section shall be inserted with effect from the 1st day of April, 2000, namely :— ‘46A. Capital gains on purchase by company of its own shares or other specified securities.—Where a shareholder or a holder of other specified securities receives any consideration from any company for purchase of its own shares or other specified securities held by such shareholder or holder of other specified securities, then, subject to the provisions of section 48, the difference between the cost of acquisition and the value of consideration received by the shareholder or the holder of other specified securities, as the case may be, shall be deemed to be the capital gains arising to such shareholder or the holder of other specified securities, as the case may be, in the year in which such shares or other specified securities were purchased by the company. Explanation.—For the purposes of this section, "specified securities" shall have the meaning assigned to it in Explanation to section 77A of the Companies Act, 1956 (1 of 1956).” 7. As per provisions of section 46A of the Act as reproduced above, it is seen that as per this section, this is not the requirement that there should be any transfer of any capital asset. The requirement is this much only that in a case where shareholders or a holder of other specified securities received in consideration from any company for purchase of its own shares or other
ITA Nos. 1783 and 1784/Bang/2018 Page 7 of 10 specified securities held by such shareholder or holder of other specified securities then subject to the provisions of section 48, the difference between the acquisition and the value of consideration received by the shareholder shall be deemed to be capital gains arising to such shareholder. Hence, in our considered opinion, sections 45 and 46A operates in a different field. Section 45 of the Act is applicable regarding transfer of a capital asset whereas section 46A is applicable in respect of receipt of consideration from any company for purchase of its own shares. Since there is no requirement in section 46A of the Act that there has to be a transfer of shares, section 47(iv) of the Act is not applicable in connection with the issue covered by section 46A of the Act and hence, there is no merit in the argument that because of section 47(iv) of the Act, the capital gain in the present case is not chargeable to tax. Now we deal with the applicability of the judgment of the Hon’ble Bombay High Court rendered in the case of Cadell Wvg. Mill Co. (P.) Ltd., Vs. CIT (supra) on which reliance has been placed by the learned AR of the assessee. In our considered opinion, this judgment is not applicable in the present case because in that case, the issue in dispute was as to whether the amount of Rs.1.40 Crores received by draft dated 05.12.1989 in consideration of surrendering the statutory tenancy arise / or the possession rights in a property can be construed to be a casual and non-recurring receipts within the meaning section 10(3) of the Act and as such exigible to tax under section 56 of the Act. This judgment is dated 06.02.2001 and the assessment year involved in that case was 1990-91 because the amount in question was received by a draft dated 05.12.1999. Section 46A of the Act has been introduced in the statute book from 01.04.2000 and the issue involved is different and therefore, this judgment is not applicable in the present case where section 46A is applicable as per the department and in our considered opinion also.
Now we examine the applicability of the Tribunal order rendered in the case of Goldman Sachs Vs. ITO, International Taxation (supra) on which
ITA Nos. 1783 and 1784/Bang/2018 Page 8 of 10 reliance has been placed by the learned DR of the Revenue. In that case, the dispute before the tribunal was this that as to whether profit arising out of buy- back of shares of the corporate entity cannot be categorized as deemed dividend and same has to be taxed under the head ‘Capital Gains’. In this regard, we first take note of these facts as to when and why the provisions of section 46A were inserted on the statute book. We find as under:-
“Sec. 77A of the Companies Act, 1956 was amended to enable a company to purchase its own shares [or other "specified securities" as defined in the Explanation to the said section]. The Finance Act, 1999 inserted w.e.f. 1st April, 2000 s. 2(22)(iv) to ensure that "dividend" does not include any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of s. 77A of the Companies Act, 1956. However, the Legislature did not intend to give complete relief to shareholders. Any profit or gain arising upon such act of purchase was intended to be taxed as capital gain and hence, s. 46A has been inserted, Sec. 46A was inserted by the Finance Act, 1999 w.e.f. 1st April, 2000. C. SCOPE OF THE PROVISIONS Sec. 46A enjoins that any consideration received by a shareholder or a holder of other specified securities from any company on purchase of its own shares or other specified securities held by such shareholder or holder of other specified securities shall be chargeable to tax. The difference between the cost of acquisition and the value of consideration received by the holder of specified securities or by the shareholder, as the case may be deemed to be the capital gains. Such capital gains will be charged to tax in the year in which such shares or other specified securities were purchased by the company. 9. As per the tribunal order cited by the learned DR of the revenue, section 46A of I T Act was considered and it was held that for the consideration received by a shareholder on buy back of shares by the company concerned, capital gain tax is payable and such receipt of shareholder is not a deemed dividend. This judgment is an authority regarding applicability of section 46A in respect of receipt by shareholder on account of buy back of shares from the concerned company but there was no argument or decision about applicability of section 47 (iv) of I T Act. We have already noted and decided that section 47 (iv) is not applicable in the present case for two reasons. First reason given
ITA Nos. 1783 and 1784/Bang/2018 Page 9 of 10 by us is this that in the present case, the assessee is not holding whole of the shares of the subsidiary company by itself or along with its nominee or nominees as required by section 47 (iv) of I. T. Act. Regarding the judgment of Hon’ble Bombay High Court rendered in the case of CIT vs. Papilion Investments Pvt. Ltd., 206 Taxman 142, we have noted that in that case, this was the argument of the revenue before Hon’ble Bombay High Court and before the tribunal that the entire Share Capital has to be held by the parent Company in its own name whereas section 47 (iv) talks about holding of whole shares of the subsidiary company by holding company or its nominees. When shares can be held by nominees also, it is not impossible to hold entire shares of the subsidiary company by the holding company along with one or more nominees or by the nominees only without holding of any share by the parent company. In that case, the tribunal held that whole of share capital being held by holding company is certainly not same thing as whole of share capital being held in name of holding company and further held that such a situation is a legal impossibility in India because in India, there has to be minimum two shareholders. This fact is also noted in that judgment that two shares were jointly held by the assessee holding company with a director of the company to satisfy requirements of Companies Act. It is seen that in that case, even those two shares were also held by the parent company although not signally but jointly with a director. It may be that the director concerned was a nominee of the parent company but in the present case, it is not the claim of the assessee at any level that the other company holding shares to the extent of 0.01 % was holding the shares as nominee of the parent company or jointly with the parent company as in that case and hence, this judgment is not applicable. 10. Second reasoning given by us about non applicability of section 47 (iv) is this that in section 46A, there is no requirement of transfer of any capital asset being shares. Only requirement is that a shareholder receives a consideration from a company for purchase of its own shares and in that situation, subject to section 48, the difference between the cost of acquisition and value of consideration received by the shareholder shall be deemed to be the capital gains arising to such shareholder in the year in which, the shares are purchased by the company. There is no mention of the term “Transfer” in section 46A. Section 47 (iv) is regarding non applicability of section 45 to a transfer of a capital asset by a company to its subsidiary company if the parent company or its nominees hold the whole of the share capital of the subsidiary company. We have noted above that section 45 and section 46A operate in different fields. Section 45 covers actual capital gain on transfer of a capital asset but section 46A is about Deemed Capital gains on buy back of shares.
ITA Nos. 1783 and 1784/Bang/2018 Page 10 of 10 11. In view of the above discussion, we hold that in the facts of the present case, section 46A is applicable and therefore, we find no reason to interfere in the order of the CIT(A). 12. In the result, the appeal of the assessee in ITA No.1783/Bang/2018 is dismissed.
Now we take up the second appeal in ITA No.1784/Bang/2018. In this appeal, the issue in dispute is regarding chargeability of interest under section 201(1A) of the Act. It is now a settled position of law that interest under section 201(1A) of the Act is mandatory and therefore, on this issue also, we find no reason to interfere in the order of the learned CIT(A). 14. In the result, the appeal of the assessee in ITA No.1784/Bang/2018 is also dismissed. 15. In the combine result, both the appeals of the assessee are dismissed. Pronounced in the open court on the date mentioned on the caption page.
Sd/- Sd/- (BEENA PILLAI) (A. K. GARODIA) Judicial Member Accountant Member Bangalore. Dated: 20th December, 2019. /NS/
Copy to: 1. Appellants 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file By order Assistant Registrar, ITAT, Bangalore.