1 - This appeal by the assessee is directed against the order of the C.I.T.(A)-XVII, Bombay and relates to the assessment year 1983-84.
2. The solitary dispute raised in this appeal pertains to the exigibility to tax of Rs. 6,80,000 as long term capital gains derived by assessee company on transfer of shares of, M/s. Citurgia Biochemicals Ltd. (hereinafter referred as CBL) to its subsidiary company, M/s. Nesvile Trading Pvt. Ltd. (hereinafter referred as NTPL).
Revenue in the facts of the present case applied the ratio laid down by the apex court in the case of McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 (SC).
3. Shri Darshan Desai, Ld. counsel for the assessee appeared before us.
It was submitted that the capital gain earned by the assessee company is not exigible to tax vide the prescription of Section 47(iv) of the Act. It was further submitted that the principle propounded by the apex court in the McDowell & Co. Ltd. 's case (supra) cannot be stretched beyond its true limits. In regard to the transfer of shares revenue cannot put any condition and the course beneficial to the assessee should be adopted. The tax advantage was available by virtue of the provisions laid down in the statute. No colourable device was adopted to reduce the tax liability. The dominant object of the transfer was not tax saving, incidence of taxation, resulting in tax saving is only consequential. McDowell principle can be applied only to dubious devices resulting in avoiding of tax.
4. It was argued that the transaction of sale of shares of the impending amalgamated company, by the assessee company was a bona fide transaction. It cannot be construed to be "sham" or "collusive". The assessee in fact, realised not only the price for the shares sold but also the separate loan granted earlier to the transferee. It, therefore, realised market value of an asset which if not sold before its impending merger would have been completely lost by way of cancellation of such shares on merger. Therefore, commercial expediency was the dominant motive behind the transaction. In view of imminent merger, maintaining the group ownership percentage in investee company was significant in the interest of business. The choice of transferee is a matter which rests entirely in the domain of the parties to the transaction. Revenue cannot conjure up a fictional situation. If NTPL sells the shares of CBL in future it would be incumbent on its part to pay capital gains tax on the price then fetched minus the cost to the assessee. Thus, the real capital gain will be realised when the shares will be sold outside the group. NTPL can then deduct only the actual cost in the hands of Sturdia and not the price paid by it or its cost of Rs. 6,80,000 in view of the provisions of Section 49 of the Act.
Thus, the case is beyond the ambit of McDowell's ruling. The mode of financing and the fact that NTPL ceased to be subsidiary are of not much relevance in deciding the issue. Ld. counsel further relied on some precedents.
5. Shri D.C. Pant, Ld. Departmental Representative appeared before us and submitted that the subsidiary company had share capital of Rs. 500 only held by two persons of the same group. No business activity was carried on by the subsidiary company. It ceased to be a subsidiary when offer of right shares were declined by the assessee-company. The subsidiary company had no funds of its own to purchase shares.
Accommodation by way of call deposit was given to the subsidiary company to enable them to make purchases and subsequently also subsidiary company did not have any assets of its own to re-pay the money raised by way of call deposit for which deposits with interest were taken from associate concern and the loan was repaid. He further invited our attention on the prescription of Section 47A which was introduced with effect from 1st April, 1985. This section was inserted to provide that, if at any time before the expiry of 8 years from the date of transfer of a capital asset referred to in clause (iv) or clause (v) of Section 47, such capital asset is converted by the transferee company into, or is treated by it as, stock-in-trade of its business; or the parent company or its nominee, or as the case may be, the holding company ceases to hold the whole of the share capital of the subsidiary company before the expiry of the period of 8 years aforesaid, the amount of capital gain exempted from tax by virtue of the provisions contained in Section 47 of the Act shall be deemed to be income of the transferor company chargeable under the head 'capital gains' of the year in which the transfer took place. It was therefore contended that the case of the assessee comes clearly within the ambit of the ratio laid down by the apex court in the case of McDowell & Co, Ltd. (supra). He also relied on some precedents.
6. We have heard the rival submissions in the light of "material placed before us and precedents relied upon. Section 47 prescribes as under: 47. Nothing contained in Section 45 shall apply to the following transfers:- (iv) any transfer of capital asset by a company to its subsidiary company if- (a) the parent company or its nominee hold the whole of the share capital of the subsidiary company, and Assessee company satisfied both the conditions and claimed that capital gain in question was not exigible to tax. Revenue rejected the claim of the assessee. The ratio of the McDowell Co. Ltd.'s case (supra) was applied in view of the following facts: (i) The capital of the subsidiary (NTPL) was only Rs. 500 i.e., five equity shares of Rs. 100 each.
(ii) The subscribers were Mrs. G.K. Batlivala and Mr.K.C. Harogan, two executives of Bombay Dyeing Mfg. Co. Ltd. (iii) NTPL was incorporated on 6-3-1978. It had no other activity since its inception.
(iv) In March 1983, this company acquired the shares of CBL and thereafter it became its wholly owned subsidiary.
(v) On 24-3-1983 assessee company placed without interest a call deposit of Rs. 15.05 lacs with NTPL. With the help of this amount NTPL purchased the shares of CBL.
(vi) On 2-8-1983 NTPL offered 995 equity shares to the assessee company by way of rights which were declined by the assessee company and therefore NTPL ceased to be assessee's subsidiary company. The shares had been picked up by another associate concern, Kampala Trading Pvt. Ltd. 7. Supreme Court is the legal mentor of the nation. Colourable devices in the guise of tax planning created chaos in the judicial cosmos. Apex adjudicator, invested with constitutional credentials under Art. 141 clarified the law apropos the same in the case of McDowell & Co. Ltd. (supra). It was held that colourable devices cannot be part of the tax planning and it is wrong to encourage and entertain the belief that it is honourable to avoid the payment of tax by dubious method. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges. There is behind taxation laws as much moral sanction as is behind any other welfare legislation. It is up to the court to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and to expose the devices for what they really are and to refuse to give judicial benediction.
8. 'You never go down the same river twice'. What, Heraclitus, said about time and flux can relate to law as well. Decision of a Superior Court is a ratiowise luminosity within the edifice of facts where the judicial lamp plays the legal flame. Dynamism of law can be viewed with reference to flow of precedents on the point in issue. We begin our journey with the oft quoted remark of Lord Tomlin who said in the case of IRC v. Duke of Westminster [1936] AC 1 that everyone is entitled, if he can to order his affairs so as to diminish the burden of tax. This was in consonance with the view taken by Lord Sumner in IRC v. Fisher's Executors [ 1926] AC 395 (HL). Lord Greene, M.R. made a departure from this view point. In the case of Lord Howard de Walden v. IRC (1942] 25 TC 121 dealing with the construction of an anti-avoidance section it was observed: "It scarcely lies in the mouth of the taxpayer who plays with fire to complain of burnt fingers". The march of law against tax avoidance scheme continued and came significant departure from the Westminster's and Fisher Executor's principle. Lord Atkin who himself dissented in the Duke of Westminster's case observed in United Australia Ltd. v. Barclays Bank Ltd. [1940] 4 All ER 20: "When these ghost of the past stand in the path of justice, clankering their medieval chains, the proper course for the judge is to pass through them undeterred".
9. In W.T. Ramsay Ltd. v. IRC [1982] AC 300 (HL), the House of Lords had to consider a scheme of tax avoidance which consisted of a series of combination of transactions each of which was individually genuine, but the result of all which was avoidance of tax. Lord Wilberforce, with great force observed: "Given that a document or transaction is genuine, the court cannot go behind it to some supposed underlying substance. This is the well known principle of Duke of Westminster.
This is a cardinal principle, but it must not be overstated or overextended.
The significance of Ramsay as turning point in the interpretation of tax laws in England and the departure from the strings of Westminster were explained in IRCv. Burmah Oil Co. Ltd. [1982] STC 30. Where Lord Diplock said: "It would be disingenuous to suggest, and dangerous on the part of those who advise on elaborate tax avoidance schemes to assume, that Ramsay case did not mark a significant change in the approach adopted by this house in its judicial role to a preordained series of transaction (Whether or not they include the achievement of a legitimate commercial end) into which there are inserted steps that have no commercial purpose apart from the avoidance of a liability to tax, which in the absence of those particular steps would have been payable. The difference is in approach. It. does not necessitate the overruling of any earlier decisions of this house, but it does involve recognising that Lord Tomlln's oft quoted dictum in IRC v. Duke of Westminster [1936] AC 1, 'every man is entitled if he can to order his affairs so that the tax attaching under that appropriate Acts is less than it otherwise would be', tell us little or nothing as to what methods of ordering one's affairs will be recognised by the courts as effective to lessen the tax that would attach to them if business transactions were conducted in a straightforward way".
10. Clause 13 of the Taxation Laws (Amendment) Bill, 1984 is reproduced here as under: 13. Insertion of new Section 4 7A.-After Section 47 of the Income-tax Act, the following section shall be inserted, namely:- '47A. Withdrawal of exemption in certain cases. -Where at any time before the expiry of a period of eight years from the date of the transfer of a capital asset referred to in clause (iv) or, as the case may be, clause (v) of Section 47,- (i) such capital asset is converted by the transferee company into, or is treated by it as, stock-in-trade of its business; or (ii) the parent company or its nominees or, as the case may be, the holding company ceases or cease to hold the whole of the share capital of the subsidiary company, the amount of profits or gains arising from the transfer of such capital asset not charged under Section 145 by virtue of the provisions contained in clause (iv) or, as the case may be, clause (v) of Section 47 shall, notwithstanding anything contained in the said clauses, be deemed to be income chargeable under the head 'Capital gains' of the previous year in which such transfer took place'.
11. The scope of the amended section was explained in the notes on clauses as under: Clause 13 seeks to insert a new Section 47A in the Income-tax Act, relating to withdrawal of exemption from capital gains in certain cases.
Under clause (iv) of Section 47 of the Income-tax Act, capital gain arising from the transfer of a capital asset by a company to its wholly-owned subsidiary company is exempted from tax. Similarly, under clause (v) of Section 47, capital gain arising from the transfer of a capital asset by the subsidiary company to the holding company is also exempt from tax. Exemption under these provisions is allowed only if the transferee company is an Indian company.
The proposed new section seeks to provide that, if at any time before the expiry of eight years from the date of transfer of a capital asset referred to in Section 47(i) or (v), such capital asset is converted by the transferee company into, or is treated by it as, stock-in-trade of its business; or the parent company (or its nominee) or, as the case may be, the holding company ceases to hold the whole of the share capital of the subsidiary company before the expiry of the period of eight years aforesaid, the amount of capital gain exempted from tax by virtue of the provisions contained in Section 47 of the Act shall be deemed to be income of the transferor company chargeale under the head 'Capital gains' of the year in which such transfer took place.
12. A provision until it is amended is a living law. Justice is seen as the consequence of procedural fairness. In the instant case on a plain reading of Section 47A, we find that the amended provision does not fall within the arena of 'totidum uerbis' (retroactive legislation).
The general rule is that all statutes other than those which are merely declaratory or which relate only to matters of procedure or of evidence are. prima facie, prospective, and retrospective effect is not given to them unless by express words or necessary implication it appears that this was the intention of the Legislature. But we are not concerned with the retrospective applicability of this provision. We are required to see the purpose for which this provision was enacted. Apparently this was to plug a loophole. It won't be inappropriate to quote here Plato who said: "Surely there is something very amusing in the way the Ministers go on enacting their petty laws and amending them, always imagining they will find some way to put an end to fraud in business.... They have no idea that really they,are cutting off the heads of a hydra".
What Plato purported in the abovesaid passage is that the amendment in law is not the only panacea to check fraud in business. If you cut down the head of a hydra two new heads will come up.
The apex court in the case of McDowell & Co. Ltd. (supra) has noted that the ghost which buttressed the cause of tax evasion found quietude with the decision of W.T. Ramsay Ltd.'s case (supra) and Burmah Oil Co.
Ltd.'s case (supra). It was exercised in England. Should it be allowed to rear its head in India? 13. In the case of CWTv. Arvind Narottam [ 1988] 173 ITR 479 (SC) revenue relied on the ratio of McDowell & Co. Ltd. 's case (supra) apex court held that this decision cannot advance the case of the revenue because the language of the deeds of settlement is plain and admits of no ambiguity. Justice Sabyasachi Mukharji (as he then was), observed as under: Dr. V. Gauri Shanker, appearing on behalf of the Revenue, made an appeal before us stating we should really construe the three trust deeds together and see 'the game of the hidden purpose' behind these trust deeds which were, in fact, for the sole and exclusive benefit of the assessee. He drew our attention to the observations of justice Chinnappa Reddy, with which other learned judges of the Full Bench agreed in McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 (SC).
He invited us to hold that having regard to the taxing statute, the tax avoidance device should be exposed. Justice Chinnappa Reddy has noticed the change in judicial attitude to tax avoidance devices.
Justice Reddy mentioned that in the country of its birth, the principles of Westminster, of condoning tax avoidance have been given a decent burial. In that very country, the phrase 'tax avoidance' is no longer condoned or looked upon with sympathy.
It is true that tax avoidance in an underdeveloped or developing economy should not be encouraged on practical as well as ideological grounds. One would wish, as noted by Reddy, J., that one could get the enthusiasm of Justice Holmes that taxes are the price of civilization and one would like to pay that price to buy civilization. But the question which many ordinary taxpayers very often, in a country of shortages with ostentatious consumption and deprivation for the large masses, ask is, does he with taxes buy civilization or does he facilitate the waste and ostentation of the few. Unless waste and ostentation in Government spending are avoided" or eschewed, no amount of moral sermons would change people's attitude to tax avoidance.
In any event, however, where the true effect on the construction of the deeds is clear, as in this case, the appeal to discourage tax avoidance is not a relevant consideration. But since it was made, it has to be noted and rejected. With these observations I agree.
14. Now let us advert to the facts of the present case. We can understand the exigency for selling the CBL shares. We have considered the various circumstances narrated before us. The question before us is whether the transfer was effected to avoid the tax. The transfer was routed through a subsidiary company. In such transfer statute grants tax concessions. But the facts connected with the subsidiary company and reasonings given by the revenue more fully described in para 6 of this order go to show that assessee company used the subsidiary company as a device to avoid taxation. Its capital was only Rs. 500. It made the purchase with the amount provided by the assessee company. After completion of task it ceased to be subsidiary of the assessee-company are some of the facts on the basis of which it can very well be said that the case of the assessee falls within the ambit of the ratio laid down by the apex court in the case of McDowell & Co. Ltd. (supra). We therefore uphold the impugned order.