Revenue Dept Seeks Denial Of Tax Exemption If Parent Co Or Its Nominee Ceases To Hold Entire Share Capital Of Subsidiary

The Supreme Court on Monday admitted a petition of revenue department seeking denial of tax exemption if the parent company or its nominee ceases to hold the entire share capital of the subsidiary. The assessee would be liable to pay capital gains tax on the transfer of its shares, the I-T department said.

A bench comprising Justice BN Agrawal and Justice PP Naolekar admitted the petition of revenue department after hearing the preliminary submissions.

Additional solicitor-general Mohan Parasaran, appearing for the I-T department, said the issue of levying capital gains tax on surplus realised from sale of shares by the holding company from its subsidiary involved a substantial question of law to be decided by the apex court.

By virtue of Section 47A(ii) of the Income-Tax Act, the tax exemption is denied if the parent holding company or its nominees cease to hold the whole of the share capital of the subsidiary company, Mr Parasaran said.

However, the assessee company through its counsel maintained that if such transfer came within the purview of corporate partition, there would be no liability towards capital gains tax on such transfers.

The assessee company, Annamalaiyar Mills, was the holding company of Annamalaiyar Textiles, which got delinked as the subsidiary. In the parent company, there were two groups of members, one group holding 61.26% shares and other group holding 38.74% shares. A reorganisation was made in the way that majority group came to hold all shares in the parent group and minority group all shares in subsidiary.

A transfer of the shares was brought about by a system of mutual share transfer. The minority group agreed to transfer their shares in the parent company and majority their part of shares in subsidiary. It was shown in the balance-sheet as a gift. At the same time, Annamalaiyar Textiles agreed to pay a sum of Rs 42.45 lakh to the assessee company. Against this, the I-T department considered it a case of tax net on capital gains.