I-T - THE issue before the HC is - Whether when the holding company creates a wholly-owned subsidiary and transfers hotel development rights for NIL consideration but when the same is transferred back to the holding company on rejection of name substitution application for a consideration, the capital gains arising out of such transaction is exempt u/s 47(v). And the verdict goes against the assessee.
AO rejected the plea of the assessee stating that as per the material unearthed during the search operation and post search investigation, the asssessee was not a wholly owned subsidiary of ‘S’ as claimed and observed that the share certificates were allotted in the name of the individual shareholders and did not show that the shareholders were nominees of ‘S’. As per MOA and AOA, it was not stated that assessee was a wholly owned subsidiary of ‘S’ and that the shares were subscribed by ‘S’. No declaration was made u/s 187C of the Companies Act, that the seven shareholders were nominees of ‘S’. Prescribed forms were filed with the Registrar of Companies after six and half years of incorporation of the assessee. The forms as submitted during the assessment proceedings dated October, 1993 were forged and fabricated as these forms were printed and sold by the book seller after May-June, 1998. Two shareholder stated in their statements that they had not signed the forms under section 187C. One shareholder stated that he was a shareholder in his individual capacity. Another shareholder stated that he was working in a chartered accountant firm and had no association with ‘S’ and ascribed his signature on MOA on asking of the Chartered Accountant. As per the report under section 209A of the Companies Act there were several irregularities with regard to issue of shares. The minutes of board meetings were false and forged and were created by the assessee to support the claim that it was a wholly owned subsidiary of ‘S’. ‘S’ made a request to NDMC on 16th Sep, 1993 to substitute and transfer the license to the assessee though the assessee was incorporated on 22nd October, 1993. Thus, it was held that since the assessee was not a wholly owned subsidiary of ‘S’, the entire amount of Rs.21 crores received by the assessee was taxable and the benefit u/s 47(v) was not available.
CIT (A) allowed the claim of the assessee observing that denial of one of the director was not sufficient. The AO should had made further enquires to find out and ascertain who had actually made investment in the share capital of the company which would determine the real ownership of the assessee. The payment of share capital was made by cheque and this aspect was not controverted and denied by the AO. Section 187C of the Companies Act is a procedural provision and the requirement of the Companies Act cannot be imported and considered for examining whether conditions u/s 47(v). As far as forgery of signatures and discrepancy in the minutes books, it was for the authorities under the Companies Act to take notice and action. For Section 47(v), this aspect was immaterial. Investment in the shares was made by ‘S’ and it was reflecting in both the companies. ITAT also confirmed the order of the CIT (A) concurring the findings taken by the CIT (A) in his order.
Revenue contended that as per Section 49 of the Companies Act, all investments made by a company should be held in its own name. A company may hold shares in the subsidiary company in its own name or in the name of its nominee, in so far as it is necessary to do so to ensure that the number of members of the subsidiary is not reduced to less than 7 (seven), in the case of public limited company, and in the case of private company the number should not fall below 2 (two). Assessee was not set up or incorporated as a wholly owned subsidiary company of ‘S’. In the Memorandum of Understanding or in subsequent correspondence with NDMC, it was not alleged or stated that the respondent assessee was a wholly owned subsidiary company. There was no contemporaneous record to show that the seven shareholders were nominees of ‘S’ and the investment was solely made by ‘S’. Share certificates were issued in the individuals’ names. There was nothing to show that the payments towards share application money were made by ‘S’.
Assessee contended that appeal was not maintainable as it was question of facts. No evidence relating to undisclosed income was found during search and, therefore, block assessment proceedings were void. In the assessment order made u/s 143(3), AO observed that factually no transaction had taken place between ‘S’ to transfer the hotel development rights in favour of the assessee and then by the assessee in favour of ‘S’. The said assessment order had become final and binding and, therefore, there was no question of capital gain on transfer of the hotel development rights by the assessee in favour of ‘S’. The findings recorded by AO in the assessment order u/s 143(3) could not had been examined in block assessment. Correspondence of ‘S’ with NDMC shows that ‘S’ wanted to incorporate its subsidiary. Ministry of Industry’s acknowledged that ‘S’ was the holding company of the assessee. The entire fund for establishment and incorporation of the assessee was provided/incurred by ‘S’. Share application money was also recorded and shown in the balance sheet and books of accounts of ‘S’. The register of members recorded that the seven shareholders were nominees of the holding company. One of the member had wrongly answered and claimed that he was not a nominee due to the bad relations. He had not disclosed and declared the shares, held by him in the assessee, in the balance-sheet and documents filed with his income tax returns. He was not the de facto shareholder and ‘S’ was the beneficial and the de facto shareholder. Replies were submitted to the Department of Company Affairs, Economic Offences Wing, Crime Cell, Delhi and they were satisfied and no further action had been taken. Section 187C of the Companies Act requires filing of forms but this is for the purpose of reporting. This is a formality and does not affect the rights of the beneficial shareholder.
After hearing both the parties, the High Court held that,
Facts of the case
'S' was granted the rights to develop a hotel by the NDMC. ‘S’ incorporated another company i.e. the assessee company and asked the NDMC to substitute its name with that of the assessee’s name. During the pendency of such application, ‘S’ transferred its right to the assessee for nil consideration. NDMC rejected the application of ‘S’ and the assessee transferred the hotel development rights back to ‘S’ for a consideration of Rs 21 crores. The assessee claimed capital gain on transfer of hotel development rights to ‘S’ as exempt u/s 47(v), which applied when a wholly owned subsidiary transferred its capital assets for consideration to the holding company.
AO held that the assessee was not a wholly owned subsidiary of ‘S’. The assessee had seven registered individuals as shareholders and ‘S’ was not a holder of even a single share. Assessee contended that seven shareholders were nominees of ‘S’ 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.7000/-, was made by the holding company in the names of the seven shareholders.
'S' was granted the rights to develop a hotel by the NDMC. ‘S’ incorporated another company i.e. the assessee company and asked the NDMC to substitute its name with that of the assessee’s name. During the pendency of such application, ‘S’ transferred its right to the assessee for nil consideration. NDMC rejected the application of ‘S’ and the assessee transferred the hotel development rights back to ‘S’ for a consideration of Rs 21 crores. The assessee claimed capital gain on transfer of hotel development rights to ‘S’ as exempt u/s 47(v), which applied when a wholly owned subsidiary transferred its capital assets for consideration to the holding company.
AO held that the assessee was not a wholly owned subsidiary of ‘S’. The assessee had seven registered individuals as shareholders and ‘S’ was not a holder of even a single share. Assessee contended that seven shareholders were nominees of ‘S’ 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.7000/-, was made by the holding company in the names of the seven shareholders.
AO rejected the plea of the assessee stating that as per the material unearthed during the search operation and post search investigation, the asssessee was not a wholly owned subsidiary of ‘S’ as claimed and observed that the share certificates were allotted in the name of the individual shareholders and did not show that the shareholders were nominees of ‘S’. As per MOA and AOA, it was not stated that assessee was a wholly owned subsidiary of ‘S’ and that the shares were subscribed by ‘S’. No declaration was made u/s 187C of the Companies Act, that the seven shareholders were nominees of ‘S’. Prescribed forms were filed with the Registrar of Companies after six and half years of incorporation of the assessee. The forms as submitted during the assessment proceedings dated October, 1993 were forged and fabricated as these forms were printed and sold by the book seller after May-June, 1998. Two shareholder stated in their statements that they had not signed the forms under section 187C. One shareholder stated that he was a shareholder in his individual capacity. Another shareholder stated that he was working in a chartered accountant firm and had no association with ‘S’ and ascribed his signature on MOA on asking of the Chartered Accountant. As per the report under section 209A of the Companies Act there were several irregularities with regard to issue of shares. The minutes of board meetings were false and forged and were created by the assessee to support the claim that it was a wholly owned subsidiary of ‘S’. ‘S’ made a request to NDMC on 16th Sep, 1993 to substitute and transfer the license to the assessee though the assessee was incorporated on 22nd October, 1993. Thus, it was held that since the assessee was not a wholly owned subsidiary of ‘S’, the entire amount of Rs.21 crores received by the assessee was taxable and the benefit u/s 47(v) was not available.
CIT (A) allowed the claim of the assessee observing that denial of one of the director was not sufficient. The AO should had made further enquires to find out and ascertain who had actually made investment in the share capital of the company which would determine the real ownership of the assessee. The payment of share capital was made by cheque and this aspect was not controverted and denied by the AO. Section 187C of the Companies Act is a procedural provision and the requirement of the Companies Act cannot be imported and considered for examining whether conditions u/s 47(v). As far as forgery of signatures and discrepancy in the minutes books, it was for the authorities under the Companies Act to take notice and action. For Section 47(v), this aspect was immaterial. Investment in the shares was made by ‘S’ and it was reflecting in both the companies. ITAT also confirmed the order of the CIT (A) concurring the findings taken by the CIT (A) in his order.
Revenue contended that as per Section 49 of the Companies Act, all investments made by a company should be held in its own name. A company may hold shares in the subsidiary company in its own name or in the name of its nominee, in so far as it is necessary to do so to ensure that the number of members of the subsidiary is not reduced to less than 7 (seven), in the case of public limited company, and in the case of private company the number should not fall below 2 (two). Assessee was not set up or incorporated as a wholly owned subsidiary company of ‘S’. In the Memorandum of Understanding or in subsequent correspondence with NDMC, it was not alleged or stated that the respondent assessee was a wholly owned subsidiary company. There was no contemporaneous record to show that the seven shareholders were nominees of ‘S’ and the investment was solely made by ‘S’. Share certificates were issued in the individuals’ names. There was nothing to show that the payments towards share application money were made by ‘S’.
Assessee contended that appeal was not maintainable as it was question of facts. No evidence relating to undisclosed income was found during search and, therefore, block assessment proceedings were void. In the assessment order made u/s 143(3), AO observed that factually no transaction had taken place between ‘S’ to transfer the hotel development rights in favour of the assessee and then by the assessee in favour of ‘S’. The said assessment order had become final and binding and, therefore, there was no question of capital gain on transfer of the hotel development rights by the assessee in favour of ‘S’. The findings recorded by AO in the assessment order u/s 143(3) could not had been examined in block assessment. Correspondence of ‘S’ with NDMC shows that ‘S’ wanted to incorporate its subsidiary. Ministry of Industry’s acknowledged that ‘S’ was the holding company of the assessee. The entire fund for establishment and incorporation of the assessee was provided/incurred by ‘S’. Share application money was also recorded and shown in the balance sheet and books of accounts of ‘S’. The register of members recorded that the seven shareholders were nominees of the holding company. One of the member had wrongly answered and claimed that he was not a nominee due to the bad relations. He had not disclosed and declared the shares, held by him in the assessee, in the balance-sheet and documents filed with his income tax returns. He was not the de facto shareholder and ‘S’ was the beneficial and the de facto shareholder. Replies were submitted to the Department of Company Affairs, Economic Offences Wing, Crime Cell, Delhi and they were satisfied and no further action had been taken. Section 187C of the Companies Act requires filing of forms but this is for the purpose of reporting. This is a formality and does not affect the rights of the beneficial shareholder.
After hearing both the parties, the High Court held that,
++ the assessee has placed on record a copy of the ledger account of assessee in the books of ‘S’. The said ledger account would reveal that entries were made as payments forwarded to the Registrar of Company for registration of the assessee. Another entry shows that the payment was made on behalf of assessee. The last entry was related to allotment of shares to ‘S’ in the assessee company. AOA and MOA record the initial shareholding in the name of 7 persons before the date of incorporation. The entry dated 31st March, 1994, that too an adjustment entry made in the books of ‘S’ would not show and establish that the payment of the shares was made by ‘S’. It is accepted and admitted that other than this document i.e. the ledger account of ‘S’, no other paper or document was produced or filed before the tribunal and in fact there is no other paper or document produced or filed before us to justify and state that payment for shares in question was made by ‘S’. The payment was certainly not by cheque as recorded and held by both CIT (Appeals) and the tribunal. It is an accepted position that shares were issued and held in the name of ‘R’. It is not understood and stated what document or evidence was required to be given/ furnished by ‘R’, when the two appellate forums recorded that ‘R’ had failed to substantiate the claim of investment in the shares and that the source was his own personal fund. What had weighed and mattered was the finding that the source of payment for purchase of the shares was the cheque issued by ‘S’ which was never the claim of the assessee that ‘S’ had paid for the share capital;
++ normal presumption in law is that the registered shareholder holds the share in his own right and in his individual/ personal capacity. He does not hold shares as a nominee of a third person. It is the contrary which has to be proved by the party who claims or asserts that the recorded shareholder is a nominee. The onus is, therefore, on the party who claims to the contrary. The said party has to lead evidence sufficient in law to enable the authorities/tribunal to come to the conclusion that it/she/he has discharged the onus. The evidence should be such that it can be held that the shares were not held by the shareholder in his individual/ personal capacity but as a nominee of the third person;
++ the tribunal has recorded that the Assessing Officer did not examine the six other subscribers to the share capital. This is factually incorrect. AO had examined and even quoted, the statement made by one more subscriber namely ‘R’. The tribunal has probably not examined and not gone through the statement of ‘R’, which has been quoted in the assessment order itself. For benefit u/s 47(v), the subsidiary must be wholly owned subsidiary. Being a subsidiary is not sufficient. Thus even if one of the shareholders was not a nominee of the holding company, benefit u/s 47(v) has to be denied;
++ the tribunal has recorded that the question of real ownership of shares should have been ascertained by the AO but he has failed to do so. There is no presumption that the registered shareholder is a nominee of a third person. In case of a dispute, the person who claims to the contrary has to establish and show that the person mentioned in the register of shareholders was his nominee. The onus is on the person who states and claims that what is apparent is not real. It was not for the AO to establish to the contrary but for the assessee to show and establish that it was a wholly owned subsidiary of the holding company and the shareholders were merely the nominees of the holding company. There is no presumption that the shareholders were nominees;
++ section 187C or Section 49 of the Companies Act and violation thereof and penalty prescribed is one aspect. But, the effect of the said violation has to be examined and considered. It has to be also examined and considered whether violation of the said provisions would prevent and bar the assessee from claiming that it was wholly owned subsidiary and the recorded shareholders were mere nominees. This aspect/question is not examined and elucidated in the impugned order. However, another contention of the Revenue may be noted that de hors provisions of Section 49 and 187 of the Companies Act, the Benami Prohibition Act, 1988, may have to be also examined. Examination of exceptions may require factual elucidation and findings. This legal aspect may be raised by the Revenue on remand;
++ the term “subsidiary” or “wholly owned subsidiary” have not been be defined in the Act. Therefore, reference is to be made to the other Acts and in this case, the Companies Act. Effect of the violation of Section 49 and 187C of the Companies Act is one aspect but the other issue, which has to be examined, is the evidentiary value and the effect when no such declaration was initially made and the subsequent filing of the declaration is disputed and contested. It is claimed that the signatures on the forms/declarations made were forged and fabricated. The tribunal is required to examine and consider whether the said conduct, reflects and is of relevance;
++ a reading of the order passed by the AO would show that he has referred to the evidence and material which was found during the search and thereafter, he has referred to the post search investigation and verification. As per the assessment order, the evidence/material found during the search and post search investigation had revealed that the respondent assessee was not 100% subsidiary of ‘S’. As we are passing order or remit, this question, if raised, will be examined and considered by the tribunal. The second contention of the assessee relying upon the original assessment order does not help or assist the assessee for the said order has proceeded on the assumption that the assessee was 100% subsidiary of ‘S’. If a decision excludes or ignores admissible or relevant evidence, takes into account inadmissible evidence, irrelevant consideration or extraneous materials, a substantial question of law arises. Similarly, when an authority has proceeded on an assumption, which is erroneous in law, a question of law can arise. Thus, the second question of law is decided in favour of the revenue. The first question is answered with the order of remit as it would be better and appropriate if the entire issue is examined threadbare by the tribunal.
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