THE issues before the Bench are - Whether if shareholders choose to transfer lands to purchaser of shares it would be valid transaction in law; Whether when assessee is able to avoid payment of capital gains tax through such transaction, it can be said to be a colourable device; Whether the provisions of section 10(38) grant exemption on sale of long term shares only, or it can also apply in case of immovable property and Whether in case there is a doubt regarding nature of asset sold by an assessee, lifting of corporate veil is tenable as per law. And the verdict goes in favour of the assessee.
F
acts of the case
Bhoruka Steel Limited (BSL), incorporated in 1969, had a mini steel plant for the manufacture of billets and rolled products at Bangalore. It is a limited company whose shares were quoted in the stock exchange. It was holding shares in BFSL. The assessee and other promoter shareholders were holding 98.73% shares in BFSL, whereas the public shareholders were holding the remaining shares. It had commenced its commercial production in 1972 and set up a refractory plant at Bangalore. It had also set up a stevedoring division in Chennai in the year 1988-89, mainly to handle import of shredded scrap. They also took over the assets and liabilities of Bangalore Wire Road Mill, a division of Transport Corporation of India in 1991. The company became a sick industrial company within the meaning of SICA. The company’s case was first heard by BIFR, when IDBI was appointed as Operating Agency. As per the scheme prepared for rehabilitation of BSL, closure of the unviable steel division, sale of surplus assets and OTS of institutions/Canara Bank’s/debentureholders’ existing dues had been decided. One of the means by which the finance was to be raised was by way of sale of surplus fixed assets for a sum of Rs.1,560 Lakhs. Accordingly, fixed assets (land, building and machinery) were proposed to be sold for estimated realization of Rs.1,560 Lakhs, 50% of which representing Rs.780 Lakhs each being received during 2000-01 and 2001- 02. The book value of assets to be sold was Rs.1,218 Lakhs as on 31.3.1998. The company had 37 acres of land in Bangalore, out of which 7 acres was proposed to be retained for refractory division and the balance 30 acres along with building and structure therein were proposed to be disposed of. An asset sale committee (ASC) was constituted comprising one representative each of the company, OA, Canara Bank, GoK and the BIFR’s special director. The ASC would oversee and supervise the sale of identified surplus assets (including 30 acres land at Whitefield Road, Bangalore, Steel Melting Shop and Wire Road Mill) in a transparent manner. In case of any delay/shortfall in realization of the expected amount of Rs.1,560 Lakh from sale of assets, the promoters would be required to bridge the gap by inducting interest free funds from their own sources. Registered Valuers were entrusted with the job of valuing 30 acres which was to be sold. The said valuers vide their valuation report had valued the said land at Rs.25 Lakhs per acre. IDBI, the Monitoring Agency and AAIFR accepted the valuation of M/s Makhija at Rs.25 Lakhs per acre while approving the Rehabilitation Scheme. One Aeekay Enterprises offered Rs.20 Lakhs per acre for purchase of the said land. However, in the meeting held on 8.7.2002 the committee resolved that the offer of Rs.20 Lakhs per acre by Aeekay Enterprises was low and the company may release advertisement in Economic Times, Mumbai and New Delhi as the land was ideally suited for large complexes like Multiplex/IT Park, etc., It was made clear that, if no worthwhile offer was received within 10 days from the date of release of advertisement, then the company had no other alternative but to request the promoters/group companies to purchase the land with the price not less than Rs.25 lakhs per acre. Thereafter, the company was directed to issue paper notification inviting tenders for purchase of the said land. Accordingly, it was issued in the local newspapers. In a meeting held on 16.12.2002 of the Asset Committee the Chairman informed the committee that the company had received an offer from BFSL, a public limited company and also one of the group Companies to purchase 30 acres of land standing in the name of the company at Whitefield Road, Bangalore, for a total consideration of Rs.750 Lakhs, i.e., Rs.25 Lakhs per acre. The offerer deposited an advance of Rs.75 Lakhs being 10% of the total consideration along with the offer. After some discussion, the committee approved the sale of 15 acres of land at Whitefield Road, Bangalore to BFSL/its nominee/s for a total consideration of Rs.375 Lakhs. Accordingly, the said amount was paid and the said land measuring 15 acres was sold in favour of BFSL under two registered sale deeds. The assessee was holding the shares in BFSL for more than a decade. BFSL was a financial company engaged in the business of investments. BFSL has purchased 15 acres of land under the aforesaid two sale deeds for a consideration of Rs.3.75 crores which was then prevailing market consideration which was accepted for the purpose of Section 50C. Thereafter, the assessee in the FY related to the relevant AY 2006-07 sold its shareholdings in BFSL to the extent of 45,350 shares for a net consideration of Rs.20,29,08,626/- after paying STT, Service Tax, etc., The sales were executed through a registered stock broker on a recognized stock exchange. The shares were sold to DLF Commercial Developers Limited. The assessee claimed the gain on sale of shares as exempt from taxation u/s 10 (38).
During assessment, AO proposed to bring to tax the gain arising on the sale of the shares as STCG on sale of the immovable property by holding that the transaction was virtually for sale of the immovable property to DLFCDL and the sale of shares was only a devise to escape from taxation. The share holders of BFSL by selling the shares to DLFCDL vested the immovable property in DLFCDL and it was the devise to transfer the immovable property to DLFCDL and the property having been held by BFSL for a period of less than 36 months and therefore the capital gains was required to be computed as a STCG and consequently the appellant was liable to be taxed accordingly. The AO held that the transaction was a colourable devise and virtually the immovable property had been transferred for consideration and the appellant was liable to tax on the STCG on sale of immovable property as determined. The AO relied on the judgment of the SC in the case of McDowell & Co., vs CTO (2002-TIOL-40-SC-CT). On appeal, CIT(A) did not find any merit in the appeal and accordingly he dismissed the appeal. On further a-ppeal, Tribunal held that, even though BEIL, BFSL and Bhoruka Steels Limited were all controlled by the same interest group as common shareholders which was very prominent in the entire course of transaction involved in the present appeal. They had entered into an agreement on 20.7.2005 with DLF-CDL to sell the shares in BFSL to that company, DLF-CDL. The assessee, its group of individuals together held 1,88,850 equity shares representing 98.73% of fully paid-up equity capital of BFSL. Therefore, it follows that the assessee along with its group owned all the assets and properties of BFSL even though those assets and properties are technically held in the name of BFSL as an independent corporate entity, once this corporate veil was pierced, which was within the powers of the revenue authorities they were of the view that the assets of BFSL were held and de facto owned by the assessee company and its group. The property was purchased from another associate concern Bhoruka Steels Limited for a consideration of Rs.3.75 crores. The said property now has become the property of DLF-CDL where 98.73% in BFSL were transferred to DLF-CDL on sale. DLF-CDL which is a real estate company by purchasing 98.73% of shares in BFSL has in fact acquired the ownership and possession of the landed property which was purchased by BFSL for an amount of Rs.3.75 crores just a few months back. DLF-CDL had acquired the shares of BFSL for a consideration of Rs.89,28,36,500/-. The substance of the transaction was apparent. Bhoruka Steels Limited sells its landed property to its associate concern BFSL for a consideration of Rs.3.75 crores and immediately thereafter the shares in BFSL are sold and transferred to DLF-CDL for a consideration of more than Rs.89 crores. If the formalities of the transactions and the legal nature of the corporate bodies were ignored for a moment, the stark fact coming to surface was that the assessee’s group had sold the property belonging to one of its concern to DLF-CDL for a consideration of more than Rs.89 crores through the medium of sale and transfer of shares which property was purchased for Rs.3.75 crores and thereby made attempt to avoid payment of STCG tax. Therefore, it held the series of transactions were well planned scheme so as to transfer valuable landed properties to DLF-CDL without attracting corresponding liability of tax. The whole transaction has been arranged in a sequential manner. BFSL never before doing any business other than financial services purchases the land for Rs.3.75 crores; immediately thereafter the asessee company and its entire group holding 98.73% of shares in BFSL selling the share holding to DLF-CDL for a consideration of Rs.89,28,36,500/- without attracting any levy of taxation. This episode had been made possible by getting away from Bangalore Stock Exchange and going to Magadh Stock Exchange to carry out the sale transaction of shares and by paying STT for claiming exemption from LTCG arising on sale of shares u/s 10(38). Therefore, they recorded a finding that it was a case of colourable device to evade payment of taxation on STCG. Therefore, the Tribunal declined to interfere with the order passed by the CIT.
Before HC, the assessee’s counsel had contended that, the authorities proceeded on the basis that the assessee had sold an immovable property and therefore the assessee was liable to pay capital gain based on such sale of immovable property. The assessee was only a share holder in BFSL. It was BFSL who had purchased the immovable property under registered sale deeds. Therefore, assessee was not the owner of the immovable property. However, the assessee had transferred his shares for a valuable consideration of Rs.4,490/- per share. The income derived from such share would not fall within the total income of the assessee in view of Section 10(38). The assessee was a shareholder in BFSL from the year 1984 and therefore the assessee was incorporated prior to that date. Neither the assessee company nor BFSL were companies which came into existence as a part of the scheme to purchase the land in question and evade payment of tax as sought to be made out by the authorities. The authorities seem to have been carried away by the fact that, before sale of shares, the BFSL sold away all its other assets and it was only thereafter the shareholders of BFSL had entered into an agreement to sell their shares in favour of DFL. In the agreement there was a reference to the immovable property which according to the authorities was proof of the colourable device adopted by the assessee to evade payment of tax. Even if the veil was lifted and if these companies were looked into, the assessee was formed somewhere in the year 1971, BFSL came into existence in 1984 and Bharuka Steels which owned this property became a sick industry only somewhere in the year 1996 and the revival scheme by the BFSL was formed in 2000 and it was in pursuance of the same, excess land 30 acres belonging to Bharuka Steel was sold and in such sale one of the sister concern has purchased this property. None of these facts could be termed as unreal. They were all events which had happened in normal course, were legal and even the same was not disputed by the department. On the other hand, the Revenue’s counsel contended that, the law laid down by the SC in McDowell was not diluted in the subsequent judgment in the case of Azadi Bachao Andolan. In fact it was reiterated in the latest judgment of the SC in Vodafone’s case. Once it was demonstrated the purpose of this transaction was to avoid payment of tax then it constitutes a colourable scheme and the authorities had lifted the veil and moreover appreciated the series of transactions wherein the property which was worth Rs.89 crores was sought to be transferred for a consideration of Rs.7 crores by the medium of transferring of shares to claim exemption u/s 10(38) and therefore it was submitted that the order passed by the authorities were valid and legal.
Held that,
++ in view of the judgment of the SC in Vodafone, it is held that “tax planning may be legitimate provided it is within the framework of law”. “Colourable devices cannot be a part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid payment of tax by resorting to dubious methods”. It is an obligation of every citizen to pay the taxes without resorting to subterfuges. Therefore, though all tax planning is illegal / illegitimate / impermissible, the revenue cannot tax a subject without a statute to support and in the course we also acknowledge that every tax payer is entitled to arrange his affairs so that his taxes shall be as low as possible and that he is not bound to choose that pattern which will replenish the treasury. A Citizen may legitimately claim the advantage of any express terms or of any omissions that he can find in his favour in taxing statutes. His legal right so to dispose of his capital and income as to attract upon himself the least amount of tax is fully recognized. The legal right of tax payer to decrease the amount of what otherwise would be his taxes, or altogether to avoid them by means which the law permits, cannot be doubted. If the tax payer is in a position to carry through a transaction in two alternative ways, one of which will result in liability to tax and the other of which will not, is at liberty to choose the latter and to do so effectively in the absence of any specific tax avoidance provision. The fact that the motive for a transaction may be to avoid tax does not invalidate it unless a particular enactment so provides. A tax-saving motivation does not justify the taxing authorities or the Courts in nullifying or disregarding a taxpayer’s otherwise proper and bona fide choice among courses of action. Tax planning may be legitimate provided it is within the framework of law. The intention of the legislature in a taxation statute is to be gathered from the language of the provisions particularly where the language is plain and unambiguous. In a taxing Act, it is not possible to assume any intention or governing purpose of the statute more than what is stated in the plain language. Therefore, as long as the arrangement of the assessee to avoid payment of tax do not contravene any statutory provision and is achieved within the four corners of law, it cannot be found fault with. If the transaction in question is sham or colorable and entered into with the sole intention of evading payment of tax, then such a transaction would not have any legitimacy. Therefore, a colorable device cannot be a part of tax planning. Therefore, in each case, the transaction in question and the material on record has to be carefully examined to find out whether the transaction is “sham” or “unreal” or “colourable device” to evade payment of tax;
++ in the instant case, as set out above, according to the revenue, on the day the assessee transferred their share from BFSL, the only property which was available in BFSL was this land. Before transfer of the shares, the BFSL has systematically reduced this investment except that of the land instead of trading its shares through BSE. The shares were traded through Magadh Stock Exchange. In the agreement entered into for transfer of shares, reference is only made to the sale of the land. Therefore, what was attempted to for transfer of shares is nothing but the transfer of immovable property. On the date of transfer, BFSL has become a Shell company. Therefore, it was a deliberate structural device to avoid tax implications. The grievance is, the property which was purchased for Rs 3.75 Crores was sold to a consideration of Rs.89,28,36,500/-, the assessee share being Rs.20,29,08,626/- without paying capital gain tax. From these facts, it is clear DLFCDL paid the market value and purchased the shares from the assessee. Therefore, the transaction of shares is not a nominal one. It is not a sham transaction. It is a real transaction for valuable consideration. The effect of the transaction is DLFCDL having acquired the shares became entitled to enjoy the asset of the company which was held by BFSL. For effecting the said transfer, instead of trading those shares through Bangalore Stock Exchange, it was traded through Magadh Stock Exchange. The material on record shows no trading activities took place in the BSE to the relevant period. The attempt on the part of the assessee to trade their shares through other Stock Exchange was not fulfilled. But they were able to trade the said shares through Magadh Stock Exchange was fulfilled though the trading license of Magadh Stock Exchange had been suspended earlier, subsequently it was revoked and after such revocation, the assessee traded the shares through Magadh Stock Exchange and therefore, the requirements of selling has been complied with. For each share, the assessee wanted permission from SEBI without being made available to the open public at a price of Rs.2,250/-. When it is traded through Magadh Stock Exchange, each share has fetched a sum of Rs.4,290/- and BFSL admittedly has paid Rs.89,28,36,500/- for the entire extent of 15 acres of land for which, a sum of Rs.20,29,08,626/- being the share value of the assessee. In the light of these undisputed facts, it cannot be said that the transfer of share by the assessee to BFSL was a colourable device to avoid payment of tax. If BFSL has sold the shares by executing a registered sale deed and received the sale consideration, then, BFSL ought to have paid capital gains on the said consideration. That is one mode through which BFSL could have sold the property belonging to it. The law also provides for transfer of shares by the shareholders and this route the assessee has adopted in the instant case. By transferring 98.3% of shares held by the shareholders, virtually, the complete control of the company has been handed over to the BFSL and they have received the consideration for the shares held by them, may be proportionate to the value of the land on the date of transfer. But that does not make the transaction “colourable” or “unreal” or “sham”;
++ a reading of provision of section 10(38) makes it clear that if the conditions mentioned therein are satisfied, the income arising from such transfer would not form part of the total income of the assessee. In other words, it is exempted from payment of tax. In the instant case, the assessee is holding the shares in BFSL from 01.10.1984. Therefore, it is a long term Capital asset. The transaction has taken place subsequent to 28.09.2004 as such the second condition is fulfilled. They have paid the security transaction tax to Magadha Stock Exchange. Where all these three conditions stipulated u/s 10(38) are fulfilled, the assessee is entitled to the benefit flowing therefrom i.e., the income from such transfer shall not be included in the total income of the assessee for the previous year. Merely because if a registered sale deed has been executed by BFSL selling the land in favour of DFL-CDL in which event capital gain should have been paid on the sale consideration, is no reason to hold that when a share holder of BFSL transfer his share for a consideration, after complying with the legal requirements, is not entitled to the benefit of tax exemption. All the authorities are carried away by this aspect of the matter and because the assessee was able to avoid payment of income tax, consequently the Department was deprived of the tax, they have come to the conclusion that it is a colourable devise and tax planning to avoid payment of tax. The assessee by resorting to such a tax planning, has taken advantage of the benefit of the law or the loopholes in the law, which had enured to his benefit. After seeing how this loophole has been exploited within four corners of the law, it is open to the Parliament to amend the law plugging the loophole. However, by any judicial interpretation we cannot read into the Section, which was not intended to, by the Parliament at the time of enacting this provision. The language employed in Section 10(38) is simple and unambiguous and it makes no distinction between the transfer of share of company with an immovable asset and movable asset, instead of executing a sale deed in respect of the immovable property by the company, which is owning the land. If the share holder chooses to transfer the lands and part with the land to the purchaser of the shares, it would be a valid legal transaction in law and merely because they were able to avoid payment of tax, it cannot be said to be a colourable devise or a sham transaction or an unreal transaction;
++ as set out above, the transaction is real, valuable consideration is paid, all legal formalities are complied with and what is transferred is the shares and not the immovable property. The finding of the Assessing Authority that it is a transfer of immovable property is contrary to law and contrary to the material on record. They committed a serious error in proceeding on the assumption that the effect of transfer of share is transfer of immovable property and therefore, if the veil of the company is lifted what appears to them is transfer of immovable property. Such a finding is impermissible in law. Unfortunately, three authorities committed the very same mistake which is ex-facie, illegal, contrary to settled legal position and therefore, requires to be set-aside. Thus, the appeal is allowed. The substantial question of law is answered in favour of the assessee and against the revenue.
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