The Madras High court said that the Income Tax Appellate Tribunal (ITAT) wrongly held the transfer of shares by the assessee to its wholly-owned subsidiary is to be considered as a Gift.
The assessee filed its return of income for the assessment year under consideration admitting taxable income at Rs.125,57,70,310. The return was processed under Section 143(1) of the Act.
Subsequently, the case was selected for scrutiny on the ground that the assessee had international transactions exceeding Rs.15 Crores and the case was referred to the Transfer Pricing Officer (TPO) for computation of Arm’s Length Price (ALP).
After hearing the assessee, the draft assessment order was passed on 31.03.2013 proposing the various additions/disallowances.
With regard to the disallowance of Long Term Capital Gain (LTCG) adjustment, the Tribunal held that the transfer of shares made by the assessee without consideration was a valid gift and the transfer of shares cannot be regarded as transfer for capital gains taxation as provided in Section 47(iii) of the Act.
The issues raised in this case was whether the ITAT was right in applying the General provision Law ignoring the specific provisions of sub Section 47(iv) and holding that the transfer of shares by the assessee to its wholly owned subsidiary is to be considered as a Gift.
The assessee contended that the transfer of shares made by the assessee to its step down subsidiary Redington International (Holdings) Limited, Cayman (RC) is gift eligible for exemption under Section 47(iii) of the Act and no capital gain tax is imputable to the said transfer of shares. The Revenue’s appeal was dismissed in its entirety.
The division bench of Justice T.S.Sivagnanam and Justice V. Bhavani Subbaroyan held that the transaction is not covered under Section 47(iii), as it is not a transfer of capital asset under a gift.
The court said that Section 47(iii) will not apply, as it is held that the transfer was not a valid gift.
The court has pointed out that the transaction is a circular transaction and is a measure adopted to avoid tax.
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