In CIT v. M/s Annamalaiar Mills, a two-judge bench of the Supreme Court categorically held that the amount received from a wholly-owned subsidiary in consideration of transfer of shares of the WOS to a group of shareholders is not taxable as capital gains.
The bench clarified that since the same was already subjected to Gift Tax, the Department cannot subject the same transaction under the Income-tax Act.
The factual settings of the case are that the assessee-Company transferred 100 percent shares of its wholly owned subsidiary Company, M/s Annamalaiar Textiles, to its minority shareholders. The Subsidiary Company paid Rs. 42.45 lakhs to the assessee, for which the assessee paid Gift Tax.
Parallelly, the Income Tax Department initiated proceedings against the assessee finding that the assessee is liable to pay capital gain tax for the amount received above. Though the first appellate authority sustained the order, both the Tribunal and the High Court accepted the plea of the assessee. Dissatisfied with the order of the High Court, the Revenue knocked the door of the Apex Court.
Dismissing the appeal, the bench comprising Justice R.K Agarwal and Justice Mohan.M. Shantanagoudar noted that M/s Annamalaiar Textiles(P) Ltd. did not pay any amount to the shareholders who ultimately got the shares transferred in their names.“The respondent was holding 100 per cent shares of M/s Annamalaiar Textiles (P) Ltd., before it was transferred to Group B. No payment was made to the shareholders belonging to Group B and, therefore, the question of there being any capital gains at the hands of the respondent herein does not arise.”
Furthermore, the bench opined that the transaction of payment of Rs.42.45 lakhs had already been subjected under the Gift Tax Act and therefore, the Department cannot claim both under the Gift Tax Act and also levy tax under the Income Tax Act.
Read the full text of the order below.
