In a recent ruling, the Hyderabad ITAT observed that when a Holding Company transfers its land to its 100% subsidiary company, it can be treated as a ‘transfer’ for the purpose of assessing as Capital Gain under the Income Tax Act, 1961 only if it is proved that the same was treated as stock-in-trade” in the hands of the transferee subsidiary companies.
Assessee-Company sold their land to its subsidiary company and claimed that the “transactions are not to be treated as transfer” as per section 47 of the I.T. Act since the land was sold only to their 100% subsidiary companies.
The department, however, took a view that the land was considered as ‘stock in trade’ by the transferee., i.e, the Subsidiary Company since the intention of the assessee companies was to make profit ultimately. Considering the nature of transaction, the department said that the transaction has to be treated as “an adventure in the nature of trade” and the income from the sale has to be brought to tax as business income.
As per section 47 of the Income Tax Act, where there is a transfer of any capital asset by a company to its 100% subsidiary company and such subsidiary company is an Indian company, then such a transaction shall not be considered as a transfer. However, as per the proviso, the clauses (iv) & (iv) shall not apply to the transfer of a capital asset, as stock-in-trade after 29th February, 1988.
Analyzing the above provision, the bench noted that the intention of the parties is to be inferred also from the entries in their books of the A/c. The assessees have filed copies of their Wealth Tax Returns wherein the lands owned by them are reflected as agricultural lands and thus exempted assets u/s 2(ea) of W.T. Act. The assessing authorities have accepted the claims of the respective assessees.
The bench noticed the decision of the Calcutta High Court in the case of CIT vs. Coats of India Ltd wherein the Court held that the proviso to section 47 (iv) and (v) is applicable, only if, in the hands of the “transferee” the capital asset on its transfer constitutes “stock-in-trade”.
“There is nothing on record brought in by the Revenue that in the hands of the transferee subsidiary companies, the lands transferred are treated as “stock-in-trade”. The learned Counsel for the assessee, when enquired as to the treatment of these assets in the hands of the transferee companies, has filed before us the copies of the Balance Sheets of the transferee companies for the relevant A.Y and the subsequent A.Ys to prove that they were treated as capital assets in the hands of the transferee companies as well. However, this Tribunal being the final fact finding authority deem it fit and proper to remand this issue to the file of the AO for the limited purpose of verifying the treatment given to these assets in the hands of the subsidiary companies and only if they are treated as “stock-in-trade”, the AO shall apply the proviso to section 47(iv) of the Income Tax Act.”
Read the full text of the Order below.
