In a recent decision the Delhi High Court ruled that there can be no tax concession to company as promoters gifted shares to the company instead of sale to avoid capital gain tax.
The Company, M/s The Indian Plywood Mfg. Co. Pvt. Ltd, filed a reference before the BIFR under Section 15(1) of Sick Industrial Companies (Special Provisions) Act, 1985 (SICA), which was registered as Case and the Board for Industrial and Financial Reconstruction (BIFR) declared the Company as a Sick Industrial Company within the meaning of Section 3(1)(o) of SICA and appointed Central Bank of India as the operating agency to prepare a rehabilitation package for the Company.
The Company filed a writ petition before the Delhi High Court to agitate the relief as sought in its application, which was pending before the BIFR, as the BIFR was not functional, at the material time. The said petition was disposed of by the Court by an order as members of the BIFR were appointed and the BIFR, which was not functional for a brief period of time, had resumed functioning.
The question to be examined is whether the BIFR’s order, whereby the Scheme was modified, necessarily required the Income Tax Department to grant further additional concessions. In terms of the Scheme, the promoters of the Company were required to make good any shortfall in the projections under the Scheme.
It was stated that the promoters of the Company as a part of their contribution, gifted shares of some other companies to the Company. The sale of the said shares would result in capital gains and the Company sought to avoid payment of tax on such gains.
In respect of the aforesaid it is important to note that the Scheme did not envisage the promoters’ contributing shares or other assets to make good the shortfall in the projections. The promoters were required to make the shortfall in liquid funds. Thus, the promoters had not complied with the Scheme which they now submit is binding on all other parties.
It also appeared that the entire exercise of gifting the shares to the Company and the Company selling the same was with the object of ensuring that the capital gains arise in the hands of the Company so as to enable the Company to claim further exemption. The promoters could instead of gifting the shares to the Company, sell the same and contribute the funds realised for the Scheme. But this would result in the promoters being liable to pay the capital gains tax which it appears, they desired to avoid.
A Division Bench of Justices Vibhu Bakhru and Amit Mahajan held that “Neither the order dated 26.02.2013 nor the impugned order indicate that the BIFR had examined the transactions, which had led to the capital gains arising in the hands of the Company or the context in which additional concessions were sought. In view of the above, the impugned order cannot be sustained. The same is set aside. The Income Tax Department is not required to grant any further concessions contrary to the Income Tax Act, to the Company.”
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