The division bench comprising of Justice Vibhu Bakhru and Justice S.Muralidhar held that, the part of the sale consideration paid directly to the shareholders shall come under the head ‘Capital Gains’, hence Taxable.
The controversy involved in the appeal relates to computation of capital gains arising from transfer of an undertaking by the Assessee to a new company, M/s Matsushita Television & Audio India Ltd., in terms of a scheme of arrangement sanctioned by this Court, under Section 391-394 of the Companies Act, 1956. Whilst the Assessee claimed that it has incurred a short term capital loss of Rs.11,14,31,696/- on the sale of the said undertaking, the Assessing Officer has assessed the said transaction as resulting in a short term capital gain of Rs.25,34,72,144/-. The principal dispute revolves around the quantum of consideration for the sale of the said undertaking; according to the Assessee, the consideration is Rs. 32,48,00,000/- but according to the AO, it is Rs.50,12,00,000/-. Further, the Assessee has computed the capital loss by taking the cost of the assets as Rs.59,94,36,171/- which according to the AO should have been Rs.41,09,32,331/- being the Written Down Value of the assets.
The Court observed that, “the identity of shareholders of a company is different from that of the company. The consideration as reflected under the Scheme is clearly for the transfer of title to the assets as well as assumption of obligations of the Panasonic Division. Undisputedly, the title to the assets of the Panasonic Division belonged to the Assessee, so as the obligation to discharge the liabilities of the said division. The Panasonic Division was an undertaking owned by the Assessee and not by its shareholders. Whilst shareholders own shares issued by a company, they have no interest in the assets held by the company”.
It would be plainly evident that it is an instrument for effecting sale of the Assessees assets where the owner selling its assets (the Assessee) has called upon the buyer to pay a part of the consideration to a third party (its shareholders). Indisputably, the seller would be entitled to the entire consideration for the sale and the fact that at its instance a part of the consideration is diverted to a third party would not absolve the seller from recognizing the entire consideration.
The Court rejected the contention of the respondent that merely because part of the consideration for the transfer of the Panasonic Division had been paid to the shareholders of the Assessee by issue of fully paid-up shares, the same could not be stated to have been “received or accruing” in favour of the Assessee. The expression “accruing” as used in Section 48 of the Act is synonymous to entitlement. If the Assessee is entitled to the consideration, then the same must be taken into account for the purposes of computation of capital gains in terms of Section 48 of the Act.
Read the full text of the Judgment here.
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