In B.A.Mohota Textiles Traders Pvt. Ltd v. DCIT & Ors, the division bench of the Bombay High Court held that receipt from the transfer of Shares by Company in consequent to family arrangement by its shareholders would be exigible to capital gain tax under the provisions of the Income Tax Act.
Not accepting the fact that the transfer of shares by the assessee company being only incidental and in consequence of allotment and control of management of companies in pursuance of family arrangement, took the transaction out of purview of Section 2 (47) of Income Tax Act, 1961.
Assessee is a private Limited company in which 80% of its share capital is held by the family members of Mr.Girdhardas Mohota, Mr.Gwaldas Mohota and Mr.Ranchhoddas Mohota. The Mohota family, besides holding a majority stake in the appellant/Company, had joint interest in various other Limited Companies and Partnership Firms. The families also owned immovable properties jointly.
In consequent to disputes between the families, they resorted to arbitration. As per the arbitration award, the properties belonging to Mohota family were distributed amongst it’s three groups and resultantly, the assessee-company was allotted to Gwaldas Family. The agreement required the assessee-Company to transfer the shares held by it in respect of the Companies belong to other two families namely, M/s R.S.Rekchand Mohota Spinning and Weaving Mills Ltd and M/s. Vaibhav Textiles Mills Ltd. as directed in the award, assessee transferred the shares at a consideration of Rs.225/- per share of M/s.R.S.Rekchand Mohota Spinning and Weaving Mills Ltd. and at a consideration of Rs.10/- per share of M/s. Vaibhav Textiles Mills Ltd.
While completing assessment, AO held that transfer of shares in M/s. Rekhchand Mohota Spinning and Weaving Mills Ltd. and M/s. Vaibhav Textiles Pvt. Ltd. to members of the two family groups was done in pursuance of family arrangement/ settlement as reflected in the Arbitration Award and therefore, the said transfer would attract Capital Gain Tax. While doing so, he pointed out that the Company being a separate legal entity distinct from it’s shareholders, cannot be as part of family settlement/ arrangement and thus, transfer of shares done by independent entity such as the Appellant/ assessee would not be covered by the ‘Family Settlement’.
Though the first appellate authority decided the issue in favour of the assessee, the ITAT held that the transaction of transfer of shares by the assessee company in pursuance of family arrangement amounted to transfer and was exigible to capital gains tax.
On assessee’s appeal against the order of the Tribunal, the bench noted that a family arrangement/ settlement would not amount to a transfer. It noted that the shares in M/s.R.S. Rekhchand Mohota Spinning and Weaving Mills Ltd. and M/s. Vaibhav Textiles Pvt. Ltd. are held by the appellant/assessee and not it’s members. The members, therefore, cannot claim any rights to the property of appellant/ assessee Company i.e. shares of M/s.R.S.Rekhchand Mohota Spinning and Weaving Mills Ltd. and M/s. Vaibhav Textiles Pvt. Ltd. as rightly held by the Authorities under the Act.
Upholding the findings of the ITAT, the bench said that “lifting of corporate veil at the instance of the assessee would mean that it is denying it’s corporate existence. This, after taking advantage of the separate existence of a Company under the Act. Therefore, after having incorporated the Limited Company and given it separate existence from it’s shareholders, it is not open to the Company to urge “Please ignore my separate existence and look at the persons behind me.“ If that be so, the Appellant/Company must opt for voluntarily winding up and then the shares being allotted to the individual members on liquidation would be governed by the family arrangement/ settlement.”
Read the full text of the Judgment below.