Tax Insights
from India Tax & Regulatory Services
www.pwc.in
Madras High Court upholds
exemption under section 47(v) of the Act, where entire share capital of subsidiary held by the holding company and its nominees
August 17, 2020
In brief
Recently, the Madras High Court1 upheld the order passed by the Income-tax Appellate Tribunal holding that the exemption under section 47(v) of the Income-tax Act, 1961 (Act) was available on transfer of land by a subsidiary company to its holding company. The holding company held 99.99%
of the share capital of the subsidiary, while the nominees of the holding company held the balance share capital. The High Court held that it is necessary to give purposive interpretation to the provisions of section 47(v) of the Act or the provision itself would become redundant.
In detail
Facts
• The taxpayer is a public company. The holding company held 99.99% share capital of the taxpayer. The balance share capital of the taxpayer is held by six individuals, as nominees of the holding company, to comply with the
requirements of the Companies Act, 1956.
• The case was selected for reassessment because the taxpayer had not offered gains arising on the transfer of land to its holding company. The taxpayer claimed that it was eligible to exemption under section 47(v) of the Act on the
1 Tax Case Appeal No. 485 of 2018
transfer of land to the holding company.
• The Tax Officer held that the taxpayer was not eligible to the exemption under section 47(v) of the Act, as the nominees of the holding company held some of the shares.
Issue before the High Court Whether exemption under section 47(v) of the Act can be granted where some of the share capital of the subsidiary is held by the nominees of the holding company?
Revenue’s contentions
• The tax authorities contended that there is a distinction in the language
used in sections 47(iv) and 47(v) of the Act.
• The word “nominees” is not present in clause (v) of section 47 of the Act.
Accordingly, when the holding company did not hold the entire share capital of the subsidiary company, the exemption under section 47(v) of the Act was not available to it in case of such a transfer.
High Court’s decision
• The High Court held that a purposive interpretation has to be given to the provisions of section 47(v) of the Act; if not, the provision itself would become redundant.
• The tax authorities did not
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dispute the fact that the six individual shareholders held shares as nominee
shareholders and that these individual shareholders held no individual right. Therefore, based on these facts, the High Court held that the entire share capital of the subsidiary company was held by the holding company. Accordingly, the subsidiary company met the conditions stipulated for availing exemption under section 47(v) of the Act.
2 CIT v. M/s. Papilion Investments Private Limited [ITA No. 226 of 2006]
• When passing the order, the High Court also relied on the decision2 of the Bombay High Court. The Bombay High Court had held that the beneficial ownership of the holding company is to be noted, and if the facts did not receive proper interpretation, it would render the provisions of section 47(v) of the Act redundant.
The takeaways
• Once again, the High Court
has upheld that the provisions of the Act should be given a purposive interpretation such that the provisions do not become redundant.
• The High Court has reaffirmed the principle of considering beneficial ownership when interpreting the provisions of section 47(v) of the Act.
Let’s talk
For a deeper discussion of how this issue might affect your business, please contact your local PwC advisor
Tax Insights
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