Case: B.A.Mohota Textiles Traders Private Limited Vs. The Deputy Commissioner of Income-Tax, Special Range-2

2. This appeal was admitted on 23 March, 2007 on the following substantial questions of law :(a) Whether in the facts and circumstances of the case and in law the Tribunal was right in holding 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 (b) Whether in the facts and circumstances of the case and in law the Tribunal was right in 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 I.T. Act, 1961 (c) Whether in the facts and circumstances of the case and in law merely because the assessee/company has a corporate veil, will it make the transfer of shares by it assessable to capital gains tax even though such transaction is in pursuance of family arrangement 3. It is agreed between the parties that Question (a) above brings out the real controversy between the parties, Questions (b) and (c) are mere facets of Question (a).The brief facts leading to this appeal are as under :(a) The appellant is a Private Limited Company. Over 80 % of its share capital is held by the family members of Mr.Girdhardas Mohota, Mr.Gwaldas Mohota and Mr.Ranchhoddas Mohota referred to by the Tribunal as Groups A, B and C respectively. The Mohota family, besides holding a majority stake in the appellant/Company, had joint interest in various other Limited Companies and Partnership Firms, besides the family also owned immovable properties jointly.(b). Disputes and differences arose between three groups of Mohota family i.e. Groups A, B and C. Consequently, with a view to settle the differences between them and restore family peace and harmony, it was decided by the three groups to refer their dispute by an agreement dated 15.1.1994 to the sole arbitration of Mr. Justice S.W.Puranik. The scope of reference to the Arbitration were as under :(a) Allotment and/or division of properties mentioned in schedule B and related matters;(b) Allotment, management and control of partnership firms and limited companies mentioned in schedule A and related matters;(c) All matters connected with or related to or ancillary to the above referred matters; and(d) To give suitable orders and directions for implementation thereof .(c). On 30.4.1994, Justice Puranik rendered his Arbitration Award by way of family settlement. The Arbitration Award thereafter became decree of the Court dated 7.11.1994 under the erstwhile Arbitration Act, 1940. The above Award distributed the properties belonging to Mohota family amongst its three groups. The Appellant/assessee was allotted to Group B. M/s.R.S.Rekchand Mohota Spinning and Weaving Mills Ltd. and M/s. Vaibhav Textiles Pvt. Ltd. were allotted to Groups A and "C collectively.(d) Thus, the settlement inter alia required members of Group B (Mr.Gwaldas Mohta group), who were in control of appellant/assessee, to transfer the shares held by the appellant/assessee in M/s.R.S.Rekhchand Mohta Spinning and Weaving Mills Ltd. and M/s. Vaibhav Textiles Mills Ltd. in favour of members of Groups A and C collectively i.e. Mr.Girdhardas Mohota and Mr.Ranchhoddas Mohota. The Award directed the transfer of 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.(e) Therefore, the appellant/assessee in terms of the Award transferred 25,650 shares held by it in M/s.Rekhchand Mohta Spinning and Weaving Mills Ltd. and 1,22,000 shares held by it in M/s. Vaibhav Textiles Pvt. Ltd. to the members of the family of Group A and Group C.(f). On 30.11.1995, the appellant/assessee filed return of income for the Assessment Yeardeclaring an income of Rs.58.35 Lakhs. During the Assessment proceedings, the appellant/assessee contended that transfer of shares in M/s.Rekhchand Mohota Spinning and Weaving Mills Ltd. and M/s. Vaibhav Textiles Pvt. Ltd. to members of Group A and C was done in pursuance of family arrangement/settlement as reflected in the Arbitration Award dated 30.4.1995. Therefore, it was contended that no Capital gains would be attracted as there was no transfer as it was working out of family settlement/arrangement. However, the Assessing Officer, by order dated 7.4.1997, negatived the same and inter alia held that the Company being a separate legal entity distinct from its share holders, cannot be as part of family settlement/arrangement. Thus, transfer of shares done by independent entity such as the Appellant/assessee would not be covered by the Family Settlement and consequently, brought the transfer of 25,650 shares for consideration of Rs. 225/per share of M/s. Rekhchand Mohota Spinning and Weaving Mills Ltd. and 1,22,000 shares for consideration of Rs.10/per share of M/s. Vaibhav Textiles Pvt. Ltd. to Capital Gains Tax. Resultantly, it determined the total income of the appellant for the Assessment Year

Court's reasoning:
10. However, the Courts have permitted the lifting of corporate veil to prevent injustice. One such class of cases, where the Court has disregarded the corporate entity is where it is used for tax evasion. A classic illustration of this is found In Re. Dinshaw Maneckjee Petit, AIR 1927 (Bombay) 371, where the Court lifted the corporate veil as it found that "the Company in this case was formed by the assessee purely and simply as a means of avoiding super tax and that the Company was nothing more than the Assessee himself. It did no business but was created purely and simply as a legal entity to ostensibly receive dividends and interest and handed them over to the assessee as pretended loan". In the present case, the Revenue does not seek to lift the corporate veil. It is not the case of the Revenue that the Corporate identity is a sham and it has been formed only to circumvent the law. In this case, it is the Assessee which seeks to lift the corporate veil so as to identify the members of the Assessee/Company as those who entered into family settlement as reflected in the Arbitration Award dated 30.4.1994 and call upon the authority to ignore the corporate existence of the Appellant. This lifting of the corporate veil is not allowed when it is not for the benefit of the Revenue. The Apex Court in the case of M/s. Bacha F. Guzdar v. CIT, 1955 (27) ITR 1     has inter alia observed that "A shareholder has no interest in the property of the Company...... It has only a right to participate in the profits of the Company as and when the Company decides to divide them. The Company is a juristic person and is distinct different from its share holders. It is the Company which owns the property and not the share holders." Therefore, the attempt of the share holder to lift the corporate veil at the instance of the share holder was rejected. In this case also, 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 its 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.11. The submission of learned Counsel Mr.Thakkar that the entire transaction should be looked at wholistically bearing in mind the purpose and object of the settlement as recorded in the Arbitration Award dated 30.4.1994 so as to settle the dispute between members of the family and it was to achieve aforesaid objective that the shares in the appellant/assessee were directed to be transferred. The objective/purpose of family settlement would restrict itself only to the persons who entered into the family arrangement and are part of the settlement. It cannot extend to the persons who are strangers to the settlement. In this case, admittedly, the Appellant/assessee is not a member of Mohota family so as to be a part of the family settlement. The appellant/assessee having been formed under the Companies Act have certain advantages and disadvantages attached to it. But once a Company comes into existence under the provisions of the Companies Act and it is considered to be an independent entity, then its obligation under the law as a separate legal entity has to be complied with and settlement arrived at between its members cannot discharge the appellant/assessee from complying with its obligations under the Law. It was also contended that the Appellant/assessee had no volition in transferring the shares. This submission overlooks the fact that an artificial entity such as a Company only acts through its Directors and in no case, does the Company has a mind of its own to decide the course of action to besubmission overlooks the fact that the Arbitration Order annexed to the decree (Page 62 of the Appeal memo) itself records that the shares in M/s.R.S.Rekhchand Mohota Spinning and Weaving Mills Ltd. and M/s. Vaibhav Textiles Pvt. Ltd. are to be transferred at a consideration of Rs.225/er share respectively. Thus, the consideration has been determined and accepted by the members of the family, who are in management of thethe aforesaid case, the issue was with regard to amalgamation of 100% subsidiary company to its holding company. The question which arose for consideration before the Calcutta High Court was whether an amalgamation between holding and subsidiary Companies would amount to transfer of capital asset in terms of Section 45 r/w. 2 (47) of the Act. The Calcutta High Court specifically referred to Section 47 of the Act and in particular, to Section 47,(v) of the Act to hold that a transfer by a subsidiary company to the holding Company of the whole of its share capital will not be regarded as transfer for the purposes of computing capital gains under Chapterof the Act. Further observations made by the Calcutta High Court to the effect that, on looking behind the facade of the Company, one would notice that all the assets of the subsidiary company are held by its parent company which owns 100 % of its shares. The aforesaid observations of the Calcutta High Court seems to provide the rationale for Section 47(v) of the Act in excluding a transfer of the entire share capital of a subsidiary to its holding company which owns 100% of its shares from being considered a transfer. In the present facts, we are not concerned with transfer between holding and subsidiary companies. It is not the case of the appellant that Section 47 of the Act is applicable.14. Further, lifting of corporate veil at the instance of the assessee would mean that it is denying its 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 its share holders, 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.15. In the above view, the Tribunal was correct in holding that the transaction of transfer of shares by the independent corporate entity was assessable to capital gain tax.