Case: Commissioner of Income Tax, Madras  Vs. Amalgamation Private Limited

se questions arise in the following facts and circumstances.M/s Amalgamation Private Limited (hereinafter referred to as the )is a company incorporated on December 22, 1938 as a private limited Company. The assesseeCompany held shares in several companies, such as simpson and Company Ltd., Addison &Company Pvt. Ltd., George Oakes (Private) Ltd., Addison Paints &Chemicals private Ltd., India pistons Private ltd., etc. Out of the issued capital of Rs. 7, 50, 000shares of Rs. 10 in Simpson and Company Ltd. the ay held, at the material time, 7, 06, 933 ordinary shares. Simpson and Company Ltd, had a subsidiary by name simpson and General Finance Company (private)Ltd, Carrying on the business of financing by way of hire purchase transactions to outsiders and by way of loans and advance to the companies of this group. As on July 1, 1956 a sum of Rs. 1, 85, 16, 000/was due to Simpson and General Finance company (Private) Ltd. from the. Under Section 295 of the Companies Act, 1956 which came into force on April1, 1956 no company could, without obtaining the previous approval of the Central Government in that behalf , directly or indirectly, make any loan to a company, which is its holding company . Inn (3) of Section 295 it is provided that where any loan made by a lending company and outstanding at the commencement of the companies ace, 1956, could not have been made without the previous approval of the Central Government If that section had then been in force, then the lending company had to, within six months from the commencement of the Actor such further time not exceedingsix months as the Central Government might grant for that purpose, either obtain the approval of the Central Government to the transaction or enforce the repayment of the Loan made. The liability of Rs. 1, 85, 16, 000/to Simpson and General Finance company (Private ) Ltd. by they was affected by the aforesaid provision and, therefore , it became necessary for they to liquidate this liability. Simpson and General Finance Company (Private) Ltd. owed a sum of Rs. 1, 05, 21, 750/to Simpson and Company ltd. The assesseecompany approached the Government of India for necessary approval to put through certain transactions sale of shares held by it tosimpson and General Finance Company(Private) Ltd. in liquidation of the liability. Simpson and General Finance Company(Private) Ltd., in its turn, would discharge its liability to Simpson and Company Ltd. by selling its holdings to simpson and General Finance Company (Private) Ltd. They as well assimpson and General Finance Company (private) Ltd. proposed to sell the shares at certain specified price per share and sought the approval of the Central Government for such sale .The Central Government, in approving the sale, fixed its own prices and stated that the said fixation was without prejudice to any valuation of shares for purposes of capital gains. There after the shares held by the assessy in Various companies in respect of which approval had been Granted by the Central Government were transferred by they to Simpson and General Finance Company (Private ) Ltd. with effect from June13, 1957at the price fixed by the Company Law Administration and Simpson and General Finance company (Private) Ltd.sold part there of to Simpson and Company Ltd. The Transaction between Simpson and General Finance Company (Private) Ltd. And Simpson and Company Ltd. was also at the same prices.In submitting its income tax return for the assessment year, the relevant previous year ending June 30, 1957, they claimed a capital loss of Rs. 4, 37, 703/in respect of the above the transaction. In arriving at this loss they opted for the substitution of the Market Value as on June1, 1954 in respect of shares in (1) S.R.V.S (Private) ltd., (2) Addison &Company Ltd., (3) George Oakes (private Ltd., and (4) India Pistons (Private) Ltd. As regards the rest of the shares, they adopted the cost prices. The Income Tax Officer, while making the assessment, proceeded on the basis that the price structure approved by the department of Company Law Administration for the transfer of the aforesaid shares was pure and simple on an add hoc basis and meant to serve the limited purpose of approval to be given under section 372 of the Companies Act, 1956 and that the price at which the sales took place could not, therefore , be taken to represent the fair market value of the Shares. He took the breakup value as on January 1, 1954 for the purpose of computation of capital gains and revised the sale prices and arrived at Rs. 6, 95, 082/as the net capital gains. Even according to his computation the re were certain capital determined by him. In the case of S.R.V.S. (Private) Ltd. the Income Tax Officer took thep value as on January 1, 1954 at Rs. 36, 35, 350/and their sale value at Rs.21, 88, 395/resulting i n the capital loss ofRs. 14, 46, 955/y appealed against the assessment of the capital gains to the Appellate Assistant Commissioner. While the said appeal was pending, the Commissioner, of Income Tax proceeded Under Section 33B of the 1922 Act as he was of the view that the order of the Income Tax officer was erroneous and prejudicial to the interest of revenue in so far ashe had wrongly allowed the capital loss amounting to Rs. 14, 46, 955/on the sale of the sharesin S.R.V.S. (Private) Ltd. After considering the submission of theS.R.V.S. (Private) Ltd. would not have parted with the se shares at cost on July 31, 1955. The commissioner revised the capital lo ss of Rs. 14, 46, 955/allowed by the Income Tax Officer and considered that the re was capital gain liable for assessment of Rs. 3, 91,. This figure was directed to be substituted and the assessment of capital gains was revised accordingly. They appealed against the said order of he Commissioner to the Tribunal contending that the sale value fixed by the Company law Administration represented the correct value of the shares and the transactions were without any motive to avoid capital gain and they had been necessitated by the various provisions of the Companies Act which prohibitedy loans and that the method adopted by the Income Tax officer, viz., the secondary valuation, was proper. The said appeal was allowed by the Tribunal and the order of the Commissioner of Income Tax was set aside and the method adopted by the Income Tax Officer of Secondary Valuation was held to be proper, The Appellant Assistant Commissioner took up the appeals of the assesseeCompany for this and Other years subsequent to the order of the Tribunal and following the Tribunals order he worked out the Capital loss in respect of the Other shares under consideration and in effect accepted thes claim of capital loss of Rs. 4, 37,. The said order led to appeals both by they and the Revenue to the Tribunal. Thes appeal related to computation of the capital loss of Rs. 4, 37, 703/as emerging from the order of the Appellate Assistant Commissioner instead of Rs. 4, 90, 244/which would be the Correct figure. The Revenue contested the acceptance of the Claim of they with reference to the capital loss of Rs. 4, 37,s shown in the returns.Onthe first occasion when the matter come before the Tribunal; it remanded the case to the Appellate Assistant Commissioner and called for a specific finding whether the sales under consideration were effected with the object of avoidance of tax or reduction of liability to tax and also Wanted the full value of consideration to be worked out, in case the first proviso to section 12B(2) of the 1922 Act was held to be applicable The Appellate Assistant Commissioner observed that the re was ample evidence to show that the sale of shares was a forced one and that they had no option but to comply with the statutory provisions and that the evidence produced clearly established the assesseecompanys contention that the sale was not motivated by any desire to avoid capital gains and that the Revenue had not proved by any conclusive evidence that the motive underlying the transaction was the avoidance or reduction of the liability to capital gains tax .He worked out the figures in accordance with the rules framed under the wealth Tax Act and found that the pricesfixed by the Company Law Administration were not very much different from the figures worked out by him. After receiving the report of the Appellate Assistant Commissioner, the Tribunal considered the matter again and held that the proviso to Section 12B of the 1922 Act could not be invoked in the instant case as the re was no evidence to support the view that the sales were effected with a view to avoid the provisions of Section 12B. The Tribunal accepted the contention of the assesseecompany and held that the Revenue was not justified in computing the capital gains and disturbing the figures fixed by the Government of India. The two questions referred in T.C. No. 160 of 1969 arise out of proceedings under Section 33B of the 1922Act, while questions Nos. land 2 referred in T.C. No. 239 of 1971 arise out of the order of the Tribunal in the appeal against the order of the Appellate Assistant Commissioner inrespect of the assessment year 195e the second question in T.C. No. 160 of 1969 and questions Nos.1 and 2 in T.C. No. 239 of 1971 raisedmore or less the same issue, they were taken up together by the High Court. After referring to the provisions of Sections 12b (2) and m ore particularly the first proviso to the said, the High Court has observed that the first requisite for the application of the said proviso, namely, that the person to whom the sale is made should be a person with whom the assessee is directly or indirectly connected, was satisfied in the present case because the sale of shares to a subsidiary of a sub sidiary is one to a person with whom they is directly or indirectly or indirectly connected. As regards the second requirement of the proviso, as to whethe r the sale was effected with the object of avoidance or reduction of the liability of the assesseecompany under that Section, the High Court has pointed out that the object with which the transaction was put through was the avoidance or reduction of the liability to capita gains. According to the High Court, such a finding of taking the result as if it was the object would not satisfy the requirement of the first proviso to Section 12B(20 of the 1922 Act. The High Court was of the view that the tribunal had rightly called for a finding on this point specifically from the appellate Assistant Commissioner. After referring to the finding recorded by the Appellate Assistant Commissioner, which was accepted b y the Tribunal, that the Object of the transaction was not to avoid or reduce such liability to capital gains tax, that the sales was a forced case since they had no option and that the prices had been fixed by the company law Administration , the High Court held that the first proviso to Section 12B(2) cannot be attracted to the present case. The High Court did not accept the contention urged on behalf of the Revenue that the sale price had been fixed by the company law Administration on ad hoc basis and, in this context, it has observed that the letter dated May 18of 1957(Annexure G. VII. At the remand report of the Appellate Assistant Commissioner) clearly shows that the company Law Administration worked out the figure s in consultation. with the Central Board of Revenue and when they sold the shares at those prices, it could not be validly contended that theAs regards the first question in T.C. No.239 of 1971, the High Court felt that it did not require any independent treatment in view of the answer given with regard to second question in T.C. No. 160 of 1969 which would answer that question also. Therefore , that question also was answered in the affirmative and in favour of the

Court's reasoning:
Prior to coming in to force of the Companies Act, 195 6 on April 1, 1956, he was getting monthly salary from the assessee and in addition he was getting monthly remuneration as technical adviser of the managed company as well as commission at a prescribed rate on the sale price of heals and reeds manufactured and sold by the managed company. After the passing of the Companies Act, 1956, the remuneration that could be received by him was reduced and he could not also be paid the commission. The assessee, therefore , increased the emoluments. The said excess payment made by the as sessee was disallowed and the expenditure incurred was restricted to the amount that was being paid prior to coming in to force of the companies Act, 1956. The Gujarat High Court held that the assessee had paid extra payment to its managing director so that the affairs of the managed company could be properly looked after and that as a result of the remuneration the profits of the managed company and the share of the commission of the assessee increased and, therefore , the excess amount paid by the assessee to its managing directing was expended wholly and exclusively for the purpose of its business and was an allowable deduction under Section 10(2)(XV) of the 1922 Act, Reliance was placed on the decision in Tata Sons Ltd. (supra ). This was also a case where the profits of the assessee in the form of managing agency commission were directly linked to the profit of the managed company which is not the position in the present case.The alternative claim by they for deduction in respect of the expenditure incurred by they in respect of amount paidto its own directors who were also the members of the finance committee has been rightly rejected by the High Court in view of the resolution passed by they where in the directors, whether they be the members of the finance committee or not, have been treated as a class and with reference to all of the m they incurred the expenditure only because they could not be remunerated to that extent by the subsidiary companies. The fact that they were directors of they and members of the finance committee was not taken into account in taking over the remuneration payable to