Tax planning within 4 corners of law is not tax avoidance – Karnataka HC

M/s BHORUKA ENGINEERING INDS LTD vs DCIT ITA No.120 of 2011 dated 9.4.2013 – Karantaka HC


Bhoruka Steel Limited (BSL) was incorporated in the year 1969. The company became a sick industrial company within the meaning of SICA.It was proposed that 30 acres of land along with building and structure to be disposed of. The valuers vide their valuation report dated 15.3.2002 valued the said land at Rs.25 Lakhs per acre. The company had received an offer from Bhoruka Financial Services Limited (BFSL), a public limited company and also one of the group Companies offered to purchase 30 acres of land for Rs.25 Lakhs per acre. Land measuring 15 acres was sold in favour of BFSL.

The assessee company is a limited company whose shares are quoted in the stock exchange. The assessee is holding shares in BFSL. The assessee and other promoter shareholders are holding 98.73% shares in BFSL, whereas the public shareholders are holding the remaining shares. The assessee in the financial year related to the relevant assessment year 2006-07 sold its shareholdings in BFSL to the extent of 45,350 shares for a net consideration of Rs.20,29,08,626/- after paying Security Transaction Tax. The shares were sold to DLF Commercial Developers Limited. The assessee claimed the gain on sale of shares as exempt from taxation under Section 10 (38) of the Act.

Assessment Proceedings:

The assessing authority proposed to bring to tax the gain arising on the sale of the shares as short term capital gain on sale of the immovable property by holding that the transaction was virtually for sale of the immovable property to DLFCDL and the sale of shares was only a devise to escape from taxation. It was held that the transaction was a colourable devise and virtually the immovable property had been transferred for consideration and the appellant was liable to tax on the short term capital gains on sale of immovable property as determined. The assessing authority relied on the judgment of the Apex Court in the case of McDowell & Co., vs CTO [(1985) 154 ITR 148]

Tribunal’s findings

  • The Tribunal held that, even though BEIL, BFSL and Bhoruka Steels Limited are all controlled by the same interest group of Agarwal family as common shareholders which is very prominent in the entire course of transaction involved in the present appeal. They had entered into an agreement on 20.7.2005 with DLF-CDL to sell the shares in BFSL to that company, DLF-CDL. Therefore, it follows that the assessee along with its group owned all the assets and properties of BFSL even though those assets and properties are technically held in the name of BFSL as an independent corporate entity, once this corporate veil is pierced, which is within the powers of the revenue authorities they were of the view that the assets of BFSL were held and de facto owned by the assessee company and its group.
  • The substance of the transaction is apparent now. BSL sells its landed property to its associate concern BFSL for a consideration of Rs.3.75 crores and immediately thereafter the shares in BFSL are sold and transferred to DLF-CDL for a consideration of more than Rs.89 crores. If the formalities of the transactions and the legal nature of the corporate bodies are ignored for a moment, the stark fact coming to surface is that the assessee’s group has sold the property belonging to one of its concern to DLF-CDL
  • If this is not a colourable device, then what would be a colourable device? Therefore, it held the series of transactions were well planned scheme so as to transfer valuable landed properties to DLF-CDL without attracting corresponding liability of tax.

High Court’s Order

  • M/s.BFSL systematically reduced its investments except that of the land which it purchased from M/s.Bhoruka Steel Limited. As on 31.03.2004, there was no fixed asset in the Company.
  • A comparative study of Balance Sheet as on 31.03.2004, 31.03.2005 and 30.06.2005 makes it clear that the Directors and Promoters of M/s.BFSL disposed off all the other assets held by M/s.BFSL except land before the shares were sold to M/s.DLFCDL. The intention of the Directors and Promoters of M/s.BFSL is to transfer the underlying asset, being land to the buyer company M/s.DLFCDL.
  • The transaction was structured in such a way that the Promoters and Directors, holding the shares of the Company, M/s.BFSL, sold their shareholdings to M/s.DLFCDL and receive the consideration.
  • In view of the judgment of the Apex Court in Vodafone, it is held that “tax planning may be legitimate provided it is within the frame work of law”. “Colourable devices cannot be a part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid payment of tax by resorting to dubious methods”.
  • The legal right of tax payer to decrease the amount of what otherwise would be his taxes, or altogether to avoid them by means which the law permits, cannot be doubted. If the tax payer is in a position to carry through a transaction in two alternative ways, one of which will result in liability to tax and the other of which will not, is at liberty to choose the latter and to do so effectively in the absence of any specific tax avoidance provision.
  • It is not a sham transaction. It is a real transaction for valuable consideration. The effect of the transaction is DLFCDL having acquired the shares became entitled to enjoy the asset of the company which was held by BFSL
  • In the light of these undisputed facts, it cannot be said that the transfer of share by the assessee to BFSL was a colourable device to avoid payment of tax.
  • If BFSL has sold the shares by executing a registered sale deed and received the sale consideration, then, BFSL ought to have paid capital gains on the said consideration. That is one mode through which BFSL could have sold the property belonging to it.
  • Where all these three conditions stipulated under Section 10(38) of the Act are fulfilled, the assessee is entitled to the benefit flowing there from i.e., the income from such transfer shall not be included in the total income of the assessee for the previous year.
  • Merely because if a registered sale deed has been executed by BFSL selling the land in favour of DFL-CDL in which event capital gain should have been paid on the sale consideration, is no reason to hold that when a share holder of BFSL transfer his share for a consideration, after complying with the legal requirements, is not entitled to the benefit of tax exemption.
  • The assessee by resorting to such a tax planning, has taken advantage of the benefit of the law or the loop holes in the law, which had enured to his benefit. After seeing how this loop hole has been exploited within four corners of the law, it is open to the Parliament to amend the law plugging the loophole.

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