COMMISSIONER OF INCOME TAX Vs. ANNAMALAIAR MILLS

JUDGEMENT

(1.) THE respondent -assessee is a company, which is a cent per cent subsidiary company, called M/s Annamalaiar Textiles (P) Ltd. The shares of the assessee holding company were held practically by two groups of shareholders, the majority shareholders called 'A' group and minority shareholders called 'B' group. Since all were not well and there were some differences of opinion, they thought it desirable to divide the companies among themselves. The result was, a memorandum of agreement was entered into on the 1st of June, 1985, and the parties to the said agreement were two companies and the shareholders of both groups 'A' and 'B', In the said memorandum, it was agreed the assessee -company shall transfer all the shares in the subsidiary company to the minority shareholder group 'B', who will in turn transfer all the shares held by them in the assessee -company to the majority shareholder group 'A'. It was further agreed that a sum of Rs. 42.45 lakhs should be transferred from the subsidiary company to the assessee -company. Pursuant to the agreement, the assessee had transferred 24,256 shares.

(2.) THE ITO took the view that the receipt of Rs. 42.45 lakhs was consideration for transfer and after deducting the face value of shares as cost of acquisition to bring the tax, the difference of Rs. 18,19,400 as capital gains. Of course, before the said officer, assessee -company put forth a plea that this was composite transaction and the payment of Rs. 42.45 lakhs was only to set off the advantage in profitability of the subsidiary company and was not a consideration for the transfer of shares. The assessee thereafter filed an appeal and put forth a plea that the transaction was only a corporate division and did not amount to a transfer. The CIT(A), however, did not accept the contention and proceeded to hold that there was a preordained sequences of transactions arranged in an artificial manner to avoid capital gains. In that view of the matter, the appellate authority dismissed the appeal.

(3.) THE present tax case has been filed by the CIT, Madurai, questioning the correctness of the order of the Tribunal.