1. ABC Ltd is a public ltd. co. incorporated under the companies Act, 1956.
2. DEF Ltd. is also a company incorporated in India under the Companies Act. The ABC Ltd is holding the majority shares of DEF Ltd. Thus, ABC Ltd. is holding co. of DEF Ltd. and DEF Ltd. is a subsidiary of ABC Ltd.
3. GHI Ltd. is also a company incorporated in India under the Companies Act. and is also a subsidiary of ABC Ltd.
4. JKL Ltd. is also a company incorporated in India under the Companies Act. and is also a subsidiary of ABC Ltd.
5. MNO Ltd. is another company incorporated in India under the companies Act which is also a subsidiary of ABC Ltd.
6. PQR Ltd. is another company incorporated in India under the companies Act which is Associates Company of ABC Ltd.
With a view to augment the business operation of all these companies, as a measure of mobilization of funds amongst the companies it is proposed to transfer the shares of the companies referred to at serial no. 3, 4, 5, & 6 to the Company mentioned at Sr. No. 2.
After implementation of the swapping of shareholding as above, the shareholding pattern of the company at Sr. no.2 may be modified. The ABC Ltd. will be holding 100% shares of DEF Ltd. However, later on DEF Ltd. may issue new shares in such a way that ABC Ltd. will continue to have 85% of the authorized & issued & Subscribed share capital and remaining 15% will be allotted to the outside parties. For 15% shares of DEF Ltd., the share applicant will pay Rs.100 crore.
Now the question that arises out of the above transactions is,
1. What are the implications of the transaction of swapping of the shares by the subsidiary company, so far as liability of capital gain is concerned?
2. Whether the transaction would amount to transfer within the meaning of section 2(47) of the Income Tax Act. ?
3. Whether the transactions of swapping of shares of the subsidiary companies will be covered by the exemptions provided u/s 47(iv) & (v) of the Income Tax Act. ?
4. Whether, in view of the provisions of section 47A (1), 47A (2), DEF Ltd. can alter its share capital structure and issue new shares to the extent of 15% of the authorized capital. ?
5. Whether this transaction will attract capital gain tax in the case of ABC Ltd.?
6. Is there any other mode by which share held under serial no 3,4,5 & 6 can be transferred to company of serial no. 2 against issue of share by DEF Ltd. to ABC Ltd. so that capital gain tax can be avoided ?
30 September 2008
1. Since the shares are transferred by a 100% holding company to its 100% subsidiary company, capital gain liability would not arise, as it is not a transfer as per section 47(iv).
4. If further issue is made by DEF,within the period mentioned in section 47A(1)so as to reduce the holding of ABC to 85%, then the exemption u/s 47(iv)will belost.
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