India: Tribunal: Sale To 100% Step-Down Subsidiary Not "Transfer" For Capital Gains

  • Sale to indirect subsidiary also covered under section 47(iv) of the Income-tax Act, 1961
  • Meaning of the term 'subsidiary company' to be understood with reference to the Companies Act

Recently, in Emami Infrastructure Limited v. ITO,1 the Kolkata bench of the Income Tax Appellate Tribunal ("Tribunal") ruled that a transfer between a holding company and a 100% step-down subsidiary is not a taxable "transfer" for capital gains purposes. In doing so, the Tribunal has extended the benefit of the exemption under section 47(iv) of the Income-tax Act, 1961 ("ITA") to a step-down subsidiary as well, thereby enabling greater tax optimization while undertaking future intra-group reorganizations.


The taxpayer, Emami Infrastructure Limited ("EIL") is an Indian listed company. EIL held 100% of Emami Realty Limited ("ERL") which, in turn, held 100% of Emami Rainbow Niketan Private Limited ("Rainbow"). EIL also held 286,329 equity shares of Zandu Realty Limited ("Zandu"), a listed Indian company, representing approximately 35% of the total share capital of Zandu. During the assessment year in question (AY 2010-11), EIL sold its 35% stake in Zandu to Rainbow, and claimed long term capital loss of approximately INR 25 crores on the sale ("Transaction"). A pictorial representation of the Transaction is given below:

At the first stage of assessment, the Assessing Officer ("AO") disallowed the long term capital loss claimed by EIL on the basis that the Transaction was not undertaken at arm's length, given the significant difference between the average quoted price per share at the time of the sale (INR 3989.80) and the actual per share price at which shares were sold to Rainbow (INR 2100). The AO accordingly recomputed the capital gains arising from the Transaction by: (i) taking the average quoted price per share as the fair market value ("FMV") of the shares transferred; and (ii) deeming this FMV to be the full value consideration received by EIL from the Transaction. This resulted in a net capital gain of approximately INR 29 crore arising from the Transaction, as against the net capital loss of INR 25 crore claimed by EIL.

Aggrieved by the order of the AO, EIL appealed to the Commissioner of Income-tax (Appeals) ("Commissioner"), who confirmed the order of the AO. In addition, the Commissioner also ruled that the Transaction would not be entitled to the benefit of section 47(iv) of the ITA (which excluded transfers between a parent company and its wholly-owned subsidiary from capital gains tax),2 based on the decision of the Gujarat High Court in Kalindi Investment (P.) Ltd v. Commissioner of Income-tax3 ("Kalindi"). In Kalindi, the Gujarat High Court had ruled that the exclusion under section 47(iv) of the ITA would only cover transfers to an immediate subsidiary, and not a step-down subsidiary, based on a literal construction of the term 'subsidiary company'.

On appeal, the Tribunal reversed on both counts.


After hearing counsel for both parties, the Tribunal framed two issues for consideration:

  1. Whether the Transaction constituted a "transfer" in view of section 47(iv) of the ITA; and
  2. If yes, whether the AO was correct in substituting the actual sale consideration received with FMV of shares sold.


Relying on the decision of the Bombay High Court in Petrosil Oil Co Ltd v. Commissioner of Income-tax4 ("Petrosil"), the Tribunal observing that since the term 'subsidiary company' had not been defined under the ITA, it would have to be understood in accordance with the meaning given to it under the Companies Act. Despite noting the conflicting decision in Kalindi, the Tribunal felt that a 100% step-down subsidiary would also qualify as a "subsidiary company" for the purposes of section 47(iv), since that was "the letter and spirit of the enactment."5 Hence, the Transaction could not be regarded as a "transfer" for the purposes of charging capital gains tax.

By consequence, the question of computing either capital gain or capital loss did not arise. For the same reason, the Tribunal did not go into the question of whether the AO was correct in substituting the actual sale consideration received with the FMV of shares sold.


The ruling of the Tribunal is certainly a welcome one and will go some way in giving a boost to internal reorganizations involving wholly owned indirect subsidiaries. The Tribunal has provided no additional justification or reasoning for following the decision in Petrosil, besides stating that as per the "letter and spirit" of section 47(iv), transfers to a step-subsidiary would also be covered by that section. It is important to note that Petrosil was not decided in the context of section 47(iv), but in the context of section 108 of the ITA (which has since been omitted) and that6 it was in that context that the Bombay High Court had imported the meaning of the term 'subsidiary company' from the Companies Act, 1956 into the ITA.

By contrast, the contradictory ruling in Kalindi was delivered on nearly identical facts as Emami, and can therefore be argued to have been the appropriate precedent applicable in this case. Kalindi concerned a taxpayer earning dividend and interest income from its activities of making or holding investments, and from financing industrial enterprises. For the assessment year in consideration, the taxpayer sold its shareholding in a private limited company to its 100% step-down subsidiary, and claimed a short-term capital loss from the sale in its return of income. Before the Gujarat High Court, counsel for the taxpayer argued that section 47(iv) had to be construed strictly: since the taxpayer did not hold any shares of the transferee, section 47(iv) would have no applicability, and the sale would amount to a "transfer" for capital gains purposes.7 It was also argued that the meaning of the term 'subsidiary company' could not be imported from the Companies Act, 1956 since section 4 of that Act, which defined the term 'subsidiary company', expressly began with the words "For the purposes of this Act".8 The Gujarat High Court agreed on both counts:

"As we have already indicated earlier, section 4 makes it clear that the expanded definition of 'holding company' is applicable for the purposes of the [Companies] Act (...) The [Income-tax] Act has carved out a smaller number of holding and subsidiary companies for the purposes of section 47(iv) and (v). The wider definition of a 'holding company' with emphasis on 'control' as the guiding factor is not adopted in clauses (iv) and (v) of section 47. It is specifically provided that the parent company or its nominees must hold the whole of the share capital of the company. The Legislature while enacting the [Income-tax] Act, therefore, made a clear departure from the definition of 'holding company' as contained in the [Companies] Act. In this view of the matter, there is no justification for invoking clause (c) of sub‐section (1) of section 4 while interpreting the provisions of clauses (iv) and (v) of section 47, which lay down two specific conditions for applicability of the said clauses and which are quite different from the criteria laid down in sub‐section (1) of section 4 of the Companies Act, 1956, for giving a more expanded definition of a 'holding company' to subject more companies to regulatory control under the Companies Act. On the other hand, the object underlying section 47 is to lay down exceptions to the legal provision (section 45) for taxing gains on transfer of capital assets. The general rule is to construe the exceptions strictly and not to give them a wider meaning." [Emphasis supplied]

On this basis, the Gujarat High Court accepted the taxpayer's argument that section 47(iv) would have no applicability in case of transfers to a 100% step-down subsidiary.

It is an accepted canon of interpretation that where a rule is capable of being interpreted more than one way, the interpretation that favours the taxpayer is to be given effect.9 The ruling in Emami represents a curious departure from this principle. Had it been held that the Transaction was not covered by section 47(iv), the taxpayer could potentially have claimed short term capital loss on the sale, which would consequently have resulted in greater benefit to the taxpayer than otherwise. While the ruling of the Tribunal in this case appears to be at odds with what equity may have necessitated, it is possible that in a wide variety of cases, making such transfers non-taxable would benefit a significant number of taxpayers.

The ruling has also appears to raise interpretational issues vis-à-vis section 47A of the ITA. Per s. 47A(1)(ii), if the parent company or its nominees ceases to hold the whole of the share capital of the subsidiary company before the expiry of eight years from the date of transfer, the exemption under section 47(iv) would be withdrawn retrospectively. Since the present case involved a transfer to a step-down subsidiary (and not a direct subsidiary), one possible interpretation is that section 47A would be attracted if: (a) the parent sold shares of the subsidiary; or (b) the subsidiary sold shares of the step-down subsidiary within eight years of the date of transfer. A second way of interpreting the applicability of section 47A would be to argue that so long as the parent company indirectly holds the whole of the share capital of the step-down subsidiary, the identity of the intermediate subsidiary company would be irrelevant, and any change of ownership at the intermediate level should not attract section 47A. On balance, this second interpretation should be the correct view, given that the intention behind section 47(iv) is to enable tax-neutral internal reorganizations.

More generally, in view of the conflicting decisions on whether the meaning of the term 'subsidiary company' under the Companies Act can be imported into the ITA, taxpayers continue to have the ability to rely on different decisions to support a position that is beneficial to them. A taxpayer wishing to claim capital losses would argue that the term 'subsidiary company' ought to be interpreted strictly, while others who might be subject to capital gains tax would argue for a liberal interpretation of the term based on the Companies Act definition. The interpretation of the term 'subsidiary company' cannot rest mainly upon what is beneficial to the taxpayer on a case to case basis, and therefore requires a final ruling by the Supreme Court to settle this issue and provide the required certainty.


1 Order dated 28-02-2018 in ITA No. 880/Kol/2014.

2 section 47(iv), ITA:

"Nothing contained in section 45 shall apply to the following transfers:


(iv) any transfer of a capital asset by a company to its subsidiary company, if –

(a) the parent company or its nominees hold the whole of the share capital of the subsidiary company, and

(b) the subsidiary company is an Indian company;".

3 [2002] 256 ITR 713 (Gujarat).

4 [1999] 236 ITR 220 (Bombay).

5 Supra note 1, at para. 17.

6 section 108 has been omitted with effect from April 1, 1988:

"108. Savings for company in which public are substantially interested — Nothing contained in section 104 shall apply—

(a) to any company in which the public are substantially interested; or

(b) to a subsidiary company of such company if the whole of the share capital of such subsidiary company has been held by the parent company or by its nominees throughout the previous year."

7 Kalindi, [2002] 256 ITR 713 (Gujarat), at para. 5.1.

8 Kalindi, [2002] 256 ITR 713 (Gujarat), at para. 5.2. Similarly, the definition section under the Companies Act, 2013 (i.e. section 2) begins with the words "In this Act, unless the context otherwise requires".

9 See IRC v. Duke of Westminster, [1936] AC 1; CIT v. Vatika Township P. Ltd., 2015 (1) SCC 1; CIT v. Shaan Finance (P.) Ltd, [1998] 231 ITR 308 (SC); Commissioner of Income-tax v. Swadeshi Match Co, [1983] 139 ITR 833 (Bombay).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Sign Up
Gain free access to lawyers expertise from more than 250 countries.
Email Address
Company Name
Confirm Password
Mondaq Newsalert
Select Topics
Select Regions
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions