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Significant ruling on legitimate tax planning

20 Jun 2013
In a significant ruling in the case of Bhoruka Engineering Industries Limited (BEIL), the Karnataka High Court has held that transfer of shares of a company owning immovable property vis-à-vis transferring the immovable property itself is legitimate tax planning.

Taxand India takes a look at the case which led to this ruling. 

BEIL, along with its group companies, was holding 98.73% of the shares of Bhoruka Financial Services Limited (BFSL). BFSL purchased 15 acres of land for a total consideration of Rs 37.5 million from Bhoruka Steel Limited (BSL) under 2 registered sale deeds in 2004. During FY 2005-06, BEIL sold the shares of BFSL to DLF Commercial Developers Limited (DLF) through a for Rs 892.8 million after paying Security Transaction Tax (STT), BEIL's share being Rs 202.9 million. BFSL sold all its assets except land before the agreement to sell the shares to DLF was executed by BEIL. 

BEIL claimed that the gain on sale of shares was exempt under section 10(38) of the Act in its tax return. The Revenue Authorities (RA) observed that the transaction for sale of shares was virtually for sale of immovable property to DLF and that the transaction was nothing but a device to avoid tax and they consequently sought to treat the gains as Short Term Capital Gains (STCG) from sale of land (and not shares) since the land was sold within a period of 36 months from the date of its acquisition. BEIL contended that they were not the owner of the immovable property but only a shareholder in BFSL and the land was owned by BFSL.

The High Court held the matter in favour of the taxpayer mainly on the basis that the language employed in section 10(38) of the Act is simple and unambiguous and the benefit of this section would be available in respect of all eligible share transfer transactions notwithstanding the type or nature of assets owned by the company whose shares are being transferred.  It also reiterated the well established principle that tax planning may be legitimate provided it is within the framework of law.  

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Taxand's Take

The High Court’s judgment upholds the well settled principle of legitimate tax planning and the correct application of the principles of the landmark McDowell case. Transferring shares of a company vis-à-vis transferring the land that a company owns is a commonly adopted practice in the real estate industry. 

Every taxpayer is entitled to arrange their affairs in a tax efficient manner. If a taxpayer has 2 alternatives at its disposal, one of which will result into a tax liability and the other does not, it has the liberty to choose the latter and to do so effectively in the absence of any specific tax avoidance provision.  

Taxand's Take Author