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HC justified invoking GAAR as issuance of bonus shares was an artificial arrangement to avoid tax obligations
In the given case, the assessee sold the shares of a company to a private limited company. Before the sale, the company issued bonus shares to its shareholders. Due to the issuance of bonus shares, the face value of each share of the company was reduced. The sale of shares resulted in a short-term capital loss to the assessee.
The assessee set off the short-term capital loss against the long-term gains made on another transaction of the sale of shares. The Assessing Officer (AO) treated said transaction as an impermissible avoidance arrangement as per the General Anti-Avoidance Rules (GAAR) under Chapter X-A starting from Section 95-102 of the Income Tax Act.
Assessee filed writ petition before the Telangana High Court.
Assessee contended that the transactions resulting in bonus stripping were subject to the specific provisions of Section 94(8), which is a Specific Anti Avoidance Rule (SAAR). Any loss incurred on account of the purchase and sale of shares, resulting in bonus stripping, must be computed as per Section 94(8). However, the AO sought to treat the transactions as impermissible avoidance arrangements as per the GAAR.
Assessee also relied upon 2012 Shome Committee Report. It was submitted that the Committee have recommended that where SAAR is applicable to a particular transaction, then GAAR should not be invoked to look into that element.
The High Court held that the assessee's argument was rooted in the belief that the Specific Anti Avoidance Rules (SAAR), particularly Section 94(8), should take precedence over the General Anti Avoidance Rule (GAAR). This contention, however, was fundamentally flawed and lacked consistency.
Given the multiple transactions that the taxpayer had undertaken, the case should fall under the umbrella of Chapter X-A and not Chapter X. Section 94(8) might be relevant in a simple, isolated case of the issuance of bonus shares, provided such issuance has an underlying commercial substance. However, this provision did not apply to the current case, as the issuance of bonus shares here was evidently an artificial avoidance arrangement that lacked any logical or practical justification.
It was clear that the assessee's arrangement was primarily designed to sidestep tax obligations in direct contravention of the principles of the Act. The landmark Vodafone judgment provides crucial insight into this issue. The judgment implies that the business intent behind a transaction could be strong evidence that the transaction isn't a deceptive or artificial arrangement. The commercial motive behind a transaction often reveals the true nature of the transaction.
The GAAR chapter, which comprises sections 95 to 102, provides a detailed account of various types of transactions that could be considered illegal tax avoidance arrangements. This Chapter lists these transactions and provides an extensive definition of conditions that render a transaction or arrangement devoid of commercial substance.
Furthermore, Section 100 of this Chapter clarifies that this Chapter is applicable in addition to or as a substitute for any other existing method of determining tax liability. This provision emphasizes the legislative intention that the GAAR provisions should act as an all-encompassing safety net. It's designed to capture all illicit arrangements, ensuring that tax on these arrangements is calculated using the provisions of this Chapter.
Further, the Committee's stance that SAAR should generally supersede GAAR mainly pertains to international agreements, not domestic cases. This stand, as per the report, is further substantiated by the Finance Minister's declaration, made on January 14, 2013. During this announcement, the Minister stated that the applicability of either GAAR or SAAR would be determined on a case-by-case basis.
Therefore, the assessee's contention that the case should have otherwise fallen under Section 94(8) was not acceptable. It was clear and convincing that the entire arrangement was intricately designed to evade tax. Assessee, on his part, hadn't been able to provide substantial and persuasive proof to counter this claim. Accordingly, the writ petition was dismissed, and AO was allowed to proceed.
Beneficial Ownership vs Shareholding: To Veil or not?
In the intricate realm of corporate ownership structures, the legal doctrines of beneficial ownership and shareholding are of paramount importance, albeit often erroneously conflated. While both concepts relate to a proprietary interest in a company, a nuanced legal analysis reveals fundamental distinctions with profound legal and practical ramifications for stakeholders, corporate entities, and regulatory authorities.
Shareholding, the more readily apparent concept, denotes the formal registration of an individual or entity as the legal owner of shares in a company. This documented ownership, readily ascertainable from public records, confers upon the shareholder a bundle of legal rights, including the entitlement to dividends, the power to exercise voting rights, and access to corporate information.
In contrast, beneficial ownership extends beyond the concept of legal title, centering on the natural person(s) who ultimately derive economic advantage from the shares. It is worth noting that, while the concept is intuitive, there exists no universally accepted legal definition of beneficial ownership, particularly in the context of tax law. This can encompass situations where the registered shareholder functions solely as a nominee, or trustee or otherwise, holding shares for the benefit of another party, or where the true beneficiary's identity is obscured through complex trust structures or corporate arrangements.
This dichotomy between formal legal ownership (shareholding) and the actual beneficiary of economic rights (beneficial ownership) has assumed heightened importance in Indian jurisprudence in contemporary and not so contemporary times. The growing interconnectedness of global economies and the increasing complexity of financial systems have made transparency a crucial element in combating illicit financial flows, including tax evasion, money laundering, and corrupt activities. As such, the identification of the true beneficiaries behind opaque corporate structures has become imperative to safeguarding the integrity of economies and taxing systems. While the onus on the type of money has shown a shift from income to capital, the emphasis on the person behind the scene remains.
In response to concerns regarding transparency and illicit financial activities, numerous jurisdictions have enacted AML legislation mandating the disclosure of beneficial ownership. These legal provisions typically impose a duty upon companies to ascertain and report the identities of their beneficial owners mostly to a designated central registry. The information contained within this registry can be utilized by diverse stakeholders to foster corporate transparency and accountability.
Law enforcement agencies can harness beneficial ownership data to investigate potentially illegal activities, identify those responsible for financial crimes, and facilitate the recovery of illicitly obtained assets.
Tax authorities can employ this information to verify that taxes are being remitted by the actual beneficial owners of companies, thereby mitigating the risk of tax evasion and avoidance.
Furthermore, the disclosure of beneficial ownership can serve as a valuable resource for investors, enabling them to make well-informed investment decisions. A comprehensive understanding of a company's ownership structure empowers investors to better evaluate potential risks linked to conflicts of interest, obscure ownership arrangements, and money laundering.
On the other hand Legal shareholding, while conferring rights such as voting and dividend entitlement, may not accurately represent the actual ownership and control structure within a corporation. This lack of transparency is often facilitated by deliberate obfuscation strategies employed by entities. For instance Nominee arrangements, or trusteeship arrangements wherein a registered shareholder holds shares on behalf of an undisclosed beneficial owner, are one such mechanism. Additionally, complex corporate structures involving multiple layers of subsidiaries and shell companies can further obscure the ultimate beneficiary.
These tactics can be exploited for illicit purposes, as evidenced by the Panama Papers scandal, which revealed a vast network of offshore legal entities used by high-net-worth individuals and corporations to conceal assets, evade taxes, and potentially engage in money laundering.
Furthermore, legal shareholding does not necessarily equate to control. In practice, a minority shareholder possessing significant voting rights or strategic alliances could exert more influence over a corporation than a majority shareholder with dispersed holdings.
This concept is exemplified by the Volkswagen emissions scandal. Despite holding only an approximate31.5%% stake in Volkswagen, Porsche SE effectively controlled the company through a complex web of shareholdings and options contracts. This granted Porsche SE a dominant voting position, enabling it to influence key decisions and ultimately leading to the emissions scandal.
Moreover, legal ownership provides limited insight into a company's true financial condition. While shareholders have a right to access financial reports prepared in accordance with applicable accounting standards, these reports may not fully disclose certain financial instruments or liabilities. For instance, complex financial instruments with embedded derivatives or off-balance sheet financing arrangements may not be transparently reflected on the balance sheet or in the footnotes of the financial statements.
This lack of transparency can create a misleading impression of a company's financial health, as exemplified by the Enron case. Enron's seemingly healthy financial statements masked a web of fraudulent accounting practices, including the use of special purpose entities to hide liabilities. These practices ultimately led to the company's spectacular collapse, causing significant losses for investors and other stakeholders.
In summation, the legal concept of shareholding, while denoting formal ownership and associated rights, does not necessarily provide a complete picture of corporate control. The delineation between legal shareholding and beneficial ownership is paramount for comprehending the intricate power dynamics within a corporation. Beneficial ownership, often masked by intricate corporate structures and nominee arrangements, unveils the natural persons or entities that ultimately derive economic benefit from and exert control over a company's assets and operations.
This distinction is of critical importance for regulatory bodies, investors, and the general public, as it exposes potential conflicts of interest, hidden risks, and avenues for financial impropriety. To address the lack of transparency surrounding beneficial ownership, continuous improvement of robust regulatory frameworks are essential. Such frameworks should mandate comprehensive disclosure of beneficial ownership information, thereby enhancing transparency and empowering stakeholders to make well-informed decisions. Only through a holistic understanding of both legal shareholding and beneficial ownership can we foster a corporate landscape characterized by fairness, accountability, and transparency.
The failure to distinguish between legal and beneficial ownership can have far-reaching consequences. It can enable illicit financial flows, tax evasion, and other forms of financial crime. By implementing robust beneficial ownership disclosure requirements, jurisdictions can mitigate these risks and promote greater corporate accountability. This not only safeguards the integrity of financial markets but also bolsters public trust in the corporate sector
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