Every transaction that result into a tax advabtage to a company cannot be treated a sham transaction,inless the company conceals

the true nature of the trabnsaction, according to a recent order by a Kalkota bench of Income-tax Appellate Tribuna ITAT)l. The ITAT gave this order in the case of Maersk Line . The transaction under considerastion was sale of shares of wholly owned subsidiary (WOS) Nedliyod India (NIPL) tp Maersk India Pvt Ltd for a consieratrion of Rs 5.2 cr. The Income-tax department alleged that just before the sale of these shares the company had distributed tax free dividend that resulted in a tax advantage. Tax advantage was in the form of paying lower tax on capital gains as the fair ,arket value of the shares had been reduced because of dividend distribution. While the case of the Assessing Of ficer is that this distribution of dividend is nothing but a colourable device to deny legi timate share of revenue in capital gains of the assessee, and should, therefore, be ignored in computation of long term capital gains in the hands of the assessee

. However, the transaction of dividend distribution by the WOS cannot be regarded as a "colourable device" or as an "impermissible tax avoidance scheme". A transaction can be regarded as a "sham" where "the document is not bona fide nor intended to be acted upon, but is only used as a cloak to conceal a different transaction" or where "it is intended to give to third parties the appearance of creating between the parties legal rights and obligations which are different from the actual legal rights and obligations which the parties intend to create". On facts, the transaction cannot be regarded as a "sham" or a "colourable device" because (a) the WOS had sufficient reserves and cash surplus for the distribution of dividend & (b) the WOS paid dividend distribution tax which wThe issue in appeal lies in a narrow compass of material fac ts. During the relevant financial period, i.e. 28th March 2006, the assessee sold 10,71,420 equity shares of its whol ly owned subsidiary Nedllyod India Pvt Ltd (NIPL, in short) for a consideration of Ra 5,20,28,155 to Maersk India Private Limited. There is also no dispute about the fact that this sale was part of the overall reorganization of business in the sense that, as state d in t h e note s t o t he asse ssee s finan cial st at ements f o r t he http://www.itatonline.org I . T.A. No. : 2150/ Kol. / 2009 As ses sment year : 2006 -07 Page 3 of 11 rele van t peri o d an d as rep ro du ce d in the ass essment o r de r, ef fecti v e 11th August 2005, AP Mollar Maersk Group acquired Royal P&O Ned ll yo d N V, ul timate hol di ng c ompa ny an d subseq u entl y, on 2 8 th March 2006, all shares of NIPL were acquired by Maersk India Pvt Ltd (Maersk India, in sho rt ) . . . The as sessee c omp ute d l ong term capital gains on sale of these shares, which worked out to Rs 2,58,76,351. The trouble, however, arose with regard to distribution of dividends , @ Rs

140 per equity share - aggregating to Rs 14,99,988,800, by NIPL just before the sale transaction between the assessee and Maersk India took place. While the case of the Assessing Of ficer is that this distribution of dividend is nothing but a colourable device to deny legi timate share of revenue in capital gains of the assessee, and should, therefore, be ignored in computation of long term capital gains in the hands of the assessee, learned Commissioner (Appeals) does not share that perception. It is an undisputed posit ion that distributionas duly accepted in its assessment.