Dept. Can’t Sit in Armchair of Businessman; Upholds Section 47(iv) Exemption on Intra-Group Share Transfer: ITAT

The Chennai Bench of the Income Tax Appellate Tribunal (ITAT) has held that tax authorities cannot question a taxpayer’s commercial decisions merely because a transaction results in a tax benefit. The bench of George George K (Vice President) and Padmavathy.S (Accountant Member) has ruled in favour of French company Valeo Bayen and deleted the addition made by the Assessing Officer (AO), while upholding exemption under Section 47(iv) of the Income Tax Act in respect of transfer of shares between group entities. The dispute arose for Assessment Year 2020-21 where Valeo Bayen, a tax resident of France, sold its shareholding in Valeo Service India Auto Parts Pvt. Ltd. (VSIAPL) to Valeo India Pvt. Ltd. (VIPL), another wholly owned subsidiary within the Valeo group, for a consideration of ₹64.78 crore. The assessee claimed that the transfer fell within the scope of Section 47(iv) and therefore could not be treated as a taxable transfer under the Income Tax Act. Taxes had been deducted at source by VIPL at the time of payment, and the assessee subsequently sought a refund. Valeo Bayen explained that VSIAPL was originally established as a joint venture between itself and Asia Investment Private Limited (AIPL), an Anand Group entity, engaged in aftermarket trading of automotive parts. However, after the joint venture objective did not materialise, Valeo Bayen acquired the remaining 40% stake from its partner in 2018 and eventually became the sole shareholder of VSIAPL. Subsequently, the company transferred the shares to VIPL and later merged VSIAPL with VIPL through a fast-track merger process under Section 233 of the Companies Act, 2013. The Revenue questioned the transaction and alleged that the assessee had structured it merely to move funds out of India without payment of tax. According to the Assessing Officer, there was no necessity for the transfer of shares since the merger could have been completed through other provisions under the Companies Act without requiring sale of shares. The AO also doubted the valuation adopted by the assessee and argued that the transaction represented a revenue receipt taxable as “income from other sources.” The Assessing Officer further took the view that the transaction lacked commercial justification and that the shares could not be considered capital assets. The Revenue also contended that the assessee’s intention was not to hold the investment as a long-term capital asset but rather to facilitate remittance of funds outside India. Before the Tribunal, the assessee argued that the sale transaction and the subsequent merger were separate commercial events. It contended that the transfer of shares was undertaken solely to facilitate a fast-track merger process and was driven by commercial expediency rather than tax considerations. The company further submitted that the tax department cannot interfere with the manner in which a business chooses to structure its operations. The Tribunal accepted the assessee’s contentions and observed that the Revenue had failed to examine the transaction in its entirety. It noted that Valeo Bayen had been holding a substantial 60% stake in VSIAPL since 2012 and had treated those shares as investments rather than stock-in-trade. Merely because the remaining 40% stake was acquired later could not change the nature of the asset. The Bench made a significant observation on the limits of tax authority intervention in business decisions. It held that tax officials cannot dictate how businesses should organise their affairs or compel taxpayers to adopt alternative modes of carrying out transactions merely because such alternatives appear preferable to the Revenue. The Tribunal also rejected the Revenue’s attempt to rely on accounting disclosures post-merger. It clarified that references in financial statements to cancellation and extinguishment of shares were merely accounting consequences of the merger and could not establish that the transaction lacked genuineness. On the issue of valuation, the Tribunal observed that the Assessing Officer had rejected the Discounted Cash Flow (DCF) valuation merely by comparing it with Net Asset Value (NAV) without identifying any specific defects in the methodology or assumptions. It stated that while the AO can scrutinize a valuation report, rejection cannot be made without pointing out concrete inaccuracies. Most importantly, the Tribunal held that the mere existence of a tax advantage cannot render a transaction impermissible. It observed that unless an arrangement lacks commercial substance or is non-genuine, tax planning within the framework of law remains permissible. Since the transaction only resulted in reorganisation of shareholding without any change in ultimate beneficial ownership, it could not be disregarded as a colourable device. Holding that the transfer was a bona fide transaction squarely covered by Section 47(iv), the ITAT directed deletion of the addition made by the Assessing Officer and allowed the appeal of Valeo Bayen. Case Details Case Title: M/s. Valeo Bayen Versus Dy. Commissioner of Income Tax Citation: JURISHOUR-1333-ITA-2026(CHE) Case No.: IT(TP)A No.63/Chny/2023 Date: 29.04.2026 Counsel For Petitioner: K. Prasanna, Advocate Counsel For Respondent: M. Murali, CIT Click Here To Read Order Read More: Company Liquidation Does Not Shield Promoters From Buyback Obligations: Kerala HC

Dept. Can’t Sit in Armchair of Businessman; Upholds Section 47(iv) Exemption on Intra-Group Share Transfer: ITAT

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