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    Question

    In the landmark case CIT v. Sunaero Limited (2012) and

    related cases, courts addressed the concept of "wholly-owned subsidiary" and its legal implications under the Companies Act, 2013. The Court established principles regarding subsidiary company status. Which principle was established?
    A A subsidiary company must have 100% shares held by the parent company, and any shares held by individuals (even if appointed by parent) would disqualify wholly-owned status. Correct Answer Incorrect Answer
    B A subsidiary is "wholly-owned" if the parent directly holds the majority of shares; the exact percentage is not relevant. Correct Answer Incorrect Answer
    C For tax purposes, a wholly-owned subsidiary status can be claimed even if some shares are held by nominees unless proof of independent beneficial ownership is established. Correct Answer Incorrect Answer
    D A company cannot be a subsidiary unless it is a private company with limited membership. Correct Answer Incorrect Answer
    E Subsidiary status cannot be changed; once incorporated as subsidiary, it cannot become independent. Correct Answer Incorrect Answer

    Solution

    In CIT v. Sunaero Limited and related case law, courts have held that a "wholly-owned subsidiary" under the Companies Act requires 100% ownership by the holding company. If any shares are held by individuals (even as nominees or at the direction of the parent), those shares must be proven to be held beneficially for the parent company; otherwise, the subsidiary loses wholly-owned status. This principle is critical for tax benefits and regulatory treatment under the Act. The judgment clarified that formal shareholding structure is what matters for legal classification, not mere operational control. Courts will not accept arguments that nominee holders are merely holding shares on behalf of the parent without explicit legal evidence.

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