2018 (7) TMI 1738 - HC - Income Tax

High Court Upholds Tribunal's Power to Order Fresh Inquiry in Tax Matters

Fidelity Business Services India (P.) Ltd. Versus Assistant Commissioner of Income-tax

Fidelity Business Services India (P.) Ltd. Versus Assistant Commissioner of Income-tax - TMI Issues Involved:1. Jurisdiction of the Income Tax Appellate Tribunal (ITAT) under Section 254 of the Income Tax Act, 1961.2. Applicability of Section 2(22)(e) of the Income Tax Act to the buy-back of shares.3. Examination of the fair market value of shares in the context of buy-back transactions.Detailed Analysis:1. Jurisdiction of the ITAT under Section 254 of the Income Tax Act, 1961:The primary issue in this case is whether the ITAT has the authority under Section 254 to direct a fresh inquiry into aspects not previously investigated by lower authorities, potentially resulting in an increased tax liability for the assessee. The court emphasized that the Tribunal's powers are extensive and not restricted merely to the grounds raised in the appeal. Section 254(1) allows the Tribunal to pass orders 'as it thinks fit' on the subject matter of the appeal, provided both parties are given an opportunity to be heard. The Tribunal's directive to the Assessing Officer to examine the fair market value of the shares bought back was deemed within its jurisdiction. The court referenced various precedents, including the Supreme Court's decisions in *Mahalakshmi Textile Mills Ltd.* and *Kapurchand Shrimal*, to support the broad scope of the Tribunal’s powers.2. Applicability of Section 2(22)(e) of the Income Tax Act to the buy-back of shares:The Tribunal had to determine whether the difference between the buy-back price and the fair market value of the shares could be deemed as dividend under Section 2(22)(e). The Tribunal initially held that the buy-back transaction did not attract tax under Section 115-O or the newly inserted Section 115-QA, as the transaction occurred before the effective date of the latter. However, the Tribunal also observed that the transaction could potentially fall under Section 2(22)(e) if the buy-back price exceeded the fair market value, suggesting that such excess could be treated as a loan or advance to the shareholder, thereby qualifying as a deemed dividend.3. Examination of the fair market value of shares in the context of buy-back transactions:The Tribunal directed the Assessing Officer to investigate whether the buy-back price of Rs. 2,85,108 per share was realistic or inflated. This inquiry was crucial because, if the buy-back price was found to be excessively high, it could indicate a colorable device for transferring reserves and surplus to the holding company, thereby avoiding tax. The court upheld the Tribunal's directive, emphasizing that the Tribunal has the authority to ensure that all relevant aspects of the subject matter are thoroughly examined to ascertain the truth and ensure proper tax liability is determined.Conclusion:The Karnataka High Court concluded that the ITAT has the power to direct a fresh inquiry into aspects of the subject matter of an appeal, even if such aspects were not previously investigated by lower authorities. The Tribunal's directive to examine the fair market value of the shares in the buy-back transaction was within its jurisdiction and aimed at ensuring the correct tax liability. The appeal by the assessee was dismissed, affirming the Tribunal's authority to remand cases for further inquiry to uphold the principles of justice and truth.