2023 (4) TMI 899 - HC - Income Tax

Court Orders New Tax Assessment for Undisclosed Income, Emphasizes Fair Hearing and Quick Resolution.

Commissioner of Income Tax, Chennai. Versus Dadha Pharma Pvt. Ltd., S. Mohandchand Dadha (Indl), Chennai

The High Court annulled the Tribunal's decisions and remanded the cases to the Assessing Officer for fresh adjudication on the merits, emphasizing ... Transfer arising out of amalgamation - Evasion of tax in the guise of Amalgamation - Exemption from capital gains - transfer of shares arising out of amalgamation - Revenue submitted that though the Scheme of Amalgamation was approved by the Gujarat High Court and this Court in November, 1997, payments have been made continuously by the Sun Group to Dadha Group till the date of search in December 1998 and interest were charged on the defaulted installments. - It is submitted that there was absolutely no need of any payment as per the Amalgamation Scheme. HELD THAT:- As per the sanctioned Scheme of Amalgamation, for every 4 shares held by shareholders in Transferor Company, viz. M/s.Tamil Nadu Dadha Pharmaceuticals Ltd. (TNDPL), the shareholders were entitled to one share in the Transferee Company, viz. M/s.Sun Pharma Industries Limited (SPIL). Thus, members and entities under of SMD Group of Dadha Group (DG) who held shares in M/s.Tamil Nadu Dadha Pharmaceuticals Ltd. (TNDPL) came to hold a consolidated 1,05,353 numbers of shares in the Transferee Company. It is the case of the Income Tax Department that there was a capital gain arising out of transfer of shares held by the respective respondents in M/s.Tamil Nadu Dadha Pharmaceuticals Ltd. (TNDPL). On account of amalgamation of M/s.Tamil Nadu Dadha Pharmaceuticals Ltd. (TNDPL) with M/s.Sun Pharma Industries Limited (SPIL), the above capital gain was not offered to tax. This transfer arising out of amalgamation was treated as “capital gains” in the hands of the shareholders (the respondents herein) and other members of the Dadha Group (DG) and therefore, proceedings came to be initiated under Section 158BC of the Income Tax Act, 1961 by issuing notice to both the members of the Dadha Group and M/s.Sun Pharma Industries Limited (SPIL) for the block period between 01.04.1988 and 15.12.1998. Merely because some of the cases filed by the Income Tax Department were disposed in the light of the Litigation Policy of the Income Tax Department will not impel to dismiss these T.C.As. as admittedly the amalgamation though reality was devised to create a smoke screen in the eyes of the Income Tax Department to evade tax on the amounts transferred in cash without proper accounting. But, for the search conduced under Section 132 at the premises of the respective respondents and their Groups namely, Dadha Group and at the premises of M/s.Sun Pharma Industries Limited (SPIL) Group, the truth would have not came to the light. There are only notional allocations based on the number of shares before and after acquisition that were held and allegedly transferred prior to the amalgamation. None of the documents relating to the allocation of shares prior to the amalgamation has been filed. Share Registers of M/s.Tamil Nadu Dadha Pharmaceuticals Ltd. (TNDPL) were also not produced before AO. Whether the amounts were individually received by the respondent or consolidated amounts were received by the members of the SMD Group out of Rs.16,85,62,000/- is also not available. Therefore, the arguments that the undisclosed income for the block period 01.04.1998 to 15.12.1998 is below the litigation policy cannot be accepted. To meet the end of justice, that a fresh assessment is required to be made by the assessing officer based on the records instead of notional allocation of amounts received by the S.Mohandchand Dadha Group (SMD Group) without any proof of direct transfer of the amounts to the individual members of the S.Mohandchand Dadha Group (SMD Group). Therefore, while answering the substantial questions of law in favour of the appellant revenue, matter restored back for de-novo adjudication. Issues Involved:1. Validity of block assessment under Section 158BC.2. Taxability of amounts received before amalgamation.3. Taxability of interest on amounts agreed to be paid by the amalgamated company.4. Permitting the assessee to challenge the validity of assessment in the revenue's appeal.5. Invocation of Rule 27 of the Income Tax Appellate Tribunal Rules, 1962.Summary:1. Validity of Block Assessment under Section 158BC:The Tribunal held that block assessment under Section 158BC was invalid as the search at the assessee's premises did not result in the discovery of any undisclosed income. The seized material from other assesses should have led to invoking Section 158BD, as expounded by the Hon'ble Apex Court in Manish Maheshwari v. ACIT. The Tribunal concluded that the block assessment made under Section 158BC without invoking Section 158BD was illegal.2. Taxability of Amounts Received Before Amalgamation:The Tribunal found that the amounts received by the assessee from the amalgamated company before the amalgamation could not be taxed. It was held that the theory of sale of shares was not cogent as there were clear evidences that the amalgamation was a reality. Consequently, there was no sale of shares by the Dadhas, and hence, no capital gains arose.3. Taxability of Interest on Amounts Agreed to be Paid by the Amalgamated Company:The Tribunal held that since there was no sale of shares due to the amalgamation, the question of receiving any interest on account of delayed payment of sale consideration did not arise. The deletion of the addition of the interest income by the CIT(A) was sustained.4. Permitting the Assessee to Challenge the Validity of Assessment in the Revenue's Appeal:The Tribunal permitted the assessee to challenge the validity of the assessment in the revenue's appeal, even though the respondent had neither filed an appeal nor a cross-objection. The Tribunal invoked Rule 27 of the Income Tax Appellate Tribunal Rules, 1962, to address the issue.5. Invocation of Rule 27 of the Income Tax Appellate Tribunal Rules, 1962:The Tribunal invoked Rule 27, allowing the assessee to raise the issue of the validity of the assessment, which was not decided by the Commissioner of Income Tax (A) and did not arise out of his order.Conclusion:The High Court set aside the Tribunal's orders and remitted the cases back to the Assessing Officer to pass fresh orders on merits and in accordance with law, after giving an opportunity to the respective respondents to make their submissions. The Court emphasized that the amounts received by the respondents were undisclosed income and liable to tax, irrespective of the amalgamation. The fresh assessment was directed to be completed within 90 days from the date of receipt of the order. The appeals were allowed by way of remand, with no costs.