Gujarat HC quashes tax order, remands LTCG revision petition under section 264 for fresh consideration on merits

Gujarat HC allowed revision application under section 264 regarding LTCG on extinguishment of shares following NCLT order. Petitioner had not originally claimed loss on extinguishment of Garden Silk shares but filed timely revision petition. HC found that Principal Commissioner should have considered the claim on merits rather than dismissing it. Following precedents from Bombay HC and earlier Gujarat HC decisions, the court quashed the impugned order and remanded the matter to Principal Commissioner Surat-I for fresh consideration of the revision petition on merits with proper hearing opportunity.

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Issues Involved:

1. Whether the petitioner can claim Long Term Capital Loss (LTCL) in a revision application under Section 264 of the Income Tax Act, 1961, after failing to claim it in the original return.
2. The applicability of Section 2(22)(d) of the Income Tax Act concerning the extinguishment of shares.
3. The scope and power of the Principal Commissioner under Section 264 of the Income Tax Act.

Detailed Analysis:

1. Claim of Long Term Capital Loss (LTCL) in Revision Application:

The petitioner filed a return for the Assessment Year 2021-2022 but failed to claim the LTCL due to an oversight. This loss arose from the extinguishment of shares of Garden Silk Mills Ltd, which were nullified following an order by the National Company Law Tribunal (NCLT) under the Insolvency and Bankruptcy Code, 2016. The petitioner later sought to rectify this omission by filing a revision application under Section 264 of the Income Tax Act. The petitioner argued that Section 264 allows for rectification of errors made by the assessee, not just those by subordinate authorities, and thus should permit the claim of LTCL. However, the Principal Commissioner rejected this application, stating that the LTCL was not claimed due to any disallowance or addition in the order under Section 143(1) and that the petitioner could not revise the return beyond the prescribed period.

2. Applicability of Section 2(22)(d) of the Income Tax Act:

The petitioner contended that the extinguishment of shares should not be treated as a distribution of profits under Section 2(22)(d), as it involved the extinguishment of share capital under the IBC proceedings, not a reduction of capital leading to profit distribution. The Principal Commissioner, however, interpreted the extinguishment as akin to a capital reduction, thereby applying Section 2(22)(d). The petitioner argued that this interpretation was incorrect and that the LTCL on the extinguishment should be recognized based on settled legal positions.

3. Scope and Power under Section 264:

The judgment extensively discussed the scope of Section 264, referencing several precedents. The petitioner cited cases such as Pramod R. Agrawal vs. Principal Commissioner of Income Tax and others, arguing that Section 264's scope includes rectifying errors even if they are not apparent from the record. The court acknowledged that the Principal Commissioner should have considered the merits of the case and the petitioner's claim for LTCL, as Section 264 is intended to provide relief where the law permits. The court emphasized that the Principal Commissioner should ensure relief is provided to the assessee, considering all relevant materials, even those not initially part of the assessment record.

Conclusion:

The court quashed the impugned order dated 30.03.2024 by the Principal Commissioner and remanded the matter for reconsideration on merits. It directed the Principal Commissioner to allow the petitioner to submit requisite documents and to adjudicate the claim of LTCL within 12 weeks, ensuring a reasoned order that addresses all submissions by the petitioner. The court's decision underscores the broad remedial scope of Section 264, emphasizing the need for a fair opportunity to rectify genuine omissions in tax filings.

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