2010 (4) TMI 293 - HC - Income Tax

Court upholds taxpayer's right to legal tax planning, distinguishes from evasion. Share transfer deemed genuine.

Commissioner of Income Tax Versus M/s Pivet Finance Ltd.

The Court dismissed the Revenue's appeals against the assessee for assessment years 2003-04 and 2004-05 under Section 260A of the Income Tax Act, finding ... Tax evasion versus tax planning – use of colorable devise to reduce tax – transfer of shares to sister concern – Held that: - once the transaction has been found to be genuine by the Tribunal then it cannot be dubbed as colourable device. It was further held that if the transaction was otherwise valid in law and a part of tax planning then merely because it has resulted in reduction of tax it cannot be ignored on the ground that the underlying motive of entering into such a transaction by the assessee was to reduce its tax liability to the State. The evasion of tax is substantially different than the planning concerning tax. - The Assessing Officer did not dispute the amount of consideration of sale received by the assessee-respondent from the buyer. Therefore, it has been concluded that there was no reason to accept that the shares were sold only for the purpose of reducing the tax liability. Issues:Revenue invoking Section 260A of the Income Tax Act, 1961 for appeals against the same assessee for assessment years 2003-04 and 2004-05. Question raised on whether the assessee resorted to a colourable device to reduce tax liability by transferring shares. Tribunal's finding on genuineness of the transaction and reliance on Supreme Court's judgment. Division Bench's decision on the issue of colourable device in tax planning. Admissibility of appeals based on questions of law.Analysis:The judgment involves the Revenue invoking Section 260A of the Income Tax Act, 1961 by filing appeals against the same assessee for assessment years 2003-04 and 2004-05. The primary issue raised was whether the assessee was using a colourable device to reduce tax liability by transferring shares to another group of companies. The Tribunal found the transaction genuine as it was at the prevailing market rate, and the Assessing Officer did not dispute the consideration received by the assessee from the buyer. This led to the conclusion that the shares were not sold solely to reduce tax liability.The Tribunal relied on the Supreme Court's judgment in Union of India v. Ajadi Bachao Andolan (2003) 263 ITR 706, which elaborated on its earlier decision in McDowell & Company Ltd. v. CTO (1985) 154 ITR 148. Additionally, a Division Bench decision in M/s Porrits & Spencer (Asia) Ltd v. The Commissioner of Income Tax, Faridabad provided further clarity. It was concluded that once a transaction is found genuine by the Tribunal, it cannot be labeled as a colourable device. The judgment emphasized that tax planning, even if resulting in tax reduction, is different from tax evasion, and taxpayers have the right to use legal means to reduce tax liability without moral considerations affecting the effectiveness of such planning.Based on the reasoning in M/s Porrits & Spencer (Asia) Ltd.'s case, the Court declined to admit the appeals as no substantial question of law arose for determination. The judgment highlighted the distinction between tax evasion and tax planning, affirming the right of taxpayers to employ lawful methods to manage their tax liabilities. Consequently, all appeals were dismissed, and the order was to be placed on the file of connected appeals.