2016 (2) TMI 495

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....Netherlands. It held 38.24% of shares comprising of 1,09,52,280 shares in the paid capital of M/s Century Enka Ltd, an Indian public listed company. During the year under consideration, the assessee tendered 85,93,109 equity shares having face value of Rs. 10/- each to M/s Century Enka Ltd at Rs. 122/- per shares under a scheme of arrangement, by way of buy back of own shares, as per the approval given by Hon‟ble High Court of Calcutta u/s 391 of the Companies Act. The said tendering of shares resulted in a capital gain of Rs. 58.64 crores. The assessee placed reliance on paragraph 5 of Article 13 of India Netherlands DTAA in order to contend that the capital gain referred above is not taxable in India. The same was not acceptable to both the AO and Ld CIT(A). Aggrieved by this decision of Ld CIT(A), the assessee has filed appeal before us. 5. With regard to the rate at which the capital gain is taxable, the assessing officer held that the concessional rate of taxation @ 10% provided in the second proviso to sec. 112 of the Act is not applicable to the assessee. Accordingly he levied tax @ 20%. However, the Ld CIT(A) decided this issue in favour of the assessee and hence t....

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....scheme of reorganization contemplated in the Treaty and accordingly contended that the capital gains is not taxable in India. The Ld CIT(A) upheld both the views taken by the AO by making following observations:- "1.3.1 The perusal of the above Article shows that gains from alienation of shares issued by a company resident in other state i.e. CE of which shares form part of atleast 10% interest in the capital stock of that company may be taxed in other state if the alienation takes place to the resident of that other state. Therefore, since the assessee has earned capital gain of alienation of 30%shares of CE (Indian Company) and also shares were tendered to a resident of India, the case of the assessee is covered under Article 13(5) of Indo - Netherlands DTAA. It is also noticed that the capital gains on sale of shares is exempt in Netherlands as per Corporate Income Tax Act, 1961 of Netherlands. Therefore, the capital gain cannot be treated as taxable in Netherlands. Further, the appellant has not paid any taxes in Netherlands on the capital gain arising from alienation of shares of Century Enka Ltd. The basic purpose of DTAA as well as section 90 of the Act is that the ....

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....to encourage or entertain the belief that it is honourable to avoid payment to tax by resorting to dubious methods. It is the obligation of every citizen to pay tax honestly without resorting to subterfuge and in the case of Juggilal Kamlapat vs. CIT (1969) (73 ITR 702)(SC) wherein it was held that the Income-tax authorities were entitled to pierce the veil of corporate personality and look at the reality of the transaction. The court could go behind the legal form and find out its substance having regard to the economic realities behind the legal facade. The court had power to disregard corporate entity if it were used for tax evasion or to circumvent tax obligation or to perpetuate fraud. The following observations of Lord Green in the case of Lord Howard De Welder vs. Commissioner of Inland Revenue (1941) 25 TC 134 were quoted with approval. "For years a battle of maneuver has been waged between the Legislature and those who are minded to throw the burden of taxation off their own shoulders on those of their fellow subjects. In that battle, the Legislature has often been worsted by the skill, determination and resourcefulness of its opponents. It scarcely lies in the mouth of th....

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....). We notice that the assessee, in the instant case, is pleading for relief on the basis of its own interpretation of Article 13(5) of the DTAA. The fact that it has tendered the shares to the M/s Century Enka Ltd under a scheme of arrangement approved by Hon‟ble Calcutta High Court is not disputed. Hence we do not see any colourable device in the claim made by the assessee and accordingly we are of the view that the observations made by Ld CIT(A) may not be relevant to the facts prevailing in the instant case. 11. The Ld A.R contended before us that the assessee has transferred the shares under a scheme of arrangement approved by the Hon‟ble High Court of Calcutta and the same falls in the category of "reorganization" specified in Article 13(5) of the DTAA entered between India and Netherlands. There should not be any dispute that the contention of the assessee, if found to be correct, then the impugned capital gains is not taxable in India. Hence, we have to examine whether the transfer of shares by the assessee to the company would fall in the category of "re-organization" mentioned in Article 13(5). 12. The Ld A.R invited our attention to the meaning of "reorg....

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.... mergers, acquisitions and takeovers, financial restructuring and re-organisation, divestitures de-mergers and spin-offs, leveraged buyouts and management buyouts are some of the most common forms of corporate restructuring.".... In our view, these discussions made by the ICAI only explains various forms of financial management. We have already noticed that there is no change in the rights and interests of the shareholders. Only change that occurred on reduction of share capital through writing off of the shares purchased from the assessee is the change in the shareholding pattern of the promoter groups, i.e., the percentage of shareholding of the promoter group has gone up. The same, in our view, cannot be considered as the change in the rights and interests of shareholders. Before and even after the reduction of share capital, the promoter groups continued and continues to remain as promoter groups with the same rights and interests. At this stage, we feel it pertinent to refer to the definition of the term "arrangement" given under sec. 390 of the Companies Act:- "390 (a).... (b) the expression "arrangement" includes a reorganisation of the share capital of ....