TaxTMI 
TaxTMI 
2018 (7) TMI 1738
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....uth. 3. Whether the Income Tax Appellate Tribunal, being a creature of Statute, Income Tax Act and being the final fact finding body and being a non- departmental appellate forum also has a similar mandate in law or not is the bed-rock of this appeal, in which we propose to interpret the powers of the Tribunal while dealing with the appeals under Section 254 of the Income Tax Act, 1961. 4. This appeal has been filed by the Appellant - Assessee - M/s. Fidelity Business Services India Pvt. Ltd., Bengaluru, raising the following substantial questions of law for consideration by this Court:- Whether on the facts, in the circumstances and on the grounds and contentions urged: (i) the Tribunal was right in directing examination by the Assessing Officer of the fair market value of the shares bought back and application of Section 2(22)(e) of the Act if the consideration for buy back of shares was in excess of the fair market value of the shares? (ii) the Tribunal was correct in holding that the difference, if any, between the buy-back price and the fair market value of the shares would be deemed to be dividend in terms of section 2(22)(e) of the Act, although the said provision would....
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....6 is chargeable to income tax as Distribution Dividend Tax (DDT) but since the transaction in the present case of buy-back of shares took place prior to 01/06/2013, such buy-back of the shares between the period 01/04/2000 to31/05/2013 would be taxed as 'Capital Gains' in the hands of the recipient in accordance with the provisions of Section 46-A of the Act and no such amount would be treated as dividend in view of exclusion part of Section 2 (22)(iv) of the Act. The Assessing Officer also held that the Capital Gains in the hands of the Holding Company (Mauritius Company) was also not chargeable to tax in India as per the provisions of Article 13(4) of the Indo-Mauritius Double Taxation Avoidance-Agreement (DTAA). 10. However, vide para 7 of the impugned Order of the learned Tribunal dated 22/02/2017 and by which para 7 only, the present Appellant Assessee is aggrieved and has filed the present appeal in this Court under Section 260-A of the Income Tax Act, 1961, the learned Tribunal observed that there is another aspect of this transaction of buy-back at an abnormally high price of Rs. 2,85,108/- per share having face value of only Rs. 10/- per share and therefore the pa....
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....ss than 10% as it holds the shares of the assessee to the extent of 99.99%. In case the buy back price is not based on the real valuation and it is artificially inflated by the parties then it is certainly a device for transfer of the reserves and surplus to the holding company by avoiding the payment of tax and therefore it will be treated as a colourable device. There are two aspects in this transaction- (i) It is a simple and plain transaction of buy back of shares without having any dispute of price then the same is beyond the scope of the provisions of Section 2(22) as well as Section 115QA of the Act and therefore cannot be treated as a colourable device. (ii) The second aspect is buy back price paid by the assessee to its wholly owned holding company does not represent true fair market price of the share of the assessee then it is nothing but a dubious method of avoiding the tax in the garb of buy back. Thus if the buy back price paid to the holding company is unrealistic and highly inflated then to that extent the transaction of payment to the holding company has been given a colour of payment towards buy back. We find that neither the Assessing Officer nor the DRP has ....
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....Mr. Pardiwala cited several case laws in support of his contentions which would be dealt with hereinafter. 17. On the contrary, the learned counsel for the Revenue, Mr.K.V. Aravind also relied upon several decisions and precedents and submitted that the learned Tribunal was perfectly justified and well within the parameters of the subject matter of the appeal involved before it and the powers of the Tribunal as defined under Section 254 of the Act to pass such Orders, "as it thinks fit" gives sufficiently wide powers to the Tribunal to remand the case back to the Assessing Authority for holding an inquiry into the fair market value of the shares bought back by the Assessee Company from its 99.99% Holding Company at an abnormally high price of Rs. 2,85,108/- per share as against the face value of Rs. 10/- per share which were probably issued during 2002 when the said Company started its business in India and which was nothing but an avoidance of tax payment in India by shifting of huge Reserves and Surpluses of the Indian Company to its Mauritius Holding Company where too, on the Holding Mauritius Company also, no Capital Gains tax could be levied as Article 13 of the Indo-Mauritiu....
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....ght to its notice by the assessee or the [Assessing] Officer: Provided that an amendment which has the effect of enhancing an assessment or reducing a refund or otherwise increasing the liability of the assessee, shall not be made under this sub section unless the Appellate Tribunal has given notice to the assessee of its intention to do so and has allowed the assessee a reasonable opportunity of being heard: Provided further that any application filed by the assessee in this sub-section on or after the 1st day of October, 1998 shall be accompanied by a fee of fifty rupees." 23. The burden of the argument of the learned Senior Counsel for the Appellant - Assessee, Mr. Percy Pardiwala was that the powers of the learned Tribunal are circumscribed and restricted by the words "thereon", used in juxtaposition with the words "as it thinks fit". 24. He submitted that the Tribunal cannot exceed the parameters or the grounds of the appeal raised by the aggrieved Appellant Assessee Company and what issue has neither been raised by the Assessee Company nor by the Revenue, cannot be dealt with or suo motu taken up by the learned Tribunal and such an exercise in excess of its jurisdiction a....
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....ny also relied upon the decision of the Division Bench of the Calcutta High Court in the case of Income Tax Officer v. R.L. Rajghoria [1979] 119 ITR 872. The Division Bench of the Calcutta High Court upholding the Order of the learned Single Judge in a Writ Petition in R.L. Rajghoria v. Income Tax Officer [1977] 107 ITR 347 held that the word 'thereon' appearing in Section 33(4) of the Income-Tax Act, 1922 akin to Section 254 (1) of the Income-Tax, 1961 restricts the jurisdiction of the Tribunal to the subject matter of the appeal and there is no doubt that the Tribunal has powers of remanding a case to the lower Appellate Authority or the Assessing Authority as the case may be, requiring him to hold further inquiry and to dispose of the case on the basis of such inquiry, but the jurisdiction of the Tribunal is confined only to the subject matter of the appeal. 28. The Tribunal by the impugned Order before the Calcutta High Court had held that for AY 1962-63, the loss of Rs. 23,100/- in shares transactions on the ground that the Assessee purchased through a Share Broker 15 Ordinary shares of M/s. Hindustan Motors Limited on 05/03/1962 for Rs. 3,17,400/- and the said shares....
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....ncome tax assessment. The ITO rejected the claim on the ground that the statutory Auditors of the Assessee had not agreed to the change in the method of Accounting. On second appeal, the Tribunal took a different stand and leaving out the aforesaid findings, upheld the additions on the ground that because of the change in the method of Accounting of the Valuation of Closing Stock in a particular year, different valuation would be shown for the same Stock which was held as the Opening Stock and remained as the Closing Stock and thus a sum equal to that difference would either be taxed twice or would escape taxation altogether and since the Tribunal thus proceeded on a new ground not taken by the lower Authorities or urged by the Department before the Tribunal, such a direction could not have been given by the learned Tribunal. 31. This judgment of Co-ordinate Bench of the Karnataka High Court to the extent of the Tribunal being bound to decide the issues within the subject matter of the appeal applies to the case before us on all fours. On merits of the case also, the view of the Tribunal about additions made on account of change of method for valuation of Closing Stock, having neu....
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....d the said definition to the extent relevant for his submissions, though we have indicated above that we are not deciding the question of taxability here, is quoted below in the following manner:- "Section 2(22) " dividend" includes- (a) any distribution by a company of accumulated profits, whether capitalised or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company; (b) any distribution to its shareholders by a company of debentures, debenture-stock or deposit certificates in any form, whether with or without interest, and any distribution to its preference shareholders of shares by way of bonus, to the extent to which the company possesses accumulated profits, whether capitalised or not; (c) any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation whether capitalized or not. (d) any distribution to its shareholders by a company on the reduction of its capital, to the extent to which the company possesses accumulated profits which arose after the end....
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....o drew our attention to Section 46-A of the Act which provides for "Levy of capital gains on purchase by the Company of its own shares or other specified securities". The said provision is also quoted below for ready reference:- "Section 46A: Where a shareholder or a holder of other specified securities receives any consideration from any company for purchase of its own shares or other specified securities held by such shareholder or holder of other specified securities, then, subject to the provisions of section 48, the difference between the cost of acquisition and the value of consideration received by the shareholder or the holder of the other specified securities, as the case my be, shall be deemed to be the capital gains arising to such shareholder or the holder of other specified securities, as the case may be, in the year in which such shares or other specified securities were purchased by the company. Explanation: For the purposes of this section, "specified securities" shall have the meaning assigned to it in Explanation to section 77A of the Companies Act, 1956 (1 of 1956)." 37. Further, he drew our attention to Section 115-O and Section 115-Q of the Act, particularly....
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....ration paid by the company on buy-back of shares as reduced by the amount, which was received by the company for issue of such shares, determined in the manner as may be prescribed." Explanation (81a) : Omitted by the Finance Act, 2018 w.e.f.1-4-2018. Prior to its omission, Explanation read as under: Explanation:- For the purposes of this Chapter, the expression dividends shall have the same meaning as is given to 'dividend' in clause (22) of section 2 but shall not include sub-clause (e) thereof:" 38. Section 77-A of the Companies Act, 1956 inserted by Act No.21 of 1999 with retrospective effect from 31/10/1998 providing for buy-back of its own shares by the Company to its relevant extent is also quoted below for ready reference, which essentially provides for the said enabling powers with the restrictions and conditions of such buy-back. "Section 77A: Power of company to purchase its own securities.- (1) Notwithstanding anything contained in this Act, but subject to the provisions of sub-section (2) of this section and section 77B, a company may purchase its own shares or other specified securities (hereinafter referred to as "buy-back") out of. (i) its free reserve....
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....uld be treated as purported loan or advance by the Indian Company to the Mauritius Holding Company to be treated as 'Dividends' under Section 2(22)(e) of the Act, is too far fetched and in the absence of any such contention or ground raised before it, the learned Tribunal could not have made such directions in excess of its powers to pass such orders 'as it thinks fit'. The said words he urged do not give extra-ordinary or arbitrary powers to the learned Tribunal to go beyond the subject matter of the appeal itself. 40. He submitted that though the Tribunal had agreed with the Assessee that the said buy-back of shares and payments made by the Indian Company could not be treated as 'Dividend' under Section2(22)(d) of the Act, towards the end of para 6 of the impugned Order of the Tribunal, the learned Tribunal had clearly held that the transaction of buy-back of shares in question prior to 01/06/2013 does not attract Section 115-QA as well as Section 2(22) of the Act, without specifying any of the Sub-clauses of Section 2 (22) of the Act and therefore any inquiry in para 7 opened for the same for bringing it in the scope of Section 2(22)(e) of the Act was wh....
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....ption can be taken to the same by the Assessee. 45. He further submitted that the Assessee Company should have nothing to fear or hide, if the shares have been bought back from its Holding Company at a fair market value and if such a buy-back has been undertaken by the Assessee Company in accordance with the provisions of the Companies Act and also the provisions of the Income Tax Act and on the conclusion of the fresh inquiry now to be undertaken in pursuance of para 7 of the Order of the Tribunal also, the Assessee Company may not be ultimately held liable to tax under the Act and therefore, it would be premature to curtail or shoot down such an inquiry in the matter under the remand directions of the learned Tribunal. 46. Mr. Aravind relied upon certain judgments also in support of his submissions which are also briefly discussed below. 47. In Commissioner of Income Tax v. Mahalakshmi Textile Mills Ltd. [1967] 66 ITR 710 (SC), the Hon'ble Supreme Court held that there is nothing in the Income Tax Act which restricts the Tribunal to the determination of the questions raised before the Departmental Authorities. All questions whether of law or of fact, which relate to the as....
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.... statute. While rejecting the appeal of the Assessee, the Hon'ble Supreme Court directed the Tribunal to further direct the Income Tax Officer (ITO) to make fresh assessments after holding an enquiry under Section 25-A(1) of the Act regarding the partition of Hindu Undivided Family (HUF) corresponding to Section 171 of the Income Tax Act, 1961. 50. Mr. Aravind also relied upon the Division Bench decision of the Madras High Court in the case of Commissioner of Income Tax v. Indian Express (Madurai) (P.) Ltd., [1983] 140 ITR 705 (Madras) which inter alia, also relied upon the decision of the Apex Court in the case of Mahalakshmi Textile Mills Ltd. (supra). The Division Bench of the Madras High Court held that the Tribunal is constituted as the final Authority on facts and the penultimate Authority on law touching the assessment and other proceedings under the Act and has the plenary jurisdiction in the matters of assessment. It held that the task of an Appellate Authority under the taxing Statute, especially a non-Departmental Authority like the Tribunal, is to address its mind to the factual and legal basis of an assessment for the purpose of properly adjusting the tax payer....
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....ccord with the legal provisions governing his assessment. Since the be-all and end-all of the statutory provisions, especially those relating to the administration and management of income-tax, is to ascertain the taxpayer's liability correctly, to the last pie, if it were possible, the various provisions relating to appeal, second appeal, reference and the like can hardly be equated to a lis or dispute as arises between the two parties in a civil litigation. Although the income-tax statute makes the department or its officer's figure as parties in appeal proceedings, they are not in the strict sense what are called by American writers as parties to adversary proceedings. This is so, because the very object of the appeal is not to decide a point raised as a dispute, but any point which goes into the adjustment of the taxpayer's liability. In that sense, a view prevails, even in England that the authorities sitting in appeal in a tax case cannot be regarded as deciding a lis, but they are only engaged in an administrative act of adjusting the taxpayer's liability. Under our fiscal jurisprudence, we may regard the appellate authorities as exercising quasi-judicial fun....
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....nt with the case pleaded by the assessee. English judges have regarded a tax appeal, not as a lis, but as a process of further adjustment of taxpayer liability - vide Lord Hewart in Rex v. Special CIT [1935]20 TC 381 (CA); Greer L.J. in IRC v. Sneath [1932] 17 TC 149 (CA); Romer L.J. in the same case, Sneath (supra) and Lord Wright M.R. in Rex's case (supra). 23. In Rex's case (supra), Lord Hewart, CJ. laid down the nature of an appeal in tax matters as under: "In my opinion, the argument of the learned Attorney-General is absolutely correct, and the argument upon the other side is manifestly based, as he said, upon a misapprehension that an appeal under the Income-tax Act, 1918, is the same in substance as an appeal where two private persons are engaged in litigation. It is of course, totally different." (p. 382) In Sneath's case (supra), Greer, L.J. gave a similar description of the true position of a tax appeal in the following words: "I think, the estimating authorities, even when an appeal is made to them, are not acting as judges deciding the litigation between the subject and the Crown. They are merely in the position of valuers whose proceedings are regul....
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....appeal, say, in civil cases. A civil appeal, like a law suit in the Court of first instance out of which it arises, is really and truly an adversary proceeding, that is to say, a controversy or tussle over mutual rights and obligations between contesting litigants ranged against each other as opponents. A tax appeal is quite different. Even as the assessing authority is not the tax payers opponent, in the strictly procedural sense of the term, so too the appellate authority sitting in appeal over the assessing authority's order of assessment is not strictly an arbitral Tribunal deciding a contested issue between two litigants ranged on apposite sides. In a tax appeal, the appellate authority is very much committed to the assessment process. The appellate authority can itself enter the arena of assessment, either by pursuing further investigation or causing further investigation to be done. It can do so on its own initiative, without being prodded by any of the parties. It can enhance the assessment, taking advantage of the opportunity afforded by the taxpayer's appeal, even though the appeal itself has been mooted only with a view to a reduction in the assessment. These are....
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....der the head "Income from house property" on the grounds mentioned in the question referred to us. Our answer to the question is, therefore, in the negative, in favour of the Revenue and against the assessee. The parties are left to bear their own costs of the reference" Other Relevant Case laws: 53. In the case of National Thermal Power Co.Ltd. v. Commissioner of Income-Tax [1998] 229 ITR 383 (SC), the Hon'ble Supreme Court following its earlier view in Jute Corporation of India Ltd. v. Commissioner of Income-Tax [1991] 187 ITR 688 (SC), held as under:- "In the case of Jute Corporation of India Ltd. v. CIT [1991] 187 ITR 688, this court, while dealing with the powers of the Appellate Assistant Commissioner observed that an appellate authority has all the powers which the original authority may have in deciding the question before it subject to the restrictions or limitations, if any prescribed by the statutory provisions. In the absence of any statutory provision, the appellate authority is vested with all the plenary powers which the subordinate authority may have in the matter. There is no good reason to justify curtailment of the power of the Appellate Assistant Commiss....
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....icer." 55. In the case of Hukumchand Mills Ltd. v. Commissioner of Income-Tax, Central, Bombay [1967] 63 ITR 232, the Hon'ble Supreme Court held that Rules 12 and 27 of the Appellate Tribunal Rules, 1946 are not exhaustive of the powers of the Tribunal and words "pass such orders as the Tribunal thinks fit" including all the powers (except possibly the power of enhancement). The Court itself expressed its doubt over the power of enhancement of the assessment or tax liability of the assessee in the said judgment which was later on explained by the Rajasthan High Court in the case of Commissioner of Income-Tax v.Pratapsingh and others (supra). The relevant extract from the said judgment in Hukumchand Mills Ltd. case (supra) is quoted below for ready reference:- "The powers of the Appellate Tribunal in dealing with appeals are expressed in section 33(4) of the Income-tax Act in the widest possible terms. The word "thereon" in section 33(4) restricts the jurisdiction of the Tribunal to the subject matter of the appeal. The words "pass such order as the Tribunal thinks fit" include all the powers (except possibly the power of enhancement) which are conferred on the Appellate Assi....
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.... be raised in support of the relied sought in the appeal, it cannot be said that it cannot be raised before the Tribunal. Such a ground can be raised provided it falls within the contours of the subject-matter of the appeal before the AAC." 57. The Calcutta High Court in the case of Khaitan Paper and Industries Ltd. v. Commissioner of Income-Tax [2005] 273 ITR 234 held that Section 254(1) of the Act empowers the Tribunal to recall its previous Order where the Assessee could not be present at the time of hearing and hear the Appeal again on merits even though there is no express provision in this regard yet as an ancillary jurisdiction under Section 254 of the Act, the Tribunal is empowered to do so. The relevant extract from the Head Note of the said judgment is quoted below for ready reference:- "The tribunal has the power to recall its previous order where the petitioner has made out a case that he was prevented from being present at the hearing of the appeal. The power of setting aside an ex parte order and thereby affording an opportunity of being heard to the aggrieved party is not the same as the power of review. When adequate and reasonable grounds for omission to appear ....
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....re the said directions were within the subject matter or the issues raised by the Assessee and making a direction to hold an enquiry into the aspect of fair market value of shares cannot be said to be beyond the subject matter of the appeal. The said directions cannot be said to be per se amounting to taxability of the said pay-out by the Appellant Assessee as 'Dividend' but the same would depend upon the nature of enquiry to be conducted by the Assessing Authority and findings arrived at in pursuance of the said direction. The power to remand including for conducting an enquiry in the aspect of the matter which was not earlier adjudicated upon by the lower Authorities, cannot, in our considered opinion, be questioned by the Assessee or the Revenue. 60. The words "as it thinks fit" employed in Section 254 of the Act is only bound by the requirement of giving an opportunity of being heard to the parties to the appeal. 61. Section 254(1) of the Act clearly stipulates that the Appellate Tribunal may, after giving both the parties to the appeal an opportunity of being heard, pass such Orders thereon as it thinks fit. The emphasis on the word 'thereon' sought to be pla....
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....allow the other party to the appeal to file its cross objections and even suo motu pass appropriate Orders 'thereon' and therefore the words 'as it thinks fit' in our opinion, confer wide powers upon the Income Tax Appellate Tribunal to pass such Orders on the subject matter of appeal 'as it thinks fit' whether the issue is raised by either party to the appeal or not. The Tribunal is not bound to decide the appeal in a particular or narrower manner or limited to the grounds raised in the appeal before it. The confines or boundary limit is only "subject matter" of the appeal. 64. The powers of the Tribunal are not limited or circumscribed by the grounds raised before it and any order on the subject matter of appeal can be passed if it is found to be necessary, expedient and relevant by the learned Tribunal. 65. Truth being the cherished ideal and ethos of India, pursuit of Truth should be the guiding star of the entire justice system. For justice to be done, truth must prevail. It is truth that must protect the innocent and it is truth that must be the basis to punish the guilty. Truth is the very soul of justice. Therefore truth should become the ideal to ....
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....mplication of taxability under Section 2(22)(e) of the Act or otherwise. 69. However, since we are not deciding the question of taxability here, as the factual foundation for the same is not there and we are not expressing any opinion on the taxability on such findings upon an enquiry which may now be held by the Assessing Authority in pursuance of the directions of the learned Tribunal. Therefore that question is left open. 70. The Mauritius route of tax avoidance and evasion is a hugely suffered phenomenon in our Country. It also resulted in a huge tax controversy in the case of Vodafone in which even after the decision of the Hon'ble Apex Court in favour of the Assessee in 2012, there was a retrospective amendment of law and the said matter is still being debated in the international Arbitration between India and the Vodafone and even the Indo Mauritius DTAA has now been amended recently by adding certain Protocols in the said DTAA with effect from 01/04/2017 seeking to plug the loopholes for the tax evasion through misuse of the erstwhile DTAA of 1983 between India and Mauritius, but it has been a route of tax evasion and money laundering in the past. 71. However, as we ....