TaxTMI 
TaxTMI 
2022 (7) TMI 783
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....n initiating the proceedings under section 263 of the Act for setting aside the order passed under section 143(3) of the Act ['Assessment Order'] as the same is neither 'erroneous' nor 'prejudicial to the interests of the revenue'. 3. The learned CIT has erred by not appreciating the fact that the learned Assessing Officer ('learned AO') has passed the assessment order only after a thorough examination of all details that were called for and submitted by the Appellant. 4. The learned CIT has erred in holding that the order passed by the learned AO is erroneous without appreciating the fact that the learned AO has passed the assessment order in accordance with the Circular No 3 of 2016 dated 26 February 2016 issued by the Central Board of Direct Taxes ('CBDT') which is squarely applicable to the Appellant's case and is binding on the learned CIT and the learned AO. 5. The learned CIT has erred in directing the learned AO to re-examine the DCF valuation of shares for purpose determining excess consideration, without giving finding as to how valuation undertaken by the Assesses is incorrect, thereby exceeding scope....
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.... 1 ('learned AO') under the jurisdiction of the Commissioner of Income-tax, Large Taxpayer Unit ('learned CIT'). 2. For the AY 2014-15, the Company filed its Income-tax return on 29 November 2014 which was subsequently revised on 07 October 2015. The Appellant's case was selected for regular assessment under section 143(3) of the Income-tax Act, 1961 ('the Act') by issue of notice under section 143(2) dated 08 September 2015. 3. Several hearings were held by the learned AO during the course of the regular assessment and the Appellant furnished all the information called for from time-to-time. Amongst the various details called for, the learned AO also requested for and examined details in relation to a buy-back of shares undertaken by the Appellant under section 77 A of the Companies Act, 1956 during the Financial Year ('FY') 2013-14 relevant to the subject AY. 4. Amongst other information / explanations the following were specifically called for and examined by the learned AO during the course of proceedings under section 143(3) of the Act: a. Valuation of the shares bought-back, including justification of the....
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....pellant thereafter challenged the Order in the aforesaid Writ Petition before a Division Bench of the Hon'ble High Court in WA No. 2081 of 2019. The Division Bench vide its order dated 5 July 2019 upheld the order passed the single Judge and also directed the learned CIT to pass an order under section 263 of the Act within two weeks of the Appellant filing its reply to the show-cause notice. The Appellant was directed to file its response within two weeks of receiving the Hon'ble High Court's order in the Writ Appeal. 10. In compliance with the said directions of the Hon'ble High Court, the Appellant filed its written submission on 19 July 2019 and also appeared before the learned CIT on 25thJuly2019in the proceedings undersection263oftheAct. 11. The Appellant submitted before the learned CIT that the Assessment Order is neither 'erroneous' nor 'prejudicial to the interest of the revenue' as more-fully explained in its written submission dated 19 July 2019 and hence, the learned CIT does not have jurisdiction to set-aside the Assessment Order under section 263 of the Act. 12. The learned CIT, on 1 August 2019 passed an orde....
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....the valuation of shares bought back by the assessee, the applicability of Sec. 2(22), 115-O, 115-QA and s.195 of Income Tax Act, 1961. The assessee had challenged notice issued u/s.263 of the Act, before the Hon'ble Madras High Court in W.P.No.7542 of 2018. The said Writ Petition was dismissed by the Hon'ble Madras High Court vide its order dated 25.06.2019. The assessee thereafter challenged the single judge order of the Hon'ble Madras High Court before a Division Bench of the Hon'ble Madras High Court in W.A.No.2081 of 2019. The Division Bench of the Hon'ble Madras High Court vide its order dated 05.07.2019 upheld the order passed by the single Judge and also directed the ld.CIT to pass an order u/s.263 of the Act, within two weeks from the date the assessee filing its reply to the show cause notice. In compliance with the directions of the Hon'ble High Court, the assessee filed its Written Submissions on 19.07.2018, and contented that the assessment order passed by the AO dated 31.12.2016, is neither erroneous nor prejudicial to the interest of the revenue and thus, the ld.CIT does not have jurisdiction to set aside the assessment order u/s.263 of the Act. 5. The ld.CIT, afte....
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....ual value of the shares of Rs.7,000/- to Rs.8,000/- per share. The AO though called for the details of buyback of shares and assessee furnished necessary information along with valuation report obtained from the independent valuer, but the AO has not analyzed the DCF method followed by the assessee and its cash flows to determine correct fair market value of the shares. The ld.CIT had also discussed the issue in light of provisions of Sec.2(22)(a) / 2(22)(d) of the Act, and observed that as per the provisions of Sec.2(22)(a) of the Act, any distribution by a company of its accumulated profits will be in the nature of dividends, if such distribution is in the nature of distribution of any part of assets of the company to its shareholders. However, the only exception to the above is buyback of shares in terms of Sec.77A of the Companies Act, 1956. Although, consideration paid for purchase of shares under buyback scheme resulted in capital gains in the hands of respective shareholders and liable to be assessed u/s.46A of the Act, but anything and everything which is paid by a company to its shareholders under the grab of buyback, will not amount to capital gains u/s.46A of the Act. Th....
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....s the order passed by the AO should be erroneous and further, the order should be prejudicial to the interest of the revenue. The ld.AR for the assessee referring to the decision of the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT [243 ITR 83] and CIT v. Kwality Steel Suppliers Complex [2017] 395 ITR 1 (SC) submitted that unless the CIT satisfies himself about two conditions prescribed u/s.263 of the Act, he cannot assume jurisdiction and revise the assessment order. The ld. Counsel for the assessee further submitted that the order of the AO is not erroneous, because buyback of shares was undertaken in accordance with provisions of Sec.77A of the Companies Act, 1956, which does not mandate determination of fair market value/provide any specific methodology for valuation of shares. The assessee had bought back shares from its shareholders in terms of Sec.77A of the Companies Act, 1956, and filed necessary documents with Registrar of Companies. All particulars relating to the buyback of shares have been disclosed in the financial statements for the relevant financial year. The financial statements have been adopted by the shareholders and accepted by the Re....
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....ent has assessed capital gain declared by two USA resident shareholders based on actual consideration and further, the Transfer Pricing Officer in case of two of shareholders i.e. Cognizant (Mauritius) Ltd. and Cognizant Technology Solutions Corp. USA, had passed order u/s.92CA of the Act, and accepted the DCF valuation method which is evident from the fact that no adjustment has been suggested under TP provisions. Since, the AO has considered the relevant facts in light of various provisions and has accepted buyback of shares, the ld.CIT cannot termed the assessment order as erroneous by substituting his views on the issue of valuation of shares and taxation of excess consideration paid over and above fair market value of the shares. 8. The ld. Counsel for the assessee, Mr. Ajay Vohra, submitted that the order of the AO is not prejudicial to the interest of the revenue, because capital gains liable to tax in India in the hands of US shareholders on buyback of shares, the assessee has duly deducted tax at source. No Capital gains is liable to tax in India in the hands of Mauritius shareholders because of treaty benefits between India and Mauritius. The assessments in the hands o....
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....een examined by the AO. 9. The ld. Counsel for the assessee further referring to Explanation-2 to Sec.263 of the Act, submitted that Explanation-2 does not give unfettered powers to CIT, because even after Explanation-2, the CIT should satisfy the twin conditions prescribed therein, i.e. he must satisfy with reason that the assessment order is erroneous and further, it is prejudicial to the interest of the revenue. In this case, if you go through the reasons given by the CIT, the CIT had invoked jurisdiction u/s.263 of the Act, on change of opinion which is evident from examination of recorded that the AO has made extensive enquiries and after due application of mind had accepted the buyback price and the tax treatment on buyback of shares. He further submitted that it is incumbent on CIT to record specific finding with regard to error in the assessment causing prejudicial to the interest of the revenue. In this case, the CIT did not record prima facie findings regarding exact value of shares before setting aside the assessment for further investigation. The sole basis for the CIT to exercise his powers u/s.263 of the Act, is genuineness of buyback transaction between the assess....
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.... head 'income from other sources', on which, tax is payable by the shareholders. The approach taken by the revenue in the case of assessee and the shareholders is inconsistent and contradictory. It is a well settled principle of law that the revenue cannot allow blowing hot and cold at the same breath and therefore, the assessment order in the case of the assessee, cannot be regarded as erroneous and prejudicial to the interest of the revenue. The ld. Counsel for the assessee further referring to the decision of the Hon'ble Karnataka High Court in the case of Fidelity Services India Pvt. Ltd. v. ACIT reported in 95 taxmann.com 253, submitted that in the said case, the Hon'ble Karnataka High Court has laid down principles on the powers of the Hon'ble Tribunal u/s. 254(1) of the Act, while hearing an appeal which is completely different from the jurisdictional condition for the revision of the order u/s.263 of the Act. Further, the said judgment is also distinguishable, because, in the assessee's case, the buyback price was examined during the regular assessment proceedings and detailed submissions were made, whereas in M/s. Fidelity Services India Pvt. Ltd., case, the ITAT had picke....
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.... 70 taxmann.com 227 Mumbai Tribunal 23 Torrent Pharmaceuticals v. DCIT 173 ITD 130 Ahmedabad Tribunal 24 Fidelity Services India Pvt. Ltd. v. ACIT 95 taxmann.com 253 High Court of Karnataka 25 G.V.R. Associates v. ITO [2017] 88 taxmann.com 716 Visakhapatnam Tribunal 26 Vegesina Kamala v. ITO [2016] 66 taxmann.com 280 Visakhapatnam Tribunal 27 Y.V.Ramana v. CIT [2017] 78 taxmann.com 23 Visakhapatnam Tribunal 28 Reliance Industries Ltd. PCIT ITA No.578/Mum/2021 Mumbai ITAT 29 Vaghasiya Exports v. PCIT ITA No.2288/Mum/2019 Mumbai ITAT 30 Vrutti Developers LLPv. PCIT ITA No.1085/Mum/2019 Mumbai ITAT 31 Manoj Kumar Biswas v. PCIT [2021] 214 TTJ (Kol) 340 Kolkata ITAT 32 ITO v. DG Housing Projects Ltd. [2012] 343 ITR 329 High Court of Delhi 33 J.P.Srivastava & Sons (Kanpur) Ltd. v. CIT [1978] 111 ITR 326 High Court of Allahabad 34 CIT v. Sunbeam Auto Ltd. [2010] 189 Taxman 436 High Court of Delhi 35 CIT v. Vikas Polymers [2010] 194 Taxman 57 High Court of Delhi 36 Nilkanth Stone Industries v. PCIT [2021] 128 Taxmann.com....
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....nterest of the revenue, because, the AO has failed to carry out required enquiries, he ought to have been carried out in light of Explanation-2 to Sec.263 of the Act, which rendered the Assessment order to be erroneous and prejudicial to the interest of the revenue. The ld. DR further referring to the decision of the Hon'ble Karnataka High Court in the case of Fidelity Business Services India Pvt. Ltd v. ACIT [2018] 95 taxmann.com 253 (Kar.), in turn, which affirmed the order of ITAT, has submitted that consideration paid for buy back of shares exceeding the fair market value of such shares, could be treated as dividends u/s.2(22) of the Act. However, the AO although called for details about buyback of shares, but he has examined the issue only in light of buyback of shares in terms of provisions of Sec.77A of the Companies Act, 1956, and ignored applicability of s.2(22) of the IT Act, 1961. Although, buyback of shares in terms of s.77A of the Companies Act, 1956, is outside the scope of sec.2(22)(a)/(d), but such exception provided in section 2(22) relating to buy back of shares are only in respect of genuine and justified considerations and not applicable to inflated consider....
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....l for the assessee. In this regard, he relied upon the following judicial precedents: 1. Smt.Renu Gupta v. CIT [2008] 301 ITR 45. 2. CIT v. Active Traders Pvt. Ltd., [1995] 214 ITR 583. 3. ITAT decision in case of M/s.Subhalakshmi Vanijya Pvt. Ltd.v. CIT in ITA No.1104/Kol/2014. 13. We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. We have also carefully considered plethora of juridical precedents cited by the ld. Counsel for the assessee along with paper book which contains relevant materials including provisions of Sec.77A of the Companies Act, 1956, rules prescribed for valuation of shares in case of unlisted companies, necessary approvals obtained by the assessee under relevant statutory provisions for remitting consideration to non-resident shareholders. The ld.CIT has invoked his jurisdictional powers conferred u/s.263 of the Act, and set aside the assessment order passed by the AO u/s.143(3) dated 31.12.2016 on the ground that the assessment order is erroneous in so far as prejudicial to the interest of the revenue. The ld.CIT has questioned the issue of buyback of shares ....
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....ee has bought back its shares form shareholders @ Rs.23,915/- per equity share when fair market value or intrinsic value of said shares was at Rs.5,035/- per equity share. The assessee has justified consideration paid for buyback of shares on the basis of valuation report obtained from independent valuer and such valuation has been carried out on the basis of DCF method. 15. In light of above factual back ground, if you examine legal precedents on the issue of revision u/s.263 of the Act, one has to understand whether the assessment order passed by the AO is erroneous in so far as prejudicial to the interest of the revenue or not. Admittedly, the issue of buyback of shares was subject matter of assessment proceedings from the AO during scrutiny assessment proceedings. In fact, the ld.CIT had categorically admitted that the AO had called for details about buyback of shares. However, the ld.CIT was of the opinion that the AO failed to carry out required enquires he ought to have been carried out in terms of Explantion-2 to s.263 of the Act. The provisions of Sec.263 of the Act, deals with revision powers of the Commissioner. The language used by the Legislature in s.263 is to the ....
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....ected with the assessment, would be erroneous and prejudicial to the interests of the Revenue, when the ITO is expected to make an enquiry of a particular item of income and he does not make an enquiry as expected, that would be a ground for the CIT to interfere with the order passed by the ITO since such an order passed by the ITO is erroneous and prejudicial to the interests of Revenue. Further, the law has been explained by various Courts, including the Hon'ble Supreme Court, as per which, an inadequate enquiry is not a ground for revision of order by the CIT. Further, it is also an established principle of law that where two views are possible on an issue and the AO has taken one possible view which the CIT is not agreeing then also there is no scope for the CIT to revise the Assessment order unless the view taken by the AO is unsustainable in law. Therefore, to decide a particular assessment order is erroneous in so far as prejudicial to the interest of the revenue, it has to be examined in light of facts of its own case along with settled legal principles. 17. In this case, the sole basis for the CIT to set aside the assessment order passed by the AO u/s. 143(3) of the Act....
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....d such valuation has been carried out by M/s. Ernst & Young, an independent valuer. Although, assessee claims that valuation carried out by the independent valuer is in accordance with standard procedure, but facts brought out by the CIT clearly indicate that there is an inflation of free cash flows considered by the assessee for subsequent FYs when compare to free cash flow determined during the FY 2016-17 for the purpose of a scheme of arrangements and compromise approved by the Hon'ble Madras High Court for the purpose of purchase of its own shares from shareholders. As per the facts brought out by the CIT, there is variation in free cash flow between FY 2013 & FY 2016, ranging between 71% to 84%., as per which, the correct fair market value of the share is only between Rs.7,000/- and Rs.8,000/-. Although, there is a lacunae in the fair market value determined by the assessee, but the AO accepted the valuation report furnished by the assessee without even examining the correctness of the said valuation report and fair market value determined by the assessee. In our considered view, the enquiries conducted by the AO cannot be considered as enquiries he ought to have been carried ....
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....e is no scope for the CIT to invoke his jurisdictional powers. However, if the enquiries conducted by the AO are inadequate or it can be said that there is no enquiry at all, then the CIT can very well invoke his powers u/s.263 of the Act, and revise the assessment order. The crux of the matter is that the AO should conduct enquiry to satisfy himself about the genuineness of transaction. The scope of the term enquiry can be different in different cases. There cannot be any hard and past rule to carry out a particular enquiry. However, such enquiry would be subject to satisfaction of AO. If the enquiry conducted by the AO is an objective satisfaction, then, even though, the AO has called for necessary materials during the course of assessment proceedings, it will lead to an inference that he has not conducted enquiries he ought to have been conducted. In other words, mere obtaining and placing documents on records cannot be equated into conducting enquiry. In this case, on perusal of facts available on record, there is a prima facie indication that there are few abnormalities on the issue of buyback of shares. In such case, the AO after collection of certain evidences should embark ....
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.... Azadi Bachao Andolan(2003) 263 ITR 706(SC). However, if tax planning is solely for evasion of legitimate tax payable to the exchequer, then such tax planning needs to be examined by lifting the corporate veil to ascertain true character of transactions and this principle is supported by the decision of Hon'ble Supreme Court in the case of Mcdowell & Co. Ltd. vs. CTO (1985) 154 ITR 148(SC). From the above, what is clear is that legitimate tax planning is acceptable under law if such tax planning is within four corners of law. However, if tax planning is a colourable device then the same needs to be brought to books under the law. In this case, facts brought on record point a finger on genuineness of buy back of shares in light of fair market value fixed for shares and Therefore, we are of the considered view that the arguments advanced by the ld. Counsel for the assessee in light of the decision of the Hon'ble Supreme Court in the case of Union of India v. Azadi Bachao Andolan (supra) does not hold good. 20. The ld. Counsel had vehemently argued the issue on the issue of lack of enquiry and inadequate enquiry in light of certain judicial precedents including the decision of the ....
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....he assessee on the issue of specific findings from CIT with regard to error in the assessment causing prejudicial to the interest of the revenue, we find that the CIT had brought out very clear facts in light of fair market value of shares as per net worth of the assessee and fair market value as considered on the basis of DCF method and opined that there is a clear case of overvaluation of fair market value of shares while making payment to shareholders on buy back of shares. In our considered view, said observations of the CIT constitutes a specific finding with regard to error in the assessment order causing prejudice to the interest of the revenue and thus, we reject the arguments of the ld. Counsel for the assessee. 21. Coming back to another facet of the issue, the ld. Counsel vehemently argued the case in light of observations of the CIT on possible tax avoidance plan and argued that genuine business transaction cannot be said to have been undertaken for avoidance of tax. We find force in the arguments of the ld. Counsel for the assessee on the preposition of genuine tax planning. However, when prima facie materials suggest that there is a possibility of undertaking a tax....
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....en dealt with or decided on merits in the above case. The Hon'ble Karnataka High Court has only laid down principles on the powers of the Hon'ble Tribunal u/s.254(1) while hearing an appeal which is completely different from the jurisdictional conditions for the revision of an order u/s.263 of the Act. We do not find any substance in the arguments of the Counsel for the assessee for the simple reason that what was decided in the case before the Hon'ble Karnataka High Court in the case of Fidelity Business Services India Pvt. Ltd. v. CIT(Supra) is on consideration paid for buy back of shares and over valuation of such consideration. Further, the Hon'ble High Court while affirming the decision of ITAT Bangalore Bench has categorically observed that there is no error in the findings recorded by the Tribunal on the issue of treatment of over valuation of shares in case of buy back of shares and under those facts, we are of the considered view that there is no error the findings of the CIT in observing that the order passed by the AO is erroneous in so far as fixing fair market value of shares in case of buy back of shares and thus, we reject the arguments of the Counsel for the assesse....
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....at the very fact that the ITO "had not made sufficient enquiries before granting registration to the firm" was considered as sufficient enough to the CIT with the power to revise the assessment order and it was not considered necessary in such circumstances: "for the CIT to have himself made enquiries before cancelling the assessment." It transpires that the fact that no enquiry was conducted by the AO or even though the enquiry was conducted, but, the relevant enquiry was omitted to be conducted, is sufficient to brand an assessment order erroneous and prejudicial to the interests of the revenue. Similar view has been taken by the Hon'ble Supreme Court in the case of Rampyari Devi Saraogi vs. CIT (1968) 67 ITR 84 (SC) in which it has been held that an assessment made by the AO "in undue haste without making any enquiry" would render an assessment order erroneous and prejudicial to the interests of the revenue. Similar view has been taken by the Hon'ble Apex Court in Smt. Tara Devi Aggarwal vs. CIT (1973) 88 ITR 323 (SC). We have held in an earlier para that the assessment orders under consideration were passed in undue haste in terms of lack of proper enquiry, thereby making it el....
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.... is right in setting aside the assessment order to redo the assessment. 27. From an overview of the above discussed judgments, it is crystal clear that where the AO fails to conduct an enquiry or proper enquiry, which is called for in the given circumstances, the CIT is empowered to set aside the assessment order by treating it as erroneous and prejudicial to the interests of the revenue. In such circumstances, it is not further required on the part of the CIT to expressly show where the assessment order went wrong. The very fact that no enquiry was conducted or no proper enquiry was conducted in the required circumstances, is sufficient in itself to invoke the provisions of section 263. 28. Coming back to plethora of judicial precedents cited by the ld. Counsel for the assessee. The ld. Counsel has relied upon several decisions in support of different propositions and all such case laws relied upon by the counsel has been listed in his arguments. We have carefully gone through various case laws relied upon by the ld. Counsel for the assessee on the revisionary powers of the Commissioner where the AO has examined the issues including the decision of ITAT Visakhapatnam Bench i....
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....c.263 inserted by the Finance Act, w.e.f.01.06.2015 and as per said explanation for the purpose of s.263, it is hereby declare that an order passed by the AO shall be deemed to be erroneous in so far as it is prejudicial to the interest of the revenue, if in the opinion of the CIT the order is passed without making enquiries or verifications which should have been made. In this case, the CIT has brought out various facts and given reasons to come to the conclusion that although the AO has conducted enquiries but enquires conducted by the AO is not in the nature of enquiry or verification which he should have been made. Therefore, the case laws relied upon by the ld. Counsel for the assessee is considered as not applicable to the facts of the present case. The ld. Counsel for the assessee had also relied upon various decisions on the proposition of powers of the commissioner in setting aside the assessment order u/s.263, on the issue of substitution of his views where the AO has taken one view in light of approval/verification by competent authorities, methodology adopted by the assessee for valuation of shares consideration is actually received is relevant for the purpose of s.46A ....