TMI Blog1999 (9) TMI 123X X X X Extracts X X X X X X X X Extracts X X X X ..... er alia provided for : "(a) transfer of the non-computer business to the new company, namely, HCL Hewlett Packard Ltd. (hereinafter referred to as "HCL HP Ltd.") along with all assets, liabilities, obligations, employees, etc. with effect from the appointed date; (b) issue of 32 equity shares in HCL HP Ltd. of Rs. 10 each credited as fully paid up for every 100 equity shares of Rs. 10 each fully paid field in HCL Ltd., (c) cancellation of paid up capital to the extent of Rs. 3.20 per equity share of Rs. 10 each of HCL Ltd. and consolidation of the same into equity shares of Rs. 10 each thereafter ; (d) transfer of 26% of the consolidated shares in HCL Ltd. to HP Co. by each shareholder at an agreed price of Rs. 168.80 per share, other than the shareholders mentioned in Annexure A to the Scheme of Arrangement (page 131 of the paper book), who were contractually bound to transfer the number of shares mentioned against then, respective names; and (e) change of name of HCL Ltd. (retaining the computer business) to HCL HP Ltd. and renaming of the new company (to which the non-computer business were transferred) from HCL HP Ltd. to HCL Ltd. 4. Pursuant to the reconstruction o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st in the facts and circumstances of the present case. Our attention was invited on the prescription of section 2(22)(d) of the Act. This reads as under :--- "Dividend includes:--- (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 of the previous year ending next before the 1st day of April, 1933, whether such accumulated profits have been capitalised or not ; 10. It was contended that section 2(22)(d) of the Act creates an artificial liability by deeming distribution to the shareholders as divided liable to tax in the hands of the shareholders in the Circumstances mentioned in that section. Therefore, this section must be construed strictly. Reference was made to the decision of the Apex Court rendered in the case of CIT v. C.P. Sarthi Mudaliar [1972] 83 ITR 170 Calcutta of Calcutta High Court in the case of Nandlal Kanoria v. CIT [1980] 122 ITR 405. 11. It was further submitted that in order to apply the deeming provision contained in section 2(22)(d) of the Act, it is necessary that the following conditions must be satisfied :--- (a) There mus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of share capital not paid up; (ii) either with or without extinguishing or reducing the liability on any of its shares, cancel paid up share capital which is lost, or is unrepresented by available assets; or (iii) either with or without extinguishing or reducing liability on any of its shares, pay off any paid up share capital which is in excess of the wants of the company. 15. It was submitted that a Scheme of Arrangement by HCL Ltd. provided for reorganisation of capital. It did not satisfy any of the aforesaid criteria for reduction of capital. Further sections 101 to 103 of the Companies Act prescribe the procedure for carrying out the reduction of capital. In the present case, the procedure prescribed under the Companies Act for reduction of capital was not followed. The Scheme was intended for re-organisation of capital and not reduction thereof. Thus, in effect the Scheme had resulted in splitting of capital of the company into two companies. There was no reduction of capital in the aggregate. The shareholding of the individual shareholders was also split between two companies and the aggregate shareholding of each shareholder in the two companies continued to r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y contended by Shri Vohra that the Scheme of Arrangement did not result in deemed income liable to be taxed in the hands of the assessee. 20. Without prejudice to the aforesaid submission, Shri Vohra also assailed the jurisdiction aspect. It was submitted that scope of proceedings under section 263 of the Act is not to set aside merely unfavourable orders, but to modify/revise those orders which are erroneous and prejudicial to the interest of Revenue. Reference was made to the decision rendered in the case of Venkata Krishna Rice Co. v. CIT [1987] 163 ITR 129/30 Taxman 528 (Mad.) at page 137. It was further submitted that in the guise of proceedings under section 263 of the Act, CIT cannot impose his own opinion in place of that of Assessing Officer, where the view taken by the Assessing Officer is also a possible view. Reference was made to the decision of the Tribunal rendered in the case of Modi Xerox Ltd. v. Dy. CIT [1998] 67 ITD 252 (Delhi). He relied on some other decisions also to buttress this point. It was stated that the view taken by the Assessing Officer in the present case finds support from the view taken by the Commissioner of Income-tax (Appeals) in the cases nar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore, in the interest of the exchequer, elongated the scope of the definition of "dividend" so as to catch the said payments within the net of taxation. 24. Section 2(22)(d) creates a legal fiction. This is to enlarge the ken of section. Before applying the deeming provision it has to be seen that conditions precedent for invoking such deeming provision did exist in the facts and circumstances of the case. Such a deeming provision or legal fiction should be narrowly watched, jealously regarded and never to be pressed beyond its true limits. The parameters set within the statute should be strictly examined with reference to the factual matrix of the case. 25. It is abundantly clear from the records that the Scheme or Arrangement resulted in reorganisation of capital, There was no reduction of capital. At para 17 of the High Court's order dated26-11-1991it is mentioned "there is really no reduction in capital as the bifurcation involves both the assets and liabilities to go with the divisions which are being spun off." For reduction of capital Companies Act enumerate procedure laid down in sections 100 to 105. Recourse was not made to this procedure. Hon'ble High Court held thi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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