TMI Blog2005 (12) TMI 464X X X X Extracts X X X X X X X X Extracts X X X X ..... come as per the provisions of section 115JA of the Act was computed at ₹ 4,73,66,265. The said return was processed under section 143(1) of the Act on 20th January, 2003. Subsequently, the Assessing Officer issued notices under sections 143(2) and 142(1) of the Act to make a scrutiny assessment year under section 143(3) of the Act. The Assessing Officer determined the total income of the assessee under section 143(3) of the Act at 15,45,83,600 vide order dated 28-3-2003. This order of the Assessing Officer was the subject-matter of examination by the Commissioner of Income-tax under section 263 of the Act. 3. The CIT went into the details filed by the assessee in the course of assessment proceedings. More particularly, he verified the statement of capital gain, wherein it was seen that the assessee has sold 41,85,425 shares of Lupin Laboratories Ltd. (LLL for short) between 31-8-1999 to 31-12-1999 for a consideration of ₹ 1,62,83,32,339 and earned capital gain of ₹ 1,57,88,42,065. In the same statement it was found that the assessee has claimed capital loss of ₹ 142,39,01,640 on account of reduction of value of share capital of six private limited com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to encourage or entertain the belief that it is honourable to avoid the payment of tax by dubious methods. The modus operandi shown in the facts of the case was only to avoid the tax payable on the capital gain already derived on sale of shares of Lupin Laboratories Ltd. and the above decisions clearly attracted the ratio of the Supreme Court decision in the case of McDowell Co. (P.) Ltd. ( supra ). He did not accept that the ratio laid down by the Supreme Court in the case of Union of India v. Azadi Bachao Andolan [2000] 263 ITR 706 is applicable to the facts of the present case. With these observations, the assessee was asked to show cause as to why the impugned assessment order should not be revised, vide his notice dated 4-2-2005. In response to the said notice, the assessee filed written submissions on 14-3-2005, the contents of which are summarized by the CIT in para 15 (pages 7 to 15). The same are not reproduced here for maintaining the brevity. The CIT in his order then set out the facts of this case and considered the several contentions of the assessee in pages 16 to 34, giving his view of the matter which is the subject-matter of the dispute before us. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndmark Builders Pvt. Ltd., Mandovi Leather Pvt. Ltd., Salva Polymers Pvt. Ltd., Enigma Electronics Pvt. Ltd. and Visant Machines Pvt. Ltd. would merge with Synchem Chemicals with effect from the appointed date, i.e., 1-3-2000. In the computation of total income filed with the return. The assessee-company had stated that in view of the decisions of the Supreme Court in the cases of Anarkali Sarabhai, Katrikeya Sarabhai and G. Narasimhan (all cited supra ) the capital gain loss of ₹ 142.39 crores suffered on account of transfer (reduction of capital) pursuant to the Bombay High Court Order is set off against long-term capital gains of ₹ 157.88 crores earned on sale of equity shares of Lupin Laboratories Ltd. In support whereof reliance was placed on the legal opinion of Ex-Chief Justice M.N. Chandurkar and the same was filed with the Assessing Officer. The Assessing Officer after considering all the relevant details information, books of account and material evidence, treated the transaction as a genuine transaction and allowed the capital gain/loss to be set off against the long-term capital gains. In allowing the set off such capital gain/loss, the Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act was examined by the Assessing Officer and after considering the ratio laid down by the Supreme Court in the cases of Anarkali Sarabhai ( supra ), Kartikeya Sarabhai ( supra ) and G. Narasimhan ( supra ) the Assessing Officer observed that in the case of assessee-company, cancellation of shares on reduction is on stronger footing than a redemption for the simple reason that it also constitutes extinguishment of rights. In the light of the above judicial pronouncements and also referring to the Act, the contentions of the assessee were accepted by Assessing Officer, as according to him a transfer has taken place. The learned counsel for the assessee pointed out that in the light of the above, it cannot be said that the order of the Assessing Officer is without application of mind to the facts of the case and the relevant case-laws. 7. The learned counsel for the assessee relied on the decision of the Supreme Court in CIT v. Mrs. Grace Collis [2001] 248 ITR 323 wherein the Hon ble Apex Court disapproved its own decision in the case of Vania Silk Mills (P.) Ltd. v. CIT [1991] 191 ITR 647 and held that the definition of transfer in section 2(47) of the Act is an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y High Court decision in Saroj G. Poddar, In re [1996] 22 Corpt LA 200 and reached a conclusion that the legal effect of the amalgamation has to be given in the tax matter even if it results in reduction of tax liability. Therefore, it is not open to the CIT acting under section 263 of the Act to say that the scheme itself was a sham and colourable device for avoidance of tax. He relied upon the decision of the Ahmedabad Bench of the Tribunal in the case of Asstt. CIT v. Gautam Sarabhai Trust [2002] 81 ITD 677 and the Gujarat High Court decision in Wood Polymer Ltd., In re and Bengal Hotels (P.) Ltd., In re 109 ITR 177 and argued that when once the scheme is approved by the High Court holding that the scheme was in the public interest, it cannot be said that the entire scheme itself was fraudulent or illegal and the department cannot ignore or object the scheme even if it was carried out as a tax planning device and results in reduction of tax liability. The Assessing Officer, the learned counsel for the assessee reiterated, had made detailed enquiries in relation to the loss and gain made by the assessee-company on sale/transfer of shares, income whereof was assessed und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if it is not only erroneous but also prejudicial to the interest of the revenue. When the Assessing Officer has taken one of the permissible views with which the CIT does not agree, his view cannot be considered as erroneous and prejudicial to the interest of the revenue unless the view taken by the Assessing Officer is totally unsustainable in law. The learned counsel for the assessee relied upon the decision of the Chandigarh Bench of the Tribunal in the case of Nahar Exports Ltd. v. Asstt. CIT [2005] 92 ITD 484 to submit that if the view expressed by the Assessing Officer is a possible view, the CIT would not be justified in treating the said order as erroneous and prejudicial to the interest of the revenue. To the same effect is the decision of the Guajrat High Court in the case of CIT v. Mehsana District Co-operative Milk Producers Union Ltd. [2003] 263 ITR 645 . Again reliance was placed on the decision of the Bombay High Court in CIT v. Gabriel India Ltd. [1993] 203 ITR 108 wherein it was held that the CIT cannot revise an assessment order merely because he disagrees with the conclusions arrived at by the ITO as to the allowability of an expenditure as revenue e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Representative, on the other hand, strongly supported the order of the CIT passed under section 263 of the Act. The learned Departmental Representative vehemently argued that the Assessing Officer has failed to understand and appreciate the facts of the case and did not make any effort to examine or investigate the entire transaction which was apparently a colourable device to evade the payment of rightful liability towards capital gain derived on transfer of shares of Lupin Laboratories Ltd. He strongly supported the action of the CIT in the light of the principle laid down by the Hon ble Supreme Court in the case of McDowell Co. Ltd. ( supra ) . According to him, colourable device cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by dubious methods. The modus operandi adopted by the assessee has, in fact, resulted in reduction of tax payable on the capital gain already derived on the sale of the shares in question The learned Departmental Representative submitted that the CIT has given a fair and reasonable opportunity to the assessee of being heard in the matter, discussed all the content ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n caused to the interest of the revenue. Reference may be made in this connection to the principle laid down by the Bombay High Court in Gabriel India Ltd. s case supra and also the principle laid down by the Apex Court in the case of Malabar Industrial Co. Ltd. ( supra ). There can be no quarrel over the proposition of law that the twin conditions prescribed in section 263, viz., the order must be erroneous and prejudicial to the interest of the revenue should be satisfied as has been held by the Madras High Court in CIT v. Seshasayee Paper Boards Ltd. [2000] 242 ITR 490. The scope of inference under section 263 is not to set aside merely unfavourable orders and bring to tax some more money to the treasury nor is the section meant to get at sheer escapement of revenue which is taken care of by other provisions in the Act. The prejudice that is contemplated under section 263 is prejudice to the income-tax administration as a whole. Section 263 is to be invoked not as a jurisdictional corrective or as a review of a subordinate order is exercise of the supervisory power but it is to be invoked and employed only for the purpose of setting right distortions and prejudices ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Apex Court has held in Malabar Industrial Co. ( supra ) that there can be no doubt that the provisions of section 263(1) cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer, it is only when an order is erroneous that the section will be attracted. An incorrect assumption of fact or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. Now the words prejudicial to the interests of the revenue have not been defined, but they must mean that the orders of assessment challenged are such as are not in accordance with law, in consequence whereof the lawful revenue due to the state has not been realized or cannot be realized. Reference may be made in this connection to the decision of the Calcutta High Court in the case of Dawjee Dadabhoy Co. v. S.P. Jain [1957] 31 ITR 872 and also the decision of the Bombay High Court in the case of Gabriel India Ltd. ( supra ). 10. By applying the above principle we have to see that in the present case the Assessing Officer has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transfer. Any profit or gain, which arises from the transfer of a capital asset, is liable to be taxed under section 45. As a result of reduction in the face value of shares, the right of the shareholders to the dividends and his right to share in the distribution of the net assets upon liquidation, is extinguished proportionately to the extent of reduction in the capital. Even though the shareholder remains a shareholder his right as a holder of those shares stands reduced with the reduction in the capital. Therefore, this extinguishment of right is a transfer. The Assessing Officer considered the ratio of these three decisions to come to the conclusion that the reduction of capital will result in transfer to the extent of the reduction and consequently a loss will also be incurred which would be in the nature of capital loss. The Assessing Officer went on to discuss the facts of the case in the light of the legal opinion of the retired Chief Justice Mr. M.N. Chandurkar. The Assessing Officer further called upon the assessee to produce the order of the Hon ble Bombay High Court wherein reduction of the capital and amalgamation of Landmark Builders Pvt. Ltd., Enigma Electronic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e scheme of arrangement as approved by the Bombay High Court. It cannot be said that the entire reduction and subsequent amalgamation of the companies was done for dubious purpose of saving income-tax on possible capital gain arising on the sale of same other investments. We cannot accept the theory of the Commissioner that the entire arrangement is fraudulent scheme arranged just to avoid the payment of capital gains tax. The legal effect of the reduction of the share capital on the arrangement has resulted in satisfying the definition of the word transfer in section 2(47) of the Act as held by the Apex Court in the cases already extensively dealt with earlier and the Assessing Officer has only given effect to the legal consequences of extinguishment of right in the investments made by the assessee. Therefore, it cannot be said that the view taken by the Assessing Officer is one of the impossible view. He has taken one of the possible views considering the facts of the case and the ratio laid down by the Supreme Court in the decisions which has been elaborately discussed by the Assessing Officer. The CIT wants to take a different view on the basis of the same decision which may ..... X X X X Extracts X X X X X X X X Extracts X X X X
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