1997 (9) TMI 78 - HC - Income Tax

Summary

Issues Involved:
1. Mistake apparent from the record and rectification of order.
2. Application of Supreme Court decision in Sunil Siddarthabhai vs. CIT.
3. Piercing the corporate veil to determine if the transaction was a ruse to evade tax.
4. Dismissal of the misc. petition filed by the Revenue.
5. Recall of the Tribunal's order and remittance to the ITO.
6. Legitimacy of filing a fresh reference application by the CIT.

Issue-wise Detailed Analysis:

Mistake Apparent from the Record and Rectification of Order:
The Tribunal initially allowed the assessee's petition under Section 254(2) of the IT Act, rectifying its order based on the Supreme Court decision in Sunil Siddarthabhai vs. CIT. The Tribunal held that no capital gains arose from the transfer of shares to the firm, as the transferor received no consideration within the meaning of Section 48. The Revenue opposed this, arguing that the Tribunal failed to consider whether the transaction was a device to evade tax.

Application of Supreme Court Decision in Sunil Siddarthabhai vs. CIT:
The Tribunal's decision to rectify its order was based on the Supreme Court ruling that transfer of assets to a firm as capital does not result in capital gains. However, the Revenue contended that the Tribunal overlooked the Supreme Court's directive to scrutinize whether the transaction was genuine or a sham designed to evade tax.

Piercing the Corporate Veil to Determine if the Transaction was a Ruse to Evade Tax:
The Revenue argued that the Tribunal should have examined the real nature of the transaction, considering the subsequent transfer of shares to M/s Bhagvathi Investments (P) Ltd. shortly after the initial transfer. The Tribunal dismissed this without adequate inquiry, merely noting that the firm was still in existence.

Dismissal of the Misc. Petition Filed by the Revenue:
The Tribunal dismissed the Revenue's misc. petition seeking to recall its order, stating that no material was brought to show the transaction was a ruse. The High Court found this dismissal erroneous, as the Tribunal failed to examine the materials presented by the Revenue, which indicated the transfer might have been a device to evade tax.

Recall of the Tribunal's Order and Remittance to the ITO:
The High Court held that the Tribunal should have remitted the matter back to the ITO to investigate the real nature of the transaction, as directed by the Supreme Court. The Tribunal's failure to do so was a significant error.

Legitimacy of Filing a Fresh Reference Application by the CIT:
The High Court noted that the second reference was made pursuant to a direction issued by the Court in OP 7949/90. Therefore, the questions in IT Ref. 48/96 were not addressed, as they were rendered unnecessary by the Court's findings on other issues.

Conclusion:
The High Court concluded that the Tribunal erred in allowing the rectification petition without proper inquiry and in dismissing the Revenue's misc. petition without considering the materials presented. The Tribunal was directed to reconsider the petitions afresh, following the Supreme Court's guidelines. The Court answered the relevant questions in favor of the Revenue and against the assessee, emphasizing the need for a thorough examination of the transaction's genuineness.