2018 (7) TMI 1738 - HC - Income Tax

Deemed dividend addition u/s 2(22)(e) - 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 - Whether the Income Tax Appellate Tribunal has power under Section 254 of the Income Tax Act, 1961, to give directions for fresh enquiry into the aspects of the subject matter of appeal filed before it either suo motu or on any grounds raised by either party to the appeal which have not been investigated or enquired into by the lower Authorities earlier and which may result in enhancement of tax liability of the assessee? - Held that - Section 254 of the Act, in our opinion, does not have any narrower scope to put fetters on the powers of the Tribunal as is sought to be canvassed before us that the Tribunal could not have exceeded the grounds raised before it by the Appellant Assessee. The Appellant may be either Assessee or Revenue before the Tribunal and the Tribunal has also powers to allow fresh ground of appeal or 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. What the learned Tribunal has done is merely to ask the Assessing Authority to hold an enquiry as to whether the abnormally high price paid for buy-back of shares from almost a single shareholder only, viz., the Mauritius Company, a Holding Company which held 99.99% of the share holding of the Assessee Indian Company so as to ascertain the fair market value of the shares which can certainly be determined with the relevant data and evidence available with the Respondent Assessing Authority. Since the shares are not listed on the Stock Exchange, therefore, fair market value of the shares on a particular date of transaction was not ascertainable otherwise readily and the said aspect of the matter was not admittedly looked into by the Authorities below before the appeal was decided by the learned Tribunal. Therefore, even though the some findings were given by the Tribunal in favour of the Assessee that the said pay-out for buy-back of the shares at an abnormally high price was not taxable under Section 115-O or Section 115-QA read with its Explanation and Section 2(22)(d) of the Act as per the contention raised by the Assessee before the Tribunal, the Tribunal was perfectly justified in directing an enquiry into the fair market price of the share of the Assessee Company which could have an implication of taxability under Section 2(22)(e) of the Act or otherwise. Thus the present appeal filed by the Assessee deserves to be dismissed and the substantial question of law framed in the present appeal is answered in favour of the Revenue and against the Assessee and it is held that the Income Tax Appellate Tribunal (ITAT) has the power to give directions for fresh enquiry into the aspects of the subject matter of appeal filed before it either suomotu or on any grounds raised by either party to the appeal which have not been investigated or enquired into by the lower Authorities earlier and which may result in enhancement of tax liability of the assessee and in the present case, the Appellate Tribunal was right and within its jurisdiction in directing the examination of the fair market value of the shares bought back by it during the previous year relevant for the AY 2011-12 in question.

Issues Involved:
1. Jurisdiction of the Income Tax Appellate Tribunal (ITAT) under Section 254 of the Income Tax Act, 1961.
2. Applicability of Section 2(22)(e) of the Income Tax Act to the buy-back of shares.
3. Examination of the fair market value of shares in the context of buy-back transactions.

Detailed Analysis:

1. Jurisdiction of the ITAT under Section 254 of the Income Tax Act, 1961:
The primary issue in this case is whether the ITAT has the authority under Section 254 to direct a fresh inquiry into aspects not previously investigated by lower authorities, potentially resulting in an increased tax liability for the assessee. The court emphasized that the Tribunal's powers are extensive and not restricted merely to the grounds raised in the appeal. Section 254(1) allows the Tribunal to pass orders "as it thinks fit" on the subject matter of the appeal, provided both parties are given an opportunity to be heard. The Tribunal's directive to the Assessing Officer to examine the fair market value of the shares bought back was deemed within its jurisdiction. The court referenced various precedents, including the Supreme Court's decisions in *Mahalakshmi Textile Mills Ltd.* and *Kapurchand Shrimal*, to support the broad scope of the Tribunal’s powers.

2. Applicability of Section 2(22)(e) of the Income Tax Act to the buy-back of shares:
The Tribunal had to determine whether the difference between the buy-back price and the fair market value of the shares could be deemed as dividend under Section 2(22)(e). The Tribunal initially held that the buy-back transaction did not attract tax under Section 115-O or the newly inserted Section 115-QA, as the transaction occurred before the effective date of the latter. However, the Tribunal also observed that the transaction could potentially fall under Section 2(22)(e) if the buy-back price exceeded the fair market value, suggesting that such excess could be treated as a loan or advance to the shareholder, thereby qualifying as a deemed dividend.

3. Examination of the fair market value of shares in the context of buy-back transactions:
The Tribunal directed the Assessing Officer to investigate whether the buy-back price of ?2,85,108 per share was realistic or inflated. This inquiry was crucial because, if the buy-back price was found to be excessively high, it could indicate a colorable device for transferring reserves and surplus to the holding company, thereby avoiding tax. The court upheld the Tribunal's directive, emphasizing that the Tribunal has the authority to ensure that all relevant aspects of the subject matter are thoroughly examined to ascertain the truth and ensure proper tax liability is determined.

Conclusion:
The Karnataka High Court concluded that the ITAT has the power to direct a fresh inquiry into aspects of the subject matter of an appeal, even if such aspects were not previously investigated by lower authorities. The Tribunal's directive to examine the fair market value of the shares in the buy-back transaction was within its jurisdiction and aimed at ensuring the correct tax liability. The appeal by the assessee was dismissed, affirming the Tribunal's authority to remand cases for further inquiry to uphold the principles of justice and truth.

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