2019 (10) TMI 317 - HC - Income Tax

Extraordinary and discretionary jurisdiction of High Court - maintainability of appeal - Single Judge directing the appellant to exhaust the statutory remedy - whether the appeal requires to be decided on merit or not? - Section 115-O invoked unilaterally and without adjudication by treating the transactions as that of dividend, which would not come within the purview of Section 2(22)(d) - HELD THAT - In issues involving fiscal statutes, extraordinary and discretionary jurisdiction of this Court available under Article 226 of the Constitution of India requires to be exercised with greater caution and very sparingly. The learned single Judge has given two findings against the appellant while holding that it is open to him to file an appeal. Though it is observed that the observations are only prima facie in nature, the writ petition was dismissed on the reasons assigned. Therefore, the findings rendered cannot be termed as prima facie as they were not mere observations. As the learned Senior Counsel appearing for the appellant submits they might militate against the appellant as substantive findings on merit. If that is the case, the appeal to be filed would be of a mere formality. Thus, the learned single Judge, in our considered view, ought not to have gone into the merits of the case. The first finding rendered by the learned single Judge is to the effect that the transactions are not mere buying back of shares but granting dividend to the shareholders. Secondly, it was held that there is no need to follow any procedure towards adjudication while invoking Section 115-O of the Act. Having given the aforesaid findings, the writ petition was accordingly dismissed. This is in our considered view cannot be sustained in the eye of law. They are not mere observations but findings on merit both on fact and law. In such view of the matter, we are of the view that the learned single Judge was not right in going to the merit while granting liberty to file an appeal. A submission is also made raising doubt over the maintainability of the appeal under Section 246-A of the Act. We have no hesitation in holding that the appeal is maintainable. The very case of the respondent is that the appellant ought to have shown its return the transactions as dividend and not capital gain. Therefore, it is a case of an improper return having been filed. Considering some what similar objection raised on a slightly different fact involving a demand raised under Section 115Q of the Act, a Division Bench of Delhi High Court in Genpact India (P) Limited Vs. Deputy Commissioner of Income-Tax (2019 (8) TMI 997 - DELHI HIGH COURT) was pleased to hold that the appeal would certainly be maintainable. Therefore, any order involving civil consequence has to be termed as final, entitling an assessee in challenging the same before the appellate forum. We also do not find any error in the order of the learned single Judge with respect to the deposit made during the pendency of the interim order as erroneous. It is only an interim arrangement directed to be made pending the appeal. In such view of the mater, while upholding the direction of the learned single Judge with respect to the deposit and the liberty granted to file an appeal are accordingly upheld. However, the findings rendered on the nature of transaction and the scope under Section 115-O of the Act are accordingly set aside. The issue as to whether the impugned order should be preceded by a procedure involving adjudication and the requirement of violation of principles of natural justice are also left open to be decided in the appeal. Accordingly, the writ appeal stands allowed in part as indicated.

Summary

Issues Involved:
1. Approval of the Scheme under Sections 391 to 393 of the Companies Act, 1956.
2. Tax treatment of the buy-back transaction under the Income Tax Act, 1961.
3. Freezing of bank accounts and the legality of the impugned order.
4. Maintainability of the writ petition and the alternative remedy of appeal.
5. Violation of principles of natural justice.

Detailed Analysis:

1. Approval of the Scheme under Sections 391 to 393 of the Companies Act, 1956:
The appellant sought approval for a Scheme involving the purchase of shares from its shareholders. The Scheme was approved by the Court on 18.04.2016, and the appellant subsequently bought back the shares, treating the transaction as capital gains.

2. Tax Treatment of the Buy-Back Transaction under the Income Tax Act, 1961:
The respondent issued an order dated 22.03.2018, holding that the transactions made in pursuance of the buy-back arrangement should be taxed under Section 115-O of the Income Tax Act, 1961, as dividends, not capital gains. The appellant challenged this order, arguing that Section 115-O could not be invoked unilaterally without adjudication and that the transactions should fall under Section 46A of the Act.

3. Freezing of Bank Accounts and the Legality of the Impugned Order:
Following the impugned order, the appellant's bank accounts were frozen. The appellant contended that the order was issued without prior notice, violating principles of natural justice. The respondent argued that Section 115-O does not mandate prior notice and that the freezing of accounts was justified.

4. Maintainability of the Writ Petition and the Alternative Remedy of Appeal:
The learned single Judge dismissed the writ petition, holding that the appellant has an appeal remedy under Section 246 of the Act. The Court emphasized that extraordinary and discretionary jurisdiction under Article 226 of the Constitution should be exercised sparingly, especially in fiscal matters. The appellant was given liberty to file an appeal within four weeks, with the Appellate Authority to dispose of the appeal on merits.

5. Violation of Principles of Natural Justice:
The appellant argued that the impugned order violated principles of natural justice as it was issued without prior notice. The learned single Judge observed that there was no need for prior notice under Section 115-O. However, the appellate court found that the single Judge's findings on the merits were not mere observations but substantive, which could prejudice the appellant in the appeal process.

Conclusion:
The appellate court allowed the writ appeal in part, setting aside the findings on the nature of the transaction and the scope of Section 115-O. The Court upheld the direction to file an appeal and the interim protection granted by the single Judge. The issue of whether the impugned order should be preceded by adjudication and the violation of principles of natural justice were left open for the Appellate Authority to decide. The appellant was granted four weeks to file an appeal, which the Appellate Authority must dispose of within eight weeks thereafter.