2021 (4) TMI 473 - AT - Income Tax

Revision u/s 263 by CIT - Long term loss arising of transfer of preference shares on redemption at par due to indexation and further purchase on preference shares of the same company which tantamount to conversion - HELD THAT - We find that assessee had filed all the supporting documents relating to redemption of preference shares of TML Holdings Pte Ltd., and further subscription of 2020000 cumulative preference shares of TML Holdings Singapore - We find that the ld. AO on going through all these relevant documents had (a) allowed carry forward of long term capital loss to be carried forward under normal provisions of the Act by duly appreciating the fact that the loss of redemption of preference shares had occurred during the year only because of indexation benefit which is a statutory deduction available to the assessee; (b) setting off business loss with the foreign dividend income u/s.71 of the Act while computing income under normal provisions of the Act. This order was sought to be revised by the ld. PCIT u/s.263 on the ground that the ld. AO had not made any enquiries regarding the aforesaid two issues in the original assessment proceedings. Assessee before the ld. PCIT in reply to show-cause notice u/s.263 of the Act had duly brought all these facts before him by pointing out that the ld.AO had made adequate enquiries with regard to the subject mentioned dispute issues during the course of assessment proceedings and on due appreciation of those submissions, the ld. AO had framed the assessment without disturbing claim thereon. It was specifically pointed out before the ld. PCIT that the order passed by the ld. AO was not in violation of any order, direction or instruction issued by CBDT u/s.119 of the Act. Rather it was specifically pointed out that in respect of taxability of foreign dividend u/s.115BBD of the Act, the order was passed by the AO in conformity with the decision of the Hon ble Jurisdictional High Court in the case of British Insulated Calendar Ltd. 1993 (1) TMI 43 - BOMBAY HIGH COURT There is absolutely no basis for arriving at this conclusion by the ld. PCIT. What could be expected from the side of the assessee is only furnishing of necessary and requisite details before the ld. AO in response to queries raised by him. Once that onus is discharged by the assessee, the assessee cannot be expected to step into the shoes and minds of the Assessing Officer by providing him assistance in the manner in which the impugned issues are to be addressed by the ld. AO in the assessment order and reach relevant conclusions thereon. This is apparently the job of the ld. AO. Hence, the assessee can in no way be faulted for the same. Even otherwise, we find that the ld. AO had duly appreciated all these facts and materials with evidence available on record and had accepted to the contentions of the assessee by making proper examination and enquiries thereon. Hence, it is not a case of lack of enquiry on the part of the ld. AO which would enable the ld. PCIT to invoke revisionary jurisdiction u/s.263 of the Act. We hold accordingly that Explanation 2 to Section 263 which has been heavily relied upon by the ld. PCIT for invoking revisionary jurisdiction u/s.263 of the Act, is bad in law in the facts and circumstances of the instant case. Once adequate enquiries were made by the ld. AO and the assessment has been framed accordingly, merely because no mention about those impugned issues has been recorded in the assessment order by the ld. AO, the said assessment order cannot be termed as erroneous even if it is found to be prejudicial to the interest of the revenue. The order of the ld. AO could not be termed as erroneous at all. Reliance in this regard is placed on the decision of the Hon ble Supreme Court in the case of Malabar Industrial Company Ltd., vs. CIT 2000 (2) TMI 10 - SUPREME COURT As assessee had duly responded before the ld. PCIT also by way of making detailed submissions on merits on the first issue regarding the loss of redemption of preference shares due to indexation benefit by specifically stating that the said loss of redemption of preference shares is distinguished from fresh purchase of preference shares during the year and the same does not amount to conversion . Order passed by the ld. AO and the opinion framed thereon by him was one of the possible views taken by him while framing the assessment based on the laws prevailing at that relevant point in time. The law is very well settled that, once a possible view has been taken by the ld. AO while framing the assessment, the same cannot be subjected to revision u/s.263 of the Act merely because the ld., PCIT is of a different view on the impugned subject. From the elaborate factual submissions made by the assessee on merits which are reproduced hereinabove, we are in complete agreement with the contentions of the assessee that the ld. PCIT ought not to have even resorted to take a divergent view than that taken by the ld. AO in the facts and circumstances of the instant case. In any case, we hold that revision jurisdictional u/s.263 of the Act is not permissible when a possible view has been taken by the ld. AO (though this is a case where no two views are possible) while framing the assessment and further revision u/s.263 could not be made merely because the ld. PCIT is trying to substitute his view in the view already taken by the ld. AO. Taxability of dividend received from specified foreign companies u/s.115BBD - We find that assessee had even submitted that by setting off the foreign dividend income with the business loss of the year u/s.71 of the Act, the assessee had actually set off the income taxable @15% with the loss which would have a tax effect of 30%. This has only caused prejudice to the interest of the assessee and it is not prejudicial to the interest of the revenue. Even this aspect has not been considered and appreciated by the ld. PCIT. We hold that in view of the aforesaid detailed observations that assessee had also made out a case before the ld. PCIT even on merits and accordingly, the ld. PCIT ought not to have given directions to the ld. AO to disallow the claim of carry forward of long term capital loss and for taxing the foreign dividend income. Hence, the assessee succeeds on this aspect on merits also. Also find from the final pages of the assessment order that ultimately the income has been determined only u/s.115JB of the Act. Even after giving effect to the order of the ld. PCIT u/s.263 of the Act, there would be no taxable income under normal provisions of the Act and even then, the income would ultimately get determined only u/s.115JB of the Act. Hence, there would be no prejudice that could be caused to the interest of the Revenue in this regard. While this is so, we are unable to persuade ourselves to accept to the contentions of the ld. PCIT that the order of the ld. AO is erroneous and prejudicial to the interest of the revenue. Reliance in this regard has been rightly placed by the ld. AR on case of Luxmi Co. Ltd. 2017 (2) TMI 1439 - ITAT KOLKATA which is directly on the point in dispute before us. For the sake of brevity, the relevant operative portion of the said order is not reproduced hereunder. Even on this ground, we hold that the revision order passed by the ld. PCIT is unsustainable in the eyes of law. - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of proceedings under Section 263 of the Income-tax Act.
2. Treatment of redemption of preference shares as conversion and disallowance of capital loss.
3. Taxation of dividend income received from specified foreign companies under Section 115BBD.

Detailed Analysis:

1. Validity of Proceedings Under Section 263 of the Act:
The assessee challenged the validity of the proceedings under Section 263, arguing that the Commissioner of Income Tax (CIT) erred in holding the order passed by the Assessing Officer (AO) as erroneous and prejudicial to the interest of the revenue. The assessee contended that the AO had taken one of the permissible views and had conducted proper inquiries and verifications, supported by various precedents, including judgments from the Supreme Court and Jurisdictional High Court. The assessee also pointed out that if the dividend income were taxed without allowing set-off under Section 71, it would result in a carry-forward and set-off of losses against business income in subsequent years, which would be taxable at the maximum marginal rate.

2. Treatment of Redemption of Preference Shares as Conversion and Disallowance of Capital Loss:
The CIT treated the redemption of preference shares as a conversion, thereby disallowing the capital loss incurred. The assessee argued that the redemption of preference shares is distinct and independent from subsequent purchases and should be treated as a 'transfer' under Section 2(47) of the Act, allowing the capital loss to be carried forward. The assessee provided detailed responses and supporting documents to the AO during the assessment proceedings, which were duly considered by the AO before allowing the carry-forward of long-term capital loss.

3. Taxation of Dividend Income Received from Specified Foreign Companies Under Section 115BBD:
The CIT separately taxed the foreign dividend income at the specified rate under Section 115BBD, arguing that in the absence of any positive income after set-off of loss from one head of income against another under Section 71, the chargeability provision under Section 115BBD fails to apply. The assessee contended that Section 115BBD(2) restricts the allowability of 'expenditure' or 'allowance' but does not expressly restrict the allowability of 'loss.' The assessee argued that business loss of the current year should be allowable to be set off against such foreign dividend income as per Section 71.

Tribunal's Findings:

1. Adequate Inquiries by the AO:
The Tribunal found that the AO had conducted adequate inquiries and had considered all relevant documents and submissions made by the assessee during the assessment proceedings. The AO had allowed the carry-forward of long-term capital loss and set off business loss with foreign dividend income under Section 71. The Tribunal held that the AO's order was neither based on incorrect assumptions nor incorrect application of law and was not in violation of any CBDT instructions under Section 119.

2. No Basis for CIT's Conclusion:
The Tribunal observed that the CIT had no basis for concluding that the AO made an erroneous interpretation of facts and law. The Tribunal held that the assessee had discharged its onus by providing necessary details and documents, and the AO had made proper examinations and inquiries. The Tribunal emphasized that the CIT's invocation of revisionary jurisdiction under Section 263 was not justified as the AO had taken a permissible view based on adequate inquiries.

3. No Prejudice to Revenue:
The Tribunal noted that the income was ultimately determined under Section 115JB, and even after giving effect to the CIT's order, there would be no taxable income under normal provisions. Therefore, there was no prejudice to the interest of the revenue. The Tribunal relied on various judicial precedents, including decisions of the Supreme Court and Jurisdictional High Courts, to support its findings.

Conclusion:
The Tribunal quashed the revision order passed by the CIT under Section 263, holding that the AO's order was not erroneous or prejudicial to the interest of the revenue. The appeal of the assessee was allowed, and the Tribunal emphasized that the AO had taken a permissible view based on adequate inquiries and proper examination of facts and law.