2022 (4) TMI 853 - AT - Income Tax

Revision u/s 263 by CIT - buy back of shares from its own holding company - deemed dividend under section 2(22)(d) - dividend distribution tax u/s 115-O - HELD THAT - Assessee bought back the shares from its holding company a Singapore incorporated entity. The consideration of buy-back was met out of general reserves and surplus. The payment so made was to be considered as distribution of accumulated profits to its holding company on the reduction of capital of the assessee company as envisaged in Sec. 2(22)(d). Accordingly, the assessee was liable to pay tax on distributed profits u/s 115-O besides payment of interest u/s 115P. Further, the excess consideration received by the holding company was to be treated as capital gains and the assessee was to be treated as representative assessee of its holding company in terms of Sec. 160 163 of the Act to pay the tax in respect of the above gains. Since, the assessment was completed without proper enquiry and non-application of mind, the order was erroneous and prejudicial to the interest of the revenue. Undisputed position that emerges is that the issue which has been racked up by Ld. Pr. CIT in the impugned order was never the subject matter of examination either by Ld. TPO or by Ld. AO during the course of regular assessment proceedings. The queries raised by lower authorities during the course of regular assessment proceedings and the assessee s replies thereto do not address the issue as highlighted by Ld. Pr. CIT in the impugned order. CIT has flagged a pertinent issue and fully justified as to how the assessment order was erroneous as well as prejudicial to the interest of the revenue. Upon perusal of assessment orders, we find that this issue was never delved into by Ld. AO or Ld. TPO and there was complete non-application of mind on the sated issue. This being so, the observation made by Ld. Pr. CIT in the impugned order could not be faulted with. The revision jurisdiction is perfectly valid and justified. The case laws as cited by Ld. Pr. CIT in the impugned order clearly support his view. However, our aforesaid view would not be construed as expression on the merits of the case, in any manner. - Decided against assessee.

Summary

Issues:
1. Validity of Order u/s. 263
2. Buyback transaction treated as deemed dividend
3. Capital gains taxation on shares sold

Issue 1 - Validity of Order u/s. 263:
The appeal challenges the revisional jurisdiction exercised by the Principal Commissioner of Income Tax under section 263. The appellant argues that the order was passed beyond the prescribed time limit and did not meet the necessary conditions. The Principal Commissioner held that the order was erroneous and prejudicial to the revenue's interest due to lack of proper inquiry and non-application of mind during the assessment. The appellant contended the revisional jurisdiction on legal grounds and merits, but the Principal Commissioner directed for revision based on the tax implications of the buyback transaction.

Issue 2 - Buyback transaction treated as deemed dividend:
The Principal Commissioner concluded that the buyback transaction with a holding company should be treated as a distribution of accumulated profits, falling under section 2(22)(d) of the Income Tax Act. Consequently, the appellant was liable to pay dividend distribution tax under section 115-O. The excess consideration received by the holding company was to be treated as capital gains, with the appellant considered as the representative assessee. The assessment order was deemed erroneous for not addressing these aspects, leading to the revision.

Issue 3 - Capital gains taxation on shares sold:
The Principal Commissioner held that the capital gains arising from the sale of shares should be taxed in the hands of the holding company, a tax resident of Singapore. However, the appellant was to be treated as the representative assessee for the capital gains earned by the holding company. The order was found erroneous for failing to inquire into these aspects, justifying the revision under section 263 based on legal precedents supporting intervention when assessments lack proper inquiry.

In the detailed analysis, it is evident that the revisional jurisdiction under section 263 was exercised based on the failure of the Assessing Officer and Transfer Pricing Officer to address critical tax implications related to the buyback transaction and capital gains on shares sold. The Principal Commissioner's decision to set aside the assessment order for proper inquiry and application of tax laws was supported by legal precedents emphasizing the importance of thorough examination in assessments. The appeal was dismissed, affirming the validity of the revisional jurisdiction exercised in the case.