1999 (9) TMI 123 - AT - Income Tax

Summary

Issues Involved:
1. Jurisdiction under section 263 of the Income-tax Act, 1961.
2. Applicability of section 2(22)(d) of the Income-tax Act, 1961 regarding deemed dividend.
3. Validity of the Scheme of Arrangement and its implications on capital reduction.

Summary:

Jurisdiction under section 263 of the Income-tax Act, 1961:
The appeal by the assessee challenges the order of the Commissioner of Income-tax (CIT) passed u/s 263 of the Income-tax Act, 1961, for the assessment year 1992-93. The CIT opined that the Assessing Officer's (AO) order was erroneous and prejudicial to the interest of the revenue. The CIT assumed jurisdiction u/s 263 to examine the issue of deemed dividend u/s 2(22)(d) of the Act. The Tribunal held that the conditions precedent for invoking jurisdiction u/s 263 did not exist, as the AO's view was a possible view and in conformity with the decisions of the Commissioner of Income-tax (Appeals) in similar cases. Therefore, the order passed u/s 263 was quashed.

Applicability of section 2(22)(d) of the Income-tax Act, 1961 regarding deemed dividend:
The CIT held that the benefit received by the assessee on account of the Scheme of Arrangement could be considered as deemed dividend u/s 2(22)(d) of the Act. The Tribunal examined the conditions for applying section 2(22)(d), which include reduction of capital, distribution of assets to shareholders, and possession of accumulated profits by the company. The Tribunal found that the Scheme of Arrangement resulted in reorganization, not reduction, of capital. There was no distribution of shares by HCL Ltd. to its shareholders; instead, shares were issued by HCL-HP Ltd. Therefore, the conditions for invoking section 2(22)(d) were not satisfied, and the transaction did not result in deemed dividend.

Validity of the Scheme of Arrangement and its implications on capital reduction:
The Scheme of Arrangement involved the transfer of non-computer business to HCL-HP Ltd., issuance of new shares, and reorganization of capital. The Tribunal noted that the Scheme resulted in the splitting of capital into two companies without reducing the aggregate capital. The Delhi High Court had also held that there was no reduction in capital. The procedure for reduction of capital u/s 100 to 105 of the Companies Act was not followed. Thus, the Scheme was intended for reorganization, not reduction, of capital, and did not attract the provisions of section 2(22)(d).

Conclusion:
The Tribunal concluded that the conditions for invoking jurisdiction u/s 263 were not met, and the order of the AO was not erroneous or prejudicial to the interest of the revenue. The appeal of the assessee was allowed, and the order passed u/s 263 was quashed.