2024 (12) TMI 1111 - HC - Income Tax

Revision u/s 263 - as per CIT transfer of shares was clearly a sham and a colourable device - HELD THAT - Commissioner appears to have taken the view that the transfer of shares was clearly a sham and a colourable device and that it was Genpact India s motive to avoid the payment of a Dividend Distribution Tax DDT u/s 115-O of the Act. On the basis of the aforenoted significant conclusions, the Commissioner came to form the opinion that the view rendered by the AO would merit correction u/s 263. This led to the respondent-assessee approaching the Tribunal. The Tribunal has, while dealing with the appeal preferred by the respondent-assessee, essentially come to hold that in the absence of the Commissioner having come to conclude that the AO had failed to undertake the requisite inquiry as contemplated, there was no justification for the assessment order being revised. It has ultimately taken note of the precedents rendered on the scope of the power which stands placed in the hands of the Commissioner by virtue of Section 263 and has come to the firm conclusion that the Order-in-Revision was clearly unsustainable. No substantial question of law Commissioner is clearly rendered unsustainable on a more fundamental plane. As is evident from the extracts of the order passed in revision, the principal allegation appears to have been that the device adopted by Genpact India was intended to avoid the payment of DDT as contemplated u/s 115-O. Undisputedly, that dividend would have to be one which would have been declared by Genpact India. We are, however, and in the present case, concerned with an assessment proposed to be made in the hands of Headstrong HCS, now known as Genpact Consulting Pte. We thus find ourselves unable to appreciate how a perceived liability in the hands of Genpact India could be viewed or considered as being relevant for the purposes of formation of opinion that the assessment of Genpact Consulting was erroneous and prejudicial to the Revenue. The appellants have failed to establish that even if the view as expressed by the Commissioner were assumed to be correct, any additional tax liability would have been foisted upon Genpact Consulting. We take note of an identical position which obtained in the case of Genpact Luxembourg S.A.R.L. 2024 (8) TMI 759 - DELHI HIGH COURT and which had assailed the initiation of Section 148 proceedings.

Issues Involved:

1. Legality of proceedings under Section 263 of the Income Tax Act.
2. Adequacy of inquiries conducted by the Assessing Officer (AO).
3. Alleged tax avoidance scheme by the assessee.
4. Interpretation of the "change in opinion" doctrine.
5. Examination of the transaction for potential tax evasion.
6. Application of the "substance over form" principle.
7. Validity of the Income Tax Appellate Tribunal's (ITAT) decision.

Detailed Analysis:

1. Legality of Proceedings Under Section 263:

The Principal Commissioner invoked Section 263, arguing that the AO's acceptance of the assessee's declared income without adequate inquiry was erroneous and prejudicial to the Revenue. The Tribunal, however, held that the Commissioner failed to demonstrate that the AO's order was erroneous or prejudicial, as required under Section 263. The Tribunal emphasized that the power under Section 263 can only be exercised when both conditions-erroneous and prejudicial-are met.

2. Adequacy of Inquiries Conducted by the AO:

The Commissioner criticized the AO for not conducting basic inquiries into the transaction, such as the upstream/downstream structure of the Genpact group and the source of funds. The Tribunal found that the AO had made inquiries and was satisfied with the explanations provided by the assessee. The Tribunal noted that the AO's decision cannot be deemed erroneous simply because the Commissioner would have conducted a more detailed inquiry.

3. Alleged Tax Avoidance Scheme by the Assessee:

The Commissioner alleged that the transaction was part of a tax avoidance scheme to evade legitimate taxes in India. The Tribunal, however, found no evidence of such a scheme. It held that the mere suspicion of tax avoidance without concrete evidence does not justify revising the AO's order under Section 263.

4. Interpretation of the "Change in Opinion" Doctrine:

The Commissioner argued that the Tribunal erred in quashing the proceedings on the grounds of "change in opinion." The Tribunal clarified that a change in opinion is not a valid ground for invoking Section 263 unless the original opinion was erroneous and prejudicial to the Revenue. The Tribunal found that the AO's opinion was based on a proper inquiry and was not erroneous.

5. Examination of the Transaction for Potential Tax Evasion:

The Commissioner claimed that the transaction was a sham designed to avoid Dividend Distribution Tax (DDT). The Tribunal found that the transaction was genuine and that the AO had appropriately assessed it. The Tribunal noted that the liability for DDT would have been on Genpact India, not the assessee, and thus was irrelevant to the assessee's tax liability.

6. Application of the "Substance Over Form" Principle:

The Commissioner invoked the "substance over form" principle, alleging that the transaction was a sham. The Tribunal, however, held that the Commissioner failed to establish that the transaction was a sham or that it lacked commercial substance. The Tribunal emphasized that without concrete evidence, the "substance over form" principle cannot be applied to revise the AO's order.

7. Validity of the ITAT's Decision:

The Tribunal's decision was based on established legal principles and precedents, including the requirement for both error and prejudice under Section 263. The Tribunal found that the Commissioner had not met these requirements and that the AO's order was neither erroneous nor prejudicial to the Revenue. Consequently, the High Court found no substantial question of law and dismissed the appeal.

In conclusion, the Tribunal's decision to quash the proceedings under Section 263 was upheld, as the Commissioner failed to demonstrate that the AO's order was erroneous or prejudicial to the Revenue. The appeal was dismissed for lack of substantial legal questions.

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