2024 (6) TMI 433 - HC - Income Tax

Validity of proceedings u/s 144BA - Issuance of bonus shares to the shareholder - Validity of invoking GAAR over SAAR - petitioner set-off the short term capital loss incurred on the sale of shares of REFL against the long term gains made on another transaction of sale of shares - Applicability of Section 94(8) vs. Chapter X-A (GAAR) of the Income Tax Act - In assessment of income sought to treat the transactions as impermissible avoidance arrangement as per the General Anti-Avoidance Rules ( GAAR ) under chapter X-A starting from Section 95-102 of the Act - as submitted what has been specifically excluded from the provisions curbing bonus stripping by way of SAAR cannot be indirectly curbed by applying GAAR - whether respondent No.1 has committed an error in law while issuing notice invoking Section 96 of the Act, which is the provision otherwise, referred as GAAR which would not be attracted to the facts of the petitioner? HELD THAT - It is worth taking note of the fact that here is a situation where the special provision of law was already there in the Act when the general provision of law has been subsequently enacted by way of an amendment. Normally it is the vice-versa, i.e., where the general provision of law already being in force, the special provision of law is subsequently enacted. What next to be appreciated is the fact that chapter X-A begins with a non-obstante clause, where in Section 95(1) dealing with the applicability of the General Anti-Avoidance Rules, it has been held that, notwithstanding anything contained in the Act if the Assessing Authority finds that an arrangement entered into by the Assessee is an impermissible avoidance arrangement, the determination has to be done in respect of the consequential tax arising there from and shall be subject to the provisions of chapter X-A. This in other words means that by virtue of the aforesaid non-obstante clause, the provisions of chapter X-A gets an overriding effect over and above the other existing provisions of law. So far as the contention of petitioner that the case of the petitioner is one which should have otherwise fallen under Section 94(8) of the Act, it would be relevant also to take note of the said provision of Section 94(8). As is known to all, Section 94 deals with avoidance of tax by certain transactions in securities. Securities can be of different natures like stocks, mutual funds, derivatives of non-recognized stock exchanges and the case of the petitioner is that the transactions of the petitioner is one which would fall under Section 94(8). At the relevant point of time sub-section 8 of Section 94 dealt with only buying and acquiring of units within a period of three (3) months prior to the record date. The explanation to the said Section provides for definitions of certain terminologies used in the said sub-section which includes the definition of securities and the definition of units. In the present case, the petitioner puts forth an argument rooted in the belief that the Specific Anti Avoidance Rules (SAAR), particularly Section 94(8), should take precedence over the General Anti Avoidance Rule (GAAR). This contention, however, is fundamentally flawed and lacks consistency .The reason being the Petitioner's own previous assertion that Section 94(8) is not applicable to shares during the relevant time frame. This inherent contradiction in the Petitioner's stance significantly weakens the overall credibility of their argument. As per the Revenue's perspective, given the multiple transactions that the taxpayer has undertaken, the case should be, one which should fall under the umbrella of Chapter X-A and not Chapter X. Section 94(8) might be relevant in a simple, isolated case of the issuance of bonus shares, provided such issuance has an underlying commercial substance.This provision does not apply to the current case, as issuance of bonus shares here is evidently an artificial avoidance arrangement that lacks any logical or practical justification. It is clear that this arrangement was primarily designed to sidestep tax obligations, in direct contravention of the principles of the Act. Petitioner's reliance on the 2012 Shome Committee Report - As in the given factual backdrop, the same is totally misplaced and misconstrued. Even the contention of the petitioner that the aforementioned Report with regard to SAAR under Section 94 would override the GAAR in Chapter X-A, is unacceptable. The Committee's stance that SAAR should generally supersede GAAR mainly pertains to international agreements, not domestic cases such as this. This stand, as per the report is further substantiated by the Finance Minister's declaration, made on January 14, 2013. During this announcement, the Minister stated that the applicability of either GAAR or SAAR would be determined on a case-by-case basis. What further weakens the petitioner's argument is the subsequent introduction of a Rule under Section 95 and Section 100. This provision indicates that Chapter X-A could be used in conjunction with, or as a substitute for, other Sections of the Act. This development again highlighted the selective and misinterpreted use of legal provisions by the Petitioner. Finance Bill, 2013, only incorporated some of the expert committee s recommendations and CBDT also clarifies that both GAAR and SAAR would be applied depending upon the specifics of each case. However, Petitioner's assertion is that the facts of the case are irrelevant in determining the application of a general law is also fundamentally flawed. This stance was already addressed and refuted by the Supreme Court in M/s. S. Zoraster and Company 1967 (2) TMI 25 - DELHI HIGH COURT The Court, in its wisdom, stated that laws must be interpreted based on the specific facts of each case. The Petitioner's argument, thus, is not only inconsistent but also contradicts the well-established legal principles. The current arrangement is being scrutinized as it is considered devoid of commercial substance as per Section 97. It is perceived as a deliberate misuse of the Act's provisions, going beyond the intended use of the law, and manipulating it to one's advantage. It creates extraordinary rights and obligations that seem to be conducted not in good faith. These unusual rights and obligations are not in line with the general principles of fair dealing, leading to the conclusion that it's an impermissible avoidance agreement under Section 96. Consequently, the arrangement falls under the purview of Chapter X-A. Given these circumstances, procedures were set in motion to apply the rules and regulations of Chapter X-A to this arrangement. Section 144AB outlines the procedure for applying the rules in Chapter X-A. This section ensures that transactions are thoroughly evaluated at multiple levels and from various perspectives before determining any connected outcomes. This involves a comprehensive examination of all the elements of the transaction, upholding the principles of fairness at each step. It ensures that the process is thorough, fair, and just. However, the Petitioner has chosen to seek this court's intervention instead of following the process set out under Section 144AB. This circumvention of the process raises questions about the Petitioner's motives. Tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges. Accordingly, we are of the considered opinion that the Revenue has persuasively and convincingly shown that the transactions in the instant case are not permissible tax avoidance arrangements. The evidence points towards the fact that these transactions do not qualify as permissible under the tax laws. Therefore, the provisions of Chapter X-A would become applicable. Therefore, the current writ petitions lack merit, as they fail to make a case so far as the application of Chapter X-A in the present facts of the case. Writ Petitions are dismissed. The respondents are allowed to proceed further with the process under Section 144AB

Summary

Issues Involved:
1. Legality of proceedings initiated u/s 144BA of the Income Tax Act, 1961.
2. Applicability of Specific Anti-Avoidance Rules (SAAR) vs. General Anti-Avoidance Rules (GAAR).
3. Validity of the show cause notice and the jurisdiction of the writ petition.
4. Interpretation of Section 94(8) regarding bonus stripping and its applicability to shares.

Summary:

Legality of Proceedings Initiated u/s 144BA of the Income Tax Act, 1961:
The petitioner challenged the initiation and continuation of proceedings dated 14.12.2022, issued by the Principal Commissioner of Income Tax (Central) for the assessment year 2019-2020, u/s 144BA of the Income Tax Act, 1961, declaring them illegal, arbitrary, ultra vires, and lacking in subject jurisdiction.

Applicability of Specific Anti-Avoidance Rules (SAAR) vs. General Anti-Avoidance Rules (GAAR):
The petitioner argued that the transactions were covered by Section 94(8) of the Act, which deals with SAAR, and hence GAAR provisions under Chapter X-A should not be invoked. The respondent contended that the transactions were impermissible avoidance arrangements under GAAR, and thus the proceedings were initiated under Chapter X-A.

Validity of the Show Cause Notice and the Jurisdiction of the Writ Petition:
The respondent argued that the writ petition challenging the show cause notice was not maintainable as it lacked patent illegality on the ground of jurisdiction. The petitioner could raise all relevant objections before the concerned authorities. The court noted that the proceedings under Chapter X-A were initiated due to the artificial nature of the transactions, which lacked commercial substance and were primarily designed to evade tax.

Interpretation of Section 94(8) Regarding Bonus Stripping and Its Applicability to Shares:
The petitioner contended that Section 94(8) specifically deals with tax avoidance in relation to bonus stripping and does not include shares within its scope. The court observed that Section 94(8) was intended to curb tax avoidance related to mutual funds and not shares. The court further noted that Chapter X-A, introduced by the Finance Act, 2013, with effect from 01.04.2016, has an overriding effect due to its non-obstante clause.

Conclusion:
The court dismissed the writ petitions, holding that the transactions were impermissible tax avoidance arrangements and that the provisions of Chapter X-A were applicable. The respondents were allowed to proceed with the process u/s 144AB. The court emphasized that tax planning should be legitimate and within the framework of law, and colorable devices cannot be part of tax planning.