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TMI Blog2012 (9) TMI 768X X X X Extracts X X X X X X X X Extracts X X X X ..... ribute dividend and sell the shares without this exercise, the tax outgo would have been ₹ 94 lakhs more than under the present arrangement, but then every tax advantageous action or inaction cannot be treated as a colourable device unless such an action or inaction is not bonafide, it conceals the true nature of transaction or is an exercise without any commercial justification. Thus distribution of dividend by NIPL, prior to sale of its shares by the assessee, even though tax advantageous cannot be termed as a colourable device or sham transaction and the receipt of these dividends cannot be recharacterized as sale consideration of shares in the hands of the assessee - in favour of assessee. - IT Appeal No. 2150 (Kol.) of 2009 - - - Dated:- 21-9-2012 - Pramod Kumar And Mahavir Singh, JJ. ORDER Pramod Kumar, Accountant Member - By way of this appeal, the Assessing Officer has challenged correctness of CIT(A)'s order dated 24th December 2008, in the matter of assessment under section 143(3) of the Income Tax Act, 1961, for the assessment year 2006-07. 2. Ground nos. 1 to 4, which are raised in the form of questions requiring our adjudication and which we will tak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng but a colourable device to deny legitimate share of revenue in capital gains of the assessee, and should, therefore, be ignored in computation of long term capital gains in the hands of the assessee, learned Commissioner (Appeals) does not share that perception. It is an undisputed position that distribution of dividend was authorised in the meeting of the board of directors on 24th March 2006, and the bank account of NIPL evidences the debit for dividend payment on 28th March 2006. 5. In the course of assessment proceedings, the Assessing Officer, in addition of having taken note of the above facts, noted that after distribution of dividends as above, NIPL got the value of its shares determined by two chartered accountant firms, namely BSR Co, and CBG Co. Both of these firms have relied upon audited accounts of NILP as on 31st March 2005 and certain adjustments in respect of period after that date. The dates of these valuation reports, as noted by the Assessing Officer, are 27th March 2006 and 29th March 2006. The Assessing Officer also noted that "as per RBI circular no. 16 of 2004, containing the relevant guidelines for valuation of shares, in the case of shares not lis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration, tax deduction and deposit to Government even before obtaining the valuation report from the second independent valuer, M/s CBG Associates, was in clear violation of RBI guidelines, since it is lower of the two prices determined which was to be followed, though incidentally the value determined by the two was the same. With this analysis, the Assessing Officer concluded that "the payment of dividend was nothing but a sham and colourable transaction" and that "even if the payment of dividend distribution tax to the tune of Rs. 2.10 crores is taken into consideration, the net tax evasion was Rs. 94 lakhs". Referring to Hon'ble Delhi High Court's judgment in the case of Azadi Bachao Andolan v. Union of India 256 ITR 563, he concluded as follows: Hon'ble Delhi High Court, in the case of Azadi Bachao Andolan had held inter alia that Having regard to the law laid down by the Supreme Court in McDowell Co Ltd. v. CTO [1985] 154 ITR 148, it is open to the income tax officer, in a given case, to lift the corporate veil for finding out whether the purpose of corporate veil is avoidance of tax or not. It is one of the functions of the Assessing Officer to ensure that there i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustified in adopting the FMV per equity share of NIPL at Rs. 184.25" , and, accordingly, the Assessing Officer was directed to "compute the LTCG by adopting the FMV per share at Rs. 48.56 and total sale consideration received by the appellant amounting to Rs. 5,20,28,155". The Assessing Officer is not satisfied by the relief so granted by the CIT(A) and is in appeal before us. 8. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position. 9. There is no dispute that distribution of dividend by NIPL prior to its sale by the assessee, even after the payment of dividend distribution taxes, has resulted in tax advantage of Rs 94 lakhs, but the fundamental question that we really need to decide is whether this declaration of dividend by NIPL, just before sale of its shares to Maersk India, could be treated as a colourable device and part of impermissible tax avoidance scheme. One of the allegations in the assessment order, as indeed in the grounds of appeal before us, is that the sale of shares is contrary to the RBI guidelines but the learned Departmental Representative could not really de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y to consider what, if any, legal concept is involved in the use of this popular and pejorative word. I apprehend that, if it has any meaning in law, it means acts done or documents executed by the parties to the 'sham' which are intended by them to give to third parties or to the Court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create. One thing I think, however, is clear in legal principle, morality and the authorities [see Yorkshire Railway Wagon Contracting State v. Maclure [1882] 21 Ch.D.309; Stoneleigh Finance Ltd. v. Phillips [1965] 1 All ER 513] that for acts or documents to be a "sham", with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating. No unexpressed intentions of a "shammer" affect the rights of a party whom he deceived." 117. In Waman Rao Ors. v. Union of India Ors. [1981] 2 SCC 362 at para 45 and Minerva Mills Ltd. Ors. v. Union of India Ors. [1980] 3 SCC 625 this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been implemented, as evident from the fact, as recorded in the assessment order itself, that bank debit for dividend is reflected on 28th March 2006. The decision to distribute dividends, on these facts, cannot be termed as a 'dubious' method to evade taxes; it is not a case where dividend distribution exercise is not a bonafide exercise, is not intended to be acted upon and is used as a cloak to conceal a different transaction. The fact that this distribution of dividend also ends up saving taxes on sale of NIPL shares cannot end up negating the effect of the lawful and legitimate action of distribution of dividend by NIPL. We have also noted that the NIPL has duly paid dividend distribution tax and the same has been duly accepted in its assessment. Once the taxes on distribution of dividend have been duly accepted, the character of such dividend payments in the hands of the assessee cannot be recharacterized just because by such characterization of receipt, revenue ends up getting higher taxes. As observed by Hon'ble Gujarat High Court in Banyan Berry v. CIT 222 ITR 831, which is approved by Hon'ble Supreme Court in Azadi Bachao Andolan's case (supra), Hon'ble Supreme Court has ..... X X X X Extracts X X X X X X X X Extracts X X X X
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