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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 ..... whether the learned CIT(A) has erred in not accepting that the payment of dividend to Nedllyod India Pvt Ltd as sham and On the facts and in the circumstances of the case, whether the learned CIT(A) colourable transaction ? 4. On the facts and in the circumstances of the case, whether the learned CIT(A) has erred in rejecting (the contention) that the transaction of sale of shares was in violation of guidelines of the RBI ? 3. Ground Nos. 5 and 6 are consequential in nature and no specific arguments are advanced in respect of the same. These two grounds are thus dismissed in limine. We, therefore, restrict our discussion on the main issue referred to in grounds numbers 1 to 4. 4. The issue in appeal lies in a narrow compass of material facts. During the relevant financial period, i.e. 28th March 2006, the assessee sold 10,71,420 equity shares of its wholly owned subsidiary Nedllyod India Pvt Ltd (NIPL, in short) for a consideration of Ra 5,20,28,155 to Maersk India Private Limited. There is also no dispute about the fact that this sale was part of the overall reorganization of business in the sense that, as stated in the notes to the assessee's financial statements f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f tax with the Government, as also the date of certificate itself, was 28th March 2006. The Assessing Officer also noted that the remittance of sale consideration, net of taxes, was on the basis of a chartered accountant's certificate and that no order under section 195(2) was obtained from the department. He also noted that both the valuation report noted that in view of declaration of dividend to the extent of Rs 17.10 crores, the net worth of NILP has been deleted to that extent, and, accordingly, the net asset value of the shares was determined at Rs 48.56 per share. 6. On these facts, the Assessing Officer was of the opinion that the since AP Mollar - Maersk Group had already acquired Royal P&O Nedllyod NV, ultimate holding company, on 11th August 2005, it was just a matter of time before merger and acquisition of other group companies takes place. He noted that the NIPL, being a domestic company, its dividends, subject to payment of dividend distribution tax by the company, were tax exempt under section 10(34) in the hands of the shareholders, including the assessee before us. The Assessing Officer was of the view that "just prior to furnishing of the valuation report of NAV ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... every citizen to pay the taxes honestly without resorting to subterfuges" In the present case, the Nedllyod Group resorted to dubious method of declaration and payment of dividend to avoid payment of tax on LTCG by the assessee. Though the decision to sale out was taken much earlier, the blue print of tax avoidance was chalked out only towards the fag end of the financial year 2005-06. The two companies involved in the process did not even hesitate to violate the RBI norms. The whole process was completed even before the valuation report was obtained from the second valuer viz. CBG & Associates. It goes on to show the culpable state of mind of the persons involved in the transaction. The payment of dividend in the present case, being a colourable transaction as established above, it cannot be considered as a part of assesee's tax planning and it clearly amounts to tax evasion. Hence, deduction is denied for the dividend paid for determination of NAV per equity share. 7. Accordingly, the Assessing Officer recomputed long term capital gain by adopting NAV @ Rs. 184.25 per share and substituting the sale consideration of Rs. 5,20,28,1555 by Rs. 19,74,09,135. The LTCG was computed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the Assessing Officer does not dispute that fact. The only controversy is that, as per the Assessing Officer, the sale of shares took place before the second valuation report, as required under this circular, was obtained, i.e. one day after the sale took place, but then this fact does not lead to the conclusion that actual sales price of share can be ignored. The fact observed by the Assessing Officer, even if correct, has no cause and effect relationship with the course adopted by the Assessing Officer. Coming back to the core issue whether declaration of dividends just prior to sale of NIPL shares can be considered colourable device or not, we find guidance from the following observations made by Hon'ble Supreme Court in the case of Union of India v. Azadi Bachao Andolan 263 ITR 706 wherein Their Lordships have, inter alia, observed as follows: 115. Though the words 'sham', and 'device' were loosely used ..........., we deem it fit to enter a caveat here. These words are not intended to be used as magic mantras or catchall phrases to defeat or nullify the effect of a legal situation. As Lord Atkin pointed out in Duke of Westminster (supra) : "I do not use the word device in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n by an assessee, the intended legal result has not been achieved, the Court might be justified in overlooking the intermediate steps, but it would not be permissible for the Court to treat the intervening legal steps as non est based upon some hypothetical assessment of the 'real motive' of the assessee. In our view, the Court must deal with what is tangible in an objective manner and cannot afford to chase a will-o'-the-wisp 10. It is important to bear in mind uncontroverted claim of the assessee that there were sufficient reserves and surplus, which were eligible for distribution as 'dividend', and the NIPL had sufficient cash balances as well. The nature of amounts distributed as dividend has not been altered as a result of, what the revenue authorities describe as, colourable device to evade taxes. It is difficult to comprehend the rationale in revenue's approach. Here is a company which has amounts available, in accordance with the law, for distribution of dividends, and when this company is in the process of changing ownership, it declares all, or most of, such available funds, as 'dividends' to the existing shareholders. There is nothing wrong in this approach on the first ..... X X X X Extracts X X X X X X X X Extracts X X X X
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