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TMI Blog2018 (7) TMI 1738X X X X Extracts X X X X X X X X Extracts X X X X ..... powers to allow fresh ground of appeal or allow the other party to the appeal to file its cross objections and even suo motu pass appropriate Orders 'thereon' and therefore the words 'as it thinks fit' in our opinion, confer wide powers upon the Income Tax Appellate Tribunal to pass such Orders on the subject matter of appeal 'as it thinks fit' whether the issue is raised by either party to the appeal or not. What the learned Tribunal has done is merely to ask the Assessing Authority to hold an enquiry as to whether the abnormally high price paid for buy-back of shares from almost a single shareholder only, viz., the Mauritius Company, a Holding Company which held 99.99% of the share holding of the Assessee Indian Company so as to ascertain the fair market value of the shares which can certainly be determined with the relevant data and evidence available with the Respondent Assessing Authority. Since the shares are not listed on the Stock Exchange, therefore, fair market value of the shares on a particular date of transaction was not ascertainable otherwise readily and the said aspect of the matter was not admittedly looked into by the Authorities below before the appeal was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will be convinced that justice is based on the foundation of the truth. 3. Whether the Income Tax Appellate Tribunal, being a creature of Statute, Income Tax Act and being the final fact finding body and being a non- departmental appellate forum also has a similar mandate in law or not is the bed-rock of this appeal, in which we propose to interpret the powers of the Tribunal while dealing with the appeals under Section 254 of the Income Tax Act, 1961. 4. This appeal has been filed by the Appellant Assessee - M/s. Fidelity Business Services India Pvt. Ltd., Bengaluru, raising the following substantial questions of law for consideration by this Court:- Whether on the facts, in the circumstances and on the grounds and contentions urged: (i) the Tribunal was right in directing examination by the Assessing Officer of the fair market value of the shares bought back and application of Section 2(22)(e) of the Act if the consideration for buy back of shares was in excess of the fair market value of the shares? (ii) the Tribunal was correct in holding that the difference, if any, between the buy-back price and the fair market value of the shares would be deemed to be di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchase of its own shares by the Company in accordance with the provisions of Section77-A of the Companies Act, 1956 is chargeable to income tax as Distribution Dividend Tax (DDT) but since the transaction in the present case of buy-back of shares took place prior to 01/06/2013, such buy-back of the shares between the period 01/04/2000 to31/05/2013 would be taxed as 'Capital Gains' in the hands of the recipient in accordance with the provisions of Section 46-A of the Act and no such amount would be treated as dividend in view of exclusion part of Section 2 (22)(iv) of the Act. The Assessing Officer also held that the Capital Gains in the hands of the Holding Company (Mauritius Company) was also not chargeable to tax in India as per the provisions of Article 13(4) of the Indo-Mauritius Double Taxation Avoidance-Agreement (DTAA). 10. However, vide para 7 of the impugned Order of the learned Tribunal dated 22/02/2017 and by which para 7 only, the present Appellant Assessee is aggrieved and has filed the present appeal in this Court under Section 260-A of the Income Tax Act, 1961, the learned Tribunal observed that there is another aspect of this transaction of buy-back at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 2(22)(e) of the Act. There is no dispute regarding the other condition of the holding company having a voting power of not less than 10% as it holds the shares of the assessee to the extent of 99.99%. In case the buy back price is not based on the real valuation and it is artificially inflated by the parties then it is certainly a device for transfer of the reserves and surplus to the holding company by avoiding the payment of tax and therefore it will be treated as a colourable device. There are two aspects in this transaction- (i) It is a simple and plain transaction of buy back of shares without having any dispute of price then the same is beyond the scope of the provisions of Section 2(22) as well as Section 115QA of the Act and therefore cannot be treated as a colourable device. (ii) The second aspect is buy back price paid by the assessee to its wholly owned holding company does not represent true fair market price of the share of the assessee then it is nothing but a dubious method of avoiding the tax in the garb of buy back. Thus if the buy back price paid to the holding company is unrealistic and highly inflated then to that extent the transaction of pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Assessee deserves to be allowed answering the aforesaid substantial questions of law in favour of the Assessee and against the Revenue. 16. Mr. Pardiwala cited several case laws in support of his contentions which would be dealt with hereinafter. 17. On the contrary, the learned counsel for the Revenue, Mr.K.V. Aravind also relied upon several decisions and precedents and submitted that the learned Tribunal was perfectly justified and well within the parameters of the subject matter of the appeal involved before it and the powers of the Tribunal as defined under Section 254 of the Act to pass such Orders, as it thinks fit gives sufficiently wide powers to the Tribunal to remand the case back to the Assessing Authority for holding an inquiry into the fair market value of the shares bought back by the Assessee Company from its 99.99% Holding Company at an abnormally high price of ₹ 2,85,108/- per share as against the face value of ₹ 10/- per share which were probably issued during 2002 when the said Company started its business in India and which was nothing but an avoidance of tax payment in India by shifting of huge Reserves and Surpluses of the Indian Compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e order was passed], with a view to rectifying any mistake apparent from the record, amend any order passed by it under sub-section (1), and shall make such amendment if the mistake is brought to its notice by the assessee or the [Assessing] Officer: Provided that an amendment which has the effect of enhancing an assessment or reducing a refund or otherwise increasing the liability of the assessee, shall not be made under this sub section unless the Appellate Tribunal has given notice to the assessee of its intention to do so and has allowed the assessee a reasonable opportunity of being heard: Provided further that any application filed by the assessee in this sub-section on or after the 1st day of October, 1998 shall be accompanied by a fee of fifty rupees. 23. The burden of the argument of the learned Senior Counsel for the Appellant - Assessee, Mr. Percy Pardiwala was that the powers of the learned Tribunal are circumscribed and restricted by the words thereon , used in juxtaposition with the words as it thinks fit . 24. He submitted that the Tribunal cannot exceed the parameters or the grounds of the appeal raised by the aggrieved Appellant Assessee Company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t affording a specific opportunity of hearing to the assessee and that appears to be the reason for setting aside of that Order of the Tribunal by the High Court. 27. The learned counsel for the Assessee Company also relied upon the decision of the Division Bench of the Calcutta High Court in the case of Income Tax Officer v. R.L. Rajghoria [1979] 119 ITR 872. The Division Bench of the Calcutta High Court upholding the Order of the learned Single Judge in a Writ Petition in R.L. Rajghoria v. Income Tax Officer [1977] 107 ITR 34 7 held that the word 'thereon' appearing in Section 33(4) of the Income-Tax Act, 1922 akin to Section 254 (1) of the Income-Tax, 1961 restricts the jurisdiction of the Tribunal to the subject matter of the appeal and there is no doubt that the Tribunal has powers of remanding a case to the lower Appellate Authority or the Assessing Authority as the case may be, requiring him to hold further inquiry and to dispose of the case on the basis of such inquiry, but the jurisdiction of the Tribunal is confined only to the subject matter of the appeal. 28. The Tribunal by the impugned Order before the Calcutta High Court had held that for AY 1962 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure of forest products for sale. It directed the method of Accounting in relation to the valuation of the Closing Stock under a bona fide reason and claimed that the Closing Stock figures should be the one as determined by it for the purpose of income tax assessment. The ITO rejected the claim on the ground that the statutory Auditors of the Assessee had not agreed to the change in the method of Accounting. On second appeal, the Tribunal took a different stand and leaving out the aforesaid findings, upheld the additions on the ground that because of the change in the method of Accounting of the Valuation of Closing Stock in a particular year, different valuation would be shown for the same Stock which was held as the Opening Stock and remained as the Closing Stock and thus a sum equal to that difference would either be taxed twice or would escape taxation altogether and since the Tribunal thus proceeded on a new ground not taken by the lower Authorities or urged by the Department before the Tribunal, such a direction could not have been given by the learned Tribunal. 31. This judgment of Co-ordinate Bench of the Karnataka High Court to the extent of the Tribunal being bound to d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are not inclined to follow the said view of the Gujarat High Court. 35. On merits of the case, the learned counsel for the Assessee Company, Mr. Pardiwala drew our attention to the definition of Section 2(22) of the Act which defines the word 'Dividend' and the said definition to the extent relevant for his submissions, though we have indicated above that we are not deciding the question of taxability here, is quoted below in the following manner:- Section 2(22) dividend includes- (a) any distribution by a company of accumulated profits, whether capitalised or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company; (b) any distribution to its shareholders by a company of debentures, debenture-stock or deposit certificates in any form, whether with or without interest, and any distribution to its preference shareholders of shares by way of bonus, to the extent to which the company possesses accumulated profits, whether capitalised or not; (c) any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er in accordance with the provisions of section 77A of the Companies Act, 1956 ( 1 of 1956); (v) Any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether) or not there is a reduction of capital in the demerged company. 36. He also drew our attention to Section 46-A of the Act which provides for Levy of capital gains on purchase by the Company of its own shares or other specified securities . The said provision is also quoted below for ready reference:- Section 46A: Where a shareholder or a holder of other specified securities receives any consideration from any company for purchase of its own shares or other specified securities held by such shareholder or holder of other specified securities, then, subject to the provisions of section 48, the difference between the cost of acquisition and the value of consideration received by the shareholder or the holder of the other specified securities, as the case my be, shall be deemed to be the capital gains arising to such shareholder or the holder of other specified securities, as the case may be, in the year in which such shares or other specified secu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall be liable to pay additional income-tax at the rate of twenty per cent on the distributed income. Explanation For the purposes of this section,- (i) buy-back means purchase by a company of its own shares in accordance with the provisions of [any law for the time being in force relating to companies]; (ii) distributed income means the consideration paid by the company on buy-back of shares as reduced by the amount, which was received by the company for issue of such shares, determined in the manner as may be prescribed. Explanation (81a) : Omitted by the Finance Act, 2018 w.e.f.1-4-2018. Prior to its omission, Explanation read as under: Explanation :- For the purposes of this Chapter, the expression dividends shall have the same meaning as is given to 'dividend' in clause (22) of section 2 but shall not include sub-clause (e) thereof: 38. Section 77-A of the Companies Act, 1956 inserted by Act No.21 of 1999 with retrospective effect from 31/10/1998 providing for buy-back of its own shares by the Company to its relevant extent is also quoted below for ready reference, which essentially provides for the said enabling powers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to undertake but the payments made from the Reserves upto the extent permitted under Section 77-A of the Companies Act, 1956 could not be treated by any stretch of imagination as Loan or Advance to the Shareholder and which could be brought within the ambit of taxable Dividends under Section 2(22)(e) of the Act and therefore, the directions of the learned Tribunal for investigating into the fair market value of the said price for buy-back, so that the excess if any, could be treated as purported loan or advance by the Indian Company to the Mauritius Holding Company to be treated as 'Dividends' under Section 2(22)(e) of the Act, is too far fetched and in the absence of any such contention or ground raised before it, the learned Tribunal could not have made such directions in excess of its powers to pass such orders 'as it thinks fit'. The said words he urged do not give extra-ordinary or arbitrary powers to the learned Tribunal to go beyond the subject matter of the appeal itself. 40. He submitted that though the Tribunal had agreed with the Assessee that the said buy-back of shares and payments made by the Indian Company could not be treated as 'Dividend' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... instance and therefore, the Tribunal being the final Appellate body under the Act, has not only the power but a duty to see that all related aspects of the subject matter are properly inquired into by the Assessing Authority, to meet the ends of justice and interest of the Revenue. The Tribunal has made the remand of the case to the Assessing Authority with certain directions to inquire into the fair market value of the shares bought back by the Assessee Company and no valid exception can be taken to the same by the Assessee. 45. He further submitted that the Assessee Company should have nothing to fear or hide, if the shares have been bought back from its Holding Company at a fair market value and if such a buy-back has been undertaken by the Assessee Company in accordance with the provisions of the Companies Act and also the provisions of the Income Tax Act and on the conclusion of the fresh inquiry now to be undertaken in pursuance of para 7 of the Order of the Tribunal also, the Assessee Company may not be ultimately held liable to tax under the Act and therefore, it would be premature to curtail or shoot down such an inquiry in the matter under the remand directions of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs 'as it thinks fit'. 49. Similarly in the case of Kapurchand Shrimal v. Commissioner of Income Tax [1981] 131 ITR 451 (SC), the Hon'ble Supreme Court held that the Appellate Authority has the jurisdiction as well as duty to correct all errors in the proceedings under appeals and to issue, if necessary, appropriate directions to the Authorities against whose decisions the appeal is preferred, to dispose of the appeal or any part of the matter afresh unless forbidden from doing so by the statute. While rejecting the appeal of the Assessee, the Hon'ble Supreme Court directed the Tribunal to further direct the Income Tax Officer (ITO) to make fresh assessments after holding an enquiry under Section 25-A(1) of the Act regarding the partition of Hindu Undivided Family (HUF) corresponding to Section 171 of the Income Tax Act, 1961. 50. Mr. Aravind also relied upon the Division Bench decision of the Madras High Court in the case of Commissioner of Income Tax v. Indian Express (Madurai) (P.) Ltd., [1983] 140 ITR 705 (Madras) which inter alia, also relied upon the decision of the Apex Court in the case of Mahalakshmi Textile Mills Ltd. (supra). The Division Ben ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. The Primary purpose of the statue is to levy and collect the Income-tax. This is based on the cardinal principle, which has been incorporated as a veritable constitutional provision, that no tax can be levied or collected save under authority of law. The task of an appellate authority under the taxing statute, especially a non-departmental authority like the Tribunal, is to address its mind to the factual and legal basis of an assessment for the purpose of properly adjusting the taxpayer's liability to make it accord with the legal provisions governing his assessment. Since the be-all and end-all of the statutory provisions, especially those relating to the administration and management of income-tax, is to ascertain the taxpayer's liability correctly, to the last pie, if it were possible, the various provisions relating to appeal, second appeal, reference and the like can hardly be equated to a lis or dispute as arises between the two parties in a civil litigation. Although the income-tax statute makes the department or its officer's figure as parties in appeal proceedings, they are not in the strict sense what are called by American writers as parties to adversa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h orders on the appeal as it thinks fit', without adding any gloss of their own to the expression. In Nelliappan's case (supra), as well as Mahalakshmi Textile Mills' case (supra), the Supreme Court had even used phrases which are reminiscent of the language which English judges have used while describing a tax appeal. The Supreme Court observed that the Tribunal is not precluded from 'adjusting' the tax liabilities of the assessee in the light of its findings merely because the findings are inconsistent with the case pleaded by the assessee. English judges have regarded a tax appeal, not as a lis, but as a process of further adjustment of taxpayer liability vide Lord Hewart in Rex v. Special CIT [1935]20 TC 381 (CA); Greer L.J. in IRC v. Sneath [1932] 17 TC 149 (CA); Romer L.J. in the same case, Sneath (supra) and Lord Wright M.R. in Rex's case (supra). 23. In Rex's case (supra), Lord Hewart, CJ. laid down the nature of an appeal in tax matters as under: In my opinion, the argument of the learned Attorney-General is absolutely correct, and the argument upon the other side is manifestly based, as he said, upon a misapprehension that an app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sent case: An appellate authority under the taxing enactments sits in appeal, only in a manner of speaking. What it does functionally, is only to adjust the assessment of the appellant in accordance with the facts on the record and in accordance with the law laid down by the Legislature. An appeal is a continuation of the process of assessment, and an assessment is but another name for adjustment of the tax liability to accord with the taxable event in the particular taxpayer's case. There can be no analogy or parallel between a tax appeal and an appeal, say, in civil cases. A civil appeal, like a law suit in the Court of first instance out of which it arises, is really and truly an adversary proceeding, that is to say, a controversy or tussle over mutual rights and obligations between contesting litigants ranged against each other as opponents. A tax appeal is quite different. Even as the assessing authority is not the tax payers opponent, in the strictly procedural sense of the term, so too the appellate authority sitting in appeal over the assessing authority's order of assessment is not strictly an arbitral Tribunal deciding a contested issue between two litigants ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncement have been put by their Lordships in brackets. The use of the word possibly and putting these words in brackets shows that only an observation has been made and the effect of it cannot be taken that any law has been laid down. The word possibly is clearly indicative of it. ** ** ** In the light of the above discussion, our answer to the question is that the Tribunal was not justified in refusing to entertain the plea of the Department that the income from the lease rent of the cinema building was assessable under the head Income from other sources instead of under the head Income from house property on the grounds mentioned in the question referred to us. Our answer to the question is, therefore, in the negative, in favour of the Revenue and against the assessee. The parties are left to bear their own costs of the reference Other Relevant Case laws: 53. In the case of National Thermal Power Co.Ltd. v. Commissioner of Income-Tax [1998] 229 ITR 383 (SC), the Hon'ble Supreme Court following its earlier view in Jute Corporation of India Ltd. v. Commissioner of Income-Tax [1991] 187 ITR 688 (SC), held as under:- In the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Note is quoted below:- An appellate authority has all the powers which the original authority may have in deciding the question before it subject to the restrictions or limitations, if any, prescribed by the statutory provisions. In the absence of any statutory provision, the appellate authority is vested with all the plenary powers which the subordinate authority may have in the matter. There is no good reason to justify curtailment of the power of the Appellate Assistant Commissioner in entertaining an additional ground raised by the assessee in seeking modification of the order of assessment passed by the Income-tax Officer. 55. In the case of Hukumchand Mills Ltd. v. Commissioner of Income-Tax, Central, Bombay [1967] 63 ITR 232, the Hon'ble Supreme Court held that Rules 12 and 27 of the Appellate Tribunal Rules, 1946 are not exhaustive of the powers of the Tribunal and words pass such orders as the Tribunal thinks fit including all the powers (except possibly the power of enhancement). The Court itself expressed its doubt over the power of enhancement of the assessment or tax liability of the assessee in the said judgment which was later on explained by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It is not necessary that the question should be specifically raised before the AAC as a ground, but it has not been dealt with, in order to imply a decision on that point. The decision of the AAC is on the subject-matter of the appeal. The subject-matter of the appeal may be capable of challenge on various grounds. Some of which might have been raised and some not. Those raised might have been dealt with, or some of them might not have been dealt with, but a decision on the subject-matter is an implied decision on all matters which are raised and which could have been raised, whether dealt with or not. Merely because a ground has not been raised, though it could be raised in support of the relied sought in the appeal, it cannot be said that it cannot be raised before the Tribunal. Such a ground can be raised provided it falls within the contours of the subject-matter of the appeal before the AAC. 57. The Calcutta High Court in the case of Khaitan Paper and Industries Ltd. v. Commissioner of Income-Tax [2005] 273 ITR 234 held that Section 254(1) of the Act empowers the Tribunal to recall its previous Order where the Assessee could not be present at the time of hearin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed opinion that the directions of the learned Tribunal in para 7 for holding an inquiry into the matter by the Assessing Authority into the aspect of fair market price of the shares bought back by the Assessee from its major share holding Mauritius Holding Company is not beyond the jurisdiction of the learned Tribunal and the said remand direction of the Tribunal to hold such an enquiry not only falls within the ambit and scope of the subject matter of the appeal filed by the Assessee by which he claimed that the remittance by the Assessee Company to its Mauritius Holding Company could not be taxed as dividend, forgetting the aspects relating to Clause (e) of Section 2(22) of the Act and therefore the said directions were within the subject matter or the issues raised by the Assessee and making a direction to hold an enquiry into the aspect of fair market value of shares cannot be said to be beyond the subject matter of the appeal. The said directions cannot be said to be per se amounting to taxability of the said pay-out by the Appellant Assessee as 'Dividend' but the same would depend upon the nature of enquiry to be conducted by the Assessing Authority and findings arr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate Authority as is well settled that the powers of the Appellate Authorities are always co-extensive with that of the Assessing Authority and therefore what the Assessing Authority or the first Appellate Authority could do in the matter of assessment, the Tribunal cannot be said to have any lesser power to do so. 63. Section 254 of the Act, in our opinion, does not have any narrower scope to put fetters on the powers of the Tribunal as is sought to be canvassed before us that the Tribunal could not have exceeded the grounds raised before it by the Appellant Assessee. The Appellant may be either Assessee or Revenue before the Tribunal and the Tribunal has also powers to allow fresh ground of appeal or allow the other party to the appeal to file its cross objections and even suo motu pass appropriate Orders 'thereon' and therefore the words 'as it thinks fit' in our opinion, confer wide powers upon the Income Tax Appellate Tribunal to pass such Orders on the subject matter of appeal 'as it thinks fit' whether the issue is raised by either party to the appeal or not. The Tribunal is not bound to decide the appeal in a particular or narrower manner or limite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares on a particular date of transaction was not ascertainable otherwise readily and the said aspect of the matter was not admittedly looked into by the Authorities below before the appeal was decided by the learned Tribunal. Therefore, even though the some findings were given by the Tribunal in favour of the Assessee that the said pay-out for buy-back of the shares at an abnormally high price was not taxable under Section 115-O or Section 115-QA read with its Explanation and Section 2(22)(d) of the Act as per the contention raised by the Assessee before the Tribunal, the Tribunal was perfectly justified in directing an enquiry into the fair market price of the share of the Assessee Company which could have an implication of taxability under Section 2(22)(e) of the Act or otherwise. 69. However, since we are not deciding the question of taxability here, as the factual foundation for the same is not there and we are not expressing any opinion on the taxability on such findings upon an enquiry which may now be held by the Assessing Authority in pursuance of the directions of the learned Tribunal. Therefore that question is left open. 70. The Mauritius route of tax avoidance ..... 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