M/S MANGALA INVESTMENTS LTD.,,MANIPAL vs. DCIT, UDUPI

IN THE INCOME TAX APPELLATE TRIBUNAL CIRCUIT BENCH AT MANGALURU BEFORE SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER AND SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER 1. ITA No.1322/Bang/2012 (Assessment year: 1996-97) 2. ITA No.1323/Bang/2012 (Assessment year: 1996-97) 3. ITA No.1324/Bang/2012 (Assessment year: 1996-97) 1. M/s.Mangala Investments Ltd. Syndicate House, Manipal-576 104. PAN: AAACM 8838 R 2. M/s.Sea Rock Investments Ltd., Syndicate House, Manipal-576104. PAN:AACCS 4700 N 3. M/s.Chitrakala Investments Trade & Business Finance Ltd. Syndicate House, Manipal-576104. PAN: AAACC 7246 H ... Appellant Vs. Deputy Commissioner of Income-tax, Circle-1, Udupi. ... Respondent Assessees by : Ms. Prathibha, Advocate. Respondent : Dr.Shakir Hussain, CIT(A) Date of hearing : 30/01/2017 Date of pronouncement : 01/05/2017 O R D E R Per INTURI RAMA RAO, AM : These are appeals filed by three assessees against identical orders of the CIT(A), Mysore, for the assessment year 1996-97.

ITA Nos.1322 to 1324/Bang/2012 Page 2 of 14 2. Since in all these appeals common issues are involved, we propose to dispose of the same vide this consolidated order for the sake of convenience.

3.1 Brief facts of the case are set out by AO in the impugned assessment order, which are extracted below:

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3.2 Thus these matters were restored to the file of the AO with a direction to examine the issue from the perspective whether shares were held by the assessee-company as investment or stock-in-trade and in order to examine whether consideration is capable of being determined. During the course of remand proceedings before the AO, the assessee took an argument for the first time that shares were deposited in Escrow Account to facilitate exchange of shares in terms of the Arbitration Award. Thus, according to the assessee-company there was no transfer of shares involved. As regards the issues set aside by the Hon’ble Supreme Court and the Hon’ble High Court, it is admitted that the said shares were held by the

ITA Nos.1322 to 1324/Bang/2012 Page 6 of 14 assessee-company as investment and therefore, any profit or loss arising out of transfer of such shares is clearly taxable under the head ‘capital gains’.

3.3 As regards the issue of determination of consideration, it is undisputed fact that in terms of award given by late C.Subramanian, consideration is determined at the rate of fRs.220 per share. Thus, issues on which remand was ordered by the Hon’ble Supreme Court have attained finality. But the assessee-company, for the first time took an argument during the course of remand proceedings that since shares were held in Escrow account, there is no transfer involved thereby attracting tax on capital gains. This was neither an issue in the original assessment order nor before the appellate authorities in the first round of proceedings. In the original assessment proceedings, the issue of transfer was contested only on the ground that it was a family settlement and therefore does not involve transfer within realm and meaning of provisions of section 2(47) of the Act. The issue that the shares were shares were deposited in Escrow account not involving transfer of shares was not raised by the assessee before the AO in the original assessment proceedings. The issue that there was no transfer involved on account of settlement of family disputes, came to be rejected by the Hon’ble High Court on revenue appeal against Tribunal order which held the issue in favour of the assessee. The assessee-company has chosen not to agitate this issue before the Hon’ble Supreme Court. Thus this issue was allowed to attain finality by the

ITA Nos.1322 to 1324/Bang/2012 Page 7 of 14 assessee-company. The terms of remand by the Hon’ble Supreme Court as well as the Hon’ble High Court are very clear that the only issue to be adjudicated by the AO was on the issue of determination of the consideration and the subject shares are held by the assessee-company as stock-in-trade or investment. The assessee-company has chosen not to agitate these two issues before the AO in the second round of proceedings, allowing the issues to attain the finality.

3.4 Thus it is clear that the issue on which remand was ordered by the appellate authority viz., Hon‘ble Supreme Court or the Hon’ble High Court was not kept alive now by the assessee- company. The issue that there is no transfer of shares was involved as the shares were deposited in Escrow account, cannot be raised for the first time in the remand proceedings. Even if the said order of the appellate authority to be read as open remand, it is not open to the AO to adjudicate a new issue which the appellate authorities viz. Hon’ble Supreme Court itself could not have done. It is trite law that in the remand proceedings, the AO is bound to go strictly by the directions of the appellate authority. This principle was laid down by the Hon’ble Supreme Court in the case of CIT vs. Rai Bhadur Hardutroy Motilal Chamraia (66 ITR 443) at page 450 and Hon’ble Gujarat High Court in the case of Saheli Synthetics (P) Ltd. Vs. CIT (302 ITR 126). The relevant portion of the judgment in the case of Rai Bhadur Hardutroy Motilal Chamraia (supra) is extracted below:

ITA Nos.1322 to 1324/Bang/2012 Page 8 of 14 "The principle that emerges as a result of the authorities of this court is that the Appellate Assistant Commissioner has no jurisdiction, under section 31(3) of the Act, to assess a source of income which has not been processed by the Income-tax Officer and which is not disclosed either in the return filed by the assessee or in the assessment order, and, therefore, the Appellate Assistant Commissioner cannot travel beyond the subject-matter of the assessment. In other words, the power of enhancement under section 31(3) of the Act is restricted to the subject-matter of assessment or the source of income which have been considered expressly or by clear implication by the Income-tax Officer from the point of view of the taxability of the assessee. It was argued by Mr. Viswanatha Iyer on behalf of the appellant that, by applying the principle to the present case, the Appellate Assistant Commissioner had jurisdiction to enhance the quantum of income of the assessee. It was pointed out that the fact of the alleged transfer of Rs. 5,85,000 to Forbesganj branch was noted by the Income-tax Officer and also the fact that it did not reach Forbesganj on the same day. So, it was argued that in the appeal the Appellate Assistant Commissioner had jurisdiction to deal with the question of the taxability of the amount of Rs. 5,85,000 and to hold that it was taxable as undisclosed profits in the hands of the assessee. We are unable to accept the argument put forward on behalf of the appellant as correct. It is true that the Income-tax Officer has referred to the remittance of Rs. 5,85,000 from the Calcutta branch ; but the Income-tax Officer considered the despatch of this amount only with a view to test the genuineness of the entries relating to Rs. 4,30,000 in the books of the Forbesganj branch. It is manifest that the Income-tax Officer did not consider the remittance of Rs. 5,85,000 in the process of assessment from the point of view of its taxability. It is also manifest that the Appellate Assistant Commissioner has considered the amount of remittance of Rs. 5,85,000 from a different aspect, namely, the point of view of its taxability. But since the Income-tax Officer has not applied his mind to the question of taxability or non-taxability of the amount of Rs. 5,85,000 the Appellate Assistant Commissioner had no jurisdiction in the circumstances of the present case to enhance the taxable income of the assessee on the basis of this amount of Rs. 5,85,000 or of any portion thereof. As we have already stated, it is not open to the Appellate Assistant Commissioner to travel outside the record, i.e., the return made by the assessee or the assessment order of the Income-tax Officer with a view to find out new sources of income and the power of enhancement under section 31(3) of the Act is restricted to the sources of income which have been the subject- matter of consideration by the Income-tax Officer from the point of view of taxability. In this context, 'consideration' does not mean 'incidental' or 'collateral' examination of any matter by the Income-tax Officer in the process of assessment. There must be

ITA Nos.1322 to 1324/Bang/2012 Page 9 of 14 something in the assessment order to show that the Income-tax Officer applied his mind to the particular subject-matter or the particular source of income with a view to its taxability or to its non-taxability and not to any incidental connection. In the present case, it is manifest that the Income-tax Officer has not considered the entry of Rs. 5,85,000 from the point view of its taxability and, therefore, the Appellate Assistant Commissioner had no jurisdiction, in an appeal under section 31 of the Act, to enhance the assessment."

3.5 An identical issue had come up for consideration before the Hon’ble Madras High Court in the case of in the case of Raja D.V. Seetharamayya Bahadur vs. Sixth Wealth-tax Officer reported in 213 ITR 502, wherein the Hon’ble High Court held as under:

“As regards the period from 1970-71 to 1975-76 which are covered by the appellate orders noticed earlier, the direction of the appellate authority was to get the agricultural properties valued under section 16A and nothing more. As regards the house property in the city of Madras, there was no direction to get them revalued under section 16A of the Act. The appellate orders for the years 1970-71 and 1972-73 had only directed the Assessing Officer to "go into the question as to the extent of the land owned by the assessee at No. 64, Luz Church Road, Mylapore, Madras-4, exclude therefrom the extent of the lands that had been settled by deeds dated March 25, 1970, on his daughters and include in the total net wealth of the assessee, the remaining portion of the land only." There is no direction in any other appellate order in relation to the property in the city of Madras. The appellate order in relation to the years 1970-71 to 1972-73 directs assessment to be "redone". The appellate order for 1974-75 and 1975-76 follows this order. The appellate order for 1973-74, however, directs the officer to make "a fresh assessment" in the manner stated in the said order. The question requiring consideration of this court is whether these directions empower the Assessing Officer to reopen the entire assessment and even revalue properties not ordered to be revalued by the appellate authority. Considering the finality attached to an assessment order and the Assessing Officer having become functus officio in relation thereto, this court is of the view that the jurisdiction of the Assessing Officer has to be found in the remand order itself and the officer cannot ignore or act contrary

ITA Nos.1322 to 1324/Bang/2012 Page 10 of 14 to or in excess of the said order. In ITO v. Ryam Sugar Co. Ltd. [1976] 105 ITR 819 (Cal), a similar situation arose in relation to an assessment made under the Income-tax Act of which only one part was challenged in appeal. The appeal having been allowed, the question arose as to whether the whole matter was wide open before the Income-tax Officer or his jurisdiction was limited to the specific question considered in appeal. The court held that the assessment order passed by the Income-tax Officer had merged in the order of the Appellate Assistant Commissioner and hence the Income-tax Officer could not decide the matter afresh. In other words, the court took the view that the jurisdiction of the Income-tax Officer after the appellate order was confined' to passing the order with a view to give effect to the appellate order. The matter received the consideration of the said court again in Kutihar Jute Mills (P.) Ltd. v. CAT [1979] 120 ITR 861 (Cal) and it was held that where the entire assessment was not set aside by the appellate authority and only a part was set aside, against which an appeal was preferred and where there is specific direction to reconsider that part only, the Income-tax Officer would not be entitled to reopen the entire assessment. According to the court, the appellate order should have been read as a whole and in proper context and if it was so read, the fresh assessment could not be made. Their Lordships also referred to the decision of the Allahabad High Court in J.K. Cotton Spg. and Wvg. Mills Co. Ltd. v. CIT [1963] 47 ITR 906 and distinguished the same by holding that in the said case the appellate authority had set aside the whole assessment and for that reason the Income-tax Officer had a free hand in the matter. This case, therefore, is an authority for the proposition that the jurisdiction of the Assessing Officer after remand would depend upon the terms of the remand order and he would not be entitled to go beyond the same. The same view has been followed in Surrendra Overseas Ltd. v. CIT [1979] 120 ITR 872(Cal), wherein it was clearly stated that "Where the order of the Appellate Assistant Commissioner is specific it is not open to the Income-tax Officer to conduct a fresh enquiry beyond the said directions and to proceed to make a fresh assessment without any reference to the earlier assessment." This decision has been followed by the Allahabad High Court in Cawnpore Chemical Works P. Ltd. (No. 1) v. CIT [1992] 197 ITR 296 by holding that the Income-tax Officer was bound by the directions given by the Appellate Assistant Commissioner while setting aside the original assessment and hence could not go beyond the same. The Orissa High Court has also taken this view in CIT v. S.V. Divakar [1993]201 ITR 914 by holding that where an assessment is set aside without imposing any restrictions or limitations, the Assessing Officer has the same power for making the assessment afresh as he could have originally done. In such a case, all matters and aspects that have relevance can be

ITA Nos.1322 to 1324/Bang/2012 Page 11 of 14 considered. A difficulty arises when the assessment has been set aside with a specific direction and an Assessing Officer stumbles upon a new source which was not noticed by him while making the original assessment. Even then the Assessing Officer could not reopen the entire assessment. The court held that: "the scope of fresh assessment following the appellate order depends on the subject-matter of the appeal and the appellate order read as a whole in its proper context". Learned standing counsel for the Department, however, relied on Sri Gajalakshmi Ginning Factory Ltd. v. CIT [1952] 22 ITR 502 (Mad) to submit that the jurisdiction of the Income-tax Officer after remand is as wide as the original jurisdiction and is in no way limited by the remand order. According to learned counsel, this decision lays down that the powers of the appellate court under the Code of Civil Procedure are not as wide as the powers of the Appellate Assistant Commissioner and, therefore, the analogy between the two would not be proper. There are no doubt observations in this judgment to that effect, but those observations do not take into consideration Order 41, rule 33, Civil Procedure Code, which confer almost unlimited jurisdiction on the appellate court under the Code of Civil Procedure. In spite of it, the jurisdiction of the appellate authority under the Code of Civil Procedure is not of any relevance in such cases. This judgment does not deal with the power of the assessing authority after remand but deals with the power of the Appellate Assistant Commissioner which have been held to be wider. This case is, therefore, not of any help to learned counsel. The decision in CIT v. Seth Manicklal Fomra [1975] 99 ITR 470 (Mad) has to be read as a whole and in the context of the question involved for consideration of the court. It is well-known that a decision takes its colour from the questions involved in the case in which it is rendered and for that reason it is not permissible to pick up a sentence from the judgment to give it a new shape or colour. It was a case where the Appellate Assistant Commissioner had, while setting aside the assessment, directed the Income-tax Officer to make a fresh assessment. The Income-tax Officer, therefore, made the fresh assessment exercising his original jurisdiction and included income of the assessee from sources not considered in the original assessment. This judgment is, therefore, not an authority for the proposition that the Income-tax Officer could go beyond the appellate order. The Allahabad High Court inCawnpore Chemical Works P. Ltd. (No. 1) v. CIT [1992] 197 ITR 296 has considered this aspect of the matter and brought out the said distinction. Even this court has in CIT v. S.K. Ulagammal Add [1987] 166 ITR 210 explained this case by observing that "the decision cited by learned counsel is also not an authority for the position that while setting aside the entire order of the Income-tax Officer, the Appellate Assistant Commissioner cannot restrict the enquiry or the points to be

ITA Nos.1322 to 1324/Bang/2012 Page 12 of 14 considered". Under the circumstances, the decision cannot help the Revenue in any manner. Learned counsel for the Department also referred to Abdul Sathar Haji Moosa Sait Dharmastapanam v. CIT [1988] 169 ITR 84 (Ker) to support the aforesaid submission. A perusal of the said judgment at page 91 would indicate that the appellate order did not contain any word limiting the jurisdiction of the Wealth-tax Officer. According to the court, "his direction is in the widest terms and cannot be read in any manner to restrict the powers of the Wealth-tax Officer". This would, therefore, indicate that the court was not considering a case of the type where the appellate order had limited the scope of enquiry and the Department was claiming the right to overreach the said decision. Yet another decision relied on is Kundanlal Maru v. CIT [1982] 135 ITR 84 (MP). This was also a case where the Appellate Assistant Commissioner while setting aside the assessment had directed the Income-tax Officer "to apply his mind afresh to the problem and process the whole matter after giving sufficient opportunity to the assessee and pass a fresh assessment order according to law". A fair reading of the whole judgment would indicate that the decision in the case turned on the interpretation of the order of the Appellate Assistant Commissioner. The court, after interpreting the said order, held that "the order of the Appellate Assistant Commissioner in unequivocal terms without leaving any ray of doubt makes it transparently clear that the order of assessment of the Income-tax Officer was set aside and the whole matter, without any limitation, was at large before the Income-tax Officer." These judgments, would, in the opinion of this court, support the submission of learned counsel for the petitioners-assessees that the Assessing Officer could not go beyond the remand order and was bound to act according to the directions contained therein. If the facts of these petitions are considered in the context of the aforesaid principle of law, it would be clear that the Assessing Officer has gone beyond the remand order and has treated the whole matter as at large before him. This was not intended by the remand order passed by the appellate authority. He has thus reopened even the matter in relation to the years where the assessment orders had not been challenged in appeal and had become final. There is, therefore, a patent illegality in the impugned notices as also the assessment orders justifying issuance of a writ of certiorari in the matter.

ITA Nos.1322 to 1324/Bang/2012 Page 13 of 14 applicable to the assessee. That is the assessee is precluded from raising any new issues in the remand proceedings.

4.1 The Hon’ble Gujarat High Court, in the case of DCIT vs. Surat Electricity Company (337 ITR 271), after quoting the decisions cited supra, held that set aside of assessment made by the appellate authority is always in accordance with directions given by the appellate authority for making fresh assessment and cannot travel beyond the directions of the appellate authority which set aside the assessment. Fresh assessment order pursuant to remand directions can be passed only in accordance with directions given by the appellate authority. Thus, the issue raised by the assessee-company in the present appeal does not emanate from the directions of the appellate authorities which set aside the assessment to the AO. Thus the issue raised by the assessee-company that there is no transfer of shares involved as the shares were deposited in Escrow account, is not subject matter of first round of proceedings at any stage. In the light of the principle enunciated in the cases cited supra, the scope of assessment proceedings cannot be widened in the remand proceedings without mandate of the terms of remand ordered by the appellate authority.

4.2 In any event, we are of the considered opinion that when the shares were deposited in Escrow account in terms of the Arbitration Award, the assessee-company ceased to have control or possession of the shares thereby alienating the ownership of

ITA Nos.1322 to 1324/Bang/2012 Page 14 of 14 such shares. The alienation of interest, in the property, amounts to transfer within the meaning of the provisions of section 2(47) of the Act.

Order pronounced in the open court on 1st May, 2017 sd/- sd/- (SUDHANSHU SRIVASTAVA) (INTURI RAMA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER Place: Bengaluru. Date: 01/05/2017 Srinivasulu, Sr. PS

Copy to: 1) Appellant 2) Respondent 3) CIT(A) 4) CIT, 5) DR ITAT, Bangalore, 6) Guard file Assistant Registrar Income-tax Appellate Tribunal Bangalore