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Income Tax Appellate Tribunal, MUMBAI BENCH “A”, MUMBAI
Before: SHRI G.S.PANNU & SHRI RAM LAL NEGI
ORDER PER G.S.PANNU,A.M:
The captioned appeal filed by the assessee pertaining to assessment year 2011-12 is directed against an order passed by PCIT-6, Mumbai dated 22/03/2016 under section 263 of the Income Tax Act, 1961 ( in short ‘the Act’), whereby the assessment order passed by the Assessing Officer under section 143(3) of the Act, dated 19/02/2014 has been held to be erroneous in so far as it is prejudicial to the interests of the Revenue within the meaning of section 263 of the Act .
In this appeal, assessee has raised the following Grounds of appeal:-
(Assessment Year 2011-12) “GROUND I -INVOKING PROVISIONS OF SECTION 263 OF THE INCOME-TAX ACT, 1961 ("THE ACT"): 1. On the facts and circumstances of the case and in law, the Learned Principal Commissioner of Income Tax - 6, Mumbai ("the Pr. CIT") erred in invoking the provisions of section 263 of the Act and thereby revising the order passed by the Income Tax Officer 6(1)(2), Mumbai ("the AO") u/s. 143(3) of the Act dated February 19,2014 ("the order") on the alleged ground that the order passed by the AO was erroneous and prejudicial to the interest of the revenue.
2. He failed to appreciate and ought to have held that: (a) The AO has examined the issue based on details filed by the Appellant during the course of assessment proceedings and taken a correct view by not making adjustment in respect of issue sought to be revised; (b) Neither the AO nor the CIT has the power to substitute the full value of sale consideration for transfer of shares in the facts of the present case; (c) Since the Appellant has not claimed any capital loss on account of sale of preference shares, question of order being prejudicial to the interest of revenue does not arise; (d) In absence of order being erroneous and also prejudicial to the interest of the revenue, order u/s.143(3) of the Act could not be revised on mere hypothetical/notional assumptions/presumptions.
3. The Appellant prays that it be held that the assessment order passed by the AO is neither erroneous nor prejudicial to the interest of the revenue and accordingly the action of the Pr. CIT in invoking provisions of section 263 of the Act and revising the order be held ab-initio and/ or otherwise void and bad-in-law.
GROUND II:- 1. On the facts and circumstances of the case and in law, the Pr. CIT erred in giving following directions to the AO: a) To call for names of all beneficiaries in the Trusts and the shareholders and directors in the two Private Limited Companies being corporate trustees; b) To call for all details submitted before the valuer for determining the valuation of preference shares; c) To examine the said Issue from the point of avoidance of payment of dividend distribution tax; d) To make a reference u/s. 142A of the Act, to arrive at the fair market value of the preference shares; e) To pass on the details, regarding correct and appropriate value of preference shares to the AO of Piramal International Pvt. Ltd. for taking remedial action as per law.
2. He failed to appreciate and ought to have held that, such directions are untenable, ultravires, beyond the jurisdiction and otherwise bad in law.
(Assessment Year 2011-12) 3. The Appellant therefore prays that the direction of the Pr. CIT in this regards should be quashed.
GROUND III: The Appellant craves leave to add to, amend and! or alter all or any of the above grounds.”
As the aforesaid Grounds of appeal reveal, the primary grievance of the assessee is that the Principal Commissioner of Income Tax (in short ‘the PCIT’) has erred in invoking the provisions of section 263 of the Act in order to hold the assessment order dated 19/2/2014(supra) as erroneous and prejudicial to the interests of the Revenue within the meaning of section 263 of the Act. Though various contentions have been raised by the appellant before us in support of the above stated Grounds of appeal, but a preliminary pertinent point has been raised, which is to effect that the mandatory pre- conditions prescribed in section 263 of the Act are not fulfilled in the present case and, therefore, the action of the PCIT is bereft of requisite jurisdiction. At the threshold, we proceed to discuss the aforesaid preliminary point made out by the appellant and in this context the relevant facts can be understood as follows.
3.1 The appellant is a company incorporated under the provisions of the Companies Act, 1956 and is, inter-alia, engaged in the business of finance and investment activity. For the assessment year under consideration, it filed a return of income on 30/09/2011 declaring ‘nil’ income and in the assessment finalized under section 143(3) of the Act dated 19/2/2014(supra), the returned income has been accepted. During the year under consideration, assessee had sold 1310 Preference shares of M/s.PHL Holdings Pvt.Ltd. ( in short ‘ PHLH Ltd.’) to M/s. Piramal International Pvt. Ltd. ( in short ‘ PIPL’) on 16/08/2010 for a total consideration of Rs.18.92 crores and long term capital loss on such sale
(Assessment Year 2011-12) was determined at Rs.150.12 crores. It emerges from record that the long term capital loss so determined by the assessee was not disturbed by the Assessing Officer and it is also clear that in the return of income filed, assessee neither claimed any adjustment against such loss nor it was carried forward for set-off in future years. In the context of such transaction, the PCIT has invoked his revisionary jurisdiction contained in section 263 of the Act. The invoking of section 263 of the Act by the PCIT is founded on two factors, namely, that Assessing Officer has not made relevant and meaningful enquiries; and, that the Assessing Officer acted in a mechanical fashion without application of mind and accepted the incorrect figure of loss arising on the sale of Preference shares of PHLH Ltd. On the aforesaid two grounds, the PCIT held the assessment order dated 19/02/2014(supra) to be erroneous and prejudicial to the interests of the Revenue and set-aside the same with a direction that it be re-framed. While setting-aside the assessment for re- framing ,the PCIT gave certain directions to the Assessing Officer which can be summarized as follows:- to call for the details submitted before the valuer for determining the valuation of Preference shares and also the names of the beneficiaries in the Trust and the shareholders; to examine the transaction from the point of view of avoidance of payment of dividend distribution tax; to make reference under section 142A of the Act for arriving at the fair-market value of the shares for the purpose of dividend distribution tax evaded by the company when it transferred the Preference shares to PIPL, a group-concern; and, to pass on the details of correct and appropriate valuation of Preference shares to the Assessing authority of PIPL for taking remedial action of bringing to tax the difference between fair-market value of shares vis-à-vis the value determined by the valuer.
3.2 The preliminary point raised by the appellant is that since the long term capital loss computed on sale of shares of PHLH Ltd. to PIPL, was neither claimed in the return and nor carried forward for set-off in future years, there was no occasion for any prejudice having been caused to the Revenue by the impugned assessment order. It has been pointed out by the Ld. Representative for the assessee that under these circumstances, even if, there is any revision in the amount of long term capital loss determined by the assessee, it would not effect the ultimate tax liability of the assessee as the loss has not been carried forward for set-off. Therefore, according to the appellant, in the absence of there being any loss of revenue, the revision of the assessment order is not justified having regard to the pre-requisites contained in section 263(1) of the Act. In this context, reliance has been placed on the following decisions:- 1. Malbar Industries Co. Ltd. v. CIT 243 ITR 83 (SC) 2. CIT v.. Gabriel India Ltd. - 203 ITR 108(Bom) 3. CIT v. D.G. Gopala Gowda 354 ITR 501(KAR) 4. CIT v. Smt. Minalben S. Parikh, 215 ITR 81(Guj) 5. CIT v. G.R. Thangamaligai [2003] 259 ITR 129 (Mad.)
On the other hand, on this aspect, Ld.CIT-DR appearing for the Revenue has merely relied upon the order of the PCIT in support of the case of the Revenue.
In the context of the preliminary point made by the appellant, it has to be appreciated that the phraseology of section 263(1) of the Act itself shows
(Assessment Year 2011-12) that in order to invoke section 263 of the Act, two conditions need to be satisfied, namely, that the order of the Assessing Officer sought to be revised is erroneous; and, that it is prejudicial to the interests of the Revenue. It is a well settled proposition that both the above conditions have to be cumulatively satisfied, meaning thereby that, even if, one of the condition is not fulfilled, the invoking of section 263 of the Act would have to fail. Before us, the preliminary point emphasized by the appellant is that there is no loss of revenue on account of the Assessing Officer having accepted the computation of long term capital loss on sale of Preference shares of PHLH Ltd. to PIPL as computed by the assessee. At this stage, we may bring-out in slight detail the manner in which the long term capital loss of Rs.150.12 crores has been computed. On 31/05/2008, assessee had purchased 1310 Preference shares of PHLH Ltd. from Alpex International Pvt. Ltd., a wholly owned subsidiary of the assessee, for a total consideration of Rs.145.00 crores, which was the book value of such shares in the Account books of Alpex International Pvt. Ltd. at the time of transfer. M/s. Alpex International Pvt. Ltd. acquired the shares on 29/08/2007 for a consideration of Rs.131.00 crores and the book value on the date of transfer to the assessee company stood at Rs.145.06 crores due to a debit of Rs.14.06 crores on account of interest cost. On the date of transfer of shares to the assessee company i.e. 31/05/2008, there was no capital gain tax in the hands of M/s. Alpex International Pvt. Ltd. on account of section 47(v) of the Act. Now, assessee sold the shares to PIPL on 16/08/2010 and the cost of acquisition was adopted at Rs.131.00 crores, which was the cost of acquisition to the previous owner of the capital asset and the indexed cost of acquisition was worked out at Rs.169.04 crores. Since the sale consideration received from PIPL was Rs.18.92 crores, the long term capital loss was (Assessment Year 2011-12) computed at Rs.150.12 crores. In the return of income filed, the aforesaid loss has neither been adjusted against any income and nor it has been carried forward for set-off in the future years. As per the appellant, even if, there is a variation in the amount of long term capital loss, it would certainly not be prejudicial to the interests of the Revenue within the meaning of section 263 of the Act because it would not result in any loss of tax. The proposition being canvassed by the assessee is quite justified and in fact, the Hon’ble Supreme Court in the case Malabar Industrial Co.(supra) held that if due to an erroneous order of the Assessing Officer the Department is losing tax lawfully payable by a person, it would certainly amount to an order which is prejudicial to the interests of the Revenue for the purposes of section 263 of the Act. We may examine the applicability of such proposition in the context of the facts before us.
In para 6.2 of his order, even the PCIT has noticed that “.......... though the said loss has not been set off and carried forward in the return of income, the impact of it otherwise, if the shares had been determined properly an appropriately resulting into gain.” The aforesaid observation of the CIT shows that he was quite aware that the condition of the assessment being prejudicial to the interests of the Revenue was required to be established before invoking section 263 of the Act. In the entire discussion contained in paras 6.3 to 6.16 of his order, the PCIT has brought out that the valuation made of the Preference shares was incorrect and further that the Assessing Officer did not make any enquiry regarding the sale of Preference share from one company to another company of the same group. Notably, the valuation report being referred to by the PCIT was the valuation report obtained by the purchaser of (Assessment Year 2011-12) the shares i.e. PIPL which was obtained by it for the purposes of section 56 of the Act r.w. Rule -11UA of the Income Tax Rules, 1962. Be that as it may, whether or not the valuation report obtained by PIPL, is correct or not does not distract from the fact that in the hands of the assessee seller, there is no dispute so far as the determination of long term capital loss is concerned. To put it differently, it is to be appreciated that any gain or loss arising from the transfer of capital asset is required to be computed by considering the full value of the consideration received or accruing as a result of the transfer of asset, which in the present case has not been found to be other than the amount stated by the assessee. Even if, it is made out that the shares have been sold by the assessee for a consideration, which is not in conformity with the fair-market value of the shares, there is no mechanism available under the Act to substitute the full value of consideration as disclosed by the assessee by any other value, for the purposes of computation of capital gains. In fact, there is not even a charge, much less any finding by the PCIT that the full value of consideration received or accruing to the assessee is in excess of the stated sale consideration, which has been considered for the purposes of computing long term capital loss. Chapter IV of the Act dealing with ‘Computation of income from capital gains’ does not contain any express provision, which empowers the Assessing Officer to substitute the full value of consideration as declared by the assessee except under the circumstances contained in 50C of the Act, which in any case, deal with transfer of capital asset being land or buildings or both, which is not the case herein. The aforesaid proposition does not require any further elaboration and in-fact the same is fully supported by the judgments of the Hon’ble Supreme Court in the case of K.P. Varghese v. ITO, 131 ITR 597 (SC), CIT v. George Henderson and Co.
(Assessment Year 2011-12) Ltd., , 66 ITR 622,(SC) and CIT v. Gillanders Arbuthnot & Co., 87 ITR 407(SC). Therefore, even if, for the sake of argument, the stand of the PCIT is accepted that the correct value of Preference shares has not been made and the correct value would have been higher than the stated sale consideration, even then, the resultant surplus could not have been brought to tax as per the scheme of computation of capital gains contained in Chapter –IV of the Act, qua the instant transaction of sale of Preference shares to PIPL. Thus, the PCIT has failed to establish any tax impact qua the error noted by him.
Another aspect of the impact on taxes which has been sought to be made out by the PCIT is to the effect that by not selling the preference shares at higher values, the assessee has avoided earning of higher profits which would have lead to higher accumulated profits which in turn would have enabled the assessee to declare dividends thereby resulting in payment of dividend distribution tax. In our considered opinion, the aforesaid perceived loss on account of dividend distribution tax made out by the PCIT is purely hypothetical and is purely in the realm of imponderableness. First of all, we have already observed that there is no case make out by the PCIT that any consideration has been received or accrued to the assessee over and above the stated consideration. Secondly, even if, it is assumed that the valuation of Preference shares is higher than the stated consideration and if the transfer was made at a higher figure, yet the presence of resultant profit (of course under hypothetical consideration) would not automatically result in distribution of dividend so as to generate dividend distribution tax, because distribution of dividend is an act purely within the domain and discretion of the Board of Directors of the assessee company. In sum and substance, in our
(Assessment Year 2011-12) view, the point made out by the PCIT is far fetched and is completely based on conjectures and surmises.
In view of the aforesaid discussion, in our view, no case has been made out by the PCIT to demonstrate that there was any prejudice caused to the Revenue or in other words, that there was any loss of taxes by the action of the Assessing Officer in accepting the computation of long term capital loss as made by the assessee. Factually speaking, the long term capital loss computed by the assessee has neither been claimed in the return of income and nor it has been carried forward for set-off against any income in the future years. Therefore, any variation in the computation of such long term capital loss accepted in the assessment order would not impact the tax liability in the hands of the assessee and, thus, one of the pre-conditions contained in section 263(1) of the Act is not fulfilled, namely, the requirement of the order being ‘prejudicial to the interests of the Revenue’. Thus, on this point itself we are inclined to uphold the plea of the assessee that the action of the PCIT is bereft of the requisite jurisdiction.
Before parting, we may also touch upon another pertinent point which also emerges with respect to the stand of the PCIT that the Assessing Officer has not made relevant and meaningful enquiries qua the computation of the impugned long term capital loss while finalizing the assessment. In this context, at the time of hearing, the Ld. Representative for the assessee has exhaustively referred to the Paper Book filed to point out that in the course of assessment proceedings the Assessing Officer had raised queries in connection with the transaction of sale of Preference shares of PIPL and, therefore, it
(Assessment Year 2011-12) could not be said that the requisite enquiries were not made by the Assessing Officer. Although, our attention has been drawn to various communications in this regard, copies of which have been placed in the Paper Book, but we may refer to a communication dated 31/01/2014 addressed to the Assessing Officer, copy of which has been placed at pages 97 to 123 of the Paper Book, which was in response to a notice issued by the Assessing Officer under section 142(1) of the Act dated 14/12/2013. In the said communication assessee explained the nature of transaction as under:- “ Piramal Polymer issued 1310 preference shares to Alpex Internation in FY 2007-08 at a premium of Rs.9.90 lakh as disclosed in form 2 attached herewith. Piramal Polymer thereafter merged with PHL Holdings. So as per scheme of amalgamation, Alpex International gets preference shares of PHL Holding of same cost.
Alpex International transferred these shares to Alpex Holdings, its 100% holding company on 31.05.2008. No capital gain was chargeable to tax under section 47(v) read with section 45 of the Income-Tax Act to Alpex International. Thus, the cost of these 1310 preference shares to Alpex Holdings is Rs.131 crores.
The capital loss out of this transaction is not claimed/carried forward in the computation of income, as already submitted vide submissions dated 20.01.2014.”
The assessee also enclosed the following documents:-
(a) Copy of valuation report dated 16.08.2010 by M. Malpani & CO., Chartered Accountants showing valuation of one preference share at Rs.144,377.35. (b) Copy of Form No.2,, Return of Allotment under Companies Act, of Piramal Polymers Ltd. and Copy of Bombay High Court approved scheme of amalgamation of Piramal Polymers Ltd. with PHL Holdings Pvt. Ltd. (earlier known as NPIL Holdings Pvt. Ltd.) dated 23.11.2007 to justify the cost of 1310 preference shares.
(Assessment Year 2011-12) 10. Subsequently, vide a notice under section 142(1) of the Act dated 04/02/2013, the Assessing Officer raised the following query in the context of the valuation report submitted by the assessee:- “5. Valuation Report of Shri Manish Malpani, CIT(A) of M/s. Malpani & Co., is very cryptic, subjective and does not provide any scientific basis as to who the fair value of preference shares of M/s. PHL Holding Ltd. held by you has been arrived at. Explanation as to why in absence of an authentic and objective assumptions and conjectures not be rejected?”
In response, vide communication dated 12/02/2014, a copy of which is placed at pages 125 to 126 of the Paper Book, assessee made a detailed reply.
By referring to the above, we are only trying to emphasize that the Assessing Officer made enquiries with respect to the transaction of sale of shares to PIPL not only with regard to the manner of sale but also with respect to the value at which the transaction was undertaken. In fact, specific queries have also been raised by the Assessing Officer with respect to the share holding pattern of the group concerns. All such enquiries and verification exercise carried out by the Assessing Officer does not find a mention in the assessment order. The moot point is, can the absence of discussion in the assessment order be enough to hold that the assessment order has been passed without making the relevant enquiries. Obviously, it is not the assessment order alone which is required to be examined but the entire record of the assessment proceedings ought to be examined to find out as to whether or not an issue has been appropriately considered by the Assessing Officer during the assessment proceedings. On this aspect, we are clearly supported by the ratio of the judgment of the Hon'ble Bombay High Court in the case of Gabriel India Ltd.(supra). Thus, on this aspect also, we find that the PCIT has erred in holding that the Assessing Officer has not made relevant and (Assessment Year 2011-12) meaningful enquiries and passed the assessment order without application of mind. As a matter of fact, having regard to the entire conspectus of facts and the material on record, in our considered opinion, the instant is a case where the PCIT has sought to substitute his view for that of the Assessing Officer without there being any material to establish that the assessment order has caused any prejudice to the interests of the Revenue in the eyes of law. Ostensibly, such a course of action by the PCIT is impermissible in law.
In view of aforesaid discussion, we hereby set-aside the order of the PCIT and the assessment order dated 19/02/2014 (supra) is hereby restored. Thus, assessee succeeds in its appeal.
In the result, appeal of the assessee is allowed.
Order pronounced in the open court on 29/12/2016