Case Note & Summary
The appeal before the High Court of Karnataka arose from an order of the Income Tax Appellate Tribunal (ITAT) concerning the tax treatment of a buy-back of shares by M/s. Fidelity Business Services India Pvt. Ltd. (the Assessee), an Indian subsidiary company, from its Mauritius-based holding company. The Assessee had bought back 2,933 shares of face value Rs.10 each at a price of Rs.2,85,108 per share during the assessment year 2011-12, utilising reserves and surplus. The Assessing Officer treated the entire pay-out as a distribution of dividend under Section 115-O of the Income Tax Act, 1961, and demanded tax. The Dispute Resolution Panel confirmed this view. On appeal, the ITAT held that the transaction involved a buy-back of shares which, under Section 46A read with Section 2(22)(iv) and the Indo-Mauritius Double Taxation Avoidance Agreement, resulted in capital gains in the hands of the holding company, not taxable in India. However, the ITAT suo motu observed that the buy-back price was abnormally high compared to the face value and possibly the fair market value. It directed the Assessing Officer to examine whether the excess over fair market value could be treated as deemed dividend under Section 2(22)(e) of the Act, as it might represent a colourable device to transfer reserves and avoid tax. The Assessee challenged this direction before the High Court, contending that the ITAT exceeded its jurisdiction under Section 254 by ordering a fresh enquiry on an issue not raised by the parties and that could lead to an enhanced tax liability. The High Court reformulated the substantial question of law to address the scope of the ITAT’s powers under Section 254. The arguments of the appellant were presented by Senior Counsel Mr. Percy Pardiwala, but the text of the judgment cuts off during the submissions; the final reasoning and decision of the High Court are not available in the excerpt provided.
Headnote
A) Income Tax - Appellate Tribunal Powers - Section 254, Income Tax Act, 1961 - Fresh enquiry and enhancement of tax liability - The High Court re-formulated the substantial question of law as whether the ITAT can suo motu direct a fresh enquiry into aspects not previously investigated that may enhance tax liability. (Para 5)
B) Income Tax - Deemed Dividend - Section 2(22)(e), Income Tax Act, 1961 - Buy-back of shares between related parties - Payment in excess of fair market value can be treated as dividend if it is a colourable device for transfer of reserves without tax. The ITAT directed the Assessing Officer to examine the fair market value of shares bought back at inflated price. (Paras 7, 10-12)
Issue of Consideration
Whether the Income Tax Appellate Tribunal has power under Section 254 of the Income Tax Act, 1961, to give directions for fresh enquiry into the aspects of the subject matter of appeal filed before it either suo motu or on any grounds raised by either party to the appeal which have not been investigated or enquired into by the lower Authorities earlier and which may result in enhancement of tax liability of the assessee?
Final Decision
The excerpt does not contain the final judgment; it ends during the arguments. The High Court's decision is not provided in the text.
Law Points
- Power of ITAT under Section 254
- suo motu enquiry
- enhancement of tax liability
- deemed dividend under Section 2(22)(e)
- buy-back of shares
- fair market value
- colourable device
- base erosion and profit shifting
- arm's length price in related party transactions
- Section 115-O
- Section 115QA
- Section 46A
- Article 13(4) Indo-Mauritius DTAA
Case Details
2018 LawText (KAR) (07) 15
Justice Vineet Kothari, Justice S. Sujatha
Mr. Percy Pardiwala, Sr. Counsel along with Mrs. Tanmayee Rajkumar for appellant; Mr. K.V. Aravind for respondents
M/s. Fidelity Business Services India Pvt. Ltd.
Assistant Commissioner of Income-tax, Circle – 3(1)(1) and The Principal Commissioner of Income-tax-3
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Nature of Litigation
Appeal against order of Income Tax Appellate Tribunal directing fresh enquiry into fair market value of shares bought back by assessee from its holding company.
Remedy Sought
Assessee sought to quash the Tribunal's direction to the Assessing Officer to examine whether the buy-back price exceeded fair market value and if such excess could be taxed as deemed dividend under Section 2(22)(e).
Filing Reason
The Tribunal, while partly allowing the assessee's appeal against taxation of buy-back amount as dividend under Section 115-O, suo motu directed the AO to investigate the fair market value aspect, holding that the excess could be a colourable device to avoid tax, which the assessee contended was beyond the Tribunal's jurisdiction.
Previous Decisions
The Assessing Officer had taxed the buy-back amount as dividend under Section 115-O; the Dispute Resolution Panel upheld this; the ITAT held that the amount was not taxable as dividend but as capital gains in the hands of the recipient, but remanded the issue of fair market value excess to the AO.
Issues
Whether the Income Tax Appellate Tribunal has power under Section 254 to direct fresh enquiry on aspects not previously investigated, suo motu, which may enhance tax liability.
Submissions/Arguments
Appellant contended that the Tribunal exceeded its jurisdiction by opening an enquiry into fair market value of shares bought back in accordance with law, and that the transaction could not be taxed as dividend.
Judgment Excerpts
Whether the Income Tax Appellate Tribunal has power under Section 254 of the Income Tax Act, 1961, to give directions for fresh enquiry into the aspects of the subject matter of appeal filed before it either suo motu or on any grounds raised by either party to the appeal which have not been investigated or enquired into by the lower Authorities earlier and which may result in enhancement of tax liability of the assessee?
The payment in the name of buy back shares made by the assessee over and above the fair market price of the share of the assessee would not be treated as part of the purchase price because the transaction is between the two closely related parties and therefore the payment which is in excess of fair market price of the share of the assessee company would certainly fall in the ambit of Section 2(22)(e) of the Act.
Thus if the buy back price paid to the holding company is unrealistic and highly inflated then to that extent the transaction of payment to the holding company has been given a colour of payment towards buy back.
Hence this issue of examination of the fair market price of the share vis-à-vis the buy back price of the assessee is set aside to the record of the Assessing officer for adjudication as per law.
Procedural History
Assessment under Section 144C(5) per DRP directions; Assessee appealed to ITAT; ITAT order dated 22-02-2017 partly allowed appeal, holding buy-back amount not taxable as dividend but as capital gains, yet directed AO to examine fair market value excess under Section 2(22)(e); Assessee filed appeal before High Court under Section 260-A.
Acts & Sections
- Income Tax Act, 1961: 2(22)(d), 2(22)(e), 2(22)(iv), 46-A, 115-O, 115-QA, 144C(5), 254, 260-A
- Companies Act, 1956: 77-A
