Itxa 387-16-O v. I.t.a

Priya Soparkar IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO.387 OF 2016 The Principal Commissioner of Income Tax-17 … AppellantV/s. Smt.Kayan Jamshid Pandole… Respondent --- Mr.P.C.Chhotaray for the Appellant.Mr.Porus Kaka, Senior Counsel with Mr.Divesh Chawla i/by Mr.Atul Jasani for the Respondent. --- CORAM : AKIL KURESHI AND M.S.SANKLECHA, JJ. DATE : NOVEMBER 19, 2018. P.C.:- 1.The Appeal is directed against the judgment of Income TaxAppellate Tribunal dated 14[th] January, 2015. 2.Following questions are presented for our consideration: “(a) Whether on the facts and in the circumstancesof the case and in law, the Hon'ble Income-taxAppellate Tribunal was justified in holding thatthe amount of Rs.2,78,46,000/- received by theassessee from Spirax Marshall (P) Ltd on sale ofits shares to the said company under the Schemeof Arrangement, which is treated as deemeddividend under section 2(22)(d) of the Act, isexempt under Section 10(34) of the Act?(b)Whether on the facts and in thecircumstances of the case and in law, in thispeculiar case, the assessee can claim exemptionunder section 10(34) of the Act when the company M/s Spirax Marshall (P) Ltd has not paid additionalincome-tax under section 115-O of the Act?” 3.Brief facts are as under: Respondent-assessee is an individual. The issue pertains tothe Assessment Year 2008-09. The assessee was holding sharesof one M/s Spirax Marshall Limited pursuant to a scheme ofarrangement formulated by the company and approved by theBombay High Court, the Company purchased shares held by theassessee and several other shareholders of the same group. Theincome received by the assessee under such arrangement wasoffered by the assessee by way of capital gain in the return filedfor the said assessment year. The Revenue was of the opinion thatthe income was in the nature of a deemed dividend in terms ofSection 2 (22)(d) of the Income Tax Act, 1961 (“the Act” forshort). 4.The issue eventually reached the Tribunal. The Tribunal bythe impugned judgment accepted the Revenue's contention andheld that the income was not in the nature of capital gain, but adeemed dividend. However, the Tribunal thereafter examined the 37 itxa 387-16-o question whether the dividend would be exempt from tax underSection 10(34) of the Act. The Tribunal referred to the saidprovision as also Section 115-O and held that the dividend wouldbe tax-free in the hands of the receiver. It is this views or theTribunal the Revenue has challenged the present appeal. 5.Learned counsel for the Revenue submitted that theTribunal committed an error in holding that the income wasexempt under Section 10(34) of the Act. He further submittedthat the company had not paid any tax on distribution of suchdividend as required under Section 115-O. The assessee, therefore,cannot claim exemption under Section 10(34) of the Act.Learned counsel agreed that against the judgment of the Tribunalin case of Kamal Imran Panju, Mumbai Vs. Department ofIncome Tax[1] who is an assessee similarly situated as the presentone, the Revenue has not preferred any appeal before the HighCourt. He, however, submitted that non-filing of the appeal bythe Revenue was on account of misinterpretation of the relevantprovisions. When court interpretation was adopted, the revenue Priya Soparkar 47 itxa 387-16-o formed a belief that the question requires further consideration.In this context, learned counsel relied on the judgment ofSupreme Court in the case of Commissioner of Income-TaxVs. Modipon Limited[1] to argue that merely because in casesome other assessee, Revenue has not preferred appeal, wouldnot preclude the revenue from filing appeal in later cases. Priya Soparkar 47 itxa 387-16-o formed a belief that the question requires further consideration.In this context, learned counsel relied on the judgment ofSupreme Court in the case of Commissioner of Income-TaxVs. Modipon Limited[1] to argue that merely because in casesome other assessee, Revenue has not preferred appeal, wouldnot preclude the revenue from filing appeal in later cases. 6.On the other hand, learned counsel Mr.Porus Kakaappearing for the assessee submitted that the income generatedby way of buy back of shares by the company was in the natureof capital gain. Assessee had offered the same to tax accordingly.If the Revenue contends that the income is in the nature ofdeemed dividend, the effect of Section 10(34) of the Act wouldautomatically follow. He further submitted that all other assesseeswho were shareholders of the same company and who formed acommon group had made declaration in the income tax returnsdeclaring the gain as a capital gain. The Revenue has notopposed these claims in their cases. The Revenue has isolatedthe cases of only two assessees for a differential treatment. He 57 itxa 387-16-o further pointed out that case of Kamal Imran Panju also aroseout of the same arrangement. In said case, the revenue chose notto pursue the issue beyond the level of the Tribunal. On thequestion of consistency, therefore, he argued that the revenuewould be precluded from pursuing the present appeal. 7.At the outset, we may notice that according to the assesseethe sale of shares did not result into any dividend and it was acapital gain. It was Revenue who had argued that income is notin the nature of capital gain but a deemed dividend. It would beopen for the assessee to persue the line that the Tribunal hadcommitted error in rejecting the assessee's contention in thisregard. Surely, however, the Revenue cannot change the standthat income was in the nature of deemed dividend. We have,therefore, examined the entire issue in this backdrop. 8.Section 2(22) of the Act as is well known includes rangeof situations under which payment by company to itsshareholders would amount to distribution of dividend. Clause(d) of Section 2(22) provides that any distribution to its shareholders by the company on reduction of capital to the extentto which the company possesses the accumulated profit whicharose after end of previous year, under certain circumstanceswould be included in the term "dividend". 9. Section 10(34) in turn exempts from payment of tax, anyincome by way of dividend referred to Section 115-O. As perSub-section (1) of Section 115-O notwithstanding anythingcontained in the provisions of Act and subject to the provisions ofthe said section in addition to the income tax chargeable inrespect of the total income of the domestic company, any amountdeclared, distributed or paid by such company by way of dividendon or after 1[st] April, 2003 would be chargeable to additionalincome tax referred to as tax on distributed profits. 10.The question would be whether the deemed dividendunder Section 2(22)(d) would fall within the purview of Sub-Section 1 of Section 115-O of the Act. However, the legislaturehas advisedly cleared this position by providing an explanationto Section 115-Q of the Act. Before we refer to the explanation, 77 itxa 387-16-o 10.The question would be whether the deemed dividendunder Section 2(22)(d) would fall within the purview of Sub-Section 1 of Section 115-O of the Act. However, the legislaturehas advisedly cleared this position by providing an explanationto Section 115-Q of the Act. Before we refer to the explanation, 77 itxa 387-16-o we may note that Section 115-Q provides that if any PrincipalOfficer of domestic company and a company does not pay taxon distributed profits in accordance with the provisions of Section115-O then he or it shall be deemed to be an assessee in defaultin respect of the amount of tax payable by him or it and all theprovisions of the Act for collection and recovery of the income taxshall apply. This provision thus makes a specific reference tounpaid distribution tax by a company. An explanation to Section115-Q which existed at the relevant time but which wasomitted by the Finance Act, 2018 and provided that for thepurposes of the said Chapter (Chapter XIID) which containsSection 115-O and 115-Q, the expression “dividend” shall have thesame meaning as it given to dividend under Sub-Section (22) ofSection 2, but shall not include sub-clause (e) thereof. 11.The plain effect of the explanation, therefore, would bethat even the deemed dividend under Section 2(22)(d) of the Actwould be covered from the purpose of Chapter XIID. In turn,therefore, such deemed dividend would be one which is referredto Section 115-O of the Act. Inescapable conclusion, therefore, 87 itxa 387-16-o would be that such dividend also would be exempt from tax inthe hands of the receiver in terms of Section 10(34) of the Act. 12.The contention of the counsel for the Revenue that thecompany having not paid such dividend distribution tax,exemption under Section 10(34) should be deprived to theassessee needs to be noted only for rejection. If a certain incomeis exempt at the hands of receiptant by virtue of statutoryprovision, unless a provision is made in the statute itself, suchexemption cannot be withdrawn only because the payer has notpaid tax. The statute has made specific provision for recovery orunpaid tax from the company. In the result, the tax appeal isdismissed. 13.For the view that we have taken, it is not necessary for usto elaborate on the assessee's contention of consistency and theRevenue's arguments that even if no appeal has been filed in thesimilar case, the present appeal would still be maintainable. (M.S.SANKLECHA,J.) (AKIL KURESHI,J.)