Mumbai v. M/S.zyma Laboratories Ltd

K.J. IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO.454 OF 2007 The Commissioner of Income-tax-10 ) Mumbai )..Appellant Versus M/s.Zyma Laboratories Ltd., )..Respondents ---- Mr.J.S.Salooja with Mr.P.S.Sahadevan for the appellant. Mrs.V.B.Patel for the respondents. ---- Coram : F.I.Rebello & R.S.Mohite,JJ Date : 27.2.2009. PC 1. Revenue has preferred this appeal on several questions. In order to answer the questions, a few relevant facts may be noted. Between 31.8.1999 to 31.12.1999 the assessee company sold shares of Lupin Laboratories Ltd., for a consideration of Rs.162,83,32,339/- and earned capital gain of Rs.157,88,42,065/-. At the same time the assessee claimed capital loss of Rs.142,39,01,640/- on account of reduction of value of share capital of shares held by the assessee of six private limited companies. The reduction of share value was pursuant to the scheme of amalgamation scheduled by the Company Court. The Company Court passed an order of amalgamation on 31.7.2000 but the scheme : 2 : was effective from 1.3.2000. The A.O. accepted the same. The Commissioner in exercise of his power under Section 263 cancelled the order of assesment with a direction to A.O. to reframe the assessment after allowing assessee proper opportunity. The C.I.T. noted that the assessee had bought shares of six groups companies at the face value of Rs.10/- on 28.2.2000. The value of the shares of the said companies on 29.2.2000 was determined as Nil as per the valuation report of C.C.Chokshi and Company dated October-2000. A.O. held, from this it was evident at the time of purchasing the shares at face value of companies which were subsidiaries, the assessee was aware that the value of shares was Nil. No prudent businessman as such would venture into acquisition of such shares and incur loss to the tune of Rs.142.30 crores without any dubious device and a deliberate intention to evade tax on capital gain. After further discussing the issue, the A.O. placed reliance on the judgment of the Supreme Court in McDowell Vs. CIT reported in 154 ITR 148 by observing that colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by dubious methods. For the said reasons cancelled the order by exercising power under section 263 of the Income Tax Act against the order of the A.O. passed under Section 143(3) dated 28.3.2003. It was also held that the sale does not : 3 : amount to a transfer. 2. Learned ITAT in the appeal preferred by the assessee considered the various contentions including the fact that scheme of amalgamation had been approved by the Company Court and the circumstaces which must exist for the Commissioner to exercise powers under Section 263 viz. 1) the order must be erroneous and 2) by virtue of the erroneous order, prejudice would be caused to the interest of the revenue. By placing reliance on the judgments of this Court and also of the Madras High Court and the Supreme Court, held that it was not within the jurisdiction of the authority exercising power under Section 263 to have interfered with the order of the A.O. The submission made on behalf of the revenue before the Tribunal that the entire arrangement was a fraudulent scheme arranged to avoid the payment of capital gain tax, was rejected. Before this Court also the submission is made that the device employed by the assessee is not a tax arrangement but was fraudulent in as much as the assessee was fully aware at the time of purchase of shares that the value of the subsidiary companies in terms of the Auditor’s report was Nil. 3. McDowell Company (supra) has been understood and judgments of this Court and also of the Madras High Court and the Supreme Court, held that it was not within the jurisdiction of the authority exercising power under Section 263 to have interfered with the order of the A.O. The submission made on behalf of the revenue before the Tribunal that the entire arrangement was a fraudulent scheme arranged to avoid the payment of capital gain tax, was rejected. Before this Court also the submission is made that the device employed by the assessee is not a tax arrangement but was fraudulent in as much as the assessee was fully aware at the time of purchase of shares that the value of the subsidiary companies in terms of the Auditor’s report was Nil. 3. McDowell Company (supra) has been understood and explained by the Supreme Court in Union of India V/s.Azadi Bachao Andolan & Anr. reported in 263 ITR : 4 : 706. In the instant case there is no dispute that factually the assessee has purchased shares of the subsidiary companies. It is not disputed that the scheme of amalgamation of the subsidiary companies was approved by the Company Court. A scheme of amalgamation has to meet the requirement of the Companies Act. It is only after the Company Court is satisfied that the scheme as propounded meet the requirements that the Court sanctions the scheme after hearing the Registrar of Companies and the Official Liquidator. Once the scheme is sanctioned by Company Court it is not open to another department of the Government to contend that the scheme was fraudulent more so when the scheme has the approval of the department of the Government itself viz. Ministry of Company Affairs as also Official Liquidator to the Company Court. The only challenge therefore, is devoid of merit. In our opinion, there is no merit in this appeal which is accordingly, dismissed. (R.S.Mohite,J) (F.I.Rebello,J)