Commissioner of Income Tax vs Hede Consultancy Company (P.) Ltd.

F.M. Reis, J.—Heard Ms. Asha Dessai, learned counsel appearing for the appellant and Shri Y.V. Nadkarni, learned counsel appearing for the respondent. The above appeal was admitted by this Court on 26th Sept., 2006 on the following substantial question of law:

Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that the transaction of transferring the shares of the group companies at low price causing long-term capital loss and sale of shares of Mackinnon & Mackenzie Co. Ltd., at high price, making short-term capital gains, thereby setting off the short-term capital gains against the long-term capital loss, is a colourable device to evade tax?

Briefly, the facts of the case are that the respondent is a company engaged in a business of travel agency and consultancy. On 2nd Dec., 1996, the respondent filed the return of income declaring a total income of Rs. 20,38,500. On 19th March, 1999, the assessment was reopened under s. 147 of the IT Act, by issuing a notice under s. 148. The respondent filed a letter requesting that the return of income filed on 2nd Dec., 1996 be considered as the return under s. 148. The assessment was completed by order dt. 30th March, 2001 thereby disallowing the claim of the respondents of long-term capital loss of Rs. 1,17,87,564 and, consequently, a sum of Rs. 45,99,337 was brought to tax. The CIT(A) in the appeal preferred by the respondent, by order dt. 18th Oct., 2002, reversed the assessment order holding that the transfer of the shares is not a colourable transaction and hence the long-term capital loss is required to be set off against the short-term capital gains made by sale of shares of Mackinnon & Mackenzie Co. Ltd. The appeal preferred before the Tribunal, by order dt. 27th Jan., 2006, upheld the order of the CIT(A) holding that both the transactions of transfer of shares of its group companies as well as sale of shares of Mackinnon & Mackenzie Co. Ltd., are genuine transactions. Being aggrieved by the impugned order dt. 27th Jan., 2006, the appellants have preferred the present appeal under s. 260A of the IT Act.

Mrs. Asha Dessai, learned counsel appearing for the appellants, has taken us through the substantial question of law and pointed out that the authorities have misconstrued the transactions entered into by the respondents and has erroneously come to the conclusion that the transaction was not a colourable transaction. Learned counsel further pointed out that in order to set off the short-term capital gains against the losses, the shares of the group company were sold at a less price and, as such, it is clear that the transaction is a colourable one. The learned counsel has further pointed out that transfer of shares at farcical price to the group company managed by the same persons was made clearly with the sole purpose of evading the tax on the sale of shares of Mackinnon & Mackenzie Co. Ltd., and hence the AO was justified in applying the ratio laid down by the apex Court by holding that sale of shares to a sister concern was a colourable transaction to avoid the capital tax in the case of McDowell and Co. Ltd. Vs. Commercial Tax Officer, . The learned counsel has taken us through the judgment of the CIT(A) as well as the Tribunal and pointed out that the authorities have erred in holding that the appellants have failed to establish; the whole exercise on the part of the respondents is a device to avoid capital gain tax. The learned counsel further pointed out that the AO had rightly applied the ratio of McDowell & Co. Ltd. (supra) to come to the conclusion that selling of shares at Re. 0.10 paise per share to the group entities clearly points out that the transaction was made with a sole purpose of evading the taxable capital gains. The learned counsel has thereafter taken us through the order of the CIT(A) and pointed out that it has been wrongly held therein that the transactions were genuine transactions. Learned counsel, as such submits, that the substantial question of law framed by this Court is to be answered in favour of the appellants/Revenue.

On the other hand, Shri Nadkarni, learned counsel appearing for the respondents, disputed the said contention. Learned counsel pointed out that the appeal was admitted without giving any hearing to the respondents and, as such, it is open to the respondents to disclose that the substantial question of law framed by this Court does not arise at all. Learned counsel further pointed out that there is no challenge to the findings by the Tribunal below to the effect that the two transactions are genuine and the prices of the shares at which they have been sold are not inflated. Learned counsel further pointed out that once the said findings have not been challenged, the question of this Court coming to any contrary conclusion would not arise, as such, substantial question of law framed by this Court does not arise at all. Learned counsel further pointed out that there is no material on record to suggest that the transaction was colourable transaction and, as such, the Tribunal was justified to pass the impugned judgment. In support of his submissions, the learned counsel has relied upon the judgments of the apex Court in the case of Vijay Kumar Talwar Vs. Commissioner of Income Tax, Delhi, and in the case of M. Janardhana Rao Vs. Joint Commissioner of Income Tax, . The learned counsel as such submits that the above appeal be accordingly dismissed.

We have considered the submissions of the learned counsel and we have also gone through the records. The CIT(A) whilst disposing of the appeal preferred by the respondents, by order dt. 18th Oct., 2002, upon appreciating the material on record, has come to the conclusion that the price at which the respondents had purchased the shares and thereafter has sold the shares, is not in dispute. The learned CIT(A) has also noted that the transaction in respect of the sale of shares of Hede Navigation Ltd., resulting in long-term capital loss had preceded the transaction involving the short-term capital gains selling the shares of Mackinnon & Mackenzie Co. Ltd. The CIT(A) also noted that the loss transactions therefore cannot be said to have been influenced by the gain transactions. The CIT(A) has also noted that the AO has not disputed about any of the transactions that have been duly completed under the law nor that the consideration received was not the market price. It is further noted that the shares of Mackinnon & Mackenzie Co. Ltd. were sold at the price quoted at the stock exchange whereas low price of M/s. Hede Navigation Ltd.''s shares @ 10 paisa per share stands explained by the fact admitted by the AO that the said company was in red. The CIT(A) also noted that even in case the second transaction had not taken place, the long-term capital loss would have been accepted by the AO and the company would have been allowed to carry forward the said loss. The learned CIT(A) has also noted that where transactions were genuine, such long-term capital loss can be allowed to be set off. In the appeal preferred before the Tribunal, the said findings of facts arrived at by the CIT(A) have been upheld and it has been held that the learned CIT(A) has given cogent reasons for coming to the conclusion that both the transactions were genuine and that it is not the case of the Department that the shares of Hede Navigation Ltd., had a higher price than the price at which it has been sold. In the present appeal, we find that there is no challenge by the appellants to the findings of the Tribunal that the transactions were genuine and that the price at which the shares were sold were not inflated. In such circumstances, the contention of Shri Y.V. Nadkarni, learned counsel appearing for the respondents, that as the genuineness of the transactions has not been disputed by the appellants nor has been assailed in the present appeal, the question of contending that the transactions were colourable transactions (does not arise) has to be accepted. The findings of facts arrived at by the Tribunal cannot be reassessed by this Court in the present appeal. The apex Court in the said judgment in the case of M. Janardhana Rao vs. Jt. CIT (supra) has observed at paras 10 and 18 (sic-15) thus:

Some of the provisions of s. 260A are in pari materia with various sub-sections of s. 100, CPC. The provisions are ss. 260A(1), 260A(2)(c), 260A(3), 260A(4) of the Act corresponding to ss. 100(1), 100(3), 100(4) and 100(5) of CPC..........

An appeal under s. 260A can only be in respect of a ''substantial question of law''. The expression ''substantial question of law'' has not been defined anywhere in the statute. But it has acquired a definite connotation through various judicial pronouncements. In Sir Chunilal V. Mehta and Sons, Ltd. Vs. The Century Spinning and Manufacturing Co., Ltd., this Court laid down the following tests to determine whether a substantial question of law is involved. The tests are: (1) whether directly or indirectly it affects substantial rights of the parties, or (2) the question is of general public importance, or (3) whether it is an open question in the sense that the issue is not settled by pronouncement of this Court or Privy Council or by the Federal Court, or (4) the issue is not free from difficulty, and (5) it calls for a discussion for alternative view. There is no scope for interference by the High Court with a finding recorded when such finding could be treated to be a finding of fact.

In the judgment in the case of Vijay Kumar Talwar vs. CIT (supra), the apex Court has observed at para. 23 thus:

A finding of fact may give rise to a substantial question of law, inter alia, in the event the findings are based on no evidence and/or while arriving at the said finding, relevant admissible evidence has not been taken into consideration or inadmissible evidence has been taken into consideration or legal principles have not been applied in appreciating the evidence, or when the evidence has been misread. [See Madan Lal Vs. Mst. Gopi and Another, , Narendra Gopal Vidyarthi Vs. Rajat Vidyarthi, , Commissioner of Customs (Preventive) Vs. Vijay Dasharath Patel, , Metroark Ltd. Vs. Commissioner of Central Excise, Calcutta, and West Bengal Electricity Regulatory Commission Vs. C.E.S.C. Ltd. etc. etc., .

Considering that the findings of facts arrived at by the Tribunal and the CIT(A) are on the basis of material on record and there is nothing brought by the appellants to disclose any perversity in such findings, the question of any interference by this Court under s. 260A of the IT Act, would not arise.

We would also record the observations of the apex Court in the judgment in the case of Vodafone International Holdings B.V. Vs. Union of India (UOI) and Another, , wherein it has been observed at paras 68, 69, 70 and 72 thus:

The majority judgment in McDowell (supra) held that:

Tax planning may be legitimate provided it is within the framework of law.

In the latter part of para 45, it held that:

... Colourable devices cannot be (a) part of tax planning and it is wrong to encourage the belief that it is honourable to avoid payment of tax by resorting to dubious methods.

It is the obligation of every citizen to pay the taxes without resorting to subterfuges. The above observations should be read with para. 46 where the majority holds: [McDowell case (supra)]

On this aspect one of us, Chinnappa Reddy, J., has proposed a separate ... opinion with which we agree.

The words ''this aspect'' express the majority''s agreement with the judgment of Reddy, J. only in relation to tax evasion through the use of colourable devices and by resorting to dubious methods and subterfuges. Thus, it cannot be said that all tax planning is illegal/illegitimate/impermissible.

Moreover, Reddy, J. himself says that he agrees with the majority.

In the judgment of Reddy, J. in McDowell (supra) there are repeated references to schemes and devices in contradistinction to ''legitimate avoidance of tax liability'' (paras. 7-10, 17 and 18). In our view, although Chinnappa Reddy, J. makes a number of observations regarding the need to depart from Westminster and tax avoidance--these are clearly only in the context of artificial and colourable devices.

Reading McDowell (supra), in the manner indicated hereinabove, in cases of treaty shopping and/or tax avoidance, there is no conflict between McDowell (supra) and Azadi Bachao or between McDowell (supra) and Mathuram Agrawal (supra).

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The approach of both the corporate and tax laws, particularly in the matter of corporate taxation, generally is founded on the above-mentioned separate entity principle i.e. treat a company as a separate person. The IT Act, 1961, in the matter of corporate taxation, is founded on the principle of the independence of companies and other entities subject to income tax. Companies and other entities are viewed as economic entities with legal independence vis-a-vis their shareholders/participants. It is fairly well accepted that a subsidiary and its parent are totally distinct taxpayers. Consequently, the entities subject to income tax are taxed on profits derived by them on standalone basis, irrespective of their actual degree of economic independence and regardless of whether profits are reserved or distributed to the shareholders/participants. Furthermore, shareholders/participants that are subject to (personal or corporate) income tax, are generally taxed on profits derived in consideration of their shareholding/participations, such as capital gains. Now-a-days, it is fairly well-settled that for tax treaty purposes a subsidiary and its parent are also totally separate and distinct taxpayers.

Taking note of the said observations of the apex Court, we find that the Tribunal has not committed any error in coming to the conclusion that the transaction arrived at by the respondents was legitimate within the framework of law. As such, we find considering the findings of facts arrived at by the authorities below, that there is nothing on record to assume that the transaction was dubious and that the exercise was to avoid tax by a colourable device. The Tribunal found that the transactions were in accordance with law and have been duly implemented. Hence, we find that the substantial question of law framed by this Court is to be answered against the appellants. In view of the above, the above appeal stands dismissed.