DIRECT TAXATION
RECENT CASE LAWS
Transaction in bogus shares involves a colorable device
Arihant Kumar Jain (ITA No. 5342/Del./2018) (Delhi ITAT)
- The taxpayer, an individual, earned long term capital gains (LTCG) from the sale of certain shares of Kappac Pharma Ltd. and claimed exemption under Section 10(38) of the Income-tax Act, 1961 (IT Act). These shares were purchased from a private party in cash and not from a recognized stock exchange and were subsequently declared under the Income-tax Disclosure Scheme-2016 (IDS).
- The aforesaid transactions were effectuated when there was a country-wide investigation conducted to unearth the organized racket of generating bogus LTCG from 2010 to 2014 under which numerous cases were detected. Individuals who were beneficiaries of such bogus entries of LTCG amounting to several crores were identified. The Chairman & Managing Director and other Directors of Kappac Pharma Ltd. had also on oath agreed that they provided bogus LTCG.
- The Assessing Officer (AO) was of the opinion that the sale consideration was received by the taxpayer from sale of penny stock where actual source of credit was unaccounted cash. The AO thus, treated the credit in the bank account of the taxpayer as unexplained income under Section 68. On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] deleted the additions made by the AO. Aggrieved, the Revenue preferred an appeal before the Income-tax Appellate Tribunal (ITAT), Delhi.
- The ITAT observed that the Securities and Exchange Board of India (SEBI) had suspended the dealing in shares of Kappac Pharma Ltd. and had also taken action against its promoters and stockbrokers. The ITAT also observed that when a company is consistently incurring a loss, no man of ordinary prudence would invest in such a company and hence the entire transaction was held to be ingenuine.
- The ITAT relied upon the ruling of Hon'ble Supreme Court in case of CIT vs. Durga Prasad More [(1972) 82 ITR 540] wherein it was held that Revenue should look into the surrounding circumstances to find out the reality of a transaction.
- In view of the above, the ITAT held that the transaction entered by the taxpayer failed to satisfy the test of human probabilities. Thus, the disallowance made by the AO on account of exempt LTCG claimed by the assessee under Section 10(38) of the IT Act was upheld.
ELP Comments:
Tax planning will be considered legitimate if it is within the four corners of law. If a transaction which on careful examination reveals ingenuity, then it shall be regarded as a colourable device and result in addition to income or disallowance of expense. With the introduction of General Anti Avoidance Rules, it would be interesting to see how these rules are applied to transactions which result in avoidance of taxes.
Rejects writ petition involving FEMA violations as alternate remedy was available
Greenstar Fertilizers Limited (W.P.No.23219 of 2021 and WMP.No.24518 of 2021) (Madras HC)
- The taxpayer, a company was subject to scrutiny assessment wherein an inter-corporate deposit (ICD) received from a non-resident entity was added to the taxpayer's income and payment for high sea sales in Indian currency was treated as external commercial borrowings.
- The taxpayer filed a writ petition before the Hon'ble Madras High Court pleading violation of principles of natural justice and contending that the additions involved matters relating to Foreign Exchange Management Act, 1999 (FEMA) and that the AO has exceeded its jurisdiction. The Revenue contended that the additions were on account of merit and hence did not warrant interference in a writ jurisdiction. Further, Revenue proceeded based on the material on record, and hence it did not exceed its jurisdiction.
- The Hon'ble Madras High Court dealt with all the issues raised in the writ petition and arrived at the conclusion that it is not a fit case for interference in the writ jurisdiction based on the following:
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- On the additions involving ICD and high seas sales, it was held that these issues are entirely a factual exercise. These were clearly matters within the ambit of an appeal and dis not warrant interference in the writ jurisdiction.
- On excess jurisdiction, it was held that it is not a case of excess jurisdiction, as the Order has dealt with the income-tax consequences under the IT Act and not with FEMA consequences.
- On violation of principles of natural justice, it was held that as the taxpayer never contended during the proceedings that the time provided for filing submissions was inadequate, there was no violation of the principles of natural justice.
- Additionally, on the alternative remedy rule, the Hon'ble Madras High Court referred to the ruling of the Hon'ble Supreme Court in case of ACCE vs. Dunlop India ([1985] 1 SCC 260), wherein it was held that when it comes to fiscal statutes, alternate remedy rule has to be applied with utmost rigour. The interference in writ jurisdiction on the teeth of alternate remedy will be only under exceptional circumstances and none of the exceptional circumstances are attracted in the case on hand.
- Thus, the taxpayer was directed to prefer a statutory appeal before the CIT(A) under Section 246A of the IT Act.
Writ Petition allowed when there is violation of principles of natural justice
Pravin Kumar Pathi (W.P.Nos.23474, 23477 & 23480 of 2021 and 24716, 24718 & 24720 of 2021)
- The taxpayer was subjected to assessment under Section 153C of the IT Act and the AO passed an assessment order without considering the taxpayer's response (which was filed against the notice issued under Section 142(1) of the IT Act). Being aggrieved by the said order, the taxpayer preferred a writ petition before the Hon'ble Madras High Court over violation of the principles of natural justice. AO objected the said petition on the grounds that the taxpayer had availability of statutory appeal before CIT(A) as an alternative remedy.
- The High Court observed that the alternate remedy rule is not an absolute, but it is a rule of discretion and a self-imposed restraint on writ jurisdiction - which should be applied with utmost rigor on fiscal statutes. Further, the High Court took note of a decision of the Hon'ble Supreme Court in Commercial Steel Limited (Civil Appeal No. 5121 of 2021) which outlines the exceptions to the alternate remedy rule and held that when the case falls in exception, a Writ Court enjoys the discretion to interfere depending on the facts and circumstances of the case.
- Relying on the above decision, the High Court held that violation of principles of natural justice is an exception to the alternate remedy rule which is the main contention in the taxpayer's submission. Further, the Hon'ble High Court also remarked that if the ground of violation of natural justice was made before CIT(A) then the matter would be sent back to the AO which would cause further delay and uncertainty to the taxpayer.
- In view of the above, the Hon'ble High Court allowed the writ petition and held that the above case falls within the exceptions to the general rule of preferring statutory appeal over writ remedy.
ELP Comments:
The principle of non-maintainability of writ petitions in situations where there is an alternate remedy available has been discussed in both the above cases. High Courts will exercise its writ jurisdiction only in an exceptional situation and one of this is violation of principles of natural justice. In both the above cases i.e., Greenstar Fertilizers Limited and Praveen Kumar, writ petitions were filed before the same High Court and one was rejected and the other was allowed. In the former, none of the exceptional situations got attracted, whereas in the latter it did. Both these rulings depict the consistent interpretation adopted by High Courts while exercising the writ jurisdiction.
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