Lehman Brothers Investments Pte. Ltd. Vs ACIT (Bombay High Court)
Conclusion: Reopening of the assessment based on a different method of computation or application of the section was nothing else but a change of opinion as there was no failure to make a full and true disclosure ans the same was impermissible in law.
Held: Assessee was an investment holding company incorporated in Singapore. The ultimate holding company of assessee Lehman Brothers Holdings Inc. (“LBHI”) filed a petition under Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy Court for the Southern District of New York. Assessee did not conduct any business activity and laid off the entire staff. Hence, assessee had no business transaction during the A.Y. 2015-16. An Assessment Order under Section 143(3) of the Income Tax Act whereby it noted that assessee had no business operations/permanent establishment in India. It was also noted that there was a capital reduction and the capital gain/loss had been computed as per the provisions of the Act. Assessee submitted that the respondent had not complied with the jurisdictional condition which was a condition precedent for conducting the reassessment inasmuch as the respondent must show a failure on the part of the assessee to disclose truly and fully all material facts necessary for the completion of his assessments, since their reassessment was conducted beyond a period of four years. It was held that all the facts on the capital reduction and the computation of capital gain /loss under Section 45 r.w.s. 48 of the Act were disclosed and there was no failure to make a full and true disclosure. The reopening of the assessment based on a different method of computation or application of the section was nothing else but a change of opinion, which was impermissible in law.
FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT
These two writ petitions are filed by the same petitioner for two Assessment Years (A.Y.) viz. 2014-15 and A.Y. 2015-16 and has a common issue. Consequently, we shall dispose them of with a common order. For brevity we refer to the facts in W.P. No. 2000 of 2022 for A.Y. 2015-16 as the same was preferred to be argued by the learned senior counsel for the petitioner.
2. The petition challenges the legality and validity of the impugned notice dated 31st March 2021 issued under Section 148 of the Income Tax Act, 1961 (“the Act”), whereby the Assessment Officer (AO) sought reopening of the assessment since he had ‘reason to believe’ that the income chargeable to tax for A.Y. 2015-16 had escaped assessment within the meaning of section 147 of the Act and the impugned reasons dated 9th January 2022 and the impugned order dated 9th March 2022 disposing of the objections raised by the petitioner.
FACTS
3. The petitioner is an investment holding company incorporated in Singapore. The ultimate holding company of the petitioner, Lehman Brothers Holdings Inc. (“LBHI”) filed a petition under Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy Court for the Southern District of New York on 15th September 2008. After LBHI’s filing for bankruptcy, the petitioner was placed into Creditors’ Voluntary Liquidation from 24th October 2008. The petitioner did not conduct any business activity and laid off the entire staff. Hence, the petitioner had no business transaction during the A.Y. 2015-16.
4. The petitioner, inter alia, held 5,70,88,801 shares of Lehman Brothers Capital Private Limited (“LBCPL”) a private limited company as on 31st March 2014. During the year under consideration, this Court by an order dated 5th September 2014, allowed the capital reduction of 4,87,80,488 equity shares held by the petitioner in LBCPL in accordance with Sections 100 to 103 of the Companies Act, 1956 on payment of 1,00,00,00,000 valued at Rs.20.5 per equity share.
5. The petitioner submitted the return of income which provided the details related to capital gain transactions filed under Schedule C.G. – Capital Gains. The Computation of income was submitted with detailed working method of arriving at the capital gain/loss including the details of dates of the purchase and sale of shares and the conversion of amounts in foreign currency as well as the provisions of Companies Act, the Income tax Act and the order of this Court. The petitioner claimed the capital gain in the sum of Rs.25,14,27,640/- u/s. 45 of the Act r.w. the first proviso to Section 48 of the Act after setting off loss for A.Y. 2014-15 in the sum of Rs.19,59,94,085/- and paid taxes at 20% u/s. 112(1)(i)(c)(ii) of the Act. 6. The petitioner filed written submissions on 24th August 2016 against the notice issued under Section 143(2) of the Act dated 4th August 2016 along with the computation of income and Form 3CEB. The petitioner also submitted a response dated 5th September 2017 to the notice issued under Section 142(1) of the Act dated 8th August 2017. In its response, the petitioner categorically mentioned that it had not carried on any business activity since the liquidation/bankruptcy application and also mentioned about the capital reduction. The said submission further highlighted as under:
“During A.Y. 2015-16, the proceeds received by the company pursuant to capital reduction by LBCPL includes deemed dividend under Section 2(22)(d) of Rs.26,599,305. The Company has considered entire proceeds received from capital reduction as sale consideration for the purpose of computing capital gains.”
7. Thereafter on 22nd November 2018, a notice under Section 142(1) of the Act was issued requesting the petitioner to provide the High Court order granting capital reduction and financial statements highlighting the capital reduction in the balance sheet. In response thereto, on 7th December 2018, the petitioner provided the High Court order passed under Section 100 of the Companies Act, 1956 granting LBCPL to cancel the shares and consequently reduced capital. On 28th March 2018, the Transfer Pricing Officer (“TPO”) to whom the capital reduction transaction was referred on account of it being with an associated enterprises, the capital reduction transaction was accepted at arm’s length. On 24th December 2018, the respondent passed an Assessment Order under Section 143(3) of the Act whereby it noted that the petitioner has no business operations/permanent establishment in India. It also noted that there was a capital reduction and the capital gain/loss had been computed as per the provisions of the Act.
8. Mr. Mistri, the learned Senior Counsel for the petitioners submitted that the respondent had not complied with the jurisdictional condition which is a condition precedent for conducting the reassessment inasmuch as the respondent must show a failure on the part of the petitioner to disclose truly and fully all material facts necessary for the completion of his assessments, since their reassessment was conducted beyond a period of four years. According to him, all the facts on the capital reduction and the computation of capital gain /loss under Section 45 r.w.s. 48 of the Act were disclosed and there was no failure to make a full and true disclosure. The details of capital reduction along with the method of computing capital gain/ loss under Section 45 r.w.s. 48 of the Act were submitted during the original assessment proceedings along with the return of income and computation of income. Moreover, specific queries were asked on the capital reduction which was the only transaction during the years under consideration to which specific reply had been provided by the petitioner. He submitted that the order of the High Court on capital reduction was also submitted and the petitioner had responded to all the queries raised by the respondent in response to the notice issued under Sections 143(2) / 142(1) of the Act.
9. The learned counsel for the petitioner submitted that the TPO had noted the transaction of capital reduction due to cancellation of sharesand held the same at Arm’s Length Price. He submitted that the Assessment Order under Section 143(3) of the Act explicitly mentioned the capital reduction on cancellation of LBCPL and the capital gains/loss has been computed as per the provisions of the Act. The learned counsel submitted that the petitioner had disclosed all primary facts required for the purposes of assessment and consequently there was no failure to
disclose fully and truly any material fact necessary for reassessment after four years. He submitted that neither the reasons for reopening nor the order disposing of the objections alleged failure to disclose any material facts.
10. In support of his submissions, he relied upon the following judgments;
1) Aventis Pharma Ltd. v/s. Assistant Commissioner of Income-tax 8(1), Mumbai1
2) Hindustan Lever Ltd. v/s. R. B. Wadkar, Asstt.
CIT2
He submitted that the impugned reasons did not disclose any new material facts or information based on which the assessment was sought to be reopened. He further submitted that the impugned reasons merely relied upon the details which were already a part of the system / portal submitted during the original assessment, on account of their being no other transaction except the capital gain that the petitioner derived on distinguishing the rights in the shares of LBPCL pursuant to the capital reduction. In support of his contention that there was no new tangible material, he placed reliance on the following decisions:
(1) Clear Media (India) Private Limited v/s. Deputy Commissioner of Income Tax 6(1)(2) Mumbai & Ors.3
(2) Jindal Photo Films Ltd. v/s. Deputy Commissioner of Income Tax4
11. The learned counsel urged that applying a different provision of the Act for the purposes of reopening the assessment, would tantamount to a change of opinion and relied upon the decision in support of his contentions in the case of Commissioner of Income Tax, Delhi v/s. Kelvinator of India Ltd.5
12. It would be worthwhile to consider Sections 45 & 48 of the Act which provides the mechanism of computing the capital gain the relevant extracts of which are as under:
“Section 45: of the Act provides that any profits or gains arising from the transfer of a capital asset effected in the previous year will be chargeable to income tax under the head ‘Capital Gains’.
“Section 48: The income chargeable under the heard “Capital Gains” shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amount, namely:-
(i) expenditure incurred wholly and exclusively in connection with such transfer;
(ii)the cost of acquisition of the asset and the cost of any improvement thereto;
Provided that in the case of an assess, who is a non-resident, capital gains arising from the transfer of a capital asset being shares in, or debentures of an Indian company shall be computed by converting the cost of acquisition, expenditure incurred wholly and exclusively in connection with such transfer and the full value of the consideration received or accruing as a result of the transfer of the capital asset into the same foreign currency as was initially utilized in the purchase of the shares or debentures, and the capital gains so computed in such foreign currency shall be reconverted into Indian currency, so, however, that the aforesaid manner of computation of capital gains shall be applicable in respect of capital gains accruing or arising from every reinvestment thereafter in, and sale of, share in, or debentures of, an Indian company;
Provided further that where long-term capital gain arises from the transfer of a long-term capital asset, other than capital gain arising to a non-resident from the transfer of shares in, or debentures of, an Indian company referred to in the first proviso, the provisions of clause (ii) shall have effect as if for the words “cost of acquisition” and “cost of any improvement:” the words “indexed cost of acquisition” and “indexed cost of any improvement” had respectively been substituted:
[Provided also that nothing contained in the first and second provisos shall apply to the capital gains arising from the transfer of a long-term capital asset being an equity share in a company or a unit of an equity oriented fund or a unit of business trust referred to in section 1 12A.]
[Provided also that nothing contained in the second proviso shall apply to the long-term capital gain arising from the transfer of a long-term capital asset, being a bond or debenture other than‑
(a) capital indexed bonds issued by the Government; or
(b) Sovereign Gold Bond issued by the Reserve Bank of India under the Sovereign Gold Bond Scheme, 2015
Provided also that in case of an assessee being a non-resident, any gains arising on account of appreciation of rupee against a foreign currency at the time of redemption of rupee denominated bond of an Indian company [held] by him, shall be ignored for the purposes of computation of full value of consideration under this section:]
[Provided also that where shares. Debentures or warrants referred to in the proviso to clause (iii) of section 47 are transferred under a gift or in irrevocable trust, the market value on the date of such transfer shall be deemed to be the full value of consideration received or accruing as a result of transfer for the purposes of this section:]
[Provided also that no deduction shall be allowed in computing the income chargeable under the head “Capital gains’ in respect of any sum paid on account of securities transaction tax under Chapter VII of the Finance (No.2) Act, 2004 (23 of 2004).]
13. The learned counsel submitted that the word “shall” has been used and accordingly, for the purpose of calculating capital gain, one has to apply Section 48 and calculate capital gain by applying the first or second proviso to Section 48 of the Act.
14. The learned counsel relied on the provisions of Section 112(1) (c) (iii) of the Act prevailing during A.Y. 2015-16. Relevant extract of Section 112(1) of the Act, is reproduced below;
“(1) Where the total income of an assessee includes any income, arising from the transfer of a long-term capital asset, which is chargeable under the head “Capital Gains”, the tax payable by the assessee on the total income shall be the aggregate of, –
(a) ………… .
(b)……………
(c) in the case of a non-resident (not being a company) or a foreign company, –
(i) …….
(ii) the amount of income-tax calculated on long term capital gains [except where such gain arises from transfer of capital asset referred to in sub-clause (iii)] at the rate of twenty percent; and
(iii) the amount of income-tax on long term capital gains arising from the transfer of a capital asset, being unlisted securities, as calculated at the rate of ten per cent on the capital gains in respect of such asset as computed without giving effect to the first and second proviso to Section 48.”
15. As per explanation to Section 112 of the Act, the expression ‘securities’ shall have the same meaning as assigned to it in Section 2(h) of the Securities Contracts (Regulation) Act, 1956 (‘SCRA’). As per Section 2(h) of SCRA, the term “securities” is defined as follows;
“securities” include –
(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;
(ia) derivative;
(ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes;
(ic) security receipt as defined in clause (zg) of Section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;
(id) units or any other such instrument issued to the investors under any mutual fund scheme;
(ii) Government securities;
(iia) such other instruments as may be declared by the Central Government to be securities; and
(iii) rights or interest in securities.”
16. As noted above, for the shares of the company to qualify as “securities” as defined in Section 2(h) of SCRA, it should be marketable. Given that the shares of the private companies are not marketable in nature, shares of private companies do not qualify as ‘securities’ as per Section 2(h) of the SCRA and consequently, does not get covered by
Section 112(1) (c) (iii) of the Act. In this regard, reliance can be placed on the decision of the Bombay High Court in the case of Dahiben Umedbhai Patel and others v/s. Norman James Hamilton and Ors.6 wherein it was held that,
“It is thus clear that the shares of a private company do not possess the character of liquidity, which means that the purchaser of shares cannot be guaranteed that he will be registered as a member of the company. Such shares cannot be sold in the market or, in other words, they cannot be said to be marketable and cannot, therefore, be said to fall within the definition of securities as a marketable security.”
17. In view of the above, the share of a private limited company is not covered by the definition of securities, and thereby provision of Section 112(1) (c) (iii) was not applicable. As the petitioner was not covered under Section 112(1) (c) (iii) of the Act, it filed a return of income showing a capital gain of Rs.25, 14,27,640/- and after setting off the loss for the A.Y. 20 14-15 (Rs.19,59,94,085), paid taxes at 20% under Section 112(1) (c) (ii) of the Act. The petitioner has paid a higher rate of tax under sub-clause (ii) at 20% compared to sub-clause (iii) at 10%. This results in a gain for the Income Tax Department.
18. The learned counsel for the petitioner further submitted that the Finance Act 2016 amended the provisions of Section 112(1) (c) (iii) to include the words “shares of a company not being a company in which the public are substantially interested” with effect from A.Y. 2017-18. The relevant extract of Section 112(1) pursuant to the amendment is reproduced as under:
“(1) Where the total income of an assessee includes any income, arising from the transfer of a long term capital asset, which is chargeable under the heard “Capital Gains”, the tax payable by the assessee on the total income shall be the aggregate of, –
(a) …………….
(b) …………….
(c) in the case of a non-resident (not being a company) or a foreign company, –
(i) ……..
(ii) the amount of income-tax calculated on long term capital gains [except where such gain arises from transfer of capital asset referred to in sub-clause (iii)] at the rate of twenty percent; and
(iii) the amount of income-tax on long term capital gains arising from the transfer of a capital asset, being unlisted securities for shares of a company not being a company in which the public are substantially interested, calculated at the rate of ten percent on the capital gains in respect of such asset as computed without giving effect to the first and second proviso to Section 48.”
19. The learned counsel for the petitioner submitted that the Finance Act 2017 amended the provisions of Section 112(1) (c) (iii) to make the amendment made vide Finance Act 2016 (i.e. insertion of the words “shares of a company not being a company in which the public are substantially interested”) effective retrospectively from 1st April 2013. The amendment was a beneficial amendment passed on to the assessee. The said amendments to Section 112(1) (c) (iii) of the Act are simplified in table below:-
