Order, prejudicial to the interest of revenue, set aside invoking jurisdiction u/s 263

Cognizant Technology-Solutions India Pvt. Ltd. Vs Dy. Commissioner-of Income Tax (ITAT Chennai)

Held that the assessment order passed by the AO is erroneous in so far as it is prejudicial to the interest of the revenue and thus, the CIT has rightly exercised his jurisdictional powers

Facts-

M/s.Cognizant Technology Solutions India Ltd. is engaged in the business of software development filed its ROI for the AY 2014-15 on 29.11.2014, which was subsequently revised on 07.10.2015. During the FY relevant to the AY 2014-15, the assessee has purchased 9,16,133 shares from its shareholder M/s.Congizant (Mauritius) Ltd. @ Rs.23,915/- per share (of face of Rs.10/- each) and paid consideration amounting to Rs.2190,93,20,625/-. The assessee had purchased 2,59,253 shares from M/s. Cognizant Technology Solutions Corporation, USA. At Rs.23,915/- per share and paid consideration amounting to Rs.620,00,35,495/-. The assessee had also purchased 16,709 shares from M/s. Market RX Inc. USA and 11,873 shares from M/s.CSS Investments LLC, USA and paid consideration amounting to Rs.39,95,95,735/- and Rs.28,39,42,795/- respectively.

During the course of assessment proceedings, several hearings were held by the AO and the assessee furnished necessary information relating to buy back of shares from its shareholders. However, with respect to the buyback of shares, the AO had accepted the explanation of the assessee and no adjustment was made to the total income.

The case has been, subsequently taken up for revision proceedings by the Commissioner of Income and a show cause notice u/s.263 was issued. The assessee had challenged notice issued u/s.263 of the Act, before the Hon’ble Madras HC. The said Writ Petition was dismissed by the Madras HC. The assessee thereafter challenged the single judge order of the Madras High Court before a Division Bench of the Madras High Court. In compliance with the directions of the High Court, the assessee filed its Written Submissions and contented that the assessment order passed by the AO, is neither erroneous nor prejudicial to the interest of the revenue and thus, the CIT does not have jurisdiction to set aside the assessment order u/s.263.

Conclusion-

We are of the considered view that the enquiry conducted by the AO in this case can’t be construed as a proper enquiry and further, inadequate inquiry conducted by the AO in the given circumstances is as good as no enquiry and as such, the CIT was empowered to revise the assessment order. The order of the CIT is not based on irrelevant considerations and further in the present circumstances, he was not obliged to positively indicate the deficiencies in the assessment order on merits on the question of consideration paid for buy back of shares. Further, the AO in the given circumstances can’t be said to have taken a possible view as the revision is sought to be done on the premise that the AO did not make enquiry thereby rendering the assessment order erroneous and prejudicial to the interest of the revenue on that score itself.

Held that the assessment order passed by the AO is erroneous in so far as it is prejudicial to the interest of the revenue and thus, the CIT has rightly exercised his jurisdictional powers and set aside the assessment order passed by the AO u/s.143(3) dated 31/12/2016. Hence, we are inclined to uphold the order of the ld.CIT and dismiss the appeal filed by the assessee.

FULL TEXT OF THE ORDER OF ITAT CHENNAI

This appeal filed by the assessee is directed against the order of the Commissioner of Income Tax, Large Taxpayer Unit, Chennai, passed u/s 263 of the Income Tax Act, 1961 dated 01.08.2019 and pertains to assessment year 2014-15.

2. The assessee has raised the following grounds of appeal:

1. The order of the learned Commissioner of Income-tax, Large Taxpayer Unit, Chennai [‘CIT’] is erroneous, bad in law, prejudicial to the Appellant and contrary to the facts and circumstances of the case.

On validity of revision proceedings

2. The learned CIT has erred in initiating the proceedings under section 263 of the Act for setting aside the order passed under section 143(3) of the Act [‘Assessment Order’] as the same is neither ‘erroneous’ nor ‘prejudicial to the interests of the revenue’.

3. The learned CIT has erred by not appreciating the fact that the learned Assessing Officer (‘learned AO’) has passed the assessment order only after a thorough examination of all details that were called for and submitted by the Appellant.

4. The learned CIT has erred in holding that the order passed by the learned AO is erroneous without appreciating the fact that the learned AO has passed the assessment order in accordance with the Circular No 3 of 2016 dated 26 February 2016 issued by the Central Board of Direct Taxes (‘CBDT’) which is squarely applicable to the Appellant’s case and is binding on the learned CIT and the learned AO.

5. The learned CIT has erred in directing the learned AO to re-examine the DCF valuation of shares for purpose determining excess consideration, without giving finding as to how valuation undertaken by the Assesses is incorrect, thereby exceeding scope of provisions of section 263 of the Act.

6. The learned CIT has erred by passing an order under section 263 of the Act solely for the purpose of substituting his view on the issue concerned in place of the view adopted by the learned AO after independent application of mind.

Re-characterizing part of the consideration paid to the Shareholders for buy-back of shares as dividend

7. The learned CIT has erred by concluding that the AO has not examined the valuation of shares bought back, especially when a value of INR 8,516 per share (computed under the net worth method, and within the range indicated by the CIT) was put forth to the Appellant during the course of regular assessment for its rebuttal, and the learned AO was duly satisfied with the valuation adopted by the Appellant.

8. The learned CIT has erred by holding that the buy-back undertaken by the Appellant as not being ‘genuine’ when all the conditions laid down in the Companies Act, 1956 and the Foreign Exchange Management Act, 1999 have been duly complied with, and the learned CIT has not brought any evidence to the contrary towards making such findings.

9. The learned CIT has erred in concluding that the provisions of section 2(22)(a) of the Act and/or section 2(22)(d) and consequently section 115-O of the Act are applicable by ignoring that sub-clause (iv) of section 2(22) of the Act specifically excludes a buyback of shares undertaken under section 77 A of the Companies Act, 1956 from the ambit of dividend and ignoring the binding circular No.3 of 2016 dated 26 February 2016.

10. The learned CIT has erred by relying on the judgment of the Hon’ble Karnataka High Court in Fidelity Services India Pvt. Ltd [2018] (95 com 253), without appreciating that the Hon’ble Karnataka High Court has not dealt with or decided the issue of characterization of the payment for buy-back of shares on merits.

The Appellant craves leave to add, supplement, amend, delete or otherwise modify any of the grounds stated hereinabove at the time of hearing.

Statement of facts

1. Cognizant Technology Solutions India Private Limited (‘the Appellant’) is a company incorporated under the Companies Act, 1956. The Appellant is assessed to tax with the office of the Deputy Commissioner of Income-tax, Large Taxpayer Unit – 1 (‘learned AO’) under the jurisdiction of the Commissioner of Income-tax, Large Taxpayer Unit (‘learned CIT’).

2. For the AY 2014-15, the Company filed its Income-tax return on 29 November 2014 which was subsequently revised on 07 October 2015. The Appellant’s case was selected for regular assessment under section 143(3) of the Income-tax Act, 1961 (‘the Act’) by issue of notice under section 143(2) dated 08 September 2015.

3. Several hearings were held by the learned AO during the course of the regular assessment and the Appellant furnished all the information called for from time-to-time. Amongst the various details called for, the learned AO also requested for and examined details in relation to a buy-back of shares undertaken by the Appellant under section 77 A of the Companies Act, 1956 during the Financial Year (‘FY’) 2013-14 relevant to the subject AY.

4. Amongst other information / explanations the following were specifically called for and examined by the learned AO during the course of proceedings under section 143(3) of the Act:

a. Valuation of the shares bought-back, including justification of the valuation methodology followed by the Appellant.

b. Explanation on non-applicability of section 2(22) of the Act and section 115-0 of the Act to the buy-back of shares

c. Explanation on non-applicability of section 115QA of the Act to the buy-back of shares

d. Explanation on the binding Circular No 3 of 2016 dated 26 February 2016 issued by the Central Board of Direct Taxes (‘CBDT’) that is applicable to the Appellant’s case.

5. After examining all the information submitted and explanation offered by the Appellant, the learned AO passed an order under section 143(3) of the Act on 31 December 2016 (‘the Assessment Order’) wherein certain adjustments were made to the total income of the Appellant.

With respect to the buy-back of shares, the stand adopted by the Appellant was accepted by the learned AO and hence, no adjustment was made to the tax liability of the Appellant on account of the said transaction. The learned AO had specifically determined a sum of ‘Nil’ against ‘Dividend Distribution Tax’ in the Income-tax Computation Form forming part of the Assessment Order.

6. On 21 March 2018 the learned CIT issued a notice under section 263 of the Act seeking to set-aside the Assessment Order in order to direct the learned AO to examine the examine the valuation of shares bought-back, the applicability of sections 2(22), 115­O, 115QA and 195 of the Act to the said buy-back of shares.

7. The said notice under section 263 of the Act was issued after the Hon’ble Madras High Court had taken note of the Assessment Order in a Writ Petition filed by two of the Appellant’s shareholders challenging draft assessment orders passed in their case on the same transaction of buy-back of shares.

8. Given the above, the Appellant challenged the notice under section 263 of the Act before the Hon’ble Madras High Court in WP No. 7542 of 2018. The said Writ Petition was dismissed by the Hon’ble Court vide its order dated 25 June 2019 passed by a single Judge and the Appellant was directed to file a suitable response to the notice under section 263 of the Act before learned CIT, who in-turn was directed to pass an order without being influenced by any findings of the Hon’ble High Court in the Orders passed in the case of the shareholders.

9. The Appellant thereafter challenged the Order in the aforesaid Writ Petition before a Division Bench of the Hon’ble High Court in WA No. 2081 of 2019. The Division Bench vide its order dated 5 July 2019 upheld the order passed the single Judge and also directed the learned CIT to pass an order under section 263 of the Act within two weeks of the Appellant filing its reply to the show-cause notice. The Appellant was directed to file its response within two weeks of receiving the Hon’ble High Court’s order in the Writ Appeal.

10. In compliance with the said directions of the Hon’ble High Court, the Appellant filed its written submission on 19 July 2019 and also appeared before the learned CIT on 25^thJuly2019in the proceedings undersection263oftheAct.

11. The Appellant submitted before the learned CIT that the Assessment Order is neither ‘erroneous’ nor ‘prejudicial to the interest of the revenue’ as more-fully explained in its written submission dated 19 July 2019 and hence, the learned CIT does not have jurisdiction to set-aside the Assessment Order under section 263 of the Act.

12. The learned CIT, on 1 August 2019 passed an order under section 263 of the Act, setting aside the Assessment Order and directing the learned AO to examine the valuation of the shares bought-back. The learned CIT has directed the AO to determine the fair market value of the shares bought back, and treat any excess consideration paid to the shareholders towards buy-back of shares as ‘dividend’ and consequently, charge dividend distribution tax under section 115-O of the Act.

13. Aggrieved by the aforesaid order passed by the learned CIT under section 263 of the Act, the Appellant prefers this appeal for the Grounds enclosed herewith.

3. The brief facts of the case are that M/s.Cognizant Technology Solutions India Ltd. is engaged in the business of software development filed its return of income for the AY 2014-15 on 29.11.2014, which was subsequently revised on 07.10.2015. During the financial year relevant to the AY 2014-15, the assessee has purchased 9,16,133 shares from its shareholder M/s.Congizant (Mauritius) Ltd. @ Rs.23,915/- per share (of face of Rs.10/- each) and paid consideration amounting to Rs.2190,93,20,625/-. The assessee had purchased 2,59,253 shares from M/s.Cognizant Technology Solutions Corporation, USA. @ Rs.23,915/- per share and paid consideration amounting to Rs.620,00,35,495/-. The assessee had also purchased 16,709 shares from M/s. Market RX Inc. USA and 11,873 shares from M/s.CSS Investments LLC, USA and paid consideration amounting to Rs.39,95,95,735/- and Rs.28,39,42,795/-respectively. The case has been taken up for scrutiny assessment and during the course of assessment proceedings, several hearings were held by the AO and the assessee furnished necessary information called for from time to time, including information relates to buy back of shares from its shareholders. The assessment has been completed u/s. 143(3) of the Income Tax Act, 1961 on 31.12.2016, wherein, certain adjustments were made to the total income of the assessee. However, with respect to the buyback of shares, the AO had accepted the explanation of the assessee and no adjustment was made to the total income.

4. The case has been, subsequently taken up for revision proceedings by the Commissioner of Income Tax (LTU)-1, Chennai, and a show cause notice u/s.263 of the Act, dated 21.03.2018 was issued to the assessee seeking to set aside the assessment order and to direct the AO to examine the valuation of shares bought back by the assessee, the applicability of Sec. 2(22), 115-O, 115-QA and s.195 of Income Tax Act, 1961. The assessee had challenged notice issued u/s.263 of the Act, before the Hon’ble Madras High Court in W.P.No.7542 of 2018. The said Writ Petition was dismissed by the Hon’ble Madras High Court vide its order dated 25.06.2019. The assessee thereafter challenged the single judge order of the Hon’ble Madras High Court before a Division Bench of the Hon’ble Madras High Court in W.A.No.2081 of 2019. The Division Bench of the Hon’ble Madras High Court vide its order dated 05.07.2019 upheld the order passed by the single Judge and also directed the ld.CIT to pass an order u/s.263 of the Act, within two weeks from the date the assessee filing its reply to the show cause notice. In compliance with the directions of the Hon’ble High Court, the assessee filed its Written Submissions on 19.07.2018, and contented that the assessment order passed by the AO dated 31.12.2016, is neither erroneous nor prejudicial to the interest of the revenue and thus, the ld.CIT does not have jurisdiction to set aside the assessment order u/s.263 of the Act.

5. The ld.CIT, after considering relevant submissions of the assessee and also taken note of various facts, was of the opinion that the assessment order passed by the AO is erroneous in so far as it is prejudicial to the interest of the revenue, because, although the AO has called for details about buyback of shares by the assessee from its shareholder, but failed to examine the issue in right perspective of the law, more particularly in light of provisions of Sec.2(22)(a) / 2(22)(d) of the Act, which rendered the assessment order not only erroneous but also prejudicial to the interest of the revenue. The ld.CIT has discussed the issue at length in light of shareholding pattern of the shareholders and subsequent amalgamation of two Indian companies i.e. M/s.Congizant India Pvt. Ltd. & M/s. Market RX India Pvt. Ltd., with the assessee company and shareholding pattern of M/s.Cognizant Technology Solutions USA and M/s.Congizant (Mauritius) Ltd., subsequent to amalgamation and opined that the assessee has shifted shares held by USA based companies to Mauritius based company. The ld.CIT had also discussed the net worth of the assessee company and its fair market value of shares before amalgamation and after amalgamation and noted that the intrinsic value of shares of the amalgamated company prior to the date of amalgamation was Rs.22,582/- per equity share, whereas after amalgamation the intrinsic value of share is reduced to Rs.5,035.63 per equity share. Thus, the ld.CIT was of the opinion that when the fair market value of the share as on the date of buyback of share was at Rs.5,035/- per share, but the assessee has purchased its own shares from its shareholder @ Rs.23,915/- per share in order to make payment to shareholders without affecting taxability under the provision of Sec.2(22)(a) / 2(22)(d) of the Act. The ld.CIT had discussed the issue in light of fair market value of the shares determined by the assessee by following the DCF method and also future cash flows considered by the assessee for the FY 2018-19 to FY 2022-23 in light of a scheme of arrangement and compromise approved by the Hon’ble Madras High Court in the FY 2016-17 and observed that there is a variation in free cash flows considered by the assessee which is ranging from 74% to 84% and thus, opined that the assessee has shown cash flows to over value the share price of Rs.23,915/- per share as against the actual value of the shares of Rs.7,000/- to Rs.8,000/- per share. The AO though called for the details of buyback of shares and assessee furnished necessary information along with valuation report obtained from the independent valuer, but the AO has not analyzed the DCF method followed by the assessee and its cash flows to determine correct fair market value of the shares. The ld.CIT had also discussed the issue in light of provisions of Sec.2(22)(a) / 2(22)(d) of the Act, and observed that as per the provisions of Sec.2(22)(a) of the Act, any distribution by a company of its accumulated profits will be in the nature of dividends, if such distribution is in the nature of distribution of any part of assets of the company to its shareholders. However, the only exception to the above is buyback of shares in terms of Sec.77A of the Companies Act, 1956. Although, consideration paid for purchase of shares under buyback scheme resulted in capital gains in the hands of respective shareholders and liable to be assessed u/s.46A of the Act, but anything and everything which is paid by a company to its shareholders under the grab of buyback, will not amount to capital gains u/s.46A of the Act. The capital gains u/s.46A of the Act, should be limited to the extent of genuine consideration paid for buyback of shares. But, if any amount is paid over and above the genuine value of shares, such excess consideration needs to be examined in light of provisions of Sec.2(22)(a) / 2(22)(d) of the Act. The ld.CIT had also discussed the issue in light of CBDT Circular No 3 of 2016 dated 26 February 2016 and observed that although, said Circular exclude buyback of shares from the purview of provisions of Sec.2(22)(a) / 2(22)(d) of the Act, but said Circular is applicable for genuine transactions of buyback of shares. However, if an assessee pays to its shareholders for buyback of shares over and above, the fair market value of such shares, then same needs to be considered as deemed dividend in terms of Sec.2(22)(a) of the Act. The CIT had also taken support from the decision of the Hon’ble High Court of Karnataka in the case of Fidelity Business Services India Pvt. Ltd. v. CIT [2018] 95 taxmann.com 253, wherein, it has been held that payment in the name of buyback of shares by the assessee over and above the fair market price of the shares, could be treated as dividends u/s.2(22)(e) of the Act. The AO although has called for certain details about buyback of shares, but failed to carry out necessary enquires or verification which he should have been made in light of various provisions of the Act, which rendered the assessment order to be erroneous and prejudicial to the interest of the revenue. Therefore, set aside the assessment order passed by the AO and direct the AO to examine the DCF valuation of the shares and determine the excess consideration, if any, over and above the fair market value of the shares paid to the shareholders and invoke the provisions of Sec.115-O to 115-P of the Income Tax Act, 1961, in order to treat such excess consideration as distribution of dividends u/s.2(22)(a) of the Act, and recover DDT payable by the assessee as per the provisions of the Act, after affording reasonable opportunity of hearing to the assessee. Aggrieved by the CIT order, the assessee is in appeal before us.

6. The ld. Sr. Counsel for the assessee, Shri Ajay Vohra, submitted that the ld.CIT erred in setting aside the assessment order u/s.263 of the Act, without appreciating the fact that in order to invoke jurisdiction u/s.263 of the Act, twin conditions must be satisfied in as much as the order passed by the AO should be erroneous and further, the order should be prejudicial to the interest of the revenue. The ld.AR for the assessee referring to the decision of the Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT [243 ITR 83] and CIT v. Kwality Steel Suppliers Complex [2017] 395 ITR 1 (SC) submitted that unless the CIT satisfies himself about two conditions prescribed u/s.263 of the Act, he cannot assume jurisdiction and revise the assessment order. The ld. Counsel for the assessee further submitted that the order of the AO is not erroneous, because buyback of shares was undertaken in accordance with provisions of Sec.77A of the Companies Act, 1956, which does not mandate determination of fair market value/provide any specific methodology for valuation of shares. The assessee had bought back shares from its shareholders in terms of Sec.77A of the Companies Act, 1956, and filed necessary documents with Registrar of Companies. All particulars relating to the buyback of shares have been disclosed in the financial statements for the relevant financial year. The financial statements have been adopted by the shareholders and accepted by the Registrar of Companies, which clearly indicate that buyback of shares were undertaken in accordance with the applicable provisions of Companies Act, 1956. The assessee had remitted consideration to its shareholders after getting necessary approval from RBI and also deducted tax at source wherever applicable. The ld.AR further submitted that Sec.46A is a specific provision for taxiing of capital gains in the hands of the shareholders in respect of buyback prior to 01.06.2013 and said capital gain is to be computed on full value of consideration and cannot be substituted for any other value. He, further submitted that contrary to Sec.46A, there are specific provisions like Sec.50CA, Sec. 56(2)(vii)(b), etc., which provides for determination of fair market value as the basis for taxation. Since, there is no provision under the Act, to substitute fair market value for full value of consideration, there is no scope for the AO to go for determination of fair market value as against consideration paid by the assessee for buyback of shares and thus, the ld.CIT cannot revise the assessment order on the issue of valuation of shares.

7. The ld. Counsel for the assessee further submitted that provisions of Sec.115QA applicable from 01.06.2013 also refers to the consideration received by the shareholders on buyback of shares and not fair market value. Further, CBDT Circular No 3 of 2016 dated 26 February 2016 clearly provides that consideration for buyback of shares can be taxed only as capital gain in the hands of the shareholders, and no such amount can be treated as dividend. Since, Circular issued by the CBDT are binding on the tax authorities, the AO after considering necessary facts including the CBDT Circular, has taken a view and hence, the CIT cannot review the order passed by the AO on very same issue by holding that the AO has not carried out required enquiries. The ld.AR for the assessee, further referring to the decision of the Mumbai ITAT in the case of Goldman Sachs (India) Securities (P.) Ltd. reported in [2016] 70 taxmann.com 46 (Mumbai-Trib.), submitted that the Tribunal clearly held that consideration for buyback of shares is taxable only as capital gains and cannot be treated as dividend notwithstanding that capital gains is exempt from tax in India in the hands of Mauritius shareholder in view of the available treaty exemption. The ld.AR further submitted that the department has assessed capital gain declared by two USA resident shareholders based on actual consideration and further, the Transfer Pricing Officer in case of two of shareholders i.e. Cognizant (Mauritius) Ltd. and Cognizant Technology Solutions Corp. USA, had passed order u/s.92CA of the Act, and accepted the DCF valuation method which is evident from the fact that no adjustment has been suggested under TP provisions. Since, the AO has considered the relevant facts in light of various provisions and has accepted buyback of shares, the ld.CIT cannot termed the assessment order as erroneous by substituting his views on the issue of valuation of shares and taxation of excess consideration paid over and above fair market value of the shares.

8. The ld. Counsel for the assessee, Mr. Ajay Vohra, submitted that the order of the AO is not prejudicial to the interest of the revenue, because capital gains liable to tax in India in the hands of US shareholders on buyback of shares, the assessee has duly deducted tax at source. No Capital gains is liable to tax in India in the hands of Mauritius shareholders because of treaty benefits between India and Mauritius. The assessments in the hands of two US residents having been completed accepting capital gains returns based on the DCF valuation, revenue is stopped from taking a different view in the matter in the hands of the assessee. The ld. Counsel for the assessee further referring to the decisions of the Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT (243 ITR 83) submitted that the meaning of prejudicial to the interest of the revenue, has been explained by the Court, as per which, the phrase ‘prejudicial to the interest of the revenue’, has to be read in conjunction with an erroneous order passed by the AO. Every loss of revenue as a consequence of an order of the AO, cannot be treated as prejudicial to the interest of the revenue. For example, when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue or where two views are possible and the ITO has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the revenue, unless the view taken by the ITO is unsustainable in law. In this case, the view taken by the AO, cannot be said to have been unsustainable, because the AO cannot take any other view except view taken on buyback of shares, because the issue involved in hand is debatable and further, there is no scope for the revenue to re-characterization of income arising from buyback of shares as dividend. The assessee has determined the fair market value of the shares as per DCF methodology and such valuation carried was out by an independent valuer. He further submitted that the assessment can be set aside only in a case, lack of enquiry and not for inadequate enquiry. In the present case, detailed enquires has been made by the AO during the course of assessment proceedings in relation to the buyback of shares as evident from order sheet entry. The AO had specifically asked for the Memorandum of Understanding between the parties, documents relating to date of receipt of the amounts and value at which purchase was made for each entity. The AO had also examined valuation of shares and also non-applicability of dividend taxation to the buyback of shares. In response to the queries, the assessee had submitted detailed replies dated 20.12.2016. Therefore, merely because, the issue does not mention in the assessment order, it does not mean that the same has not been examined by the AO.

9. The ld. Counsel for the assessee further referring to Explanation-2 to Sec.263 of the Act, submitted that Explanation-2 does not give unfettered powers to CIT, because even after Explanation-2, the CIT should satisfy the twin conditions prescribed therein, i.e. he must satisfy with reason that the assessment order is erroneous and further, it is prejudicial to the interest of the revenue. In this case, if you go through the reasons given by the CIT, the CIT had invoked jurisdiction u/s.263 of the Act, on change of opinion which is evident from examination of recorded that the AO has made extensive enquiries and after due application of mind had accepted the buyback price and the tax treatment on buyback of shares. He further submitted that it is incumbent on CIT to record specific finding with regard to error in the assessment causing prejudicial to the interest of the revenue. In this case, the CIT did not record prima facie findings regarding exact value of shares before setting aside the assessment for further investigation. The sole basis for the CIT to exercise his powers u/s.263 of the Act, is genuineness of buyback transaction between the assessee and its shareholders. If you go through the reasons given by the CIT, he has expressed doubt about tax avoidance planning probably executed by the assessee through buyback of shares, ignoring the fact that when two courses opened for distribution of execs cash to the shareholders, i.e buyback of shares or declaration of dividend, the revenue cannot compel the assessee to adopt the course that results in higher tax outgo. It is for the assessee to choose the option available which makes its tax impact less. Further, legitimate tax plan is acceptable under law. If an assessee makes a tax planning within four corners of law, which resulted in less taxes payable to the revenue, it cannot be called as tax evasion arrangements. This legal position is clarified by the Hon’ble Supreme Court in the case of Union of India v. Azadi Bachao Andolan reported in [2003] 263 ITR 706 (SC). The report of the expert committee on GAAR constituted by the Ministry of Finance also provides that repatriation of funds by way of dividend or buyback is a business choice of a company. The Circular issued by the CBDT No.7 of 2017 also clearly provides that GAAR will not interplay the right of the taxpayer to choose the method of implementing a transaction. In the facts of the case, there is no intent for avoidance of tax considering that the assessee could have repatriated the same amount of buyback consideration to the shareholders by buying back larger number of shares at lower price without breaching the provisions of Sec.77A of the Companies Act, 1956, and without resulting in dilution of the inter-se shareholding percentage. In this regard, the assessee has illiterated how consideration paid by the assessee is not impacted the shareholding pattern of shareholders.

10. The ld. Counsel for the assessee further submitted that the revenue has taken a contradictory position in as much as in the case of the assessee, the CIT has directed the AO to determine the fair value of shares as per DCF method and treat the same as capital gains to the extent of fair market value and balance as dividends liable for dividend distribution tax u/s.115-O of the Income Tax Act, 1961. However, in the case of shareholders, the AO in the draft assessment order has treated the buyback consideration as taxable under the head ‘capital gains’ to the extent of fair value and balance consideration under the head ‘income from other sources’, on which, tax is payable by the shareholders. The approach taken by the revenue in the case of assessee and the shareholders is inconsistent and contradictory. It is a well settled principle of law that the revenue cannot allow blowing hot and cold at the same breath and therefore, the assessment order in the case of the assessee, cannot be regarded as erroneous and prejudicial to the interest of the revenue. The ld. Counsel for the assessee further referring to the decision of the Hon’ble Karnataka High Court in the case of Fidelity Services India Pvt. Ltd. v. ACIT reported in 95 taxmann.com 253, submitted that in the said case, the Hon’ble Karnataka High Court has laid down principles on the powers of the Hon’ble Tribunal u/s. 254(1) of the Act, while hearing an appeal which is completely different from the jurisdictional condition for the revision of the order u/s.263 of the Act. Further, the said judgment is also distinguishable, because, in the assessee’s case, the buyback price was examined during the regular assessment proceedings and detailed submissions were made, whereas in M/s. Fidelity Services India Pvt. Ltd., case, the ITAT had picked up the valuation of shares for the first time and had remanded the issue to the AO for examining the fair market value of the shares. The Hon’ble Karnataka High Court has not dealt with or decided the merits of the issue i.e. treatment of possible over valuation of shares in case of buyback of shares. Therefore, the order of the CIT in revising the assessment order on the basis of the decision of the Hon’ble Karnataka High Court is totally misplaced. Therefore, he submitted that the CIT is erred in setting aside the assessment order u/s.263 of the Act. In this regard, the ld. Counsel for the assessee has relied upon the following judicial precedents:

11.  The ld. DR, on the other hand, supporting the order of the ld.CIT submitted that the order passed by the AO u/s. 143(3) dated 31.12.2016 is erroneous in so far as it is prejudicial to the interest of the revenue, because, the AO has failed to carry out required enquiries, he ought to have been carried out in light of Explanation-2 to Sec.263 of the Act, which rendered the Assessment order to be erroneous and prejudicial to the interest of the revenue. The ld. DR further referring to the decision of the Hon’ble Karnataka High Court in the case of Fidelity Business Services India Pvt. Ltd v. ACIT [2018] 95 taxmann.com 253 (Kar.), in turn, which affirmed the order of ITAT, has submitted that consideration paid for buy back of shares exceeding the fair market value of such shares, could be treated as dividends u/s.2(22) of the Act. However, the AO although called for details about buyback of shares, but he has examined the issue only in light of buyback of shares in terms of provisions of Sec.77A of the Companies Act, 1956, and ignored applicability of s.2(22) of the IT Act, 1961. Although, buyback of shares in terms of s.77A of the Companies Act, 1956, is outside the scope of sec.2(22)(a)/(d), but such exception provided in section 2(22) relating to buy back of shares are only in respect of genuine and justified considerations and not applicable to inflated consideration. In the instant case, shares were valued at Rs.23,915/- per share, as against actual value of Rs.7,875/- per share in view of Net Assets Method as prescribed by Rule 11UA of the Income Tax Rules, 1962. Therefore, excess consideration of Rs.16,040/- paid per share amounts to dividends as per section 2(22) of the Act, and liable for Dividend Distribution Tax u/s.115-O of the Act. Therefore, the action of AO in not invoking the provisions of section 115-O, while completing the assessment has resulted in loss of revenue causing prejudice to the interests of the revenue. During the course of assessment proceedings, the AO, though called for the details of ‘buy back’ transactions, but failed to draw logical conclusion, especially with regard to the fair market value of the shares for the purpose of buy-back, and the consequential applicability of provisions of section.115-Or.w.s 2(22) of the Act. Hence, the assessment order passed by the AO is erroneous. In view of the above, it is submitted that the order of the AO is not only erroneous and also prejudicial to the interests of the revenue, within the meaning of provisions of section 263 of the Act. Hence, the learned CIT is justified in passing the impugned revisionary order.

12. The ld. DR further submitted that the ld. Counsel for the assessee heavily placed his reliance on the valuation report under DCF method obtained by the appellant from M/s. Ernst & Young. However, said valuation report cannot be relied upon, since, the same was issued by manipulating the projections to arrive at an illogical value of Rs.23,915/-per share. From the paper book submitted by the assessee, it is evident that the AO had enquired only in respect of buy back of shares. However, there is no application of mind with reference to applicability of section 115-O of the Act. During the course of appeal hearing, the assessee has relied upon orders passed in the case of respective shareholders. However, the same has no relevance to the issue in hand since there is no discussion either on Fair Market Value of shares or regarding dividends in the said orders. Therefore, he submitted that the CIT has brought out very clear facts in his order to the effect that the order passed by the AO is not only erroneous but also prejudicial to the interest of the revenue and thus, there is no merit in arguments taken by the ld. Counsel for the assessee. In this regard, he relied upon the following judicial precedents:

1. Smt.Renu Gupta v. CIT (2008] 301 ITR 45.

2. CIT v. Active Traders Pvt. Ltd., (1995] 214 ITR 583.

3. ITAT decision in case of M/s.Subhalakshmi Vanijya Pvt. Ltd.v. CIT in ITA No.1104/Kol/2014.

13. We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. We have also carefully considered plethora of juridical precedents cited by the ld. Counsel for the assessee along with paper book which contains relevant materials including provisions of Sec.77A of the Companies Act, 1956, rules prescribed for valuation of shares in case of unlisted companies, necessary approvals obtained by the assessee under relevant statutory provisions for remitting consideration to non-resident shareholders. The ld.CIT has invoked his jurisdictional powers conferred u/s.263 of the Act, and set aside the assessment order passed by the AO u/s.143(3) dated 31.12.2016 on the ground that the assessment order is erroneous in so far as prejudicial to the interest of the revenue. The ld.CIT has questioned the issue of buyback of shares and consideration paid by the assessee to its shareholders in light of provisions of Sec.2(22)(a)/(d) and provisions of Sec.115-O to 115-P of the Income Tax Act, 1961. According to the CIT, consideration paid by the assessee for buyback of shares from his shareholders is overvalued so as to escape from the provisions of Sec.2(22)(a)/(d) coupled with provisions of Sec.115-O to 115-P of the Income Tax Act, 1961. The ld.CIT has discussed the issue at length in light of facts of the present case along with various averments made by the assessee during the course of revision proceedings and he came to the conclusion that although, the AO has examined the issue of buyback of shares during assessment proceedings, but failed to conduct necessary enquires which he ought to have been carried out in terms of Explanation-2 to s.263 of the Act. Therefore, before deciding the issue on hand, it is necessary to re-capture the facts brought out by the ld.CIT in his revision order u/s.263 of the Act.

14. As could be seen from the facts brought out by the ld.CIT, during the FY 2011-12, two Indian companies i.e. M/s.Cognizant India Pvt. Ltd. (CIPL) & M/s. Market RX India Pvt. Ltd., (MIPL) got amalgamated with the assessee company M/s.Cognizant Technology Solutions India Pvt. Ltd. (CTS). M/s.Cognizant (Mauritius) Ltd., held 100% shares of CIPL & MIPL. Similarly, CTS India is 100% subsidiary of M/s.Cognizant Technology Solutions Corporation, USA. It was further noted that before amalgamation, the fair market value shares of CTS, in which M/s.Cognizant Technology Solutions Corporation, USA, was holding 100% equity shares was at Rs.22,582/- per share, whereas, the equity share value of CIPL & MIPL was only at Rs.1,447/- per share and Rs.84/- equity share respectively. It was further noted that after amalgamation, the shareholding pattern of CTS has been drastically changed, as per which, M/s.Cognizant (Mauritius) Ltd. was controlling 76.68% share capital of Indian Company. Further, after amalgamation, the intrinsic value of equity share of CTS has been reduced to Rs.5,035/- per equity share. From the above, what we could understand is that there was rejig in shareholding pattern of group companies so as to restructure the share capital in the assessee company in the hands of M/s.Cognizant (Mauritius) Ltd. It was further brought out in the order u/s.263 of the Act, that the assessee has bought back its shares form shareholders @ Rs.23,915/- per equity share when fair market value or intrinsic value of said shares was at Rs.5,035/- per equity share. The assessee has justified consideration paid for buyback of shares on the basis of valuation report obtained from independent valuer and such valuation has been carried out on the basis of DCF method.

15. In light of above factual back ground, if you examine legal precedents on the issue of revision u/s.263 of the Act, one has to understand whether the assessment order passed by the AO is erroneous in so far as prejudicial to the interest of the revenue or not. Admittedly, the issue of buyback of shares was subject matter of assessment proceedings from the AO during scrutiny assessment proceedings. In fact, the ld.CIT had categorically admitted that the AO had called for details about buyback of shares. However, the ld.CIT was of the opinion that the AO failed to carry out required enquires he ought to have been carried out in terms of Explantion-2 to s.263 of the Act. The provisions of Sec.263 of the Act, deals with revision powers of the Commissioner. The language used by the Legislature in s.263 is to the effect that the Ld.CIT may interfere in revision, if he considers that the order passed by the ITO is erroneous, in so far as it is prejudicial to the interests of the Revenue. It is quite clear that two things must co-exist in order to give jurisdiction to the CIT to interfere in revision. The order of the ITO in question must not only be erroneous but also the error in the ITO order must be of such a kind that it can be said that it is prejudicial to the interests of the Revenue. In other words, merely because, the officer’s order is erroneous, the CIT cannot interfere. Again, merely because, the order of the officer is prejudicial to the interests of the Revenue, then again, that is not enough to confer jurisdiction on the CIT to interfere in revision. These two elements must co-exist, this is because, the first of the two requirements namely, (i) the order is erroneous and (ii) the same is also prejudicial to the Interests of the Revenue, must be satisfied. Similarly, if an order is erroneous, but not prejudicial to the interests of the Revenue, then also the power of suo-motu revision, cannot be exercised. Any and every erroneous order cannot be the subject-matter of revision, because the second requirement also must be fulfilled. There must be some prima facie material on record to show that tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was just has been imposed.

16. The phrase ‘prejudicial to the interests of the Revenue’ has to be read in conjunction with an erroneous order passed by the AO. Every loss of revenue as a consequence of an order of AO cannot be treated as prejudicial to the interests of the Revenue. For example, when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the ITO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the Interests of the Revenue unless the view taken by the ITO is unsustainable in law. This legal principle is supported by the decision of the Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. vs. CIT (243 ITR 83). Similarly, assessment order passed by the ITO without making necessary enquiries on certain important points connected with the assessment, would be erroneous and prejudicial to the interests of the Revenue, when the ITO is expected to make an enquiry of a particular item of income and he does not make an enquiry as expected, that would be a ground for the CIT to interfere with the order passed by the ITO since such an order passed by the ITO is erroneous and prejudicial to the interests of Revenue. Further, the law has been explained by various Courts, including the Hon’ble Supreme Court, as per which, an inadequate enquiry is not a ground for revision of order by the CIT. Further, it is also an established principle of law that where two views are possible on an issue and the AO has taken one possible view which the CIT is not agreeing then also there is no scope for the CIT to revise the Assessment order unless the view taken by the AO is unsustainable in law. Therefore, to decide a particular assessment order is erroneous in so far as prejudicial to the interest of the revenue, it has to be examined in light of facts of its own case along with settled legal principles.

17. In this case, the sole basis for the CIT to set aside the assessment order passed by the AO u/s. 143(3) of the Act is buyback of shares by the assessee from its shareholders. There is no dispute with regard to the fact that the scheme of buy back is in accordance with provisions ofSec.77A of the Companies Act, 1956. It is also not in dispute that the scheme of buy back has been approved by the shareholders and has been accepted by the Registrar of Companies. The assessee had also taken necessary approvals from Regulatory Authorities including the Ministry of Corporate Affairs and RBI for remitting the consideration to non-resident shareholders under FEMA Regulations. The assessee had also deducted TDS on consideration paid to non-resident shareholders wherever such consideration is liable for capital gains tax in India in terms of s.46A of the Act. In fact, the CIT has never disputed the fact that the assessee has complied with provisions of Sec.77A of the Companies Act, 1956 and other regulatory requirements. According to the CIT, although the assessee has satisfied the conditions prescribed for buyback of shares, but, consideration paid by the assessee for buyback of shares to its shareholders is not genuine and further, the same has been overvalued so as to make the payment to the shareholders of its surplus funds without affecting their taxability in terms of Sec.2(22)(a) / 2(22)(d) of the Act, and consequent DDT payable by the assessee u/s.115-O to 115-P of the Income Tax Act, 1961.

18. We have given our thoughtful consideration to the reasons given by the ld.CIT to set aside the assessment order u/s.263 of the Act, in light of various arguments advanced by the ld. Counsel for the assessee and we ourselves do not subscribe to the arguments of the ld. Counsel for the assessee for the simple reason that although, there is no dispute with regard to fact that the AO has called for details about buyback of shares, but in our considered view, he did not carry out necessary enquiries he ought to have been carried out before allowing the claim of the assessee. Further, as per the facts brought out by the ld.CIT, it is abundantly clear that the AO has failed to apply relevant provisions of Act in right perspective of law, even though, consideration paid by the assessee for buyback of shares is exorbitantly on higher side when compare to intrinsic value of shares as on the date of buyback of shares. Further, the assessee has followed DCF method for valuation of shares and such valuation has been carried out by M/s. Ernst & Young, an independent valuer. Although, assessee claims that valuation carried out by the independent valuer is in accordance with standard procedure, but facts brought out by the CIT clearly indicate that there is an inflation of free cash flows considered by the assessee for subsequent FYs when compare to free cash flow determined during the FY 2016-17 for the purpose of a scheme of arrangements and compromise approved by the Hon’ble Madras High Court for the purpose of purchase of its own shares from shareholders. As per the facts brought out by the CIT, there is variation in free cash flow between FY 2013 & FY 2016, ranging between 71% to 84%., as per which, the correct fair market value of the share is only between Rs.7,000/- and Rs.8,000/-. Although, there is a lacunae in the fair market value determined by the assessee, but the AO accepted the valuation report furnished by the assessee without even examining the correctness of the said valuation report and fair market value determined by the assessee. In our considered view, the enquiries conducted by the AO cannot be considered as enquiries he ought to have been carried out in terms of Explanation-2 to sec.263 of the Act. In this case, as per facts brought on record, the share capital of assessee company was held by 3 non-resident shareholders, out of which, M/s.Cognizant (Mauritius) Ltd., a 100% subsidiary of M/s.Cognizant Technology Solutions Corporation, USA, is holding more than 76.68% equity shares. Further, M/s.Cognizant (Mauritius) Ltd., is enjoying the benefit of non-taxation in India because of treaty benefits available in terms of India Mauritius DTAA. Therefore, in our considered view, when there is a restructuring of shareholding pattern of the company before buyback of shares and further, the major shareholding controlling more than 75% of share capital of the company is exempt from payment of capital gains tax in terms of Sec.46A of the Act, the AO ought to have examined the issue and consideration paid by the assessee for buyback of shares in light of provisions of Sec.2(22)(a)/(d). In this case, although, what is apparent is not real, the AO simply accepted the explanation furnished by the assessee without any application of mind to relevant provisions of Act in light of peculiar facts of the case. In our considered view, the enquiries conducted by the AO can be set to have been half-baked enquiry ignoring vital aspects, which were required for examination. Because, no prudent business person will buy its own shares at such an exorbitant price, when the book value or intrinsic value of the share was very much less when the buyback of shares were happened. Therefore, we are of the considered view that enquiries conducted by the AO resulting in drawing incorrect assumption of facts, makes the order erroneous and prejudicial to the interest of the revenue. Further, if the CIT on examination of records of assessment comes to the conclusion that the AO failed to enquire into certain other relevant aspects, which in fact necessitated for investigation then he has all the powers to revise the assessment order. To argue that once the AO, as per his wisdom has enquired into certain aspects of assessment which he considers relevant and thereafter, the CIT cannot interfere, is wholly untenable. If this argument is taken to its logical conclusion, then it would mean that the provisions of Sec.263 of the Act, would be redundant. No doubt, if the AO has conducted necessary enquires and has taken a possible view, then there is no scope for the CIT to invoke his jurisdictional powers. However, if the enquiries conducted by the AO are inadequate or it can be said that there is no enquiry at all, then the CIT can very well invoke his powers u/s.263 of the Act, and revise the assessment order. The crux of the matter is that the AO should conduct enquiry to satisfy himself about the genuineness of transaction. The scope of the term enquiry can be different in different cases. There cannot be any hard and past rule to carry out a particular enquiry. However, such enquiry would be subject to satisfaction of AO. If the enquiry conducted by the AO is an objective satisfaction, then, even though, the AO has called for necessary materials during the course of assessment proceedings, it will lead to an inference that he has not conducted enquiries he ought to have been conducted. In other words, mere obtaining and placing documents on records cannot be equated into conducting enquiry. In this case, on perusal of facts available on record, there is a prima facie indication that there are few abnormalities on the issue of buyback of shares. In such case, the AO after collection of certain evidences should embark upon further investigation so as to ascertain the true colours of the transactions, because, what is apparent is not real. However, the AO simply called for certain details on the issue of buyback of shares, but did not reach to a logical conclusion on the issue, even though, there is a scope for application of provisions of Sec.2(22)(a) / 2(22)(d) of the Act. Therefore, we are of the considered view that there is no error in reasons given by the ld. CIT to exercise his jurisdiction.

19. Let us come to specific arguments of the ld. Counsel for the assessee that the AO has caused detailed enquiry on the issue of buyback of shares during the course of assessment proceedings by calling for various details, for which, the assessee has filed necessary details and merely, for the reason that the issue does not find mention in the assessment order, it does not mean that the same has not been examined by the AO, where examination of record shows otherwise. We find that although, it appears that the AO has conducted enquiries on the issue of buyback of shares, but in principle, the enquiries conducted by the AO is a case of lack of enquiry or no enquiry at all. Because, even though, there is a scope for AO to test the buyback of shares and consideration paid by the assessee in light of provisions of Sec.2(22)(a) / 2(22)(d) of the Act, but, the AO restricted the scope of enquiry in light of provisions of Sec.46A of the Act, relevant provisions of Companies Act, 1956, and tax treaty between India and Mauritius without going into the aspect of distribution of accumulation of profits of the company in the grab of buyback of shares. No doubt, where the law enables the taxpayer to choose one out of various available options, it is the prerogative of the taxpayer to choose the option that leave the taxpayer with less tax burden, but such option should not be a tool for avoidance of legitimate tax payable to the exchequer. In this case, as per options available to the assessee, the assessee can either go for buyback of shares or distribution of dividend. But, such option cannot be an arrangement to give a colour of legitimate tax planning within the four corners of law. Legitimate tax planning is acceptable under law, if such tax planning is within four corners of law and this principle is supported by the decision of Hon’ble Supreme Court in the case of Union of India v. Azadi Bachao Andolan(2003) 263 ITR 706(SC). However, if tax planning is solely for evasion of legitimate tax payable to the exchequer, then such tax planning needs to be examined by lifting the corporate veil to ascertain true character of transactions and this principle is supported by the decision of Hon’ble Supreme Court in the case of Mcdowell & Co. Ltd. vs. CTO (1985) 154 ITR 148(SC). From the above, what is clear is that legitimate tax planning is acceptable under law if such tax planning is within four corners of law. However, if tax planning is a colourable device then the same needs to be brought to books under the law. In this case, facts brought on record point a finger on genuineness of buy back of shares in light of fair market value fixed for shares and Therefore, we are of the considered view that the arguments advanced by the ld. Counsel for the assessee in light of the decision of the Hon’ble Supreme Court in the case of Union of India v. Azadi Bachao Andolan (supra) does not hold good.

20. The ld. Counsel had vehemently argued the issue on the issue of lack of enquiry and inadequate enquiry in light of certain judicial precedents including the decision of the Hon’ble Delhi High Court in the case of CIT v. Sunbeam Auto Lt. 332 ITR 167. According to the ld. Counsel for the assessee, lack of enquiry may be a reason for revision of assessment order, but once, it is accepted that the AO has conducted enquiry then for inadequate enquiry the CIT cannot assume jurisdiction u/s.263 of the Act, merely because the issue does not find mention in the assessment order. No doubt, in so far as legal prepositions concerned that for inadequate enquiry, the CIT cannot exercise his powers conferred u/s.263 of the Act, but, once it is observed that it is a case of lack of enquiry then the question of inadequacy in enquiry conducted by the AO does not arise. Because, what is enquiry which required to be conducted by the AO has been explained by insertion of Explanation-2 to Sec.263 of the Act. As per which, the orders passed without making enquiries or verification which should have been made are called as erroneous orders. In this case, we have already observed that enquiry conducted by the AO can at best be termed as no enquiry and thus, we are of the considered view that though there is no unfettered powers of revision to the CIT even after Explanation-2 to s.263 but when it comes to a case of lack of enquiry, the CIT does have power to revise the assessment order and thus, we find no merits in the arguments taken by ld. Counsel for the assessee. In so far as legal proposition argued by ld. Counsel for the assessee on the issue of change of opinion and powers of CIT u/s.263 of the Act, we are of the considered view that the concept the of change of opinion is relevant in so far as re-assessment proceedings is concerned. However, when it comes to revision powers of the Commissioner u/s.263, what is required to be seen is whether the CIT has made out a case of satisfaction that the assessment order is erroneous and prejudicial to the interest of the revenue. Once, it is noticed that there is no application of mind on the issue by the AO then the question of change of opinion does not come into play at all, because only when the AO after apprising relevant facts, formed a opinion then the concept of change of opinion would arise. In case, there is no opinion at all then the concept of change of opinion is irrelevant, more particularly in the context of provisions of Sec.263 of the Act. As regards the arguments of the ld. Counsel for the assessee on the issue of specific findings from CIT with regard to error in the assessment causing prejudicial to the interest of the revenue, we find that the CIT had brought out very clear facts in light of fair market value of shares as per net worth of the assessee and fair market value as considered on the basis of DCF method and opined that there is a clear case of overvaluation of fair market value of shares while making payment to shareholders on buy back of shares. In our considered view, said observations of the CIT constitutes a specific finding with regard to error in the assessment order causing prejudice to the interest of then revenue and thus, we reject the arguments of the ld. Counsel for the assessee.

21. Coming back to another facet of the issue, the ld. Counsel vehemently argued the case in light of observations of the CIT on possible tax avoidance plan and argued that genuine business transaction cannot be said to have been undertaken for avoidance of tax. We find force in the arguments of the ld. Counsel for the assessee on the preposition of genuine tax planning. However, when prima facie materials suggest that there is a possibility of undertaking a tax avoidance plan, then it is open for the assessing authority to lift the corporate veil to ascertain the true nature of transaction undertaken by the parties, more particularly when prima facie materials suggest what is apparent is not real. Therefore, the transaction needs to be examined in light of legitimate tax planning and possible colourable device to avoid payment of taxes. As we have already noted in previous paragraphs of this order, legitimate tax planning is acceptable under law. In fact, this has been time and again upheld by the Hon’ble Supreme Court including in the case of UOI v. Azadi Bachao Andolan [2003] 263 ITR 706 But, all arrangements between the parties cannot be accepted as legitimate tax planning when facts gathered suggest otherwise. In such cases, the decision of the Hon’ble Supreme Court in the case of Mc.dowell Co. Ltd. v. CIT (supra) would be relevant decide whether or not the parties resorted to any kind of tax avoidance plan, where it has been held that tax planning for the purpose of avoidance of payment of tax should be regarded as colourable devices and those needs to be examined by lifting the corporate veil. Therefore, the arguments of the ld. Counsel for the assessee that after the decision of UOI v. Azadi Bachao Andolan(Supra) much water flown in the system and thus, each and every case, cannot be examined in light of decision of Mc.dowell Co. Ltd. v.CIT cannot be accepted. In our considered view, even after UOI vs. Azadi Bachao Andolan (Supra), the decision of Mc.dowell & Co. Ltd. vs. CTO (Supra) still holds good and thus, we reject the arguments of the ld. Counsel for the assessee.

22. Coming back to the decision of the Hon’ble Karnataka High Court in the case of Fidelity Business Services India Pvt. Ltd. v. CIT (supra). The CIT heavily relied upon the decision of the Hon’ble Karnataka High Court in the case of Fidelity Business Services India Pvt. Ltd. v. CIT(supra) and observed that treatment of possible over valuation of shares in case of buy back can be verified in light of provisions of Sec.2(22)(a) / (d) of the Act. The CIT while concluding his observation has taken support from the decision of the Hon’ble Karnataka High Court. The ld.AR for the assessee vehemently opposed decision relied upon by the CIT and argued that the issue of treatment of over valuation of shares in case of buy back of shares has not been dealt with or decided on merits in the above case. The Hon’ble Karnataka High Court has only laid down principles on the powers of the Hon’ble Tribunal u/s.254(1) while hearing an appeal which is completely different from the jurisdictional conditions for the revision of an order u/s.263 of the Act. We do not find any substance in the arguments of the Counsel for the assessee for the simple reason that what was decided in the case before the Hon’ble Karnataka High Court in the case of Fidelity Business Services India Pvt. Ltd. v. CIT(Supra) is on consideration paid for buy back of shares and over valuation of such consideration. Further, the Hon’ble High Court while affirming the decision of ITAT Bangalore Bench has categorically observed that there is no error in the findings recorded by the Tribunal on the issue of treatment of over valuation of shares in case of buy back of shares and under those facts, we are of the considered view that there is no error the findings of the CIT in observing that the order passed by the AO is erroneous in so far as fixing fair market value of shares in case of buy back of shares and thus, we reject the arguments of the Counsel for the assessee.

23. The ld. Counsel for the assessee vehemently argued the judgment of the Hon’ble Supreme Court in Malabar Industrial Company Ltd. Vs. CIT (2000) 243 ITR 83 (SC) in support of his arguments. The Hon’ble Supreme Court while examining powers of the CIT in exercising powers u/s 263 of the Act, has been observed that non-application of mind by the AO makes the order erroneous and prejudicial to the interests of the Revenue. An order is said to be erroneous when it does not conform to the law or proceeds on incorrect assumption of facts. An order is said to be prejudicial to the interests of the revenue not only where the due tax has not come to the coffers of the exchequer, but, also where bad precedent is set by the AO. In other words, the expression ‘prejudicial to the interests of the revenue’ needs to be viewed in a broader sense and cannot be confined to its narrow meaning of non-realization of the due tax only. It further explained the ambit of the expression ‘prejudicial to the interests of the revenue’ by laying down that it: “is not an expression of art and is not defined in the Act. Understood in its ordinary meaning, it is of wide import and is not confined to loss of tax. The facts of the instant cases speak volumes of the bad trend set up by the AO in not conducting proper enquiries, which in our considered opinion have been rightly set aside by the CIT u/s.263 of the Act. Thus, we are of the considered view that the case law relied upon by the ld. Counsel for the assessee in the case of Malabar Industrial Company Ltd. Vs. CIT (2000) 243 ITR 83 (SC) will not rescue the case of the assessee.

24. At this stage, it is relevant to consider observations of the Hon’ble Delhi High Court in Gee Vee Enterprises vs. Addl. CIT and Others (1975) 99 ITR 375 (Del), where it was held that the: “CIT was justified in exercising his revisional jurisdiction on the ground that the ITO had not made sufficient enquiries before granting registration to the firm and it was not necessary for the CIT to have himself made enquiries before cancelling assessment.” In our considered opinion, this judgment is an answer to the contention put forth on behalf of the assessee that the CIT must initially indicate the mistake in the assessment order on merits by making proper enquiry at his end before cancelling assessment under section 263. This judgment makes it palpable that the very fact that the ITO “had not made sufficient enquiries before granting registration to the firm” was considered as sufficient enough to the CIT with the power to revise the assessment order and it was not considered necessary in such circumstances: “for the CIT to have himself made enquiries before cancelling the assessment.” It transpires that the fact that no enquiry was conducted by the AO or even though the enquiry was conducted, but, the relevant enquiry was omitted to be conducted, is sufficient to brand an assessment order erroneous and prejudicial to the interests of the revenue. Similar view has been taken by the Hon’ble Supreme Court in the case of Rampyari Devi Saraogi vs. CIT (1968) 67 ITR 84 (SC) in which it has been held that an assessment made by the AO “in undue haste without making any enquiry” would render an assessment order erroneous and prejudicial to the interests of the revenue. Similar view has been taken by the Hon’ble Apex Court in Smt. Tara Devi Aggarwal vs. CIT (1973) 88 ITR 323 (SC). We have held in an earlier para that the assessment orders under consideration were passed in undue haste in terms of lack of proper enquiry, thereby making it eligible for revision by the CIT u/s.263 of the Act.

25. A similar view has been expressed by the Hon’ble Gujarat High Court in Addl. CIT vs. Mukur Corporation (1978) 111 ITR 312 (Guj), where it has held that it is not necessary that CIT in his order u/s.263 should come to a firm conclusion that the order of the AO was erroneous in so far as it was prejudicial to the interest of the revenue. Where the AO allowed deduction without properly probing the matter, the Hon’ble High Court held that the initiation of proceedings u/s.263 was proper.

26. The Hon’ble Rajasthan High Court in the case of Smt.Renu Gupta v. CIT [2007] 211 CTR 147 had also considered an identical issue and held that the CIT may considered an order of the AO to be erroneous not only if there is an apparent error of reasoning or of law or of facts on the face of it but also when it is a stereo type order which simply accepts what the assessee has stated in his submission and fails to make enquiries which are called for in the circumstances of the case. It is not necessary for the CIT to make further enquiry before cancelling the assessment order of the AO. The Hon’ble Madras High Court in the case of Mofussil Warehouse & Trading v. CIT [1998] 238 ITR 867 has considered an identical issue and held that when nothing is traceable to the assessment order as relatable to the application of mind for the part of the ITO to the silent provisions adumbrated under relevant provisions of the Act and further, if he really applied his mind in this regard, there have been some sort of discussion in the order and the absence of any discussion therefore, is a clear indication of his non-application of mind. The non-performance of such a duty on the part of the ITO culminated in distortions and prejudices to the revenue and such distortions and prejudices to the revenue far being set right the CIT invoked his powers u/s.263 and exercise of such powers, he cancelled the assessment with a direction to make a fresh assessment according to law. Such a power can by no stretch of imagination be stated to be a power exercised in appellate or revisional jurisdictional conferred on the CIT u/s.263 of the Act. The Hon’ble Karnataka High Court in the case of CIT v. Active Traders Pvt. Ltd., [1995] 214 ITR 583 had also expressed similar view and held that when the AO had not made any enquiry on the issues then the CIT is right in setting aside the assessment order to redo the assessment.

27. From an overview of the above discussed judgments, it is crystal clear that where the AO fails to conduct an enquiry or proper enquiry, which is called for in the given circumstances, the CIT is empowered to set aside the assessment order by treating it as erroneous and prejudicial to the interests of the revenue. In such circumstances, it is not further required on the part of the CIT to expressly show where the assessment order went wrong. The very fact that no enquiry was conducted or no proper enquiry was conducted in the required circumstances, is sufficient in itself to invoke the provisions of section 263.

28. Coming back to plethora of judicial precedents cited by the ld. Counsel for the assessee. The ld. Counsel has relied upon several decisions in support of different propositions and all such case laws relied upon by the counsel has been listed in his arguments. We have carefully gone through various case laws relied upon by the ld. Counsel for the assessee on the revisionary powers of the Commissioner where the AO has examined the issues including the decision of ITAT Visakhapatnam Bench in the case of GVR Associates v. ITO [2017] 88 taxmann.com 716. There is no dispute with regard to ratios laid down by various courts and Tribunal on revisionary powers of the Commissioner in as much as where the AO has examined the issues during the assessment proceedings and after considering relevant facts has accepted the explanation furnished by the assessee then there is no scope for CIT to assume his jurisdiction. However, when it is a case of lack of enquiry or no enquiry at all, nowhere it has been decided that the CIT cannot assume his jurisdiction and set aside the assessment order. In this case, it has been observed that it is a case of lack of enquiry or no enquiry at all and thus, the CIT has rightly invoked his jurisdiction and set aside the order and hence, the case laws relied upon by the assessee are not applicable to the facts of present case.

29. The ld. Counsel for the assessee has also relied upon plethora of judicial precedents in support of various legal propositions including satisfaction of the CIT before invoking his powers, in light of the decision of the Hon’ble Delhi High Court in the case of ITO v. DG Housing Project Ltd. [2012] 343 ITR 329. We find that there is no dispute about legal proposition laid down by the Hon’ble High Court in as much as the CIT must record a prima facie satisfaction that the assessment order is prejudicial to the interest of the revenue and not merely remit the issue to the AO for re-examination. But fact remains that in this case, the CIT had brought out clear facts and also given various reasons to come to the conclusion that how and why assessment order passed by the AO erroneous and prejudicial to the interest of the revenue. Therefore, we are of the considered view that case laws cited by the ld. Counsel for the assessee on this proposition has no application to the facts of the present case. The ld. Counsel for the assessee had also relied up to the decision of the Hon’ble Delhi High Court CIT v. Kelvinator of India Ltd. [2002] 256 ITR 1 and argued that rising queries ad seeking submissions on issues during assessment tantamount to application of mind and specific discussion in order is not necessary. We find no infirmity in said legal proposition set out by various high Courts including the Hon’ble Delhi High Court in the said case. However, those cases are rendered before explanation-2 to sec.263 inserted by the Finance Act, w.e.f.01.06.2015 and as per said explanation for the purpose of s.263, it is hereby declare that an order passed by the AO shall be deemed to be erroneous in so far as it is prejudicial to the interest of the revenue, if in the opinion of the CIT the order is passed without making enquiries or verifications which should have been made. In this case, the CIT has brought out various facts and given reasons to come to the conclusion that although the AO has conducted enquiries but enquires conducted by the AO is not in the nature of enquiry or verification which he should have been made. Therefore, the case laws relied upon by the ld. Counsel for the assessee is considered as not applicable to the facts of the present case. The ld. Counsel for the assessee had also relied upon various decisions on the proposition of powers of the commissioner in setting aside the assessment order u/s.263, on the issue of substitution of his views where the AO has taken one view in light of approval/verification by competent authorities, methodology adopted by the assessee for valuation of shares consideration is actually received is relevant for the purpose of s.46A of the Act and submitted that when the AO has taken a view after considering necessary approvals and also relevant provisions then no scope for the CIT to set aside the assessment order on the very same issue. We find that what is relevant to see whether order passed by the AO is erroneous in so far as it is prejudicial to the interest of the revenue is the scope of enquiry conducted by the AO during assessment proceedings and satisfaction of the CIT on the basis of relevant records, but not observations of the Courts on the issue of method of valuation, approval/verification, etc. In this case, there is no doubt of whatsoever with regard to satisfaction of the CIT before setting aside the assessment order u/s.263, where he had very categorically observed that the assessment order is erroneous and prejudicial to the interest of the revenue for various reasons including for lack of enquiry or no enquiry at all, non-application of mind by the AO to the relevant provisions and thus, we are of the considered view that there is no merit in the arguments taken by the ld. Counsel for the assessee in light of various decisions ad hence, the case laws cited by the Counsel for the assessee are rejected. In so far as various case laws cited by the assessee, although those case laws are not specifically dealt with in this order in light of facts of the present case to decide whether ratio laid down in said cases is applicable to the facts of the present case or not but, we have gone though all those case laws cited by the ld. Counsel for the assessee and tested the ratio laid down therein, to the facts of the present case and find that those case laws have no application to the facts of the present case and thus, we are of the considered view that those case laws are not applicable to the facts of the present case.

30. In this view of the matter and considering facts and circumstances of the case and also by relied upon various case laws, we are of the considered view that the enquiry conducted by the AO in this case can’t be construed as a proper enquiry and further, inadequate inquiry conducted by the AO in the given circumstances is as good as no enquiry and as such, the CIT was empowered to revise the assessment order. The order of the CIT is not based on irrelevant considerations and further in the present circumstances, he was not obliged to positively indicate the deficiencies in the assessment order on merits on the question of consideration paid for buy back of shares. Further, the AO in the given circumstances can’t be said to have taken a possible view as the revision is sought to be done on the premise that the AO did not make enquiry thereby rendering the assessment order erroneous and prejudicial to the interest of the revenue on that score itself. Therefore, for all these reasons, we hold that the assessment order passed by the AO is erroneous in so far as it is prejudicial to the interest of the revenue and thus, the CIT has rightly exercised his jurisdictional powers and set aside the assessment order passed by the AO u/s.143(3) dated 31/12/2016. Hence, we are inclined to uphold the order of the ld.CIT and dismiss the appeal filed by the assessee.

31. In the result, the appeal filed by the assessee is dismissed. Order pronounced on the 29^th day of June, 2022, in Chennai.