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 25thJuly2019in 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:
