The Karnataka High Court in the case of M/s. Fidelity Business Services India Pvt. Ltd. v. ACIT vide its judgment dated July 23, 2018 has delivered a significant judgment by interpreting the powers of the Income Tax Appellate Tribunal (ITAT) and held that ITAT has the power to give directions for fresh enquiry into the aspects of the subject matter of appeal filed before it either suo motu or on any grounds raised by either party to the appeal.
The Appellant Assessee Company bought back its own shares from its Holding Company at a very high price during the relevant previous year out of the ‘Reserves and Surplus’ of the Appellant. This amount was taxed as Dividend u/s 115-O of the I.T. Act upon directions given by the Dispute Resolution Panel (DRP) u/s 144-C(5) for which an appeal was preferred with the Income Tax Appellate Tribunal (ITAT). The ITAT held that the buy-back shall be taxed as ‘Capital Gains’ in the hands of the recipient in accordance with the provisions of Section 46-A of the Income Tax Act and non-taxability as was also stated in the Indo-Mauritius Double Taxation Avoidance Agreement (DTAA). The ITAT reasoned the transfer to be a colorable device and hence eligible to be reopened on the basis that the AO did not consider that the transaction is between two closely related parties and not at the Arm’s Length treating the excess of payment for buyback from the fair market price of shares as Dividends. Hence, the present appeal.
The issue before the present Court was whether the Tribunal was right in directing examination by the Assessing Officer (AO) of the fair market value of the shares bought back and application of Section 2(22)(e) of the Act if the consideration for buy back of shares was in excess of the fair market value of the shares.
It was submitted on behalf of the assessee that the Tribunal has exceeded its jurisdiction to unnecessarily open the enquiry upon questions of market price of the shares’ buy-back.
On the other hand, the respondent submitted that the Tribunal was completely justified in re-opening the assessment and the same was well within the parameters of the subject of appeal.
The Hon’ble Court after considering the submissions of both the parties held that ITAT has the power to give directions for fresh enquiry into the aspects of the subject matter of appeal filed before it either suo motu or on any grounds raised by either party to the appeal which have not been investigated or enquired into by the lower Authorities earlier and which may result in enhancement of tax liability of the assessee. It was elaborated that the remittance by the assessee to its holding company could not be taxed as dividend. The powers of the Tribunal are not limited or circumscribed by the grounds raised before it and any order on the subject matter of appeal can be passed if is found to be necessary, expedient and relevant by the learned Tribunal.
Further, the Hon’ble Court denied adjudication upon the second question of taxability of the remittance pointing to the 2012 Vodafone case mentioning that the “Mauritius route of tax avoidance and evasion is a hugely suffered phenomenon in our Country. It also resulted in a huge tax controversy in the case of Vodafone in which even after the decision of the Hon’ble Apex Court in favour of the Assessee in 2012”.
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