The Delhi High Court quashed the revision order and held that a revisionary order under Section 263 of the Income Tax Act, 1961 could not be passed against a non-existing seller entity. The Long Term Capital Gain (LTCG) exemption passed against the buyer of non existing seller.
The appellant/revenue challenged the order dated 19.12.2022 passed by the Income Tax Appellate Tribunal [“Tribunal”] in favour of the assessee, Cairnhill CIPEF Ltd.
A share purchase agreement was executed between three entities i.e., Cairnhill CIPEF Ltd., Cairnhill CGPE Ltd., and Monet Ltd. concerning the shares of a public limited company incorporated in India named, Mankind Pharmaceutical Ltd. [“Mankind Ltd.”], for the sale of shares to Cairnhill CIPEF Ltd. and Cairnhill CGPE Ltd.
An assessment order was passed qua Monet Ltd., which had sold the shares to Cairnhill CIPEF Ltd. and Cairnhill CGPE Ltd. The record also shows that Monet Ltd. was, at the relevant time, a 100% subsidiary of another entity company incorporated in Mauritius i.e., Chryscapital IV LLC.
Monet Ltd. had sold 2157534 shares of Mankind Ltd., @ Rs.5590.76 per share, to Cairnhill CIPEF Ltd. and Cairnhill CGPE Ltd. As a result of the said sale of shares, Monet Ltd. registered Long Term Capital Gain (LTCG) amounting to Rs.10,02,92,15,510/-, after setting off a loss amounting to Rs.1,06,35,77,482/-. Monet Ltd., however, set off the LTCG against brought forward loss amounting to Rs.1,06,35,77,482/-.
Consequently, Monet Ltd. had declared its income as “NIL” for the AY in issue i.e., AY 2016-17. The Return of Income (ROI) qua which the assessment order was framed was filed on 28.09.2016. Importantly, insofar as the LTCG amounting to Rs.10,02,92,15,510/- was concerned, Monet Ltd. claimed exemption by taking recourse to Article 13 of India-Mauritius Double Taxation Avoidance Agreement [“India-Mauritius DTAA”].
The record shows that before framing the assessment order dated 12.12.2018, Monet Ltd.’s case was selected for scrutiny under CASS. Accordingly, a notice dated 18.07.2017 was issued under Section 143(2) of the Income Tax Act, 1961 [“the Act”]. However, thereafter the aforementioned assessment order dated 12.12.2018 was passed, whereby the ROI filed by Monet Ltd. was accepted.
The Assessing Officer (AO) had applied his mind to the sale of shares and the brought forward loss that had been set off is evident from the assessment order. The appellant/revenue avers that the Commissioner of Income Tax (CIT) passed an order dated 27.03.2021 under Section 163 of the Act concerning the respondent/assessee.
A division bench comprising Justice Rajiv Shakdher and Justice Girish Kathpalia observed that “the revisionary power under Section 263 of the Act is directed towards the assessment order is also, in our view, an untenable submission for the reason that the assessment order is framed qua “an assessee”.”
Further observed that in the usual and normal course, the expression “agent” suggests that there is a principal in existence, on whose behalf the agent acts. The fact that an entity or a person is treated as an agent only buttresses this point of view.
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