Telangana High Court: The present writ petition was filed seeking issuance of writ of mandamus declaring the initiation and continuation of proceedings dated 14-12-2022, issued by Respondent 1, Principal Commissioner of Income Tax (Central) for the assessment year 2019-2020, under Section 144-BA of the Income Tax Act, 1961 (‘the 1961 Act’) and all consequent proceedings thereto as illegal, arbitrary, ultra vires the 1961 Act, lacking in subject jurisdiction and to set aside the same and further direct the respondents not to take any coercive steps or action against the petitioner.
The Division Bench of P. Sam Koshy and Laxmi Narayana Alishetty, JJ., opined that colourable devices could not be part of tax planning and it was wrong to encourage or entertain the belief that it was honourable to avoid the payment of tax by resorting to dubious methods. The Court held that the provisions of Chapter X-A, i.e., the General Anti-Avoidance Rules (‘GAAR’) would become applicable in the present case, thus, it dismissed the present writ petition and held that the respondents could proceed further with the process under Section 144-AB of the 1961 Act.
Background
The petitioner sold the shares of Ramky Estate and Farms Limited (‘REFL’) to Advisory Services Pvt. Ltd (‘ADR’) and prior to the sale of shares to ADR, REFL had issued bonus shares to its shareholders in the ratio of 5:1. Owing to the issuance of bonus shares, the face value of each share of REFL was reduced to 1/6th of its value. The sale of REFL shares to ADR resulted in a short-term capital loss to the petitioner as per the provisions of the 1961 Act. The petitioner set off the short-term capital loss incurred on the sale of shares of REFL against the long-term gains made on another transaction of sale of shares in Ramky Enviro Engineers Limited (‘REEL’). For the assessment year 2019-2020, the petitioner filed his income tax return reporting the income under the head ‘Capital Gains’ arising out of the sale of shares of REEL after adjusting the capital loss incurred on the sale of REFL shares and paid the requisite income tax.
Respondent 2, Deputy Commissioner of Income Tax, treated these transactions as impermissible avoidance arrangement as per GAAR. In the process, Reference Notice dated 02-08-2022 was issued by Respondent 2 under Rule 10-UB(1) of the Income Tax Rules, 1962, and sought objections from the petitioner under Section 144-BA(1) of the 1961 Act. Thereafter, Respondent 1 issued the impugned notice on 14-12-2022 stating that the transactions undertaken by the petitioner qualified as Impermissible Avoidance Arrangement under the 1961 Act.
Analysis, Law, and Decision
The petitioner contended that since there was a special provision relating to avoidance of tax envisaged under the 1961 Act, under the said circumstances, the general provision of law of anti-avoidance could not be applied and the respondents were required to scrutinize the case of the petitioner strictly within the four corners of the provisions of Chapter X i.e., Specific Anti-Avoidance Rules (‘SAAR’) and Chapter X-A i.e., GAAR could not be invoked.
The Court noted that Chapter X dealt with the special provisions relating to avoidance of tax and Chapter X-A was brought by way of an amendment to the 1961 Act, consequent to the Finance Act, 2013, with effect from 01-04-2016. The Court observed that in the present case, there was a situation where the special provision of law was already there in the Act when the general provision of law was subsequently enacted by way of an amendment. Normally it was the vice versa, i.e., where the general provision of law already being in force, the special provision of law was subsequently enacted.
The Court also observed that Chapter X-A begins with a non-obstante clause, where in Section 95(1) dealing with the applicability of the GAAR, it was held that, notwithstanding anything contained in the 1961 Act if the Assessing Authority finds that an arrangement entered into by the Assessee was an impermissible avoidance arrangement, the determination had to be done in respect of the consequential tax arising there from and shall be subject to the provisions of Chapter X-A. The Court stated that this meant that by virtue of the non-obstante clause, the provisions of Chapter X-A get an overriding effect over and above the other existing provisions of law.
The petitioner submitted that SAAR, particularly Section 94(8), should take precedence over the GAAR. The Court opined that this contention, however, was fundamentally flawed and lacked consistency as the petitioner asserted that Section 94(8) was not applicable to shares during the relevant time limit. The Court opined that this contradiction in the petitioner’s contention weakens the overall credibility of his argument.
The Court opined that Section 94(8) did not apply to the current case, as issuance of bonus shares was an artificial avoidance arrangement that lacked any logical or practical justification. The Court also opined that this arrangement was primarily designed to sidestep tax obligations, in direct contravention of the principles of the 1961 Act.
The Court relied on CIT v. S. Zoraster & Co., (1972) 4 SCC 15 and opined that the petitioner’s contention that the facts of the case were irrelevant in determining the application of a general law was also fundamentally flawed. The Court also relied on McDowell & Co. Ltd. v. CTO, (1985) 3 SCC 230 and opined that tax planning might be legitimate provided it was within the framework of law.
The Court further opined that colourable devices could not be part of tax planning and it was wrong to encourage or entertain the belief that it was honourable to avoid the payment of tax by resorting to dubious methods. It was the obligation of every citizen to pay the taxes honestly without resorting to subterfuges.
The Court held that the Revenue had persuasively and convincingly shown that the transactions in the present case were not permissible tax avoidance arrangements, and the evidence pointed towards the fact that these transactions did not qualify as permissible under the tax laws. Thus, the Court held that the provisions of Chapter X-A would become applicable.
The Court dismissed the writ petitions and held that the respondents could proceed further with the process under Section 144-AB of the 1961 Act.
[Ayodhya Rami Reddy Alla v. CIT, 2024 SCC OnLine TS 985, Order dated 07-06-2024]
Advocates who appeared in this case :
For the Petitioner: Advocate Rubaina S Khatoon
For the Respondents: Advocate B Narasimha Sarma
