CASE LAW

Can a notice under section 148 of the Income-tax Act, 1961(‘the Act’), calling upon a taxpayer to file a return of income, be valid if issued after the end of the relevant assessment year??????

In this petition presented under Article 226 of the Constitution, the petitioner assails the jurisdiction of the respondent to continue reassessment proceedings initiated by notices issued by the Dy. Director (International Taxation), Noida under Section 148 of the Income Tax Act, 1961. (Adobe Systems Software Ireland (Petitioner) vs Assistant Director of Income Tax on DOI 28 March, 2014)

FACTS OF THE CASE

· The petitioner is a non-resident company, incorporated in Ireland. It functions in India from Gurgaon, Haryana. It is engaged in the business of Adobe Products – shrink-wrapped/ off-the-shelf computer software.

· Petitioner for first time filed a return of income for the assessment year 2008-09 with the respondent declaring “nil” taxable income.

· A notice under Section 143(2) was served on the petitioner in respect of the return. A draft assessment order under Section 144C was proposed by the respondent and the proceedings were referred to the Disputes Resolution Panel (DRP). In the meantime i.e. after the issue of notice under section 143(2) by the respondent and before the preparation of the draft assessment order, a notice under Section 142(1) was issued by the Deputy Director of Income Tax, International Taxation, Noida (Noida officer) calling for a return for the income for the assessment year 2009-10

· The petitioner pointed out that the jurisdiction to assess a non-resident company is determined either on the basis of the location of the “permanent establishment” (PE) of the non-resident company or the location of a source of income accruing to the company in India and that the petitioner did not have any source of income in Noida (India) as none of its clients in India were located there, nor did the petitioner have a PE in India. It was accordingly submitted that the notice issued by the Noida officer was without jurisdiction. It would appear that there was no reply to this notice.

· Noida officer issued notices under Section 148 of the Act seeking to reopen the petitioner’s assessment for the assessment years 2004-05, 2005-06 and 2006-07. These notices were received by the petitioner and the petitioner wrote to the Noida officer informing him that the petitioner was already assessed in India by the respondent (Delhi officer) and, therefore, he had no jurisdiction to issue the notices.

· No reply appears to have been received for a period of 4 months from the Noida officer. However, on 26.09.2011 the Noida officer wrote a letter to the petitioner enclosing the reasons recorded for reopening the assessments for all the three years. The reasons are identical and they are as follows:

Reasons

· The assessee is a company incorporated in Ireland. NO return of income has been filed by the assessee for the A.Y. 2006-07

· During the year the assessee has received Rs.301731289 for marketing support services from Adobe India which is AE of the assessee.

· Indian company is a dependent agent for non-resident company as it works wholly and exclusively for non-resident and completed contracts of non-residents with the distributors in India. Without prejudice to the above, the assessee’s income is chargeable to tax in India as royalty received by him for licensing software to various customers in India. Predictably, the petitioner’s response was;

(a) the notices under Section 148 were issued without any jurisdiction by the Noida officer and at the time

(b) notice issued under Section 142(1) for the assessment year 2004-05 was barred by limitation since it was issued beyond the period of six years from the end of the relevant assessment year;

(c) even assuming that the notices under Section 148 were validly issued by the Noida officer, the time limit to complete the reassessments under Section 153 of the Act would expire.

· The respondent wrote to the petitioner pointing out that no returns had been filed in response to the notices issued under Section 148 and also pointing out that despite issue of notices under Section 142(1) on 14.11.2011 “to enforce compliance to the requirement of filing the return in response to notice u/s 148”, the petitioner did not file any return and calling upon the petitioner to show- cause “as to why the assessment in your case may not be completed u/s. 144 read with Section 147 of the Act”.

JUDGEMENT

After examining the facts of the case High court held that the jurisdiction of Directors of Income Tax (International Taxation) over a foreign company lay with the assessing officer in whose area the foreign company has a PE or a business connection. Examination of records reveals that the petitioner had a “dependent agent PE” in Noida in the form of Adobe India, which was also the petitioner’s associated enterprise. Therefore, the Noida officer had valid jurisdiction over the petitioner and was entitled to issue the notices under Section 148.

(a) For the aforesaid reasons the court concluded that the objections raised by the petitioner were without merit and dismissed them, it seems clear that the validity of the proceedings which were continued by the respondent depends upon the validity of the initiation of the proceedings for reassessment by notices issues by the Noida officer.

(b) The question whether the initiation of reassessment proceedings by the Noida officer was valid or not would depend upon whether the petitioner had a PE within the jurisdiction of the Noida officer. If the petitioner is found to have a PE at Noida as alleged by the revenue, and if the revenue is able to establish that fact, the petitioner not having filed any returns of income for the assessment years 2004-05 to 2006-07, there was escapement of income which the revenue is entitled, subject to the provisions of the Act, to bring to assessment. There can be no vested right that escaped income cannot be taxed, provided all the jurisdictional conditions and the procedural requirements of the Act are satisfied.

(c) It is also noticed that the petitioner did not file any returns of income in response to the notices issued under Section 148. We are inclined to agree with the view taken by the respondent that the petitioner would get the reasons recorded for reopening the assessment only upon filing the return of income pursuant to the notice issued under Section 148. The conduct of the petitioner has been one of defiance; it did not file returns in response to the notices issued under Section 148. The mere filing of the return can never amount to submitting to the jurisdiction. The filing of the return in response to the notice under Section 148 defines the stand taken by the assessee. Section 148 says that the return called for by the notice issued under that section shall be treated as if such a return were a return required to be furnished under Section 139 of the Act.

(d) The petitioner, not having made the Noida officer aware that no income chargeable to tax had escaped assessment and having merely told him that he has no jurisdiction to issue reassessment notices, was not acting strictly in accordance with law. The writ remedy being a discretionary remedy, the discretion can be exercised in favour of the writ petitioner only if his conduct has been in conformity with law. If it is not, the Court may refuse to exercise the discretion in favour of the writ petitioner. For the aforesaid reasons the writ petitions with all connected applications are dismissed with no order as to costs.

Conclusion

In India taxation of Non Residents has always been fraught with uncertainty. The existence of a business connection and also that of a PE (Permanent Establishment) has been a subject matter of frequent debate decision of the High Court in the present case dealt with a number of significant issues relating to the taxation of nonresidents.

The observations of the High Court should serve as a useful reference for non-residents desiring to carry on business in India. Chartered Accountants practicing Income-tax and Tax Counsel should also find this decision stimulating and a useful tool for guiding non-resident taxpayers in optimizing their Indian income-tax liability. We need to understand that a return of income conveys the position taken by the assessee to the assessing authority – whether he has taxable income or not. A return is not a mere scrap of paper. There is a sanctity attached to the return. If the assessing authority calls upon the assessee to file a return of income, the same shall be complied with by the assessee and it is no answer to the notice to say that since in his (assessee’s) opinion there is no taxable income, he is under no obligation to file the return.

Case Law

There can be no presumption of inability to pay debts where the same are not accepted as such. Proceedings before a company court are not recovery proceedings.

In the matter of M/s Nakshatra Steel Sales & Services Limited V/s. M/s Radlay Metal Products Private Limited, the Hon’ble High Court of Delhi has decided the matter with regard to the delayed payment charges claimed by the petitioner, the same can by no stretch be considered to be a debt admitted by the respondent. Mere mentioning a stipulation with regard to delayed payment interest in a bill or invoice would not per se constitute agreement for payment of interest. The Court did not accept that the respondent company was unable to pay its debts and is liable to be wound up by virtue of Section 433(e) of the Act.

Facts of the Case

1. The petitioner company supplied various iron and steel products to the respondent company as per agreed specifications. The petitioner had raised various bills for the materials supplied and the petitioner had provided the details of the invoices which have remained unpaid.

2. The respondent company had failed to make the payment of the bills amounting to Rs. 1,18,11,927/- despite receiving the delivery of products.

3. The petitioner had further stated that the respondent is liable to pay interest at the rate of 4% per month on the delayed payment. The said rate of interest had been agreed and specifically mentioned in the invoices raised by the petitioner.

4. The late payment charges were not claimed as penalty but as pre-determined assessment of loss suffered by the supplier petitioner on account of any delay in the payment. Therefore, the petitioner has claimed and is entitled for an amount of Rs. 43,14,976/- as late payment charges.

5. The respondent issued various cheques for an amount aggregating to Rs. 81,46,886/- in discharge of its liabilities, however, the said cheques were dishonoured.

6. The respondent failed to pay the said amounts within the time specified in the notices therefore, the petitioner initiated proceedings under section 138 of NI Act and filed Criminal Complaint.

7. The respondent replied to the said notices, by its separate repliesand raised the issue of the inferiorquality of goods being supplied by the petitioner and non-adjustment of a debit note.

8. The petitioner also sent a statutory notice under section 434(1)(a) of the Act, demanding the amount of Rs. 1,18,11,927/- along with late payment charges.

9. The said statutory notice elicited no response from the respondent company and therefore, the petitioner filed the present winding up petition.

10. Subsequently, the respondent company filed applications in the proceedings initiated under section 138 of the NI Act before the Metropolitan Magistrate, Saket, Delhi, for making the payments of the amounts reflected in the dishonored cheques.

11. Magistrate rejected the said application as the petitioner had declined to accept the said amount.

12. The respondent filed a reply to the petition, raising disputes regarding the quality of goods supplied by the petitioner and further stated that the amount claimed by the petitioner did not account for a debit note.

Judgement

After hearing the learned councils of both the parties the high court held.

1. A petition for the winding up of the company under Section 433(e) of the Act is maintainable if the company is unable to pay its debt. In the present case the substantial parts of the amount claimed by the petitioner is undisputedly payable by the respondent which indicates that the respondent company is able to pay its debts and could not be considered as commercially insolvent.

2. It is trite law that the proceedings before a company court are not recovery proceedings and the company court cannot be used as a debt collecting agency or as a means of bringing improper pressure on the company to pay a bona fide disputed debt.

3. Relying on the Judgment of the Supreme Court in the case of IBA Health (I) (P) Ltd. v. Info-Drive Systems Sdn. Bhd.: (2010) 10 SCC 553. A company court should not exercise its discretionary power provided under Section 433 of the Act where there is ample material on record to substantiate the fact that there are substantial and bona fide disputes against the amount claimed by the creditor of the company.

4. The present petitions and the pending applications are dismissed with cost quantified at Rs. 5,000.

Conclusion

In the present case, Petitioner had raised a claim towards the supplies made to the respondent. The respondent, disputed the claim of the petitioners on the ground that the petitionersupplied inferior quality material due to which the respondent alleged that it had suffered huge lose which the petitioners were liable to make good. Dispute existed before issuance of statutory notice u/s 433(1) A of the Companies Act, 1956.

Therefore it was strongly advisable that a Company Court, should act with circumspection, care and caution and examine as to whether an attempt is made to pressurize the company to pay a debt which is substantially disputed. A Company Court, therefore, should be guarded from such vexatious abuse of the process and cannot function as a debt collecting agency and should not permit a party to unreasonably set the law in motion, especially when the aggrieved party has a remedy elsewhere.

Case Law

Whether the CLB could vacate the interim order suo motu without any application making such prayer being filed by the respondent ???

The Hon’ble High Court Of Delhi, in the matter of Satish Sharma v. Vrinda Realtors Ltd. and Others has dismissed appeal challenging order of the Company Law Board vacating certain interim order restraining the company from alienating its assets.

Facts of the Case

v The appellant Satish Sharma was a director in the Vrinda Realtors Ltd. (Respondent company) and was holding 15,000 equity shares of Rs.10 each in respondent No.1-company.

v The appellant also lodged a complaint, on 19th May, 2012, with the Sahibabad Police Station, Distt. Ghaziabad . The appellant had stated that he was called to the office of respondent No. 2 on 11th May, 2012, when he reached the office of respondent No.2 he did not find the respondent at the said office. However, two men appeared and assaulted the appellant with slaps and fists to coerce him to sign certain documents and papers.

v The appellant states that he resisted the onslaught, but the said two men forcibly injected him with some drugs and also held a gun to him. The appellant states that, thereafter, he became drowsy and in this state his signatures were obtained on the documents. It is contended that the said documents have been used to show that the appellant had transferred his shares in the respondent No.1-company and also resigned from the Board of directors of the respondent No.1-company.

v The appellant filed a company petition under sections 397, 398, 401 and 403 of the Act, before the CLB, inter alia, seeking setting aside the alleged decisions taken in the Board meeting held on 9th May, 2012. The appellant filed the said petition on the allegations that respondent No.2 had obtained the signatures of the appellant on various documents under coercion and intoxication. It is, therefore, contended that the transfer of shares and the appointments in the respondent No.1-company are illegal and void.

v CLB passed an interim order directing the respondent-company not to alienate the fixed assets of the company until an order was passed on merits. The said restraint order was passed as the counsel for the respondent conceded to the same without prejudice to the rights and contentions of parties

v The respondent filed an application under regulation 44 of CLB Regulations, 1991 seeking dismissal of the company petition, inter alia, on the ground that the company petition was not maintainable as appellant was not a shareholder of the company.

v By the impugned order, the CLB disposed of the said application by vacating the interim order passed on 1st August, 2012

v The appellant contented that the CLB has vacated the interim order as passed on 1st August, 2012 suo motu and without any application on behalf of the respondents. It has been pointed out by the appellant that the application in which the order has been passed by the CLB was with regard to the maintainability of the company petition and not for the vacation of the interim protection as granted on 1st August, 2012. It is further contended that the CLB does not have powers under section 403 of the Act to suo motu vacate the restraint order.

Judgement

On hearing the learned council in length High Court examined the controversy which had been raised in the present case. “It considered whether the CLB has erred in vacating the interim orders without any application being filed by the respondent.” Court felt that it was necessary to examine the reasons why the CLB has decided to vacate the interim order Court find no infirmity in the approach adopted by the CLB. The CLB after considering the relevant facts has not found the case of the petitioner credible enough to warrant an interim order.

Sections 397 and 398 of the Act give very wide powers to the CLB with regard to the affairs of the company. By virtue of section 397 of the Act, the CLB is empowered to make such orders as it thinks fit with a view to bring an end to the matters companied of. And, by virtue of section 398 of the Act, the CLB is also empowered to pass such orders as it thinks fit to prevent matters which are apprehended.

In view of the wide powers conferred on the CLB. It cannot be accepted that the CLB did not have the power to vacate an interim order. The contention that section 403 of the Act restricts the CLB from vacating interim orders without an appropriate application is also erroneous. The said section is also couched in wide terms and empowers the CLB to make any interim order which it thinks fit. It necessarily follows that the CLB would also have the power and discretion to modify or vacate an interim order granted earlier.

The present appeal was without merits and is, accordingly, dismissed.

Case Law

Will benefit of Capital Gain Exemption available to a company during its conversion from a Private Limited Company to a LLP if certain exemption condition is violated??

It is held that advancing of loan to its partners by Limited Liability Partnership out of Reserve and Surplus of erstwhile company results in violation of section 47(xiiib) of the Income Tax Act, 1961. Therefore, the benefit of exemption of capital gain under section 47(xiiib) would not be available to the taxpayer. Accordingly it was held that the capital gain on transfer of assets on conversion of company into LLP is to be computed under Section 45 of the Income Tax Act. (Aravali Polymers LLP v JCIT (I.T.A. No. 718/Kol. / 2014 dated 27.06.2014) (Kol ITAT))

Facts of the Case:

· A Private Limited Company, Aravali Polymers Pvt. Ltd. was converted into a Limited Liability Partnership under section 56 of the erstwhile Companies Act and the Aravali Polymers LLP (Appellant/ Assessee) came into existence.

· After the conversion of the Private Limited Company into the appellant Limited Liability Partnership, 31,84,807 equity shares of the East India Hotels Ltd. was sold by the appellant for an amount of Rs.53,56,69,888/- and the same was offered for taxation as long-term capital gains at the rate of 10%.

· The assessee had approximately Rs. 49 crores profit. The assessee had also received Reserves and Surplus amounting to Rs.3,06,31,969/- of the Private Limited Company.

· When the assessee filed its return, the assessee had offered the capital gains on the sale of the equity shares of East India Hotels Ltd. and had also claimed exemption under section 47(xiiib).

· The AO observed that assessee had provided interest- free loan to the partners of the assessee- firm out of the Reserve and Surplus received by the assessee firm on the conversion of the Pvt. Limited Company into the Limited Liability Partnership. AO also held that there was violation of the provisions of section 47(xiiib) and consequently held that in view of the provisions of section 47A(4), the amount of profit and gains arising from the transfer of the capital assets or shares is to be profit and gains chargeable to tax on the assessee firm being the successor LLP.

· The assessee- firm had given interest – free loans to its partners to an extent of Rs.50 crores. The loan was given to the partners in the same ratio as that of profit sharing.

· Tax Authority’s argued that Proviso (c) to section 47(xiiib) states that “the partners of the firm do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the Company.”

· Loan having been given to the partners of the assessee-firm who are none other than the shareholders of the erstwhile company, is, in fact, a benefit and such benefit had been given in the form of interest-free loans.

· The assessee having used a part of the Reserves and Surplus, which was transferred from the erstwhile company to the assessee-firm, had been paid directly to the partners of the assessee-firm.

Judgement

· Reading the proviso (c) to section 47 gives a meaning that both the Company and the LLP must exist for the shareholders of the Company to receive any consideration. Admittedly, in the present case, the Company does not exist after conversion. Therefore, the question of a violation of Proviso (c) to Section 47(xiiib) does not exist.

· Coming to the proviso (f) to Section 47(xiiib), it bars payment either directly or indirectly to any partner out of the accumulated profit standing in the accounts of the Company on the date of conversion for a period of three years from the date of conversion. Which clearly shows that there is a violation of proviso (f) to section 47(xiiib). Proviso (f) of section 47(xiiib) having been violated

· It is an interest- free loan coupled with the fact that the loan has been given to its partners in the same ratio as profit sharings hows that the amount has been given directly to the partners out of the balance of the accumulated profits standing in the accounts of the Company on the date of conversion. It clearly shows that there is a violation of proviso (f) to section 47(xiiib).

· A perusal of the provisions of section 47A(4) uses the words “shall be deemed to be the profits and gains chargeable to tax of the successorLimited Partnership”. The words are not “be deemed to be capital gains chargeable”.

· In the computation of capital gains, nowhere in the Act is there provision, more so in section 45, for deeming the sale price in the case of equity shares. The value at which the shares or the assets of the Company Aravali Polymers Pvt. Ltd. was taken over by the Limited Liability Partnership firm, would be the sale price and the cost of acquisition thereof is to be as per books of the erstwhile Company.

· The capital gains in respect of the transfer of the assets in the hands of M/s. Aravali Polymers Pvt . Ltd. to the appellant firm Aravali Polymers LLP is to be computed under sect ion 45 of the Income Tax Act for which purpose, the issue is restored to the file of the Assessing Officer.

· The appeal of the assessee is partly allowed for statistical purposes.

Kolkata Tribunal held that Capital gains exemption is not available on conversion of a private limited company into an LLP if exemption conditions are violated. Tribunal observed the following:

Observation

It is a welcome observation of the Tribunal that the capital gain if any should be computed on the basis of actual transfer value and not on the basis of market value as on the date of conversion. Accordingly if the conversion is made at book value .

Case Law: 

Company’s inability to file Form 8 due to MCA online services not accepting the digital signatures of the director who had signed the Form 8 due to his default in some other company. In such a situation can jurisdiction as vested under section 614 be invoked ???

The present Petition is filed with CLB Chennai Bench in the matter of Kotak Mahindra Bank Ltd V/s M/s. Nagarjuna Travels & Hotel Ltd, under section 614 of the Companies Act 1956 read with Regulation 44 of the CLB Regulations 1991, praying CLB Bench to direct the respondent Company and its directors to register a charge under section 125 of the Companies Act, the mortgage created by the respondent No 1 in favour of the petitioner.

Facts of the case:  

•   Kotak Mahindra Bank (Petitioner Company) sanctioned a short term loan of Rs 50 Crore and working capital demand loan facility of Rs 50 Crores to the Deccan Chronicle Holdings Ltd (DCHL) (Petitioner).
•      The amount was transferred to the bank account of DCHL.
• The Board of directors of Nagarjuna Travels & Hotel (Respondent Company) passed a resolution dated 16/07/2012 agreeing to guarantee the payment of the debt of Rs 100 Crores to the petitioner on behalf of DCHL and also agreeing to mortgage its immovable property comprising of land and building to secure the loans under the short term loan facility.
•   The respondent company filed form 8 for registration of charge created by it duly signed by its director Mr Venkatram Reddy on behalf of Respondent company and M Ramakrishna P Shenoy on behalf of Petitioner company.
•  Petitioner Company appointed a CS to file Form 8 on MCA website. However the same could not be uploaded at the pre-Scrutiny stage itself with the following remarks “some pre-scrutiny validation have failed, please make the required change and upload the Form again.
•  On enquiring it was found that the director whose DSC was appended to Form 8 could not be uploaded for registration of charge on the ground that the said director is also a director of another company viz, Open Door Ltd, which is a defaulting company.
• The Petitioner Company being a secured creditor is an interested person u/s 134 of CA 1956 and therefore entitled to get the charge registered with ROC read with section 125 of the Act.
•    The Petitioner Company exhausted all the remedies available and issued a notice U/S 614 of the Act calling upon the respondent Company to come forward and comply with the filing of Form 8 within 14 days from the receipt of this notice.
•     The Notice was duly received by the respondent company but it did not comply with the filing of Form 8.

Judgement

CLB directed on 12th Day Of March, 2014, that Petitioner company seeking directions from the Bench by invoking jurisdiction as vested under section 614 is completely misplaced.

•  The company and its officers who has been authorised to file form 8 for creation of charge has complied in creation of charge and in filing of Form 8 with ROC.
• On the other hand from the pleadings it is seen that the company’s inability to file form 8 is due to MCA online services not accepting the digital signatures of the director who has signed the form 8 due to his default in some other company.
•   In this case no Directions can be issued against the respondent company as section 614 of the act envisages issues of directions by CLB only against the company and its officers who are in default and not against anyone else.
•    In view of the above the petition has miserably failed both facts and on law and the petitioner company is not entitled for any relief as prayed for.
•      The present petition was dismissed with no costs.

CASE LAW: 

Whether workman is entitled to reinstatement with back wages and other consequential benefits as if his services were never terminated in case of termination under Industrial Dispute Act, 1947 ??????

The Hon’ble Supreme Court of India in the matter of Bhuvnesh Kumar Dwivedi vs Hindalco Industries Limited has decided the issue relating to whether termination of a workman would amount to retrenchment who has been in continuous service for not less than one year under an employer in any industry.

FACTS OF THE CASE

1.  Mr. Bhuvnesh Kumar Dwivedi (appellant workman) was appointed as Labour Supervisor in M/s. Hindalco Industries Limited (employer’s/respondent) and he worked continuously in terms of Section 25B of the Industrial Disputes Act, 1947 wherein if a worker works for a period of 240 days, it will be deemed as if he has works for the full one calendar year. The appellant workman works on the said post till 28-07-1998- the day on which his services were terminated.

2.   The appellant workman worked for six calendar years from the date of his appointment till the termination of his service and he has rendered more than 240 days of continuous service in every calendar year before his termination. The respondent employer terminated the services of appellant workman on 27-07-1998 as per practice with the reason “sanction expired”.

3.   The respondent employer neither paid retrenchment compensation nor issued any notice or paid wages in lieu of the same to the appellant workman as mandated under Section 6N of the U.P. Industrial Disputes Act (“the Act”).

4. The appellant workman falls within the definition of workman under section 2(s) of the Act and has been rendering service since the day of his appointment on 30.12.1992. Therefore, termination of his contract is a clear case of retrenchment as opposed to the provision in Section 6N of the Act.

5.   The workman raised an industrial dispute and the Labour Court held that he was retrenched and awarded a compensation of Rs.1,00,000/- which was set aside by the High Court in the appeal preferred by the employer. The workman had challenged the judgement of the High court before the Supreme Court.

JUDGEMENT

The Supreme Court held that no workman employed in any industry who has been in continuous service for not less than one year under an employer can be retrenched by that employer until the conditions enumerated in Clauses (a) and (b) of Section 25F of the Act are satisfied. The Court has held that Section 25F (a) and (b) of the Act is mandatory and non-compliance thereof renders the retrenchment of an employee nullity.

The Supreme Court hold that appellant is a worker of the respondent Company providing continuous service for 6 years except for the artificial breaks imposed upon him with an oblique motive by the respondent Company.

The appellant is entitled to reinstatement with all back wages and other consequential reliefs and awarding Rs. 1,00,000/- towards damages and other consequential benefits. The appellant is gainfully employed post termination of his service on the respondent company. The claim of the respondent company that the appellant company is gainfully employed somewhere is vague and cannot be considered and accepted.

CONCLUSION

Termination of a workman would amount to retrenchment who has been in continuous service for not less than one year under an employer in any industry and on his termination the employer has to comply with the provisions of Section 25F of the Industrial dispute Act, 1947.

Whether the amount received on redemption of preference shares was a transfer for the purpose of capital gains tax liability or whether it was deemed dividend ???

Income Tax Appellate Tribunal Mumbai Bench in the case of Parle Biscuits P. Ltd., Mumbai V/s. Department Of Income Tax held that that redemption of preference shares amounts to ‘transfer’ of capital asset which is subject to capital gains under Section 45 of the Income- tax Act 1961 (the Act) and any loss on redemption thereon would be allowable as a capital loss Thus, amount received on redemption of preference shares cannot be taxed as ‘deemed dividend’. The sum received amounts to ‘transfer’ of a capital asset under the Income-tax Act and any loss on redemption thereon would thus be allowable as a capital Loss.

FACTS OF CASE:

· The Parle Biscuits P. Ltd. (Taxpayer) is engaged in manufacture of biscuits under the brand name of Parle-G, Krackjack, Monaco, Nimkin etc. The taxpayer was allotted preference shares in two Indian companies.
· Taxpayer claimed capital loss of 35,58,718/- on account of redemption of preference shares. The total consideration received by assessee on redemption of preference shares has two categories. The preference shares are of SFR Ltd. and Himachal Futuristics Communications Ltd
· The preference shares were redeemed and the taxpayer relying on the decision of Anarkali Sarabhai v. CIT [1996] 224 ITR 422 (SC) treated the amount received as a ‘transfer’ under Section 2(47) of the Act for the purpose of capital gains tax liability.
· Taxpayer claimed indexation benefit on cost of acquisition of 2 crores thereby arriving at the cost of acquisition at 2,35,58,7 18/-The taxpayer claimed indexation benefit on the cost of acquisition and the resultant difference was claimed as capital loss.
· The Assessing Officer (AO) relying on the decision of CIT V/s G. Narasimhan [1999] 236 ITR 327(S.C) held the amount received on redemption of preference shares was treated as deemed dividend under Section 2(22)(d) of the Act, Thus the question of allowing the loss did not arise. The AO thus disallowed the capital loss relating to redemption of preference shares.
· Aggrieved by the Order of the Assessing Officer, assessee contended before the learned CIT (A) that the view taken by the Assessing Officer is not in accordance with law. The taxpayer contended that since the shares were non-participating preference shares, they were covered under the exception of the definition of deemed dividend. Accordingly, the amount received on redemption of such preference shares was not taxable as deemed dividend under Section 2(22)(d) of the Act
· The Taxpayer relying on decision of court contended that redemption of preference shares amounts to transfer for the purpose of capital gains tax liability.

JUDGEMENT

· The Tribunal, relied on the Supreme Court decisions in the case of Anarkali Sarabhai v. CIT [1996] 224 ITR 422 (SC) and Kartikeya Sarabhai v. CIT [1997] 228 ITR 163 (SC), held that redemption of preference shares has to be considered as ‘transfer’ under Section 2(47) of the Act and loss on redemption thereof is an allowable long-term capital loss.
· Further, the Tribunal observed that even if for the purpose of argument, the consideration is deemed as dividend, the same amount of consideration cannot be considered at the time of computing capital gains on redemption, and therefore, the assessee may be entitled to a higher loss on redemption.
· On analyzing the implications of section 2(22)(d) of the Act, the Tribunal held that since there is no reduction of capital in the given case, considering section 80(3) of the Companies Act, 1956 even though the amounts were distributed out of accumulated profits, the amounts received by the assessee cannot be construed as ‘deemed dividend’ and would therefore be considered as consideration received on ‘transfer’ in working out the capital gains.

CONCLUSION

This is an important Judgment by Mumbai ITAT as in the above quoted case there was no reduction of share capital considering section 80(3) under the provisions of Companies Act, 1956. Therefore the amount received on redemption of preference share did not result into deemed dividend and would therefore be considered as consideration received on ‘transfer’ in working out the capital gains.

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A Profitable Company proposes to reduce its share capital by cancelling a specified number of shares held by certain shareholders. Whether such reduction of share capital was really to pay off the capital which is in excess of the requirements of the company or it was distribution of profits under the guise of reduction of capital.????

The Hon’ble High Court of Delhi in the petition filed by RS Livemedia Private Limited, the petitioner company under Sections 100-104 of the Companies Act, 1956 (hereinafter referred to as the ‘Act’) seeking approval/sanction to the proposed reduction of the Subscribed and Paid-up Equity and Preference Share Capital of the petitioner Company

Observation made by the Regional Director expresses the apprehension that the proposed reduction of capital is in substance a ruse to distribute profits hence the approval of reduction of share capital should be withheld.

Facts of the case: 

• The present petition has been filed by the petitioner company under Sections 100-104 of the Companies Act, 1956
• The petitioner proposes to reduce its share capital by cancelling a specified number of shares held by certain shareholders. The petitioner has also determined the amounts payable to the shareholders with respect to the shares proposed to be cancelled reduced.
• A resolution approving the reduction of share capital had been passed by the members of the petitioner company at the Extra Ordinary General Meeting of the company held on 08.07.2013.
• As per the Explanatory Statement issued, the object of reduction of share capital was to pay off the capital which is in excess of the requirements of the company, to the investor shareholders, thereby providing partial exit to the investor shareholders.
• In EGM members of the company approved the reduction of the existing issued, subscribed and paid up share capital from `5,08,28,456 to `1,25,00,000/- by cancelling 2,97,29,048 equity shares and 85,99,408 Non-Cumulative Convertible Preference shares.
• The Petition stated that the company company did not have any secured creditor and out of the 20 unsecured creditors, 15 unsecured creditors representing more than 90% of the unsecured debt had given their no objection or consent to the said reduction of capital, the requirement of complying with the provisions of Section 101(2) of the Act was dispensed with by an order dated 06.11.2013
• The petitioner has also filed an affidavit dated 10.02.2014 stating that no objections have been received from the general public in pursuance of the publication of the notices.

Observations of the Regional Director

• Observed that the petitioner company is an profit making company and the petitioner company had reported income from operations of `13.84 crores and net profit of `9.83 crores during the year.
• Observed that cancelling/reducing the said preference shares without conversion would amount to treating the said shares as redeemable preference shares. It is submitted that as per the RBI guidelines the preference shares would have to be considered as debt capital and the petitioner company would be required to comply with the norms as applicable to External Commercial Borrowing.

Judgement by the Hon’ble High Court

The Court held that the question of reduction of share capital is treated as a matter of domestic concern, i.e. it is the decision of the majority which prevails. If a majority by special resolution decides to reduce share capital of the company, it has also the right to decide as to how this reduction should be carried. While reducing the share capital the company can decide to extinguish some of its shares without dealing in the same manner as with all other shares of the same class. The company limited by shares is permitted to reduce its share capital in any manner, meaning thereby a selective reduction is permissible within the framework of law.

In view of the above, the present petition is allowed and the approval of reduction in the share capital cannot be withheld on the basis of the above mentioned observation made by the Regional Director

Conclusion

The observation made by the Regional Director is solely premised on the fact that the petitioner company is a profitable one. There is no principle of law which prohibits a profitable company from reducing its share capital and thus the fact that the petitioner company is a profitable one cannot possibly, in absence of any other material fact, lead to the conclusion that the reduction of capital is for a collateral purpose.