ORDER
G.E. Veerabhadrappa, Vice President.
This appeal by the assessee arises out of the order dated 23-3-2005 of the CIT City- 10, Mumbai passed under section 263 of the Income Tax Act for assessment year 2000-01.
2. The assessee is a limited company and is engaged in the business of purchase and sale of shares and securities of other companies. In the course of making investment in shares of other bodies corporate, the assessee mainly invested by subscribing directly to the shares issued by the companies. Its total income for the year under consideration therefore consisted of business income, dividend income and capital gains. For the year under appeal, the assessee filed a return declaring an income of Rs. 15,44,94,082 on 13-2-2002. The income as per the provisions of section 115JA of the Act was computed at Rs. 4,73,66,265. The said return was processed under section 143(1) of the Act on 20-1-2003. Subsequently, the assessing officer issued notices under sections 143(2) and 142(1) of the Act to make a scrutiny assessment year under section 143(3) of the Act. The assessing officer determined the total income of the assessee under section 143(3) of the Act at 15,45,83,600 vide order dated 28-3-2003. This order of the assessing officer was the subject-matter of examination by the Commissioner of Income-tax under section 263 of the Act.
3. The Commissioner went into the details filed by the assessee in the course of assessment proceedings. More particularly, he verified the statement of capital gain, wherein it was seen that the assessee has sold 41,85,425 shares of Lupin Laboratories Ltd. (LLL for short) between 31-8-1999 to 31-12-1999 for a consideration of Rs. 1,62,83,32,339 and earned capital gain of Rs. 1,57,88,42,065. In the same statement it was found that the assessee has claimed capital loss of Rs. 142,39,01,640 on account of reduction of value of share capital of six private limited companies in which the shares were held by the assessee. All these companies are the assessee’s subsidiaries and they are as under
(i) Synchem Chemicals (I) Pvt. Ltd.
(ii) Landmark Builders Pvt. Ltd.
(iii) Mandovi Leather Pvt. Ltd.
(iv) Shalva Polymers Pvt. Ltd.
(v) Enigma Electronics Pvt. Ltd.
(vi) Visant Machines Pvt. Ltd.
As a note to the statement of capital gains it was mentioned that loss arising on account of reduction of capital is claimed pursuant to the order of the Bombay High Court.
4. The Commissioner considered the order passed under section 143(3) on 28-3-2003 as erroneous in so far as it is prejudicial to the interest of revenue in respect of determination of capital loss and reduction of value of shares and its set off against the capital gains. According to him, the view of the assessing officer that on account of amalgamation of Enigma Electronics Pvt. Ltd., Land Mark Builders Pvt. Ltd., Mandovi Leather Pvt. Ltd., Shalva Polymers Pvt. Ltd. and Vishant Machines Pvt. Ltd. with Synchem Chemicals (India) Ltd. has resulted in the reduction of capital, which in turn resulted in capital loss, is totally incorrect. According to him, the assessing officer failed to understand and appreciate the facts of the case in proper perspective. According to the Commissioner no prudent businessman would venture into acquisition of shares at a cost of Rs. 10 per share and incur huge capital loss without any dubious device and deliberate intention to evade tax on capital gain. The Commissioner further opined that the assessing officer did not understand the intricacies of section 100, 391/394 of the Companies Act and also the decisions of the Hon’ble Supreme Court in the cases of Anarkali Sarabhai v. CIT (1997) 224 ITR 422, Kartikeya V Sarabhai v. CIT (1997) 228 ITR 163 and CIT v. G. Narasimhan (1999) 236 ITR 327. According to him the assessing officer has totally failed to understand and appreciate the facts of the case and did not make any effort to examine or investigate the entire transaction which is apparently a colourable device to evade the rightful tax liability on capital gains derived on transfer of share of Lupin Laboratories Ltd. According to him, in the light of Supreme Court decision in the case of McDowell & Co. Ltd. v. CTO (1985) 154 ITR 148 a colourable device cannot be a part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by dubious methods. The modus operandi shown in the facts of the case was only to avoid the tax payable on the capital gain already derived on sale of shares of Lupin Laboratories Ltd. and the above decisions clearly attracted the ratio of the Supreme Court decision in the case of McDowell & Co. (P.) Ltd. (supra). He did not accept that the ratio laid down by the Supreme Court in the case of Union of India v. Azadi Bachao Andolan (2000) 263 ITR 706 is applicable to the facts of the present case. With these observations, the assessee was asked to show cause as to why the impugned assessment order should not be revised, vide his notice dated 4-2-2005. In response to the said notice, the assessee filed written submissions on 14-3-2005, the contents of which are summarized by the Commissioner in para 15 (pages 7 to 15). The same are not reproduced here for maintaining the brevity. The Commissioner in his order then set out the facts of this case and considered the several contentions of the assessee in pages 16 to 34, giving his view of the matter which is the subject-matter of the dispute before us.
5. The Commissioner went on to add that even though all the materials were placed before the assessing officer, he (the assessing officer) has not appreciated the facts of the case properly and further he has not applied the law correctly. Mere collection of material and placing it on record does not mean that proper enquiries had been conducted. If despite all the materials being on record, the assessing officer failed to properly appreciate the facts and applied the incorrect law, according to the Commissioner, the case becomes fit for application of the provisions of section 263 of the Act. He further stated that the assessing officer failed to go beyond the smoke screen and discover the true state of affairs. In fact according to the learned Commissioner there was lack of application of mind on the part of the assessing officer to go behind the entire scheme of sudden phenomenal increase the paid-up share capital of subsidiaries of Synchem allotment of shares at par value despite nil value and immediate reduction in the face value of shares and creation of artificial loss. According to him, the assessing officer failed to tear the corporate veil and thereby stripping the entire scheme naked. According to him, the assessing officer has miserably failed to properly appreciate the facts of the case and to apply the correct law to the facts of the case. Therefore, he cancelled the assessment framed for the assessment year under consideration with a direction to the assessing officer to reframe the same after allowing the assessee proper opportunity of being heard in the matter. Hence, the assessee is aggrieved.
6. Shri Y.P. Trivedi, the learned counsel for the assessee vehemently argued that during the period June 1997 to December 1999, the assessee in the course of its business had subscribed to and had paid application money to the above mentioned companies. The share application moneys were paid from time to time and the applications were submitted for issue of shares at par. Thereafter, pursuant to a scheme of arrangement reorganization under sections 391 and 394 approved by the Hon’ble Bombay High Court in Company Petition No. 484 of 2001 connected with the company petition No. 35 of 2001 by an order dated 13-7-2001, firstly there was reduction in the paid-up value of the equity shares of the abovementioned subsidiaries companies on 29-2-2000 and thereafter Landmark Builders Pvt. Ltd., Mandovi Leather Pvt. Ltd., Salva Polymers Pvt. Ltd., Enigma Electronics Pvt. Ltd. and Visant Machines Pvt. Ltd. would merge with Synchem Chemicals with effect from the appointed date, i.e., 1-3-2000. In the computation of total income filed with the return. The assessee-company had stated that in view of the decisions of the Supreme Court in the cases of Anarkali Sarabhai, Katrikeya Sarabhai and G. Narasimhan (all cited supra) the capital gain loss of Rs. 142.39 crores suffered on account of transfer (reduction of capital) pursuant to the Bombay High Court order is set off against long-term capital gains of Rs. 157.88 crores earned on sale of equity shares of Lupin Laboratories Ltd. In support whereof reliance was placed on the legal opinion of ExChief Justice M.N. Chandurkar and the same was filed with the assessing officer. The assessing officer after considering all the relevant details information, books of account and material evidence, treated the transaction as a genuine transaction and allowed the capital gain/loss to be set off against the long-term capital gains. In allowing the set off such capital gain/loss, the assessing officer also took into consideration the order of the Bombay High Court approving the scheme of arrangement/reorganization, the legal opinion of Ex. Chief Justice M.N. Chandurkar and the decision of the Supreme Court in the three cases cited before him and held that once the comprehensive and consolidated scheme involving reduction of capital first on 29-2-2000 and thereafter, amalgamation is approved by the Bombay High Court, then the legal effect of the scheme has to be given in taxation proceedings. The Board of Directors of Synchem Chemicals (India) Pvt. Ltd., Landmark Builders Pvt. Ltd., Enigma Electronics (P.) Ltd., Visant Machines (P.) Ltd., Shalva Polymers (P.) Ltd. and Mandovi Leathers (P.) Ltd. passed the necessary resolutions of reduction of their equity share capital on 29-2-2000. These companies have complied with the basic prescribed procedure of section 101(2) of the Companies Act and the resolutions passed by the Board of Directors have been approved by the respective shareholders. The assessee has not resorted to the scheme of arrangement whereby the reduction in the face value of shares of the investee companies had resulted in. In other words, the assessee- company had not reduced its own share capital, but the third parties who were different corporate entities and regularly assessed to tax independently, effected the reduction in the value of their equity shares. Thereafter, the Board of Directors of the amalgamating companies have passed resolutions approving the amalgamation with Synchem Chemicals (India) (P.) Ltd. with effect from the appointed date, i.e., 1-3-2000. All the material facts necessary for the assessment, such as the details of share application moneys paid to the aforesaid companies, the evidence and documents in support of the scheme of reduction of capital and amalgamation of the companies, copies of the report on fair exchange ratio of M/s. C. Chokshi & Co., the scheme of re-organization and the order of the Bombay High Court, the legal opinion of the Ex. Chief Justice, etc., were filed with the assessing officer in response to the query raised by him in relation to the computation of the capital gain. The copy of the order of the Bombay High Court sanctioning the scheme of reorganization /amalgamation was also placed on record. The issue as to how the reduction of capital amount to transfer under section 2(47) of the Income Tax Act was examined by the assessing officer and after considering the ratio laid down by the Supreme Court in the cases of Anarkali Sarabhai (supra), Kartikeya Sarabhai (supra) and G. Narasimhan (supra) the assessing officer observed that in the case of assessee-company, cancellation of shares on reduction is on stronger footing than a redemption for the simple reason that it also constitutes extinguishment of rights. In the light of the above judicial pronouncements and also referring to the Act, the contentions of the assessee were accepted by assessing officer, as according to him a transfer has taken place. The learned counsel for the assessee pointed out that in the light of the above, it cannot be said that the order of the assessing officer is without application of mind to the facts of the case and the relevant case-laws.
7. The learned counsel for the assessee relied on the decision of the Supreme Court in CIT v. Mrs. Grace Collis (2001) 248 ITR 323 wherein the Hon’ble Apex court disapproved its own decision in the case of Vania Silk Mills (P.) Ltd. v. CIT (1991) 191 ITR 647 and held that the definition of transfer in section 2(47) of the Act is an inclusive definition and, therefore, extends to events and transactions which may not otherwise be ‘transfer’ according to its ordinary, popular and natural sense. The definition clearly contemplates in its fold the extinguishment of rights in a capital asset distinct and independent of such extinguishment consequent upon the transfer thereof. Thus, on reduction of capital, according to the learned counsel for the assessee, there is extinguishment of right of the assessee as a shareholder qua the investee companies. The decisions, viz., T. Durairajan v. Waterfall Estates Ltd. (1972) 42 Comp. Cas. 563 (Mad.) and Asian Investments Ltd. In re (1992) 73 Comp. Cas. 517 (Mad.) relied upon by the Commissioner in order passed under section 263 of the Act, according to the learned counsel for the assessee, are clearly distinguishable from the facts of the assessee’s case is in those cases reduction in capital had taken place in the course of amalgamation, whereas in the case of investee companies, in whose shares the assessee had made investment, reduction in the paid-up value of equity shares had taken place independent of amalgamation. It was pointed out that reduction in capital was taken place on 29-2-2000 whereas the amalgamation was approved with effect from 1-3-2000. As a result of reduction, the assessee’s right to receive the paid-up value in the event of liquidation suffered proportionate extinguishment. For this proposition, reliance was placed on the Gujarat High Court decision in CIT v. Minor Bababhai (1981) 128 ITR 12. It was contended that the facts of the assessee’s case are similar to the facts of the case before the Andhra Pradesh High Court in the case of Khan Bahadur Ahmed Allaudin Co. v. CIT (1966) 62 ITR 49 and the assessing officer has only taken a permissible legal view while passing the order under section 143(3) of the Act and, therefore, his order cannot be considered as erroneous within the meaning of section 263 of the Act. In para 5.3 of the assessment order, the assessing officer examined all the details whether the scheme as approved by the Bombay High Court was implemented to evade capital gains tax and he followed the decision of the Rajasthan High Court in Indo Continental Hotels and Resorts Ltd In re (1990) 185 ITR 38, Supreme Court decision in Konark Investment Ltd. v. Union of India (1999) 97 CC 52 and the Bombay High Court decision in Saroj G. Poddar, In re (1996) 22 Corpt LA 200 and reached a conclusion that the legal effect of the amalgamation has to be given in the tax matter even if it results in reduction of tax liability. Therefore, it is not open to the Commissioner acting under section 263 of the Act to say that the scheme itself was a sham and colourable device for avoidance of tax. He relied upon the decision of the Ahmedabad Bench of the Tribunal in the case of Assistant Commissioner v. Gautam Sarabhai Trust (2002) 81 ITD 677 and the Gujarat High Court decision in Wood Polymer Ltd., In re and Bengal Hotels (P) Ltd., In re 109 ITR 177 and argued that when once the scheme is approved by the High Court holding that the scheme was in the public interest, it cannot be said that the entire scheme itself was fraudulent or illegal and the department cannot ignore or object the scheme even if it was carried out as a tax planning device and results in reduction of tax liability. The assessing officer, the learned counsel for the assessee reiterated, had made detailed enquiries in relation to the loss and gain made by the assessee-company on sale/transfer of shares, income whereof was assessed under the head ‘Capital gains’. The relevant extracts from the notings in the order sheet on 9-1-2003, 5-2-2003, 17-2-2003, 20-2-2003 and 11-3-2003, which is given in the form of written submissions, was relied upon to say that there has been a detailed enquiry by the assessing officer into the facts of the present case. In the light of these, it cannot be said that the order of the assessing officer is erroneous or prejudicial to the interest of revenue. The assessing officer, after examining all the factual details, was only guided by the law laid down by the Apex Court in the cases of Anarkali Sarabhai (supra), Kartikeya V Sarabhai (supra), G. Narasimhan (supra), which are clearly applicable to the facts of the present case. The learned counsel for the assessee also pointed out that the scheme of capital reduction and amalgamation was a legitimate legal device and, therefore, the ratio laid down by the Supreme Court in the case of McDowell& Co. Ltd (supra) is not applicable. The assessing officer has critically examined the transactions of the assessee with reference to the decision in the case of McDowell& Co. Ltd. (supra) and also the decision of the Supreme Court in the case of Union of India v. Playworld Electronics (P.) Ltd. (1990) 184 ITR 308 before passing the impugned assessment order. The order passed by the commissioner under section 263 of the Act, the learned counsel for the assessee forcefully submitted therefore, amounts to re-appreciation or re-examination of the facts and evidence already examined by the assessing officer. The learned counsel for the assessee, relying on the principle laid down by the Apex Court in the case of Malabar Industrial Co. Ltd. v. CIT (2000) 243 ITR 83 pointed out that every loss of revenue as a consequence of an order of the assessing officer, cannot be termed as prejudicial to the interest of revenue. For example, when the assessing officer has adopted one of the course permissible in law and it has resulted in loss of revenue, or where two views are possible and the assessing officer had taken one view, it cannot be treated as an erroneous order prejudicial to the interest of the revenue within the meaning of section 263 of the Act. The Apex Court has discusssed the scope and ambit of the powers under section 263 of then Act and has held that the Commissioner can revise an order under section 263 if it is not only erroneous but also prejudicial to the interest of the revenue. When the assessing officer has taken one of the permissible views with which the commissioner does not agree, his view cannot be considered as erroneous and prejudicial to the interest of the revenue unless the view taken by the assessing officer is totally unsustainable in law. The learned counsel for the assessee relied upon the decision of the Chandigarh Bench of the Tribunal in the case of Nahar Exports Ltd. v. Assistant Commissioner (2005) 92 ITD 484 to submit that if the view expressed by the assessing officer is a possible view, the commissioner would not be justified in treating the said order as erroneous and prejudicial to the interest of the revenue. To the same effect is the decision of the Guajrat High Court in the case of CIT v. Mehsana District Co-operative Milk Producers Union Ltd. (2003) 263 ITR 645. Again reliance was placed on the decision of the Bombay High Court in CIT v. Gabriel India Ltd. (1993) 203 ITR 108 wherein it was held that the commissioner cannot revise an assessment order merely because he disagrees with the conclusions arrived at by the Income Tax Officer as to the allowability of an expenditure as revenue expenditure or because in his opinion the Income Tax Officer did not make an elaborate discussion in this regard. The Hon’ble High Court held that the power of suo motu revision under section 263 is in the nature of supervisory jurisdiction and the same can be exercised only if the circumstances specified therein exist. If an assessing officer, acting in accordance with law, makes a certain assessment, the same cannot be branded as erroneous by the commissioner simply because according to him the order should have been written more elaborately or because he writes a brief order without details. Again reliance was placed on the decision of the Delhi High Court in the case of Nabha Investments (P.) Ltd. v. Union of India (2000) 246 ITR 41 wherein it was held that every order passed by the assessing officer, which may result in loss of revenue, cannot be read as erroneous or prejudicial to the interest of the revenue if the view taken by the assessing officer is one of the permissible views. The section does not visualize change of opinion or substitution of judgment of the commissioner for that of the assessing officer. To the same effect, according to the learned counsel for the assessee, is the decision of the Punjab & Haryana High Court in the case of CIT v. Max India Ltd. (2004) 268 ITR 128 and the decisions of the Calcutta High Court in the case of CIT v. Smt. Jyotsana Poddar (1998) 232 ITR 759 and CIT v. Hastings Properties (2002) 253 ITR 124. The Calcutta High Court, the learned counsel for the assessee pleased in CIT v. Subhas Projects & Marketing Ltd. (IT Appeal No. 448 of 2000, dated 19-10-2001) has held that in exercise of power under section 263, the order of the assessing officer can be said to be erroneous only when an impossible view is taken. In other words, if a possible view has been taken by the assessing officer such order cannot be branded as erroneous and is not open for revision under section 263 of the Act. The revisional jurisdiction cannot be allowed to be exercised by the commissioner either for substituting his own opinion for that of the assessing officer or for making a fishing or roving enquiry, as has been held by the Tribunal in the case of Jhulelal Land Development Corpn. v. Dy. CIT (1996) 56 ITD 345 (Bom.), the learned counsel for the assessee submitted. He has also filed a paper book consisting of 132 pages.
8. The learned Departmental Representative, on the other hand, strongly supported the order of the commissioner passed under section 263 of the Act. The learned Departmental Representative vehemently argued that the assessing officer has failed to understand and appreciate the facts of the case and did not make any effort to examine or investigate the entire transaction which was apparently a colourable device to evade the payment of rightful liability towards capital gain derived on transfer of shares of Lupin Laboratories Ltd. He strongly supported the action of the commissioner in the light of the principle laid down by the Hon’ble Supreme Court in the case of McDowell & Co. Ltd. (supra). According to him, colourable device cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by dubious methods. The modus operandi adopted by the assessee has, in fact, resulted in reduction of tax payable on the capital gain already derived on the sale of the shares in question. The learned departmental Representative submitted that the commissioner has given a fair and reasonable opportunity to the assessee of being heard in the matter, discussed all the contentions raised by the assessee and has correctly come to the conclusion that the order of the assessing officer is erroneous and also prejudicial to the interest of the revenue. The learned departmental Representative pointed out that the assessee’s planning of giving different dates for reduction and amalgamation itself proved the intention and motive behind the entire scheme. The learned Departmental Representative further pointed out that all the investee companies belonging to one group had held the entire shareholdings of these companies. Though on papers these companies are independent entities, they are managed by the same group for all practical purposes and they have no separate existence without the group. The purpose of reduction in the value of shares was only to bail out the assessee from paying full tax liability arising out of the sale of shares of Lupin Laboratories. The scheme as such was devised, the learned Departmental Representative contended, after taking advice from the experts and, even after evaluation of the shares of these companies. Therefore, the assessee’s contention that the reduction was carried out by the investee company does not hold water. The learned Departmental Representative pointed out that, as has been correctly discussed by the commissioner in his order, the assessing officer did not appreciate the ratio laid down by the Supreme Court in the cases of Anarkali Sarabhai (supra) Kartikeya V. Sarabhai (supra) and G. Narasimhan (supra). The learned Departmental Representative further pointed out that merely because all the materials were placed before the assessing officer, it does not mean that the commissioner exercising revisional jurisdiction will be shut out especially when the assessing officer did not consider those material from correct and legal angles. Therefore, he strongly supported the order passed by the commissioner under section 263 of the Act.
9. We have carefully considered the rival submissions and have gone through the record. The power of suo motu revision under section 263 is in the nature of supervisory jurisdiction and the same can be exercised only if the circumstances prescribed therein exist. Two circumstances must exist to enable the Commissioner to exercise the power of revision under section 263, viz., (i) the order is erroneous and (ii) by virtue of the order being erroneous prejudice has been caused to the interest of the revenue. Reference may be made in this connection to the principle laid down by the Bombay High Court in Gabriel India Ltd.’s case supra and also the principle laid down by the Apex Court in the case of Malabar Industrial Co. Ltd. (supra). There can be no quarrel over the proposition of law that the twin conditions prescribed in section 263, viz., the order must be erroneous and prejudicial to the interest of the revenue should be satisfied as has been held by the Madras High Court in CIT v. Seshasayee Paper & Boards Ltd. (2000) 242 ITR 490. The scope of inference under section 263 is not to set aside merely unfavourable orders and bring to tax some more money to the treasury nor is the section meant to get at sheer escapement of revenue which is taken care of by other provisions in the Act. The prejudice that is contemplated under section 263 is prejudice to the income-tax administration as a whole. Section 263 is to be invoked not as a jurisdictional corrective or as a review of a subordinate order is exercise of the supervisory power but it is to be invoked and employed only for the purpose of setting right distortions and prejudices to the revenue, which is a unique conception which has to be understood in the context of and in the interest of revenue administration. Such a power cannot in any manner be equated to or regarded as approaching in any way in appellate jurisdiction or even the ordinary revisional jurisdiction conferred on the Commissioner under section 264, as has been held by the Madras High Court in Venkatkrishna Rice Co. v. CIT(1987) 163 ITR 129 and the Karnataka High Court in the case of S.S. Muddanna v. State of Karnataka(1993) 89 STC 90. It has again been held by the Bombay High Court that in the garb of exercising power under section 263, the Commissioner cannot initiate proceedings with a view to starting fishing and roving enquiries in matters or orders which are already concluded. Such action will be against the well-accepted policy of law that there must be a point of finality in all legal proceedings that state issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial and quasi judicial controversies as it must be in other spheres of human activities.
The expression “erroneous”, “erroneous assessment” and “erroneous judgment” have been defined in Black’s Law Dictionary 6th Edition, page 542. According to it “erroneous” means “involving error, deviating from the law”, “Erroneous assessment” refers to an assessment that deviates from the law and is therefore, invalid and is a defect that is jurisdictional in the nature. “Erroneous judgment” means “one rendered according to course and practice of court, but contrary to law, upon mistaken view of law, or upon erroneous application of legal principles”. From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless is not in accordance with law. If the assessing officer acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. Section 263 does not visualize a case of substitution of the judgment of the Commissioner for that of the assessing officer, who passed the order, unless the decision is held to be erroneous. Useful reference in this regard can be made to the decision of the Jurisdictional High Court in the case of Gabriel India Ltd. (supra). Again the Apex court has held in Malabar Industrial Co. (supra) that there can be no doubt that the provisions of section 263(1) cannot be invoked to correct each and every type of mistake or error committed by the assessing officer, it is only when an order is erroneous that the section will be attracted. An incorrect assumption of fact or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. Now the words “prejudicial to the interests of the revenue” have not been defined, but they must mean that the orders of assessment challenged are such as are not in accordance with law, in consequence whereof the lawful revenue due to the state has not been realized or cannot be realized. Reference may be made in this connection to the decision of the Calcutta High Court in the case of Dawjee Dadabhoy & Co. v. S,P. Jain (1957) 31 ITR 872 and also the decision of the Bombay High Court in the case of Gabriel India Ltd, (supra).
10. By applying the above principle we have to see that in the present case the assessing officer has correctly appreciated the facts of the case and applied the correct law to the same and whether his order can be considered as either as erroneous or prejudicial to the interest of the revenue. The assessing officer, as the discussions in the assessment order shows, has elaborately dealt with the issue. He has not left any of the case law, which is supposed to be discussed, from being discussed and the facts of the case are also discussed. He has examined the assessee’s case with reference to the principle laid down by the Supreme Court and the definition of the word “transfer’ as defined in section 2(47) of the Act. This important three case laws on the subject viz., in the cases of Anarkali Sarabhai (supra) Kartikeya V. Sarabhai (supra) and G. Narasimhan (supra) have also been discussed. The term “transfer” defined in section 2(47) is an inclusive definition and inter alia, provides that relinquishment of an asset or extinguishment of any right therein amounts to transfer of a capital asset. It is not necessary for a capital gain to arise that there must be a sale of capital asset. Sale is only one of the mode of transfer envisaged by section 2(47) of the Act. Relinquishment of the asset or extinguishment of any right therein, which may not amount to sale, can also be considered as a transfer. Any profit or gain, which arises from the transfer of the capital asset, is liable to be taxed under section 45 of the Act. In Kartikeya v. Sarabhai’s case (supra) the Supreme Court was concerned with a situation of reduction of face value of the shares i.e., when the share capital is reduced the right of the shareholder to the dividends and his right to share in the distribution of the net assets upon liquidation, is extinguished proportionately to the extent of reduction in the capital. The Apex court has held that such reduction of the right in the capital asset would clearly amount to a transfer within the meaning of that expression in section 2(47) of the Act. Again in the case of G. Narasimhan (supra) the Apex Court has made the following observations, which are very much relevant to the facts of the present case :
“It is not necessary for a capital gain to arise that there must be a sale of capital asset. Relinquishment of the asset or extinguishment of any right in it, which may not amount to a sale, can also be considered as a transfer. Any profit or gain, which arises from the transfer of a capital asset, is liable to be taxed under section 45. As a result of reduction in the face value of shares, the right of the shareholders to the dividends and his right to share in the distribution of the net assets upon liquidation, is extinguished proportionately to the extent of reduction in the capital. Even though the shareholder remains a shareholder his right as a holder of those shares stands reduced with the reduction in the capital. Therefore, this extinguishment of right is a transfer.”
The assessing officer considered the ratio of these three decisions to come to the conclusion that the reduction of capital will result in transfer to the extent of the reduction and consequently a loss will also be incurred which would be in the nature of capital loss. The assessing officer went on to discuss the facts of the case in the light of the legal opinion of the retired Chief Justice Mr. M.N. Chandurkar. The assessing officer further called upon the assessee to produce the order of the Hon’ble Bombay High Court wherein reduction of the capital and amalgamation of Landmark Builders Pvt. Ltd., Enigma Electronics Pvt. Ltd., Visan Machines (P.) Ltd., Shalva Polymers (P.) Ltd. and Mandovi Leathers (P.) Ltd. with Synchem Chemicals was permitted by the High Court. The assessing officer in para 5.2 of his order has listed the benefits that would arise to the assessee as a result of the amalgamation. In para 5.3, the assessing officer posed a question to himself whether the scheme of amalgamation was implemented by the assessee to evade capital gains tax. The assessing officer went to examine this issue with reference to several case laws relied upon by the assessee and relying upon the principle laid down by the Bombay High Court in the case of Saroj G. Poddar (supra) held that the scheme could not be considered as fraudulent or illegal because it is so arranged as to avoid capital gain tax or any other tax liability as a person is lawfully entitled to it having so conducted his affairs as to avoid or reduce tax liability. The assessing officer called for the details and placed on record, the transfer, amalgamation and the approval of the Bombay High Court and finally accepted the assessee’s computation as regards the capital gains.
11. The proceedings recorded in the order sheet as mentioned by the assessee in the written submissions also evidences the facts that the assessing officer has, in fact, called for the relevant details and information in order to enable him to come to the right conclusion. This is not a case where the assessing officer has not made any enquiry and has reached a wrong conclusion without fully dealing with all the required details. It is on record that the assessee in the course of its business of investment in shares and securities of other body corporate has subscribed and paid application money, to various companies in the group between June 1997 to December 1999 for allotment of shares at par and there was a scheme of arrangement/re-organization under section 391/394 of the Companies Act. The Hon’ble Bombay High Court approved the scheme of reduction of share capital as well as the amalgamation of the companies on different dates as already stated elsewhere in this order. The Board of Directors of all these companies have followed all the prescribed procedures under section 101(2) of the Companies Act to effect the reduction of share capital and the assessee has done nothing but saw the reduction of investments as a result of the scheme of arrangement as approved by the Bombay High Court. It cannot be said that the entire reduction and subsequent amalgamation of the companies was done for dubious purpose of saving income-tax on possible capital gain arising on the sale of same other investments. We cannot accept the theory of the Commissioner that the entire arrangement is fraudulent scheme arranged just to avoid the payment of capital gains tax. The legal effect of the reduction of the share capital on the arrangement has resulted in satisfying the definition of the word ‘transfer’ in section 2(47) of the Act as held by the Apex Court in the cases already extensively dealt with earlier and the assessing officer has only given effect to the legal consequences of extinguishment of right in the investments made by the assessee. Therefore, it cannot be said that the view taken by the assessing officer is one of the impossible view. He has taken one of the possible views considering the facts of the case and the ratio laid down by the Supreme Court in the decisions which has been elaborately discussed by the assessing officer. The commissioner wants to take a different view on the basis of the same decision which may perhaps be a view favourable to the interest of the revenue. But that does not render the first order of the assessing officer as erroneous. The assessing officer has only followed what, according to him, is the correct legal consequence of the decisions of the Apex Court. In such a situation, it cannot be said that the order of the assessing officer is erroneous as held by several authorities in this regard and discussed above. We are, therefore, of the clear view that the order passed by the commissioner under section 263 of the Act is the result of a change of opinion and what all that the commissioner acting under section 263 wants is the substitution of his own opinion to that of the assessing officer, which is clearly impermissible within the scope of section 263 of the Act as held by the Supreme Court in the case of Malabar Industrial Co. Ltd. and also the Bombay High Court decision in the case of Gabriel India Ltd. cited supra, the principles of which are elaborately discussed in the preceding paragraphs.
12. In the light of the above discussions, we find lot of merits in the contentions of Shri Y.P. Trivedi appearing for the assessee and have no hesitation in vacating the order passed by the commissioner under section 263 of the Act. It is accordingly vacated.
13. In the result, the appeal is allowed.