Whether communication by department was in the nature of determination of the liability?

COGNIZANT TECHNOLOGY SOLUTIONS INDIA PVT. LIMITED (APPELLANT) VS.
DY COMMISSIONER OF INCOME TAX, LARGE TAXPAYER UNIT-1 (RESPONDENTS)

SUPREME COURT OF INDIA
DATED: 04.03.2020

QUESTION RAISED

Whether communication by department was in the nature of determination of the liability?

APPLICABLE PROVISIONS:
SECTION 2(22) IN THE INCOME- TAX ACT, 1995

(22) " dividend" includes-
(a) any distribution by a company of accumulated profits, whether capitalised or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company.

(b) any distribution to its shareholders by a company of debentures, debenture- stock, or deposit certificates in any form, whether with or without interest, and any distribution to its preference shareholders of shares by way of bonus, to the extent to which the company possesses accumulated profits, whether capitalised or not.

(c) any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not.

(d) any distribution to its shareholders by a company on the reduction of its capital, to the extent to which the company possesses accumulated profits which arose after the end of the previous year ending next before the 1st day of April1933, whether such accumulated profits have been capitalised or not.

(e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) 5 made after the 31st day of May, 1987 , by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern, in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to asthe said concern)] or any payment by any such company on behalf, or for- the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits; but" dividend" does not include—

(i) a distribution made in accordance with sub- clause (c) or sub- clause (d) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets.

(ia) a distribution made in accordance with sub- clause (c) or sub- clause (d) in so far as such distribution is attributable to the capitalised profits of the company representing bonus shares allotted to its equity shareholders after the 31st day of March1964, and before the 1st day of April 1965

(ii) any advance or loan made to a shareholder or the said concern] by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company.

(iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub- clause (e), to the extent to which it is so set off.

Explanation 1-The expression" accumulated profits", wherever it occurs in this clause, shall not include capital gains arising before the 1st day of April1946, or after the 31st day of March1948, and before the 1st day of April1956.

Explanation 2. -- The expression" accumulated profits" in sub- clauses (a), (b), (d) and (e), shall include all profits of the company up to the date of distribution or payment referred to in those sub- clauses, and in subclause (c) shall include all profits of the company up to the. date of liquidation, but shall not, where the liquidation is consequent on the compulsory acquisition of its undertaking by the Government or a corporation owned or controlled by the Government under any law for the time being in force, include any profits of the company prior to three successive previous years immediately preceding the previous year in which such acquisition took place.

Explanation 3.- For the purposes of this clause, -

(a) " concern" means a Hindu undivided family, or a firm or an association of persons or a body of individuals or a company.
(b) a person shall be deemed to have a substantial interest in a concern, other than a company, if he is, at any time during the previous year, beneficially entitled to not less than twenty per cent of the income of such concern;

BRIEF FACTS

1. The Appellant was engaged in the business of development of computer software and related services.

2. The Appellant approached the High Court with a Scheme of Arrangement and Compromise to buy-back its shares.

3. The High Court sanctioned the Scheme in Company Petition, pursuant to which the Appellant purchased shares from its four shareholders and made a remittance.

4. Thereafter, the Appellant made statutory filing under Form 15 CA after obtaining requisite certificate from a Chartered Accountant in Form 15CB furnishing details of remittances made to non-residents.

5. A letter was received by the Appellant from the Deputy Commissioner of Income Tax in connection with non-payment of tax on the remittances made to the non-residents. Later, a communication was addressed by the Department to the Appellant that the payments made to the shareholders, under purchase of shares through the scheme of arrangements and compromise, was a dividend within the meaning of Section 2(22)(d) and 2(22)(a) of the Income Tax Act, 1961, requiring to remit the taxes in to the government account under Section 115-O of the Income Tax Act 1961.

6. Further, since the company had failed to remit the taxes within the stipulated period, the company was deemed to be an Assessee in default, under Section 115-Q of the Act. Therefore, the Assessee Company was required to remit the taxes.

7. An application was preferred by the Appellant before the Authority for Advance Ruling (AAR) under Section 245Q of the Income Tax Act, 1961 seeking a ruling on the issue whether the Appellant was liable to pay tax on buy-back of its shares under Section 115QA or Section 115-O Income Tax Act, 1961 or any other provision of the Act.

8. The Appellant challenged the communication by filing Writ Petition in the High Court submitting inter alia that while the issue was pending before the AAR under Section 245Q of the Income Tax Act, 1961, in view of the bar provided under Section 245RR of the Income Tax Act, 1961, the matter could not have been considered.

9. The Single Judge dismissed the Writ Petition as not being maintainable and relegated the Appellant to avail the remedy before the Appellate Authority under the Act. The Single Judge did not find any merit in the contention that the shares purchased pursuant to the order of the Company Court could not be treated as dividend.

10. The Appellant, being aggrieved, challenged the aforesaid view by filing Writ Appeal before the Division Bench which was dismissed.

DECISION OF THE APEX COURT

11. On the issue whether communication by department was in the nature of determination of the liability, both the Counsels were heard at considerable length, at the end of which it was agreed by the Department, that the communication could be treated as a show cause notice and the Department be permitted to conclude the issue within a reasonable time, provided the interim order passed by the Single Judge of the High Court was continued.

12. The course suggested by the Counsel for the Department was acceptable to the Counsel for the Appellant. It was, therefore, suggested that the Appellant may file an affidavit of undertaking to withdraw the proceedings initiated by it before the AAR and the Department may also file an appropriate affidavit stating that it was willing to treat the communication as a show cause notice.

13. An appropriate affidavit of undertaking to withdraw the proceedings initiated before the AAR had since then been filed by the Appellant.