GOVERNMENT OF INDIAINCOME TAX DEPARTMENT

OFFICE OF THE PRINCIPAL COMMISSIONER OF INCOME-TAX, CHENNAI-6 ,

Room No. 601, 6th Floor, New Block,121, Mahathma Gandhi Road, Chennai-34.

*********** C.No.6119(14)/PR CIT-6/2014-15 Dt : 27/11/2015

PROCEEDINGS UNDER SECTION 263 OF THE INCOME TAX ACT, 1961

REG: Income Tax Assessment – Assessment Year : 2011-12 Order under Section 263 of the Income Tax Act, 1961 - In the case of Shri Ravi Kannan, DLF Garden CityTower No.42, Flat No.34, Thazhamboor Village,Near Chemmencherry, Chennai -603 119(PAN : AENPR4937G)- Reg.

******************ORDER:

The assessee is an individual deriving income from Investment in Shares and Mutual Funds. For the AY in question, the assessee had returned an income of Rs.6,00,47,572/-. The Income returned from the Long Term Capital Gain was Rs.5.80 Crore whereas the Income from ‘Other Sources’ was reflected at Rs.20.15 lakh. On examination of records, it was noticed that during the year in question, the assessee had sold in the capacity of an Indian Resident, the following shares to a non-resident:-

“Shares transferred/sold during FY 2010-11 : 425117

Equity Shares of Tutor Vista Global Private Ltd(Company)

Transferor : Shri Ravikannan

Transferee : M/s Pearson(Singapore) Pvt Ltd

Contd.2/-

-2-

The above said shares were purchased by the assessee during FY 2007-08 and sold

during FY 2010-11 @ Rs.372.20 per share and the assessee had declared a Sale

Value of Rs.15.76 Crore. Thereafter, it was noticed that the assessee had claimed a

deduction u/s 54F of the Act at Rs.9.96 Crore on the ground that an amount of Rs.10

Crore out of the Long Term Capital Gain was deposited in the Capital Gain Account

Scheme with the Bank of Maharashtra and UCO Bank before the due date of filing the

return. It was further noticed that he had spent a sum of Rs.7.31 Crore out of this

Capital Gain Account towards Purchase of Land at Muthukadu and the construction was

said to be in progress. It was claimed during the course of assessment proceedings that

once the construction is complete, he will be paying the Capital Gains Tax for the

unutilized portion of the Capital Gain, if any, while filing his return for AY 2014-15 as the

three year period lapses on 01-01-2014. The balance amount was invested in the

Mutual Fund.

2. The AO had passed a cryptic assessment order accepting the claim of the

assessee without any kind of discussion. A Show Cause notice u/s 263 was issued on

27-10-2015 and a further reminder on 14-09-2015 was issued, in response to which,

Shri R. Sivaraman, Advocate appeared on 19-11-2015 and filed the written submissions

in support of the fact that the assumption of jurisdiction u/s 263 was null and void. The

Show Cause notice issued by this office clearly pointed out the assessment so framed

by the AO was erroneous and prejudicial to the interests of revenue as a proper

verification was not carried out with respect to valuation of sale value of the shares sold

as also the eligibility while allowing claim of deduction u/s 54F of the Act. As can be

seen from the cryptic assessment order, the AO had accepted the claim without an iota

of discussion, in two simple paragraphs without an, reproduced as under:-

“3. The AR was required to produce Investment details, bank account details,

and proof regarding sales of shares(i.e share certificates). The AR provided the same

and verified by me. The AR also clarified that the assessee has started the

Contd.3/-

-3

construction of a residential house in the purchased land and will be completed before

the year end.

4. Through verification of all the above details, it is found correct. Thus, the

assessment is completed by accepting the Return of Income.”

3. In the written submissions filed, the Assessee’s A/R challenged the

assumption of the jurisdiction u/s 263 of the Act on two grounds i.e. first, that the

Commissioner did not reach a satisfaction as to how the order is erroneous and

prejudicial to the interests of revenue and secondly, there was no instance of non-

application of mind as well as lack of enquiry on the part of the AO. The second

contention will be dealt with in detail in the later part of this order. The first contention

of the A/R is dealt with by taking support from the judgment of the Calcutta High Court,

a gist of which is reproduced as under”-■■■

[ 2015 ] 58 taxmann.com 314 (Calcutta) HIGH COURT OF CALCUTTAZigma Commodities (P.) Ltd.

v.Income-tax Officer*

SOUMITRA PAL AND ARINDAM SINHA, JJ. G.A. NO. 1911 OF 2014†

APO NO. 212 WP NO. 281 OF 2014AUGUST  19, 2014 

Section 263 of the Income-tax Act, 1961 - Revision - Of orders prejudicial to interest of revenue (Signed order) - Assessment years 2003-04 to 2009-10 - On a writ petition assessee prayed for cancellation of show-cause notice issued under section 263 - Single Judge held that it was discernible from facts narrated in show-cause notice that order of Assessing Officer was erroneous and prejudice was caused to revenue, making show-cause notice legal and valid - Whether since Commissioner had complied with provisions contained in section 263 by signing approval of draft notice, issuance of show-cause notice was sustainable - Held, yes [Para 11] [In favour of revenue]

Contd.4/-

-4-

CASE REVIEW Zigma Commodities (P.) Ltd. v. ITO [2014] 365 ITR 276/46 taxmann.com 339 (Cal.)affirmed.

CASES REFERRED TO Zigma Commodities (P.) Ltd. v. ITO [2014] 365 ITR 276/46 taxmann.com 339 (Cal.) (para 1), CIT v. G. M. Mittal Stainless Steel (P.) Ltd. [2003] 263 ITR 255/130 Taxman 67 (SC) (para 12), CIT v. Karam Chand Thapar & Sons Ltd. [1990] 186 ITR 368 (Cal) (para 12), Chhugamal Rajpal v. S. P. Chaliha [1971] 79 ITR 603 (SC) (para 12), Galileo India (P.) Ltd v. CCE) Tax Pub (DT 733 (Delhi - Trib) (para 12) and Sahara India Mutual Benefit Co. Ltd. v. Asstt. CIT GJX 386 TALL (para 12).

3.1 The second contention will be dealt with after analsing the action of the AO in the later part of this order. The following proposition emerging from the above judgment takes care of the first contention:-

Having put his signature in approval of draft show-cause notice, Commissioner had complied with provisions contained in section 263, and, thus challenge by assessee on account of non-recording of requisite satisfaction in said notice was not sustainable

4. Before proceeding further, it will be relevant to analyse as to when the jurisdiction under Section 263 can be validly exercised:-

Revision of orders prejudicial to revenue.263. (1) The Commissioner may call for and examine the record98 of any proceeding under this Act, and if he considers that any order passed therein by the 99[Assessing] Officer is erroneous in so far as98 it is prejudicial to the interests of the revenue98, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment98 and directing a fresh assessment.1[Explanation.—For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,—

 (a) an order passed 2[on or before or after the 1st day of June, 1988] by the Assessing Officer shall include—

(i) an order of assessment made by the Assistant Commissioner 3[or Deputy Commissioner] or the Income-tax Officer on the basis of the directions issued by the 4[Joint] Commissioner under section 144A;

Contd.5/--5-

 (ii)  an order made by the 4[Joint] Commissioner in exercise of the powers or in the performance of the functions of an Assessing Officer conferred on, or assigned to, him under the orders or directions issued by the Board or by the Chief Commissioner or Director General or Commissioner authorised by the Board in this behalf under section 120;

 (b) "record" 5[shall include and shall be deemed always to have included] all records relating to any proceeding under this Act available at the time of examination by the Commissioner;

 (c) where any order referred to in this sub-section and passed by the Assessing Officer had been the subject matter of any appeal 6[filed on or before or after the 1st day of June, 1988], the powers of the Commissioner under this sub-section shall extend 6[and shall be deemed always to have extended] to such matters as had not been considered and decided in such appeal.]

7[(2) No order shall be made under sub-section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed.](3) Notwithstanding anything contained in sub-section (2), an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, 8[National Tax Tribunal,] the High Court or the Supreme Court.Explanation.—In computing the period of limitation for the purposes of sub-section (2), the time taken in giving an opportunity to the assessee to be reheard under the proviso to section 129 and any period during which any proceeding under this section is stayed by an order or injunction of any court shall be excluded

3.1 The scope of Section 263 was examined as under:-[2000] 109 TAXMAN 66 (SC)

SUPREME COURT OF INDIA*Malabar Industrial Co. Ltd.

v.Commissioner of Income-tax

D.P. WADHWA AND S.S. MOHAMMED QUADRI, JJ. CIVIL APPEAL NO. 3646 OF 1993

FEBRUARY 10, 2000

Section 263 of the Income-tax Act, 1961 - Revision - Of orders prejudicial to interests of revenue - Assessment year 1983-84 - Whether in order to invoke section 263 Assessing Officer’s order must be erroneous and also prejudicial to revenue and if one of them is absent, i.e., if order of Income-tax Officer is erroneous but is not prejudicial to revenue or if it is not erroneous but is prejudicial to revenue, recourse cannot be had to section 263(1) - Held, yes - Whether if due to an erroneous order of ITO, revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to interests of revenue - Held, yes - Assessee-company entered into agreement for sale of estate of rubber plantation - As purchaser could not pay instalments

Contd.6/--6-

as scheduled in agreement, extension of time for payment of installments was given on condition of vendee paying damages for loss of agricultural income and assessee passed resolution to that effect – Assessee showed this receipt as agricultural income - Resolution passed by assessee was not placed before Assessing Officer - Assessing Officer accepted entry in statement of account filed by assessee and accepted same - Commissioner under section 263 held that said amount was not connected with agricultural activities and was liable to be taxed under head ‘Income from other sources’ - Whether, where Assessing Officer had accepted entry in statement of account filed by assessee, in absence of any supporting material without making any enquiry, exercise of jurisdiction by Commissioner under section 263(1) was justified - Held, yesSection 2(1A) of the Income-tax Act, 1961 - Agricultural income - Assessee sold estate of rubber plantation - Extension of time for payment of sale consideration was granted to vendee on condition of vendee paying certain amount towards loss/damage of agricultural income - Assessee claimed amount of damages as agricultural income - Tribunal found that assessee had stopped agricultural operations and receipt under consideration did not relate to any agricultural operation carried on by assessee - Whether receipt was rightly taxed under head ‘Income from other sources’ - Held, yes

FACTS

The assessee-company entered into an agreement for sale of estate of rubber plantation. The agreement provided, inter alia, for payment of the consideration in instalments as scheduled therein. However, the purchaser could not adhere to the Schedules and on his request the parties agreed to the extension of time for payment of the instalments on condition of vendee paying compensation/damages for loss of agricultural income and other liabilities. Accordingly, the assessee-company passed a resolution also to that effect and the purchaser paid the said amount. In the return filed by it, the amount was noted as compensation and damages for loss of agricultural income. The Assessing Officer accepted the same and endorsed nil assessment for that year. Exercising his jurisdiction under section 263, the Commissioner held that the said amount was unconnected with any agricultural operation activity and was liable to be taxed under the head ‘Income from other sources’. The Tribunal dismissed the assessee’s appeal. On reference, the High Court also favoured the department.On appeal to the Supreme Court :

HELD

A bare reading of section 263(1) makes it clear that the pre-requisite to exercise of jurisdiction by the Commissioner suo motu under it, is that the order of the ITO is erroneous insofar as it is prejudicial to the interests of the revenue. The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the revenue. If one of them is absent - if the order of the ITO is erroneous but is not prejudicial to the revenue or if it is not erroneous but is prejudicial to the revenue - recourse cannot be had to section 263(1).There can be no doubt that the provision 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 facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall

Contd.7/-

-7-orders passed without applying the principles of natural justice or without application of mind.The phrase ‘prejudicial to the interests of the revenue’ is not an expression of art and is not defined in the Act. Understood in its ordinary meaning, it is of wide import and is not confined to loss of tax. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the revenue. If due to an erroneous order of the ITO, the revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the revenue.The phrase ‘prejudicial to the interests of the revenue’ has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the revenue, for example, when an ITO adopts one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the ITO has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue unless the view taken by the ITO is unsustainable in law. It has been held by the Supreme Court that where a sum not earned by a person is assessed as income in his hands on his so offering, the order passed by the Assessing Officer accepting the same as such will be erroneous and prejudicial to the interests of the revenue.In the instant case, the Commissioner noted that the ITO passed the order of nil assessment without application of mind. Indeed, the High Court recorded the finding that the ITO failed to apply his mind to the case in all perspective and the order passed by him was erroneous. It appeared that the resolution passed by the board of the appellant-company was not placed before the Assessing Officer. Thus, there was no material to support the claim of the appellant that the said amount represented compensation for loss of agricultural income. He accepted the entry in the statement of the account filed by the appellant in the absence of any supporting material and without making any inquiry. On these facts the conclusion that the order of the ITO was erroneous was irresistible. Therefore, the High Court had rightly held that the exercise of the jurisdiction by the Commissioner under section 263(1) was justified.It was not shown at any stage of the proceedings that the amount in question was fixed or quantified as loss of agricultural income and, admittedly, it was not so found by the Tribunal. The further question whether it would be agricultural income within the meaning of section 2(1A) did not arise for consideration. It was evident from the order of the High Court that the findings recorded by the Tribunal that the appellant stopped agricultural operation in November 1982 and the receipt under consideration did not relate to any agricultural operation carried on by the appellant, were not questioned before it. Though the High Court was not correct in holding that the amount was paid for breach of contract as indeed it was paid in modification/relaxation of the terms of the contract, it was to be held that the High Court was justified in concluding that the said amount was a taxable receipt under the head ‘Income from other sources’.

Contd.8/--8-

CASE REVIEW

Decision of the Kerala High Court in Malabar Industrial Co. Ltd. v. CIT [1992] 198 ITR 611 affirmed.CASES REFERRED TO

Dawjee Dadabhov & Co. v. S.P. Jain [1957] 31 ITR 872 (Cal.), CIT v. T. Narayana Pai [1975] 98 ITR 422 (Kar.), CIT v. Gabriel India Ltd. [1993] 203 ITR 108 (Bom.), CIT v. Smt. Minalben S. Parikh [1995] 215 ITR 81/ 79 Taxman 184 (Guj.), Venkatakrishna Rice Co. v. CIT [1988] 163 ITR 129 (Mad.), Rampyari Devi Saraogi v. CIT [1968] 67 ITR 84 (SC), Smt. Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC) and CIT v. Raja Benoy Kumar Sahas Roy [1957] 32 ITR 466 (SC).

[2006] 100 ITD 173 (MUM.)

IN THE ITAT MUMBAI BENCH ‘H’Mrs. Khatiza S. Oomerbhoy

v.Income-tax Officer, Ward 17(3)(3)

K.K. BOLIYA, ACCOUNTANT MEMBER AND MS. SUSHMA CHOWLA, JUDICIAL MEMBER

IT APPEAL NOS. 3299 AND 3300 (MUM.) OF 2005 [ASSESSMENT YEARS 1997-98 AND 1998-99]

FEBRUARY 27, 2006

Section 263 of the Income-tax Act, 1961 - Revision - Of orders prejudicial to interest of revenue - Assessment years 1997-98 and 1998-99 - Whether powers vested in Commissioner under section 263 are extraordinary powers and completed assessment proceedings cannot be reopened unless there is some cogent material to show that there is total non-application of mind on part of Assessing Officer or that Assessing Officer has committed any glaring mistake of fact or law - Held, yes - Whether where during reassessment proceedings, Assessing Officer raised several queries regarding computation of income under head ‘Capital gains’ and in response assessee had filed detailed replies explanations supported by various documents which were duly considered by Assessing Officer, it could not be assumed that there was non- application of mind on part of Assessing Officer and, therefore, Commissioner was not justified in interfering with order passed by Assessing Officer by invoking his jurisdiction under section 263 - Held, yesFACTSFor the relevant assessment years, assessments of assessee were completed under section 143(3) read with section 147 assessing income under the head ‘Capital gains’. The Commissioner, while exercising powers under section 263, set aside assessment orders on grounds that the Assessing Officer had granted excess benefit under section 54; and that he had accepted cost of construction of a building without applying his mind and referring to valuation cell.On appeal :HELD

The fundamental principles which emerge from the several cases regarding the powers of the Commissioner under section 263 may be summarized below :

Contd.9/-

-9-(i )The Commissioner must record satisfaction that the order of the

Assessing Officer is erroneous and prejudicial to the interests of the revenue. Both the conditions must be fulfilled.

(ii )Section 263 cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer and it is only when an order is erroneous, that the section will be attracted.

(iii )An incorrect assumption of facts or an incorrect application of law will suffice for the requirement of order being erroneous.

(iv )If the order is passed without application of mind, such order will fall under the category of erroneous order.

(v )Every loss of revenue cannot be treated as prejudicial to the interests of the revenue and if the Assessing Officer has adopted one of the courses permissible under law or where two views are possible and the Assessing Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order, unless the view taken by the Assessing Officer is unsustainable under law.

(vi )If while making the assessment, the Assessing Officer examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income, the Commissioner, while exercising his power under section 263, is not permitted to substitute his estimate of income in place of the income estimated by the Assessing Officer.

(vii )The Assessing Officer exercises quasi-judicial power vested in him and if he exercises such power in accordance with law and arrives at a conclusion, such conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion.

(viii )The Commissioner, before exercising his jurisdiction under section 263, must have material on record to arrive at a satisfaction.

(ix )If the Assessing Officer has made enquiries during the course of assessment proceedings on the relevant issues and the assessee

has given detailed explanation by a letter in writing and the Assessing Officer allows the claim on being satisfied with the explanation of the assessee, the decision of the Assessing Officer cannot be held to be erroneous simply because in his order he does not make an elaborate discussion in that regard.

Contd.10/--10-

The jurisdiction under section 263 cannot be utilized as an instrument for reopening concluded proceedings on flimsy grounds or on assumptions.In the instant case during the course of re-assessment proceedings, the Assessing Officer raised several relevant queries regarding computation of income under the head ‘Capital gains’ and in response to such queries, the assessee filed detailed replies/explanations supported by documents like valuation reports, copy of development agreement, etc. In the order passed by him, the Assessing Officer had referred to the relevant facts and also referred to the deduction claimed by the assessee under section 54.

The Bombay High Court, in the case of CIT v. Gabrial (India) Ltd. [1993] 203 ITR 188/ 71 Taxman 585 has clearly held that if the Assessing Officer has raised queries and the assessee has filed written submission/explanation, merely because there is no elaborate discussion in the Assessing Officer’s order, it cannot be said that such order becomes erroneous. In the instant case, new material came to the notice of the Commissioner and he made certain assumptions without any basis or material. The powers vested in the Commissioner under section 263 are extraordinary powers and completed assessment proceedings cannot be reopened unless there is some cogent material to show that there is total non-application of mind on the part of the Assessing Officer or that the Assessing Officer has committed any glaring mistake of fact or law. The assessee filed proper explanations with regard to the cost of construction, assessee’s claim for deduction under section 54 and the valuation, which was ‘supported by valuation report of registered valuer’. The entire material was available before the Assessing Officer during the course of the assessment proceedings. As a matter of fact, all the material was filed before the Assessing Officer in response to the queries raised by him. There was hardly any basis to assume that there was non-application of mind on the part of the Assessing Officer. Considering the entire facts and circumstances, the Commissioner had wrongly invoked his jurisdiction under section 263 and, therefore, common order passed under section 263 for the assessment years 1997-98 and 1998-99 was to be quashed. [Para 8]In the result the assessee’s appeal stood allowed. [Para 9]CASES REFERRED TO

Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83/ 109 Taxman 66 (SC) (para 5), CIT v. Gabrial India Ltd. [1993] 203 ITR 108/ 71 Taxman 585 (Bom.) (para 5), Girdharilal B. Rohra v. CIT [2004] 86 TTJ (Mum.) 177 (para 5), Triveni Engg. Works Ltd. v. Dy. CIT [2004] 87 TTJ (Delhi) 93/[2003] 131 Taxman 32 (Delhi) (para 5) and Bipin P. Shah v. ITO [IT Appeal No. 5992 (Mum.) of 2003, dated 31-3-2005] (para 5).

3.2 The principles emerging from the judgment of the Apex Court also

analysed by the Mumbai Bench of the Honorable ITAT are as under:-

Contd.11/-

-11-

The fundamental principles which emerge from the several cases regarding the powers of the Commissioner under section 263 may be summarized below :(i )The Commissioner must record satisfaction that the order of the

Assessing Officer is erroneous and prejudicial to the interests of the revenue. Both the conditions must be fulfilled.

(ii )Section 263 cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer and it is only when an order is erroneous, that the section will be attracted.

(iii )An incorrect assumption of facts or an incorrect application of law will suffice for the requirement of order being erroneous.

(iv )If the order is passed without application of mind, such order will fall under the category of erroneous order.

(v )Every loss of revenue cannot be treated as prejudicial to the interests of the revenue and if the Assessing Officer has adopted one of the courses permissible under law or where two views are possible and the Assessing Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order, unless the view taken by the Assessing Officer is unsustainable under law.

(vi )If while making the assessment, the Assessing Officer examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income, the Commissioner, while exercising his power under section 263, is not permitted to substitute his estimate of income in place of the income estimated by the Assessing Officer.

(vii )The Assessing Officer exercises quasi-judicial power vested in him and if he exercises such power in accordance with law and arrives at a conclusion, such conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion.

(viii )The Commissioner, before exercising his jurisdiction under section 263, must have material on record to arrive at a satisfaction.

(ix )If the Assessing Officer has made enquiries during the course of assessment proceedings on the relevant issues and the assessee has given detailed explanation by a letter in writing and the Assessing Officer allows the claim on being satisfied with the explanation of the assessee,

Contd.12/-

-12-the decision of the Assessing Officer cannot be held to be erroneous simply because in his order he does not make an elaborate discussion in that regard.

4. Coming to the instant case, it is observed that the AO had accepted the

value of the consideration received on sale of Shares declared by the assessee at face

value. The AO had neither enquired nor applied his mind to the Notifications applicable

on sale of shares by a Resident to a Non-Resident. The said guidelines contained in

the Notifications issued by RBI are reproduced as under:-

RBI/2009-10/445A. P. (DIR Series) Circular No.49

May 04, 2010To

All Category-I Authorised Dealer BanksMadam / Sir,

Foreign Direct Investment (FDI) in India - Transfer of Shares / Preference Shares / Convertible Debentures 

by way of Sale - Revised pricing guidelinesAttention of the Authorised Dealer Category – I (AD Category - I) banks is invited to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000, notified vide Notification No. FEMA 20/2000-RB dated May 3, 2000, as amended from time to time.2. In terms of Schedule 1 of the Notification, an Indian company may issue equity shares, compulsorily convertible preference shares and compulsorily convertible debentures (equity instruments) to a person resident outside India under the FDI policy, subject to inter alia, compliance with the pricing guidelines. Further, in terms of the A. P. (DIR Series) Circular No.16 dated October 4, 2004 and A. P. (DIR Series) Circular No. 63 dated April 22, 2009, general permission is available for transfer of equity instruments, by way of sale, from residents to non-residents (including transfer of subscriber's shares) of an Indian company in sectors other than financial services sector (i.e. Banks, NBFCs, Insurance, Asset Reconstruction Companies, Infrastructure companies in securities market namely, Stock Exchanges, Depositories and Clearing Corporations, Credit Information Companies and Commodity Exchanges) from residents to non-residents and vice versa.3. The extant guidelines have been reviewed in consultation with the Government of India and accordingly the pricing guidelines in respect of   issue of shares including preferential allotment have been revised. A copy of the Notification No. FEMA 205/2010-RB dated April 7, 2010, notified vide G.S.R. No.341 (E) dated April 21, 2010, amending the Foreign Exchange Management (Transfer

or Issue of Security by a Person Resident Outside India) Regulations, 2000 (Notification No. FEMA 20/2000-RB dated May 3, 2000) issued in this regard is enclosed (Annex-II).4. Further, the pricing guidelines for transfer of equity instruments from a resident to a non-resident and vice versa issued vide A. P. (DIR Series) Circular No.16 dated October 4, 2004 have also been reviewed and the paragraph Nos. 2.2 and 2.3 of the Annex to the circular have been accordingly amended. The revised instructions applicable to transfer of shares of an Indian company in all sectors are given in the Annex-I. All the other instructions of A. P. (DIR Series) Circular No.16 dated October 4, 2004 shall remain unchanged.5. These directions will become operative with immediate effect.6.   AD Category – I banks may bring the contents of this circular to the notice of their constituents and customers concerned.7. The directions contained in this circular have been issued under sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and is without prejudice to permissions / approvals, if any, required under any other law.

 Yours faithfully,

(Salim Gangadharan)Chief General Manager-in-Charge

Contd.13/--13-

Annex-I[Annex to A. P. (DIR Series) Circular No. 49

dated May 04, 2010]Paragraph No.[cf. A.P.(DIR Series) Circular No. 16 dated October 4, 2004]

Existing Provisions Revised Provisions

        2.2 Transfer by Resident to Non-resident (i.e. to incorporated non-resident entity other than erstwhile OCB, foreign national, NRI, FII)Transfer of shares by way of sale, by resident to non-resident shall be at a price not less thana) the ruling market price, in case the shares are listed on stock exchange,b) fair valuation of shares done by a   a Chartered Accountant as per the guidelines issued by the erstwhile Controller of Capital Issues, in case of unlisted shares. The price per share arrived at should be certified by a Chartered Accountant.

Transfer by Resident to Non-resident   (i.e. to foreign national, NRI, FII and incorporated non-resident entity other than erstwhile OCB)(a) where shares of an Indian company are listed on a recognized stock exchange in India, the price of shares transferred by way of sale shall not be less than the price at which a preferential allotment of shares can be made under the SEBI Guidelines, as applicable, provided that the same is determined for such duration as specified therein, preceding the relevant date, which shall be the date of purchase or sale of shares.(b) where the shares of an Indian company are not listed on a recognized stock exchange in India, the transfer of shares shall be at a price not less than the fair value to be determined by a SEBI registered Category – I - Merchant Banker or a Chartered Accountant as per the discounted free cash flow method.The price per share arrived at should be certified by a SEBI registered Category-I-Merchant Banker / Chartered Accountant.

              2.3

Transfer by Non-resident (i.e. by incorporated non-resident entity, erstwhile OCB, foreign national, NRI, FII) to Resident. 

Sale of shares by a non-resident to resident shall be in accordance with Regulation 10 B(2) of Notification No. FEMA 20/2000-RB dated May 03,2000 which is

 Transfer by Non-resident (i.e. by incorporated non-resident entity, erstwhile OCB, foreign national, NRI and FII) to ResidentPrice of shares transferred by way of sale, by non-resident to resident shall not be more than the minimum price at which the transfer of shares can be made from a resident to a non-resident as given in para

as below:

a) Where the shares of an Indian company are traded on stock exchange 

i) The sale is at the prevailing market price on stock exchange and is effected through a merchant banker registered with the SEBI or through a stock broker registered with the stock exchange.ii) if the transfer is other than that referred to in clause (i), the price shall be arrived at by taking the average quotations (average of daily high and low) for one week preceding the date of application with 5 per cent variation.

Where, however, the shares are being sold by the foreign collaborator or the foreign promoter of the Indian company to the existing promoters in India with the objective of passing management control in favour of the resident promoters the proposal for sale will be considered at a price which may be higher by up to a ceiling of 25 per cent over the price arrived at as above.

(b) Where the shares of an Indian company are not listed on stock exchange or are thinly traded,

i) if the consideration payable for the transfer does not exceed Rs. 20 lakh per seller per company, at a price mutually agreed to between the seller and the buyer, based on any valuation methodology currently in vogue, on submission of a certificate from the statutory auditors of the Indian company whose shares are proposed to be transferred, regarding the valuation of the shares, and

ii) if the amount of consideration payable for the transfer exceeds Rs.20 lakh per seller per company, at a price arrived at, at the seller's option, in any of the following manner, namely:

A) a price based on earning per share (EPS) linked to the Price Earning (P/E) multiple, or a price based on the Net Asset Value (NAV) linked to book value multiple, whichever is higher,                 orB) the prevailing market price in small lots as may be laid down by the Reserve Bank so that the entire shareholding is sold in not less than five trading days through screen based trading system                    orC) where the shares are not listed on any stock exchange, at a price which is lower of the two independent valuations of share, one by statutory auditors of the company and the other by a Chartered Accountant or by a Merchant Banker in Category 1

2.2 above.

registered with Securities and Exchange Board of India.

Notification No. FEMA 20 /2000-RB dated 3rd May 2000

RESERVE BANK OF INDIA(EXCHANGE CONTROL DEPARTMENT)

CENTRAL OFFICEMUMBAI 400 001

5. Permission for purchase of shares by certain persons resident outside India :-

(1) A person resident outside India (other than a citizen of Bangladesh or Pakistan or Sri Lanka) or an entity outside India, whether incorporated or not, (other than an entity in Bangladesh or Pakistan) , may purchase shares or convertible debentures of an Indian company under Foreign Direct Investment Scheme, subject to the terms and conditions specified in Schedule 1.

(2) A registered Foreign Institutional Investor (FII) may purchase shares or convertible debentures of an Indian company under the Portfolio Investment Scheme, subject to the terms and conditions specified in Schedule 2.

(3) A non-resident Indian or an overseas corporate body may purchase shares or convertible debentures of an Indian company -

(i) on a stock exchange under the Portfolio Investment Scheme, subject to the terms and conditions specified in Schedule 3; or/and

(ii) on non-repatriation basis other than under Portfolio Investment Scheme, subject to the terms and conditions specified in Schedule 4.

(4) A non-resident Indian or an overseas corporate body or a registered FII may purchase securities, other than shares or convertible debentures of an Indian company, subject to the terms and

conditions specified in Schedule 5.

10. Prior permission of Reserve Bank in certain cases for transfer of security :-

A. Transfer by way of gift or sale by a person resident in India

A person resident in India who proposes to transfer to a person resident outside India: -

a) any security, by way of gift, shall make an application to the Reserve Bank furnishing the following information, namely:

i) Name and address of the transferor and the proposed transferee

ii) Relationship between the transferor and the proposed transferee

iii) Reasons for making the gift.

b) any share/convertible debenture of an Indian company, by way of sale, shall obtain the Government approval for the transfer and thereafter apply to the Reserve Bank for its approval, which may be granted subject to such conditions as are considered necessary by Reserve Bank, including the price at which such sale may be made.

B. Transfer by way of sale not covered by Regulation 9 by a person resident outside India

(1) Transfer by way of sale not covered by Regulation 9 by a person resident outside India of the shares/convertible debentures held by him to a person resident in India, shall require prior permission of the Reserve Bank, for which application in form TS 1 may be made to the Reserve Bank.

(2) While considering the grant of permission, the Reserve Bank shall take into account the following factors, namely:

(a) where the shares of an Indian company are traded on stock exchange,

i) the sale is at the prevailing market price on stock exchange and is effected through a merchant banker registered with Securities and Exchange Board of India or through a stock broker registered with the stock exchange;

ii) if the transfer is other than that referred to in clause (i), the Reserve Bank will satisfy itself that the shares are proposed to be sold at a price arrived at by taking the average quotations (average of daily high and low) for one week preceding the date of application with 5 percent variation. Where, however, the shares are being sold by the foreign collaborator or the foreign promoter of the Indian company to the existing promoters in India with the objective of passing management control in favour of the resident promoters the proposal for sale will be considered at a price which may be higher by upto a ceiling of 25 percent over the price arrived at as above,

(b) where the shares of an Indian company are not listed on stock exchange or are thinly traded,

i) if the consideration payable for the transfer does not exceed Rs.20 lakh per seller per company, at a price mutually agreed to between the seller and the buyer, based on any valuation methodology currently in vogue, on submission of a certificate from the statutory auditors of the Indian company whose shares are proposed to be transferred, regarding the valuation of the shares, and

ii) if the amount of consideration payable for the transfer exceeds Rs.20 lakh per seller per company, at a price arrived at, at the seller's option, in any of the following manner, namely:

A) a price based on earning per share (EPS linked to the Price Earning (P/E) multiple ,or a price based on the Net Asset Value (NAV) linked to book value multiple, whichever is higher,

Or

B) the prevailing market price in small lots as may be laid down by the Reserve Bank so that the entire shareholding is sold in not less than five trading days through screen based trading system

c) where the shares are not listed on any stock exchange, at a price which is lower of the two independent valuations of share, one by statutory auditors of the company and the other by a Chartered Accountant or by a Merchant Banker in Category 1 registered with Securities and Exchange Board of India.

Explanation:

i) A share is considered as thinly traded if the annualised trading turnover in that share, on main stock exchanges in India, during the six calendar months preceding the month in which application is made, is less than 2 percent (by number of shares) of the listed stock.

ii) For the purpose of arriving at Net Asset Value per share, the miscellaneous expenses carried forward, accumulated losses, total outside liabilities, revaluation reserves and capital reserves (except subsidy received in cash) shall be reduced from value of the total assets and the net figure so arrived at shall be divided by the number of equity shares issued and paid up. Alternatively, intangible assets shall be reduced form the equity capital and reserves (excluding revaluation reserves) and the figure so arrived at shall be divided by the number of equity shares issued and paid up. The NAV so calculated shall be used in conjunction with the average BV multiple of Bombay Stock Exchange National Index during the calendar month immediately preceding the month in which application is made and BV multiple shall be discounted by 40 per cent.

iii) For computing the price based on Earning Per Share, the earning per share as per the latest balance sheet of the company shall be used in conjunction with the average Price Earning Multiple of Bombay Stock Exchange National Index for the calendar month preceding the month in which application is made and Price Earning shall be discounted by 40 per cent.

11. Remittance of sale Proceeds :-

(1) No remittance of sale proceeds of an Indian security held by a person resident outside India shall be made otherwise than in accordance with these Regulations and the conditions specified in the relevant Schedule.

(2) An authorised dealer may allow the remittance of sale proceeds of a security (net of applicable taxes) to the seller of shares resident outside India:-

Provided -

a) the security was held by the seller on repatriation basis;b) either the security has been sold on a recognised stock exchange in India through a stock broker at the ruling market price as determined on the floor of the exchange, or the Reserve Bank's approval has been obtained in other cases for sale of the security and remittance of the sale proceeds thereof; andc) a no objection/tax clearance certificate from the Income Tax authority has been produced.

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6. After examining the Capital Gains A/c held with Bank of Maharashtra,

Neelankarai Branch, Chennai, it is seen that the assessee had deposited a sum of

Rs.5 Crore 30-07-2011. On the same very day, this amount was converted into a Fixed

Deposit and the same was closed on 19-09-2011. The AO had failed to apply his mind

and cause an enquiry as to whether this amounts to correct utilization as per the

Capital Gains A/c Scheme. As per the provisions of Sec.54F, such amounts have to be

utilized in accordance with the scheme framed by the Central Government, the gist of

which is reproduced as under:-

“Account Type Under Capital Gains Accounts Scheme- Under the scheme there can be two types of accounts. Deposit Account A: This account is like a savings deposit account. Withdrawals may be made from the account from time to time, subject to other conditions of the scheme. This account is suitable for assessees who are planning to construct a house over a period of time. Deposit Account B: This account is like a term deposit that is payable after a fixed period of time. The interest earned on the deposit may either be withdrawn periodically or it may be reinvested. In order to open the account, an assessee must fill up the prescribed application form in duplicate. Further, the type of account – A or B – is to be specified. In case Deposit Account B is opted for, it has to be specified whether the account will be cumulative or non-cumulative. The proof of such deposit should be attached with the income tax returns. Both the accounts will be eligible to interest as per the guidelines of the Reserve Bank of India. Moreover, a depositor may make or change nominations to the account by filling in the relevant forms. The amount can be utilised in accordance with the scheme which the Central Government may frame. The amount withdrawn should be utilised for the purpose of purchase or construction of a house.The amount withdrawn should be utilised for the purpose within sixty days of the withdrawal. Any unutilised amount should be redeposited in Deposit Account A. The amount already utilised by an assessee for the purpose of purchase or construction of a new property together with the amount deposited will be deemed to be the cost of the new property. In case the amount deposited is not utilised wholly or partly for the purchase or construction of the new property within the period specified, then the unutilised amount will be charged as income of the previous year in which the period of three years from the date of the transfer of the original property expires. Further, an assessee will be entitled to withdraw the amount in accordance with the provisions of the scheme. The withdrawals from Deposit Account A can be made through a prescribed form. In case of Deposit Account B, a depositor will first have to transfer the amount to Deposit Account A,and then make the withdrawal. The amounts can be transferred from one branch of a bank to another branch of the same bank only. A depositor may close the account with the approval of the assessing officer.

Contd.16/-

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Forms C and D – Similarly, it is possible to convert the deposit Account B to the deposit Account A. As and when the money is required to be withdrawn for the purposes of making payment for the residential property, the assessee shall apply in form No C.  After receiving the application the bank shall permit the withdrawal of the amount. It may also be noted here that where the amount of withdrawal exceeds Rs 25,000, the bank will make the payment by way of crossed demand draft drawn in favour of the person to whom the depositor intends to make the payment.  Tax payers should also note that other than the initial withdrawal later on when the withdrawals are made by the tax payers, they shall furnish in Form No D in duplicate, the details regarding the manner and the extent of utilizing of the amount in respect of the immediately preceding withdrawal. The bank after receiving two copies of Form D from the accountholder will retain one copy and return the other copy to the tax payer. Forms E and G- The scheme further provides that the amount which has been withdrawn should be utilized for purchase or construction of the property within 60 days from the date of such withdrawal. The facility of nomination is also available to the deposit holder by filling up Form No E.   Finally, when the property has been purchased or the construction has been completed and now the tax payer desires to close his Capital Gains Account Scheme then he shall make an application with the approval of the assessing officer. The application for closure of the account will be in Form G. Whenever you are contemplating to make a deposit in respect of Capital Gains Account Scheme, either by way of a savings account or a fixed deposit account , then please remember that you do not

open the normal savings bank account or a normal saving bank deposit but specifically fill up No A and then make the

deposit with the concerned bank under the Capital Gains Accounts Scheme.”

6.1 From the aforesaid analysis, it is clear that the AO had neither applied his

mind nor caused an enquiry as to whether the conversion of money into Fixed Deposit

in the Bank account is as per the rules of the scheme reproduced above.

7. After examining the records, it is also seen that the assessee had

purchased Agricultural land measuring 54,000 sqft for a consideration of Rs.7.31 Crore

on 21-10-2011. A Sworn Statement was recorded by the AO on 13-08-2014 after the

assessment order was passed and the assessee had admitted that the three years

period to construct a residential house lapses on 21-01-2014 and the Completion

Certificate was not obtained from the Muthukadu Village Panchayat on or before the

due date. Furthermore, the land purchased was agricultural in nature and the assessee

was not aware whether the Muthukadu Panachayat had given approval for construction

of a residential house on this agricultural land. These facts do not pertain to the

assessment year in question and the allowable deduction u/s54F of the Act will pertain

to the AY 2015-16. The AO is directed to examine this point in the

Contd.17/-

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relevant assessment year as to whether the eligibility for the claim u/s 54F of the Act is disqualified on the ground that the residential property was not completed before the due date and take necessary remedial measures on this count.

8. Coming to the current AY, it is evident that the AO had failed to apply his

mind and cause necessary verification and an enquiry with respect of the value of sale

consideration of the shares as per the RBI Notifications(supra), as also, whether the

amount deposited in the Bank of Maharashtra ( supra) was transacted in accordance

with the Capital Gains Scheme of the Central Government. Moreover, there is an audit

observation that the Sale process did not follow the SEBI Guidelines in force and copies

of Agreements enter into were also not disclosed. Such transactions require approval of

SEBI/RBI and the same has not been examined by the AO. In view of the detailed

discussions in the body of this order, I am satisfied vis-à-vis the principles laid down by

the Apex Court interpreted by the Mumbai Bench of the Hon’ble Tribunal that the

assessment so framed by the AO is erroneous and prejudicial to the interests of

revenue and the Assessment is set aside with a direction to the AO to redo the

assessment on the specific issues highlighted above.

It is ordered accordingly.

(HARSH PRAKASH)Principal Commissioner of Income Tax-6

ChennaiTO

The AssesseeCopy to:

1) The Joint Commissioner of Income Tax, Non Corporate Range-15,2) The ACIT, Non Corporate Circle-15, Chennai.