4th Justice Dr. B.

P Saraf National Tax Moot Court Competition,

2018

Moot Problem
1. Brief Facts

(Note: (a) For full forms of abbreviations used in the problem, please refer Annexure: ‘A’
appended hereto

(b) Sections / sub-sections referred to in the problem relate to Income-tax Act, 1961 unless
otherwise mentioned)

1.1 Mr. Alok Singhania (in short AS) was holding 95 % equity shares of M/s. Great
Western Hotels (P) Ltd. (In short, GWHPL). M/s. GWHPL was the owner of a three – star
hotel – Hotel Honeymoon Inn in the Park Street area, a prime location in the city of Kolkata.
Mr. AS entered into a share sale agreement on 20.04.2009 with one Mr. S.P. Jain (in short
SPJ) for transfer of his 95% share-holding (9.5 lac shares) in M/s. GWHPL for a
consideration of Rs.300/- per share and received Rs. 1 crore as advance and the balance sum
was to be paid at the time of completion of deal i.e., within one month of signing of the
agreement. Mr. AS felt that Mr. SPJ was lacking funds and is buying time to fulfil his
obligations. Meanwhile, Mr. AS got a better offer from one M/s. Green Valley Hotels Ltd. (in
short, GVHL) to purchase the said lot of shares at Rs.400/- a piece.

Grabbing the opportunity, Mr. AS entered into another agreement for sale of shares on
18.09.2009 with M/s. GVHL at Rs.400/- a piece.

1.2 It is pertinent to note that prior to Mr. AS entering into the second agreement dated
18.09.2009, he received a letter dated 05.06.2009 from Mr. SPJ whereby he drew attention of
Mr. AS to clause 10 of the agreement dated 20.04.2009 entered into with him, according to
which, Mr. AS was required to fulfil certain obligations (due diligence) and after which the
sale agreement could be completed by Mr. SPJ. According to Mr. SPJ, Mr.AS had failed to
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fulfil his obligations as per clause 10 of the agreement. In the said letter, Mr SPJ also stated
that he has come to know that Mr AS was trying to sell the shares to some other persons and
sounded warning to Mr AS to desist from the illegal act, failing which appropriate action as
per law would be taken.

1.3 Mr. AS proceeded to invoke clause 17 of the agreement for sale dated 20.04.2009 and
referred the matter to the sole arbitrator Mr. A.L Banerjee, Advocate whose name was
mentioned therein. After hearing the parties, learned sole arbitrator passed an award on
15.02.2010 and awarded compensation @ 20/- a piece amounting to Rs 1.90 cr. in favour of
Mr. SPJ. He also directed Mr. AS to refund Rs.1 cr. received as advance from Mr. SPJ while
executing the agreement for sale on 20.04.2009 with him.

1.4 Mr. AS filed his ROI on 31.07.2010 for the A.Y. 2010 – 2011 wherein he computed
LTCGs arising from the sale of shares to M/s. GVHL as under –

Income from LTCGs Rs.(in lacs)

Full value of consideration received as result of transfer of capital

asset, being 9,50,000 shares in M/s. GWHPL

(9,50,000 X Rs.400/-) 3800.00

Less: Indexed cost of acquisition in terms of 2nd proviso to section 48

(Year of acquisition: A.Y.: 1990 – 1991

Cost of acquisition: Rs.10/- per share) 329.89

(9,50,000/- X 10 X 632)

182
Less: Expenditure incurred in connection with transfer as per sec. 48(i),
being compensation paid to Mr. SPJ as per arbitral award dated 15.02.2010 190.00
LTCG 3280.11
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2. Scrutiny Proceedings u/s. 143(3)

Mr. AS received notice u/s. 143(2) and u/s. 143(1) from his jurisdictional A.O. on
30.08.2011. The A/R of Mr. AS appeared before the A.O. from time to time and submitted
details alongwith evidences and books of accounts. As regards LTCGs computation, the A.O.
asked for and examined the evidences of cost of acquisition as well as share sale agreement
dated 18.09.2009. He neither asked the assessee to produce nor the assessee produced, copies
of 1st agreement dated 20.04.2009 and the arbitral award dated 15.02.2010. The A.O. framed
the assessment order u/s. 143(3) on 31.03.2012 and accepted the LTCGs offered by the
assessee to tax at the returned figure of Rs.3,280.11 lacs.

3. Re-assessment proceedings u/s 147

Around six year from the end of the relevant A.Y (2010-11) i.e., on 31.03.2017, the A.O
issued a notice u/s 148 for re-opening the concluded assessment u/s 143(3). Mr. AS complied
with the notice and filed a fresh return pursuant to the notice disclosing the same income
including LTCG earned. On request, the A.O supplied “reasons to belief” recorded by him
for re-opening the assessment by him, which are reproduced hereunder –

“From the material on record, it is seen that while computing LTCGs on sale of 9,50,000
shares, the assessee has made a claim of Rs. 190.00 lacs towards expenditure incurred in
connection with transfer u/s 48(i), being compensation paid to Mr. SPJ. In the course of
original assessment proceedings, the assessee did not furnish any evidence in support of the
claim. Further, payment of compensation to Mr. SPJ cannot be said to be an expenditure
incurred in connection with transfer u/s 48(i). Therefore, I have “ reasons to believe” that
the income of the assesseeto the extent of the wrongful claim of Rs. 190.00 lacs has escaped
assessment”.

The A.O. proceeded to pass the order u/s 147 r.w. section 143(3) on 02.05.2017 wherein he
disallowed the assessee’s claim of compensation paid to Mr. SPJ of Rs. 1.90cr.
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4. Appeals before the CIT(A) and ITAT

4.1 Before the FAA, the assessee, Mr. AS raised various technical objections against the
reassessment order framed by the A.O. u/s 147 r.w. section 143(3) and called for quashing
the said order, which were all rejected by him as under-

(a) Assessee’s objection: The notice dated 31.03.2017 issued u/s 148 was barred by
limitation inasmuch as the same was served on 04.04.2017 beyond six years from the end of
the relevant A.Y.

CIT(A) responded by holding that as per section 149, time limit prescribed is for the “issue”
of notice and not the “service of notice” and from the perusal of notice, it is seen that the date
of issue is 31.03.2017, which is further fortified by the order-sheet recordings of the re-
assessment folder.

(b) Assessee’s objection: Though it is true that the assessee did not produce copies of the 1 st
agreement dated 20.04.2009 and the arbitral award dated 15.02.2010 in the original
assessment proceedings since the A.O. did not ask for it, but the payment was properly
disclosed in the computation of LTCGs and profit & Loss Account, all submitted before the
A.O. during original assessment proceedings. Therefore, the action of the A.O in initiating re-
assessment proceedings is also barred by the law of limitation as per proviso below section
147. Further, the A.O. has failed to record his satisfaction in the reasons recorded that there
was failure on the part of the assessee to disclose full and true material facts.

CIT(A)’s finding: As per explanation 1 below section 147, production before the A.O. of the
accounts etc. from which material evidence could with due diligence have been discovered by
the A.O. will not necessarily amount to true and full disclosure of material facts. Hence, mere
disclosure in the accounts without furnishing the material evidences before the A.O. would
not help the case of the assessee. Further, mere failure to record satisfaction about the failure
on the part of the assessee by the A.O. is a hyper technicality which will not vitiate the action
of the A.O.
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(c) Assessee’s objection: The A.O. has reopened the assessment merely on the basis of
“change of opinion” on the same set of facts.

CIT(A)’s response: It is to be seen whether the A.O. had passed order based on the material
available before him and has taken a view in the matter. If he had not done so, the re-opening
cannot be assailed on the ground that the same is based only on a change of opinion. On
perusal of the original assessment order dated 31.03.2012, it is seen that there is no whisper
about the compensation payment by the assessee. In the computation portion of the
assessment order, he has merely reproduced the computation filed by the assessee. The
principle of “change of opinion” would not apply where there is no application of mind at all.

(d) Assessee’s obejction: The assessment has been reopened without obtaining proper
sanction as mandated by section 151. The sanctioning authority has merely stated against the
reasons recorded by the A.O.- “I agree”. The same shows non-application of mind by the said
authority viz, CIT.

CIT(A)’s response: In Prem Chand Shaw’s case 67 Taxmann.com 339 (Cal.), Hon’ble
jurisdictional High Court has held that the sanctioning authority need not set out reasons.

(e) Assessee’s obejction: Raesons recorded are vague and has been recorded without making
appropriate enquiries to come to a firm conclusion that income of the assessee has escaped
assessment. Further, reasons recorded lack live nexus or rational connection between reasons
and belief.

CIT(A)’s response: The appellate authorities / Courts cannot go into the adequacy or
sufficiency of reasons. The reasons recorded are proper and there is a live nexus between
reasons and belief.
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4.2 In view of the above, the FAA rejected all the technical objections of the assessee.

On merit of the case also, he was not convinced and the appeal was dismissed in toto.

4.3 The assessee filed second appeal before the Hon’ble ITAT where also he was
unsuccessful. It reiterated the findings of the FAA. However, it discussed two issues in
further detail as under-

(a) On the issue of notice u/s 148

The finding of ITAT is as under-

“On the last date of hearing at the request of the assessee’s A/R, we directed the DR to
produce the notice issued register. It is seen there from that a copy of the notice was handed
over to the process server on 31.03.2017. Against the entry, the initial of the A.O. is there, but
there is no signature of the process server. Learned A/R submits that absence of signature of
the process server raises doubt as to the issue of notice within time. Learned D/R submits that
governmental records should not be doubted and there is presumption as to the regularity of
records. Further, 31st March was a Friday. 1st and 2nd April were holidays, being Saturday
and Sunday. The process server has served the notice within a reasonable time i.e., on 4th
since he had many more services to be effected.

After hearing both the sides, we are not convinced with the submission of the A/R.

There is a presumption that the regularity and truth of the governmental records cannot be
doubted unless proved otherwise. Section 149 talks about the “issue” of notice within the
limitation period and not about “service” of notice. From perusal of records, it is apparent
that the notice was issued well within time. Further, the assessee has participated in the
proceedings and not raised appropriate objections during the proceedings. Therefore,
assessee is precluded from raising the technicality about the improper notice in view of
section 292BB. Therefore, assessee’s ground on this issue is rejected”.
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(b) On merit of the claim of compensation

“ After hearing both the sides, we are of the view that even on merits of the case, the
assesee’s appeal is liable to be dismissed. Firstly, it is observed that as per section 48(i), only
the expenditure incurred wholly and exclusively in connection with the transfer of a capital
asset is allowable as deduction from the sale proceeds. Law envisages direct expenditure like
brokerage, lawyer’s fees etc. to be allowed as deduction. The Ld. A/R has relied on various
court decisions holding that expenses / compensation for removal of encumbrance falls
within the pale of section 48(i) but we are not convinced. The decisions are distinguishable
on facts.

It is observed that in the instant case, the Ld. Sole arbitrator has awarded compensation for
breach of contract by Mr. AS in favour of Mr. SPJ. We fail to understand, what more the ld.
Arbitrator could have done. There is nothing in the 2nd agreement dated 18.09.2009 which
proves that the buyer was made aware of the 1st agreement dated 20.04.2009. The right has
been created in favour of the 2nd buyer as he entered into the agreement to buy shares in
good faith. There was no way, Mr. SPJ could have created hurdles in the smooth transfer of
title in shares in favour of the 2nd buyer viz., M/s GVHL. He could, at the most, ask for
compensation which he got. At this stage, we may gainfully refer to section 10 of Specific
Relief Act, 1963 which is reproduced hereunder for the sake of convenience-

“10. Cases in which specific performance of contract enforceable.—Except as otherwise

provided in this Chapter, the specific performance of any contract may, in the discretion of
the court, be enforced—
(a) when there exists no standard for ascertaining actual damage caused by the non-
performance of the act agreed to be done; or
(b) when the act agreed to be done is such that compensation in money for its non-
performance would not afford adequate relief.
Explanation.—Unless and until the contrary is proved, the court shall presume—
(i) that the breach of a contract to transfer immovable property cannot be adequately
relieved by compensation in money; and
(ii) that the breach of a contract to transfer movable property can be so relieved except in the
following cases:—
(a) where the property is not an ordinary article of commerce, or is of special value or
interest to the plaintiff, or consists of goods which are not easily obtainable in the market;
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(b) where the property is held by the defendant as the agent or trustee of the plaintiff”.

A perusal of the above, clearly demonstrates that as per explanation below section 10, there
is presumption only in the case of an immovable property that breach of a contract to
transfer cannot be adequately relieved by compensation in money. As such, court may award
“specific performance”. However, in the instant case, the subject matter is a movable
property viz., shares. Therefore, the Ld. Arbitrator could award only compensation and not
specific performance. We, therefore, are of the view that no encumbrance on the property
viz., shares was created in favour of the first buyer by virtue of agreement dated 20.04.2009.
He merely got the right to compensation which was awarded by the arbitrator.

Therefore, the appeal of Mr.AS also fails on merit.

5. Mr. AS further filed an appeal before the Hon’ble High Court of Calcutta u/s 260A of
the Act. The said appeal also came to be dismissed.

6. Now, Mr. AS is before the Hon’ble Supreme Court of India on the following
“Questions of Law”-

(i) Whether the notice dated 31.03.2017 issued u/s 148 was barred by limitation?

(ii) Whether the action of the A.O. in initiating the re-assessment proceedings is also barred
by the law of limitation as per proviso below section 147?

(iii) Whether the reassessment order passed u/s 147 r.w. section 143(3) is also vitiated in law
for failure of the A.O. to record satisfaction in the “reasons recorded” that there was failure
on the part of the assessee to disclose truly and fully all material facts?

(iv) Whether reopening of concluded assessment originally framed u/s 143(3) can be said to
be vitiated in law due to “change of opinion” on the same set of facts?

(v) Whether the reopening of assessment can be said to be vitiated in law due to lack of
proper sanction?
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(vi) Whether reasons recorded by the A.O. were vague and suffers from the infirmity so as to
vitiate the entire re-assessment order?

(vii) Whether on merit of the case, the compensation paid to Mr. SPJ by Mr. AS as per the
award passed by the sole arbitrator is an allowable expenditure against the sale proceeds of
the shares while computing LTCGs?

All the above questions stand admitted in the SLP filed by Mr. AS and the matter is ripe for
the final hearing.

AnnexureA

Full form of abbreviations used in the Moot problem

1. ROI: Return of Income

2. LTCG: Long Term Capital Gains
3. A.O.: Assessing Officer
4. A/R: Authorised Representative of assessee
5. A.Y.: Assessment Year
6. r.w.: Read with
7. CIT(A): Commission of Income Tax (Appeals)
8. ITAT: Income Tax Appellate Tribunal
9. FAA: First Appellate Authority
10. CIT: Commissioner of Income Tax
11. D/R: Departmental Representative