Madras HC directs Cognizant to approach Appellate Authority on tax dispute

A Division Bench of Madras High Court has partially allowed an appeal by IT major Cognizant against a single judge order, while upholding its direction to the company to approach the tax appellate authority for a remedy.

The order was issued on an appeal filed by the company against a single judge order dismissing its petition against the Income Tax Department's demand of Rs 2,806 crore in connection to a Scheme of Arrangement the company made to buy back shares from its shareholders, in 2016. 

Considering the appeal by Cognizant, the Division Bench comprising of M M Sundresh and M Nirmal Kumar, in an order today, said "...while upholding the direction of the learned single Judge with respect to the deposit and the liberty granted to file an appeal are accordingly upheld."

"However, the findings rendered on the nature of transaction and the scope under Section 115-O of the Act are accordingly set aside. The issue as to whether the impugned order should be preceded by a procedure involving adjudication and the requirement of violation of principles of natural justice are also left open to be decided in the appeal. Accordingly, the writ appeal stands allowed in part as indicated," said the order.

A Cognizant spokesperson said that the company may not be able to comment on the development since it has not officially received a copy of the order.

The Division Bench granted four weeks from the date of receipt of a copy of the order for the company to file an appeal before the Appellate Authority. As and when such an appeal is filed, the same will have to be disposed of within a period of eight weeks thereafter, it added. 

"When in a fiscal statute, hierarchy of remedy of appeals are provided, the party has to exhaust them instead of seeking relief by invoking the jurisdiction of this Court under Article 226 of the Constitution of India," observed the court.

The Bench, however, dismissed the findings of the single judge including that the transactions are not mere buying back of shares but granting dividend to the shareholders, observing that the single judge ought not to have gone into the merits of the case, while granting liberty to go for an appeal.

It may be noted that the IT Department has issued an order in March 23, that the transactions made for the buy back arrangement has to be taxed under Section 115-O of the Income Act as it would constitute dividend and not capital gain.

The transaction was treated as capital gains and a sum  of Rs 898.01 crore was withheld as TDS for the amount paid to its shareholders.

As a consequence thereon, the bank accounts of the company were freezed. Challenging the order, the company approached the Madras High Court. Following a conditional interim order granted by the Single Judge, the company paid a sum of Rs 495 crore.

The Division Bench said that it do not find any error in the order of the single Judge with respect to the deposit made during the pendency of the interim order as erroneous. It is only an interim arrangement directed to be made pending the appeal.