2004 (10) TMI 537 - AT - Income Tax

Summary

Issues Involved:
1. Validity of reassessment under section 147 read with section 143(3) of the Income-tax Act.
2. Assessment of capital gains on merits.
3. Relief granted by rectification order of CIT(A).

Issue-wise Detailed Analysis:

1. Validity of Reassessment:
The primary issue was the validity of the reassessment initiated under section 147 read with section 143(3) of the Income-tax Act. The assessee, a non-resident company incorporated in the Netherlands, filed a return of income on 19-7-2000 declaring total income of Rs. NIL and claiming a refund due to a change in the tax rate from 20% to 10%. The assessee pursued the refund through multiple letters to the Assessing Officer (AO). There was a dispute regarding whether the return was processed under section 143(1)(a). The AO issued a notice under section 148 on 31-5-2002, reopening the assessment and subsequently brought to tax long-term capital gains of Rs. 78,37,46,380 from the sale of shares in HDFC Bank Limited. The assessee challenged the reassessment's validity, arguing that the AO had been made aware of the refund claim and did not act on it, thus it could not be said that the AO "noticed" income escaping assessment. The Tribunal held that the AO's inaction despite the assessee's continuous reminders meant the reassessment was without jurisdiction, allowing Ground No. 1.

2. Assessment of Capital Gains on Merits:
The second issue was the assessment of capital gains on merits. The assessee, a subsidiary of NatWest Bank, Plc. of England, had transferred shares of HDFC Bank Limited to companies in the Netherlands as part of a restructuring decision by the parent company. The shares were later sold to India Equity Fund, a company in Mauritius. The assessee claimed exemption from capital gains tax under the Indo-Netherlands Double Taxation Avoidance Agreement (DTAA), specifically Article 13.5, which states that capital gains are taxable only in the state of the seller's residence. The Income-tax authorities rejected this claim, citing the McDowell & Co. Ltd. v. CTO doctrine, arguing the transactions were a colorable device to avoid tax and should be taxed under the Indo-UK treaty. The Tribunal, however, found the restructuring decision bona fide and the appellant companies substantive entities. The Tribunal also found no evidence of the appellants controlling India Equity Fund or any commercial motive behind the transactions other than the restructuring decision. The Tribunal applied the Supreme Court's judgment in Union of India v. Azadi Bachao Andolan, which supported the assessee's claim for exemption under the Indo-Netherlands treaty, allowing Ground No. 2.

3. Relief Granted by Rectification Order of CIT(A):
The third issue was related to a relief granted by a rectification order of CIT(A). The assessee's counsel informed the court that the relief had been granted, and thus this ground was not pressed. Consequently, this ground of appeal was dismissed as not pressed.

Conclusion:
The Tribunal allowed the appeal of the assessee in part, holding the reassessment under section 147 was without jurisdiction and granting exemption from capital gains tax under the Indo-Netherlands DTAA. The relief granted by the rectification order was acknowledged, and that ground of appeal was dismissed as not pressed.