2010 (3) TMI 926 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of capital gains earned on the sale of shares of Indian companies.
2. Determination of the place of effective management and its impact on tax residency.

Summary:

Issue 1: Taxability of Capital Gains
The assessee, a company incorporated in Mauritius, claimed exemption on long-term capital gains from the sale of shares u/s Article 13(4) of the Double Taxation Avoidance Agreement (DTAA) between India and Mauritius. The company argued that being a tax resident of Mauritius, the capital gains derived from the sale of shares of Indian companies are not taxable in India. The Assessing Officer questioned the taxability of these gains and the basis for treating this income as exempt.

Issue 2: Determination of Place of Effective Management
The Assessing Officer examined whether the assessee had a permanent establishment in India. The assessee contended that it did not have any office or place of business in India and that all board meetings and important decisions were made outside India. The Assessing Officer, however, focused on the place of effective management, citing that the orders for the sale of shares were placed by Mr. Suresh Rajpal, who was presumed to be in India. The officer held that the effective place of management was in India due to the following reasons:
1. Mr. Suresh Rajpal, owning 99% of the shares, placed all orders and was presumed to be residing in India.
2. The shares were purchased in India when Mr. Rajpal was a resident and senior executive in India.
3. The company filed its first return of income only in the assessment year 2002-03, denying the Income-tax Department the opportunity to examine the source of investment.
4. The company was set up in Mauritius to escape capital gains liability in India.
5. The shares were held in a demat account in India since their purchase.
6. Citing case laws, the Assessing Officer emphasized that the actual place of management determines the residence of a company.

The Tribunal noted the lack of documentary evidence to support the assessee's claim of effective management in Mauritius. The Tribunal restored the appeals to the Assessing Officer for a fresh examination, emphasizing the need for third-party or government agency evidence to substantiate the assessee's claim.

Conclusion:
The appeals were allowed for statistical purposes, and the case was remanded to the Assessing Officer for a de novo decision, considering the Tribunal's observations.