2011 (5) TMI 853 - AT - Income Tax

Summary

Issues Involved:

1. Jurisdiction of the assessing authority to issue notices under section 148 and complete assessments under section 147 for the assessment years 2000-01, 2001-02, and 2002-03.
2. Taxability of the Malaysian income of the assessee-company under the Double Taxation Avoidance Agreement (DTAA) between India and Malaysia.
3. Levy of interest under sections 234B and 234D of the Income-tax Act, 1961.

Detailed Analysis:

1. Jurisdiction of the Assessing Authority:

The assessee challenged the jurisdiction of the Assessing Officer to issue notices under section 148 and complete assessments under section 147 for the assessment years 2000-01, 2001-02, and 2002-03. The assessee argued that the reason recorded by the Assessing Officer for reopening the assessments was erroneous. The Assessing Officer had stated that since the Malaysian foreign income was not taxable under the Malaysian Income-tax Act, it had to be assessed under the Indian Income-tax Act, thereby implying that income chargeable to tax had escaped assessment within the meaning of section 147. The assessee contended that this reasoning was based on a misunderstanding of the DTAA provisions, which do not mandate that income must be taxed in India if not taxed in the contracting state.

The Commissioner of Income-tax (Appeals) upheld the reopening of the assessments, relying on various judicial pronouncements. However, the Tribunal found that the Assessing Officer's reasoning was legally flawed and thus, the notices issued under section 148 were invalid. Consequently, the reassessments completed for these years were deemed ab initio void.

2. Taxability of Malaysian Income under DTAA:

The core issue was whether the income earned by the Malaysian branch of the assessee-company should be taxed in India. The assessee argued that the income from investments made outside India was attributable to its Malaysian branch, a permanent establishment (PE) in Malaysia, and hence should be taxed in Malaysia as per the DTAA. The Assessing Officer, however, held that since the income was not taxed in Malaysia, it should be taxed in India.

The Commissioner of Income-tax (Appeals) concluded that the Malaysian branch was not a permanent establishment and that the control and management of the branch were exercised by the directors in India. Therefore, the income was part of the global income of the assessee-company, which is taxable in India. The Tribunal, however, disagreed, stating that the Malaysian branch was a permanent establishment and that the income attributable to it should be taxed in Malaysia as per the DTAA. The Tribunal emphasized that liability to tax and actual payment of tax are distinct concepts, and the income should not be taxed in India merely because it was not taxed in Malaysia.

3. Levy of Interest under Sections 234B and 234D:

The Assessing Officer had levied interest under sections 234B and 234D, which was deleted by the Commissioner of Income-tax (Appeals). The Commissioner relied on the decision of the Madras High Court in CIT v. Revathi Equipment Ltd., which held that interest under section 234B is not applicable if the assessee is not liable for advance tax. Regarding section 234D, the Commissioner referred to the decision in Sitalakshmi Mills Ltd. v. CIT, which held that the provision is not retrospective in operation. The Tribunal upheld the Commissioner's decision, affirming that the assessee was not liable for interest under sections 234B and 234D.

Conclusion:

The Tribunal allowed the appeals filed by the assessee, holding that the reopening of assessments for the years 2000-01, 2001-02, and 2002-03 was invalid due to erroneous reasoning by the Assessing Officer. It also held that the income of the Malaysian branch of the assessee-company was not taxable in India under the DTAA. The Tribunal dismissed the appeals filed by the Revenue regarding the levy of interest under sections 234B and 234D. The order was pronounced on May 31, 2011, at Chennai.