2012 (7) TMI 806 - HC - Income Tax

Initiation of reassessment proceedings u/s 147 r.w.s. 148 - DTAA between India and the UAE - as there was no tax regime in UAE and as the assessee was not liable to taxation in UAE, the question of benefit under the said DTAA was not applicable - Held that - In terms of Circular No. 732 dated 20th December, 1995, the petitioner was issued an annual no objection certificate and in terms thereof, the ships operated and owned by the petitioner were allowed to leave the ports. The certificate as itself was treated as valid and binding and in compliance with the Section 172. As the AO has relied upon judgments of ARR in Cyril Eugene Pereira, In Re (2005 (5) TMI 12 - AUTHORITY FOR ADVANCE RULINGS ) for the proposition that benefit under DTAA is only meant for taxpayers who are liable to pay tax twice in two countries on the same income and not where tax is not payable in one country but failed to notice the decision of the Supreme Court in Azadi Bachao Andolan 2003 (10) TMI 5 - SUPREME COURT disapproving the reasoning/ratio mentioned in Cyril Eugene Pereira The circular issued by CBDT No. 789 dated 13th April draws a distinction between liability to pay tax and actual or de facto payment of tax . Phrase liable to taxation it has been held is not the same as payment of tax . The test for liability for taxation is not determined on the basis of an exemption granted in respect of any particular source of income but by taking into consideration the totality of provisions of income tax law - Merely because at the given time there is an exemption from income tax in respect of any particular head, it cannot be contended or held that the assessee is not liable to tax - For the purpose of application of article 4 of the DTAC, what is relevant is the legal situation, namely, liability to taxation, and not the fiscal fact of actual payment of tax. If this were not so, the DTAC would not have used the words, liable to taxation , but would have used some appropriate words like pays tax - the company incorporated in Dubai and carrying on shipping business in India is entitled to benefit under Article 8 of the DTAA and there is no scope of taxing them in any port of India - in favour of assessee.

Issues Involved:
1. Applicability of Section 172 of the Income Tax Act, 1961, as a complete code.
2. Binding nature of the 'annual no objection certificate' issued under Article 8 of the Double Taxation Avoidance Agreement (DTAA) between India and UAE.
3. Validity of reassessment proceedings under Sections 147/148 of the Act.
4. Legitimacy of the reasons to believe recorded by the Assessing Officer for reassessment.

Detailed Analysis:

1. Applicability of Section 172 of the Income Tax Act, 1961, as a Complete Code:
Section 172 of the Act is a special provision for levy and recovery of tax from non-resident owners and charterers of ships. It mandates a summary assessment of tax payable at a flat rate of 7.5% before the ship leaves India. The petitioner argued that reassessment proceedings under Sections 147/148 could not be initiated as Section 172 is a complete code. However, the court held that Section 172 does not preclude the applicability of Sections 147/148. The court emphasized that Section 172(4) is a summary procedure and not a detailed regular assessment. Therefore, reassessment provisions can be invoked when conditions under Section 147/148 are satisfied.

2. Binding Nature of the 'Annual No Objection Certificate':
The petitioner contended that the 'annual no objection certificate' issued under Article 8 of the DTAA between India and UAE was binding on the respondent, and thus reassessment proceedings could not be initiated. The court noted that the certificate was issued based on a prima facie or tentative view and did not preclude reassessment proceedings. The certificate allowed the ships to leave ports, but it did not constitute a final assessment. Therefore, the issuance of the certificate did not bar the initiation of reassessment proceedings under Sections 147/148.

3. Validity of Reassessment Proceedings under Sections 147/148:
The petitioner argued that the conditions for initiating reassessment proceedings were not satisfied. The court held that Section 172 does not negate the application of Sections 147/148. The court emphasized that there is no inconsistency between Section 172 and Sections 147/148, and both can operate simultaneously. The court also referred to the Supreme Court's decision in A.S. Glittre D/5 I/5 Garonne and Ors. vs. Commissioner of Income Tax, which categorized assessment under Section 172(4) as ad-hoc and not precluding regular assessment.

4. Legitimacy of the Reasons to Believe Recorded by the Assessing Officer:
The court scrutinized the "reasons to believe" recorded by the Assessing Officer and found them insufficient to meet the requirements of Section 147. The reasons were based on the assumption that the petitioner was not liable to pay tax in UAE and thus could not claim benefits under the DTAA. However, the court noted that the Supreme Court in Azadi Bachao Andolan had disapproved similar reasoning. The court emphasized that "reasons to believe" must be based on some material or basis and not on mere suspicion. The court found that the reasons recorded did not satisfy the requirement of forming a prima facie belief that income had escaped assessment.

Conclusion:
The court allowed the writ petition, quashing the impugned reassessment notice and proceedings. The court held that Section 172 does not preclude the applicability of Sections 147/148 and that the 'annual no objection certificate' does not bar reassessment. The court also found that the reasons recorded by the Assessing Officer did not meet the mandate of Section 147.

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