2014 (11) TMI 220 - AT - Income Tax

Reopening of assessment u/s 147 Reason to believe - Held that - The assessee is a FUND and a resident of Denmark - Along with its return of income, in India, the assessee had submitted Tax Residency Certificate issued by the Danish Authorities in order to claim the benefit of Article 14 of India-Denmark DTAA the AO is first of all, is not clear whether the assessee is tax resident of Denmark or not, and secondly, whether AOP-Trust is taxable unit in Denmark or not - This is evident from the reasons where he observes that, there is a possibility that AOP is not a taxable unit under the tax laws of Denmark and because of this, there is possibility of loss of revenue - for assuming the jurisdiction to reopen the case u/s 147, the AO must have reasons to believe that any income chargeable to tax has escaped assessment - The belief entertained by the AO must not be irrational or hypothetical but must be held in good faith and not merely as a pretence - The formation of belief must have rational connection with or relevant bearing from the material on record having live link nexus with income escaping assessment - The reasons recorded by the AO clearly shows that the reopening has been done merely on some kind of a possibility for which he himself is not sure - There is even no reference to any material that assessee s claim for benefit under Article 14 of DTAA is false or incorrect - the reopening is merely pretence to examine, whether the assessee is a taxable unit or not and whether there could be possibility of loss of revenue. Once the Tax Residency Certificate was there in the record, then there could not have been any ground for presumption that the assessee is not a taxable entity in Denmark - He has not referred to any other information or material that the assessee is not a tax resident of Denmark and there was loss of revenue because the assessee has falsely claimed the benefit under Article 14 of the DTAA - The reasons as recorded by the AO falls in the realm of surmises and presumption de hors any material fact having live link nexus with the formation of reasons to believe that income chargeable to tax has escaped assessment - on the face of the reasons recorded , the AO cannot assume jurisdiction to reopen the case in the case of the assessee - the entire proceedings initiated vide notice u/s 148 is bad in law and deserves to be quashed Decided in favour of assessee.

Summary

Issues Involved:
1. Legality of Reassessment under Section 147 of the Income-tax Act, 1961.
2. Denial of Exemption under Article 14 of the India-Denmark Double Taxation Avoidance Agreement (DTAA).
3. Denial of Exemption under Section 10(38) of the Income-tax Act.
4. Levy of Interest under Section 234B of the Income-tax Act.

Detailed Analysis:

1. Legality of Reassessment under Section 147 of the Income-tax Act, 1961:
The primary issue was whether the reassessment initiated by the Assessing Officer (AO) under Section 147 was valid. The AO reopened the assessment on the grounds that there was a possibility that the assessee, a Foreign Institutional Investor (FII) and a tax resident of Denmark, might not be a taxable unit under Danish tax laws, leading to potential revenue loss. The Tribunal found that the AO's reasons were based on mere presumption and conjecture without any concrete material evidence. It was emphasized that the AO must have "reasons to believe" based on rational and relevant material that income had escaped assessment. The Tribunal concluded that the AO's reasons were hypothetical and lacked a live link nexus with the material on record, rendering the reassessment proceedings invalid.

2. Denial of Exemption under Article 14 of the India-Denmark Double Taxation Avoidance Agreement (DTAA):
The AO denied the exemption under Article 14 of the DTAA, arguing that the assessee, being an AOP-Trust, was not a taxable unit in Denmark. The Tribunal noted that the assessee had submitted a Tax Residency Certificate (TRC) issued by Danish authorities along with its return of income, which should have sufficed to claim the DTAA benefits. The Tribunal observed that the AO's reopening was based on a hypothetical scenario without any factual basis, as the TRC confirmed the assessee's tax residency in Denmark. Consequently, the Tribunal found the AO's denial of the DTAA exemption to be unjustified.

3. Denial of Exemption under Section 10(38) of the Income-tax Act:
The assessee alternatively claimed exemption under Section 10(38) for long-term capital gains arising from the sale of shares subject to securities transaction tax. However, given the Tribunal's decision to quash the reassessment proceedings, there was no need to adjudicate this issue on merits. The Tribunal's ruling on the invalidity of the reassessment rendered this ground moot.

4. Levy of Interest under Section 234B of the Income-tax Act:
The AO had levied interest under Section 234B for the alleged tax liability. However, since the reassessment proceedings were quashed, the basis for levying interest under Section 234B was also invalidated. The Tribunal did not need to address this issue separately as the entire reassessment was deemed null and void.

Conclusion:
The Tribunal quashed the reassessment proceedings initiated under Section 147, declaring them null and void due to the AO's reliance on presumptive and hypothetical grounds without any concrete material evidence. Consequently, the issues of denial of exemptions under Article 14 of the DTAA and Section 10(38) of the Income-tax Act, as well as the levy of interest under Section 234B, were rendered moot. The appeals of the assessee were allowed, and the assessment orders were annulled.