2016 (3) TMI 688 - HC - Income Tax

Reopening of assessment - addition on Capital gains - transfer of a capital asset in India - Held that - The shares of the Petitioner company were transferred by its shareholders to Ingram Micro Asia. The Petitioner itself has not transferred anything. In order to attract capital gains tax there are two requirements that need to be fulfilled (1) that there is a transfer of a capital asset; and (2) there is a gain by virtue of such transfer. If these conditions are satisfied, then capital gains tax is to be computed as set out in section 48 of the Act. The facts of the present case would clearly show that the Petitioner has not transferred any capital asset in India that would give rise to any capital gains tax in their hands. This is borne out from the share purchase agreement which itself stipulates that the 100% shareholding of the Petitioner company was transferred by its shareholders (described in schedule I thereof) to Ingram Micro Asia for a total consideration of AUD 730 million (Australian dollars) equivalent to ₹ 2,501.72 crores (conversion rate being 1 Australian dollar ₹ 34.l27). Even if we were to assume that by virtue of Ingram Micro Asia purchasing the 100% shareholding of the Petitioner, there was a transfer of a capital asset in India, the same could never be taxed as capital gains in the hands of the Petitioner company. This is for the simple reason that the shares of the Petitioner company have been transferred to Ingram Micro Asia by the Petitioner s shareholders and therefore the transferor in the aforesaid transaction is the shareholders of the Petitioner and not the Petitioner company. In these circumstances, if there was any liability towards capital gains tax, if at all (we are not called upon to consider this aspect), it was that of the shareholders of the Petitioner and not the Petitioner itself. This being the position in law, the Assessing Officer could never have reason to believe that income of the Petitioner chargeable to tax in India had escaped assessment. If the Assessing Officer could not have had any reason to form the aforesaid belief, then naturally what follows is that no notice under section 148 of the Act could be issued in the facts of the present case. Consequently, the Assessment Order passed under section 144 of the Act was therefore wholly without jurisdiction. On this count also, we find that the Assessment Order passed under section 144 of the Act is unsustainable and has to be set aside. - Decided in favour of assessee.

Summary

Issues Involved:
1. Jurisdiction of the Assessment Order.
2. Service of Notices.
3. Reason to Believe for Escaped Assessment.
4. Transfer of Capital Asset and Capital Gains Tax Liability.

Detailed Analysis:

1. Jurisdiction of the Assessment Order:
The Petitioner challenged the Assessment Order dated 25th March 2013, passed under section 144 read with section 147 of the Income Tax Act, 1961, on the grounds that it was without jurisdiction. The Petitioner contended that no notices under sections 148, 142(1), or 143(2) were ever served on them, which is mandatory before passing any Assessment Order under section 144. Additionally, the Petitioner argued that the notice under section 148 was issued without jurisdiction as the Petitioner was not the transferor of any capital asset in India.

2. Service of Notices:
The Petitioner, a company incorporated in Bermuda, argued that none of the mandatory notices were served on them. The Revenue contended that notices were served on Ingram Micro India (previously known as Tech Pacific India), the downstream company of the Petitioner, which they considered the last known address of the Petitioner. However, the court found that the notices served on Ingram Micro India could not be considered as valid service on the Petitioner, especially when the Revenue was aware of the Petitioner's address in Bermuda. The court emphasized that service of notice under section 148 is a sine qua non for any further proceedings, and failure to serve this notice invalidates all subsequent actions.

3. Reason to Believe for Escaped Assessment:
The Petitioner argued that no capital gains had accrued in their hands as the shares were transferred by its shareholders to Ingram Micro Asia, and thus, the Petitioner could not be taxed for capital gains. The court agreed, noting that the Petitioner did not transfer any capital asset and did not receive any gain from such a transfer. Therefore, the Assessing Officer could not have any reason to believe that income chargeable to tax had escaped assessment, which is a prerequisite for issuing a notice under section 148.

4. Transfer of Capital Asset and Capital Gains Tax Liability:
The court examined the facts and found that the shares of the Petitioner company were transferred by its shareholders to Ingram Micro Asia. The Petitioner itself did not transfer any asset. The court held that capital gains tax, if applicable, would be in the hands of the shareholders who transferred the shares, not the Petitioner company. The court rejected the Revenue's argument that the share purchase agreement was between the Petitioner and Ingram Micro Asia, noting that the Petitioner could not sell its own shares, which are owned by its shareholders.

Conclusion:
The court concluded that the Assessment Order passed under section 144 of the Act was without jurisdiction due to the failure to serve the mandatory notices on the Petitioner and the lack of a valid reason to believe that income had escaped assessment. Consequently, the court set aside the Assessment Order and allowed the Petition. The court clarified that it did not examine whether capital gains had accrued to the shareholders and left it open for the Revenue to take action against the shareholders if deemed appropriate under the law.