2018 (8) TMI 923 - HC - Income Tax

Assessment in the hands of representative / agent - Chief Financial officer (CFO) of the non-resident assessee - According to the appellant, the Chief Financial Officer was questioned about transfer of shares of the appellant by Clayton Dewandre to WABCO, Singapore, even though the Chief Financial Officer was not employed with the appellant during the Financial Year 2013-14 and had no knowledge of the transaction. Whether the writ petition ought to have been dismissed on the sole ground that the appellant had a right of reply to the show cause notice. The answer to the aforesaid question has to be in the negative, for the reasons discussed hereinbelow. Held that - The Division Bench held that no case was made out by the Department that in respect of transfer of share to a third party, that too outside India, the Indian company could be taxed when the Indian company had no role in the transfer. Merely because those shares related to the Indian company, that would not make the Indian company as agent qua deemed capital gain purportedly earned by the foreign company. The writ petition was held to be maintainable and was allowed. We are in full agreement with the judgment of the Division Bench of Delhi High Court in General Electric Co. 2011 (8) TMI 344 - DELHI HIGH COURT and another, supra. May be, there is an appeal from the aforesaid judgment, as contended on behalf of the Revenue, but the fact remains that the judgment has not yet been interfered with. The issues in this writ appeal are covered by the aforesaid judgment of the Delhi High Court, with which we are in full agreement. The judgment and order under appeal is set aside and consequently, the impugned show cause notice is also set aside. - Decided in favor of assessee.

Issues Involved:

1. Jurisdiction of the show cause notice under Section 163(1)(c) of the Income Tax Act, 1961.
2. Conditions precedent for issuance of the show cause notice.
3. Appellant's liability as a representative assessee/agent.
4. Validity of the show cause notice in light of prior assessment on the non-resident entity.

Detailed Analysis:

Jurisdiction of the Show Cause Notice:

The primary issue was whether the show cause notice issued under Section 163(1)(c) of the Income Tax Act was within jurisdiction. The appellant argued that the notice was without jurisdiction as the conditions precedent for its issuance were absent. The learned Single Bench dismissed the writ petition on the ground that the appellant had the right to reply to the notice, which would not prejudice the appellant. However, the appellate court held that the writ petition should not have been dismissed solely on this ground. The High Court has the discretion to entertain a writ petition if the show cause notice is without jurisdiction or if the conditions precedent are absent.

Conditions Precedent for Issuance of the Show Cause Notice:

The court examined whether the conditions precedent for issuing a show cause notice under Section 163(1)(c) were met. The show cause notice alleged that capital gains had directly arisen from the consideration received by Clayton Dewandre from the appellant, proposing to treat the appellant as an agent for tax liability. The court noted that a show cause notice must disclose a liability on the part of the noticee and that the jurisdictional facts must be correctly determined. The court cited the Supreme Court in Raza Textiles Ltd. vs. Income Tax Officer, which held that no authority could confer jurisdiction on itself by deciding a jurisdictional fact wrongly.

Appellant's Liability as a Representative Assessee/Agent:

The court addressed whether the appellant could be treated as a representative assessee/agent under Section 163(1)(c). The appellant contended that Clayton Dewandre, a non-resident, was not in receipt of any income from the appellant, and thus, the show cause notice was unsustainable. The court referenced several precedents, including Claggett Brachi Co. Ltd. vs. CIT and Commissioner of Income Tax vs. Alfred Herbert (India) (P.) Ltd., which held that once an assessment had been made on a non-resident, the agent could not be assessed for the same income. The court also cited General Electric Co. and another vs. Deputy Director of Income-Tax, where it was held that an Indian company could not be taxed when it had no role in the transfer of shares outside India.

Validity of the Show Cause Notice:

The court found that the show cause notice was without jurisdiction and the conditions precedent were not met. The court agreed with the judgment of the Division Bench of Delhi High Court in General Electric Co. and another, which held that an Indian company could not be treated as an agent for deemed capital gains earned by a foreign company when the Indian company had no role in the transfer. The court concluded that the show cause notice was invalid and set it aside.

Conclusion:

The Writ Appeal was allowed, setting aside the judgment and order under appeal, and consequently, the impugned show cause notice was also set aside. The court emphasized that the High Court has the power to issue prerogative writs under Article 226 of the Constitution, particularly when the show cause notice is without jurisdiction or the conditions precedent are absent.

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