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2019 (1) TMI 391 - AT - Income TaxDeemed dividend addition u/s 2(22)(e) - sum advanced by two concerns to appellant foreign company who is common shareholder in two concerns, Portescap and Videojet - As per the assessee, it is a tax resident of Mauritius and the DRP in its order dated 23.12.2016 held that deemed dividend in question is not covered within the meaning of the expression dividend used in Article 10(4) of the India-Mauritius Tax Treaty - Assessment Year 2009-10 - Held that - The third facet stated in Article 10(4) of the Treaty, in our view, clearly suggests that even deemed dividend as per Sec. 2(22)(e) of the Act is to be understood to be a dividend for the purpose of the Treaty. The presence of the expression same taxation treatment as income from shares in the country of distributor of dividend in Article 10(4) of the Treaty in the context of the third facet clearly leads to the inference that so long as the Indian tax laws consider deemed dividend also as dividend , then the same is also to be understood as dividend for the purpose of the Treaty. Therefore, for the said reason, we are unable to accept the plea of the assessee contained in the Additional Ground of appeal. Thus, on this aspect, assessee has to fail. Rate of tax applied by the income-tax authorities - Assessing Officer has taxed the dividend at 42.23% on gross basis. As per the assessee, it was to be taxed @ 5% in terms of Article 10 of India-Mauritius Tax Treaty - stand of AO is based on the decision of the DRP that dividend income as per Sec. 2(22)(e) of the Act is not dividend as understood for the purposes of India-Mauritius Tax Treaty - Held that - As in the earlier paras we have already held that it is wrong to say that deemed dividend in question is not be understood as dividend for the purposes of India-Mauritius Tax Treaty. Once it is held that the impugned deemed dividend is also of the nature of dividend for the purposes of India-Mauritius Tax Treaty, we find that the applicable rate of tax is 5% as correctly canvassed by assessee. Thus, in conclusion, we uphold the stand of assessee that the applicable tax rate on the dividend income is in terms of the India-Mauritius Tax Treaty. Thus, assessee succeeds on this aspect. Reopening of assessment - Inter Corporate Deposit treated as Loan and taxed as dividend under Section 2(22)(e) of the Act Assessment Year 2010-11 - Held that - neither in the assessment order nor in the order of CIT(A) there is any material to point out that the payment in question made by Portescap to GVR was for the individual benefit of any shareholder of Portescap; and, in any case it cannot be straightaway inferred that the payments made on 29.10.2009, 02.03.2010 and 03.03.2010 to GVR were for the individual benefit of the assessee considering that assessee was not even a shareholder of Portescap on the aforesaid dates. Thus, there is no justification for the CIT(A) to invoke the third limb of Sec. 2(22)(e) of the Act in the present situation. Thus, on this aspect, so far as the inclusion of ₹ 90,00,00,000/- paid by Portescap to GVR within the scope of Sec. 2(22)(e) of the Act is concerned, the same is quite untenable. In the absence of any Deposit agreement or any other bilateral agreement, which would bring out the terms and conditions and the features of the transaction as understood by the parties, it would not be appropriate to say that it is in the nature of an ICD and not a loan. Therefore, the aforesaid plea of the assessee, though accepted in Assessment Year 2009-10 by us in the earlier paras, has to fail in this assessment year on account of the failure of the appellant to lead appropriate evidence. As regard to a sum of ₹ 2,00,00,000/- given by Portescap to DHR. The said amount is liable to be treated as a loan or advance, as held by us in the earlier para and, therefore, the same has been rightly treated to be falling within the scope of Sec. 2(22)(e) of the Act by the income-tax authorities, which we hereby affirm. For reopening of assessment the relevant copies of the proposal of reopening initiated by the Assessing Officer as also the requisite approval by the competent authority in terms of Sec. 151 of the Act. We do not find any infirmity in the same and, therefore, the objection of the assessee on the initiation of proceedings under Sections 147/148 of the Act is liable to be dismissed Assessing Officer is directed to recompute the total income considering the sum of ₹ 2,00,00,000/-as falling within the meaning of deemed dividend as per Sec. 2(22)(e) of the Act and determine the tax liability
Issues Involved:
1. Validity of reopening assessment under Sections 147/148 of the Income Tax Act. 2. Treatment of Inter Corporate Deposits (ICDs) as loans for deemed dividend taxation under Section 2(22)(e) of the Income Tax Act. 3. Tax rate applicable to deemed dividend under India-Mauritius Tax Treaty. 4. Additional grounds related to the applicability of the India-Mauritius Tax Treaty. Issue-wise Detailed Analysis: 1. Validity of Reopening Assessment: The assessee challenged the reopening of the assessment under Sections 147/148 on the grounds that the income had already been assessed in the hands of other entities and thus could not be considered as having "escaped assessment." The Tribunal observed that the Assessing Officer (AO) must have a rational connection or relevant bearing on the formation of belief about the escapement of income. Since the income in question was already assessed on a substantive basis in the hands of Videojet and on a protective basis in the hands of Portescap, it could not be said to have escaped assessment. Consequently, the Tribunal quashed the reopening of the assessment for Assessment Year (AY) 2009-10. 2. Treatment of ICDs as Loans for Deemed Dividend Taxation: The primary issue was whether the ICDs given by Portescap to Videojet and other entities could be treated as loans under Section 2(22)(e) of the Act. The Tribunal examined the nature of the ICDs and distinguished them from loans based on various characteristics such as initiation, repayment terms, and purpose. It concluded that the ICDs were distinct from loans and thus should not be taxed as deemed dividends under Section 2(22)(e) for AY 2009-10. However, for AY 2010-11, the Tribunal found insufficient evidence to classify the transactions as ICDs and upheld the AO's treatment of the amounts as loans. 3. Tax Rate Applicable to Deemed Dividend: The assessee argued that the deemed dividend should be taxed at a lower rate of 5% under the India-Mauritius Tax Treaty. The Tribunal held that deemed dividends under Section 2(22)(e) are to be considered as dividends for the purposes of the Treaty. Therefore, the applicable tax rate should be 5%, as per the provisions of the India-Mauritius Tax Treaty. 4. Additional Grounds Related to the Applicability of the India-Mauritius Tax Treaty: The Tribunal addressed the additional ground raised by the assessee regarding the applicability of the India-Mauritius Tax Treaty. It concluded that deemed dividends are covered under the definition of dividends in the Treaty, and thus the Treaty provisions apply, allowing for a lower tax rate of 5%. Conclusion: - For AY 2009-10, the Tribunal quashed the reopening of the assessment and held that the ICDs could not be treated as loans for deemed dividend taxation. The applicable tax rate was determined to be 5% under the India-Mauritius Tax Treaty. - For AY 2010-11, the Tribunal upheld the reopening of the assessment. It found that the amounts advanced by Portescap to GVR and DHR were loans and thus taxable as deemed dividends under Section 2(22)(e). The tax rate was also determined to be 5% under the India-Mauritius Tax Treaty. The appeals were allowed for AY 2009-10 and partly allowed for AY 2010-11.
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