2024 (1) TMI 426 - HC - Income Tax

Validity of reopening of assessment - investment in shares in an Indian subsidiary - as submitted notices u/s 148A(b) had been issued in the present batch of matters in accordance with the Risk Management Strategy formulated by the Central Board of Direct Taxes ( CBDT ) - HELD THAT - The admitted facts in the present batch of matters are that the assessees are foreign companies who have made remittances/investment in shares of their Indian subsidiaries. It is an admitted position that the transactions in question are capital account transactions. Though there is a doubt expressed that the transactions in question may be a consequence of round tripping, yet no evidence or proof of the said allegations have been stated or annexed with the impugned orders and notices. It is settled law that investment in shares in an Indian subsidiary cannot be treated as income as the same is in the nature of capital account transaction not giving rise to any income. In Nestle SA Versus Assistant Commissioner of Income Tax 2019 (8) TMI 934 - DELHI HIGH COURT this Court held that the allegation of the Revenue that the investment in the shares of Indian subsidiary amounted to income is flawed. The action of the Respondents is in contravention of the CBDT Instruction No. 2 of 2015 dated 29th January, 2015 reiterating the view expressed by the Bombay High Court in Vodafone India Services Pvt. Ltd. Versus Union of India 2014 (10) TMI 278 - BOMBAY HIGH COURT that no income arises on investment in shares since it is a capital account transaction. Further, this Court in Divya Capital One Private Limited (Earlier Known as Divya Portfolio Private Limited) 2022 (5) TMI 1016 - DELHI HIGH COURT held that Whether it is information to suggest under amended law or reason to believe under erstwhile law the benchmark of escapement of income chargeable of tax still remains the primary condition to be satisfied before invoking powers under Section 147 of the Act . Consequently, the impugned orders under Section 148A (d) of the Act and the notices passed under Section 148 of the Act and all consequential action taken thereto are set aside. It is clarified that if any material becomes subsequently available with the Revenue, it shall be open to it to take proceedings in accordance with law. The challenge to the vires to Explanation 1 to Section 148 of the Act is left open.

Summary

Issues:
The judgment involves quashing impugned notices under Section 148A(b) of the Income Tax Act, 1961, orders under Section 148A(d) of the Act, and notices under Section 148 of the Act, along with challenging the legality and constitutional validity of Explanation 1 to Section 148 of the Act.

Details of Judgment:

1. The petitioners filed writ petitions seeking to quash the impugned notices and orders under the Income Tax Act, challenging the legality of Explanation 1 to Section 148.

2. The factual scenario of one case involved a foreign company subscribing to shares in its Indian subsidiary without earning income in India, leading to non-filing of income tax returns.

3. Petitioners argued that the transactions were capital account transactions incapable of generating income, with no tangible material indicating income escapement.

4. Respondents issued notices under Section 148A(b) based on the Risk Management Strategy of the CBDT.

5. The admitted facts were that foreign companies made capital account transactions in their Indian subsidiaries, with doubts of round-tripping but lacking evidence.

6. The judgment cited precedent stating that investment in Indian subsidiary shares does not constitute income, as confirmed by the CBDT and the Bombay High Court.

7. Respondents' actions were deemed contrary to CBDT instructions and the Bombay High Court judgment, accepted by the Union Cabinet.

8. The Union Cabinet accepted the Bombay High Court's decision, emphasizing that investment in shares is a capital account transaction with no income chargeable to tax.

9. Another case law highlighted the primary condition of "escapement of income chargeable to tax" before invoking powers under Section 147 of the Act.

10. The impugned orders and notices were set aside, allowing the Revenue to proceed if new material emerges, while leaving the challenge to the validity of Explanation 1 to Section 148 open. The writ petitions were disposed of accordingly.