2015 (3) TMI 722 - HC - Income Tax

Application for Advance Ruling declined - application seeking an Advance Ruling is in respect of a transaction designed prima facie for tax avoidance in terms of Section 245 -R (2)(iii) of the Income Tax Act, 1961 (the Act) as revenue's stand that two Indian residents namely one Mr. Dhruv Khaitan and Mr. Piyush Khaitan (Indian residents) are the ultimate beneficiaries of the sale of the shares by the Petitioner - Petitioner is a Company incorporated in Mauritius - Held that - The facts and submissions of law put-forth by the Petitioner to meet the objections of the Revenue have not at all been considered. Similarly, so far as prima facie case is concerned, the impugned order besides adverting to the legal position has not given any reason as to why in the present facts, the entire issue/ transaction had been designed prima facie for the purposes of avoiding income tax. The facts arising in this case for consideration have to be examined in the light of the prevailing law. The issue raised are fairly contentious. However, the impugned order after setting out the law in respect of what is exactly meant by words 'control and management' and the understanding of the word 'prima facie' concluded by holding that the factual scenario projected by the Revenue clearly establishes that the transaction in question was designed prima facie for avoidance of income tax. Accordingly, we decline to entertain the application, which is accordingly, rejected. We find that the impugned order has after recording the submission of the Petitioner and the Revenue concluded that the view canvassed by the Revenue establishes a prima facie design to avoid tax. The impugned order gives no reasons which would indicate why the Petitioner's contention is not acceptable. We do appreciate that very detailed reasons need not be given for a prima facie view but some consideration must be evident from the order. This reasoning is absent in the impugned order. Thus he impugned order suffers from the vice of being an order without reasons. Therefore, the impugned order is quashed and set aside. The Authority shall consider de novo the application of the Petitioner dated 3rd January, 2011. - Decided in favour of assessee.

Summary

Issues Involved
1. Validity of the Authority's order under Section 245-R (2)(iii) of the Income Tax Act, 1961.
2. Allegations of tax avoidance in the transaction.
3. Compliance with principles of natural justice, specifically the requirement for a reasoned order.

Detailed Analysis

1. Validity of the Authority's Order under Section 245-R (2)(iii) of the Income Tax Act, 1961
The petitioner challenged the order dated 30th April 2014, by the Authority for Advance Ruling Income Tax, which declined to entertain the petitioner's application for Advance Ruling. The Authority held that the application was in respect of a transaction designed prima facie for tax avoidance under Section 245-R (2)(iii) of the Income Tax Act, 1961. The petitioner argued that their submissions were not considered, making the order without reasons. The court emphasized that in writ jurisdiction, it is concerned with the decision-making process rather than the merits of the decision. Thus, the merits of the rival submissions were left to the Authority constituted under the Act.

2. Allegations of Tax Avoidance in the Transaction
The petitioner, a company incorporated in Mauritius and a tax resident there, sold shares of an Indian company to a Singapore-based company, realizing long-term capital gains. The revenue objected, arguing that the control and management of the petitioner were in India, and the transaction was designed to avoid tax. The petitioner countered that the control was in Mauritius, with only two out of eight directors being Indian residents. They also clarified that the source of funds was from various equity investors, not the two Indian residents. The Authority, however, concluded that the transaction was designed prima facie for tax avoidance without considering the detailed submissions of the petitioner.

3. Compliance with Principles of Natural Justice
The court found that the impugned order lacked reasons, violating the principles of natural justice. The Supreme Court in CCT v. Shukla Brothers and Kranti Associates (P) Ltd v. Masood Alam Khan emphasized the necessity of a reasoned order. The court noted that recording reasons ensures fairness, transparency, and accountability in the decision-making process. The impugned order merely concluded that the transaction was designed for tax avoidance without providing any reasoning or addressing the petitioner's detailed submissions.

Conclusion
The court quashed and set aside the impugned order, directing the Authority to reconsider the petitioner's application de novo. It emphasized that the Authority must provide reasons for its decision, ensuring compliance with the principles of natural justice. The court clarified that it had not considered the merits of the issue, and the Authority should not be influenced by any observations made in this order. The petition was disposed of on the grounds of breach of natural justice, with no order as to costs.