2016 (3) TMI 548 - AT - Income Tax

Revision u/s 263 - taxability of alleged long term capital gain on sale of shares - DTTA between India and the Sri Lanka. - Held that - Gains from alienation of the shares of capital stock of the company the property of which consists directly or indirectly principally of immovable property situated in a contracting State may be taxed in that State. The situs of the shares was in Sri Lanka. The Royale Exports Ltd. is a resident of Sri Lanka, and therefore, the transfer of shares of that company held by the assessee company in India would be taxable in Sri Lanka and if gain is to be taxed in Sri Lanka, then that will not be taxed in India as per the DTAA. Thus, even after setting aside the issue to the AO, the result will be same i.e. gain will not be taxed in India. The Hon ble Karnataka High Court in the case of D.G. Gopala Gowda (2013 (5) TMI 46 - KARNATAKA HIGH COURT) had an occasion to examine similar aspect, i.e. if after exercise of power u/s.263, no taxable income is unearthed in the hands of the assessee, then, action u/s.263 should not be upheld. In view of the above discussion, we allow the appeal of the assessee and quash the order passed by the ld. Commissioner under section 263 of the Income Tax. Revision u/s 263 - operation of weighbridge and income therefrom wrongly mentioned as per CIT(A) - as per CIT(A) expenditure is in higher side as compared to income from the operation of weigh-bridge - Held that - The assessee has placed on record computation of income, details of expenditure and all other details called for by the AO. The assessee has an income of ₹ 906/- under the head Business Income . This income was earned by the assessee from renting of weigh-bridge. In our opinion, the ld.Commissioner was of the view that against an income of ₹ 906/- from the operation of weigh-bridge, the expenditure of ₹ 2,98,212/- towards salary and ₹ 1,16,067/- towards depreciation of weigh-bridge are prima facie on the higher side and this aspect has been accepted by the AO without verification. In our opinion, the assessee has placed on record the details. If the logic of the ld.Commissioner is accepted that against a miniscule income, expenses of more than ₹ 4,16,000/- has been claimed by the assessee, then no assessee would ever suffer loss. Certain expenditure are to be given to the assessee, even if in a particular year no business activity was carried out. The assessee has shown operation of weighbridge and income therefrom. Therefore, the ld.Commissioner is not justified in taking action under section 263 of the Income Tax Act. We allow this appeal of the assessee also and quash the order passed by the ld. Commissoner. - Decided in favour of assessee

Summary

Issues Involved:
1. Legitimacy of the Commissioner's action under section 263 of the Income Tax Act.
2. Adequacy of the Assessing Officer's (AO) inquiry during the assessment.
3. Taxability of long-term capital gains under the Double Taxation Avoidance Agreement (DTAA) between India and Sri Lanka.

Issue-wise Detailed Analysis:

1. Legitimacy of the Commissioner's Action under Section 263 of the Income Tax Act:

The primary grievance of the assessee was that the Commissioner erred in taking cognizance under section 263 of the Income Tax Act, thereby setting aside the assessment order dated 31.10.2012 for re-adjudication. The Commissioner believed that the AO did not examine the issues properly and issued a show cause notice to the assessee on 18.9.2014. The Commissioner held that the AO failed to carry out adequate inquiry, making the assessment order erroneous and prejudicial to the interest of the Revenue. Consequently, the Commissioner set aside the assessment order with directions to the AO to pass a fresh assessment order determining the total taxable income of the assessee.

2. Adequacy of the Assessing Officer's Inquiry during the Assessment:

The assessee argued that there is a distinction between inadequacy or lack of inquiry. If the AO, after conducting an inquiry, adopted one of the possible views in law, that view cannot be disturbed. However, if there is a total lack of inquiry, only then can the assessment order be termed as erroneous. The assessee contended that the AO had issued a show cause notice under section 143(2)/142(1) and had called for details regarding the buy-back of shares by Royale Exports Ltd. The AO accepted the returned income after examining the details provided by the assessee. Therefore, the inquiry was conducted, and the order could not be termed erroneous merely because the AO did not discuss the issue elaborately in the assessment order. The Tribunal agreed with this contention, stating that the assessment order cannot be termed erroneous and prejudicial to the interest of the Revenue on the ground that the inquiry was not conducted by the AO.

3. Taxability of Long-term Capital Gains under the DTAA between India and Sri Lanka:

The assessee argued that the long-term capital gain on the sale of shares is covered under Article 13 (4) and (5) of the DTAA between India and Sri Lanka. According to the DTAA, gains from the alienation of shares of a company resident in a contracting state may be taxed in that state. The situs of the shares was in Sri Lanka, and Royale Exports Ltd. is a resident of Sri Lanka. Therefore, the transfer of shares held by the assessee would be taxable in Sri Lanka and not in India. The Tribunal noted that even after setting aside the issue to the AO, the result would remain the same, i.e., the gain would not be taxed in India. The Tribunal referred to the decision of the Hon'ble Karnataka High Court in the case of CIT vs. D.G. Gopala Gowda, which held that if no taxable income is unearthed in the hands of the assessee after the exercise of power under section 263, the action under section 263 should not be upheld.

Conclusion:

The Tribunal allowed the appeals of the assessee and quashed the orders passed by the Commissioner under section 263 of the Income Tax Act. The Tribunal held that the AO had conducted an inquiry, and the assessment order could not be termed erroneous and prejudicial to the interest of the Revenue. Additionally, the gains from the sale of shares were taxable in Sri Lanka under the DTAA, and no prejudice was caused to the Revenue.