2017 (3) TMI 1469 - AT - Income Tax

Reopening of assessment - approval does not meet the requirements laid down u/s 151(2) - Held that - The assessee applied for PAN on 8.11.2006. Based on the information provided by the assessee it was assigned to the jurisdiction of Circle 1(2)(1), Delhi, which came under the jurisdiction of Addl DIT(IT), Range 1, Delhi. Vide notifications no. 263/2001 of 14.09.2001 and 250/2007 dated 28.09.2007 read with order of DIT (IT)-l Delhi dated 11.10.2007 (copies enclosed), the Add DIT (IT), Range 1, Delhi was empowered to exercise the powers and the functions of Additional Commissioner of Income-tax. Therefore, the grant of approval for issue of notice u/s 148 by Addl DIT (IT), Range-1, Delhi was as per law. The proposition canvassed by the AR that notices u/s 143(2)/142(1) cannot be issued till the disposal of objections made by the assessee in response to the communication of reasons to believe -is an erroneous interpretation of the SC judgment in GKN Driveshafts 2002 (11) TMI 7 - SUPREME Court case. After issue of notice u/s 148 the AO cannot be expected to remain idle waiting for the assessee to seek reasons and then prefer objections at the last minute. It is also worth noting that the time available with the AO for passing draft assessment order was only up to 31.03.2015. Under the circumstances, and keeping in view that the assessee had not sought reasons for almost six months even after receiving the notice u/s 148 on 21.03.2014 the action on part of the AO to issue notices u/s 143(2) and 142(1) before 10.06.2014 cannot be faulted upon. Regarding claim of assesses that Reasons Recorded by the AO were not signed contention has never been raised before at any stage. Not only that the assessee through letter dated 16.10.2014 responded to the reasons conveyed, but continued to participate in the proceedings even after that without raising any disagreement about the same, till now. Nevertheless, the fact that the AO not only recorded reasons (and, of course, signed those) for reopening of assessment, but also obtained approval of the competent authority for issue of notice u/s 148 is undeniable. Moreover, the AO conveyed the reasons for issue of notice u/s 148 to the assessee on 25.07.2014 through a duly signed covering letter of the same date. The office copy of the signed letter along with the sticker of Speed Post bar-code is available in the assessment records (P-201/c). It is worth noting that another similar letter addressed to Cairn Energy PLC (a group company) was also sent on the same date to the same address receipt of which is not denied. Proof of dispatch of these letters is also available with the office (copy enclosed). The assessment records in original were produced for kind perusal of Hon ble Members. The Bench also allowed the AR to inspect the assessment file and verify that the AO had indeed sent the reasons for reopening through a covering letter under his signature. Information on share transfer was available with AO of CIL - Held that - Even though information was available with the AO of CIL, it reached the AO of the assessee much later. In any case, the law does allow action against an erring assessee (i.e. reopening of assessment in cases where income has escaped assessment) within certain time frame. In this case the action was taken within the prescribed time frame i.e. within 6 years of income having escaped assessment.Even though the assessment of CIL was made with full application of mind, income in the case of the assessee had escaped assessment because, among other aspects, the assessee had failed to file any return whatsoever till the notice u/s 148 was sent. Regarding claim that Reopening is contrary to Vodafone Judgment 2012 (1) TMI 52 - SUPREME COURT OF INDIA - Held that - Vodafone judgment, to remove doubts the Parliament clarified the law as it stood since 1962. Whether the Parliament of the Country was competent to do so, it is most humbly submitted, cannot be deliberated in this Hon ble Tribunal. At the time of issue of notice, the law was thus clear and the AO had clearly stated (order disposing of objections; page 36 - 47 of assessee s paper book) that the conditions laid down in section 9(l)(i) were satisfied and the capital gains accruing to the assessee from transfer of CIHL shares which derived all their value from the assets situated in India, was taxable in India. Regarding issue on Survey Report - Held that - The assessee did not file the tax return voluntarily is a fact. In such a scenario, whether the survey brought out any new facts for the purposes of reopening is not material. That there was income chargeable to tax in India and the assessee had not even filed the tax return was sufficient reason to believe that the income had escaped assessment. The survey only confirmed the aspect of income accruing or arising in India through the transfer of assets situate in India. Whether survey report was received by the AO before or after issue of notice u/s 148 does not come in the way of the legality of such notice. Issue regarding Territorial Jurisdiction - Held that - The challenge to the jurisdiction was made 72 days after the service of notice u/s 148, much after the 30 days bar placed in that regard u/s 124 of the Income Tax Act. Any challenge to the jurisdiction of the assessing officer at this stage deserves to be rejected. Approval does not meet the requirements laid down under section 151 (2) - Held that - Necessarily the grant of approval for issue of notice under section 148 of the Income Tax Act was also required to be given by the Additional Director of income tax (International Taxation), New Delhi. The appellant also could not say that the notifications relied upon by the revenue are not in accordance with the law. The decisions relied upon by the Ld. authorized representative are not applicable to the facts of the present case as in this particular case there is a notification issued by the Central board of direct taxes conferring jurisdiction of the Joint Commissioner/Additional Commissioner of income tax on the joint director/ Additional Director of income tax. In view of this we reject the contention of the Ld. authorized representative that the approval does not meet the requirements laid down under section 151 (2) of the Income Tax Act, 1961. Form number ITNS 34 provides for the format of notice under section 148 of the Income Tax Act, 1961 - Held that - Undisputedly, in this case proper approval of Ld. Additional Director of income tax (international taxation) has been taken by the Ld. assessing officer under section 151 of the Income Tax Act. Merely if the notice issued does not mention some facts that are prescribed in a non-statutory form when substantially the procedure laid down by the Income Tax Act has been complied with cannot make the notice invalid. In view of this we also rejected the contention of the Ld. authorized representative of the assessee that the notice is not in the prescribed format, it should be held to be invalid. Violation of guidelines - Held that - In the present case, the notice under section 148 was issued on 21/01/2014 where the Ld. assessing officer granted time of 30 days from the date of service of the notice to file a return. In response to that notice, assessee filed return only on 03/04/2014, beyond the time limits provided by the Ld. assessing officer. The assessee sought the reasons only on 10/06/2014, which were supplied on 25th July 2014 and assessee filed its objection only on 16/10/2014. Therefore, we do not agree with the contention of the Ld. authorized representative that in this case there is any violation of the guidelines Share transfer of Cairn India Holdings Ltd was available with the Ld. assessing officer - Held that - It cannot be argued that if assessment in the case of some another assessee has been made who was also a party to the contract, reassessment proceedings in the hands of the other party cannot be initiated. Here, the argument of the assessee is that that the information could have been passed on to the Ld. assessing officer of the appellant from the assessing officer of the Cairn India Ltd, and such information has not been passed by the Ld. assessing officer of the Cairn India Ltd to the Ld. assessing officer of the appellant and therefore the reopening is invalid. Such an argument is required to be rejected at the threshold only because the assessment proceeding of one person is quite different from the assessment proceedings of another person and the provisions of the Income Tax Act should be applied fully with respect to the records and information relevant to that assessee only. Chargeability of capital gain - whether transaction entered into by appellant of transferring 251224744 shares of Cairn India holdings Limited to Cairn India Limited on 12/10/2006 is whether liable to tax in India or not ? - assessee company is a tax resident of United Kingdom - Held that - 1st contention of the assessee is that lower authorities have erred in holding that capital gains arising to the appellant on account of the sales of shares of Cairn India Holdings Ltd to cairn India Ltd is deemed to accrue or arise in India under section 9 (1) (i) of the act and is therefore, chargeable to tax in India. The argument of the assessee is that retrospective amendment to section 9 (1) (i) of the act by The Finance Act, 2012 is bad in law and ultra vires. In view of the decision of the Hon ble Supreme Court in L. Chandra Kumar V Union of India 1997 (3) TMI 90 - SUPREME Court this is not the right forum to challenge validity of provisions of the Income Tax Act. In view of this contention of the assessee rejected. As an internal reorganization of the group there is no change in controlling interest as a result of these internal or reorganization - Held that - According to us there are series of transactions entered in to by the group, which culminated in to the Initial Public Offering of 98639903 shares @ 160 per share of Cairn India Limited. Part of the purchase price of the share of ₹ 6101 crores have been paid out of the proceeds of the public issue by Cairn India Limited to the appellant. In the IPO as per Annexure 1 to the letter submitted before DRP placed at page no 159 of the paper book of the revenue shows that in IPO, cairn India Limited has divested 30.50 % of the stake to the General Public and Institutional investors. The complete financial arrangement of the Group has ended through series of transfer of shares from U K Jurisdictions to Jersey Jurisdiction to India. On divesting 30 % stake in these oil and gas assets located in India and part of IPO proceeds app. ₹ 6101/- Crore paid to the appellant in U K. Therefore, we are not convinced that these series of transactions entered in to by the group is merely a business reorganization process in consolidation of its oil and gas business India. Furthermore arguments of the assess also do not have any rational that there is no increase in the wealth of appellant as the value of the holdings of the appellant in Cairn India Limited has been unlocked due to IPO and value is derived by the book building process. No real income accruing to the assessee and only real income can be taxed - Held that - The argument of the assessee that there is no increase in the wealth of the appellant and there is no real income earned by the assessee does not deserve to be accepted. In fact, the assessee has earned substantial gain on sale of the shares and also has gained on account of taxes too as according to the assessee itself such gain is not chargeable to tax. Therefore, the assessee has earned the real income on account of sale of its shares in Cairn India Holdings Ltd to Cairn India Ltd. Cost of acquisition should be stepped up to the fair value of the shares of cairn India holding Ltd on the date of acquisition while computation of the capital gain - Held that - On conjoint reading of provisions of section 48, 49 and 55 of the Act it is apparently clear that property held by the assessee and its mode of acquisition do not fall in any of the clauses which provides for taking the cost of acquisition in the hands of the assessee in these transaction being cost to the previous owner. No such provision has also been cited before us. We also do not agree with the contention of the assesee that as there is no timing difference between the acquisition and disposal of shares , the full value of consideration and the cost of acquits ion is same. Provision of section 48, 49 and 55(2) of the act does not allow such treatment. Therefore the computation of capital gain in the hands of the assessee is required to be made by deducting from the full value of consideration cost of acquisition incurred by the assessee for acquisition of the property. We do not find any infirmity in the order of the ld AO in taking the cost of acquisition, which is derived by issues of shares as well as by sale of debt. In the result we confirm the order of the Ld AO in working out capital Gain on sale of shares of Cairn India Holding limited in the hands of appellant of ₹ 245035012588/-. DTAA provisions applicability - whether according to Article 14 of Indian United Kingdom except as provided in Article 8 and 9 each contracting state may tax capital gain in accordance with the provisions of its domestic law? - Held that - In relation to applicability of Article 3(2) of the relevant DTAAs, that it can apply only to terms not defined in the DTAA. Since the relevant DTAAs in the case before them defined royalty , Article 3(2) could not be applied. For terms which are defined under the DTAA, there is no need to refer to the laws in force in the Contracting States, especially to deduce the meaning of the definition under the DTAA. Further, the court has held that neither act of parliament supply or alter the boundaries of DTAA or supply redundancy to any part of its. Similarly, according to us, the provisions of DTAA where it simply provides that particular income would be chargeable to tax in accordance with the provisions of domestic laws , such article in DTAA also cannot the limit the boundaries of domestic tax laws. In view of this, we do not find any force in the argument of the assessee and dismiss ground of the appeal. Interest u/s 234A and 234B - retrospective amendment made by The Finance Act, 2012 - Held that - Admittedly in the present case, the income of nonresident appellant has become chargeable to tax due to retrospective amendment in the act and further the payments made to assessee was also subject to withholding tax u/s 195 of the act and in view of the above judicial precedents cited before us, we are of the opinion that assessee cannot be burdened with interest u/s 234A and 234B of the Act on tax liability arising out of retrospective amendment w.e.f. 01.04.1962 in the provision of section 9(1) of the Income Tax Act. In the result ground of the appeal of the assessee is allowed.

Summary

Issues Involved:
1. Assumption of Jurisdiction
2. Levy of Capital Gains Tax
3. Erroneous Findings of the AO
4. Incorrect Levy of Interest
5. Initiation of Penalty Proceedings

Detailed Analysis:

1. Assumption of Jurisdiction:
The appellant contended that the AO erred in assuming jurisdiction under Section 147 of the Act without proper compliance with conditions precedent. The AO's approval under Section 151(2) was challenged as it was given by the Additional Director of Income Tax (International Taxation), not by the Joint Commissioner, as required. The Tribunal found that the Central Board of Direct Taxes (CBDT) had empowered the Additional Directors to perform functions of Joint Commissioners through notifications. Thus, the approval was valid. The issuance of notice under Section 143(2) before the disposal of objections was also contested. The Tribunal held that since the objections were filed after the notice, there was no procedural lapse. The argument that the AO had prior information about the share transfer was rejected, emphasizing that each assessment is distinct.

2. Levy of Capital Gains Tax:
The appellant argued that the capital gains tax on the sale of shares of Cairn India Holdings Ltd. (CIHL) to Cairn India Ltd. was not chargeable under Section 9(1)(i) of the Act. The Tribunal upheld the AO's view that the gains were chargeable to tax in India, as the shares derived substantial value from assets located in India. The retrospective amendment to Section 9(1)(i) by the Finance Act, 2012, was deemed valid. The appellant's claim that the transaction was an internal reorganization without real income was rejected, as substantial gains were realized and recorded in financial statements. The Tribunal also dismissed the argument that the cost of acquisition should be stepped up to the fair market value, affirming the AO's computation based on actual costs.

3. Erroneous Findings of the AO:
The appellant challenged the AO's findings on regulatory compliance and disclosure of facts. The Tribunal found these issues irrelevant to the core matter of capital gains tax liability and dismissed the ground.

4. Incorrect Levy of Interest:
The appellant argued against the levy of interest under Sections 234A and 234B, citing the retrospective nature of the tax liability. The Tribunal agreed, noting that the appellant could not have foreseen the liability due to the retrospective amendment. It referenced judicial precedents, including the Hon'ble Madras High Court's decision in CIT vs. Revathi Equipment Ltd. and the Hon'ble Delhi High Court's ruling in DIT vs. GE Packaged Power Inc., which supported the appellant's position. The Tribunal held that interest under Sections 234A and 234B was not applicable.

5. Initiation of Penalty Proceedings:
The appellant contested the initiation of penalty proceedings under Section 271(1)(c). The Tribunal deemed the issue premature as only the initiation of proceedings was in question, not the imposition of a penalty. The ground was dismissed.

Conclusion:
The Tribunal upheld the AO's jurisdiction and the levy of capital gains tax, dismissed challenges to the AO's findings, and ruled in favor of the appellant regarding the levy of interest. The initiation of penalty proceedings was deemed premature. The appeal was partly allowed.