2019 (8) TMI 934 - HC - Income Tax

Reopening of assessment u/s 147 - non filing of return u/s 115A (5) - rejection of objections against notice - investment in shares to be a capital account transaction - HELD THAT - Respondent failed to notice that u/s 115A (5) r.w.s. 115A (1) (a) there was no need for the Petitioner to file a return of income u/s 139(1). Respondent wrongly adverted to Clause (b) of Explanation 2 when this was a case of no return having been filed and the case if at all would fall under Clause (a). As decided in GKN DRIVESHAFTS (INDIA) LTD. VERSUS INCOME-TAX OFFICER AND OTHERS 2002 (11) TMI 7 - SUPREME COURT when a notice u/s 148 is issued, the proper course of action for the noticee is to file return and if he so desires, to seek reasons for issuing notices. The assessing officer is bound to furnish reasons within a reasonable time. On receipt of reasons, the noticee is entitled to file objections to issuance of notice and the assessing officer is bound to dispose of the same by passing a speaking order. Merely because the notice issued to the Petitioner was a system generated notice since the NMS detected the Petitioner as a non-filer does not automatically mean that the Petitioner has to be issued a notice u/s 147. Even assuming that at the time notice was issued the Respondent was perhaps not fully aware of all the relevant facts, once the Petitioner submitted its objections drawing his attention to the specific legal position, it was obligatory for the Respondent to have applied his mind to those points. The order passed by the Respondent rejecting the objections on 23rd October, 2018 shows that there is no reference whatsoever to the specific objections of the Petitioner. Even a cursory examination of those objections would have dissuaded the Respondent from persisting with the proceedings consequent upon the impugned notice dated 26th March, 2018. Filing of the return by the Petitioner could not have been construed as an admission by it of a legal obligation to file a return. In the Petitioner s case, the admitted facts make it abundantly clear that there was no obligation on the Petitioner to file a return of income for the AY in question. The principal objection of the Petitioner that its investment in the shares of its subsidiary cannot be treated as income is well founded. The decision of the Bombay High Court in Vodafone India Services Pvt. Ltd. v. Union of India 2014 (10) TMI 278 - BOMBAY HIGH COURT holding such investment in shares to be a capital account transaction not giving rise to income was accepted by the CBDT. Therefore, the fundamental premise of the Respondent that the above investment by the Petitioner in the shares of its subsidiary amounted to income which had escaped assessment was flawed. The question of such a transaction forming a live link for reasons to believe that income had escaped assessment is entirely without basis and is rejected as such. This Court sets aside the impugned notice

Issues Involved:
1. Validity of the notice issued under Section 148 of the Income Tax Act, 1961.
2. Applicability of Section 115A (5) of the Income Tax Act to the Petitioner.
3. Treatment of share transactions as 'income' for tax purposes.
4. Compliance with procedural requirements as per the Supreme Court's decision in GKN Driveshafts (India) Ltd. v. Income Tax Officer.

Detailed Analysis:

1. Validity of the Notice Issued under Section 148 of the Income Tax Act, 1961:
The Petitioner, a tax resident of Switzerland, challenged the notice dated 26th March 2018 issued under Section 148 of the Income Tax Act, 1961, requiring it to file a return of income. The Respondent issued the notice on the grounds that the Petitioner’s income chargeable to tax had escaped assessment. The Petitioner argued that its income from India consisted only of dividend and interest on which tax was duly deducted at source, and it was exempt from filing a return under Section 115A (5) of the Act. The Court noted that the Respondent failed to consider this exemption and issued the notice without proper application of mind. The Court found that the notice was issued based on a system-generated alert from the Non-filers Monitoring System (NMS), which did not automatically justify the issuance of the notice under Section 147 of the Act.

2. Applicability of Section 115A (5) of the Income Tax Act to the Petitioner:
The Petitioner contended that as a non-resident company, its income from dividends and interest was subject to tax deduction at source, and therefore, it was exempt from filing a return under Section 115A (5) of the Act. The Court agreed, stating that the Petitioner’s income from India during the relevant assessment year consisted only of dividend and interest on which tax had been deducted at source. The Court emphasized that the Respondent failed to recognize this exemption, which was clearly stipulated in the Act and further clarified by the CBDT Instruction No.14 of 2013.

3. Treatment of Share Transactions as 'Income' for Tax Purposes:
The Petitioner argued that the purchase of shares of its subsidiary, Nestle India Ltd., was a capital account transaction and could not be treated as income. The Court referred to the decision of the Bombay High Court in Vodafone India Services Pvt. Ltd. v. Union of India, which held that such share transactions are capital account transactions and do not give rise to income. The Court noted that the CBDT had accepted this decision and issued Instruction No. 2 of 2015, directing field officers to adhere to this judgment. Consequently, the Court found that the Respondent’s premise that the Petitioner’s investment in shares amounted to income was fundamentally flawed.

4. Compliance with Procedural Requirements as per the Supreme Court's Decision in GKN Driveshafts (India) Ltd. v. Income Tax Officer:
The Petitioner followed the procedure outlined by the Supreme Court in GKN Driveshafts (India) Ltd. v. Income Tax Officer by filing a return and requesting the reasons for the notice under Section 148. The Respondent provided the reasons, which were subsequently challenged by the Petitioner. The Court found that the Respondent did not adequately address the Petitioner’s objections and failed to pass a speaking order as required. The Court emphasized that the procedure mandated by the Supreme Court must be strictly followed, and the Respondent’s failure to do so rendered the proceedings invalid.

Conclusion:
The Court set aside the impugned notice dated 26th March 2018 and the impugned order dated 23rd October 2018, concluding that the notice was issued without proper application of mind and that the Petitioner was exempt from filing a return under Section 115A (5) of the Act. The Court also found that the Respondent’s treatment of the Petitioner’s share transactions as income was incorrect. The writ petition was allowed, with no order as to costs.

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