2023 (2) TMI 35 - HC - Income Tax

Reopening of assessment u/s 147 - Unexplained gain on sale of shares of company abroad - assessee claimed gains earned by it on sale of Agile shares were not taxable in India by virtue of Article 13(4) the Double Tax Avoidance Agreement entered into and subsisting between India and Singapore ( India-Singapore DTAA ) based on the Tax Residency Certificate ( TRC ) - Relevance of information from a third party - borrowed satisfaction - AO got information about the petitioner s income from the TDS officer of Igarashi, as all the details were available in the petitioner s return which had been processed under Section 143(1) - whether the respondent-revenue can go behind the tax residency certificate issued by the other tax jurisdiction and issue re-assessment notice under Section 147 to determine issues of residence status, treaty eligibility and legal ownership? - HELD THAT - Undoubtedly, information from a third party can form the basis for an examination/investigation by the Assessing Officer but the decision to reopen the assessment has to be of the Assessing Officer and not of the third party. In the present case, this Court finds that the respondent has merely done a cut and paste job as it has issued the notice under Section 148 of the Act based on information forwarded by the TDS Officer of Igarashi without any independent application of mind or verification or investigation. Consequently, the impugned notice has been issued on borrowed satisfaction - which is impermissible in law. This Court is of the view that the respondent has incorrectly referred to Explanation 2(b) to Section 147 of the Act as the same applies only if the assessee understates its income or claims excessive loss, deduction, allowance or relief in its return of income. Beneficial ownership under DTAA - Under the India Singapore DTAA, at the relevant time, capital gain was to be taxed on the basis of legal ownership and not on the basis of beneficial ownership. In fact, the concept of beneficial ownership, at the relevant time under the India Singapore DTAA, was attracted for taxation purposes only qua three transactions i.e. dividend, interest and royalty and not for capital gains Applicability of Explanation 2(b) to section 147 - In the case under consideration, the petitioner has claimed benefit in terms of Article 13(4) of the India-Singapore DTAA, which only provides for the allocation of taxation rights among the parties, as held by Supreme Court in the case of Union of India vs. Azadi Bachao Andolan 2003 (10) TMI 5 - SUPREME COURT - Consequently, the claim of benefit in Article 13(4) of the DTAA does not qualify as a deduction, relief or exemption. The claim of benefit in Article 13(4) of the DTAA merely allocates the taxing rights vis- -vis capital gains to Singapore. Consequently, the provisions of Explanation 2(b) to Section 147 of the Act is not applicable. In addition, apart from merely citing the provision, the impugned order does not give any reason as to how the said Explanation applies. In the case of Prashant S. Joshi 2010 (2) TMI 271 - BOMBAY HIGH COURT while dealing with the same Explanation, the Bombay High Court has held that when the Assessing Officer applies the Explanation, he has to provide reasons in the order itself and not supplement it with an affidavit. Companies to be incorporated initially with minimum paid up share capital - This Court takes judicial notice that it is quite common for companies to be incorporated as a special purpose vehicle for a particular investment / project and that too initially with a minimum paid-up share capital of USD 1. It is not in dispute that the petitioner was subsequently adequately capitalized and a genuine investment was made in India which had grown exponentially and from which the petitioner had exited. Live link between the material disclosed and the formation of belief - The powers of the Assessing Officer to reopen assessment, though wide, are not plenary. The words of the statute are reason to believe and not reason to suspect . The reopening of the assessment after the lapse of many years is a serious matter. In the present case, there is no live link between the material disclosed and the formation of belief that any income chargeable to tax has escaped assessment. Form 10K relied by the respondent in the reasons recorded is for the year ended 31 st December, 2011, whereas the petitioner was incorporated on 25th June, 2013. Thus, the said Form 10K does not pertain to the petitioner and does not show any live-link between the reasons and the material shown in the reasons for reopening. Though, the Form 10K for the year ended 31st December 2015 was not before the Assessing Officer and not relied upon by the Assessing Officer at any stage of the proceedings, yet the said Form 10K now produced does not include the petitioner in the list of subsidiaries. The respondent has not furnished any documents to show that the petitioner is a tax resident of USA. The petitioner is incorporated in Singapore and is managed by its board of directors based in Singapore. There is no dispute that Mr.Stephan A. Schwarzmann is not part of the board of directors of the petitioner and there is no material on record to rebut the petitioner s contention that he does not have any participation in the affairs/management of the petitioner. Consequently, the petitioner is neither a US based company nor its affairs are managed from USA. It is an Investment Fund governed by and complying with Singapore law rules and regulations. Reasons recorded cannot evolve or be allowed to grow with age and ingenuity - It is settled law that the reasons recorded cannot evolve or be allowed to grow with age and ingenuity. The reasons which are recorded cannot be supplemented by affidavits. If the reasons are allowed to be added, subtracted or deleted, then by the time the matter reaches the Court, the Assessing Officer would be allowed to change its reasons for believe. The Supreme Court in New Delhi Television Ltd 2020 (4) TMI 133 - SUPREME COURT has held that the Assessing Officer is not allowed to alter its reasons, which must be considered only based on their recordings. Limitation of benefit LOB clause - In the present case, the expenditure has admittedly been incurred in Singapore as required under the LOB clause and is confirmed as per the audited financial statement as well as the independent chartered accountant certificate. The same is also duly reported in the annual filing as required under the respective regulations and has been recognized by the regulators in Singapore, like the Monetary Authority of Singapore as an expense incurred in Singapore. Consequently, all expenses incurred in Singapore, whether directly or indirectly, have to be considered as operational expenditures to satisfy the LOB clause. In the objections the petitioner has furnished the details of compliance with the LOB clause to the India-Singapore DTAA. The Assessing officer has not questioned the satisfaction of the LOB clause or the Independent Chartered Accountant certificate at any stage except in the present proceedings. Consequently, the petitioner is a bonafide entity and not a shell / conduit entity as it complies with the LOB clause to the India-Singapore DTAA as the expenditure has been incurred in Singapore and the same has been certified by an independent chartered accountant and accepted by the authorities in Singapore i.e. Income Tax authorities, Monetary Authority of Singapore. Accordingly, the allegation of treaty shopping is irrelevant in the present case as the India-Singapore DTAA has a limitation of benefit clause which the petitioner satisfies. Revenue cannot go behind TRC - Article 4 of the India-Singapore DTAA states that the term resident of a Contracting State means any person who is a resident of a Contracting State in accordance with the taxation laws of that State. As per Singapore tax laws, a company is resident in Singapore if the management and control of its business is exercised in Singapore. The petitioner has a valid TRC dated 3rd February, 2015 from the IRAS Singapore evidencing that it is a tax resident of Singapore and thereby is eligible to claim tax treaty benefits between India and Singapore. As early as March 30, 1994, CBDT issued Circular No.682 in which it was emphasised that any resident of Mauritius deriving income from alienation of shares of an Indian company would be liable to capital gains tax only in Mauritius as per Mauritius tax law and would not have any capital gains tax liability in India. This circular was a clear enunciation of the provisions contained in the DTAA, which would have overriding effect over the provisions of Sections 4 and 5 of the Act by virtue of Section 90 of the Act. CBDT vide Circular No.789 dated 13th April 2000 once again clarified that the TRC shall serve as sufficient evidence of the taxpayer's residence and beneficial ownership for applying the DTAA. Consequently, the TRC is statutorily the only evidence required to be eligible for the benefit under the DTAA and the respondent s attempt to question and go behind the TRC is wholly contrary to the Government of India s consistent policy and repeated assurances to Foreign Investors. In fact, the IRAS has granted the petitioner the TRC after a detailed analysis of the documents, and the Indian Revenue authorities cannot disregard the same as doing the same would be contrary to international law. The respondent s reliance on the decision in GE Capital Mauritius Overseas Investments 2021 (3) TMI 1207 - DELHI HIGH COURT , is misconceived on facts, as in the case of GE Capital Mauritius Overseas Investments (supra), the Court was concerned with examining the validity of the reasons given in an order under Section 241A of the Act (dealing with withholding refunds). During the course of the hearing before this Court, the assessee, a non-resident, tried to expand its arguments to include that the income earned was not taxable under the treaty. Though accepting the arguments, the Court decided not to intervene in the matter. Accordingly, this Court is of the view that the respondent-revenue cannot go behind the TRC issued by the other tax jurisdiction as the same is sufficient evidence to claim treaty eligibility, residence status, legal ownership and accordingly there is no capital gain earned by the petitioner liable to tax in India. Even the clarificatory press release dated 1st March, 2013 issued by the Finance Ministry pursuant to the 2013 amendment makes it clear that a TRC is to be accepted and tax authorities cannot go behind it. Further, since on the basis of repeated assurances by the Government of India which have been upheld by the Apex Court, the petitioner had invested in India, the respondent is estopped from arguing to the contrary. Conclusion - This Court is of the view that no income chargeable to tax has escaped assessment in the present case. In Indu Lata Rangwala 2016 (5) TMI 804 - DELHI HIGH COURT this Court has held that reopening of assessment based on the return of income must show 'reasons to believe' that income chargeable to tax has escaped assessment. Consequently, the impugned reassessment proceedings are without jurisdiction and the impugned Notice under Section 148 of the Act, impugned Reasons undated and the impugned Order and the subsequent draft Assessment Order under Section 144C are quashed. - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the respondent-revenue can go behind the tax residency certificate issued by another tax jurisdiction.
2. The legality of the re-assessment notice under Section 147 of the Income Tax Act, 1961.
3. The validity of the reasons to believe that income chargeable to tax has escaped assessment.
4. The applicability and sufficiency of the Tax Residency Certificate (TRC) for claiming treaty benefits under the India-Singapore DTAA.
5. The compliance with the Limitation of Benefit (LOB) clause under the India-Singapore DTAA.
6. The validity of the order disposing of the objections to the re-assessment notice.

Issue-wise Detailed Analysis:

1. Whether the respondent-revenue can go behind the tax residency certificate issued by another tax jurisdiction:
The court held that the respondent-revenue cannot go behind the TRC issued by the other tax jurisdiction. The TRC is sufficient evidence to claim treaty eligibility, residence status, and legal ownership. The court emphasized that the TRC should be accepted as conclusive evidence, and the tax authorities in India should not question the resident status of the assessee. This principle was reiterated in various CBDT Circulars and upheld by the Supreme Court in Union of India vs. Azadi Bachao Andolan and Vodafone International Holdings B.V. The court also highlighted the Government of India's assurances to foreign investors that the TRC would be accepted without further scrutiny.

2. The legality of the re-assessment notice under Section 147 of the Income Tax Act, 1961:
The court found that the re-assessment notice issued under Section 147 was based on borrowed satisfaction and lacked independent application of mind by the Assessing Officer. The notice was issued merely to verify the nature and genuineness of the transaction, which is not permissible in law. The court held that the reasons for reopening should show a live link between the material before the Assessing Officer and the belief that income has escaped assessment. In this case, the reasons recorded were based on information from a third party without any independent verification, making the re-assessment notice invalid.

3. The validity of the reasons to believe that income chargeable to tax has escaped assessment:
The court held that the reasons to believe must be based on reasonable grounds and not mere suspicion. The reasons recorded by the Assessing Officer did not demonstrate any live link between the material and the belief that income had escaped assessment. The court emphasized that the reasons cannot evolve or be supplemented during the course of arguments. The reasons recorded at the time of issuing the notice must be the basis for the validity of the re-assessment proceedings.

4. The applicability and sufficiency of the Tax Residency Certificate (TRC) for claiming treaty benefits under the India-Singapore DTAA:
The court reiterated that the TRC is sufficient evidence to claim treaty benefits under the India-Singapore DTAA. The TRC issued by the Inland Revenue Authorities of Singapore (IRAS) confirmed the petitioner's tax residency in Singapore. The court referred to various CBDT Circulars and the Supreme Court's judgments in Union of India vs. Azadi Bachao Andolan and Vodafone International Holdings B.V., which upheld the validity and sufficiency of the TRC for claiming treaty benefits.

5. The compliance with the Limitation of Benefit (LOB) clause under the India-Singapore DTAA:
The court held that the petitioner had complied with the LOB clause under the India-Singapore DTAA. The petitioner had incurred the required expenditure in Singapore, as confirmed by its audited financial statements and an independent chartered accountant's certificate. The court noted that the Assessing Officer did not dispute the satisfaction of the LOB clause at any stage of the proceedings. Therefore, the petitioner was deemed not to be a shell/conduit company and was eligible for the benefits under the DTAA.

6. The validity of the order disposing of the objections to the re-assessment notice:
The court found that the order disposing of the objections was arbitrary and non-speaking. It did not address the petitioner's detailed submissions and failed to provide any justification for the reopening of the assessment. The court emphasized that the reasons for reopening must be recorded in the order itself and cannot be supplemented by affidavits or additional arguments during the proceedings. The court quashed the impugned order disposing of the objections, as it did not meet the legal requirements for a valid re-assessment.

Conclusion:
The court concluded that no income chargeable to tax had escaped assessment in the present case. The re-assessment proceedings were found to be without jurisdiction, and the impugned notice under Section 148, the reasons recorded for reopening, and the order disposing of the objections were quashed. The court emphasized the sufficiency of the TRC for claiming treaty benefits and the importance of independent application of mind by the Assessing Officer in re-assessment proceedings.