2023 (12) TMI 922 - AT - Income Tax

Deemed dividend u/s 2(22)(d) - Determination of accumulated profit - capital gains arising pursuant to capital reduction by the Indian company - migration from IGAAP to Ind-AS - opening balance as on 01.04.2016 for computation of the accumulated profit / (losses) as on date of capital reduction should be considered as per the amount taken up in accordance with the Indian Accounting Standard - AO recomputing the accumulated profit as against the actual accumulated loss of Novateur as on the date of capital reduction - whether treating the capital gains as dividend, the AO/ DRP erred in recomputing the accumulated profit as against the actual accumulated loss of Novateur as on the date of capital reduction? - HELD THAT - The financial statement prepared and approved by the share holders prior to Ind-AS are based on policies and method of accounting adopted by the assessee's. As per the new Ind-AS, general accepted policies and method in line with the global acceptance are being adopted to present the financials of the company. In order to achieve the transition, Ind-AS 101 was introduced to facilitate the companies to prepare the first balance sheet. This requires the companies to prepare the current (FY 2016-17) and previous year (FY 2015-16) balance sheet by adopting the new and accepted policies and method proposed in the Ind-AS. The argument that the figures reinstated is only comparative purpose is not proper considering the fact that the reinstated figures are based on the new accounting method and new policies as per the Ind-AS, which the company proposes to follow consistently in the future. Reinstated figures are not for past performance but for the future adoption of the policies. The reinstated figures are the actual status and financial position of the company based on the accepted new method of accounting proposed in the Ind-AS. The balance sheet adopted by the share holders as on 31.03.2016 are based on the previous set of accounting method as per Indian GAAP and when the company adopts the new accounting standards as per Ind AS, the assets and liabilities in the balance sheet will certainly change. The changes in the assets and liabilities are reflected in the reinstatement of figures declared by the company in the current financial year. The argument put forth by the assessee cannot be accepted. The figure declared by the assessee in the balance sheet in the retained earning opening balance sheet is the actual accumulated loss carried forward by the company Novateur India based on the adoption of new accounting policies. Hence, Ground Nos.1 and 2 are dismissed. Assessment proceedings of Novateur India, the assessing officer has accepted the submissions of the company and it amounts to acceptance of the department that the figures declared by them are proper and same has to adopted in the case of the assessee - Both the assessments are independent and if there is any financial impact, we could consider the same in both the assessments. Merely because the AO has collected the information and not discussed anything in the assessment order, we cannot presume his acceptance. Therefore, we are inclined to follow the accumulated loss declared by the Novateur India in their reinstated balance sheet as the proper accumulated loss based on the new set of accounting method and policies adopted by them and it is not mere comparative figures. Hence, the accumulated profit determined by the tax authorities are proper and the determination of dividend as per section 2(22)(d) is proper, accordingly sustain their findings. Exemption u/s 10(34) denied (which is available if the income is in the nature of dividend referred to in the section 115-O of the Act) - exemption was denied on the premise that Novateur India has not paid Dividend Distribution Tax (DDT) and that dividend on account of capital reduction does not fall u/s. 115O - Whether exemption under section 10(34) would be applicable only for the amount, which has suffered tax under section 115-O? - HELD THAT - We observe from the record that the claim of the assessee that the deemed dividend u/s 2(22)(d) is also eligible to claim exemption u/s.10(34) of the Act- since the provisions of the section 115-O does cover the definition of dividend except specifically as mentioned in the proviso to section 115Q of the Act. In Smt. Kayan Jamshid Pandole case 2018 (11) TMI 1340 - BOMBAY HIGH COURT gave the decision in favour of the assessee considering the fact the share holder should not suffer on the failure of the company, the revenue can recover from the company with the other specific provisions for recovery. The ratio of the decision clearly shows that the individual share holders should not suffer because of gross failure on the part of the company. We observe the fact in the present case is distinguishable to the fact in the above case. In the present case, the assessee is a holding company holding majority shares (By B Ticino SPA Holding company and the assessee holding 99.999%) in the Novateur India. Basically, the management of the Novateur India is controlled by them and the failure of the Novateur India to pay additional tax in the form of DDT is nothing but failure of the assessee itself. They cannot claim the benefit both sides. In the case of Smt Kayan Jamshbid Pandole (supra), the group of individual share holders does not have any control over the company whereas in the given case, the situation is different. One hand, we cannot hold the Novateur India as defaulter and other hand, we cannot allow the same management to take the advantage of benefit u/s 10(34) of the Act for the failure of the same management. It is fact on record that Novateur India has not paid any DDT on the dividend, hence the benefit u/s. 10(34) cannot be claimed even though the definition of dividend u/s.2(22)(d) is covered u/s 115O of the Act. Assessee has received the gross dividend including DDT. In the normal case, the company will deduct DDT at the applicable rate and remit the net dividend. Therefore, as per the provisions of section 10(34) r.w.s. 115O the dividend received by the shareholders are exempt. In this case, the assessee has received gross dividend. The option available to the assessee is two-fold, considering the fact that same management is responsible to deduct DDT. Either they should remit the DDT to the Novateur India and Novateur India will remit the DDT and thus assessee can claim exemption or other option is to pay the applicable tax under DTAA on the Gross dividend received by them which has lower rate of taxation. Therefore, we are inclined to reject the factual submissions of the assessee and accordingly, the plea raised by the assessee in the Ground No 3 is rejected. MFN Clause - Whether if the alleged dividend is taxed in the hands of the assessee, the applicable tax rate should be considered as 5% in view of the Most Favoured Nation or MFN Clause of the tax treaty (read with the protocol to the Tax Treaty)? - HELD THAT - Where tax has been levied at source at excess under the provisions of Article 10 to 12, applications for refund of the same have to be lodged with the competent authority of the state which levied the tax within a period of three years after the expiration of the calendar year in which the tax has been levied. In this case, the tax under DTAA rates were levied by the Assessing Officer. Now the assessee takes the plea that in case the dividend income is chargeable to tax then the applicable rate would be based on the MFN clause, which is lesser than the applicable treaty rate. As discussed in this case, Assessing Officer has levied the applicable tax, the period of claiming the excess tax has already elapsed. Therefore, in this case, the assessee cannot claim any benefit under treaty or under MFN clause. Therefore, we are not inclined to entertain the claim of the assessee at this stage based on the above discussion. Accordingly, the ground raised by the assessee is dismissed even though they relied on the decision of Hon ble High Court, in our view, the issue raised is time barred and even the CBDT has raised circular objecting to unilateral implementation of protocol by the Netherland. Unless it is notified by the Indian government under section 90(2) of the Act. Accordingly, Ground No. 4 is dismissed. Capital gain claimed as not taxable in India as per the para 5 of Article 13 of the Tax Treaty - HELD THAT - Capital reduction by way of an order of the NCLT cannot be reckoned as alienation of shares in the course of corporate organization, re-organization, amalgamation, division or similar transaction. What has been canvassed before us is that, the first exception is only applicable if the alienation takes place to the resident of that other state i.e. India, if it is sold to a resident of India, i.e., other than NOVATEUR INDIA. Such a plea in our opinion cannot be accepted, because exception for taxability of capital gains in the state of resident which has been carved out, clearly envisages that if alienation of shares are more than 10% of the Indian company and such an alienation takes place to an Indian resident, then resident based taxation cannot be applied if the Netherland company had more than 10% interest in the Indian Company. Undisputedly, the alienation took place to resident of India and therefore, it cannot be held that only if some other Indian company or Indian resident could have bought shares, then only this exception would apply is too farfetched understanding of the Para No. 5. In any case, the alienation of shares is by way of capital reduction and in lieu of such capital reduction where Indian company has paid consideration for alienation of such shares which it has bought back and had paid a compensation, is nothing but a consideration of transfer of shares and therefore, it tantamount to gain on alienation of shares taxable under the head 'capital gain' in India. As stated above, second exception is not applicable. Contention of the assessee before us is that it falls under the first limb which categorically provides that in case of alienation of shares, resident country had right to tax the capital gain i.e. Netherland - Though under Article 13(5), it is a resident based taxation, however, if the exception has been carved out if the threshold of alienation of shares which forms part of 10% interest in the capital stock of Indian Company is present, then resident based taxation is shifted to source based taxation and the source country i.e. India has right to tax under DTAA. Accordingly, this ground raised by the assessee is dismissed. AO computed surcharge and cess on the rate of tax for dividend (ie, 10%) provided in the tax treaty in the computation sheet to final assessment order - HELD THAT - As relying on SUNIL V. MOTIANI 2013 (12) TMI 1105 - ITAT MUMBAI we direct the Assessing Officer to follow the ratio as laid down in the above judgment, accordingly, we direct the Assessing Officer to levy only the applicable rate of tax as per the treaty without additional surcharge or cess since the applicable tax is inclusive of surcharge and education cess. Accordingly, this ground of appeal is allowed.

Summary

Issues Involved:
1. Treatment of capital gains as dividend under section 2(22)(d) of the Income-tax Act.
2. Applicability of Section 115-O and exemption under section 10(34) of the Act.
3. Tax rate on dividend under the India-Netherlands tax treaty.
4. Taxability of capital gains under Article 13 of the India-Netherlands tax treaty.
5. Levying of surcharge and education cess on the tax treaty rate.
6. Initiation of penalty proceedings under Section 270A of the Act.

Summary:

Issue 1: Treatment of Capital Gains as Dividend
The assessee, a Netherlands-based company, held shares in an Indian company, Novateur India. During AY 2017-18, Novateur India undertook a capital reduction, and the assessee received compensation. The Assessing Officer (AO) treated part of the capital gains as dividend under section 2(22)(d) of the Income-tax Act, based on accumulated profits. The assessee contended that the accumulated losses should be considered as per Indian GAAP, not Indian Accounting Standards (Ind-AS). The Tribunal upheld the AO's view, stating that the reinstated figures under Ind-AS reflect the actual financial position and should be used for computing accumulated profits.

Issue 2: Applicability of Section 115-O and Exemption under Section 10(34)
The AO denied the exemption under section 10(34) of the Act, arguing that section 115-O, which applies to dividends distributed by domestic companies, does not cover deemed dividends under section 2(22)(d). The Tribunal agreed with the AO, noting that the assessee, as a holding company, could not claim the benefit of section 10(34) due to the failure of Novateur India to pay Dividend Distribution Tax (DDT).

Issue 3: Tax Rate on Dividend under India-Netherlands Tax Treaty
The assessee argued for a 5% tax rate on dividends under the Most Favoured Nation (MFN) clause of the India-Netherlands tax treaty. The Tribunal rejected this claim, citing a CBDT circular that requires bilateral consultation and notification under section 90(2) of the Act for MFN benefits. The Tribunal also noted that the claim was time-barred as per the treaty's protocol.

Issue 4: Taxability of Capital Gains under Article 13 of the Tax Treaty
The assessee claimed that capital gains from the cancellation of shares were taxable only in the Netherlands under Article 13(5) of the tax treaty. The Tribunal held that the capital gains were taxable in India, as the reduction of share capital constituted an alienation of shares to a resident of India (Novateur India). The Tribunal dismissed the argument that the transaction fell under corporate reorganization, which would have made the gains taxable only in the Netherlands.

Issue 5: Levying of Surcharge and Education Cess
The Tribunal directed the AO to follow the decision in Sunil V. Motiani v. ITO, holding that the tax rate under the treaty is inclusive of surcharge and education cess. Thus, the AO should not levy additional surcharge or cess on the 10% tax rate.

Issue 6: Initiation of Penalty Proceedings under Section 270A
The Tribunal found the ground premature for adjudication and dismissed it.

Conclusion:
The appeal was partly allowed, with the Tribunal upholding the AO's treatment of capital gains as dividend, denial of exemption under section 10(34), and taxability of capital gains in India. The Tribunal directed the AO to exclude surcharge and cess from the treaty tax rate and dismissed the penalty proceedings as premature.