2024 (1) TMI 654 - AT - Income Tax

Revision u/s 263 - eligibility of benefit of Article 13 (4) of India Mauritius tax Treaty - as per CIT(A) benefit of Article 13 (4) of India Mauritius tax Treaty to the Mauritius registered assessee company, having Tax Residency certificate, for sale of shares acquired in F Y 2007-08, sold in AY 2018-19 earning capital gain claimed as not chargeable to tax in India , accepted by ld AO, held to be erroneous and Prejudicial to revenue - HELD THAT - The foreign source income are eligible for foreign tax credit. Thereafter after mentioning the provisions of Mauritius and India jurisdiction on income tax , reconciliation between the accounting profits for tax purposes along with book profit was made. In that assessee has made a provision at the rate of 15% applicable to the assessee company in Mauritius. Therefore, as the assessee has mentioned in that note the CIT has taken a view that the learned Assessing Officer failed to enquire about such taxability as per the provisions of Indian Income Tax and Indo Mauritius Double Taxation Avoidance Agreement. That particular note also says that the protocol would be applicable only if the shares are acquired after 1st April, 2017. Thus, it is not the case of the Revenue that the shares of the Indian entity were acquired by the assessee after 1st April, 2017. Against this, the annual accounts of the assessee clearly states that such shares were acquired in F.Y. 2007-08. It is not the case of the CIT that the tax residency certificate is as a result of fraud or illegal activities. Therefore, The learned CIT also does not doubt that assessee is holding tax residency certificate. It is also not the case of the CIT that tax residency certificate of the assessee is not valid in view of the same other information. The amendment to the Double Taxation Avoidance Agreement limiting the benefit of profit or gains on sale of shares in the hands of the Mauritius entity as per Article 13 (3B) and 27(A) would apply with effect from 1st April, 2017. The press release of Central Board of Direct Taxes dated 29th August, 2016, has expressly provided for grandfathering of investment prior to 1st April, 2017. It specifically says that the protocol provides for source based taxation of capital gain arising from alternation of shares acquired on or after 1st April, 2017 in a company resident in India with effect from F.Y. 2017-18. It further says that simultaneously investment made before 1st April, 2017, have been grandfathered and will not be subject to capital gain tax in India. Thus, claim of exemption granted by AO based on the above information is clearly in accordance with the press release dated 29th August, 2016 issued by the CBDT. CIT has nowhere stated that the assessment order passed by the learned Assessing Officer is not in consonance with the above, Therefore We hold that the assessment order passed by AO granting benefit of Article 13 to the assessee on shares acquired prior to 1st April 2017, is after making due enquires and further same is also made in accordance with the press release of Central Board of Direct Taxes , hence, cannot be considered to be erroneous insofar as it is prejudicial to the interest of the Revenue - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of the order passed under Section 263 of the Income-tax Act, 1961.
2. Application of Article 13 (4) of the India-Mauritius Tax Treaty to the capital gains earned by the assessee.
3. Adequacy of the enquiries conducted by the Assessing Officer (AO) during the original assessment proceedings.

Summary:

1. Validity of the order passed under Section 263 of the Income-tax Act, 1961:
The Commissioner of Income Tax (CIT) passed an order under Section 263, declaring the assessment order dated 1st March 2021, as erroneous and prejudicial to the interest of the Revenue. The CIT directed the AO to make a fresh assessment, questioning the benefit of Article 13 (4) of the India-Mauritius Tax Treaty granted to the assessee. The assessee argued that the order under Section 263 was without jurisdiction and bad in law, and that the original assessment order was neither erroneous nor prejudicial to the interest of the Revenue.

2. Application of Article 13 (4) of the India-Mauritius Tax Treaty to the capital gains earned by the assessee:
The assessee, a Mauritius registered company holding a valid Tax Residency Certificate, sold shares acquired in FY 2007-08 in AY 2018-19 and claimed the resulting capital gains as not chargeable to tax in India under Article 13 of the India-Mauritius DTAA. The AO accepted this claim. The CIT, however, held that the AO did not verify whether the capital gains were genuinely exempt under Article 13, considering the amendments effective from 1st April 2017, which introduced the main purpose test and bonafide business test.

3. Adequacy of the enquiries conducted by the Assessing Officer during the original assessment proceedings:
The CIT noted that the AO failed to conduct necessary enquiries to ascertain the applicability of the capital gains exemption under the DTAA. The AO did not verify the main purpose test, bonafide business test, or whether the assessee was a shell/conduit company. The CIT also pointed out that the AO did not inquire into the routine expenses, the source of investment, or the application of funds received from the sale of shares. The assessee contended that the AO had indeed conducted detailed enquiries, provided necessary documents, and justified the exemption claim based on the shares being acquired before 1st April 2017.

Judgment:
The Tribunal held that the AO had made due enquiries and the assessment order was in accordance with the provisions of the DTAA and the press release of the Central Board of Direct Taxes dated 29th August 2016, which grandfathered investments made before 1st April 2017. The Tribunal quashed the revisionary order passed by the CIT under Section 263, stating that the original assessment order was not erroneous or prejudicial to the interest of the Revenue.

Conclusion:
The appeal of the assessee was allowed, and the order under Section 263 was set aside. The Tribunal confirmed that the long-term capital gains on the sale of shares acquired before 1st April 2017 were not chargeable to tax in India under the India-Mauritius DTAA.

Order pronounced in the open court on 11.01.2024.