Income Tax Appellate Tribunal - Mumbai
Nat West Securities B.V. vs Dy. Cit on 28 October, 2004
Equivalent citations: [2005]1SOT503(MUM)
ORDER
R.V. Easwar, Judicial M ITA No. 4839/Mum./2004-The assessee in this appeal is a non-resident company. It is incorporated in Netherlands. We are concerned with the assessment year 2000-2001 for which the previous year ended on 31-3-2000.
2. The first ground in the appeal relates to the validity of the reassessment made under section 147 read with section 143(3) of the Income Tax Act. The assessee filed a return of income on 19-7-2000 declaring total income of Rs. NIL and claiming a refund. The refund arose because in respect of certain payments made to the assessee tax was deducted at the rate of 20% as per certificate issued under section 197. The rate of tax was later amended to 10%. After filing the return the assessee kept pursuing the refund by number of letters written to the assessing officer, which are complied as item numbers 11 to 15 of the Paper Book. These are letters written to the CIT as well as the assessing officer for early processing of the return and release of refund. There is some dispute as to whether the return was processed under section 143(1)(a) or not. According to the assessing officer it was processed on 11-3-2002 but according to the assessee no such intimation was served within 31-3-2002, nor after that date. No notice under section 143(2) was also issued by the assessing officer and the time for issue of such notice expired on 31-7-2001. Be that as it may, a notice under section 148 of the Act was issued on 31-5-2002 reopening the assessment. Apparently the assessee wrote to the assessing officer that the return filed originally may be taken as a return filed in response to the notice. Thereafter notices of hearing were issued to the assessee and after hearing the assessee the assessing officer brought to tax long-term capital gains of Rs. 78,37,46,380, by order dated 27-2-2003. The capital gains arose on sale of certain shares held by the assessee in HDFC bank Limited, a Bank incorporated in India. The assessee in Ground No. 1 before us challenges the validity of the reassessment initiated under section 148 and in Ground No. 2 challenges the assessment of the capital gains on merits.
3. The challenge to the reassessment is based on the language of Explanation 2(b) to section 147 of the Act. This Explanation says that a case where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the assessing officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return, would also be deemed to be a case where income chargeable to tax has escaped assessment. The submission is that the assessee had pursued the refund claim with the assessing officer vigorously and also had discussions with him from time to time in relation thereto and therefore it cannot be said that the assessing officer had noticed that income chargeable to tax had escaped assessment. It is emphasised that the assessee had brought the claim of refund arising because of the claim for exemption of tax in respect of the capital gains on the sale of shares to the assessing officer from time to time even during the pendency of the first return filed on 19-7-2000 but the assessing officer did not think it fit to examine the same nor had he thought it fit to issue any notice to the assessee for the purpose of ascertaining the correctness of the assessees claim and therefore, it cannot now be stated that it was noticed by the assessing officer that income chargeable to tax had escaped assessment. Our attention was drawn to pages 35, 39 and 40 of the Paper Book which are letters drawing the particular attention of the CIT as well as the assessing officer in regard to the claim of refund due to non-taxability of the capital gains. It is therefore contended that the reassessment is without jurisdiction.
4. The contention urged on behalf of the department is that Explanation 2(b) of section 147 was clearly attracted. It was pointed out that the assessing officer has mentioned in the assessment order that the return filed by the assessee on 19-7-2000 was processed under section 143(1) on 11-3-2002. It is therefore submitted that the reassessment was valid. Reliance is placed on the judgment of the Honble Bombay High Court in Dr. Amins Pathology Laboratory v. P.N. Prasad_Joint CIT (2001) 252 ITR 673 (Bom). It is also pointed out that no assessment tinder section 143(3) has been made on the return filed by the assessee and the assessing officer having noticed escapement of income has rightly issued the notice under section 148.
5. We have carefully considered the rival contentions. Though the assessing officer has stated that the return filed by the assessee was first processed under section 143(1) on 11-3-2002 the intimation was not produced before us. We further notice that in the statement of facts filed by the assessee before the CIT (A) as Annexure B to the appeal, the assessee has stated that neither any notice under section 143(2) was issued nor any intimation under section 143(1) was served on the assessee. The CIT (A) does not appear to have examined this question and has proceeded on the basis that the return of income had been processed under section 143(1), though no assessment under section 143(3) had been completed. We are of the view that when the assessee has specifically denied the service of any intimation under section 143(1) even before the CIT (A), it was his duty to have contradicted the same from the material on record. Section 143(1) says that the intimation shall be sent to the assessee. No such proof is available before us to show that the intimation has been sent. However, this may not be conclusive to decide the issue because it is common ground that no assessment had been made under section 143(3) of the Act in respect of the return filed by the assessee. The only question therefore is, irrespective of whether an intimation under section 143(1) was passed or not, whether it was the assessing officer who noticed that the assessee had understated its income or claimed excessive loss etc., thus resulting in escapement of income. In the present case, having regard to the assessees conduct in pursuing the refund claim made in the return by consistently remanding the CIT as well as the assessing officer about the pending return, it cannot be said that it was the assessing officer who for the first time noticed, after the time limit for completing the assessment had expired on 31-3-2002, that income chargeable to tax had escaped assessment. A return of income is not a mere scrap of paper and if the assessee continuously brings to the notice of the assessing officer the fact that a return claiming a refund is pending with the assessing officer and that it should be proceeded with and still the assessing officer remains indifferent to the request of the assessee, it cannot be said that the assessing officer noticed for the first time that income had escaped assessment. We have perused the letters written by the assessee to the CIT/assessing officer. copies of which are placed at Pages 35 to 40 of the Paper Book. These letters are testimony to the assessees vigorous pursuit of the refund claimed. The letters have been written from September 2000 to September 2001 and they also refer to discussions that were had between the assessee and the assessing officer from time to time with regard to the pending return. Complete details about the assessees claim for exemption from capital gains tax have also been given in the assessees letter dated 12-9-2000. When the assessing officer has been briefed about all the facts relating to the pending return and no steps are taken by the assessing officer to take up the return for processing, it cannot be said that it was the assessing officer who noticed that income chargeable to tax had escaped assessment. The assessee has done all that it could within its means. The consequences of upholding such inaction on the part of the assessing officer are quite serious. An assessing officer cannot (sic) simply refuse to take up the assessment proceedings and allow them to become time-barred and thereafter issue notice under section 148 read with Explanation 2(b) to section 147. This would be making a mockery of the provisions relating to reassessment in the Income Tax Act. A return is not to be taken lightly, especially when the assessee has bona fide pursued the claim of refund with the assessing officer. It is not merely that the spirit of the law stands violated, but it is also that the letter of the law stands violated. The assessing officer cannot be said to have noticed that income chargeable to tax has escaped assessment, because normally one notices something when he has no knowledge of the thing earlier. In the present case the assessing officer had full knowledge of the facts of the case, the claim made by the assessee in the return etc. It must be remembered that the Explanation below section 147 deems certain cases to be cases of escaped assessment and should receive a strict construction. We are therefore of the view that the assessing officer was not justified in relying on Explanation 2(b) below section 147 for the purpose of issuing the notice under section 148, on the facts of the present case. We therefore hold that the reassessment was without jurisdiction. Ground No. 1 is allowed.
6. The above decision of ours is sufficient to dispose of the present appeal but having regard to the importance of the matter and for the sake of completeness and in deference to the arguments addressed before us, we would proceed to decide the merits of the assessees claim also. This is taken up in Ground No. 2 before us. The brief facts in this regard may be noticed. The assessee is a company incorporated in Netherlands. It is a subsidiary of Nat West Bank, Plc. of England. There were two companies incorporated in Mauritius, which were wholly owned subsidiaries of Nat West Bank of England. These companies were each holding 10% share capital in HDFC Bank Limited which is an Indian company. These shares had been acquired by them on 16-2-1995 by subscribing to them. Sometime in the year 1996 the Nat West Bank UK which is the parent company, took a decision that all investments outside England will henceforth be held by a single company. It would appear that apart from investments held in Mauritius there were investments in other countries such as Australia, Germany, France, Switzerland, Isle of Man, Bahamas, etc. (Page 81 of the Paper Book). Accordingly the companies were set up in Netherlands which are the appellants before us. National Westminster International Holdings B.V., which is one of the appellants before us, is a direct subsidiary of the parent company in UK NatWest Securities B.V., the other appellant before us is the subsidiary of National Westminster International Holdings B.V. In the year 1998, around August, as part of the restructuring of the investments, the shares of HDFC Bank Limited were transferred to the appellants. This was achieved by liquidating the Mauritius companies. The shares held by the Mauritius companies in HDFC Bank Limited thereafter came to be held by the two appellant companies.
7. On 29-4-1999 the appellants sold the shares of HDFC Bank Limited to a company by name India Equity Fund. This company is located in Mauritius. Since the appellants were companies incorporated in Netherlands, they claimed that the Indo Netherlands treaty for Avoidance of Double Taxation was applicable. According to clause 13.5 of the treaty, the capital gains from the alienation of the shares shall be taxable only in the State of which the transferor or the seller was resident. Since the appellant companies were residents of Netherlands, it was claimed that the capital gains arising on the sale of shares of HDFC bank Limited were not subject to Indian Income Tax. The claim was rejected by the income-tax authorities on the ground that the entire transaction was a colourable device which attracted the rule laid down in McDowell & Co. Ltd. v. CTO (1985) 154 ITR 148 (SC) and therefore the assessees claim for exemption cannot be accepted. It was also emphasised that the parent company was incorporated in England and therefore the treaty between India and England, which did not have such an exemption clause, was applicable and therefore the capital gains were chargeable to Indian Income Tax. It is this conclusion of the income-tax authorities that is challenged before us in appeal.
8. The contentions urged on behalf of the appellants are broadly as under :
(a) It is not a colourable device or subterfuge adopted by the appellant companies. The appellants are companies of substance. They were incorporated only because of the bona fide decision taken by the UK Company, which is the holding company, to consolidate all the nonUK investments in Netherlands because of the stable political climate there. This decision is a bona fide business decision and has not been questioned. Therefore, merely because a tax advantage arises to the appellants, it cannot be said that the rule in McDowell & Co. Ltd.s case (supra) is attracted.
(b) That the appellants are companies of substance and not created as shield companies is proved by the material on record such as the Balance Sheets, Minutes of Meetings, etc., which are all placed at Pages 81, 97, 98, 113 and 117 of the Paper Book.
(c) There is no material to show that India Equity Pvt. Fund, which is incorporated in Mauritius and to which the appellants sold the shares, was connected to or controlled by the appellant companies. In this connection our attention is invited to the detailed letter filed before the CIT (A) on 18-3-2004.
(d) The departmental authorities are not justified in ignoring the existence of the appellant companies in Netherlands and thus refusing to give effect to article 13.5 of the Indo Netherlands Double Tax Avoidance Agreement and in holding that the Indo UK treaty, which did not contain any exemption for. capital gains tax, would be applied.
(e) At any rate after the judgment of the Supreme Court in Union of India v. Azadi Bachao Andolan (2003) 263 ITR 706 (SC). in which the Supreme Court laid down principles as to the proper understanding of the McDowell & Co. Ltd.s doctrine, there was no scope for. understanding the transactions entered into by the appellants as the result of tax avoidance measures. It must be accepted that all the transactions are within the framework of law, genuine and even assuming that they were planned in such a manner that the appellants did not become liable to capital gains tax in India, the transactions shall have to be accepted by the income-tax authorities and the exemption claimed under the Indo Netherlands treaty should be given.
9. On the other hand the contention urged by the learned Departmental Representative was completely based on the findings and conclusions recorded by the income-tax authorities. It was emphasised, relying on Paragraph 5 of the order of the CIT (A) that the chain of transactions was so arranged as to avoid payment of capital gains tax in India and that those transactions had no commercial motive. It was submitted that even though no capital gains tax is taxable in Netherlands, the capital gains shall be taxed in India on the basis that the Indo UK treaty is attracted because the holding company is incorporated in UK.
10. On a careful consideration of the facts and the rival contentions, we are of the view that the assessee is entitled to succeed. The decision taken by the parent holding company in UK that all non-UK investments will be held in a single country and the country chosen would be Netherlands because of its stable political climate cannot be questioned nor has it been questioned. It is for the UK Company to arrange its affairs in such a manner as would best suit it, having regard to business considerations. The appellant companies are companies of substance as would be seen from their Balance Sheet filed in the Paper Book. They show that not only were the investments in Mauritius transferred to them, in accordance with the decision taken earlier, but the investments in Australia, Hong Kong, Germany, France, USA, Isle of Man, Switzerland and Baha-mas were also transferred to the appellant companies. These are given at Page 81 of the Paper Book. The appellant companies are also liable to income-tax in Netherlands as the returns filed by them in Netherlands would show. Copies of these returns are also enclosed in the Paper Book. At Page 97 we find the Balance Sheet of one of the appellants, National Westminster International Holdings B.B., as on 31-12-1999. The Balance Sheet shows investments of Pounds Sterling 754,322,364. The Profit and Loss Account in the next Page shows operating income of Pounds Sterling 122,775,548 after taxation. The Schedule of Investments at Page 113 shows investments aggregating to Pounds Sterling 846,781,763. When the shares of HDFC Bank Limited were held by the above company, the total investments were Pounds Sterling 102,891,666 out of which the subject shares amounted to 22,683,931 which is just about 1/5th. Page 117 contains the Minutes of the Meeting held on 18-3-1999 in Netherlands. It was in this meeting that the decision to disgorge the HDFC Bank Limiteds shares would appear to have been taken. This meeting was attended by the Chairman and the other Directors of the company. It is also seen that these Directors are residents of Netherlands, Switzerland, Channel Islands, England and Germany. No doubt a nominee of the UK holding company is also expected to attend the meetings but on this ground alone it cannot be said that the existence of the appellant companies, as independent subsidiary companies in Netherlands, shall be ignored and that the Indo UK treaty should be applied. There is also no material to show that the appellant companies were incorporated merely as shield companies for taxation purposes. We have already referred to their Balance Sheets, which show substantial investments, which are held by the appellant companies in other countries. Again there is no material to show any nexus between the assessee companies and India Equity Pvt. Fund of Mauritius nor is there any material to show that the assessee companies in any way controlled the India Equity Pvt. Fund. There is nothing to disbelieve the price at which the shares were sold. Merely because the appellant companies were incorporated in Netherlands with which India has a Double Taxation Avoidance treaty under which the capital gains is taxable only in Netherlands and that the appellants were not taxed in Netherlands in respect of the capital gains because of the Income-tax regulations there, the departmental authorities were not in our view justified in invoking the Indo UK treaty to tax the capital gains by ignoring the appellant companies totally.
11. In our opinion the judgment of the Supreme Court in the case of Azadi Bachao Andolan (supra)-the ratio laid down therein-fully applies to the facts of the present case. All the steps taken by the appellant companies are genuine steps. All of them are within the legal framework and our attention has not been drawn to any law, rule or regulation, which had been violated by the appellant companies. The sale of shares has been effected in a transparent manner. Merely because the appellants are subsidiaries of the holding company in UK it cannot be said that there was no effective transfer of ownership of the shares by the appellant companies to India Equity Pvt. Fund in Mauritius.
12. Our attention was drawn on behalf of the department to the ruling of the AAR in XYZ, In re (1996) 220 ITR 377. In this ruling, which was at the instance of the company incorporated in Mauritius earlier and which held the subject shares before they were transmitted to the appellant companies in Netherlands, it was held that the authority cannot give a ruling in respect of the taxability of the dividends on the shares because the authority was of prima facie opinion that there was a tax avoidance scheme and hence the provisions of section 245R(2) of the income-tax apply. However, on going through the decision we find that this ruling had been given only in respect of the dividends arising from the shares. in respect of capital gains, which was also the subject-matter of the AARs ruling, it was held by the authority that they were not taxable in India under articles 10 and 13 of the treaty between India and Mauritius. We do not find anything in the ruling of the AAR, which would support the income-tax authorities in their conclusion in the present case. We are not concerned with the Indo Mauritius treaty nor are we concerned with the Mauritius Company. We are concerned with the companies incorporated in Netherlands, which transferred the shares to a Mauritius company. The shares were those of an Indian company. It is the Indo Netherlands treaty, which is applicable to the present case. Article 13.5 of the treaty is quite clear.
13. For the above reasons we are of the view that the income-tax authorities were wrong in their conclusion that the appellant companies claim for exemption from capital gains on the transfer of shares under article 13.5 of the Double Taxation treaty between India and Netherlands cannot be accepted. The ratio of the judgment of the Supreme Court in the case of Azadi Bachao Andolan (supra) is fully applicable to the facts of the present case. We, accordingly, allow the appeal of the assessee.
14. As regards Ground No. 3, the learned counsel for the assessee informed the court that the assessee was given the relief by a rectification order of CIT (A) and as such this ground is not pressed by the assessee. Hence, we are dismissing this ground of appeal as not pressed for.
15. In the result, the appeal of the assessee is allowed in part.
16. IT A No. 4838/Mum./2004-For the reasons mentioned above, in the case of National Westminster International Holdings B.V., we allow the appeal of the assessee, in part.