Income Tax Appellate Tribunal - Chennai
M Ct. M Corporation Pvt. Ltd., Chennai vs Department Of Income Tax on 28 November, 2008
IN THE INCOME TAX APPELLATE TRIBUNAL
"B" BENCH, CHENNAI
Before Shri Abraham P. George, Accountant Member and
Shri George Mathan, Judicial Member
.....
I.T.A. No. 1426/Mds/2009
Assessment Year : 1999-2000
The Assistant Commissioner of M/s. M.Ct.M. Corporation Pvt.
Income-tax, Company Circle-IV(1), v. Ltd., 761, Anna Salai,
Chennai. Chennai-600 002.
(PAN : AAACM4530C)
(Appellant) (Respondent)
AND
C.O. No. 166/Mds/2009
(In ITA No. 1426/Mds/2009)
Assessment year : 1999-2000
M/s. M.Ct.M. Corporation Pvt. Ltd., v. The Assistant Commissioner
761, Anna Salai, of Income Tax,
Chennai-600 002. Company Circle-IV(1),
Chennai.
(Cross Objector) (Respondent)
Department by : Shri P.B. Sekaran, CIT(DR),
Shri Shaji P. Jacob, Sr. DR &
Smt. C.Chandrakanta, AO
Assessee by : Shri R. Rajasekaran, CA,
Shri S. Nagarajan, CA &
Shri S. Thiagarajan, CA
2
I.T.A. No. 1426 & CO 166/Mds/2009
ORDER
PER GEORGE MATHAN, JUDICIAL MEMBER :
ITA No. 1426/Mds/2009 is an appeal filed by the Revenue against the order
of the learned CIT(Appeals)-V, Chennai in ITA No. 152/2005-06 dated 28-11-2008 for the assessment year 1999-2000. C.O. No. 166/Mds/2009 is a cross objection filed by the assessee in the Revenue's appeal.
2. Shri P.B. Sekaran, learned CIT-DR, Shri Shaji P. Jacob, learned Sr. DR and Smt. C. Chandralekha, Assistant Commissioner of Income-tax, Central Range, pCoimbatore represented on behalf of the Revenue and Shri R. Rajasekaran, FCA, represented on behalf of the assessee.
3. In the Revenue's appeal, the Revenue has raised the following grounds :
"1. The order of the learned CIT(A) is contrary to law and facts of the case.
2.1 The learned CIT(A) erred in holding that interest receipts from investment activity of the assessee is taxable under the head "income from business" and not 'income from other sources'. 2.2 Having regard to the fact that the Hon'ble Tribunal in the case of Kankhai Investments and Trading Co. P. Ltd. v. ACIT(116 ITD 492), following the ratio of the Apex Court in the case of Narain Swadeshi Wvg. Mills v. CEPT (26 ITR 765), had laid down that to satisfy as to whether an assessee can be said to be engaged in the business of holding investments, the assessee must have carried on some real, 3 I.T.A. No. 1426 & CO 166/Mds/2009 substantial and systematic or organized course of activity or conduct with a set purpose and the MoA of the assessee is not sufficient to satisfy the said test, the learned CIT(A) ought to have upheld the action of the assessing officer.
3.1 The learned CIT(A) erred in holding that charging of interest u/s 234B (` 2.64 crores) of the Act was not correct in the facts of the assessee's case.
3.2 In view of the decision of the Hon'ble Apex Court in the case of CIT v.
Anjum M.H. Ghaswala (252 ITR 1) and of the Hon'ble Delhi Tribunal in the case of Ashwani Dhingra v. Addl. CIT (119 ITD 88), the learned CIT(A) ought to have noted the settled position of law that charging of interest u/s.234B is mandatory.
4.1 The learned CIT(A) erred in holding that no interest u/s 234D would be chargeable prior to a-y 2004-05.
4.2 Having regard to the decision of the Bangalore Bench of the Hon'ble ITAT in the case of Sigma Aldrich Foreign Holding Company v. ACIT (104 ITD 95) and of the Ahmedabad Bench of the Hon'ble Tribunal in the case of JC IT v. Sardar Sarovar Narmada Nigam Ltd. (93 ITD
321), the learned CIT(A) ought to have upheld the levy of interest u/s 234D of the I.T.Act.
5. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned CIT(A) may be set aside and that of the Assessing Officer restored."
4. In the cross objection filed by the assessee, the assessee has raised the following grounds :
4
I.T.A. No. 1426 & CO 166/Mds/2009 "1. The order of the Commissioner of Income tax (Appeals) in so far as it relates to the confirmation of the order passed by the Assistant Commissioner of Income tax, Company Circle IV(l) is against the provisions of law and contrary to the facts and circumstances of the case.
2. The Learned Commissioner of Income tax (Appeals) erred in holding that the assessment was validly reopened under section 147 of the Income tax Act, 1961. The Learned Commissioner of Income tax (Appeals) should have found that the Assessing Officer did not have jurisdiction to reopen the assessment proceedings.
3. The Learned Commissioner of Income tax (Appeals) erred in holding that the Branch of the Company situated in Malaysia does not constitute a Permanent Establishment in terms of provisions of Article 5 of the DTAA between India and Malaysia. He should have found that the said clause 5 of the DTAA clearly specifies a Branch to be a Permanent Establishment. In coming to his conclusion that the Respondent did not have a permanent establishment in Malaysia, the Learned Commissioner of Income tax (Appeals) has misdirected himself to the test fiscal domicile as enumerated in Article 4 of the DTAA between India and Malaysia instead of correctly interpreting the existence of Permanent Establishment in terms of Article 5 of the said DTAA.
4. Having himself found that section 5(1)(c) of the Income tax Act, 1961 cannot operate in view of the relevant provisions of the Act, the Circular and the settled law and based on the concept of treaty over ride reiterated by the Hon'ble Apex Court, the Learned 5 I.T.A. No. 1426 & CO 166/Mds/2009 Commissioner of Income tax (Appeals) should have appreciated that there is no jurisdiction to subject the overseas income of the Malaysian Branch of the Respondent, on the facts and circumstance of the case.
5. The Learned Commissioner of Income tax (Appeals) erred in holding that the provisions of the DTAA between India and Malaysia are not applicable to the income earned by the Company.
6. The Learned Commissioner of Income tax (Appeals) erred in holding that the income by way of interest and dividend earned by the Company on various investments is to be assessed as income from other sources and not as income from business contrary to the facts and circumstances of the case.
7. The Learned Commissioner of Income tax (Appeals) contrary to the correct position that clause 6 of Article 7 of the DTAA between India and Malaysia is part of Article 7, which deals with only business profits, erred in taking a novel and incorrect view that incomes by way of dividends and interest would not be components of business profits because of the so called qualification contained in the provision of clause 6 of Article 7 of the said DTAA.
8. Without prejudice, the Learned Commissioner of Income-tax (Appeals) ought to have appreciated that clause 6 of Article 7 of the DTAA between India and Malaysia, which remains the same since the commencement of the DTAA, only enables the allocation of business profits to the other Articles contained 6 I.T.A. No. 1426 & CO 166/Mds/2009 therein and does not make the said treaty itself inoperative so as to provide an omnibus route to the other Treaties outside the Indo Malaysian Treaty.
9 The Learned Commissioner of Income tax (Appeals) erred in wrongly lacing reliance on Article 23 of the DTAA between India and Malaysia in coming to a conclusion that the income of the Permanent Establishment of the Respondent, in so far as it relates to interest and dividend, are taxable in India.
10. The Learned Commissioner of Income tax (Appeals) erred in not allowing the expenses that were incurred for the purpose of earning its overseas income by the Respondent through its Permanent Establishment in Malaysia.
11. The Learned Commissioner of Income tax (Appeals) erred in not allowing the expenses incurred within India by the Respondent, which were incurred for the purpose of earnings its come in the normal course of its business.
12. The Learned Commissioner of Income tax (Appeals) erred in not following the decision of the jurisdictional ITAT in the Respondent' own case for the assessment year 1998-99, wherein the Hon'ble ITAT had held that the income attributable to the Permanent Establishment of the Respondent in Malaysia is not taxable in India.
13. The Respondent craves leave to additional grounds.
14. For these reasons and for any other reasons that may be adduced at the time of hearing it is prayed that the order of the Learned Commissioner of Income tax (Appeals) may be set aside to the extent it is prejudicial to the interests of the Respondent 7 I.T.A. No. 1426 & CO 166/Mds/2009 and render justice."
5. The assessee has challenged the re-opening of the assessment which goes to the root of the appeal. The cross objection was heard first in regard to the issue of re-opening. It was submitted by the learned authorised representative that the assessee has been served with a notice u/s 148 of the Income-tax Act, 1961 ('the Act' for short) dated 26.03.2003 whereas the reasons have been recorded on 26- 03-2004. It was the submission that the notice u/s. 148 dated 26-03-2003 was served on the assessee on 31.03.2004. It was the submission that the Tribunal had been pleased to allow the assessee inspection of the records of the Revenue in the assessee's own case on 25-01-2010 and the records were verified by the learned authorised representative on 24.04.2010. Copies of the order sheet had also been taken as also the notice u/s. 148 of the Act as were available in the records of the Revenue as also the copy of the acknowledgement of service of the notice. It was the submission that the records of the Revenue showed that the notice u/s 148 as was available in the file of the Revenue was dated 26-03-2003 which was subsequently corrected to 26-03-2004. It was the further submission that in the order sheet above the line the reasons recorded for reopening the assessment u/s 147 of the Act, the words "notice u/s 148 prepared and put up" had been struck off with whitener. The learned authorised representative further drew our attention to page 15 of the assessee's paper book I, which is copy of notice said to have been 8 I.T.A. No. 1426 & CO 166/Mds/2009 received by the assessee dated 26-03-2003 on which it has been mentioned that the same has been received on 31-03-2004. The said notice is signed by Smt. C. Chandrakanta, Asst. Commissioner of Income Tax, Company Circle-IV(1), Chennai-
34. The learned authorised representative further drew our attention to page 12 of the paper book-I filed by the assessee which was copy of the order sheet recording where the whitener has been applied. The same was verifiable with the original produced by the Revenue and it was also accepted by the learned CIT-DR that the words were "Notice u/s 148 prepared and put up" which had been erased using whitener. The learned authorised representative further drew our attention at page 9 of the paper book I filed by the assessee which was the copy of the notice issued u/s 148 taken from the file of the Revenue. It was the submission that in the said notice the year "03" has been altered to "04". It was the submission that the assessee had filed a writ petition before the ' High Court on this issue and after considering the counter affidavit as also the notice of satisfaction recorded by the Assessing Officer, the Hon'ble High Court dismissed the writ petition giving opportunity to the assessee to raise all the issues in the appeal. It was the submission that the notice had been tampered with insofar as the notice was actually dated 26-03-2003 and when the notice was issued, no reasons had been recorded. However, the line issuing the notice had been struck off with whitener and the reasons had been recorded. It was the submission that when the assessee had asked for the copy of the reasons records, the Assessing Officer had given the 9 I.T.A. No. 1426 & CO 166/Mds/2009 assessee a typed copy of the reasons recorded and not the copy of the order sheet where the reasons had been recorded. It was fairly agreed by the learned authorised representative that the reasons as recorded in the order sheet and the copy as given to the assessee were in verbatim identical. Thus it was the submission by the learned authorised representative that on eight grounds the re- opening was invalid, viz., I) As no reasons had been recorded before the issuance of notice u/s 148 of the Act, the re-opening was bad. It was the submission that the notice was dated 26-03-2003 and the reasons had been recorded subsequent to 26.03.2003.
II) The notice was not preceded by the reasons as per section 148(2). III) The correction of the date 26-03-2003 to 26-03-2004 made the notes invalid.
IV) The learned authorised representative also drew our attention to page 1 of the order of the learned CIT(A) to show that the learned CIT(A) had also recognized that the notice was dated 26-03-2003 and the Revenue had not filed any rectification application before the learned CIT(A) to rectify the same ifit was genuinely a mistake. It was the submission that the order sheet had been doctored. V) It was the further submission that the notice u/s. 148 dated 26-03- 10 I.T.A. No. 1426 & CO 166/Mds/2009 2004 had not been served on the assessee and it was only a notice u/s 148 dated 26-03-2003 which has been served on the assessee. VI) It was the further submission that assuming that such a notice had been served, there would be two notices u/s 148 which cannot exist at the same time.
VII) The learned authorised representative drew our attention to the reasons recorded which is as follows :
"Reasons recorded for reopening the assessment u/s.147 of the Income Tax Act,1961 M.Ct.M.Corpration Pvt. Ltd. A.Y.1999-2000 G.I.No.MC-8 The assessee filed return of income for A.Y.1999-2000 on 10/12/1999 declaring a business loss of Rs.1,21,706/-. From the balance sheet and P&L account as on 31/3/1999, it is noticed that the assessee invested Rs.18 crores in Global market through Goldman Sach, a New York based company, Rs.17.1 crores in WGIL and Rs.24.9 lakhs as deposit in Dresdner Bank. In the return of income the assessee declared the investments mentioned above as attributable to Malaysian branch and claimed relief in respect of the profits derived from its permanent establishment (branch office) at Malaysia under the provisions of DTAA between India and Malaysia. Such profits comprise mainly of :
Income from investments - Rs. 1,75,71,427/-
Difference in exchange - Rs. 1,37,21,867/-
Interest on fixed deposits - Rs. 10,67,235/-
11
I.T.A. No. 1426 & CO 166/Mds/2009
It has to be noted that the investments represents investment of the sale proceeds of Karainagar Estate in Malaysia in F.Y.1997-98. This investment has been made through a concern named Goldman Sachs (referred to as GS), a New York based company having a global presence and no presence in Malaysia. The relief under DTAA is not available to the assessee in view of the following:
(i) It is gathered that GS is a New York based company. It accepts funds in the Portfolio Management Scheme from high net worth individuals /concerns and invests them in various forms like shares, bonds, currencies, precious metals etc., all over the world after careful study of potential to maximize returns for its investors. GS is a world leading global investment banking, securities and investment management firm. As the funds were handed over to GS and invested in Global market, the income can not be said to be derived from nor attributable to the PE in Malaysia.
(ii) The above income can be classified as 'Income from Other Sources' as this represents investment made out of surplus funds. Moreover, apart from the investment made through GS & WGIL, there is no other activity that would entail classification of assessee's activity as something in the nature of business. In order that an activity is classified as "business", it should have been carried on in a continuous and organized manner. Moreover, the decisions relating to the model of investment of the sale proceeds are the prerogative of GS and the assessee does not have any say in it. Under the DTAA, relief is available only for business profits having PE at Malaysia and not for income from other sources.
(iii) Moreover, an investment has been carried on through GS and WGIL, as an agent, who is at total freedom to decide the mode of 12 I.T.A. No. 1426 & CO 166/Mds/2009 investment. Clause 6 of article 5 of DTAA makes it clear that the assessee shall not be deemed to have a permanent establishment in the other contracting state merely because of the fact that the business in that other contracting state is carried on through a broker, general commission agent or any other agent of an independent status where such persons are acting in the ordinary course of their business. In this case GS is one such agent on whom the decisions relating to investment of assessee's surplus fund were vested, GS neither had in its presence in Malaysia nor received funds in Malaysia nor invested such funds in Malaysia. GS did not have any connection whatsoever with Malaysia. Hence, notwithstanding the argument in point (ii) above, the claim of relief under the DTAA is not available to the assessee as the assessee can not be said to be having a permanent establishment in Malaysia.
(iv) As per sec.3 of the I.T. Act, Malaysia incomes in respect of an offshore business activity carried on by an offshore company is not chargeable to tax. Secondly, from the Schedule 8 of Balance sheet it is noticed that Provision for taxation is NIL. This implies that the assessee is not liable/chargeable to tax at Malaysia on income earned through GS & WGIL on investment made outside Malaysia. DTAA is available only if the income is liable/chargeable to tax in the other contracting state. Since income is not chargeable to tax at Malaysia, no relief is available on the income earned through GS & WGIL under DTAA.
(v) Moreover, the decision of Madras High Court rendered in the case of Commissioner of Income Tax Vs. SRM Firm, 208 ITR 400 is not applicable to the facts of the case. The decision of Karnataka High Court in the case of Commissioner of Income Tax Vs. R.M.Muthaiah, 13 I.T.A. No. 1426 & CO 166/Mds/2009 202 ITR 508 and CBDT circular No.333 dt.2.4.92 (137 ITR 1) are not applicable to the facts of the present case.
The assessee company got demerged during the A.Y.2000-2001 as a result of which the investment (made through GS) got transferred to one of the resulting companies, namely M/s. M.Ct. M.Global Investments Pvt Ltd. (Global). Global also claimed relief in respect of the income,(earned through GS) claimed to have been earned through the permanent establishment in Malaysia for the A.Y.2000-01. During the course of assessment it was found that Global was not eligible for the relief in view of the following findings:
a. Funds were invested outside Malaysia in Global Market by GS. b. The control and management with respect to the transaction with GS was in Chennai and the branch at Malaysia did not have any say in the matter of investment carried out through GS. Only the Directors at Chennai were authorized and empowered to execute the trading authorization, establish and maintain accounts with Gs. The branch at Malaysia was not so authorized. The income was neither derived from Malaysia nor attributable to the permanent establishment in Malaysia.
c. GS remits the money from New York and not from Malaysia. d. DTAA relief is available only if the income is liable chargeable to tax in the other contracting state. But in the present case, the income earned through GS is not liable/chargeable to tax in Malaysia. Thus, no relief is available on this income under the DTAA.
The Director of the assessee company and the succeeding company (Global), are the same and the activity carried on relating to investment of sale proceeds of Karainagar Estate through GS is the same. Thus, the finding in Global are applicable to the assessee's claim of relief also and the DTAA 14 I.T.A. No. 1426 & CO 166/Mds/2009 relief is not available to the assessee. Exchange difference, amounting to Rs.1,37,21,867/- will not be eligible for DTAA relief. Similarly, interest on Fixed Deposits amounting to Rs.10,67,253/-, on investment made through GS & WGIL, is also required to be taxed as income from other sources, in which case, this income will also not get DTAA relief. Thus, by claiming DTAA relief for which it is not eligible, the assessee has understated the income. Thus, I have reasons to believe that taxable income has escaped assessment within the meaning of section 147 of the Income Tax Act, 1961. Put up notice u/s.148."
It was the submission that the Assessing Officer was of the view that the income of the assessee was not chargeable to tax in Malaysia and consequently no relief was available to the assessee and the income earned through GS & WGIL under the DTAA. It was the submission that this view was erroneous in view of the decision of the Hon'ble Supreme Court in the case of Union of India And Another v. Azadi Bachao Andolan And Another, reported in 263 ITR 706 at pages 741 and 744 and as the view of the Assessing Officer was erroneous in law, the re-opening was bad in law.
VIII) It was the further submission that the satisfaction had been recorded in the case of M/s. M.Ct.M. Global Investments P. Ltd. for the purpose of re- opening the assessment for the assessment year 2000-01 and on the basis of the same reasons, the reasons have been recorded in the assessee's case. It was the submission that the satisfaction recorded in the assessee's case was a borrowed 15 I.T.A. No. 1426 & CO 166/Mds/2009 satisfaction from the file of M/s. M. Ct.M. Global Investments P. Ltd. for the assessment year 2000-01 and consequently the re-opening could not be sustained.
6. It was thus submitted that the learned CIT(A) had erroneously upheld the re-opening of the assessment insofar as in page 9 para 11 of the order of the learned CIT(A), the learned CIT(A) had come to a conclusion a conclusion that the final determination of the facts and the legal pronouncements on the same cannot be treated as a pre-condition for the assessing authority to entertain a reason to believe. It was the submission that the reason that the amount was not taxable In Malaysia was not tenable in view of the decision of the Hon'ble Supreme Court in the case of Azadi Bachao Andolan, referred to supra. It was the further submission that the learned CIT(A) had also relied upon the decision in the case of M/s. M.Ct.M. Global Investments P. Ltd. for the assessment year 2000-01 wherein the co-ordinate Bench of this Tribunal in ITA No. 659/Mds/05 dated 19-12-2007 had held that the re-opening was valid on the reasons recorded. It was the submission that this view of the learned CIT(A) was bad in law insofar as the co-ordinate Bench of this Tribunal in the case of M/s. Sivagami Holdings Pvt. Ltd. in ITA Nos. 956, 957, 958 & 959/Mds/2009 dated 31-05-2011, on identical facts as in the assessee's case, had held that the re-opening was bad in law. It was the submission that the reasons for re-opening in the case of M/s. M.Ct.M. Global Investments P. Ltd. differed from that of M/s. Sivagami Holdings 16 I.T.A. No. 1426 & CO 166/Mds/2009 Pvt. Ltd. and that the decision of the co-ordinate Bench of this Tribunal in the case of M/s. Sivagami Holdings Pvt. Ltd. is liable to be applied to the facts of the present case. It was the submission that the assessee M/s. M.Ct.M. Corporation owned an estate in Malaysia and had also owned property in Chennai, India. It was the submission that the assessee was also deriving rental income and interest income from banks. It was the submission that the assessee was registered as a non-banking finance company. It was the submission that on 01.04.1999 the company, i.e. M/s. M.Ct.M. Corporation P. Ltd. demerged itself into two companies, being M/s. Sivagami Holdings Pvt. Ltd. and M/s. M. Ct,.M. Global Investments Pvt. Ltd. The assessee had sold its assets in Malaysia during 1998 and the sale proceeds had been used for making investments in the global market through M/s. Goldman Sachs a New York based company as also in WGIL. It had also maintained a deposit in Dresdner Bank. It was the submission that on the demerger, M/s. Sivagami Holdings Pvt. Ltd. was put into possession of the balance properties in Malaysia and part of the investments held through M/s. Goldman Sachs and WGIL. M/s. M.Ct.M. Global Investments was given the immovable property in Chennai, India and the balance of the investments made through M/s. Goldman Sachs and WGIL. The learned authorised representative drew our attention to the decision of the co-ordinate Bench of this Tribunal in the case of M/s. Sivagami Holdings Pvt. Ltd., referred to supra, particularly at page 24, para 34, to submit that in the case of M/s. M.Ct.M. Global Investments Pvt. 17
I.T.A. No. 1426 & CO 166/Mds/2009 Ltd. the Tribunal had held that it did not have permanent establishment in Malaysia and therefore the Malaysian income formed part of its global income liable for tax in India. It was the further submission that in the said order the Tribunal had recognized that though M/s. Sivagami Holdings Pvt. Ltd. and M/s. M. Ct. M. Global Investments Pvt. Ltd. were born out of the demerger process of the assessee company, but for the purpose of income tax such legacy was not the only crucial point to be considered. Further, the learned authorised representative drew our attention to page 28, para 38 of the order of the Tribunal in the case of M/s. Sivagami Holdings Pvt. Ltd. to show that it was not that control and management of the Malaysian branch of M/s. M.Ct.M. Global Investments were carried out in India, was not the only condition which was liable to be considered for deciding whether there was a permanent establishment or not in Malaysia. The learned authorised representative drew our attention to page 40, para 52, of the order of the co-ordinate Bench of this Tribunal in the case of M/s. Sivagami Holdings Pvt. Ltd. to support his contention that as the reasons recorded were erroneous, the re-opening of the assessment was void ab initio. It was the submission that when the law itself has been wrongly stated by the Assessing Officer, then the reasonings become erroneous and consequently the notice under section 148 becomes invalid in law. He further drew our attention to page 153 of the assessee's Paper Book-IV which is the copy of the assessment order of the assessee company for the assessment year 1997-98 wherein the Assessing Officer 18 I.T.A. No. 1426 & CO 166/Mds/2009 had recorded that the assessee carried on the business through a permanent establishment in Malaysia. The learned authorised representative further drew our attention to page 157 of the Paper Book IV, which is the copy of the proceedings of the Deputy Commissioner of Income-tax, Company Circle-IV(1), Chennai in the case of the assessee for the assessment year 1998-99 wherein it has been accepted that during the year the assessee had a permanent establishment in Malaysia. The learned authorised representative further drew our attention to page 25 of Paper Book-IV which is the copy of the assessment order which is the subject matter of the appeal for the assessment year 1999-2000 in the case of the assessee, wherein it has been recorded as follows :
"(v) The case laws of M/s. VR.SR.M. Firm & Others (208 ITR 400) and CIT v. Vs. R.M. Muthiah (202 ITR 508) on which the assessee relies heavily in support of its claim are not applicable to the facts and circumstances of the present case.
Both the above cases relate to permanent establishment in Malaysia and the finding of the High Court was that there was no separate establishment in India. In the present case, the investment in stocks, securities and foreign exchange were done through M/s. Goldman Sachs who have no branch in Malaysia. No evidence has been brought on record to prove that the assessee's branch in Malaysia had any discretion to invest, withdraw, deal with the investment or issue directions to the concern M/s. Goldman Sachs, on any of the above activities. Only the directors in India exercised these powers. The fact that the assessee has a permanent establishment is not disputed. 19
I.T.A. No. 1426 & CO 166/Mds/2009 For these reasons the decision of the Madras High Court in the case of CIT Vs. VR. SR.M. Firm & others (208 ITR 400) and the decision of the Karnataka High Court CIT v. R.M. Muthia (202 ITR 508) and the CBDT Circular NO.333 dated 2.4.92 (137 ITR
1) are not applicable to the facts of the present case." It was the submission that even here the Assessing Officer has accepted that the assessee has a permanent establishment in Malaysia. It was the submission that once the permanent establishment has been established, then such permanent establishment cannot disappear or be shifted. It was the submission that the assessee had a permanent establishment in Malaysia right from 1930. The learned authorised representative further drew our attention to page 799 of the Paper Book-IV, which is the copy of the Power of Attorney given by the assessee company to one Shri R.M. Somasundaram. This Power of Attorney is dated 18- 01-1993. It was the submission that Shri R.M. Somasundaram was managing the permanent establishment in Malaysia and he was a citizen of Malaysia. The learned authorised representative drew our attention to page 164 of the Paper Book-IV which is the extract of Article 5 of the DTAA between the Govt. of India and the Govt. of Malaysia. It was the submission that the treaty deed talk of the control for the purpose of permanent establishment. It was the submission that the physical domicle was one of the deciding factors for the permanent establishment in view of the decision of the Hon'ble Supreme Court in the case of CIT v. P.V.A.L. Kulandagan Chettiar reported in 267 ITR 654. On a query from 20 I.T.A. No. 1426 & CO 166/Mds/2009 the Bench it was submitted that the Malaysian branch functioned with Shri R.M. Somasundaram and two other staff and the Chennai office functioned with 5 staff. It was also the submission that no funds for the purpose of investment through M/s. Goldman Sachs and WGIL went out of India. It was the submission that it was the sale proceeds of the estate in Malaysia sold in 1998 which was invested outside India. It was the submission that the situs of the capital was also an important issue. On a query of the Bench as to the history of the group, it was submitted that the directors of the assessee company were the family group who are the promoters of IOB. In 1930s some funds were moved to Malaysia to buy an estate there. As there was a threat of acquisition of assets belonging to non- Malaysian, the assessee company had sold the estate and the proceeds had been used for making the investment through GS and WGIL. The learned authorised representative further drew our attention to page 165 of the Paper Book which was Article 5.5 of the DTAA between Govt. of India and Govt. of Malaysia, wherein as per sub-clause (a), the person in Malaysia had the authority to conclude contracts on behalf of the enterprise and the activity of the Power of Attorney holder was not limited to the purchase of goods and merchandise for the assessee. It was thus the submission that the re-opening itself was invalid and even on merits the assessee's permanent establishment was in Malaysia and consequently in view of the decision of the co-ordinate Bench of this Tribunal in 21 I.T.A. No. 1426 & CO 166/Mds/2009 the case of M/s. Sivagami Holdings Pvt. Ltd., referred to supra, the re-opening as also the assessment were liable to be quashed.
7. In reply, the learned DR submitted that the Assessing Officer, who had issued the notice, being Smt. C. Chandrakanta had filed her submission in regard to the show cause notice under section 148 which is reproduced as under :
"OFFICE OF THE JOINT COMMISSIONER OF INCOME TAX CENTRAL RANGE, 67-A, RACE COURSE ROAD, COIMBATORE Q) EPABX 0422-2225090 Office: 0422-2220708 Fax:
2221174 Before the Hon'ble Income Tax Appellete Tribunal, 'B' Bench, Chennai ACIT, Company Circle - IV (1) Vs M. Ct. M. Corporation Pvt Ltd., Chennai In I.T.A. No. 1426/Mds/09 AND CO 166/Mds/09 SUBMISSION I, C. Chandrakanta, aged 39, daughter of Shri D.C. Mohan presently working as Joint Commissioner of Income Tax, Central Range, Coimbatore submit as under:-
I held the charge of Company Circle - IV (1), Chennai as additional charge only for the period 23.10.2003 to 11.08.2004 and definitely not in the month of March 2003. During this period, my substantive charge was Company Circle - IV (4), Chennai. The re-assessment proceedings in the case of Mis M. Ct. M. Global Investments Pvt Ltd (Assessment Year 2000-01) which came into existence after 22 I.T.A. No. 1426 & CO 166/Mds/2009 the dermerger of Mis M. Ct. M. Corporation Pvt Ltd was pending for disposal. This case of Mis M. Ct. M. Global Investments Pvt Ltd (Assessment Year 2000-01) was re-opened by my predecessor and the notice uls 148 was issued by him. After numerous hearing and detailed verification of facts I documents, the case was finalized and assessment order in the case of M/s M. Ct. M. Global Investments Pvt Ltd (Assessment Year 2000-01) was passed by me on 26.03.2004 taxing the Malaysian Income and raising a demand of Rs. 4.17 Crore. Penalty proceedings uls 271 (1 ) (c) was also initiated.
It was noticed that nature of investment, fact and circumstances of the assessee's case (Mis M. Ct. M. Corporation Pvt Ltd) was similar to the case of Mis M. Ct. M. Global Investments Pvt Ltd. In fact Mis M. Ct. M. Global Investments Pvt Ltd came into existence consequent to the demerger of Mis M. Ct. M. Corporation Pvt Ltd with effect from 01.04.1999. On the strength of fact of the case and based on the finding in the case of Mis M. Ct. M. Global Investments Pvt Ltd, belief was formed that income had escaped assessment in the assessee's case. After duly recording the reasons for reopening on 26.03.2004, the clerk was directed to put up the notice uls 148 in the case of Mis M. Ct. M. Corporation Pvt Ltd (Assessment Year 1999-2000). The notice uls ]48 was put up by the Tax Assistant I Clerk on 26.03.2004 (as per the order sheet noting) and was signed by me on 26.03.2004. The notice was dispatched on 3] .03.2004 and was served on the assessee on 31.03.2004, which was well within the due date.
11.
12. The handwriting of the clerk who had written in the order sheet putting up the notice on 26.03.2004 was the same as that of the notice uls 148 served on the assessee. However, inadvertently the date mentioned in the notice was 26.03.2003 instead of 26.03.2004. This mistake was noticed and corrected as 26.03.2004. However, probably the carbon paper impression may not have fallen in the notice served on the assessee. Now the assessee is harping on the fact that notice dated 26.03.2003 (signed by me) was only served on him and was different from the notice dated 26.03.2004 which was on record.
It is submitted that I was not the officer in charge of Company Circle - IV (I), Chennai in the month of March 2003. I joined this post only on 23.10.2003. He~ I could not have signed the notice on 26.03.2003.Only one notice in this case u/s 148 was issued on 26.03.2004. The order sheet entry proves this point. This notice was signed by me and was dispatched on 31.03.2004. The order sheet entry and the dispatch clerk initials on the notice on record proves this point. Only this notice was served on the assessee on 31.03.2004. "THE TEAR OFF ACKNOWLEDGEMENT SLIP" (which is on record) is the acknowledgement given by the assessee for 23 I.T.A. No. 1426 & CO 166/Mds/2009 having received the notice, clearly mentions the fact that notice uls 148 dated
26..03.94 for the A.Y. 99-2k was received by the assessee from the notice server of the Department on 31.03.2004. The scanned copy is reproduced as under:
/ 'j "C') ~~ TVII 01'1" "ClC.HOWI fOCO\;MrNT BUP ~!- ~n .,...,,~~ ~'ol __ 'ATn ~o -.- Y1~/C. I II 'Ill The assessee has also not disputed the fact that the notice uls 148 was served on 31.04.2004 and is a very relevant and important fact in the given circumstances. I-Ience it is proved beyond doubt that the notice u/s 148 was issued only on 26.03.2004 and was served on 31.03.2004. Bona fide clerical mistake in the date mentioned in the notice served on the assessee (which is supposed to be only a copy) is well covered uls 292 B of the Income Tax Act, 1961.
The Learned Authorized Representative had also submitted before the Hon'ble IT A T that whitener was used in the order sheet which proves that notice u/s 148 was issued on 26.03.2003. In this regard, it is submitted that mistake by the clerk was committed in putting up the notice before the recording of the reasons. This mistake was rectified. Proper reasons were recorded and thereafter the clerk was directed to put up the notice. Notice u/s 148 was put up on 26.03.2004, signed by me on 26.03.2004 and received by the assessee on 31.03.2004. Using whitener to correct mistakes is not prohibited under any law I rules.
Here it is important to bring to your kind notice that the assessee is in the 24 I.T.A. No. 1426 & CO 166/Mds/2009 habit of blaming the Department of tampering with records and questioning the validity of reopening the assessments. In the case of Mis M. Ct. M. Global Investments Pvt Ltd (Assessment Year 2000-01) (reopened by my predecessor and completed by me) the assessee alleged that reasons recorded was at variance with the facts (Ground No.4). The Hon'ble IT AT 'B' Bench called for the record, inspected the same and vide order I.T.A. No. 659/Mds/05 dated 19.12.2007 Para 4, (Page No. 10, 11 & 12) held that there was no variance of the reason recorded with the fact and held that re-opening was valid. On merit, the case was decided in favour of the Department. In the present case of Mis M. Ct. M. Corporation Pvt Ltd (reopened by me and completed by my successor), it is disturbing to note that the assessee makes similar kind of allegation against the Department. This only shows the adverse attitude of the assessee and the wild imagination of the assessee to presume that a set of officers in collusion with their staff are tampering with records.
The concealment penalty u/s 271 (1 ) (c) of the Income Tax Act, 1961 was dropped in the case of Mis M. Ct. M. Global Investments Pvt Ltd (Assessment Year 2000-01) which only goes to show the just and fair attitude of the Department in these cases, in contrast to the behaviour and imagination of the assessee.
The Learned Authorized Representative further submitted that the reasons for reopening cannot be imported from another case. In this regards it is submitted that the Company got demerged and the nature of investment, facts and circumstances of the case the parent company and succeeding company were the same. Apart from this, there were other reasons as mentioned in the recorded reasons on the strength of which belief was formed that the income had escaped assessment.
Now coming to the merits of the case: The interest income and dividend income earned through investments in GS and WGIL is taxable in India in the hands of the assessee on account of following reasons.
1.The income is assessable under the head income from other sources and not business income as per Para 10.1 to 10.8 of the assessment order. (This point of view is upheld by the Hon'ble IT A T in the case of Mis M. Ct. M. Global Investments Pvt Ltd vide order in I.T.A. No. 659/Mds/05 dated 19.12.2007 (Page 30 line 3).
Concept of permanent establishment is applicable only for business income and not income from other sources. As it is income from other sources, concept of permanent establishment is not applicable. Article 7 of DT AA deals with business profit and is not applicable here.
Presuming that the concept of Permanent establishment is applicable, then a question 25 I.T.A. No. 1426 & CO 166/Mds/2009 arises whether the permanent establishment is there in Malaysia or not. No permanent establishment is there in Malaysia for the following reasons: (please refer to Para 9 of Page 5 and Para 11.1 to 11.7 of Page 8 & 9 of the assessment order.) i. Only directors are authorized to deal with GS.
ii. Only directors are authorized signatories for trading authorization of GS. iii. Control and Management is at Chennai by the directors. iv. Remittance of money is to Chennai from New York and not to or from Malaysia. This point of view is upheld by Hon'ble ITAT in the case of Mis M. Ct. M. Global Investments Pvt Ltd (Page 28).
Lastly DTAA is applicable only if income is chargeable to tax in two countries. As per Malaysian Income Tax Act (Charging Section 3 & 3B), income from investment in GS and WGIL is not charged to tax at Malaysia. It is not a case where income is charged to tax and exemption I deduction is claimed. This income is primarily not charged to tax at Malaysia as it neither accrued, derived or is received in Malaysia. DT AA is hence not applicable and precisely for this reason, Hon'ble Supreme Court decision in the ease of Azadi Baehoa Andolan is not applicable. (Please refer to Para 12 to 12.8 in Page 9, 10 & 11 of Assessment Order in the ease of Mis M. Ct. M. Corporation Pvt Ltd). As DTAA is not applicable, the question of Permanent establishment does not arise and the income is assessed to tax in India.
Sd/- (C. Chandrakanta) Joint Commissioner of Income Tax, CentralRange,Coimbatore "
8. It was the submission that the original notice under section 148 of the Act dated 26-03-2003 had not been produced before the Tribunal. It was submitted by the learned authorised representative on behalf of the assessee that the said notice was subject-matter of writ petition and the original had been filed before the Hon'ble High Court. It was submitted by the learned DR that Smt. C. Chandrakanta was holding charge as Assistant Commissioner of Income-tax, Company Circle-IV(4) and vide an order dated 23-10-2003 she was given additional charge as the Assistant Commissioner of Income-tax, Company Circle- 26
I.T.A. No. 1426 & CO 166/Mds/2009 IV(1). He placed before us the copy of the Office Order wherein Smt. C. Chandrakanta had been granted the additional charge on 23-10-2003. It was the submission that the notice said to have been issued on 26-03-2003, the Xerox copy of which has been placed in the paper Book, was signed by Smt. C. Chandrakanta. It was the submission that such notice could not have been signed on 26-03-2003 as Smt. C. Chandrakanta did not hold charge of Company Circle-IV(1) on the said date. It was the submission that the recording in the order sheet had been done by the office staff as also the notice had been filled up by the office staff. As the office staff had written "put up the notice u/s. 148" and as it was noticed that the reasons had not been recorded, the same was struck down by the Assessing Officer, Smt. C. Chandrakanta recorded the reasons and the notice issued. While writing the notice u/s. 148 the date had erroneously been put by the office staff as "26-3-2003" and this error was corrected by the Assessing Officer by over-writing the "3" by "4". It was the submission that if the original was seen, the carbon impression may be recognized. It was the further submission that the Assessing Officer derived no specific benefit by making the date 26-3-2004. It was the submission that as per the provisions of section 153 limitation for completion of the assessment started from the date of service of the notice and not from the date of notice. It was the submission that the acknowledgement for the service of the notice also clearly showed the notice to be dated 26-03-2004. It was the submission that the allegation of tampering with 27 I.T.A. No. 1426 & CO 166/Mds/2009 the notice by the Assessing Officer was in bad taste. It was the submission that no notice under section 26-03-2003 has ever been served on the assessee. It was the further submission that the reasons recorded are not borrowed reasons. It was the submission that the assessment in the case of M/s. M.Ct.M. Global Investments Pvt. Ltd. was completed on 26-03-2004 for the assessment year 2000-01 and it was there that the Assessing Officer had recognized that in the case of the assessee the same situation arose on account of the fact that M/s. M.Ct.M. Global Investments Pvt. Ltd. was formed by the demerger of the assessee company. It was the submission that the facts found in the case of M/s. M.Ct.M. Global Investments Pvt Ltd. were identical to the facts as found in the case of the assessee and consequently the reasons for re-opening were recorded and notice was issued to the assessee. It was the submission that the investment found in the case of M/s. M.Ct.M. Global Investments Pvt. Ltd. was the carry forward of the investments made by the assessee company and the reference to M/s. M.Ct.M. Global Investments Pvt. Ltd. and the reasons recorded for the assessee company were only a passing reference. It was the further submission that in the order of the ITAT in the case of M/s. Sivagami Holdings Pvt Ltd. it was categorically found that there was a Permanent Establishment in Malaysia in view of the fact that M/s. Sivagami Holdings Pvt. Ltd. held property in Malaysia and was controlled in Malaysia. It was the submission that the assessee company had both properties in India as also in Malaysia and the control over the properties 28 I.T.A. No. 1426 & CO 166/Mds/2009 were from India. It was the submission that on the facts of the case the decision in the case of M/s. Sivagami Holdings Pvt. Ltd. was relevant only to the said assessee and the said decision cannot be applied to the assessee's case automatically. Further the learned DR drew our attention to page 28 para 38 of the order of the Tribunal in the case of M/s. Sivagami Holdings Pvt. Ltd. to submit that the question of Permanent Establishment was not an issue in the said case. It was the further submission that for the purpose of assessment for the assessment years 1997-98 and 1998-99 the Assessing Officer having recorded that there was a Permanent Establishment in Malaysia would not help the assessee insofar as for the assessment year 1999-2000 no evidence has been shown that there was a Permanent Establishment in Malaysia or that the Permanent Establishment had done any act in Malaysia nor was shown that the business of the assessee company wholly or partly carried on through the Permanent Establishment in Malaysia. It was the submission that the Power of Attorney given to Shri Somasundaram was in 1993 and nothing was shown to show that the Power of Attorney had done any activity during the assessment year 1999-2000. It was the submission that the Permanent Establishment had to be proved year after year. Just because there was a Permanent Establishment in one year cannot mean that the said Permanent Establishment existed year after year. It depended on the facts of each year. It was the submission that no evidence was produced before the Assessing Officer or the learned CIT(A) or the 29 I.T.A. No. 1426 & CO 166/Mds/2009 ITAT to show that there was Permanent Establishment in Malaysia during the assessment year 1999-2000. In fact the assessee was shown as a resident Indian and consequently its applicable income was assessable in India. Even if the Power of Attorney was to be shown as a Permanent Establishment, he should be shown to have exercised control over the business activities of the assessee company in Malaysia which has not been done. The learned DR drew our attention to the assessment order wherein the Assessing Officer had categorically given a finding that the income of the assessee was liable to be taxed under the head "Income from Other Sources". The decision relating to investments was taken by the Directors in the board meeting held in the assessee company's head office at Chennai and Shri R.M. Somasundaram was authorized by the Board of Directors to operate the bank account only jointly with either of the Directors and not independently.
9. On 11-07-2011 at the time of hearing the learned authorised representative placed before us the copy of the original notice u/s. 148 of the Act dated 26-03- 2003. It was the submission that the said notice did not have any carbon copy markings. It was the submission that submission that the Assessing Officer has mentioned that there is no notice dated 26-03-2003 and the notice is a notice u/s. 148 dated 26-03-2004. It was the submission that as per the assessee there was no notice dated 26-03-2004. It was thus the submission that, (i) the notice served on the assessee being a notice dated 26-03-2003 and as the reasons 30 I.T.A. No. 1426 & CO 166/Mds/2009 recorded for the issuance of notice was not before the issuance of the notice u/s 148 dated 26-03-2003, the notice was liable to be held as invalid, (ii) the assessee having not been served with the notice u/s 148 dated 26-03-2004, the assessment done as a consequence of the notice dated 26-03-2004 as was available with the Revenue was liable to be annulled and (iii) assuming that the notices dated 26-03-2003 and 26-03-2004 did exist together, the notice dated 26- 03-2004 would be an invalid notice insofar as no two notices u/s. 148 can exist together. It was the further submission that the assessee co-operated and participated in the assessment proceedings only in pursuance of the notice dated 26-03-2003 and it was only when the assessee was granted the opportunity to verify the records that the assessee had come to know of the non-recording of the reasons before the issuance of the notice u/s.148 dated 26-03-2003. It was the submission that there was no reason for preponderance of probability in the light of the ground reality that the notice u/s 148 was dated 26-03-2003 for which the reasons have been recorded subsequently and the notice served on 31-03- 2004. It was the submission that the recording of the date of the notice was not a mistake which is clerical or inadvertent. This is because as per the provisions of sec. 148(2) before the issuance of the notice, the Assessing Officer is bound to record reasons which has not been done and as the notice u/s. 148 was a statutory notice any mistake or error allegedly in the notice cannot be protected by the provisions of section 292B of the Act. It was the submission that the 31 I.T.A. No. 1426 & CO 166/Mds/2009 infirmity in the initiation cannot be cured for which proposition the learned authorised representative relied on the decision of the Gujarat High Court in the case of P.V. Doshi v. CIT, reported in 113 ITR 22. It was the submission that the learned DR having shown that the Assessing Officer did not hold charge of the office when the notice u/s. 148 was issued proved that the notice which was signed by the Assessing Officer was without legal sanction or authority. It was the further submission that as per the provisions of sec. 148(1) no reassessment shall be done until and unless a notice u/s.148 is served on the assessee. It was the submission that no notice dated 26-03-2004 was served on the assessee. It was the submission that in the acknowledgment though it is mentioned that it is a notice dated 26-03-2004, in fact, what was served was an envelope. It was the submission that no notice u/s 148 dated 26-03-2004 having been served, the assessment was liable to be annulled.
10. In reply, the learned DR submitted that the order sheet entry which has been struck down using whitener is an unsigned entry. It was re-iterated that the entry was a mistake which was corrected. It was the submission that the assessee's claim that no notice dated 26-03-2004 was served on the assessee stands dislodged in view of the acknowledgement copy which shows otherwise. It was the further submission that the assessee's allegation that the Assessing Officer signed the notice u/s.148 on 26-03-2003 is a serious allegation which would have to be supported by an affidavit as the same has already been 32 I.T.A. No. 1426 & CO 166/Mds/2009 countered by an affidavit by the Assessing Officer. It was the submission that the Assessing Officer had accepted that the notice was originally dated 26-03-2003 which was a mistake and the same was corrected to 26-03-2004 and the notice issued as a notice u/s.148 dated 26-03-2004 as is also acknowledged and there is no notice dated 26-03-2003 on record or acted upon. It was the further submission that on 26-03-2003 the Assessing Officer in-charge of the office of the Assistant Commissioner of Income-tax, Company Circle-IV(1), Chennai was one Shri M. Mathivanan. The learned DR placed before us a copy of the assessment order by the said Shri M. Mathivanan on 26-03-2003 in the case of M/s. Mathi Leathers Pvt. Ltd. to substantiate his claim. It was also the submission that the Chartered Accountant of the assessee who was one of the representatives of the assessee before the Tribunal had also appeared before the said Shri M. Mathivanan in March, 2003.
11. It was further submitted by the learned DR on merits that as per the Minutes of the meeting of the Board of Directors dated 10-07-1997 which took place in Madras, the persons present were Shri M.Ct.Muthiah and Shri M.Ct. Pethachi and it was decided in the said Board meeting that an account be opened with Goldman Sachs, New York. It was the further submission that as per the Minutes only Shri M.Ct.Muthiah and Shri M.Ct. Pethachi along with the said Shri Somasundaram, the Power of Attorney holder were authorized to operate that account with M/s. Goldman Sachs. It was the further submission that as per the 33 I.T.A. No. 1426 & CO 166/Mds/2009 Board meeting verbal instructions given by the Directors would also be confirmed in writing by the Madras office. It was the further submission that in the Board meeting of the Directors on 06-12-1997 at Madras approved for the utilization of the funds available with the company outside India and in view of the FAX dated 01-12-1997 to M/s. Goldman Sachs, Singapore as also the FAX sent by Mr. M. Ct. Pethachi on 05-12-1997 to M/s. Goldman Sachs, the funds lying with the assessee company was transferred to a new account opened in the company's name in Singapore. The Board further approved the withdrawal and confirmed the instructions issued by Shri M.Ct. Muthiah and Shri M.Ct. Pethachi to M/s. Goldman Sachs. It was the further submission that in the Board meeting dated 06-12-1997 in supersession of earlier resolutions passed it was resolved that the account with Union Bank of Switzerland, Singapure was to be operated by Shri M.Ct. Pethachi or Shri P. Chidambaram. The learned DR placed before the Minutes of the meeting referred to above. He also drew our attention to the Corporate Account Agreement between the assessee company and M/s. Goldman, Sachs & Co. which was signed by Shri M.Ct.Muthiah and the address of the Corporation was given as Madras. It was the submission that the control and management of the foreign funds held by the Indian company, being the assessee herein, was done by the Directors sitting in India and consequently there was no Permanent Establishment of the assessee company in Malaysia. It was the submission that M/s Goldman Sachs did not have an office or Permanent Establishment in Malaysia. The 34 I.T.A. No. 1426 & CO 166/Mds/2009 learned DR further drew our attention to page 168 of the assessee's Paper Book- IV which was Article 12 of the DTAA to support his submission that the interest derived by the resident of one Contracting State from the other Contracting State may be taxed in the other Contracting State except when the interest is derived from the Contracting State if the payer is a Government, State Government, a political sub-division, local authority or a resident of that Contracting State It was the further submission that M/s. Goldman Sachs was not falling in any of the said clauses and was not a resident of Malaysia nor had a Permanent Establishment in Malaysia. It was the further submission that the business income was referred to in Article 7 of the DTAA and none of the incomes fell within the term "Business Income" as mentioned in Article 7. It was the submission that in any case the assessee did not have a Permanent Establishment in Malaysia. It was the further submission that Permanent Establishment is defined in Article 5 of the DTAA. It was the submission that the Power of Attorney was issued in 1993 to Shri R.M. Somasundaram. After the sale of the estate in Malaysia the control of the funds was done from India and Shri R.M. Somasundaram had no administrative control over the funds. It was the submission that nothing was shown to point out that Shri R.M. Somasundaram did any act using his Power of Attorney in regard to the administration or financial matters of the assessee company in Malaysia. It was the submission that the control and management being in India, it cannot be said that the assessee had any Permanent Establishment in Malaysia and consequently 35 I.T.A. No. 1426 & CO 166/Mds/2009 the income of the assessee company was liable to be assessed in India. For this proposition he relied upon the decision of the Calcutta High Court in the case of Bank of China reported in 154 ITR 617. It was the further submission that downloading of the information the liaison offices did not create a Permanent Establishment. It was the submission that in similar manner having a Power of Attorney in Malaysia who did not do any administrative functions or financial functions for the company or on behalf of the company in Malaysia, it cannot be said that there was a Permanent Establishment of the assessee company in Malaysia. For this proposition he relied upon the decision of the Delhi High Court in the case of U.A.E. Exchange Centre Ltd. v. Union of India And Another, reported in 313 ITR 94. It was the further submission that in the decision of the Hon'ble Supreme Court in the case of CIT v. P.V.A.L. Kulandagan Chettiar reported in 267 ITR 654 which has been referred to an relied upon by the assessee, the facts were different insofar as in the said case the assessee therein was a firm owning immovable properties in Malaysia and the income was earned from the estates. It was the submission that in the said case the estate was sold and capital gains was sought to be assessed. It was the submission that the Hon'ble Supreme Court had categorically held that in the appeals the issue was in regard to the income arising from the immovable property and the Hon'ble Supreme Court had proceeded on the presumption that the fiscal connection arises in relation to taxation either by reason of residence of the assessee or by 36 I.T.A. No. 1426 & CO 166/Mds/2009 reason of the location of the immovable property which is the source of income. It was further submitted that the Hon'ble Supreme Court had held that where the person is a resident in both the contracting States fiscal domicile will have to be determined with reference to the fact that if the contracting State with which his personal and economic relations are closer, he shall be deemed to be a resident of the contracting State in which he has an habitual abode. It was the submission that in the present case the assessee company did not hold any immovable property in Malaysia during the relevant period. The assessee company held immovable properties in India. The source of the investment in the estates in Malaysia was money transferred from India long ago. On the sale of the estate in Malaysia the funds had been moved to M/s. Goldman Sachs in Singapore and M/s. Goldman Sachs also did not have a Permanent Establishment in Malaysia. The administrative and financial controls of the monies were done from India. The Registered Office of the assessee company is in India. The Directors of the assessee company are in India. The Board meetings had been done in India where decisions in regard to the utilization of the funds had also been done in India. It was the submission that the income of the assessee was liable to be taxed in India. It was the submission that this was exactly what was decided by the Tribunal in the case of M/s. M.Ct.M. Globel Investments Private Ltd. in ITA No. 659/Mds/05 dated 19-12-2007 and consequently the said decision was liable to be 37 I.T.A. No. 1426 & CO 166/Mds/2009 followed and not the decision of the Tribunal in the case of M/s. Sivagami Holdings Pvt. Ltd. in ITA Nos. 956 to 959/Mds/2009 dated 31-05-2011.
12. The learned DR further placed before us the original of the Notice Server's diary wherein it is noted that what was served on the assessee on 3assessee1-03- 2004 was a notice u/s. 148 dated 26-03-2004. In regard to the Revenue's appeal, the Revenue submitted that the income of the assessee was liable to be assessed under the head 'income from other sources' and not 'income from business'. It was the further submission that the learned CIT(A) erred in holding that interest under section 234B of the Act was not leviable. It was the submission that the learned CIT(A) had relied upon the decision of the Hon'ble Madras High Court in the case of CIT v. Revathy Equipment Ltd. reported in 298 ITR 67. It was the submission that even in the decision of the Hon'ble jurisdictional High Court in the case of Revathy Equipment Ltd. the Hon'ble High Court had held that the levy of interest u/s. 234B is mandatory. It was the submission that the provisions of sec.234B did not contain any provision for looking into the bona fides of an assessee. It was the submission that if advance tax was not paid, then interest u/s 234B was mandatory. It was the submission that the Hon'ble Supreme Court in the case of Anjum M.H. Ghaswala And Others reported in 252 ITR 1 also clearly held that the interest under sec. 234B was mandatory. It was the further submission that Explanation 1 to sec. 234B did not give room for any claim of bona fides.38
I.T.A. No. 1426 & CO 166/Mds/2009
13. In regard to the levy of interest under section 234D of the Act it was the submission by the learned DR that as the assessment had been completed after the introduction of the provisions of section 234D, the same was leviable. He vehemently supported the order of the Assessing Officer.
14. In reply, the learned authorised representative submitted that after the decision of the Hon'ble Supreme Court in the case of Anjum M.H. Ghaswala And Others, the Hon'ble Supreme Court in the case of CIT v. Insilco Ltd. reported in 278 ITR 1 had sent back the issue of levy of interest u/s 234B to the High Court to decide whether bona fides could be considered. It was the submission that the decision of the Hon'ble Supreme Court in the case of Anjum M. H. Ghaswala And Others only said that the Settlement Commission did not have the power to waive interest u/s. 234B. It was the submission that the decision of the Hon'ble Supreme Court in the case of Anjum M.H. Ghaswala And Others did not override the decision in the case of CIT v. Ranchi Club Ltd., reported in 247 ITR 209. The learned authorised representative further drew our attention to the decision of the co-ordinate Bench of this Tribunal in the case of Estate of late K.N.K. Inthera, in ITA No. 958/Mds/2001 dated assessee12-08-2003 wherein the Tribunal had held that while levying the interest under section234B the Assessing Officer has to establish that all the ingredients for the levy of interest under section 234B were present when passing the assessment order. It was the submission that as the assessment order did not give any factual finding 39 I.T.A. No. 1426 & CO 166/Mds/2009 in regard to the levy of interest u/s 234B, no interest was leviable. It was the submission that in the original order u/s 143(1) no interest was levied and consequently the same could not be levied in the re-assessment proceedings. The learned authorised representative relied on the decision in the case of Revathy Equipment Ltd. to submit that the jurisdictional High Court had held that bona fides were to be taken into consideration before the levy of interest under section 234B. It was the submission that the assessee was hitherto never liable to tax on its income from its Malaysian PE and consequently the assessee could never have the tax liability on account of the said income and this showed the bona fides of the assessee. It was the submission that the order of the learned CIT(A) in regard to the levy of interest u/s 234B was liable to be deleted.
15. In regard to the levy of interest under section 234D it was the submission that in view of the decision of the Madras High Court in the case of Ayyappan Textiles Ltd., M/s. Varadhalakshmi Mills Ltd. and Sitalakshmi Mills Ltd. v. CIT reported in 241 ITR 545, no interest under section 234D could be levied prior to the assessment year 2004-05 and in the present case the assessment year involved was 1999-2000 and consequently no interest u/s 234D was leviable.
16. In regard to the merits decided by the learned CIT(A) it was the submission that the order of the learned CIT(A) on merits was misdirected, perverse and worse than the assessment order and the same was liable to be reversed. It was the submission that if the assessee had PE in Malaysia and consequently the 40 I.T.A. No. 1426 & CO 166/Mds/2009 income of the assessee as arising to the PE in Malaysia was not liable to tax in India.
17. We have considered the rival submissions. Here it may specifically mentioned that along with the oral arguments placed by both sides, both the assessee and the Revenue have also filed written submission which for the purpose of completeness of this order are extracted herein below :
By the Assessee BEFORE THE HON'BLE ITAT "B" BENCH, CHENNAI M.Ct.M.Corporation Pvt Ltd., 761, Anna Salai Chennai-600 002 ... Cross objector Sub: Forwarding of supplementary written submissions on Jurisdiction - Reg.
Ref: 1. C.O.No.166/CHNY/2009 in ITA No.1426/CHNY/2009 - A.Y.1999-2000
2. Assessee's Petition dt. 22-1-2010 for inspection of records and obtaining of copies allowed by the Hon'ble Bench on 25-1-2010
3. Inspection done and copies obtained on 21--4--2010
4. Preliminary Written submissions on Jurisdiction on the basis of inspection of record, dt.
6-5-2010, filed on 10-6-2010
5. Hearing on 20-6-2011 SUPPLEMENTARY WRITTEN SUBMISSIONS ON JURISDICTION 1.00 These submissions may be read as part and parcel of the Assessee's petition dt. 22-1-2010 and the Preliminary written submissions dt. 6-5-2010 cited supra.41
I.T.A. No. 1426 & CO 166/Mds/2009 1.01 At the outset, certain admitted and unassailable facts need a mention before making further submissions. A notice dt. 26-3-2003 u/s 148 of the Act was served on the assessee on 31-3-2004 (kind reference is invited to page 67 of the paper book/Annexe III appended to the Preliminary Written submissions dt. 6-5-2010). It is in response to this notice that the assessee participated in the reassessment proceedings and extended utmost co-operation to the Department, notwithstanding the challenge made by the assessee to the said notice by way of a writ petition before the Hon'ble Jurisdictional High Court. In fact, it was this notice u/s 148 dt. 26-3-2003 that was the subject matter of the Writ petition, though the said petition was dismissed primarily on account of the availability of alternative remedy for the assessee by way of appeals. The only notice that was served on the assessee was the one dated 26-3-2003. This is also clear from the finding of the learned CIT(Appeals)-V; "Subsequently the assessment was reopened by issue of notice under section 148 on 26-3-2003" (Kind reference is invited to the second paragraph on page 5 of the paper book). The department has apparently accepted this position as to the factum of date of issue of notice as 26.3.2003 , as can be understood from the fact that no objection on this vital point has been taken by way of an appeal before the Hon'ble ITAT. It is noteworthy that no mention of the date of issue of notice u/s 148 of the Act or the date of recording of reasons was anywhere found: (i) in the Assessing 42 I.T.A. No. 1426 & CO 166/Mds/2009 officer's letter dt. 22-7-2004 furnishing the reasons recorded, (ii) in his speaking order dt. 10-12-2004 and (iii) even in his entire order u/s 143(3) rws 147 dt. 29-3-2005. However, there is no dispute regarding the date of service viz., 31-3-2004".
1.02 As stated in the Preliminary Written submissions dt. 6-5-2010, the assessee averred, inter alia, in the Written petition filed before the Hon'ble Jurisdictional High Court that the service of the notice issued on 28-3-2003 was deliberately withheld by the Department upto 31-3-2004 with a view to extend the limitation for assessment in terms of sub-section (2) of section
153. However, in the counter affidavit filed by the Department(enclosed as Annexure to the assessee's petition dt. 22-1-2010 before this Hon'ble Bench), on paragraph 'I' therein, the learned Assessing officer has affirmed as follows:
"The notice u/s 148 was issued on 26-3-2004 served on 31-3-04 the date of satisfaction note of the Assessing officer before issuing the notice u/s 148 is also 26-3-2004 and not 26-3-2003 as mentioned by the petitioner. Hence, the petitioner's submission with reference to the expiry of one year are factually incorrect and may be rejected"
1.03 From what has been extracted above, it is amply clear that as per the Department's version, the reason for reopening was recorded and the impugned 43 I.T.A. No. 1426 & CO 166/Mds/2009 notice was issued on the same date viz., 26-3-2004, while the notice issued to the assessee is dated 26-3-2003 and not 26-3-2004 as alleged by the Department. On the factual aspect viz., that the notice u/s 148 issued to the assessee is only dt. 26- 3-2003, the counter affidavit is silent nor any mistake on its part is admitted therein by the Department. It is under these circumstances, that the assessee had to approach this Hon'ble Bench for a direction to the Department for inspection and for obtaining copies of the relevant order sheets. It is respectfully submitted that if the right of inspection was not gracefully allowed by the Hon'ble Bench, the whole issue going to the root of the matter concerning jurisdiction would have gone unnoticed.
2.00 POSSIBLE INFERENCES/INTERPRETATION ON THE ORDER SHEETS INSPECTED:
a) Kind attention of the Hon'ble Bench is drawn to page No.2 top of the order sheet where AN ENTRY HAS BEEN EFFACED WITH WHITENER correcting fluid) . As for the portion effaced with whitener though the date on the left side of the entry is not clearly visible, the other words like : "Notice u/s 148 prepared and put up" are discernible, of course with some difficulty.
b) THIS EFFACED ENTRY ON TOP OF PAGE 2 IS NOT PRECEDED BY ANY ENTRY, MUCH LESS ANY REASON RECORDED.
c) This effaced entry clearly indicates the existence of the notice dt. 26-3-2003, 44 I.T.A. No. 1426 & CO 166/Mds/2009 issued to and served on the assessee on 31-3-2004. This fact of notice u/s 148 dt.
26-3-2003 is also corroborated by the notice actually received by the assessee (c/f page 67 of the paper book/ANNEXE III appended to the Preliminary written submissions dt. 6-5-2010).
d) A reference to page 4 of ANNEXE I to the Preliminary Written Submissions dt. 6- 5-2010, which is the Department's copy of the Notice u/s 148, clearly reveals that the date of Notice is altered as 26.3.04, instead of 26-3-03 as originally written. This also lends corroboration to the real fact that the notice was actually issued on 26-3-03, considering this together with the entry effaced on top of page 2 of the order sheet.
e) From what have been stated above, the following positions emerge:
i) There was no reason recorded prior to the issue of notice u/s 148 dt. 26-3-2003, served on the assessee on 31-3-2004;
ii) From the assertion in the Counter affidavit filed by the Department and the correction made in the Department's copy of notice u/s 148, considered with the other entries in the order sheet, there was one more notice u/s 148 dt. 26-3-2004, about the existence of which the assessee was unaware, the same having not been served on it.
iii) The simultaneous effacing of the entry with whitener on top page 2 of the 45 I.T.A. No. 1426 & CO 166/Mds/2009 order sheet with corresponding correction in the Department's copy of notice u/s 148 are not inadvertent but intentional and hence the subsequent entries in the order sheet suggesting some proceedings arising out of the alleged notice u/s 148 dt. 26-3-04 in the assessee's own case and still unknown to the assessee, have no legs to stand on.
3.00 WRITTEN SUBMISSIONS BACKED BY SETTLED LAW:
1. As no reasons have been recorded prior to the issue of notice u/s 148 dated 26-
3-2003 which was served on the assessee on 31-3-2004 contrary to the mandatory provisions of Section 148(2) of the Act, the entire reassessment proceedings are liable to be cancelled in limine:
(a) Section 148(2) of the Act reads as follows:
"The Assessing officer shall, before issuing any notice under this section, record his reasons for doing so".
(b) Law is settled that jurisdictional issues have to be decided first and if only jurisdiction exists,merits are to be gone into:
Case law: i) Rahulkumar Bajaj vs ITO (1999) ITD 1 (Nag)(SB);
ii) Deepchand Kothari vs CIT (1998) 171 ITR 381, 385 (Raj);
iii) CIT vs Wilh Wilhelmsen Times Ltd.,(1980) 126 ITR 318 (Cal);
iv) P.K.Divekar vs CIT (1985) 151 ITR 11 (Bom);46
I.T.A. No. 1426 & CO 166/Mds/2009 (c ) Only the reasons recorded can be looked at for sustaining or setting aside a notice issued u/s 148/No other reason other than that recorded can be seen:
i) IAC & Another vs IBM World Trade Corporation (1995) 216 ITR 811 (Bom);
ii) CIT vs S.R.Construction (2002) 257 ITR 502, 507 (MP);
iii) Surat City Gymkhana vs DCIT (2002) 254 ITR 733 (Guj);
iv) Jamnalal Kabra vs ITO (1968) 69 ITR 461 (All);
v) Hindustan Lever Ltd., s ACIT (2004) 268 ITR 332 (Bom);
vi) ACIT vs Champdany Industries Ltd.,(2005) 95 ITD 169 (Kol) (para 10);
vii) ITO vs Satya Narayan Parwal (2005) 96 ITD 362 (Jp);
viii) CIT vs Agarwalla Brothers (1991) 189 ITR 786(Pat);
ix) C.M.Rajgharaia vs ITO (1975) 98 ITR 486 (Pat);
x) H.A.Nanji & Co., vs ITO (1979) 120 ITR 593 (Cal);
xi) East Coast Commercial Co Ltd., vs ITO (1981) 128 ITR 326 (Cal);
xii) ITO vs Electro Steel Castings Ltd.,(2003) 264 ITR 410 (Cal);
- SLP dismissed in Electro Steel Castings Ltd., vs CIT (2004) 266 ITR 104 (SC);
(d) Recording of reasons u/s 148 (2) before issue of notice u/s 148 is mandatory & pre-requisite,for assumption of jurisdiction - If no reason is recorded, the reopening is ab initio void and bad:
Case law: i)Fuller India Ltd Vs. JCIT(2004) 269 ITR 365(Mad); 47
I.T.A. No. 1426 & CO 166/Mds/2009
ii)CIT Vs. Shiv Ratan Soni(Decd)(2005) 279 ITR 261(Raj);
iii)CIT Vs. Rajindra Rosin and Turpentine Industries(2008) 305 ITR 161( P& H );
iv) Surat City Gymkhana vs ACIT (2001) 76 ITD 327, 336 (Ahd);
v) Chandan Metal Products (P) Ltd., vs DCIT (2002) 81 ITD 366 (Pune);
vi) Johrilal (HUF) vs CIT (1973) 88 ITR 439 (SC);
vii) Malhar Rao Tatya Saheb Holdar vs ITO (1995) 54 ITD 562 (Ind);
viii)Rahul Steel Forgings (P) Ltd., vs ACIT (1998) 66 ITD 408 (Ind);
ix) Jamnalal Kabra vs ITO (1968) 69 ITR 461 (All);
x) CIT vs T.R.Rajakumari (1974) 96 ITR 78 (Mad);
xi) L.Madanlal (Aluminium) P Ltd., vs ITO & Others (1978) 115 ITR 293 (Kar);
xii) S.P.Divekar & A.P.Divekar vs CIT (1986) 157 ITR 629 (Bom);
xiii) CIT vs Sukh Lal Ice Cold Storage Co (1992) 196 ITR 562, 563 (All);
xiv) CIT vs Kerala State Cashew Development Corporation (1992) 198 ITR 520 (Ker);
xv) Narang Brothers vs CIT (1988) 173 ITR 409, 415 (pat); xvi) UOI vs Rai Singh Deb Singh Bist & Another (1973) 88 ITR 200 (SC);
48
I.T.A. No. 1426 & CO 166/Mds/2009 xvii) East Commercial Co Ltd., vs ITO (1981) 128 ITR 326 (Cal); xviii) CIT vs Thakurlal (1981) 132 ITR 398 (MP);
xix) Chhugavural Rajpal vs S.P.Chaliha (1971) 79 ITR 603 (SC); xx) CIT vs Kurban Hussain Ibrahamji Mithiborwala (1971) 82 ITR 821 (SC);
xxi) CIT vs Agarwala Bros (1991) 189 ITR 786 (Pat);
xxii) H.C.L.Ltd., vs CIT (1993) 199 ITR 291 (Del);
xxiii) Morarjee Goculdas Spinning & Weaving Co Ltd., vs P.N.Bansal(1994)208 ITR 471 (Bom);
xxiv)Hotel Appolo vs ITO (1995) 213 ITR 762 (Guj);
xxv)Govind Ballabh Parikh vs ITO (1995) 214 ITR 519, 523 (Raj);
(e) Notings of the Assessing officer do not amount to recording of reasons in law:
Case law: i) Baldev Singh Giani vs CIT (2001) 248 ITR 266 (P&H);
ii) CIT vs Kerala State Cashew Development Corporation (1992) 198 ITR 520 (Ker) ("148 Notice put up")
iii) CIT vs Thakural (1981) 132 ITR 398 (MP);
iv) Vijayalakshmi Oil Industries vs ITO (1985) 155 ITR 748 (Kar). 49
I.T.A. No. 1426 & CO 166/Mds/2009 4.00 RECORD TINKERED WITH - CANCELLATION OF REASSESSMENT IS JUSTIFIED ON THIS SCOREALONE AND ALSO:
Already it has been established that the record maintained by the learned Assessing officer has been tinkered with first on top of page 2 of the order sheet (effacing of the original entry with whitener) and secondly in the Department's copy of Notice u/s 148, the year is altered as "04" instead of the original entry "03". The notice u/s 148 served on the assessee is dated 26-3-03 in response to which the assessee participated in the reassessment proceedings. The alterations in the order sheet and the Department's copy of the notice were probably made to be in tandem with the Revenue plea before the Hon'ble High Court that the reasons were recorded/notice was issued only on 26-3-2004 and not on 26-3-2003. Be that as it may, the alterations in record themselves would unsuit the reopening of assessment and would justify the cancellation of the reassessment proceedings.
5.00 EXISTENCE OF TWO NOTICES - RE-ASSESSMENT PROCEEDINGS ARE LIABLE TO BE CANCELLED
a) As has been stated already, a notice u/s 148 dated 26-3-2003 was served on the assessee on 31-3-2004. Even the learned CIT (Appeals) found: "Subsequently the assessment was reopened by issue of notice under section 148 on 26-3-2003"
(c/f para 2 on page 5 of the paper book). The assessee has not received any 50 I.T.A. No. 1426 & CO 166/Mds/2009 other notice, much less the one dated 26-3-2004. However, there are entries on pages 2 to 4 of the order sheet showing computer typed reasons recorded and "Notice u/s 148 prepared & put up" on 26-3-04, which accord with the Revenue plea in their counter affidavit before the Hon'ble Jurisdictional High Court :
"The notice u/s 148 was issued on 26-3-2004 and served on 31-3-04 the date of satisfaction note of the Assessing officer before issuing the notice u/s 148 is also 26-3-2004 and not 26-3-2003 as mentioned by the petitioner.
Hence, the petitioner's submission with reference to the expiry of one year are factually incorrect and may be rejected.
(b) As per the assessee and the learned CIT (Appeals), the notice u/s 148 was issued on 26-3-2003 while as per the order sheets (even overlooking the effaced entry on top of page 2 of the order sheet and the correction in the Departments"
copy of notice u/s 148) and the assertion of the Department in the Court proceedings, the notice was issued on 26-3-2004. As such, two notices - one dated 26-3-2003 and another dated 26-3-2004 appear to surface. Interestingly, there is no dispute regarding the date of service of the notice u/s 148 viz., 31-3- 2004.
51
I.T.A. No. 1426 & CO 166/Mds/2009 (c ) A second initiation of reassessment proceedings during the pendency of an earlier initiation is bad and invalid in law:
Where reassessment proceedings are set in motion by issuance of a notice and the same pending, no second notice for reassessment can be issued. Caselaw: i) Commercial Art Press vs CIT (19768) 115 ITR 876 (All);
ii) A.S.S.P.& CO., VS CIT (1988) 172 ITR 274 (Mad);
iii) CIT vs P.Krishnankutty Menon (1990) 181 ITR 237, 241 (Ker)
iv)Communidado of Chicalim vs ITO (2001) 247 ITR 271(SC)
6.00 THE ALLEGED NOTICE U/S 148 DATED 26-3-2004 WAS NOT SERVED ON THE ASSESSEE IN VIOLATION OF SECTION 148(1) OF THE ACT - RE-ASSESSMENT IS BAD IN LAW:
a) It has already been pointed out that no such notice u/s 148 dated 26-3-2004 was served on the assessee which is contrary to the mandatory provisions of section 148(1) of the act. it may be recalled that as per the department, the notice u/s 148 was issued on 26-3-2004. Hence, the reassessment proceedings are liable to be cancelled.
b) If no notice is issued or the notice issued is found to be defective for any reason, the entire proceedings are illegal and void:
Caselaw:
52 I.T.A. No. 1426 & CO 166/Mds/2009 i) Y.Narayana Chetty vs ITO (1959) 35 ITR 388 (SC); ii) R.K.Das & Co., vs CIT (1956) 30 ITR 439 (Cal); iii) Rama Devi Agarwalla vs CIT (1979) 117 ITR 256 (Cal); iv) Rawatmal Harakchand vs CIT (1981) 129 ITR 346 (Cal); v) Madanlal Agarwal vs CIT (1983) 144 vi) P.V.Doshi vs CIT (1978) 113 ITR 22 (Guj); vii) Jayanthi Talkies Distributors vs CIT (1979) 120 ITR 576 (Mad);
viii) Nyalchand Malukchand Dagli vs CIT (1966) 62 ITR 102 (Guj);
ix) B.K.Gooyee vs CIT (1966) 62 ITR 109 (Cal);
x) CIT vs Thayaballi Mulla Jeevaji Kapasi (1963) 47 ITR 184 (Ker);
xi) Vijayakumar Jain vs CIT (1975) 99 ITR 349 (Punj);
xii) Ramaswami Mudaliar Kudumba Dharma Trust vs Agrl ITO (1983) 139 ITR
990 (Mad);
c) Proper Service of Notice alone is the foundation of jurisdiction:
In view of effacing of entry on top of page 2 of the order sheet and the alteration of the year in the Department's copy of notice u/s 148, mere acknowledgement slip, particularly in the face of the actual notice with the assessee and the learned CIT(A)s findings, cannot be availed by the Department. In view of the tinkering with the record, the presumption and protection of bonafide action cannot also be availed by the Department. 53
I.T.A. No. 1426 & CO 166/Mds/2009 Moreover, law is settled as below that proper service of notice alone is the foundation of jurisdiction:
i) C.N.Nataraj vs Fifth ITO (1965) 56 ITR 250 (Mys);
ii) Lakshmibai vs ITO (1972) 86 ITR 804 (Mys);
iii) Kind reference is invited to the cases referred to in Para 6.00 (b) above;
The reason stated inparagraph (iv) of the recorded reasons is based on an erroneous view of law;
Law is settled that the reason to believe must be tenable in law [Bawa Abhai Singh vs DCIT (2002) 253 ITR 83, 92 (Del)] and the reason must be acknowledged and reconised by law [Assam Co Ltd., vs UOI (2005) 275 ITR 609, 626 (Gauhati)]. Contrary to settled law, it has been stated: "DTAA relief is available only if the income is liable/chargeable to tax in the other contracting State. Since income is not chargeable to tax at Malaysia, no relief is available on the income earned through GS and WGIL under the DTAA". This reason is based on an erroneous view of law as per the following settled law:
i) UOI vs Azadi Bachao Andolan (2003) 263 ITR 706 (SC);
i) "In our view, the contentions of the respondents proceeds on the fallacious promise that liability to taxation is the same as payment of tax. Liability to tax is a legal situation; payment of tax is a fiscal fact". 54
I.T.A. No. 1426 & CO 166/Mds/2009 (page 741 - emphasis supplied)
ii) "It is, therefore, not possible for us to accept the contentions so strenuously urged on behalf of the respondents that avoidance of double taxation can arise only when tax is actually paid in one of the contracting States"
(page 744 - emphasis supplied)
ii) Emmerich Jaegar vs CIT (2005) 274 ITR 125 (Guj);
(Hon'ble Apex Court decision in Azadi Bachao Andolan (supra) followed]
iii) ADITvs Greeen Emirate Shipping & Travels (2006) 100 ITD 203 (Mumbai):
(Hon'ble Apex Court decision in Azadi Bachao Andolan (supra) followed"
"It is thus clear that taxability in one country is not the sine qua non for availing relief under the treaty from taxability in another country"
(para 8 - page 213 - emphasis supplied)
iv) Meera Bhatia vs ITO (2010) 38 SOT 95 (Mumbai):
[Decision in ADIT vs Greeen Emirate Shipping & Travels) supra followed] If the reason for reopening is based on an erroneous view of law, the reopening is bad in law:
Caselaw: i) Desai Brothers vs DCIT (1999) 240 ITR 121, 126 & 127 (Guj);
ii) N.R.K.Ram Kumar Raja vs ITO (2001)249 ITR 385,389 & 390 55 I.T.A. No. 1426 & CO 166/Mds/2009 (Mad);
iii) CIT vs Ram Krishna Tekriwal (2005) 274 ITR 266, 267 (All);
iv) Siemens Information Systems Ltd., vs ACIT & others (2007) 293 ITR 548, 551, 552 (Bom);
v) Bharat Co-opt Bank (Mumbai) Ltd., vs UOI (2002) 122 Taxman 264 (Bom);
vi) Farrukhabad Gramin Bank vs ITO (2005) 273 ITR 113 (All);
vii) ITO vs Project India (2007) 109 ITD 87 (Indore); CONCLUDING SUBMISSIONS ON THIS POINT:
The above reason given by the learned Assessing officer for reopening is purely one of law apparently based upon the then view of the Department prompted by a ruling of the authority for Advance Ruling in Cyril Eugene Pereira in re (1999) 239 ITR 650 (AAR) where it was held that when an income which is not taxed in the country which is entitled to tax the same, the other country can tax it, overruling its own earlier ruling in Mohsinally Alimohammed Rafik in re (1995) 213 ITR 317 (AAR). The Hon'ble Apex Court in UOI vs Azadi Bachao Andolan (2003) 263 ITR 706 (SC) at page 744 specifically referred to the later ruling and found the view unacceptable in view of the concept of treaty override irrespective of the fact whether or not such income is taxable in the other country which is entitled to tax the same. The very basis for assumption of jurisdiction is his wrong view of law 56 I.T.A. No. 1426 & CO 166/Mds/2009 contrary to the above Apex court decision apart from Board Circular Nos.333 dt. 2-
4-1982, No.734 dated 24-1-1996 and other precedents. Since this reason is contrary to the Hon'ble Apex Court decision, reopening is bad in law on this score as well.
Another reason for reopening is based on BORROWED SATISFACTION" , which is bad in law:
In paragraph (v) of the reason recorded the learned Assessing officer has borrowed satisfaction from another case i.e. M.Ct.M.Global Investments Pvt Ltd., for A.Y.2000-01. This reason based on borrowed satisfaction weighed heavily with the learned Assessing officer/CIT (Appeals) as a reference to the assessment and the first appellate orders would readily reveal. Adopting the decision in some other case without affording opportunity (N.S,Choodamani vs CIT (1959) 35 ITR 676 (Ker)] or importing facts and circumstances not on record (Kishenlal Roopchand & Co Vs CIT (1976) 104 ITR 422 (Mad)] are insupportable in law. Law is also settled that if the reopening is based on borrowed satisfaction, the same is bad in law (Shree Rajasthan Syntex Ltd., vs ACIT (2005) 93 ITD 78 (Jodh) approved in CIT vs Shree Rajasthan Syntex Ltd.,(2009) 313 ITR 231 (Raj)]. The decision of the Hon'ble ITAT, "D" Bench, Chennai, dt.31.5.2011, upholding the point that re-
opening cannot be done by borrowing satisfaction from some other case, is herewith enclosed.
57
I.T.A. No. 1426 & CO 166/Mds/2009 It is not a little remarkable and not a mere coincidence that the reassessment order of the said MCTM Global Investments Pvt Ltd. for AY 2000- 2001 was passed on the same date viz.,26.3.2004 by the same officer to import the facts of that case into the case on hand and to avail borrowed satisfaction to somehow reopen this case.A copy of the order in the othercase is herewith enclosed.This also corroborates to the fact that the record of the assessee has been tampered with to consider facts not forming part of the record of the assessee.
Assessee's case covered from A.Y.1993-94 to 1998-99 [Ref: Hon'ble ITAT decisions found on pages 86 - 93 of the paper book] It is noteworthy that even the assessment orders for A.Y.1993-94 to 1998-99 were protective Orders in view of the non-acceptance by the Department of the decision in V.RM.SR.M.Firm vs CIT (1994) 208 ITR 400 (Mad) which was in favour of the assessee, against which SLP was taken by Revenue before the Hon'ble Apex Court. The said decision was approved in CIT vs PVAL Kulandagan Chettiar (2004) 267 ITR 654 (SC) - Revenue's review petition dismissed (2008) 300 ITR 5 (SC). Upto the preceding assessment year i.e. A.Y.1998-99, the issue on merits stands COVERED in favour of the assessee.Overlooking the Hon'ble ITAT decision amounts to judicial indiscipline. It is also opposed to the principle of consistency. 58
I.T.A. No. 1426 & CO 166/Mds/2009 Alterations in order sheet are also contrary to the doctrine of fair play:
As per the decision in J.T.(India) Exports & Another vs UOI & Another (2003) 262 ITR 269, 274 (Del) (FB), "Justice should not only be done but should manifestly be seen to be done". It is respectfully submitted that the alterations in the order sheet are also contrary to the doctrine of fair play. It is settled law that infirmity in initiation cannot be cured (P.V.Doshi vs CIT(1978) 113 ITR 22 (Guj) and that if initiation is bad, whatever follows is also bad (Rawatmal Harakchand vs CIT (1981) 129 ITR 346 (Cal)]. Adverting to the above, it is apposite to respectfully quote the following observations made in CIT vs Simon Carves Ltd.,(1976) 105 ITR 212 (SC):
"The taxing authorities exercise quasi judicial powers and in doing so they must act in a fair and not in a partisan manner. Although it is part of their duty to ensure that no tax which is legitimately due from an assessee should remain unrecovered, they must also at the same time not act in a manner as might indicate that scales are weighted against the assessee. We are wholly unable to subscribe to the view that unless those authoriies exercise the power in a manner most beneficial to the Revenue and consequently most adverse to the assessee, they should be deemed not to have exercised it in a proper and judicious manner"59
I.T.A. No. 1426 & CO 166/Mds/2009 (page 218) THE UNJUST RE-OPENING IS VIOLATIVE OF THE RULE OF FINALITY:
As stated already,the position is that for several decades the issue on merits stands covered in favour of the assessee.The department cannot unsettle the settled position. The unjust re-opening is violative of the rule of finality.It is apt, appropriate and apposite to extract the following ruling of the Hon'ble Apex Court in Parshuram Pottery works Co Ltd Vs ITO(1977)106 ITR 1 (SC):
"We have to bear in mind that the policy of the law is that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and the lapse of time must induce repose in and set at rest judicial and Quasi-judicial controversies as it must in other spheres of human activity".
PRAYER:
In view of the above submissions, it is implored that the Hon'ble Bench may be pleased to quash the illegal notices u/s 148 and cancel the reassessment order under appeal and thereby render justice.
Chennai 20.6.2011 (R. RAJASEKARAN) Authorised Representative 60 I.T.A. No. 1426 & CO 166/Mds/2009 BEFORE THE HON'BLE ITAT "B" BENCH, CHENNAI M.Ct.M.Corporation Pvt Ltd., 761, Anna Salai, Chennai-600 002 ... cross objector Sub: Prayer for calling for Departmental records, by the Hon'ble Bench, particularly relating to the reopening proceedings for A.Y.1999-00 and allowing inspection and obtaining certified copies thereof - Reg.
Ref: C.O.No.166/CHNY/2009 in ITA No.1426/CHNY/2009 - (Cross objections of the assessee and the Revenue Appeal respectively) for A.Y.1999-2000 - Adjourned hearing on 25-1-2010 Vide Ground No.2 of the Grounds of cross-objections (kind reference is invited to page 2 of the paper book), the above cross objector has questioned the validity and jurisdictional aspects of reopening which go to the root of the matter. We are advised and submit as follows:
1. Law is settled that jurisdictional issues have to be decided first and if only jurisdiction exists, merits are to be gone into:
i) Rahulkumar Bajaj vs ITO (1999) 69 ITD 1 (Nag) (SB);
ii) Deepchand Kothari vs CIT (1998) 171 ITR 381, 385 (Raj);
iii) CIT vs Wilh Wilhelmsen Lines Ltd., (1980) 126 ITR 318 (Cal);
iv) P.K.Divekar vs CIT (1985) 151 ITR 11 (Bom) 151 ITR 11 (Bom);
2. It is admitted that the reasons recorded were furnished on request and the objections raised were rejected by a speaking order by the learned Assessing officer. However, for the following reasons and for the ultimate 61 I.T.A. No. 1426 & CO 166/Mds/2009 advancement of justice, there is no other way than to approach the Hon'ble Bench by way of this humble petition:
a) At the outset, a reference to the following chart will readily reveal that though as per settled law reopening is a serious matter and is hedged with several conditions, there have been casual, mechanical and repetitive reopenings as a matter of routine for various assessment years in this case:
CHART Assessment 143(1)(a) Notice u/s Date of S.No. year date 148 order date u/s 143(3) rws 147
1. 1993-94 25-2-1994 7-3-2000 27-3-2002
2. 1994-95 31-3-1995 7-3-2000 27-3-2002
3. 1995-96 14-3-1996 31-1-2000 27-3-2002
4. 1996-97 21-12-1998 3-1-2000 27-3-2002
5. 1998-99 21-7-2000 9-2-2001 27-3-2002
b) The notice u/s 148 of the Act is dated 26-3-2003 (ref: page 67 of the paper book), which fact is also confirmed by the learned CIT(A)-V (para 2 on page 5 of the paper book). The said notice u/s 148 dated 26-3-2003 was served 62 I.T.A. No. 1426 & CO 166/Mds/2009 on the assessee on 31-3-2004, which fact is mentioned in the Statement of Facts filed before the learned CIT(A) (para 3 on Page 39 of the paper book).
The reasons for reopening must have, in law, been recorded on or prior to 26-3-2003. Thus, the actual date of recording of reasons gains much significance having regard also to the fact that it has taken more than 1 year to serve the notice on the assessee in a local address, that too in a case involving very high stakes.
c) As can be seen from the Chart supra, assessments for A.Y.1993-94 to 1996-97 & 1998-99 were reopened assessments and exceptionally, the assessment for A.Y.1997-98 was a scrutiny assessment. Again, reopening was done for the assessment year under appeal viz., AY 1999-2000. It is interesting to note that all the assessments from A.Y.1993-94 to 1998-99 (please see pages 140, 143, 145, 148, 150 & 151 & 155 of the paper book) were protective assessments to keep issue alive and the two reasons given therein, both insupportable in law, are as follows:-
i) "Even if the enterprise carries on business through a permanent establishment tax may be imposed in the other contracting states on the income attributable on the income attributable to the permanent establishede 63 I.T.A. No. 1426 & CO 166/Mds/2009 subject to sec.2(a) of the article 22 of the DTA ageement".
ii) "Though the decision of the Hon'ble Madras High Court is in favour of the assessee the matter has not reached finality because of the SLP admitted by the Supreme Court. Hence the income of the assessee from Malaysia is added to the total income of the assessee as a matter of abundant caution and also to keep the issue alive."
d) The only ground taken in he Revenue appeals for A.Y.1993-94 to 1998-99, as can be seen on pages 96, 99, 102, 105, 108 & 111 of the paper book, is again, as follows:
"It is submitted that the decision of the Madras High Court in the case of V.RM.S.RM.Firm reported in 208 ITR 400 relied on by the CIT (A) in deciding the issue in favour of the assessee has not become final and appel is pending before the Supreme Court vide Civil Appeal No.5751 of 97"64
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e) It is submitted that the orders giving effect to the orders of the learned CIT(A) for AY 1997-98 & 1998-99 (pages 153 & 157 respectively of the paper book) were respectively made on 27-3-2002 and 30-9-2002. Therein, a categorical finding as per the appellate directions after due verification & examination was given that the assessee carries on business through the PE in Malaysia and income from Malaysia is exempt as per the above decision of the Madras High Court.
f) It is not a little remarkable that in the case of this assessee, the appellate orders of the learned CIT(A) (pages 112 to 138 of the paper book) and the Hon'ble ITAT (pages 86 to 93 of the paper book) were in favour of the assessee. In other words, from AY 1993-94 to 1998-99 the issue stood covered in favour of the assessee.
g) A writ petition was filed by the assessee before the Hon'ble Madras High Court. In the counter Affidavit filed by the learned Assessing officer in the above-said proceedings, a copy of which is herewith enclosed as ANNEXURE-I, vide paragraph 17 I on page 11, it is affirmed by the learned Assessing officer as follows: 65
I.T.A. No. 1426 & CO 166/Mds/2009 "The notice u/s 148 was issued on 26-3-2004 served on 31-3-04 the date of satisfaction note of the assessing officer before issuing the notice u/s 148 is also 26-3-2004 and not 26-3-2003 as mentioned by the petitioner. Hence , the petitioner's submission with reference to the expiry of one year are factually incorrect and may be rejected".
3. The notice u/s 148 of the Act, received by us is dated 26-3-2003 (ref: page 67 of the paper book), while the learned Assessing officer asserted that the date was 26-3-2004. We have not received any notice dt. 26-3-2004. As stated already, the learned CIT(A) has also stated in his order that the Notice u/s 148 dt. 26-3-2003 was served on the assessee on 31-3-2004. Our Writ petition was dismissed, wherein, as extracted in paragraph 3 of the order of the learned CIT(A) (page 6 of the paper book), the High Court noted:
"...If the assessee is of the view that even the reopening is not in accordance with law, that can very well be agitated by way of an appeal against the order to be passed on the reopening of the assessment. There is no extraordinary or special reason for the appellant to approach this court by way of Writ Petition..."66
I.T.A. No. 1426 & CO 166/Mds/2009 In the above circumstances, we are left with no other alternative than to approach the Hon'ble Bench which is the final court of facts. For better and proper presentation of our case - both on jurisdiction and on merits - it is just and necessary that the Hon'ble Bench may be pleased to call for assessment and other records, particularly relating to reopening of assessment for A.Y.1999-00 and afford inspection to the assessee and obtaining of certified copies of order sheet on payment of prescribed fees. Hence, it is implored that the Hon'ble Bench may be pleased to call for the above records and afford inspection and grant certified copy of order sheets to the assessee's representative and thereby render justice.
Encl: ANNEXE I For M.Ct.M.CORPORATION PVT LTD., CHENNAI 22-1-2010 DIRECTOR 67 I.T.A. No. 1426 & CO 166/Mds/2009 68 I.T.A. No. 1426 & CO 166/Mds/2009 69 I.T.A. No. 1426 & CO 166/Mds/2009 70 I.T.A. No. 1426 & CO 166/Mds/2009 71 I.T.A. No. 1426 & CO 166/Mds/2009 72 I.T.A. No. 1426 & CO 166/Mds/2009 73 I.T.A. No. 1426 & CO 166/Mds/2009 74 I.T.A. No. 1426 & CO 166/Mds/2009 75 I.T.A. No. 1426 & CO 166/Mds/2009 76 I.T.A. No. 1426 & CO 166/Mds/2009 BEFORE THE HON'BLE ITAT "B" BENCH, CHENNAI M.Ct.M.Corporation Pvt Ltd., 761, Anna Salai, Chennai-600 002 ... Cross objector Sub: Forwarding of Preliminary Written submissions on jurisdiction on the basis of inspection of record - Humble prayer for perusal of the original record by the Hon'ble Bench - reg.
Ref: 1. C.O.No.166/CHNY/2009 in ITA No.1426/CHNY/2009 -A.Y.1999- 2000
2. Assesssee's petition dt. 22-1-2010 for inspection of records and obtaining of copies allowed by the Hon'ble Bench on 25-1-2010
3. Inspection done and copies obtained on 21-4-2010
4. Hearing posted on 6-5-2010
------------------------------------------------------------------------------------------------------
----
1.00 The Hon'ble Bench was pleased to allow on 25-1-2010, the assessee's petition dt. 22-1-2010 for inspection of the order sheet and assessment records and for obtaining xerox copies. Pursuant to the above direction of the Hon'ble Bench, on the subsequenthearing on 21-4-2010, the learned DR fairly allowed the AR to inspect the record. He also first gave the AR the Xerox copy of the reason recorded (3 pages), the department'scopy of the notice u/s 148 (1 page) and the copy of acknowledgement of service (1 page), which are enclosed herewith as ANNEXE I. However, after inspection of record containing original order sheets, at the request of AR, the learned DR also gave xerox copy of page 1 to 4 of the order sheet in entirety, which is enclosed herewith as ANNEXE II. The co-operation extended by the learned DR needs a special mention.
2.00 The myth, mystery & controversy surrounding the impugned notice u/s 148:
For the A.Y.1999-2000, a notice dt. 26-3-2003 u/s 148 of the Act was servedon the assessee on 31-3-2004. A copy of the said notice is enclosed herewith as ANNEXE 77 I.T.A. No. 1426 & CO 166/Mds/2009 III. At the request of the assessee made on 15-4-04,the learned Assessing officer furnished the reasons vide letter dt. 22-7-2004 (found on pages 68-70 of the paper book). The assessee filed objections to the reasons recorded vide letter dt. 3-8-
2004 (found on pages 71-73 of the paper book); Through a speaking order dt. 10- 12-2004 (found on pages 74-78 of the paper book), the learned Assessing officer rejected the assessee's objections. The learned Assessing officer passed the order u/s 143(3) r.w.s147 dt. 29-3-2005 (found on pages 24 - 36 of the paper book). It is noteworthy that no mention of the date of issue of notice u/s 148 of the Act or the date of recording of reasons was anywhere found: (i) in the learned Assessing officer's letter dt. 22-7-2004 furnishing the reasons recorded, (ii) in his speaking order dt. 10-12-2004 and (iii) even in the entire order u/s 143(3) rws 147 dt. 29-3-2005. 2.01 The assessee averred, inter alia, in the Writ Petition filed before the Hon'ble Jurisdictional High Court that the service of the notice issued on 28-3-2003 was deliberately withheld by the Department upto 31-3-2004 with a view to extend the limitation for assessment in terms of sub-section (2) of Section 153. 2.02 However, in the counter affidavit filed by the Department (enclosed as annexure to the assessee's petition dt. 22-1-2010), on paragraph 'I' therein,the learned Assessing has stated as follows:
"The notice u/s 148 was issued on 26-3-2004 served on 31-3-04 the date of satisfaction note of the assessing officer before issuing the notice u/s 148 is also 26-3-2004 and not 26-3-2003 as mentioned bv the petitioner. Hence, the petitioner's 78 I.T.A. No. 1426 & CO 166/Mds/2009 submission with reference to the expiry of one year are factually incorrect and may be rejected".
2.03 The Hon'ble High Court ultimately dismissed the assessee's writ petition by observing, inter alia, as follows:
" If the assessee is of the view that even the reopening is not in accordance with law, that can very well be agitated by way of an appeal against the order to be passed on the reopening of the assessment. There is no extraordinary or special reason for the appellant to approach this court by way of writ petition..."
2.04 From what has been extracted in paragraph 2.02 supra, it is amply clear that as per the Department's version the reason for reopening was recorded and the impugned notice was issued on the same date viz., 26-3-2004, while the notice issued to the assessee is dated 26-3-2003 and not 26-3-2004 as alleged by the Department. On the factual aspect viz., that it is dated 26-3- 2003, the counter affidavit is silent nor any mistake on its part admitted by the Department therein. As already stated in paragraph 2.00 supra, the letter of the learned Assessing officer dt. 22-7-2004 providing the assessee the reasons recorded, the speaking order dt. 10-12-2004 and even the order dt. 29-3-2005 keep a guarded silence in this regard. Thus, even on a vital issue going to the root of the matter concerning the very assumption of jurisdiction to reopen the assessment and to pass an order, the assessee 79 I.T.A. No. 1426 & CO 166/Mds/2009 was kept in suspense and the matter remained a mystery. While there is no dispute as to the date of service of the impugned notice, the learned CIT (appeals) has given the finding: "Subsequently the assessment was reopened by issue of notice under section 148 on26-3-2003. The assessee company in response to the said notice sought the reasons recorded for reopening of the assessment". (c/f Para 2 on Page 5 of the paper book). In view of the above circumstances, the petition for inspection/copies was made and the Hon'ble Bench was pleased to order the same and the direction was also complied with by the Department.
3.00 Observations of the Authorised Representative on the inspection of record:
(Inspection done and copies obtained on 24-1-2010) On documents enclosed in Annexe I:
(a) On order sheet pages 2 - 4:
The first three pages, the last page being probably attested as found from the Xerox copy given, are actually pages 2 to 4 of the order sheet. They contain the "Reasons recorded for reopening the assessment u/s 147 of the Income-tax Act, 1961". They appear to be computer typed. They look innocuous as no correction/effacing is discernible therefrom. 80
I.T.A. No. 1426 & CO 166/Mds/2009
(b) On page 4 of Annexe I:
This is the copy of the notice u/s 148, kept in the file of the Department.
"THE DATE IS ALTERED AS 26-3-04 FROM 26-3-03. THIS ALTERATION IS VISIBLE."
(c ) On page 5 of Annexe I This is the acknowledgement of service of notice. As stated already, this is not relevant as there is no dispute regarding the date of service viz., 31-3-2004.
II On documents enclosed as Annexe II
i) These are the four pages of the order sheet, copy furnished as per the request of the AR, wherein entries from 20-01-02 to 30-7-2004 are made.
ii) Kind attention of the Hon'ble Bench is drawn to top page No.2 of the order sheet. AN ENTRY HAS BEEN EFFACED WITH WHITENER (CORRECTION FLUID).
iii) As for the portion effaced with whitener, though the date on the left side of the entry is not clearly visible, the other words like "Notice u/s 148 prepared and put up" are dimly discernible, of course with some difficulty to the naked eyes.81
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iv) Long and short, there are two - to say the least - discrepancies in the record maintained by a quasi-judicial authority - one in the copy of the notice u/s 148 wherein the year is altered (ANNEXE I) and the otherin the top of page 2 of the order sheet wherein effacing an entry has been done (ANNEXE II) 4.00 Factual finding on the record by this Hon'ble Bench which is the final Court of facts is necessary for advancement of justice. This aspect of the matter goes to the root of jurisdiction. Law is settled that in reassessment proceedings, the onus is on the department. In this appeal, the jurisdiction to reopen itself has been questioned by the appellant. The record even without any forensic examination does not prima facie appear to be impeccable and in any view is not reconcilable with the counter affidavit filed by the Department. The Department owes an explanation to the Hon'ble Bench on the record maintained by it. Without such explanation, the assessee can not hasten to advance its own inferences and arguments at this point of time.
In the light of the above, it is implored that the Hon'ble Bench may be pleased to peruse the documents concerned, record its own findings thereon, enable the Department to offer its explanations and thereby render justice.
Chennai
6--5--2010 (R.RAJASEKARAN)
AUTHORISED REPRESENTATIVE
Encl: Annexe I, II & III
82
I.T.A. No. 1426 & CO 166/Mds/2009
BEFORE THE HON'BLE ITAT "B" BENCH, CHENNAI
M.Ct.M.Corporation Pvt.Ltd.
761, Anna Salai
Chennai 600 002 ... Cross Objector
Sub: Forwarding of reply submissions to the written submission of the Learned AO dated 30.6.2011 filed on 4.7.11 and to the arguments of the Learned DR on 4.7.11. Ref: 1) C.O.No. 166 / CHNY/ 2009 in ITA no. 1426/ CHNY/ 2009- A.Y. 1999- 2000
2) Assessee's petition dt. 22.-1-2010 for inspection of records and obtaining copies allowed by the Hon'ble Bench on 25-1-2010, since numbered as Paper book no. 2 per directions of the Hon'ble Bench
3) Inspection done and copies obtained on 21-4-2010
4) Preliminary written submissions on Jurisdiction on the basis of inspection of record, dt.6-5-2010, filed on 10-6-2010, since numbered as Paper book no.1 per directions of the Hon'ble Bench.
5) Respondents paper book in the Departmental appeal filed on 25.1.2010 (since numbered as paper book no.3 per directions of the Hon'ble Bench
6) Cross- objectors paper book filed on 25.1.2010 (since numbered as paper book no. 4 per directions of the Hon'ble bench)
7) Supplementary written submissions on jurisdiction dated 20.6.2011, filed on 20.6.2011along with the copies of the Hon'ble ITAT order in Sivagami Holdings Private Limited and the order of M.Ct.M.Global Investments Pvt. Ltd. for 2000-01, while advancing oral arguments.
8) Oral argument of the AR on jurisdiction and merits on 4-7-2011 after filing reconciliation statement as directed by the Hon'ble Bench - the Learned DR filing the written submissions of the Learned AO dated 30.6.11 and arguing on jurisdiction and merits.
9) Hearing reposted on 11-7-2011 for assessee's reply submissions. I) REPLY SUBMISSION TO THE LEARNED AO'S WRITTEN SUBMISSION DATED 30.6.2011 A) ON JURISDICTION 83 I.T.A. No. 1426 & CO 166/Mds/2009 The Learned AO's contentions:
1. The first contention of the Learned AO in paragraph 2 of page 1 and in paragraph 2 of page 2 is that she held additional charge in Company Circle IV (1) only for the period from 23.10.2003 to 11.8.2004. Evidence has been let in to this effect. Hence it is stated that she could not have signed the notice under section 148 of the Act on 26.3.2003.
ASSESSEE'S REPLY SUBMISSIONS:
On the above point, the reply submissions are as follows:
a. While there can be no dispute about the period of her holding additional charge, the contention that she could not have signed the notice under section 148 dated 26.3.2003 purely rests on probability and runs counter to the reality in the face of the original notice dated 26.3.2003, signed by the same officer and served on the assessee on
31.3.2004, which is produced for perusal. This vital evidence let in by the assessee weakens the probability theory advanced by the revenue.
b. The learned CIT (Appeals) has also given a clear and categorical finding: "subsequently the assessment was reopened by issue of notice under section 148 on 26.3.2003." (kind reference is invited to para 2 on page 5 of the paper book no.4) The Department has apparently accepted the position as to the factum of the date of issue of notice Viz. 26.3.2003, since no rectification petition before the Learned CIT (A) / appeal before the Hon'ble ITAT was filed on this vital matter going into the roots of jurisdiction, though some mistakes are admitted by the Revenue at this stage after several submissions of the assessee. It is nobody's contention that any alteration/ correction was done by the assessee in the notice dated 26.3.2003 received by it on 31.3.2004.
c. While as per settled law reopening is a serious matter, signing of a statutory notice, when the Learned AO had no seisin is all the more serious and ab initio void. This certainly is also indicative of non- application of mind on the part of the Learned AO, which is bad in law albeit for the attribution of the mistake to the clerk. The impugned 84 I.T.A. No. 1426 & CO 166/Mds/2009 notice issued on the 26.3.2003 and served on the assessee on the 31.3.2004 is ex-facie defective and suffers from incurable infirmity. d. Law is settled that infirmity in initiation cannot be cured [Vide P.V.Doshi Vs. CIT (1978) 113 ITR 22 (Guj)] and that if initiation is bad, whatever follows is also bad [vide Rawatmal Harakchand Vs. CIT (1981) 129 ITR 346 (Cal)]
2. The Learned AO's contentions:
It is stated that in Paragraph 2 on page 1 of the Learned AO's submissions: "
After duly recording the reasons for reopening on 26.3.2004, the clerk was directed to put up the notice u/s 148 in the case of M.Ct.M.Corporation Pvt.Ltd. (assessment year 1999-2000) (Emphasis supplied) Again in paragraph 1 of page 3 it is stated:
" The Learned Autorized Representative had also submitted before the Hon'ble ITAT that whitener was used in the order sheet which proves that notice u/s 148 was issued on 26.03.2003. In this regard, it is submitted that mistake by the clerk committed in putting up the notice before the recording of the reasons. This mistake was rectified. Proper reasons were recorded and thereafter the clerk was directed to put up the notice. Notice u/s148 was put up on 26.03.2004, signed by me on 26.03.04 and received by the assessee on 31.03.2004. Using whitener to correct mistakes is not prohibited under any law/ rules. (Emphasis supplied) ASSESSEE'S REPLY SUBMISSIONS:
i. The Learned AO's contentions in paragraph 2 on page 1 are contrary and diametrically opposite to those contained in paragraph 1 on page
3. If the former contention is correct, the alleged mistake on the part of the clerk would not and need not have arisen. Putting up notice before recording of reason as even admitted by the Learned AO, is like putting the cart before the horse and this is sufficient to unsuit the reopening of assessment by issue of notice stated to have been dated 26.3.2004. This is violative of the mandatory provisions of section 148 (2) of the Act and as such, this infirmity in initiation cannot be cured as per settled law.
ii. The assessee has actually and factually received the notice u/s. 148 dated 26.3.2003 on 31.3.2004 as proved by the original notice 85 I.T.A. No. 1426 & CO 166/Mds/2009 received by it, which is submitted for perusal of the Hon'ble bench and the Learned DR. The Assessee has not received any other notice, much less the one stated to have been issued on 26.3.2004. iii. The fact that the original notice received by the assessee is dated 26.3.2003 is proved by the production of the said notice for perusal. The Learned CIT (A) has also given a factual finding that the assessment was reopened by issue of notice under section 148 on 26.3.2003. It is not possible for the assessee to let in any further evidence to prove that the notice under section 148 was issued on 26.3.2003, in the circumstances. This point has to be viewed from the fact that the correction of the year of notice from 2003 as 2004 was done by the Department only. When the assessee proves that the notice signed by the Learned AO is dated 26.3.2003, the correct inference is that it is issued on the 26.3.2003. However the Department, based on its own records, after correction, maintains that the same is issued on 26.3.2004 and not 26.3.2003. Hence there is a doubt whether the statutory notice by which the Learned AO assumed jurisdiction to reopen the assessment is dated 26.3.2003 or 26.3.2004 at the threshold stage itself, thereby leading to doubtful validity of the very reopening proceedings itself. On this score also, the reopening is bad in law and the notice and the reassessment order are liable to be quashed inlimine.
3. The contention of the Learned AO on Para 2 of page 2 that the acknowledgement was obtained by the Department, ASSESSEE'S REPLY SUBMISSIONS:
a. The notice under section 148 dated 26.3.2003 was received in a closed cover by the steno- Secretary on 31.3.2004. The Company does not have the practice of affixing the usual rubber stamp maintained by some Government Departments stating: "received a sealed cover- contents not known", while acknowledging receipt of closed covers. The fact that a separate acknowledgement slip was prepared and her signature was obtained itself shows that the notice dated 26.3.2003 was received on 31,3,2004 in a closed cover consistent with the established departmental practice as otherwise the 86 I.T.A. No. 1426 & CO 166/Mds/2009 acknowledgement would have been received in the copy of the Department itself.
b. In any and every view of the matter the mere acknowledgement slip cannot advance the case of the Department in the light of the following facts and circumstances of the case:
It is clear from the original notice dated 26.3.2003 under section 148 of the Act, which is now produced for perusal of the Hon'ble Bench and the Learned DR that:
i. There is no alteration/correction, whatsoever made in the notice under section 148 dated 26.3.2003; Rather it is nobody's contention that that the assessee made any correction; ii. From the endorsements made by the Steno/ secretary in the notice itself, it is found that the said notice dated 26.3.2003 was received on 31.3.2004and that a copy of the same was sent Mr.Ct.M ( i.e Mr.Ct.Malayandi) who was in charge of the tax matters and who co-ordinated with the Auditors. No further proof is necessary or possible on this point as the notice speaks for itself;
iii. The only notice received by the assessee was dated 26.3.2003 in pursuance of which the assessee participated in the reassessment proceedings, which is also corroborated by the affidavit filed in the writ proceedings initiated by the assessee; iv. The assessee is neither actually aware of any such notice under section 148 dated 26.3.2004 issued by the Department - on the other hand, it is only the Department, which brought up a new case that the notice under section 148was issued on 26.3.2004 and not on 26.3.2003, for the first time in its counter affidavit dated - day of February'2005 (Vide para 1 on page 11 of the said Counter affidavit appended as ANNEXE 1 in Paper book no.2);
v. The portion of the order sheet effaced with whitener (though using whitener is not prohibited by any law / rules in the view of the Department) clearly indicates the actual existence of the notice under section 148 dated 26.3.2003, further demonstrated by the original notice received by the assessee; vi. When the alteration of the year of issue in the notice under Section 148 itself was admittedly done by the Department, 87 I.T.A. No. 1426 & CO 166/Mds/2009 mere acknowledgement, in a printed form in the possession of the Department, cannot establish the date of issue as 26.3.2004. An acknowledgement cannot partake the role of a notice in law. By notice jurisdiction to reopen the assessment is assumed whereas acknowledgement of service of notice confers jurisdiction to make reassessment;
vii. The Acknowledgement is also not free from confusion in that as per the assessee, the notice dated 26.3.2003 was received on 31.3.2004 whereas as per the Department, the notice dated 26.3.2004, after corrections from its end, was served on the assessee on 31.3.2004. The Acknowledgement, in the circumstances would appear to be of doubtful validity. Thus there is a bonafide doubt and dispute with regard to both the date of notice and which notice was served, leading to a doubtful validity of the entire proceedings from the start to the end and hence the reopening proceedings are devoid of jurisdiction and insupportable in law;
viii. Since the notice under section 148 stated to have been issued on 26.3.2004 has not been served on the assessee, the reassessment should fail;
ix. Without prejudice to the above submissions, even assuming that the versions of both the Department and the Assessee are true as to the existence of two different notices, the same is bad in law.
4. The contention of the Learned AO on Para 1 of page 2 on the mistake in the date of notice due to the carbon paper impression .According to the Learned AO, there was an inadvertent mistake in the date of the notice issued under section 148, which was originally written as 26.3.2003 instead of 26.3.2004 and however probably the carbon paper impression may not have fallen in the notice served on the assessee ASSESSEE'S REPLY SUBMISSIONS:
The original notice under section 148, dated 26.3.2003 received by the assessee on 31.3.2004, which is separately written, rules out the Carbon 88 I.T.A. No. 1426 & CO 166/Mds/2009 paper probability raised by the Learned AO. That apart, though the handwriting in the notice(s) appears to be of the same person, there are several differences, in filling up the details therein, which also suggests that the two notices cannot be carbon copies of the other. Even at a cursory glance, the following differences, to cite a few, are readily discernible to a naked eye without any forensic examination:
a. P.A.No. on the top left: The wordings MC- 8 is worded in two different places in the two notices. Besides the words 'M' 'C' and '8' are all different in the two notices. The slash appearing after '8' is appearing in two different places in the two notices. Further the numbers 99-00 are differently spaced and are of unequal sizes in the two notices.
b. Office of the .....: the spacing between ACIT followed by a / is different in both the notices.
c. To: in the address column in the first line the gap between Pvt. and Ltd. Is different in both the notices, besides the gap between Anna and Salai, in the second line, which besides slight variation in the style of writing also shows a difference in the space between the two words in the two notices. In the third line, the letter C in the word Chennai is aligned towards the left of Anna in the second line in one of the notices and towards the right in the other notice. The numeral 2 after Chennai, in the third line of the address column also is very pronounced in its difference.
d. Date: The numeral 26 appears very different in the two notices. Besides the slash after 3 is confined between the dotted lines in the previous column and the dotted lines in the date column, in one notice whereas the slash is going below the dotted line in the date column in the other notice. e. In the second line of the printed version starting with "Whereas......." after the printed numeral 19 the numerals "99- 00"
Appearing thereafter appears very different in the two notices.
5. The contention of the Learned AO in the last Para of page 2 that it is proved beyond doubt that the notice under Section148 was issued only on 89 I.T.A. No. 1426 & CO 166/Mds/2009 26.3.2004 and was served 31.3.2004 and the bonafide clerical mistake in the date mentioned in the notice served on the assessee which is supposed to be only a copy is well covered under section 292 B of the Act; ASSESSEE'S REPLY SUBMISSIONS:
a. The assessee has only admitted that the notice dated 26.3.2003 was received on 31.3.2004 as a matter of fact. That does not mean that the assessee has admitted that the notice u/s 148 was issued only on 26.3.2004 and the Department is put to strict proof to establish that the notice was issued only on 26.3.2004 b. The notice dated 26.3.2003 served on the assessee is not a carbon copy and therefore there may not be any bonafide clerical mistake in the notice and as such the protection provided by section 292B of the Act cannot be availed in the facts and circumstances of the case.
6. In para 2 of page 3 learned AO has drawn to the attention of the Hon'ble Bench of what is in her opinion the adverse attitude and the wild imagination of the assessee to presume that a set of officers in collusion with the staff are tampering with the records, which is sought to be buttressed by the appeal in the case of M.Ct.M.Global Investments for the assessment year 2000-01, which has been confirmed by the Hon'ble ITAT.
ASSESSEE'S REPLY SUBMISSIONS:
It is submitted that in the case of M.Ct.M.Global Investments, on receipt of the notice issued under section 148, they had requested for the reasons recorded for reopening the Assessment proceedings. In response to this request, the Learned AO had issued a letter to the assessee asking for their objections to assess the income in Malaysia in terms of the provisions of Article 22 and 23 of the Indo- Malaysian Treaty. To this the assessee had submitted their objections and till the date of completion of the assessment, notwithstanding the objections of the assessee, the Learned AO had not disposed off the objections in line with the decision of the Hon'ble Supreme Court in the case of GKN Driveshafts. The Assessee kept on insisting that the Learned AO provides a speaking order to overcome their objections to take up the case for reassessment. In the meanwhile, a fresh record of reasons was furnished just a week before the completion of the assessment to the effect that the provisions of the DTAA were not applicable to the Company. 90
I.T.A. No. 1426 & CO 166/Mds/2009 These reasons, as observed by that Company were different from the earlier record/ show cause notice provided by the Learned AO. The Assessee in that case, in the light of the two diametrically opposite views of the Learned AO, took a reasonable view that the reasons recorded were at variance with the facts. This view, was however not accepted by the Hon'ble ITAT. Against the order of the Hon'ble ITAT, the assessee, M.Ct.M.Global Investments had filed an appeal before the Hon'ble High Court of Judicature at Madras and the same is pending. Be that as it may, a reference to that episode here is out of context, particularly when defects committed in the reopening process in this case are admitted in the written submissions of the Learned AO dated 30.6.2011.
7. The contention of the Learned AO, in para 4 of page 3, that the facts and circumstances of this assessee and its succeeding Company were the same and there were other reasons as mentioned in the recorded reasons on the strength of which belief was formed that income had escaped assessment:
ASSESSEE'S REPLY SUBMISSIONS: As stated earlier the Assessment orders In the case of M.Ct.M. Global for AY 2000-01 and this assessee for the AY 1999-2000 were verbatim the same in most parts, including the other reasons referred to. It is a matter on record that the said M.Ct.M Global came into existence consequent on the demerger of the assessee Company, and all the assets including the investments were vested with the resultant Companies. But in any view of the matter reopening of assessment on borrowed satisfaction by importing facts not apparent on records of the assessee Company cannot be sustained as per settled law. On this point, para 34 of the order of the Hon'ble ITAT in the case of Sivagami Holdings Private Limited must be taken as a correct precedent.
B) On merits
8. In Para 1 on page 3 of the written submissions, the Learned AO, by adverting to para 10.1 to 10.8 of the Assessment order, has contended that the interest and dividend incomes are assessable as "income from other sources." And that this point of view is fortified by the order of the Hon'ble ITAT in the case of M.Ct.M.Global Investments Pvt. Ltd., vide order in I.T.A no.659/ Mds/ 05 dated 19.12.2007.91
I.T.A. No. 1426 & CO 166/Mds/2009 The Assessees submission's :
I. While arguing on merits, the A.R. pointed out that the operation of Section 5 (1) ( c ) of the Act is ousted by Section 90, that the concept of treaty override is pronounced by circular no. 333 dated 2.4.1982 and the law settled by the Hon'ble High Court(s) / Apex Court. The attention of the Hon'ble bench was also drawn to the circular with judicial analysis (Vide pages 180 and 181 of Paper Book no.4) and the decision of the Hon'ble Madras Special Bench ( pages 182 to 185 of the Paper book no.4).The said Madras Special Bench decision was approved in CIT v/s. R.M.Muthiah (1993) 202 ITR 508( Kar) and in CIT V/s. VR.S.R.M.Firm (1994) 208 ITR 400 (Madras), which were affirmed in CIT V/s. P.V.A.L Kulandagan Chettiyar (2004) 267 ITR 654 (SC) - Revenue's review petition dismissed in (2008) 300 ITR 5 (SC).
Further the relevant provisions of the Indo-Malaysian Treaty (vide pages 161 to 179 of the paper book no.4) were also read out. Then the attention of the Hon'ble Bench was drawn to the factual findings of the Learned AO as to the existence of the PE for AY 1997-98 (Page 153 of paper book no.4) AY 1998-99 (Page 157 of the paper book no.4) and AY 1999-2000 (Page 26 of paper book no.4). It was then stressed by drawing attention to Article 7 (Page 166 of paper book no.4) that the tax jurisdiction to assess the profits attributable to the PE will lie in the Contracting state in which the PE is situated, by citing the concept of Fiscal Domicile as enunciated by the Hon'ble Apex Court in Kulandagan Chettyar's case, cited Supra.
II. Coming to the stand of the Learned AO that the incomes and the profits attributable to the PE in Malaysia, which is registered as a Company under the Malaysian Laws and which is subject to the Income Tax / Company Law provisions in Malaysia, ought to be taxed in India under the head " Income from other Sources", it is submitted that in view of the circular, the specific provisions of the Indo- Malaysian Treaty particularly Article 22, dealing with Elimination of Double Taxation ( page 174 of paper book no.4), the question of tax jurisdiction in India by applying the provisions of the Indian Income Tax Act 1961 does not apply.
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I.T.A. No. 1426 & CO 166/Mds/2009 III. It is a misdirection to apply the provisions of the Indian Income Tax Act to the nature of income covered by the DTAA with Malaysia. The argument by the AR that reopening cannot be based on borrowed satisfaction will apply equally on merits as well. Each case rests on its own facts and importing the facts of one case into the other, particularly when the facts are not apparent on the records of this assessee, is impermissible in law.
IV. Most part of the order in this case has been simply borrowed from the Assessment order dated 26th March'2004, in the case of M.Ct.M. global investments Pvt. Ltd., for AY 2000-2001- not only from paras 10.1 to 10.8 stressed in the written submissions of the Learned AO. From this it is clear that the said M.Ct.M. Global's order formed a complete basis for framing the order in the assessee case by simply importing the facts of the other case in an automatic manner, even on merits.
9. As for Para 2 of Page 4 of the Learned AO's written Submission, it may, at the outset, be respectfully submitted that the contentions in this paragraph amounts to total misdirection. The Learned AO's submission is oblivious of the relevant provisions of the Indo-Malaysian Treaty. The existence or otherwise of a PE, has to be tested only on the basis of Article 5 of the Treaty and not with reference to the provisions of the Indian Income Tax Act. While the concept of Permanent establishment (PE) is applicable only for Business Profits attributable to the PE, the tests for the existence or otherwise of a PE are laid down in Article 5 of the Treaty and the same cannot be tested against the provisions of Indian Income Tax Act. Having found in the reassessment order under appeal that " the fact that the assessee has a permanent establishment is not disputed" ( page 36 of the Paper book no.4), it is erroneous to contend that there is no permanent establishment by applying the heads of income stipulated in the Income Tax Act'1961. The mere assertion, in the nature of ipse dixit, that Article 7 of the DTAA, which deals with business profits is not applicable here has to be rejected in limine. This is more so when regard is had to the deeming fiction embedded in Article 7.2 of the Indo-Malaysian Treaty (Page 177 of paper 93 I.T.A. No. 1426 & CO 166/Mds/2009 book no.4), wherein the PE is deemed to be dealing wholly independently with the enterprise of which it is a PE
10. Regarding para 3 of Page 4 of the Learned AO's written submission, kind reference is drawn to ANNEXE-I appended to these submissions, wherein some of the paragraphs between 11.1 to 11.7 relied on by the Learned AO are found adopted from the order in the case of Global and hence the same cannot advance the case of the Department, particularly with reference to the existence of the Permanent establishment. The other points relating to Directors' authorizations, control and Management remaining at Chennai and remittance of Money to Chennai from New York are all not germane to the issue relating to permanent establishment, which is clearly dealt with under Article 5 of the Indo-Malaysian Treaty. Control and Management is not at all a relevant factor in the interpretation or application of any DTAA, particularly with reference to the determination of the existence or otherwise of a PE. To drive home the point abundantly clear, certain provisions of the Indo- Malaysian Treaty and relevant settled law are cited. To start with, Article 5.7 of the Indo- Malaysian Treaty (page 165 of the paper book no.4) may be cited, according to which, Controlling or being controlled by a Company is not at all a relevant factor for determination of the existence or otherwise of a PE. Other references such as Article 23.2 and 23.3 (page 176 of the paper book no.4) also support the view that Control and Management is not a decisive factor, particularly in the determination of the existence of a PE. Adverting to Article 4.3 of the Indo- Malaysian Treaty (Page 163 of the paper book no.4), it is emphasized that the Fiscal Domicile is determined only with reference to "Place of Effective Management", which is totally different from the theory of "Control and Management", which is totally alien to any treaty provisions, for that matter. When Article 5 of the Indo- Malaysian Treaty defines, what is PE and what is not deemed to be a PE, any other exercise drawing inferences from any other law is impermissible. The Simple question is whether a PE stood constituted in this case in terms of the relevant provisions of the Treaty, about which, there are factual concurrent findings in the Assessment orders including the one relating to the assessment year under appeal.
Remittance of money from Chennai to New York and not to or from Malaysia is highlighted by the Learned AO to conclude that there is no PE in Malaysia, which factor, it is respectfully submitted, is neither relevant nor germane for such a conclusion in a manner known to Indo- Malaysian Treaty. The 94 I.T.A. No. 1426 & CO 166/Mds/2009 remittances have been made within the frame work of law adhering to the relevant RBI regulations and as such the point stressed by the Learned AO regarding the non-existence of a PE in Malaysia is not at all tenable.
11. On para 4 of Page 4 of the Learned AO's written submission:
To establish that all the points raised by the Learned AO on merits as contained in paragraph 4 on page 4 of the written submissions filed on 11.7.2011 are contrary to the provisions of the Indo- Malaysian Treaty and the settled law, a line by line analysis of the same has become imperative.
Line by line analysis of the Learned AO's contentions:
a) "Lastly DTAA is applicable only if income is chargeable to tax in two countries."
ASSESSEE'S SUBMISSION IN REPLY:
i. This view is based on a ruling of the Authority of Advance ruling in Cyril Eugene Pereira in re (1999) 239 ITR 650 (AAR), which held on page 659 of its decision as follows:
"this matter can be viewed from the angle of the Tax payer. Liability to pay tax both in India and the foreign country entitles a tax payer to claim relief under the rules laid down in the Double Taxation Avoidance Agreement. If the tax payer pays tax or is liable to pay tax under the laws in force in one country alone, he cannot claim any relief from a non- existent burden of double taxation under DTAA. The DTAA is meant only for the benefit of tax payers who are liable to tax twice on the same income, (Page 659 - Emphasis supplied) ii. The above decision of the AAR was rejected by the Hon'ble Apex Court in UOI v/s. Azadi Bachao Andolan (2003) 263 ITR 706 (SC) with the remark :" having perused the order of the advance ruling authority, we are not persuaded". On the other hand the Hon'ble Apex Court laid down the correct proposition as follows:
A) In our view, the contention of the respondents proceeds on the fallacious premise that liability to taxation is the same as payment of 95 I.T.A. No. 1426 & CO 166/Mds/2009 tax. Liability to tax is a legal situation; payment of tax is a fiscal fact.
(page 741- Emphasis supplied) B) It is therefore, not possible for us to accept the contentions so strenuously urged on behalf of the respondents that avoidance of double taxation can arise only tax is actually paid in one of the contracting states. (Page 744 Emphasis supplied) Other decisions in Assessees favour:
1. Emmerich Jaegar Vs CIT (2005) 274 ITR 125 (Guj) (Apex Court decision in Azadi Bachao Andolan followed:
2. ADIT V/s. Green Emirate Shipping & Travels (2006) 100 ITD 203 (Mumbai) (apex court decision in Azadi Bachao andolan followed):
"it is thus clear that taxability in one Country is not the Sine qua non for availing relief under the treaty under taxability in another country". (Para 8- page 213 -
Emphasis supplied)
3. Meera Bhatia vs. ITO 2010 38 SOT 95 (Mumbai): (Decision in 100 ITD 203 (Mumbai) cited above followed.
b) "As per Malaysian Income Tax Act (Charging section 3 & 3B) income from investment in GS and WGIL is not charged to tax at Malaysia. It is not a case where income is charged to tax and exemptions/ deduction is claimed. This income is primarily not charged to tax at Malaysia as it neither accrued derived or is received in Malaysia. DTAA is hence not applicable and precisely for this reason, Hon'ble Supreme Court decision in the case of Azadi Bachao Andolan is not applicable. (Please refer to para 12 to 12.8 in page 9, 10 &11of Assessment order in the case of M.Ct.M.Corporation Pvt. Ltd.)"96
I.T.A. No. 1426 & CO 166/Mds/2009 ASSESSEE'S SUBMISSION IN REPLY:
With regard to the above contentions of the Learned AO, the following reply submissions are made.
i. There seems to be a clear confusion on the part of the Learned AO since the distinction between the avoidance of double taxation and relief against double taxation has been lost sight of. The Hon'ble Apex Court, while interpreting Section 49A of the erstwhile IT Act and Article 4 of the Indo-Pakistan Treaty noticed the distinction between the two in CIT Vs. Carew and Co. Ltd (1979) 120 ITR 540 (SC) at page 548 in the following words:
"Before parting with this case, it is appropriate to point out that a distinction exists between the avoidance of double taxation and relief against double taxation. That distinction is evidenced by two clauses of Section 49A of the Indian Income Tax Act. One important feature distinguishing the two concepts lies in this that in case of of avoidance of double taxation the assessee does not have to pay tax first and then apply for relief in the form of refund, as he would be obliged to do under a provision for relief against double taxation. The respective schemes embodying the two concepts differ in some degree from each other, and that needs to be borne in mind when statutory provisions are referred to and cases are cited before the Court on a point involving double taxation". (emphasis supplied) Notes: This distinction between avoidance of double taxation and relief against double taxation is also made clear in section 90 (1) (a)
(i) and (ii) and (b) of the Income Tax Act, 1961 as well. Moreover this concept is alsoexplained in the decisions of R.M.Muthiah (1993) 202 ITR 508 (Kar) and C.I.T. Vs. VR.S.R.M. Firm (1994) 208 ITR 400 (Mad).The corresponding provisions relating to avoidance and relief are contained in Articles 22.1 and 22,2 respectively in the Indo-
Malaysian Treaty (C/f page 174 of the Paper book no. 4) 97 I.T.A. No. 1426 & CO 166/Mds/2009 ii. The only distinction as regards overseas income between section 5 (1) (c ) of the Indian Income Tax Act and section 3 of the Malaysian Income Tax Act is that the charge is on accrual basis in the former while it is on receipt basis in the latter. As such in so far as the Malaysian Income Tax Act, covers the income accrued, derived or received, DTAA is applicable and was applied consecutively in all assessment years upto and inclusive of AY 1998-99 in the Assessees own case. It is incorrect to overlook that both DTAA and Section 90 are benevolent provisions in favour of the Asseesee. That apart as stressed earlier, the operation of Section 5 (1) (c ) is ousted by the concept of treaty override provided by Section 90, the Board circular, the settled law and the Article 22.1 of the Indo- Malaysian Treaty. As such the overseas income earned by the Malaysian branch cannot be brought to tax under the provisions of the Indian Income Tax Act, particularly when they are profits attributable to the PE in terms of Articles 7.1 and 7.2 of the Treaty (c/f. page 177 of Paper book no.4) iii. The casual remark that the Hon'ble Apex Court's decision in Azadi Bachao Andolan is not applicable is untenable and is as a result of misreading of the said decision, wherein even the concept of Treaty shopping is affirmed.
C) "As DTAA is not applicable, the question of Permanent establishment does not arise and the income is assessed in India.
ASSESSEE'S REPLY SUBMISSIONS:
With regard to the above contentions of the Learned AO, the following reply submissions are made.
i. The DTAA was applied for the last several years and section 90 is a benevolent provision in favour of the assessee. The benefit conferred by the treaty read with section 90 cannot be denied depending upon the change in moods of the assessing officer ii. It is erroneous to state that there was no PE de hors Article 5 of the Indo- Malaysian Treaty. All the extraneous reasons 98 I.T.A. No. 1426 & CO 166/Mds/2009 to deny the PE have been rebutted while dealing with paragraph 3 of page 4 supra of the written submissions of the Learned AO dated 30.6.2011.
iii. In any and every view of the matter, the question of subjecting the income to the Indian Income Tax in terms of succession 5 (1) (C ) does not arise and is insupportable in law.
iv. In the earlier paragraph, it was stated on irrelevant considerations that the concept of PE is not applicable. In this paragraph even the applicability of the DTAA is questioned again on irrelevant considerations.
II) Assessees reply submissions to the arguments of the Learned DR on 4-7- 2011:
A) On Jurisdiction:
1. The Learned DR pointed out that the Assessee was yet to show evidence of original copy of the notice, which is alleged to contain the date of issue of notice as 26.3.2003, as required under the evidence Act. He also stressed that no evidence was let in by the Assessee to prove that the alleged notice dated 26.3.2003 was ever served on the assessee. The Learned DR maintained that the date of issue of notice u/s. 148 was only 26.3.2004 and not 26.3.2003 as alleged by the assessee. In this regard he read over the Learned AO's submissions dated 30.6.2011 and stressed that taking into consideration the preponderance of probabilities, since the Learned AO was not the officer in charge on 26.3.2003, she could not have signed the notice dated 26.3.2003. In this regard he cited the decision in 333 ITR 182 (Ker) and pointed out that order sheet should form the basis of the assessment proceedings and even absence of Signature of the Assessing officer would not invalidate the proceedings.99
I.T.A. No. 1426 & CO 166/Mds/2009 ASSESSEE'S REPLY SUBMISSIONS:
i. The original notice dated 26.3.2003under the hand and seal of the Learned AO and received by the assessee on 31.3.2004 is produced for perusal of the Hon'ble bench and the Learned DR. This document shows that the Learned AO has actually signed the notice which rules out invoking probability theory.
ii. In the decision cited by the Learned DR [ CIT Vs. T.O.Abhraham & Co. (2011) 333 ITR 182 (Ker)], it was held that the fact that the first copy of the assessment order sent to the assessee on May 30, 1997 along with a signed valid notice of Demand issued under Section 156 of the Act did not contain the signature did not invalidate the assessment which was validly completed on May 27'1997, within the period of limitation provided under section 158BE of the Act and the whole purpose of Section 292B is not to defeat on technicalities the object of the statute that is to assess and collect the tax legitimately due under the Act. Since the assessee's challenge is not based on technical defects, it is respectfully submitted that this decision is quoted out of context.
2. The Learned DR lead through pages 1 and 2 of the recorded reasons on the basis of which the assessment was reopened. Inter alia, he argued that borrowed satisfaction was not a bar on the reopening of assessments by citing the decision in 242 ITR 176 (Mad).
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I.T.A. No. 1426 & CO 166/Mds/2009 ASSESSEE'S REPLY SUBMISSION:
i. As the Learned Dr reiterated the submissions of the Learned AO, as contained in her submissions dated 30.6.2011 on merits, which are replied separately herein, to avoid repetition, the assessee's reply on them is avoided.
ii. It is submitted that in CGT Vs. Susheela Shanmugasundaram (2000) 242 ITR 176 (Mad) the issue was not on whether borrowed satisfaction was a bar on reopening. The issue in that case was whether the letter of the Wealth Tax Officer to the Gift tax Officer would constitute information for the purpose of reopening the assessment u/s. 16(1) (b) of the Gift Tax Act. Moreover, the information given was with reference to the same property for the same Assessment year. Hence, this decision cannot advance the case of the Department on the lines suggested by the Learned DR.
B) On Merits:
1. After referring to paragraph 3 of page 3 of the order of the Hon'ble ITAT in the case of Sivagami Holdings Private Limited (SHPL for short ) relied on by the assessee, by stating that the facts are not identical in the assessee's case since no other property was acquired by the assessee herein:
ASSESSEE'S REPLY SUBMISSIONS: Since the assessee Company itself was demerged in the subsequent year into two Companies, namely SHPL And M..Ct.M. Global Investments Private Ltd. the question of the assessee Company acquiring any further property thereafter does not arise.
2. The Learned DR lead the Hon'ble members through pages 16 and 17 of the Hon'ble ITAT order in the case of SHPL, 101 I.T.A. No. 1426 & CO 166/Mds/2009 and maintained that the facts of SHPL should not be inferred into the facts of the assessee herein, in pretty much the same way as the Hon'ble ITAT has decided in the case of SHPL.
ASSESSEE'S REPLY SUBMISSIONS: The Clear distinction between importing the facts of some other assessee which are not apparent on the record of the assessee and application of the ratio based on the similarity of facts which can be cited as a precedent, has been lost sight of by the Learned DR, overlooking the fact that the facts of M.Ct.M.Global were imported onto the case of the assessee herein, which ceased to be in existence consequent on demerger.
3. The Learned DR then lead through para 38 on page 28 of the order of the Hon'ble ITAT in the case of SHPL to argue that in the case of SHPL, PE was not really the subject matter of appeal, whereas in this case the existence of PE was not established for this year. According to the Learned DR the existence of PE would have to be determined every year and existence of PE in earlier years does not automatically extend its existence to the subsequent year ASSESSEE'S REPLY SUBMISSIONS: What constitutes or what does not constitute a PE has to be decided only in terms of Article 5 of the Indo Malaysian Treaty and not by considering extraneous and irrelevant factors such as 'Control and Management. A PE has been judicially analyzed and interpreted in CIT Vs. Visakhapatnam Port Trust (1983) 144 ITR 146 (AP) as per which :"the words Permanent establishment postulate the existence of a substantial element of an enduring or permanent nature of a foreign enterprise in another Country, which can be attributed to a fixed place of business in that Country. It should be of such a nature that it would amount to a virtual projection of the foreign enterprise of one Country into the soil of another 102 I.T.A. No. 1426 & CO 166/Mds/2009 Country." (vide page 162). It may be added that the said decision of the Hon'ble AP High Court was relied on and followed in Integrated Container Feeder Service V/s. JCIT (2005) 96 ITD 371 (Mum). Moreover, the fact that the assessee has a permanent establishment is not at all disputed even by the Learned AO for the assessment year under appeal (c/f page 26 of the Paper book no.4) It is a matter on record that the assessee Company had been carrying on its business operations for several decades from this fixed place of business at Malaysia. Even the inclusive definition of Permanent establishment contained in section 92F (iiia) of the Income Tax Act'1961 does not stipulate that the existence of a Permanent establishment need to be proved or demonstrated on a year to year basis. Such an unwarranted condition stipulated by the Learned DR is something not to be found in the Indo- Malaysian Treaty as well. So long as the business of the Enterprise is wholly or partly carried on from a fixed place of business the existence of a PE cannot be disputed on assumed conditions found neither in the Indo- Malaysian Treaty nor the Indian Income Tax Act. Long and short, once a PE always a PE so long as the business of the enterprise is wholly or partly carried on through a fixed place of business and the criteria laid down in Article 5 of the DTAA are complied with. It is of utmost importance in this context to note that the branch of the Assessee Company in Malaysia has been registered as a Company in Malaysia and had been complying with all statutory requirements, including Income Tax/ Company law formalities.
4. The Learned DR then argued that in the absence of a PE (which in his opinion is not existent, this year), the global income of the appellant would be liable to tax in India:
ASSESSEE'S REPLY SUBMISSIONS: Incomes in the nature of rent, dividend, interest etc., as part of business or otherwise can be earned. The comprehensive Indo-103
I.T.A. No. 1426 & CO 166/Mds/2009 Malaysian Treaty takes care of such incomes either through business or otherwise. When interest, dividends and rents are profits attributable to a PE, Article 7 of the treaty takes care of the treatment of incomes as business Profits. Even such persons who do not have a PE can also avail the benefit of the Treaty provisions incorporated in the Treaty to cover cases or rent (Article 6), Dividends (Article 11) and Interest (Article 12). Therefore the assumption on the part of the Learned DR that in the absence of the PE, the global income would be liable to tax in India is totally unfounded and untenable. The elimination of Double taxation as provided in Article 22 of the Indo- Malaysian Treaty (page 174 of the Paper book no.4) takes care of both these situations, namely business profits through PE or otherwise.
5. The Learned DR then referred to the decision in 274 ITR 117 (MAD) to contend that the incomes of the assessee were liable to tax as "Income from other Sources"
ASSESSEE'S REPLY SUBMISSION: In the decision of CIT Vs. Chennai Properties and Investments Ltd. (2005) 274 ITR 117 (Mad) the only question was whether the rental income from properties was assessable as income from business or from house property. This is a decision under the Income Tax Act 1961, the sections considered being 22 and 28 of the Act. When the operation of Section 5 (1 ) (C ) of the Act is ousted by section 90, the Board circular, the settled law and the DTAA, there is no warrant to import the provisions of the Indian Income Tax Act at all. And hence the case relied on by the Learned DR will not advance the case of the Revenue.
6. The Learned DR then referred to the Board resolutions of the assessee Company to indicate that the Control and Management of the affairs of the Company was only in India and not in Malaysia:104
I.T.A. No. 1426 & CO 166/Mds/2009 ASSESSEE'S REPLY SUBMISSIONS: It is a requirement under section 372 of the Indian Companies Act for all Companies to pass Board resolutions to make investments.
The Company, with a view to complying with such provisions had passed the necessary resolutions accordingly. No adverse inference whatsoever could be drawn on the aspect of passing such Board resolutions relating to such investments. Further Control and Management is not at all a relevant factor in the interpretation or application of any DTAA. Adverting to Article 4.3 of the Indo- Malaysian Treaty (Page 163 of the paper book no.4), it is emphasized that the Fiscal Domicile is determined only with reference to "Place of Effective Management", which is totally different from the theory of "Control and Management", which is totally alien to any treaty provisions, for that matter.
Chennai 11.07.11 (Authorised Representative) By the Revenue 105 I.T.A. No. 1426 & CO 166/Mds/2009 106 I.T.A. No. 1426 & CO 166/Mds/2009 107 I.T.A. No. 1426 & CO 166/Mds/2009 108 I.T.A. No. 1426 & CO 166/Mds/2009 109 I.T.A. No. 1426 & CO 166/Mds/2009 110 I.T.A. No. 1426 & CO 166/Mds/2009 111 I.T.A. No. 1426 & CO 166/Mds/2009 112 I.T.A. No. 1426 & CO 166/Mds/2009 113 I.T.A. No. 1426 & CO 166/Mds/2009 114 I.T.A. No. 1426 & CO 166/Mds/2009 115 I.T.A. No. 1426 & CO 166/Mds/2009 116 I.T.A. No. 1426 & CO 166/Mds/2009 117 I.T.A. No. 1426 & CO 166/Mds/2009 118 I.T.A. No. 1426 & CO 166/Mds/2009 119 I.T.A. No. 1426 & CO 166/Mds/2009 120 I.T.A. No. 1426 & CO 166/Mds/2009 121 I.T.A. No. 1426 & CO 166/Mds/2009 122 I.T.A. No. 1426 & CO 166/Mds/2009 123 I.T.A. No. 1426 & CO 166/Mds/2009 124 I.T.A. No. 1426 & CO 166/Mds/2009 125 I.T.A. No. 1426 & CO 166/Mds/2009 126 I.T.A. No. 1426 & CO 166/Mds/2009 127 I.T.A. No. 1426 & CO 166/Mds/2009 128 I.T.A. No. 1426 & CO 166/Mds/2009 129 I.T.A. No. 1426 & CO 166/Mds/2009 130 I.T.A. No. 1426 & CO 166/Mds/2009 131 I.T.A. No. 1426 & CO 166/Mds/2009 132 I.T.A. No. 1426 & CO 166/Mds/2009
18. It was made clear and accepted by both the sides at the Bench that even though various citations have been quoted in the written submissions only such citations which are specifically discussed in the oral arguments would be considered. The facts that emanate out of the present appeal clearly show that the assessee is relying upon a notice under sec.148 dated 26-03-2003 as the notice on the basis of which the assessment has been re-opened. The Revenue is contending that there is no notice u/s. 148 dated 26-03-2003 and the notice u/s.
148 for the relevant assessment year is a notice dated 26-03-2004. The Revenue has supported its contention by producing the original copy of the sec. 148 notice dated 26-03-2004 which we must mention here is originally written as " 26-3-03 and the '03' has been over-written as '04' (Page 70 of this order). The Revenue has also produced the acknowledgement obtained by the Notice Server to show that the notice that was served on the assessee was 26-03-2004 (Page 71 of this order). The Revenue has also produced the Notice Server's Register which also records that the notice which was sent through the Notice Server for service on the assessee was a notice u/s 148 dated 26-03-2004 (Pages 115 & 116 of this order). The Revenue has also placed the order of the Chief Commissioner of Income Tax, Chennai-I, Chennai dated 23-10-2003 whereby Smt. C. Chandrakanta, the Officer who has signed the notice u/s. 148 has been given the Additional charge of the Company Circle-IV(1), Chennai (Pages 111 & 112 of this 133 I.T.A. No. 1426 & CO 166/Mds/2009 order). The Revenue has also placed before us a copy of an assessment order passed by the Assistant Commissioner of Income-tax, Shri M. Mathivanan on 26-
03-2003 when he was holding charge of the Company Circle-IV(1), Chennai (Page 114 of this order). All these evidences which have been produced by the Revenue have been extracted above and made part of this order. As against these evidences produced by the Revenue the assessee's only contention is that the assessee has been served with a notice u/s. 148 dated 26-03-2003 for which the assessee has produced the original which has been served upon it. The submission of the assessee is that in the order sheet recording before the reasons recorded there is a line struck off which reads as "Notice u/s. 148 prepared and put up" (Page 73 of this order). This noting, it is noticed, is struck off with the whitener. The noting is also an unsigned noting. The said notice dated 26-03- 2003 which is being relied upon by the assessee is also signed by the same Assessing Officer being Smt. C. Chandrakanta as the Assistant Commissioner of Income-tax, Company Circle-IV(1), Chennai. The facts clearly show that Smt. C. Chandrakanta was not the Assessing Officer who had jurisdiction over the assessee nor was she holding charge over Company Circle-IV(1), Chennai on 26- 03-2003. Here we may specifically mention that the notice u/s 148 dated 26-03- 2003 produced by the assessee before us is an original notice and it is not a carbon copy. We may specifically mention here that it has been categorically admitted that the copy of the notice sent to the assessee would normally be a 134 I.T.A. No. 1426 & CO 166/Mds/2009 carbon copy whereas the copy of the sec. 148 notice produced by the Revenue which admittedly contains a correction in the date from '03' to '04' is also an original. The assessee is unable to produce any evidence before us even though the appeal was heard on a number of dates to show as to how the notice dated 26-03-2003 was served on the assessee. In fact, the acknowledgement of delivery which is undisputed by the assessee categorically admit of a notice u/s 148 dated 26-03-2004 having been served on the assessee. We may also mention here that when a notice is alleged not served on an assessee or a particular fact is disputed by an assessee, the normal course open to the assessee to file a sworn affidavit. Even though the Revenue had specifically raised the issue that no affidavit has been filed, the fact that no affidavit has been filed by the assessee alleging the non-service of a notice u/s 148 dated 26-03-2004, remains. In these circumstances, on the basis of the facts as available and the evidences as produced by the Revenue we have no other alternative but to come to the conclusion that a notice u/s 148 dated 26-03-2004 has been served on the assessee and the assessment is as a consequence of the notice u/s. 148 dated 26-03-2004 served on the assessee on 31-03-2004. How and from where the assessee came into possession of the notice u/s. 148 dated 26-03-2003 remains a mystery. In any case, the said notice is not shown to have been served on the assessee nor are there any records to show that such a notice in original was sent to the assessee. Such a notice dated 26-03-2003 signed by Smt. C. Chandrakanta 135 I.T.A. No. 1426 & CO 166/Mds/2009 could also never have been issued insofar as Smt. C. Chandrakanta was not having any charge over Company Circle-IV(1) as on 26-03-2003. Interestingly, we may also mention here that when the notice u/s. 148 was served on 31-03- 2004, the assessee had written a letter dated 15-04-2004 (Page 121 of this order) to the Assessing Officer asking for the reasons recorded for the issuance of the notice and in the said letter though the notice u/s. 148 is referred to, the date of the said notice is conspicuous by its absence. In the circumstances, we are of the view that the Revenue has not issued two notices u/s. 148, one dated 26-03-2003 as claimed by the assessee and another dated 26-03-2004 and it is only one notice which has been issued and served on the assessee which is a notice u/s. 148 dated 26-03-2004 served on 31-03-2004. We may also mention here that under the General Clauses Act the records of the Government are deemed to be sacrosanct until and unless prejudiced or perversity is specifically proved. Here the notice u/s. 148 dated 26-03-2004 issued by the Assessing Officer and served on the assessee on 31-03-2004 is supported not just by the notice as found in the assessment folder but also by the independent record of the Notice Server, the independent record of the acknowledgement of service of the notice through the Notice Server.
19. Coming to the next argument of the assessee that the reasons recorded are invalid insofar as it is a borrowed satisfaction from the file of M.Ct.M. Global Investments Pvt. Ltd., it is noticed that there is no concept of borrowed 136 I.T.A. No. 1426 & CO 166/Mds/2009 satisfaction under the Act. In fact, the Assessing Officer has referred to the splitting of the assessee into M/s. M.Ct.M. Global Investments Pvt. Ltd. and M/s. Sivagami Holdings Pvt. Ltd. It is only when the Assessing Officer did the assessment of M/s. M.Ct.M. Global Investments Pvt. Ltd. that the Assessing Officer came to recognize that the facts in the case of M/s. M.Ct.M. Global Investments Pvt. Ltd. were similar to the facts in the case of the assessee company and consequently had recorded the reasons in detail for the purpose of re-opening. We may specifically mention here that for the purpose of re-opening all that is required is recording of reasons. The final ascertainment of the quantum or establishment of income and the source for the escaped income etc. need not be conclusively proved in the reasons recorded. A bona fide act done by the Assessing Officer which has legal sustainability would very much be adequate for re-opening of the assessment. In the present case, it is noticed that the reasons recorded are clear, categorical and are supported by the evidences from the records of the assessee itself. In the circumstances, we are of the view that the re-opening of the assessment is valid. Here we may also mention that admittedly the return filed by the assessee originally was processed u/s. 143(1) and in view of the decision of the Hon'ble Supreme Court in the case of Assistant Commissioner of Income-tax v. Rajesh Jhaveri Stock Brokers P. Ltd. reported in 291 ITR 500 also the re-opening is liable to be upheld and we do so. 137
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20. Coming to the merits, admittedly the assessee company had purchased an estate in Malaysia sometime in 1930s. The funds for the purchase of the estate were drawn from India. The said estate was sold and during the relevant assessment year under appeal funds had been invested in the global market through M/s. Goldman Sachs, WGIL and Dresdner Bank. The assessee did receive income from the investments made. The assessee has claimed that the income generated from the investment of the sale proceeds of the estate in Malaysia is not liable to tax in India as it is the business income of the assessee in Malaysia. The submission of the assessee is that the assessee had a Permanent Establishment in Malaysia and the income of the Permanent Establishment in Malaysia in view of the DTAA between India and Malaysia is not taxable in India. For supporting its case that it had a Permanent Establishment in Malaysia, the assessee has produced the Certificate of Registration of a foreign company in Malaysia which was issued on 19-12-1975 as also a Power of Attorney given to one Shri R.M. Somasundaram to act as the Power of Attorney in Malaysia. The Revenue on the other side has placed before us the copies of the Minutes of the Board of Directors of the assessee company passed in Chennai on 10-07-1997 and 16-12-1997 (Pages 122 to 128 of this order) as also the copy of the Corporate Agreement between the assessee and M/s. Goldman Sachs entered into on 23-07-1997 (Pages 129 to 131 of this order).
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21. Thus what is evident from the facts is that the decisions in regard to the movement of the funds, the mode and modus operandi of the investments have been taken in Chennai in the Board meeting of the Board of Directors. Interestingly, in none of the Board meetings the said Shri R.M.Somasundaram who is the Power of Attorney and who has been granted the Power of Attorney in 1993 was present. Thus it becomes clear that the situs of the seed capital being the investment in the estate was sourced from India in 1930s, the estate was sold in 1997-98 and the funds were utilized for making the investment with M/s. Goldman Sachs, WGIL and Dresdner Bank. The decision to make the investment with M/s. Goldman Sachs, WGIL and Dresdner Bank was taken in India. The signatories for opening the account with M/s. Goldman Sachs and others are by the Directors in India and Shri R.M. Somasundaram could only jointly operate the accounts with the signature of either one of the two Directors specified. The application form in the case of M/s. Goldman Sachs which has been placed before us also clearly shows that the principal executive office address as also the registered office address to be in India. The fact that the form does recognize a principal executive office and a separate registered office show that M/s. Goldman Sachs did recognize that there could be investments from a company or an individual who is permanently residing in one country but has a Permanent Establishment in another country and the fact that in the present case both the addresses have been given as Chennai address in India categorically shows that 139 I.T.A. No. 1426 & CO 166/Mds/2009 the administrative control over the funds was also done from India itself. This view of ours gets support from the principles laid down by the Hon'ble Supreme Court in the case of CIT v. P.V.A.L. Kulandagan Chettiar, referred to supra. Here we may also specifically mention that in the decision of the Hon'ble Supreme Court in the case of P.V.A.L. Kulandagan Chettiar the Hon'ble Supreme Court had proceeded on the basis that the fiscal connection arises in relation to taxation either by reason of residence of the assessee or by reason of the location of the immovable property which is the source of income. The Hon'ble Supreme Court further went on to hold that where the person is a resident in both the contracting States fiscal domicile will have to be determined with reference to the fact that if the contracting State with which his personal and economic relations are closer, he shall be deemed to be a resident of the contracting State in which he has an habitual abode and that it implies that tax liability arises in respect of a person residing in both the contracting States has to be determined with reference to his close personal and economic relations with one or the other. When this principle is applied, the assessee's personal and economic relations are controlled from India as is evident from the Board meetings held in India and the assessee did not have any personal or economic relations in Malaysia after the sale of the estate in Malaysia. Thus it becomes clear that the assessee did not have a Permanent Establishment in Malaysia during the relevant assessment year insofar as the estate itself had been sold and the funds had been moved out of 140 I.T.A. No. 1426 & CO 166/Mds/2009 Malaysia for investments through fund managers who did not have a Permanent Establishment in Malaysia also.
22. Next would come the question as to whether the income received by the assessee is business income or income from other sources. Here one should understand that business is a systematic and continuous activity. In the present case the assessee has handed over its funds to the fund manager and nothing more has been done. The decision in regard to the application of the funds or the investment of the funds is left with the fund manager. It is not available with the assessee, its Directors nor with its Power of Attorney Holder in Malaysia. As it is not a systematic and continuous activity, the income received by the assessee from the investments of its funds would fall into the residual clause of 'income from other sources'.
23. In the Revenue's appeal, the Revenue has challenged the action of the learned CIT(A) alleging that the learned CIT(A) has held that the income of the assessee is business income and it should be assessed as 'income from other sources'. However, a perusal of para 37 of the order of the learned CIT(A) clearly shows that the learned CIT(A) has categorically held that the foreign income earned by the assessee company from its investments of the sale proceeds of the estates in Malaysia in M/s. Goldman Sachs, SGIL and Dresdner Bank is assessable under the head "income from other sources". Consequently, we are of the view 141 I.T.A. No. 1426 & CO 166/Mds/2009 that the grounds 2.1 and 2.2 of the Revenue's appeal are misconceived and liable to be dismissed and we do so.
24. In regard to the issue of the levy of interest under section 234B of the Act, it is noticed that the assessee is claiming that it had a bona fide belief that its income was not taxable in India and consequently it was not liable to pay advance tax under section 234B. The decision relied upon by the learned authorised representative , more specifically the decision of the Hon'ble Supreme Court in the case of Ranchi Club Ltd., referred to supra, would no more be a law on the issue insofar as the provisions of section 234B has been amended with retrospective effect from 1.4.1989 by the Finance Act, 2001. True, in the case of Anjum M.H. Ghaswala & Others, referred to supra, the Hon'ble Supreme Court did hold that the Settlement Commission did not have the powers to waive interest under sec. 234B and in the case of Insilco, referred to supra, the Hon'ble Supreme Court had restored the issue to the file of the Hon'ble High Court for re-adjudication. In the case of Insilco Ltd., referred to supra, the Hon'ble Supreme Court had restored the issue to the file of the Hon'ble High Court to decide the legal issue as to whether the decision in the case of Anjum M.H. Ghaswala & Others had any impact on the decision of the Hon'ble Supreme Court in the case of Ranchi Club Ltd. Here it is kept in mind that after the decision of the Hon'ble Supreme Court in the case of Ranchi Club Ltd., the provisions of section 234B had been amended, whereby annulling the effect of the decision of the Hon'ble Supreme 142 I.T.A. No. 1426 & CO 166/Mds/2009 Court in the case of Ranchi Club Ltd., referred to supra. Further the decision in the case of Revathi Equipment, referred to supra, would not come to the rescue of the assessee insofar as the Hon'ble jurisdictional High Court of Madras had in the said case accepted the finding of the Tribunal that till the Finance Bill was passed by both the Houses of Parliament, receiving the assent of the Hon'ble President of India, on 11-05-2001, the assessee could not have visualized that the individual liability would be fastened on him. In the said case it was on account of the fact that the there was a change in the law and that change was not contemplated by the assessee that the interest under section 234B was not leviable and the bona fides was accepted. In fact, for the purpose of waiving interest u/s 234B the CBDT has specifically issued a circular authorizing the Chief Commissioners of Income Tax under section 119(2)(b) of the Act and in the said circular one of the conditions for waiver of interest is the subsequent amendment to the law. That is not the case in the present appeal. The law has not undergone any amendment. In the present case the assessee knew that it has got income from its investments. The assessee knew that its investment decisions were being taken in India. A perusal of the provisions of section 234B also clearly shows that the word used is "shall" and not "may". Therefore, it is not incumbent upon the Assessing Officer to consider the bona fides of an assessee or to grant an assessee an opportunity before the levy of interest under section 234B. The levy of interest u/s 234B is compensatory in nature and 143 I.T.A. No. 1426 & CO 166/Mds/2009 therefore consequential and does not provide for any room for considering the bona fides or opportunity. In the circumstances, the finding of the learned CIT(A) in deleting the levy of interest u/s 234B stands reversed. Consequently, grounds 3.1 and 3.2 of the Revenue's appeal stands allowed.
25. In regard to levy of interest u/s 234D of the Act, it is noticed that the assessment year involved is 1999-2000. In view of the decision of the Hon'ble jurisdictional High Court in the case of Ayyasppan Textiles Ltd., Varadhalakshmi Mills Ltd. and Sitalakshmi Mills Ltd. v. CIT, reported in 241 ITR 545, we are of the view that no interest under section 234D would be chargeable prior to the assessment year 2004-05. Consequently, grounds 4. 1 and 4.2 stands dismissed.
26. As we have already held that the issue of notice u/s. 148 is valid, grounds 2 of the assessee's appeal stands dismissed.
27. As we have held that the assessee did not have a Permanent Establishment in Malaysia and the foreign income of the assessee is liable to tax in India, grounds Nos. 3 to 9 stand dismissed.
28. No submissions in regard to grounds 10,11 and 12 have been placed. Consequently, the same are dismissed.
29. Grounds 1, 13 and 14 are general in nature and do not call for any adjudication.
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30. In the result, the appeal of the Revenue is partly allowed and the cross objection filed by the assessee is dismissed.
31. The order was pronounced in the court on 28/07/2011.
Sd/- Sd/-
(Abraham P. George) (George Mathan)
Accountant Member Judicial Member
Chennai,
Dated the 28th July, 2011.
H.
Copy to: Assessee/AO/CIT (A)/CIT/D.R./Guard file