Case Law Details
CPI India Ltd. Vs ACIT (ITAT Delhi)
Conclusion: Even though the department had the authority to dispute the residential status of the assessee merely on the strength of the Tax Residency Certificate (TRC), it was incumbent upon the department to make a proper inquiry and to establish the fact that the party claiming benefit and the strength of the TRC was a shell or conduit company.
Held: Assessee was an investment holding company incorporated under the Mauritius Companies Act, 2001 and holding a valid Tax Residency Certificate (TRC) for the year under consideration. Assessee filed a return of income however, such a return was not subjected to scrutiny. Subsequently, information was received from the Income Tax Officer, International Taxation, New Delhi, that an Indian company had remitted an amount of Rs. 162 crores to assessee towards the purchase of shares without withholding any tax. AO verified the records and found that, as per the returns filed by assessee for past assessment years, it was continuously claiming loss. AO reopened the assessment under Section 147. In response to the notice issued under Section 148, assessee filed its return of income, declaring a net long-term capital loss of Rs. 33,34,167. In the course of assessment proceedings, AO called upon assessee to furnish information relating to transactions in the purchase and sale of shares in Indian companies. From the information and details furnished by assessee, AO noticed that assessee had received a total sum of Rs. 407,32,20,235 towards the sale of shares of four Indian companies. Whereas, it had claimed a net long-term loss of Rs. 33,34,167. On verifying the computation of income, AO found that assessee had computed the capital gain in respect of the sale of shares by applying the provisions of the first proviso to Section 48, read with Rule 115A. Assessee had not followed the provisions contained under Section 112(1)(c)(iii), which specifically debar the benefits given under the second proviso to Section 48. Thus, he held that assessee could not claim benefit under the first proviso to Section 48 by reducing capital gain. After analyzing the issue in detail, AO ultimately disallowed assessee’s computation of net long-term capital loss by applying the provisions to the first proviso to Section 48(1) read with Rule 115A. AO held that assessee had a net long-term capital gain of Rs. 141,28,52,811, which was subject to tax in India. Having held so, he also rejected assessee’s claim of exemption under Article 13(4) of the India-Mauritius Double Taxation Avoidance Agreement (DTAA) on the reasoning that assessee was not entitled to treaty benefits, as it was merely a paper company created in Mauritius to avail treaty benefits. Thus, after allowing unabsorbed long-term capital loss pertaining to assessment year 2012–13, AO added back net capital gain amounting to Rs. 122,42,10,688. It was held that though, the Revenue had authority to dispute the residential status of the assessee merely on the strength of TRC, however, it was incumbent upon Revenue to make proper inquiry and to establish the fact that the party claiming benefit and the strength of the TRC was a shell/conduit company. Except making vague allegations, the departmental authorities had failed to bring on record any cogent material to substantiate their allegations that assessee was merely a paper company, hence, could not be treated as a genuine tax resident of Mauritius. There was nothing on record to suggest that the departmental authorities were disputing the fact that the assesse had made investment in the shares giving rise to the capital gain prior to 07.04.2017. That being the established factual position, assessee would certainly be entitled to the benefit provided under Article 13(4) of the tax treaty. Interestingly, though, AO had made various allegations regarding the status and genuineness of assessee while denying benefit under Article 13(4) of the tax treaty, however, while computing the capital gain he had allowed set off of long-term capital loss of 18,86,42,123/- relating to the assessment year 2012-13. This fact showed that AO to certain extent had accepted the genuineness of the activities carried on by the assessee, i.e., investment in shares of Indian companies. Thus, assessee was entitled to claim exemption under Article 13(4) of the tax treaty qua the capital gain arising on sale of shares.
FULL TEXT OF THE ORDER OF ITAT DELHI
Captioned appeal of the assessee challenges the final assessment order dated 19.01.2023 passed under section 147 read with section 144C(13) of the Income-tax Act, 1961 (in short ‘the Act’) pertaining to assessment year 2016-17 in pursuance to directions of learned Dispute Resolution Panel (DRP).
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