Case Laws

In CIT vs. Ajanta Pharma 318 ITR 252 the Bombay High Court held (reversing the Special Bench judgement in DCIT vs. Syncome Formulations 292 ITR (AT) 144)) that the "sunset clause" of s. 80HHC (1B) applies to s. 115JB as well.

Broad Contentions of assessee

The transaction represents a transfer of a capital asset viz., the share of CGP. Any gain arising to the transferor or to any other person out of this transfer is not taxable in India because the asset is not situated in India. Hence, there was no sum chargeable to tax in India and the obligation to deduct tax under Section 195 did not, as a result, arise. The submissions can now be summarised. (para 53 page 24-30)

1.   The case of the Department has vacillated

2.   The parties to the transaction understood the expression "equity interest" to be (i) The transfer of direct and indirect control of 42.34% of the equity capital of HEL; (ii) The transfer of prorate control over TII and SMMS which is mandated by the policy of the Government of India which provides a cap on foreign investments in telecommunications; and (iii) The availability of the `put' options. The revised case of the Department is fallacious

3.   In the present case, there is no income that accrues or arises in India since the right to receive the money was outside India under a contract entered into outside India and payment was made outside India;

4.   In Section 9, Parliament has specifically limited gains arising out of transfers of capital assets to an asset situate in India. The share of CGP is situated outside India. A share is situated where it can be transferred.

5.   A lookthrough provision cannot be introduced by judicial interpretation

6.   The SPA represents an arms length commercial transaction which was entered into between the two large foreign corporations. It is not the case of the Revenue that the document is sham or colourable.

7.   The contention of the Department that the right to use the Hutch Brand during the transition period which was royalty free brings about the transfer of some capital assets in India to which the consideration paid for the shares relates, is misconceived.

8.   For the purpose of taxation, the corporate veil can be lifted only where a tax fraud is being perpetrated;

9.   Section 195 is inapplicable to offshore entities making offshore payments.

10. In order that there should be an enforceable obligation under Section 195 against the payer, it must be established that the payment is of a sum chargeable under the Act.

137. Under Section 5(2) the total income of a nonresident includes all income from whatever source derived which (a) is received or is deemed to be received in India or (b) accrues or arises or is deemed to accrue or arise to him in India. Parliament has designedly used the words "all income from whatever source derived". These are words of width and amplitude. Clause (i) of Section 9 explains the ambit of incomes which shall be deemed to accrue or arise in India. Parliament has designedly postulated that all income accruing or arising whether directly or indirectly, (a) through or from any business connection in India or (b) through or from any property in India; or (c) through or from any asset or source of income in India or (d) through the transfer of a capital asset situate in India would be deemed to accrue or arise in India. Where an asset or source of income is situated in India or where the capital asset is situated in India, all income which accrues or arises directly or indirectly through or from it shall be treated as income which is deemed to accrue or arise in India.

140. In assessing the true nature and character of a transaction, the label which parties may ascribe to the transaction is not determinative of its character. The nature of the transaction has to be ascertained from the covenants of the contract and from the surrounding circumstances.

Chargeability and enforceability are distinct legal conceptions. A mere difficulty in compliance or in enforcement is not a ground to avoid observance. In the present case, the transaction in question had a significant nexus with India. The essence of the transaction was a change in the controlling interest in HEL which constituted a source of income in India. The transaction between the parties covered within its sweep, diverse rights and entitlements.

Para 146

F Where documents relating to transfer of entire shareholding in public domain for three years not challenged and no relief of cancellation of transfer sought, petitioners not shareholders as on date and have no locus standi to maintain petition u/ss 397, 398 and 399 of 1956 Act : Satish Kumar Seth v. Seth Hotels P. Ltd. p. 255

F CLB cannot interfere in day-to-day affairs of company : P. Ramesh Kumar v. D. R. Shankaranarayana Gupta p. 258

F Irregularities in conducting investigation is outside scope of jurisdiction of CLB : Technical defects in presentation of petition not to be given importance when pitted against substantial justice : Union of India v. Design Auto Systems Ltd. p. 272

F Director responsible for fraud is ineligible to hold office of director in any company and cannot be appointed as managing director in contravention of Act : Union of India v. Design Auto Systems Ltd. p. 272

F Where state of affairs of company revealing mismanagement, direction to Central Government to appoint Government directors to safeguard interest of all concerned : Union of India v. Design Auto Systems Ltd. p. 272

Facts of the case:- The taxpayer made certain payments to non-resident without deducting tax on the same. The Assessing Officer (AO) disallowed such expenditure under section 40(a)(ia) of the Income-tax Act, 1961 (the Act) on account of failure to deduct tax on the payments made to non-resident. The Income-tax Appellate Tribunal (the Tribunal) upheld the order of the AO.

Taxpayer's contentions

    * The taxpayer contended that since the payment made to non-resident was not liable to tax in India, tax was not required to be deducted. Accordingly, the question of disallowance of such expenditure does not arise.
    * Further, in view of recent decision of the Delhi High Court in the case of Van Oord ACZ India (P) Ltd the matter should be remanded to the Tribunal.

High Court's ruling

    * The High Court relying on the decision in the case of Van Oord ACZ India (P) Ltd. held that the question of tax withholding in case of payment made to non-resident would arise only if the said payment was chargeable to tax in the hands of the non-resident under the provisions of the Act.
    * If the payment made to the non-resident was not chargeable to tax in India then the taxpayer will not be under an obligation to deduct tax. Accordingly, such expenditure cannot be disallowed under section 40(a)(ia) of the Act.
    * However, since it was not clear whether the payment made by the taxpayer was taxable in India in the hands of non-resident or not, the High Court remanded back the matter to the Tribunal.

Our Comments

In the present case the Delhi High Court after following recent decision of its own in the case of Van Oord ACZ India (P) Ltd. reaffirmed that the question of withholding of tax will arise only if the payment made to non-resident is chargeable to tax in India.

Recently, Special Bench (SB) of the Chennai Tribunal in the case of TO v. Prasad Production Ltd. (ITA No. 663/ Mds/2003) has held that withholding tax obligation on payer applies only if the payments to non-residents are chargeable to tax in India. Further, the payer has a first right to decide whether a particular payment bears any income character or not.

Once book results are not rejected, AO has no alternative except to accept the book results

*    No assessment under the first proviso to section 145(1) or under section 145(2) can be sustained if the Assessing Officer has not considered and recorded a finding against the assessee as to whether he has been regularly employing a method of accounting or whether his income, profits or gains can properly be deduced from his method of accounting if he has been regularly employing a method of accounting or whether the accounts are correct and complete.

CASE LAW DETAILS

CASE LAW DETAILS

Decided by: HIGH COURT OF KARNATAKA, In The case of: CIT v. Monarch Citadel Pvt. Ltd.,  Appeal No.: ITA No. 1183 of 2006, Decided on: January 13, 2010

CASE LAW DETAILS

Decided by: HIGH COURT OF BOMBAY,  In The case of: Bhavesh Developers  v. Assessing Officer,  Appeal No.: Writ Petition No. 2508 0f 2009,  Decided on: January 12, 2010

Decided by: HIGH COURT OF KARNATAKA,  In The case of: CIT v. Aslam Ulla Khan , Appeal No.: ITA Nos. 448 to 451 of 2004, Decided on: January 4, 2010

RELEVANT PARAGRAPH

8. The appeal had been admitted to examine the following question of law :

(1) Whether, the Tribunal was correct in holding that the Assessing officer had to record his reasons and based on those reasons form his opinion that the income has escaped assessment by relying on two judgments of this Hon'ble Court in 133 JTJ? 199 and 155 ITR 748 before reopening assessments when Section 147 has been amended by Direct Tax Laws Amendment Act, 1989, w.e.f. from 1.4.1989 by substituting the words "for reasons to be recorded by him in writing is of the opinion* with the words "has reason to believe".

(2) Whether the Assessing officer was correct in taking into account the declaration filed by the assessee under the VDIS Sdvsrrte and had reasons to believe that the income chargeable to tax had escaped assessment and correctly brought to tax the said amount declared under the scheme, by re-opening assessment.

(3) Whether the Tribunal was correct in holding that any declaration which has been filed under the VDIS scheme cannot be used as admissible evidence for the purpose of this Act, especially when the scheme has been held to be not applicable.

9. We have beard Sri M V Sheshachala, learned standing counsel for the revenue-appellants and Sri A Shankar, learned counsel for the assessee-respondent

10. Appearing for the appellant-revenue, Sri Seshachala, learned standing counsel for the revenue, submits that the tribunal has committed an error in interfering with the matter and setting aside a well considered order passed by the assessing authority and affirmed by the first appellate authority. Learned counsel would submit that reopening was well within the scope ofSection 147 of the Act; that the declaration filed by the assessee definitely can constitute information within the meaning of Section 147 of the Act and in support of this submission, reliance is placed on a Division Bench decision of the Punjab & Haiyana High Court in the case of SAT NARAIM vs COMMISSIONER OF INCOME TAX ((2009) 183 TAXMANN 40].

11. While the question as to whether a declaration filed by the assessee under the voluntary disclosure scheme can constitute information for the purpose of reopening underSection 147 may be a debatable point and either way may be the position, it is not open for this court to consider the matter now, as thetribunal has recorded a finding that there was no application of mind on the part of the assessing authority for reopening, particularly, if on perusing the actual reasoning as recorded in the proposition for reopening, which we have already extracted above, we are in full agreement with this view that theassessing authority cannot act on the dictates of the commissioner, who had directed him to reopen the concluded assessment for the year 1991-92, that, in our view also, does not constitute an information within the scope of Section 147 of the Act.

12. Apart from this, Sri Shankor, learned counsel for the respondent-assessee also points out that the sanction - itself was defective, for the reason that the sanction was from the commissioner of income tax, whereas the authorized authority for sanction was only the joint commissioner, particularly, as the commissioner will have to act as the appellate authority against the orders passed by theassessing authority.

13. This submission is only reiterating the circumstance that the reopening was bad in law and therefore we cannot accept this submission made on behalf of the appellant-revenue.

14. In the result, this appeal is dismissed, answering the first substantial question of law in the negative against the appellant-revenue and leaving open the other two questions, as they become virtually academic and accordingly they are not answered