Cairnhill Cgpe Ltd vs C.I.T

These two appeals by two different assessees are preferred against the order of the CIT, International Taxation - 2 dated 31.03.2021 framed u/s 263 of the Income-tax Act, 1961 [hereinafter referred to as 'The Act'].

Since common grievances are involved and the underlying facts are also identical, both these appeals were heard together and are disposed of by this common order for the sake of convenience and brevity.

In fact, the CIT, International Taxation – 2 has framed order u/s 263 r.w.s 163 of the Act in respect of both the appellants by a common order. For the sake of our convenience and with the consent of both the representatives, we are considering the facts of ITA No. 2022/DEL/2021.

Grievances raised by the assessee read as under:

“The appellant objects to the order dated 31 March 2021 (received on 10 December 2021) passed under section 263 r.w.s. 163 of the Income Tax Act, 1961 (‘the Act’) by the Commissioner of Income-Tax (International Taxation) -2, New Delhi [Teamed CIT’] for the aforesaid assessment year on the following among other grounds:

The order passed by the learned CIT is invalid, bad in law, without jurisdiction, void ab initio and violative of the principles of natural justice and therefore ought to be quashed.

The learned CIT erred in not appreciating that since the original assessment was completed in the case of M/s. Monet Ltd. (‘M/s. Monet1), the proceedings under section 263 also ought to be initiated against M/s. Monet and not against the appellant as an agent of M/s. Monet.

The learned CIT erred in passing a combined order under section 263 r.w.s 163 of the Act assessing the two entities i.e. the appellant and Cairnhill CGPE Limited. The appellant submits that the order passed by the learned CIT is invalid and bad in law and therefore ought to be quashed.

The learned CIT erred in not appreciating that since the appellant was regularly assessed to tax in Mumbai, the learned CIT did not have the jurisdiction to pass the order under section 263 r.w.s 163 against the appellant.

The learned CIT erred in passing the order without serving the notice and without providing an opportunity of being heard to the appellant. The appellant therefore prays that the order passed by the learned CIT is violative of the principles of natural justice and therefore ought to be quashed.

The learned CIT erred in not serving on the appellant the notice issued under section 263 of the Act fixing the hearing on 26 March 2021.

The learned CIT erred in not serving on the appellant the show-cause notice issued under section 263 of the Act fixing the hearing on 30 March 2021.

The learned CIT erred in not providing/ serving the appellant with a copy of the document / information relied upon while passing the order passed under section 263 r.w.s 163 of the Act. The appellant therefore submits that the order passed by the learned CIT is violative of the principles of natural justice and therefore ought to be quashed.

The learned CIT erred in basing his conclusions on various erroneous assumptions and unsubstantiated allegation and therefore the order passed by the learned CIT under section 263 r.w.s. 163 of the Act be quashed.

The learned CIT erred in treating the appellant as an agent of M/s. Monet without serving the notice and providing an opportunity of being heard to the appellant as contemplated under the provisions of section 163 of the Act. The appellant therefore states that the order passed by the learned CIT treating the appellant as an agent of M/s. Monet is violative of the principles of natural justice and therefore ought to be quashed.

The learned CIT erred in holding that the order dated 12 December 2018 passed by the Assessing Officer, Circle 2(2)( 1) - (International Taxation) - New Delhi (‘learned AO’) under section 143(3) of the Act in the case of M/s. Monet for the assessment year 2016-17 is erroneous and prejudicial to the interest of the revenue

The learned CIT erred in not serving the appellant with a copy of the order passed u/s 143(3) of the Act in the case of M/s. Monet for the assessment year 2016-17.

The learned CIT erred in denying the benefit of the tax treaty benefit as claimed by M/s. Monet in the return of income filed for assessment year 2016-17 which was also accepted by the learned AO in the order dated 12 December 2018 passed under section 143(3) of the Act.

The appellant therefore prays that the order passed by the learned CIT under section 263 r.w.s. 163 of the Act be quashed.

Each one of the above grounds of appeal are distinct and separate and without prejudice to the other.

The appellant craves leave to add, alter or delete any or all of the above grounds of appeal, at any time before or at the time of appeal hearing.”

At the very outset, the ld. counsel for the assessee emphatically raised three issues for our kind consideration:

(i) The ld. CIT has no power to pass order u/s 163 of the Act;

(ii) When the principal has been assessed to tax by the Assessing Officer, can proceedings be initiated against the representative u/s 163 of the Act?

(iii) When the principal has been liquidated and is no more in existence, can there be a representative of the said principal u/s 163 of the Act?

The representatives of both the sides were heard at length on the above mentioned issues. The case records were carefully perused and the judicial decisions referred to during the course of hearing duly considered.

Briefly stated, the facts of the case are that vide share purchase agreement dated 31.03.2015, entered into between Cairnhill CIPEF Limited, Cairnhill CGPE Limited and Monet Limited executed at Mauritius, shares of Mankind Pharma Limited, a public limited company, incorporated in India, were sold to the investors Cairnhill CIPEF Limited and Cairnhill CGPE Limited by Monet Limited.

Vide order dated 12.12.2018, assessment was framed u/s 143(3) of the Act in the case of Monet Limited wherein, inter alia, the Assessing Officer gave a categorical finding as under:

“During the year under consideration, the assessee sold some of its investments held in the shares of Indian entities which resulted in long term capital Gain to the assessee and the same has been set off with Brought Forward Losses. After examination of the details/submissions filed, the assessment is framed at returned income.”

Assuming jurisdiction conferred upon him by provisions of section 263 of the Act, the ld. CIT-2, International Taxation issued notice u/s 263 of the Act fixing the date of hearing on 26.03.2021. The ld. CIT observed that neither anyone appeared on the date of hearing nor any submissions were filed in response to notice u/s 263 of the Act.

Subsequently, an order u/s 163 of the Act was passed on 27.03.2021 holding Cairnhill CIPEF Limited and Cairnhill CGPE Limited as representative assessee /agent of Monet Limited for Assessment Year 2016-17 and once again, notice u/s 263 of the Act was issued to Cairnhill CIPEF Limited and Cairnhill CGPE Limited as representative assessee of Monet Limited fixing the date of hearing on 31.03.2021.

On receiving no plausible reply, order u/s 263 r.w.s 163 of the Act was framed u/s 31.03.2021.

Adverting to the issue raised by Shri Pardiwalla, the ld. counsel for the assessee that whether the CIT has power to pass an order u/s 163 of the Act, let us see the provisions of section 163 which reads as under;

“163. (1) For the purposes of this Act, "agent", in relation to a non-resident, includes any person in India—

(a) who is employed by or on behalf of the non-resident; or

(b) who has any business connection with the non-resident; or

(c) from or through whom the non-resident is in receipt of any income, whether directly or indirectly; or

(d) who is the trustee of the non-resident;

and includes also any other person who, whether a resident or non-resident, has acquired by means of a transfer, a capital asset in India :

Provided that a broker in India who, in respect of any transactions, does not deal directly with or on behalf of a non-resident principal but deals with or through a non-resident broker shall not be deemed to be an agent under this section in respect of such transactions, if the following conditions are fulfilled, namely:—

(i) the transactions are carried on in the ordinary course of business through the first-mentioned broker; and

(ii) the non-resident broker is carrying on such transactions in the ordinary course of his business and not as a principal.

Explanation.—For the purposes of this sub-section, the expression "business connection" shall have the meaning assigned to it in Explanation 2 to clause (i) of sub-section (1) of section 9 of this Act.

(2) No person shall be treated as the agent of a non-resident unless he has had an opportunity of being heard by the Assessing Officer as to his liability to be treated as such.”

A bare perusal of the aforementioned section does not show the authority as to who can pass the order u/s 163 of the Act. Though section 246 of the Act which contains the provisions relating to the appealable orders before the CIT at clause (d) which mentions “An order made u/s 163 of the Act treating the assessee as agent of the non agent” which means that the order u/s 163 of the Act is to be passed by an authority below the rank of a commissioner, because if the commissioner passes the order, then it cannot be appealed against before the ld. CIT(A).

Section 253 of the Act contains the provisions relating to appeals to the appellate Tribunal and in the said section, there is mention of all orders passed under different sections of the Act which are appealable before the appellate Tribunal but there is no mention of order passed u/s 163 of the Act, which means that the commissioner has no power to pass an order u/s 163 of the Act.

Though the ld. DR had vehemently stated that the commissioner has concurrent jurisdiction/powers as that of the Assessing Officer, but in light of the aforesaid discussion, we do not find any merit in this contention of the ld. DR.

In light of the provisions of section 163 of the Act considered in light of the aforementioned discussion, order passed u/s 163 of the Act by the CIT, International-2 deserves to be quashed and treated as non-est. The ld. CIT assumed jurisdiction u/s 263 of the Act on the basis of order passed u/s 163 of the Act.

Sublato Fundamento Cadit Opus, meaning thereby, that in case the foundation is removed, the super structure falls. Since the very basis [order u/s 163 of the Act] has been removed, the super structure i.e. order u/s 263 of the Act must fall.

Coming to the second issue raised by Shri Pardiwalla, there is no dispute that the Assessing Officer framed assessment u/s 143(3) of the Act in the case of Monet Limited in the status of non-resident. In our considered opinion and understanding of law, since the principal has been assessed to tax than for the same income, there cannot be a separate assessment in the hands of the representative/agent, when the alleged representative/agent are also non-residents.

Vide order dated 19.12.2018, Corporate and Business Registration Department of Port Louis ordered as under:

“Take notice that the Category 1 Global Business Company Money Limited bearing File No. C60444 has been removed from the register u/s 308 of the Companies Act, 2001 as from today.”

Sd/-

F. Sudally [Mrs]

For Registrar of Companies

By this order, it is clear that Principal Monet Limited has been extinguished. Then how can there be representative /agent of non-existing company. Provisions of section 163 of the Act are not akin to that of section 159 wherein a legal heir is substituted in place of a deceased assessee. This answers the third issue raised by Shri Pardiwalla.

To sum up, the CIT, International Taxation-2 passed an order u/s 163 of the Act without having any such authority and thereafter, wrongly assumed jurisdiction u/s 263 of the Act treating Cairnhill CIPEF Limited and Cairnhill CGPE Limited as representative /agent of Monet Limited which extinguished on 19.12.2018 and framed the impugned orders which do not have any support /backing of any provisions of the Act.

Considering the facts in totality, we have no hesitation in setting aside the order of the ld. CIT, International Txation-2 dated 31.03.2021. Captioned appeals are, accordingly, allowed.

In the result, the appeals of the assessees in ITA No. 2022 & 2023/DEL/2021 are allowed.