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Judgment
PER VIKAS AWASTHY, JM:
This appeal by the assessee is directed against the order of Commissioner of Income Tax-(IT), Delhi-3 (hereinafter referred to as 'the CIT') dated 24.03.2022 passed u/s.263 of the Income Tax Act, 1963 (hereinafter referred to as 'the Act'), for AY 2017-18.
The assessee has assailed the order of CIT by raising following grounds in appeal:-
“1.The impugned order dated 24.03.2022 u/s 263 of the Income Tax Act, 1961 (‘the Act’) passed by the Ld. Commissioner of Income Tax (International Tax) - 3, Delhi ("the Ld. CIT) is bad in law and Void ab Initio, being without any jurisdiction.
2.In the facts and circumstances of the case and in law, the Ld. CIT grossly erred in holding that the assessment order u/s 143(3) dated 02.12.2019 passed by the assessing officer is erroneous in so far as it is prejudicial to the interest of revenue.
3.In the facts and circumstances of the case and in law, the Ld. CIT grossly erred in holding that the appellant is not entitled to the benefit of India-Mauritius Double Taxation Avoidance Agreement (India-Mauritius DTAA).
4.In the facts and circumstances of the case and in law, the Ld. CIT grossly erred in holding that the long-term capital gains of INR149,37,42,732 earned by the appellant on sale of listed securities (on which securities transaction tax has been paid) is taxable in India u/s 115JB of the Act.”
Shri Porus F Kaka, Senior Advocate appearing on behalf of the assessee narrating facts of the case submitted that the assessee is a tax resident of Mauritius and is engaged in activity of holding investments in equity shares. The Tax Residency Certificate (TRC) issued by Mauritius Revenue Authority for FY 2016-17 is at page 45 of the paper book. During the course of scrutiny assessment proceedings, the assessee had furnished TRC to the Assessing Officer (AO) which was duly accepted. The assessee has no Permanent Establishment (PE) in India. During the period relevant to assessment year under appeal, the assessee sold shares of Bharat Financials Exclusions Ltd. (formerly known as SKS Microfinance Ltd.) through stock market and paid Security Transaction Tax (STT) on such sale. The Long-Term Capital Gain (LTCG) on transfer of aforesaid shares i.e. Rs.149,37,42,732/- was claimed as exempt under Article 13(4) of India-Mauritius Double Tax Avoidance Agreement (DTAA). The assessee filed its return of income for AY 2017-18 on 16.10.2017 declaring NIL Income. The computation of income is at page 26 of the paper book. Dehors the fact that capital gains on sale of said shares was claimed as exempt under Article 13(4) of India-Mauritius DTAA, the said capital gain is even otherwise exempt in the hands of the assessee u/s.10(38) of the Act. The AO in assessment proceedings examined all these facts. The ld. Counsel referred to the notice dated 08.11.2019 issued u/s.142(1) of the Act at pages 15 to 20 of the paper book. The ld. Counsel submitted that a detailed questionnaire was sent by the Assessing Officer inter alia asking the assessee to furnish details of exemption/deduction claimed, the list of AEs in India, report u/s.115JB of the Act, etc. The assessee vide its reply dated 25.11.2019 (at pages no. 22 and 23 of the paper book) explained that the provisions of section 115JB of the Act are not applicable and that the assessee does not have any PE in India. The assessee furnished copy of TRC and details of shareholding and the name and address of the Directors. It was further explained that no sale or purchases were made by the parent company in India and the assessee has no activity in India other than holding investments in equity shares. The copies of broker notes for the shares sold along with copy of Demat statement of holdings for the Financial Year ending 31.03.2012, 31.03.2015 and 31.03.2016 were also furnished. The AO after taking note of the documents and information furnished by the assessee accepted returned income. He submitted that even in the preceding assessment year the issue was examined by the AO in assessment made u/s.143(3) of the Act and the returned income was accepted. He referred to the assessment order for AY 2016-17 dated 13.12.2018 at page 49 to 51 of the paper book.
The ld. Counsel submits that the CIT has wrongly assumed jurisdiction u/s.263 of the Act. The CIT while passing the impugned order has made certain factual incorrect observations. The CIT held that there is possibility of conduit created by the assessee. The ld. Counsel asserted that the assessee is engaged in making investments in share of the Indian company. The assessee need not create any conduit to take the benefit of treaty as the assessee is eligible for benefit u/s.10(38) of the Act. He submitted that in so far as applicability of provisions of section 115JB of the Act on the assessee, Explanation 4 to section 115JB of the Act clearly oust the application of provisions of section 115JB on foreign companies. Hence, the provisions of section 115JB of the Act would not apply to the assessee.
On the observation made by the CIT that the assessee company is not the beneficial owner of the income and does not have control and dominion over the funds and that the assessee has resorted to ‘treaty shopping’, the ld. Counsel submitted that the parent/holding company of the assessee Sandstone Capital India Master Fund Ltd. is also based in Mauritius. The TRC of the holding company for FY 2016-17 is at page 193 of the paper book. On the observation made by the CIT on ‘treaty shopping’, the ld. Counsel placed reliance on the decision rendered in the case of Union of India vs. Azadi Bachao Andolan , 263 ITR 706 (SC) and CBDT Circular No. 789 of 2020.
Per contra, Shri M.S. Nethrapal representing the department vehemently defending the impugned order submits, that the assessee was merely a pass-through entity. This fact is evident from the financials of the company placed on record by the assessee at page 247 of the paper book. The ld. DR pointed that a perusal of statement of Profit & Loss (P&L) would show that there are no operational expenses in the company. The ld. DR further submitted that the capital gains earned by the assessee in India are liable to tax u/s.115JB of the Act. To reinforce his argument, the ld. DR placed reliance on Explanation 2 to section 115JB of the Act.
Rebutting submissions made on behalf of the Department, the ld. Counsel for the assessee asserted that the assessee is covered by Explanation 4 of section 115JB of the Act and not Explanation 2 as has been argued by the Department. He further placed reliance on the decision rendered in the case of Castleton Investment Ltd. vs. DIT [379 ITR 363 (SC)] to submit that Attorney General representing the department made a statement at Bar that the Government would abide by the decision taken vide Circular dated 02.09.2015. The ld. Counsel referred to the CBDT Instruction No.9/2015 dated 02.09.2015 at page 160 of the paper book, wherein the Government has accepted the recommendations of the committee on Direct Tax matters that section 115JB of the Act would be appropriately amended to clarify the inapplicability of the provisions of 115JB of the Act to FIIs/FPIs having no PE/place of business in India for a period prior to 01.04.2015. Thereafter Explanation 4 to section 115JB of the Act was inserted by the Finance Act, 2016 w.r.e.f 01.04.2001.
We have heard the submissions made by rival sides and have examined the orders of authorities below. The assessee in appeal has primarily assailed the action of CIT in disturbing the assessment order passed u/s.143(3) of the Act, on the ground that the assessment order was passed by the AO without calling for relevant details and making necessary verifications/enquiry. Further, on merits the CIT held that the LTCG earned by the assessee on sale of shares is taxable under the provisions of Income Tax Act and also under Article 13(4) of India-Mauritius DTAA. It is an undisputed fact that the assessee was incorporated in Mauritius and is a tax resident of Mauritius. The assessee has placed on record TRC issued by the Tax Authorities of Mauritius at page 45 of the paper book. It is also not in dispute that the assessee is having no PE in India. These facts have been accepted by the AO in the assessment order passed u/s.143(3) of the Act.
The CIT has exercised revisional powers in the instant case on two issues:-
First, whether the assessment order passed by the AO calling for relevant details and making necessary verification/inquiry would require revision under section 263 of the Act being erroneous and prejudicial to the interest of revenue.
Second, whether the long term capital on disposal of shares is taxable under the provisions of Income-tax act and also under Article 13(4) of India-Mauritius DTAA.”
The CIT has alleged that while passing the assessment order AO has not made necessary verification and enquiries. We find that the AO had issued notice u/s.142(1) of the Act along with Annexure raising as many as 37 questions inter alia enquiring about exemption/deduction claimed by the assessee, report u/s.115JB of the Act, the details of shareholding and the name & address of the directors, the details of PE in India, the details of bank account and also asking for a copy of TRC. The assessee vide reply dated 25.11.2019 (at page 22 and 23 of the paper book) furnished the documents and the information sought by the AO. The AO after having examined the documents furnished by the assessee accepted the returned income. We find that in the immediately preceding assessment year i.e. AY 2016-17, similar large outward remittances were made by the assessee. The assessee filed return of income declaring NIL income. In assessment made u/s.143(3) of the Act vide order dated 13.12.2013, the AO accepted the returned income under similar set of facts. Thus, in the given set of facts and the documents on record it cannot be said that necessary verification/enquiries were not made by the AO during scrutiny assessment proceedings specially when the case of the assessee was selected for complete scrutiny. The assessment order cannot be held as erroneous and prejudicial to the interest of Revenue merely for the reason that it is not elaborate. In the case of CIT vs. Sunbeam Auto Ltd. 332 ITR 167, the Hon’ble Delhi High Court held:
“An order cannot be termed erroneous unless it is not in accordance with | law. If an Income-tax Officer acting in accordance with law makes a certain assessment, it cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written-more-elabo-rately. Section 263 does not visualize a case of substitution of the judgment of the Commissioner for that of the Income-tax Officer who passed the order unless the decision is held to be erroneous. Where the Income-tax Officer has exercised the quasi-judicial power vested in him in accordance with law and arrived at a conclusion such a conclusion cannot be found to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. There must be some prima facie material on record to show that tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was just has been imposed.”
[Emphasized by us]
Further, the CIT cannot exercise revisional power u/s.263 of the Act to substitute his opinion or view. [Re: CIT vs. Gabriel India Ltd, 203 ITR 108 (Bombay)].
The second issue raised by the CIT in revision proceedings is with respect to taxability of capital gains on sale of shares under the provisions of Income Tax Act and also Article 13(4) of India-Mauritius DTAA. The ld. Counsel for the assessee has argued that even if treaty benefit is not allowed to the assessee, the capital gain on sale of shares is not taxable in the hands of the assessee under section 10(38) of the Act. Before proceeding further, it would be relevant to refer to the provisions of section 10(38) of the Act as they were applicable to assessment year 2017-18. The same are reproduced herein under:-
“(38)any income arising from the transfer of a long-term capital asset, being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust where—
(a)the transaction of sale of such equity share or unit is entered into on or after the date on which Chapter VII of the Finance (No. 2) Act, 2004 comes into force; and
(b)such transaction is chargeable to securities transaction tax under that Chapter :
Provided that the income by way of long-term capital gain of a company shall be taken into account in computing the book profit and income-tax payable under section 115JB :
Provided also that nothing contained in sub-clause (b) shall apply to a transaction undertaken on a recognised stock exchange located in any International Financial Services Centre and where the consideration for such transaction is paid or payable in foreign currency”
A bare reading of first proviso to section 10(38) of the Act would show that income by way of LTCG of a company shall be taken into account in computing books profits u/s.115JB of the Act. Here it becomes imperative to examine relevant provisions of section 115JB of the Act as well. Explanation 4 to section 115JB of the Act provides immunity to Foreign Companies from the provisions of section 115JB of the Act. For the sake of ready reference, Explanation 4 inserted by the Finance Act, 2016 w.r.e.f. 01.04.2001 reads as under:-
“Explanation 4.—For the removal of doubts, it is hereby clarified that the provisions of this section shall not be applicable and shall be deemed never to have been applicable to an assessee, being a foreign company, if—
(i)the assessee is a resident of a country or a specified territory with which India has an agreement referred to in sub-section (1) of section 90 or the Central Government has adopted any agreement under sub-section (1) of section 90A and the assessee does not have a permanent establishment in India in accordance with the provisions of such agreement; or (ii) the assessee is a resident of a country with which India does not have an agreement of the nature referred to in clause (i) and the assessee is not required to seek registration under any law for the time being in force relating to companies.”
On conjoint reading of provisions of section 10(38) of the Act and Explanation 4 to section 115JB of the Act, it is explicit that capital gains on sale of shares are not taxable in the hands of a foreign company having no PE in India if listed shares/units are sold on stock exchange and STT is paid on sale transactions. In the instant case assessee being a foreign company and having paid STT on sale transaction of share sold in stock exchange would be entitled to benefit of exemption u/s.10(38) of the Act. We find no merit in the submissions of ld. DR that the case of assessee is covered by Explanation 2 to section 115JB of the Act. Explanation 2 would not operate in the case of assessee as none of the conditions of said explanation can be applied in the case of assessee. Hence, we find that LTCG on sale of shares is not taxable under provisions of the Act.
The CIT has summed up his findings in para 10.10 of the impugned order as under:-
“10.10 Summary
In a nutshell, following facts emerges:
1.The scheme of arrangement employed by the assesssee is a tax avoidance through treaty shopping mechanism.
2.The assessee company is just a conduit and the real owner is the shareholders/investors who are tax residents of different countries.
3.The TRC is not sufficient to establish the tax residency if the substance establishes otherwise.
4.The assessee company is also not a beneficial owner of income as control and dominion of fund is not with the company.
5.There is no commercial rationale of establishment of assessee company in Mauritius as the commercial outcomes would be identical irrespective of location of funds.
10.11In view of the aforesaid discussions, the assessee company is not entitled to the treaty benefits of India-Mauritius DTAA. Therefore, the taxability of income of the non-resident assessee company would be decided under the provisions of Income-tax Act only.”
The aforesaid findings recorded by the CIT are superfluous and contrary to documentary evidences available on record. The assessee has duly established that it is a tax resident of Mauritius and is engaged in the business of holding investments. The parent company of the assessee is also a resident of Mauritius. The Hon’ble Apex Court in the case of UOI vs. Azadi Bachao Andolan (supra) rejected the Department’s argument of treaty shopping holding that if the assessee qualifies for treaty benefit, the said benefit cannot be denied on some theoretical ground that treaty shopping is unethical and illegal. Section 90 enables the Central Government to enter into a DTAA with the foreign Government. When the requisite notification has been issued thereunder, the provisions of sub-section (2) of section 90 comes into action and an assessee who is covered by the provisions of the DTAA is entitled to seek benefit thereunder, even if the provisions of the DTAA are inconsistent with the provisions of the Act. The Revenue cannot be allowed to allege treaty shopping merely for the reason that the assessee claimed benefit of DTAA. In any case in the present appeal, the assessee as pointed earlier is even otherwise eligible for exemption on LTCG u/s 10(38) of the Act. Further, CBDT Circular No. 789, dated 13-4-2000, clarifies that FIIs, etc., which are resident in Mauritius, would not be taxable in India on income from capital gains arising in India on sale of shares. Dehors treaty provisions, the LTCG on sale of shares is exempt in hands of the assessee under provisions of the Act.
In so far as findings of the CIT that there is no commercial rationale of establishment of assessee company in Mauritius, the said findings according to us are without merit. The Revenue Authorities cannot sit in arm chair of the assessee and decide how the business is to be conducted and from where operations are to be carried out. As long as the assessee is working within the statutory legal framework, and is complying with all formalities as required under different provisions of the Act, by which it is governed and is taking advantage of any provisions which are available to it within the Act or any legislation or treaty, the Revenue cannot deny the benefit to the assessee on flimsy objections.
The CIT to exercise its revisional powers u/s.263 of the Act has to satisfy two mandatory conditions i.e. (i) any order passed by the AO is erroneous; and (ii) the said order is prejudicial to the interest of Revenue. Both the conditions have to be met concurrently.
The satisfaction of twin conditions set out in u/s. 263 of the Act is sine qua non for exercising revisional jurisdiction. Merely, for the reason that the assessment order is prejudicial to the interest of Revenue cannot ipso facto grant ammunition to the CIT for exercise of the revisional powers. The provisions of section 263 of the Act cannot be invoked by the CIT for the reason that the order passed by AO is not detailed order or the view taken by the AO is not in consensus with the view of CIT. The Hon’ble Apex Court in the case of Malabar Industries Company Ltd. vs CIT has held:
“A-bare reading of this provision makes it clear that the prerequisite to the exercise of jurisdiction by the Commissioner suo motu under it, is that the order of the Income-tax Officer is erroneous in so far as it is prejudicial to the interests of the Revenue. The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent-if the order of the Income-tax Officer is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue recourse cannot be had to section 263(1) of the Act. There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer, it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. xxxx
The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. If due to an erroneous order of the Income-tax Officer, the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the Revenue. The phrase "prejudicial to the interests of the Revenue" has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the Revenue. For example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of Revenue; or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue, unless the view taken by the Income-tax Officer is unsustainable in law."
Thus, in light of above judgment and from perusal of the impugned order, we find that the CIT has failed to show that the assessment order is erroneous. The two mandatory conditions for exercise of revisional powers are not satisfied in the present case. We find merit in appeal of the assessee, hence, the impugned order is set aside and appeal of the assessee is allowed.