BOMBAY HIGH COURT
PRECILION HOLDINGS
LIMITED VS. DCIT
09-03-2019
W P NO. 3342 OF 2018
1. The petitioner has
challenged a notice of reopening of assessment dated 3.4.2018.
2. Brief facts are as
under:-
2.1 Petitioner is a
company incorporated in Cyprus enjoying tax residency certificate issued by the
Cyprus Authorities. Petitioner’s principal activity is to act as an investment
holding company. During the assessment year 2011-12, the petitioner had made
investment in Compulsory Convertible 1 of 18 Debentures of M/s. Wadhwa
Residency Pvt Ltd, a company incorporated in India, of a sum of Rs. 161.31
crore (rounded off). On such investment, the petitioner had received interest
amount of Rs. 11.93 crore (rounded off) during the relevant period. The
petitioner had filed return of income for the assessment year 2012-13 declaring
total income of Rs. 11.93 crore being the interest eared by the petitioner and
offered the same to tax @ 10%, placing reliance on Article 11 of the Double
Taxation Avoidance Agreement (“DTAA” for short) between India and Cyprus. It is
undisputed that M/s. Wadhwa Residency Pvt Ltd is an associated enterprise of
the petitioner and the receipt of interest income was subject to transfer
pricing mechanism. The order of assessment came to be passed by the Assessing
Officer on the petitioner’s said return of income under Section 143(3) of the
Income Tax Act, 1961 (“the Act) for short) on 23.3.2016. The income was taxed
at 10%, as offered by the petitioner. In order to reopen such assessment, the Assessing
Officer had issued the impugned notice. For doing so, the Assessing Officer had
recorded following reasons:-
“THE REASONS FOR
INITIATING PROCEEDINGS U/S 148 FOR A.Y. 2012-13
The return of income
for A.Y. 2012-13 was e-filed on 30.11.2012 declaring total income of Rs.
11,93,41,710/- On which assessee has deducted TDS of Rs. 1,19,34,170/. @ 10%.
The return was processed u/s 143(1) on 31.12.2013.
2. The assessee company
ie. Precilion Holding Limited is a company incorporated in Cyprus. The assessee
has offered interest income at tax rate of 10% claiming beneficial ownership of
interest income as per Article 11 of DTAA.
3. The case was
selected for scrutiny and assessment order u/s 143(3) r.w.s. 92CA(3) of the I.
T. Act was passed on 23.03.2016 accepting the returned income.
4. The draft assessment
order u/s 143(3) r.w.s 92CA(3) r.w.s. 144C(1) of the Income Tax Act, 1961 was
completed for A.Y. 2014-15 on 29.12.2017. During the course of assessment
proceedings following facts merged out and assessee was denied beneficial
ownership of interest income.
5. In this case for
A.Y. 2014-15, assessee is Cyprus based Foreign Company. It holds investments in
Compulsory Convertible Debentures (CCD’s) in various Indian companies and
offers for tax the interest income on such investments on receipt basis. The
said income of Rs. 55,01,17,499/- has been offered to tax @ 10% as per the
provisions of Article 11(2) of the DTAA by the assessee as beneficial owner of
interest income.
6. To be beneficial
owner of interest income assessee should be independent and free to utilize its
interest income on its own and it should have substantial commercial activity
in Cyprus.
7. In order of the
interest income at lower tax rate @ 10%, assessee has to be beneficial owner of
such interest income.
8. Accordingly in order
to verify the same movement of the receipts and payments through bank account
transfer was verified and analyzed. Source of the investment made by the
assessee was inquired into and nature of payback to investors was analyzed. A
inquiry regarding whether assessee has any office and employees on its payroll
in Cyprus was made. Activities of directors were studied and related party
transactions if any were looked into. Articles of Association and memorandum of
association of company were gone through and terms and conditions of issue of
various types of shares were studied.
9. Thus, it is clearly
established that assessee has invested in CCD’s of Indian company out of its
share holders funds. Upon receipt of interest income related to CCD’s,
invariably within 6 to 20 days, this income amount is transferred to share
holder by paying dividend. Pay out of income is dependent on receipt of
interest income in terms of timing and availability of funds. Assessee does not
have a single employee and any substantial economic activity in Cyprus and
working of the company is controlled by beneficial share holder of the company
by hiring of services of working as directors from employees of IPS Mauritius
by whom local address is given in Mauritius to beneficial owner of Assessee
Company.
10. In the assessment proceedings, it is held
that the assessee is not beneficial owner of this income on these tests and
thus treaty benefits are denied to the assessee to the extent of interest
income only in the present case. Interest income of Rs. 55,01,17,499/- is taxed
at rate @ 20% as per provision of section 115A(1)(a)(ii) of I.T. Act, 1961
instead of 10% offered by the assessee.
11. In view of this, it
was held that the assessee is not beneficial owner of this income on these
tests and thus treaty benefits are denied to the assessee in respect of
interest income. Interest income is taxed at the rate @ 20% as per provision of
Section 115A(1)(a)(ii) of I.T. Act, 1961.
12. It is pertinent to
note that during the assessment proceedings, order u/S. 143(3) r.w.s. 92CA(3)
of the I.T. Act, 1961 for the A.Y. 2012-13 was passed on 23.03.2016. The
assessing officer has not raised any query on the above issue and the same was
not verified during the course of assessment proceedings for A.Y. 2012-13.
Keeping in view of the above fact, the issue is required to be verified for the
A.Y. 2012-13.
13. In view of the
above facts, it is clear that interest income is taxed at low rate of 10%
instead of 20% and I have reason to believe that the provisions of clause (c)
of Explanation 2 to Section 147 of the Income Tax Act are applicable to the
facts of this case and the assessment year under consideration is deemed to be
a case where the income which is more than Rs. 1,00,000/- chargeable to tax @
20% rate tax has escaped assessment.
14. In this case, more
than four years have lapsed from the end of the assessment year under
consideration. Hence, necessary sanction to issue notice u/S. 148 has been
obtained separately from the Commissioner of Income Tax(IT)-3, Mumbai as per
the provisions of Section 151 of the Act.”
2.2 The petitioner
raised objections to the notice of reopening of assessment under communication
dated 28.5.2018. Such objections were disposed of by the Assessing Officer by
order dated 25.9.2018. Upon which, this petition came to be filed.
3. Appearing for the
petitioner, learned senior counsel Shri. Mistri raised the following
contentions in support of challenge:-
i. The impugned notice
has been issued beyond the period of four years from the end of relevant
assessment year. The petitioner had made true and full disclosures in the
return filed. The Assessing Officer,
therefore, could not have reopened the assessment;
ii. During the scrutiny
assessment, the entire issue was examined by the Assessing Officer. Only after
which the order of assessment was passed accepting the stand of the petitioner
that the interest income was correctly offered to tax @ 10%. Even in the order
of assessment, this aspect has been referred by the Assessing Officer;
iii. Even on merits,
the Assessing Officer’s stand is completely incorrect. The petitioner enjoys a
tax residency certificate issued by Cyprus Authorities. The Assessing Officer
cannot disregard such certificate to hold a belief that the assessee company is
not a genuine company based in Cyprus and that, therefore, the benefit of
reduced rate of tax as per DTAA was wrongly claimed.
5. Having thus, heard
the learned counsel for the parties, we may record that the impugned notice has
been issued beyond the period of 4 years from the end of relevant assessment
year. Under these circumstances, the additional requirement flowing from the
first proviso of Section 147 of the Act that escapement of income chargeable to
tax should be due to a failure on the part of the assessee to disclose truly
and fully all material facts, must be satisfied. We may peruse the materials on
record on such basis.
6. The perusal of the
reasons recorded by the Assessing Officer would show that according to the
Assessing Officer, in order to claim the benefit of Article 11 of the DTAA, the
assessee had to be a beneficial owner of the interest income and in turn, the
assessee should be independent and free to utilize its interest income on its
own and should have substantial commercial activities in Cyprus. He has further
recorded during the course of assessment for the assessment year 2014-15 to
verify the movement and the receipt of payments,
bank account was verified and analyzed. Source of investment of the assessee
was inquired into and nature of payback to the investors was analyzed by the Assessing
Officer. He has also verified the activities of the directors and related party
transactions. He had also gone through the Articles of Association and
Memorandum of Association of the company. On the basis of such material, the
Assessing Officer had come to certain important conclusions ultimately leading
to his belief that the assessee was not the beneficial owner of the interest
income and that, therefore, the reduced rate of tax @ 10% was not available,
instead, the assessee would have to pay tax at higher rate on such income.
7. In the reasons, the
Assessing Officer further records that in respect of the scrutiny assessment
for theassessment year 2012-13, “the Assessing Officer has not raised any query
on the above issue and the same was not verified during the course of the
assessment proceedings for the assessment year 2012-13”. Keeping in view the
above fact, the issue requires to be verified for the assessment year 2012-13″
.
8. We notice that
during the course of the assessment proceedings for assessment year 2012.13,
the Assessing Officer had raised multiple queries and elicited replies from the
petitioner assessee. For example, under a letter dated 16.2.2016, the Assessing
officer had called for, besides other, following information:-
“7. Furnish the details
of share holding / investments / loans / advances & interest earned / paid
with M/s. Wadhwa Residency Pvt Ltd as on 31.3.2011, 31.3.2012 and 31.3.2013.
8. Furnish details of
purchases of debentures / shares from Wadhwa Residency Pvt Ltd;
9. Furnish list of
directors of the company along with details of their share holdings;
10.Furnish details of
investments made / interest with M/s. Wadhwa Residency this is your associated
enterprises.” In reply to such queries, the assessee under communication dated
2.3.2016 had provided following information and documents :-
“A. At the outset, we wish to inform you that
assessee is an investment holding company incorporated in Cyprus on 20 April
2011.
The assessee has made
investment in compulsory convertible debentures (“CCDs”) of Wadhwa Residency Private Limited
(“WRPL”) amounting to Rs. 1,61,53,50,000 during the year under consideration.
Further, the assessee has received interest
on CCDs amounting to Rs. 11,93,41,705/- The assessee has earned interest on
CCDs and has not earned any other income in India during the year under consideration.
B. ……..
3. Copy of
incorporation certification is enclosed as Annexure III
5. Copy of financial
statements is enclosed as Annexure VI. Further, the assessee is a foreign
company and made investment in India and therefore, the assessee is not
required to prepare tax audit report.
7. The assessee has
earned interest on CCDs from WRPL as follows:-
AY 2011-12 – Nil. Investment was made in CCDs in AY
2012-13
AY 2012-13 – Rs.
11,93,41,705
AY 2013-14 – Rs.
32,30,70,000
8. Copy of the
agreement in respect of investment in CCDs of WRPL is enclosed as Annexure VII.
9. Directors of the
assessee company are as follows:
a. Briantserve Limited
b. Ceantrust Limited
c. Basanta Lala
Couldiplall
Shareholding structure
of the assessee is as under:-
Sr. No. Name of the
Shareholder Percentage of shareholding
1 IL & FS Realty
Fund II LLC 74.46%
2 Saffron India Real
Estate Fund I 25.54%
Total 100%
10. Please refer point
A above.
12. Copy of bank
account and bank statement is enclosed as Annexure IX and Annexure X. Along
with this communication, the petitioner had annexed certain documents which
included the bank statement.
On 16.3.2016, the
petitioner supplied further information to the Assessing Officer which included
the following:-
“The total grossed up
amount of interest was INR 119,341,705. WRPL deducted tax at the rate of 10
percent as per Article 11 of Double Taxation Avoidance Agreement between India
and Cyprus.
3. The assessee company was formed on 20 April
2011. IL&FS Realty Fund II LLC and Saffron India Real Estate I invested
into 74.46% and 25.54% of equity shares of the assessee respectively.
The assessee had
invested the money received against the equity shares into CCDs of WRPL. Copy
of the bank statement depicting the flow is enclosed as Annexure III.
4. Details of the
shareholders of the assessee are as under Sr. No. Name of the Shareholder
Percentage of shareholding.
1 IL & FS Realty
Fund II LLC Address : IFS Court, Twenty Eight Cybercity, Ebene, Mauritius
74.46%.
2 Saffron India Real
Estate Fund I Address : Rogers House, 5 Joh N. President Cennedt Street, Port
Lueis Mauritius 25.54%.
Total 100%
We further confirm that
the above entities are tax residents of Mauritius and do not have any upstream
shareholders in India.” Under letter dated 21.3.2016, the petitioner supplied
following additional documents:
“Further, without
prejudice to the above, as requested by your goodself, we submit as under:-
1. Shareholding
structure of IL&FS Realty Fund II LLC as on 31 March 2012 as Annexure I
2. Shareholding
structure of Saffron India Real Estate Fund I as on 31st March 2012 as Annexure
II
3. Bank statement for
the period from 1 January 2011 to 31 March 2013 of IL&FS Realty Fund II LLC
as Annexure III
4. Bank statement for
the period from 1 January 2011 to 31 March 2013 of Saffron India Real Estate
Fund I as Annexure IV.”
It was after such
exchange of communications that the Assessing Officer had passed the the order
of assessment on 23.3.2016 in which he has observed as under:-
“4. The assessee i.e
Precilion Holdings Limited is a company incorporated in Cyprus. The Principal
activity of the assessee is to act as an investment holding company.
5. During the year, the
assessee has received interest on compulsory convertible debentures amounting
to Rs. 11,93,41,705/- from Wadhwa Residency Private Limited, which is
Associated Enterprises of the assessee.
6. The Arm’s length
price of the international transaction as reported by the assessee has been
accepted by the transfer pricing officer. The details furnished by the assessee
have been verified and discussed.
7. In view of the facts
of the case as discussed above, the total income of the assessee is assessed on
the income of Rs. 11,93,41,705/- i.e income returned.
8. Assessed accordingly
under Section 143(3) r.w.s. 92CA(3) of the Act at the total income of Rs.
11,93,41,710 (round off) as interest income. Give credit for TDS and taxes
paid, if any after due verification. Charge interest as applicable. Issue D.N./R.O/ Challan
accordingly.”
9. It can thus be seen
that the entire financial activity of the petitioner during the relevant period
came up for scrutiny before the Assessing Officer during the original scrutiny
assessment. The petitioner had limited financial activities during the said
period resulting into only one principal transaction of earning interest
income. The Assessing officer had inquired about the nature of activities of
the assessee and the nature of source of income. Even if, it is believed that
the question of taxing such interest income at the concessional rate as per the
DTAA was not in the mind of the Assessing Officer when such queries were raised
and the order of assessment was passed, one thing that cannot be denied is that
there was no failure on the part of the assessee to disclose truly and fully
all material facts necessary for assessment. Whatsoever allegations by the Assessing
Officer in the reasons recorded that there was no failure on the part of the
assessee to disclose true and full all material facts. The assessee had filed
the return of income making all necessary declaration. Detailed scrutiny examination
during the original assessment was carried out. The assessee supplied full
information called for by the Assessing Officer and also placed on record
voluminous documents for his consideration. Nowhere in the reasons, the
Assessing Officer contends that in the process of such scrutiny also, there was
any failure on the part of the assessee to disclose truly and fully all
material facts. Whatever be the validity of the Assessing Officer’s contention that
the assessor’s interest income in the case on hand could not be taxed at the
concessional rate, reopening of assessment beyond the period of four years was
simply not permissible.
10. Even in the
reasons, the Assessing Officer’s logic revolves around the further scrutiny
carried out by the Assessing Officer for the assessment year 2014-15 during
which he formed the belief that the income should have been charged at high
rate of 20%. In the quoted portion of the reasons, he goes on to suggest that
the Assessing Officer during the scrutiny for assessment year 2012.13 had not
raised any query on this aspect and had not verified the same during the
assessment. In that view of the matter, he was of the opinion that the issue
requires verification; which would tantamount to fishing or roving inquiry. His
reference to the subsequent assessment, in absence of any additional material
outside of the present assessment proceedings would not form a valid source of
information permitting him to reopen assessment. If during the assessment of
the later assessment year, the Assessing officer collects or chances upon new
material which may have bearing on the assessment of the assessee, and in case
where the assessment is sought to be reopened beyond four years, he can also
establish lack of true and full disclosures on the part of the assessee, it may
be open for him to reopen assessment of the earlier year. However, merely because
in the later year, the Assessing Officer takes a different view on the basis of
similar material, which may have been collected during such process, would not
permit him to reopen the assessment. Under these circumstances, the Assessing
Officer’s reference to further exercise undertaken while carrying out scrutiny
assessment for the assessment year 2014-15 during which he decided to tax the
assessee at higher rate would not enable the Assessing Officer in the present
case to reopen the assessment beyond four years.
11. We may now refer to
the decisions cited by the learned counsel for the Revenue. In case of Raymond
Woolen Mills Ltd Vs. ITO1, information was obtained in assessment proceedings
for subsequent year which would suggest that the disclosures by the assessee
during the year under consideration were untrue. It was on that basis that reopening
of assessment was permitted, however, observing that at that stage, the Court
would consider only whether there was prima facie material on which the assessment
could be reopened.
12. In case of Rabo
India Finance Ltd Vs. Deputy CIT (Bom)2, this Court observed that the judgments
of the Supreme Court lay down a principle that the Assessing Officer acts
within jurisdiction in reopening the assessment on the basis of the information
which comes to him after the original assessment and during the course of the
assessment proceedings for subsequent assessment years. This principle was
reiterated in later judgment in case of Multiscreen Media Pvt Ltd Vs. Union of
India & Anr.3. With this proposition, there cannot be any doubt or dispute.
What is to be gathered in a given case as in the present one is whether the
Assessing Officer can be stated to have received any such additional
information during the course of subsequent assessment. Significantly, in both
these cases, the notice of reopening was issued within the period of four
years.
13. In case of
Sociedade De Formento Industrial P Ltd Vs. Asst. CIT & Anr.4, this Court
had not turned down the assessee’s challenge to the notice of reopening of
2 [2013] 356 ITR 200
(Bom)
3 [2010] 324 ITR 54
(Bom)
4 [2011] 339 ITR 595
(Bom)
assessment but had
merely refused to act in exercise of writ jurisdiction observing that the
challenge could be more conveniently dealt with in the proceedings under the
Income Tax Act rather than Writ Petition.
14. Reference to the
decision in case of Asst. CIT Vs. Rajesh Jhaveri Stock Brokers P Ltd. 5 was
limited to the observations suggesting that at the stage of deciding the legality
of reopening of assessment, the Court would be considering only with the prima
facie satisfaction of the reasons recorded.
15. In view of the
above discussion, the impugned notice of reopening of assessment cannot be
sustained. We, however, make it clear that we have not examined the contention
of the petitioner that even on merits; the additions could not have been made.
In the result, the impugned notice is quashed. The petition is allowed and
disposed of accordingly.
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