S. 147/148: If the AO is of the opinion that the issue requires verification, it tantamounts to fishing or roving inquiry. He is not permitted to reopen merely because in the later year, he took a different view on the basis of similar material. Even if the question of taxing interest income under the DTAA was not in the mind of the AO when he passed the assessment, he cannot reopen if there is no failure to disclose truly and fully all material facts
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
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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:-
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“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
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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.
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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
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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.
4. On the other hand, learned counsel Shri. Chhotaray
opposed the petition contending that the Assessing Officer
has recorded proper reasons. During the course of the
assessment of the petitioner assessee for the subsequent
assessment years, the entire issue was examined by the
Assessing Officer at length and he has come to the
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conclusion that the assessee had wrongly claimed reduced
rate of tax on the interest income. Thus, the formation of
belief of the Assessing Officer in the present case is based on
information available subsequent to the framing of
assessment. He relied on several decisions reference to
which would be made at an appropriate stage.
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
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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 the
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assessment 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
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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:-
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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%
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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.
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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
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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
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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
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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.
1 236 ITR 54 (SC)
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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)
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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 Ltd5 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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