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HC upholds legal provision against foreign tax havens
April, 14th 2016

In a major boost to the Centre’s efforts to prevent infusion of black money through shell companies in foreign tax havens, the Madras High Court has upheld the Constitutional validity of Section 94A(1) of the Income Tax Act, 1961 which empowers the government to declare any country, with which it lacks effective exchange of information, a ‘notified jurisdictional area.’

Dismissing a batch of writ petitions challenging the legal provision, inserted in the Act through an amendment in 2011, a Division Bench of Justices V. Ramasubramanian and T. Mathivanan held that the insertion of Section 94A(1) did not amount to disrespecting international bilateral treaties to avoid double taxation. The judges also refused to quash a notification issued by Central Board of Direct Taxes on November 1, 2013 declaring Cyprus a notified jurisdictional area irrespective of having entered into an ‘Agreement for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital,’ with the Republic of Cyprus on December 21, 1994.

Stating that the 1994 agreement contained a specific provision for exchange of information about investments made by Cyprus-based companies in India and the source of investments, the judges said that a breach of that obligation had forced the Centre to declare Cyprus a notified jurisdictional area and demand tax from assesses transacting with individuals or companies in that country.

Authoring the judgement, Mr. Justice Ramasubramanian said that defensive measures such as insertion of Section 94A were aimed at enforcing transparency in cross border remittances and preventing abuse of benefits conferred by treaties. He recalled that leaders of G20 nations adopted certain resolutions in the London summit on April 2, 2009 and issued a statement which read: “We agree to take action against non-cooperative jurisdictions including tax havens.”

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