Case Note & Summary
The petitioner, Techpac Holdings Ltd., a company incorporated in Bermuda, challenged an assessment order dated 25th March 2013 passed by the Deputy Commissioner of Income Tax (OSD-II), Mumbai, for Assessment Year 2005-06. The assessment order was passed under Section 144 read with Section 147 of the Income Tax Act, 1961, holding that a sum of Rs.575.39 crores was capital gains in the hands of the petitioner arising from the transfer of a capital asset in India, and raising a demand of Rs.697.94 crores including interest. The petitioner contended that it had transferred shares of another Bermuda company (M/s. Techpac N.V.) outside India, and the shares were not situated in India. The Assessing Officer had earlier completed a scrutiny assessment under Section 143(3) on 28th December 2007, accepting the petitioner's return of income. Subsequently, reassessment proceedings were initiated under Section 147 on the ground that the shares derived their value from underlying Indian assets. The petitioner argued that the reassessment was based on a mere change of opinion and that the shares of a foreign company are not capital assets situated in India. The court examined the provisions of Sections 2(14), 5(2), and 9(1)(i) of the Act and held that the situs of shares is determined by the location of the company's register of members, which in this case was in Bermuda. The court further held that the reassessment notice under Section 148 was issued without proper application of mind and was invalid. Additionally, the assessment order was passed ex parte without giving the petitioner adequate opportunity of being heard, violating principles of natural justice. The court quashed the assessment order and the notice under Section 148, allowing the writ petition with no order as to costs.
Headnote
A) Income Tax - Capital Gains - Territorial Jurisdiction - Situs of Shares - Transfer of shares of a foreign company (Bermuda) by a non-resident outside India does not constitute transfer of a capital asset situated in India under Section 2(14) of the Income Tax Act, 1961. The Assessing Officer erred in holding that the shares derived their value from underlying Indian assets, as the shares themselves are not situated in India. Held that the reassessment order under Section 147 read with Section 144 was without jurisdiction and quashed. (Paras 1-31)
B) Income Tax - Reassessment - Validity of Notice under Section 148 - The notice under Section 148 was issued without proper application of mind and based on a change of opinion, as the original assessment under Section 143(3) had already examined the issue of capital gains. Held that the reassessment proceedings were invalid and liable to be set aside. (Paras 15-20)
C) Income Tax - Natural Justice - Violation of Principles - The reassessment order was passed ex parte under Section 144 without giving the petitioner adequate opportunity of being heard, in violation of principles of natural justice. Held that the order was unsustainable on this ground as well. (Paras 21-25)
Issue of Consideration
Whether the transfer of shares of a foreign company (incorporated in Bermuda) by a non-resident outside India gives rise to capital gains taxable in India under the Income Tax Act, 1961, on the ground that the underlying assets of the foreign company are situated in India.
Final Decision
The court allowed the writ petition and quashed the assessment order dated 25th March 2013 and the notice under Section 148. The rule was made absolute with no order as to costs.
Law Points
- Capital gains tax
- territorial jurisdiction
- situs of shares
- transfer of foreign company shares
- Section 2(14)
- Section 5(2)
- Section 9(1)(i)
- Section 45
- Section 147
- Section 144
- Income Tax Act
- 1961
- Article 226
- Constitution of India
Case Details
2016 LawText (BOM) (03) 49
Writ Petition No.241 of 2014
M.S. Sanklecha, B.P. Colabawalla
Mr J.D. Mistry, Sr. Counsel with Mr Madhur Agarwal i/b Mr Atul K. Jasani for Petitioner; Mr A.R. Malhotra with Mr N.A. Kazi for Respondents
The Dy. Commissioner of Income Tax (OSD-II), Mumbai and another
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Nature of Litigation
Writ Petition under Article 226 of the Constitution of India challenging an assessment order passed under Section 144 read with Section 147 of the Income Tax Act, 1961.
Remedy Sought
Quashing of the assessment order dated 25th March 2013 and the notice under Section 148, and setting aside the demand of Rs.697.94 crores.
Filing Reason
The Assessing Officer held that the transfer of shares of a Bermuda company by the petitioner (a non-resident) gave rise to capital gains taxable in India, on the ground that the underlying assets of the Bermuda company were situated in India.
Previous Decisions
Original assessment under Section 143(3) was completed on 28th December 2007 accepting the petitioner's return. Reassessment proceedings were initiated under Section 147 on the basis that income had escaped assessment.
Issues
Whether the transfer of shares of a foreign company (Bermuda) by a non-resident outside India is taxable as capital gains in India under the Income Tax Act, 1961.
Whether the reassessment proceedings under Section 147 were validly initiated or based on a change of opinion.
Whether the assessment order passed ex parte under Section 144 violated principles of natural justice.
Submissions/Arguments
Petitioner: The shares transferred are of a Bermuda company, not situated in India. The situs of shares is where the register of members is kept, which is in Bermuda. The reassessment is based on a change of opinion as the original assessment had already examined the issue. The order was passed without giving adequate opportunity of being heard.
Respondents: The shares derive their value from underlying Indian assets, and therefore the transfer gives rise to capital gains taxable in India. The reassessment was valid as income had escaped assessment. The petitioner was given sufficient opportunity.
Ratio Decidendi
The transfer of shares of a foreign company by a non-resident outside India does not give rise to capital gains taxable in India because the shares are not capital assets situated in India under Section 2(14) of the Income Tax Act, 1961. The situs of shares is determined by the location of the company's register of members. Reassessment based on a change of opinion is invalid. An ex parte order without proper opportunity violates natural justice.
Judgment Excerpts
The shares of a foreign company are not situated in India merely because the underlying assets are in India.
The reassessment notice under Section 148 was issued without proper application of mind and is based on a change of opinion.
The assessment order was passed in violation of principles of natural justice.
Procedural History
The petitioner filed its return of income for A.Y. 2005-06 on 30th November 2005. A scrutiny assessment under Section 143(3) was completed on 28th December 2007 accepting the return. Subsequently, reassessment proceedings were initiated under Section 147 by notice under Section 148 dated 28th March 2012. The Assessing Officer passed the impugned assessment order under Section 144 read with Section 147 on 25th March 2013. The petitioner filed the present writ petition on 23rd June 2014, when rule was issued and interim relief granted. The petition was taken up for final disposal on 3rd March 2016 and judgment pronounced on 18th March 2016.
Acts & Sections
- Income Tax Act, 1961: 2(14), 5(2), 9(1)(i), 45, 144, 147, 148
- Constitution of India: Article 226
