Reassessment and treaty residence principles govern validity of reopening and exemption for share-transfer capital gains.

Reassessment under section 148 was treated as invalid where the Assessing Officer had not newly noticed escapement of income under Explanation 2(b) to section 147 and the assessee had already disclosed the relevant facts; the reopening was held without jurisdiction. On the treaty issue, capital gains on transfer of shares were found not taxable in India because the Netherlands companies were genuine, had real business substance, and could not be disregarded as shell entities absent material showing sham, control, or legal violation. The India-Netherlands treaty residence was therefore respected for applying Article 13.5, and the transfer was treated as covered by lawful tax planning rather than a colourable device.

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Issues: (i) whether reassessment initiated under section 148 of the Income-tax Act, 1961 was valid under Explanation 2(b) to section 147; (ii) whether the capital gains arising on transfer of shares were taxable in India or exempt under Article 13.5 of the India-Netherlands treaty.

Issue (i): Whether reassessment initiated under section 148 of the Income-tax Act, 1961 was valid under Explanation 2(b) to section 147.

Analysis: The assessee had repeatedly brought the pending refund claim and the relevant facts to the notice of the Assessing Officer through letters and discussions. No material was shown to establish that an intimation under section 143(1) had been served, and no assessment under section 143(3) had been made. On the facts, the Assessing Officer could not be said to have newly "noticed" escapement of income within the meaning of Explanation 2(b) merely by remaining inactive until the original assessment time-limit expired and then reopening the matter.

Conclusion: The reassessment was without jurisdiction and the issue is decided in favour of the assessee.

Issue (ii): Whether the capital gains arising on transfer of shares were taxable in India or exempt under Article 13.5 of the India-Netherlands treaty.

Analysis: The appellant companies were found to be genuine and substantial entities incorporated in the Netherlands pursuant to a bona fide restructuring decision of the parent group. Their financial records and corporate activities showed real business substance, and there was no material to treat them as mere shell entities or to establish control over the Mauritian purchaser. In the absence of any legal violation, the arrangement was held to be within the lawful framework, and the treaty residence of the appellant companies could not be ignored for applying the India-UK treaty instead of the India-Netherlands treaty. The principles governing tax planning as explained in the later Supreme Court decision were applied to uphold the genuineness of the transactions.

Conclusion: The capital gains were not taxable in India under the treaty and this issue is decided in favour of the assessee.

Final Conclusion: The appeal succeeded on the reassessment issue and also on the merits of the capital gains claim, with only the unpressed ground standing dismissed.

Ratio Decidendi: Reassessment cannot be sustained under Explanation 2(b) to section 147 unless the Assessing Officer can be said to have newly noticed escapement of income on the facts of the case, and a genuine treaty-based corporate restructuring cannot be disregarded as a colourable device in the absence of material showing sham, control, or legal violation.

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