Reopening for nondisclosure and taxation of permanent establishment asset gains as short-term capital gains under depreciation rules

Failure to disclose the sale of a depreciable rig forming part of an Indian permanent establishment can justify reopening under section 147 beyond four years, because the proviso protection is unavailable where a material fact is omitted and the reopening rests on bona fide belief of escaped income. Gains on alienation of such a PE asset are taxable in India under domestic deeming provisions and Article 13(2) of the treaty, and the place of delivery outside India does not alter taxability. Because the asset belonged to a depreciable block, section 50 applies, so the excess over written down value is treated as short-term capital gain.

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Issues: (i) Whether reassessment under section 147 was valid in the absence of full and true disclosure of the sale of the rig and related material facts; (ii) Whether the gain arising from sale of the rig was taxable in India and assessable as short-term capital gains.

Issue (i): Whether reassessment under section 147 was valid in the absence of full and true disclosure of the sale of the rig and related material facts.

Analysis: The assessee had not disclosed in the return the sale of a depreciable asset forming part of the Indian permanent establishment. The failure to mention a material fact relevant to assessment prevented the assessee from claiming the protection of the proviso to section 147. The reassessment was supported by material giving rise to a bona fide belief that income had escaped assessment, and the adequacy of that material was not for examination at the stage of reopening.

Conclusion: Reassessment under section 147 was valid and the challenge to the reopening failed.

Issue (ii): Whether the gain arising from sale of the rig was taxable in India and assessable as short-term capital gains.

Analysis: The rig was part of the assessee's Indian permanent establishment and had been used as a depreciable asset in India. Gains on alienation of assets of a permanent establishment are taxable in the source State under the domestic law deeming provisions and under Article 13(2) of the treaty. The transaction was held to have taken place while the asset was still connected with the Indian permanent establishment, and in any event the situs of delivery outside India did not displace taxability in India. As the asset formed part of a depreciable block, section 50 applied to the excess of sale consideration over written down value.

Conclusion: The gain was taxable in India as short-term capital gains under section 50.

Final Conclusion: The assessee's objections to both reopening and the quantum addition were rejected, and the assessment was sustained.

Ratio Decidendi: Where a non-resident sells an asset forming part of its Indian permanent establishment and fails to disclose that material fact, reassessment can be reopened beyond four years, and gains on alienation of that PE asset are taxable in India irrespective of the place of delivery.

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