2016 (9) TMI 158 - AT - Income Tax

Assessment orders quashed: Call Option income not taxable under India-Singapore DTAA

The Tribunal quashed the assessment orders, holding that the income from the Call Option Agreement should be treated as capital gain, not taxable in India ... Capital gain from transfer of shares - DTAA between India–Singapore - Held that:- No actual shares which has been transferred or alienated albeit a substantive and valuable right has been given in the shares, which has to reckoned as capital asset or property as per our discussion herein above. Hence, it is gains from the alienation of an asset or property and any gain from alienation of such kind of “property” will fall within the scope of Para 6 of Article 13, whereby, the taxing right has been given to the resident state, that is, the state of the alienator, which here in this case is Singapore. The allocation of taxing right under Article 13(6) cannot be attributed to India but to the resident state. Thus, on the facts and circumstances of the case as discussed above, we hold that, firstly, the consideration received by the assessee is arising from the assignment of substantive and valuable rights in the shares of an Indian company which is assessable under the head “capital gain”; and secondly¸ such a capital gain cannot be held to be taxable in India in terms of para 6 of para 13 of India-Singapore-DTAA. With these observation, the addition made by the AO and as confirmed by the CIT(A) is directed to be deleted. Issues Involved:1. Validity of Section 147 notice and assessment order.2. Taxability of income as 'income from other sources' vs. 'capital gain'.3. Double Taxation Avoidance Agreement (DTAA) applicability.4. Residential status and location of income generation.5. Impact of Call Option Agreement on taxability.6. Consideration of written submissions and evidence.Issue-Wise Detailed Analysis:1. Validity of Section 147 Notice and Assessment Order:The assessees contested the validity of the Section 147 notice and assessment order. They argued that the notice was issued without proper approval from the competent authority. The Tribunal examined the approval process and found that the approval was given by the Commissioner of Income-tax instead of the Joint Commissioner, which is required under Section 151(2). The Tribunal held that the satisfaction mandated by the statute must be of the designated authority, and the Commissioner of Income-tax is not a Joint Commissioner within the meaning of Section 2(28C). Consequently, the Tribunal quashed the proceedings initiated under Section 148 and declared the assessment order void-ab-initio.2. Taxability of Income as 'Income from Other Sources' vs. 'Capital Gain':The primary issue was whether the income received under the Call Option Agreement should be taxed as 'income from other sources' or 'capital gain.' The Assessing Officer (AO) treated the amount received from the Call Option Agreement as 'income from other sources' under Section 9(1)(i), while the assessee argued that it should be considered as 'capital gain.' The Tribunal analyzed the nature of the Call Option Agreement and concluded that the agreement involved the alienation of substantive and valuable rights in the shares of an Indian company. Therefore, the income should be taxed under the head 'capital gain.'3. Double Taxation Avoidance Agreement (DTAA) Applicability:The assessees argued that under the India-Singapore DTAA, the income should not be taxable in India. The Tribunal referred to Article 13 of the DTAA, which deals with the taxation of capital gains. The Tribunal noted that the gains from the alienation of property, other than those mentioned in paragraphs 1, 2, 3, 4, and 5 of Article 13, are taxable only in the contracting state of which the alienator is a resident. Since the assessee was a tax resident of Singapore, the Tribunal held that the capital gain cannot be taxed in India under Article 13(6) of the DTAA.4. Residential Status and Location of Income Generation:The assessee, being a non-resident Indian and a tax resident of Singapore, argued that the income did not arise in India. The Tribunal considered the facts and concluded that the income arose from the alienation of substantive rights in shares of an Indian company. However, due to the DTAA provisions, the income was not taxable in India.5. Impact of Call Option Agreement on Taxability:The Tribunal examined the Call Option Agreement and noted that it involved a significant and valuable transfer of rights in the shares of an Indian company. The agreement provided for an irrevocable power of attorney and other substantive rights, which were considered as a transfer of property. The Tribunal held that such an agreement resulted in a capital gain, not merely an income from other sources.6. Consideration of Written Submissions and Evidence:The Tribunal acknowledged the written submissions and evidence provided by the assessee, including the affidavit stating that no money was received from the Call Option Agreement. The Tribunal emphasized the importance of considering the substance of the transaction and the actual state of affairs rather than merely the terms of the agreement.Separate Judgments:The Tribunal delivered separate judgments for the two appeals but followed a consistent approach in analyzing the issues. Both appeals were allowed, and the assessments were quashed based on the invalidity of the Section 147 notice and the applicability of the DTAA.Conclusion:The Tribunal allowed both appeals, quashing the assessment orders and holding that the income arising from the Call Option Agreement should be treated as capital gain, which is not taxable in India under the India-Singapore DTAA. The Tribunal also emphasized the importance of obtaining proper approval from the designated authority for issuing notices under Section 148.