Court sets aside improper tax notice, rules share transactions capital not income, proceedings invalid.

The Court set aside the notice issued under Section 148 of the Income Tax Act, finding it was issued without proper consideration and that the Petitioner was exempt from filing a return under Section 115A (5). The Court also ruled that the treatment of the Petitioner's share transactions as income was incorrect, following precedents that such transactions are capital in nature. The Respondent's failure to address the Petitioner's objections and adhere to procedural requirements rendered the proceedings invalid. The writ petition was allowed, with no costs awarded.

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Issues Involved:
1. Validity of the notice issued under Section 148 of the Income Tax Act, 1961.
2. Applicability of Section 115A (5) of the Income Tax Act to the Petitioner.
3. Treatment of share transactions as 'income' for tax purposes.
4. Compliance with procedural requirements as per the Supreme Court's decision in GKN Driveshafts (India) Ltd. v. Income Tax Officer.

Detailed Analysis:

1. Validity of the Notice Issued under Section 148 of the Income Tax Act, 1961:
The Petitioner, a tax resident of Switzerland, challenged the notice dated 26th March 2018 issued under Section 148 of the Income Tax Act, 1961, requiring it to file a return of income. The Respondent issued the notice on the grounds that the Petitioner’s income chargeable to tax had escaped assessment. The Petitioner argued that its income from India consisted only of dividend and interest on which tax was duly deducted at source, and it was exempt from filing a return under Section 115A (5) of the Act. The Court noted that the Respondent failed to consider this exemption and issued the notice without proper application of mind. The Court found that the notice was issued based on a system-generated alert from the Non-filers Monitoring System (NMS), which did not automatically justify the issuance of the notice under Section 147 of the Act.

2. Applicability of Section 115A (5) of the Income Tax Act to the Petitioner:
The Petitioner contended that as a non-resident company, its income from dividends and interest was subject to tax deduction at source, and therefore, it was exempt from filing a return under Section 115A (5) of the Act. The Court agreed, stating that the Petitioner’s income from India during the relevant assessment year consisted only of dividend and interest on which tax had been deducted at source. The Court emphasized that the Respondent failed to recognize this exemption, which was clearly stipulated in the Act and further clarified by the CBDT Instruction No.14 of 2013.

3. Treatment of Share Transactions as 'Income' for Tax Purposes:
The Petitioner argued that the purchase of shares of its subsidiary, Nestle India Ltd., was a capital account transaction and could not be treated as income. The Court referred to the decision of the Bombay High Court in Vodafone India Services Pvt. Ltd. v. Union of India, which held that such share transactions are capital account transactions and do not give rise to income. The Court noted that the CBDT had accepted this decision and issued Instruction No. 2 of 2015, directing field officers to adhere to this judgment. Consequently, the Court found that the Respondent’s premise that the Petitioner’s investment in shares amounted to income was fundamentally flawed.

4. Compliance with Procedural Requirements as per the Supreme Court's Decision in GKN Driveshafts (India) Ltd. v. Income Tax Officer:
The Petitioner followed the procedure outlined by the Supreme Court in GKN Driveshafts (India) Ltd. v. Income Tax Officer by filing a return and requesting the reasons for the notice under Section 148. The Respondent provided the reasons, which were subsequently challenged by the Petitioner. The Court found that the Respondent did not adequately address the Petitioner’s objections and failed to pass a speaking order as required. The Court emphasized that the procedure mandated by the Supreme Court must be strictly followed, and the Respondent’s failure to do so rendered the proceedings invalid.

Conclusion:
The Court set aside the impugned notice dated 26th March 2018 and the impugned order dated 23rd October 2018, concluding that the notice was issued without proper application of mind and that the Petitioner was exempt from filing a return under Section 115A (5) of the Act. The Court also found that the Respondent’s treatment of the Petitioner’s share transactions as income was incorrect. The writ petition was allowed, with no order as to costs.

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