Foreign companies' share investments in Indian subsidiaries ruled capital transactions, not taxable income under Section 148A(b) and 148

The Delhi HC set aside reassessment notices u/s 148A(b) and 148 issued to foreign companies for investments in Indian subsidiaries. The court held that investment in shares of Indian subsidiaries constitutes capital account transactions, not income chargeable to tax. Despite Revenue's allegations of round-tripping, no evidence was provided. The court relied on established precedent that share investments cannot be treated as income and noted Revenue's action contravened CBDT instructions. The court emphasized that escapement of chargeable income remains a primary condition for invoking reassessment powers under Section 147, regardless of amended provisions.

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Issues:
The judgment involves quashing impugned notices under Section 148A(b) of the Income Tax Act, 1961, orders under Section 148A(d) of the Act, and notices under Section 148 of the Act, along with challenging the legality and constitutional validity of Explanation 1 to Section 148 of the Act.

Details of Judgment:

1. The petitioners filed writ petitions seeking to quash the impugned notices and orders under the Income Tax Act, challenging the legality of Explanation 1 to Section 148.

2. The factual scenario of one case involved a foreign company subscribing to shares in its Indian subsidiary without earning income in India, leading to non-filing of income tax returns.

3. Petitioners argued that the transactions were capital account transactions incapable of generating income, with no tangible material indicating income escapement.

4. Respondents issued notices under Section 148A(b) based on the Risk Management Strategy of the CBDT.

5. The admitted facts were that foreign companies made capital account transactions in their Indian subsidiaries, with doubts of round-tripping but lacking evidence.

6. The judgment cited precedent stating that investment in Indian subsidiary shares does not constitute income, as confirmed by the CBDT and the Bombay High Court.

7. Respondents' actions were deemed contrary to CBDT instructions and the Bombay High Court judgment, accepted by the Union Cabinet.

8. The Union Cabinet accepted the Bombay High Court's decision, emphasizing that investment in shares is a capital account transaction with no income chargeable to tax.

9. Another case law highlighted the primary condition of "escapement of income chargeable to tax" before invoking powers under Section 147 of the Act.

10. The impugned orders and notices were set aside, allowing the Revenue to proceed if new material emerges, while leaving the challenge to the validity of Explanation 1 to Section 148 open. The writ petitions were disposed of accordingly.

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