FPI share investments ruled capital transactions, not income - reassessment notices under Sections 148A and 148 quashed

The Delhi HC quashed reassessment notices under Sections 148A and 148 for AY 2019-20. The court held that an FPI's investment in Indian shares constituted a capital account transaction, not income subject to assessment. Since funds remitted were used for securities subscription without generating income, no return filing was required. The Revenue's premise that share investments constituted escaped income was fundamentally flawed. Additionally, the court found procedural violations as discrepancies in share prices were raised in the Section 148A(d) order without being mentioned in the initial Section 148A(b) notice, violating natural justice principles. The reassessment proceedings were deemed unjustified and unsustainable.

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Issues Involved:
1. Validity of the Impugned Notice under Section 148A(b) of the Income Tax Act.
2. Justification for issuance of the Impugned Order under Section 148A(d) of the Income Tax Act.
3. Allegation of income escapement and requirement to file a return of income in India.
4. Discrepancies in share prices and their impact on the assessment.
5. Adherence to principles of natural justice in the reassessment proceedings.

Issue-wise Detailed Analysis:

1. Validity of the Impugned Notice under Section 148A(b) of the Income Tax Act:
The petitioner, a foreign company registered as an FPI with SEBI, challenged the notice issued under Section 148A(b) of the Income Tax Act, alleging that it was based on erroneous and inflated transaction values. The petitioner argued that the notice incorrectly considered the purchase value of shares and total transaction value, leading to an unjustified initiation of assessment proceedings. The court found that the fundamental premise of the Revenue that the investment made by the petitioner in shares amounted to "income" which had escaped assessment was flawed. The court referenced a Co-ordinate Bench decision, reiterating that investments in shares are capital account transactions and do not give rise to income.

2. Justification for issuance of the Impugned Order under Section 148A(d) of the Income Tax Act:
The petitioner contended that the Impugned Order under Section 148A(d) was based on discrepancies in share prices, which were never addressed in the initial notice under Section 148A(b). The court held that the basis of the order dated 26.04.2023, which noted discrepancies in share prices, was not mentioned in the initial notice, thereby violating principles of natural justice. The court emphasized that the reasons for reassessment must be consistent and cannot be supplemented or altered post issuance of the notice.

3. Allegation of income escapement and requirement to file a return of income in India:
The petitioner argued that no income had accrued or was received in India during the relevant assessment year, and hence, there was no requirement to file a return of income. The court agreed, noting that the funds remitted to India were used solely for subscribing to securities, making it a capital account transaction. The court referenced previous judgments, including the case of M/s. Angelantoni Test Technologies SRL, which held that investments in shares do not constitute income.

4. Discrepancies in share prices and their impact on the assessment:
The respondent noted discrepancies in the share prices provided by the petitioner compared to the exchange rates, leading to the conclusion that the source of investment remained unexplained. However, the court found that these discrepancies were not initially communicated to the petitioner, thereby denying them an opportunity to address these concerns. The court ruled that such discrepancies could not form the basis for reassessment without proper notice and opportunity for the petitioner to respond.

5. Adherence to principles of natural justice in the reassessment proceedings:
The court emphasized the importance of adhering to principles of natural justice, stating that the petitioner should not be prejudiced or taken by surprise by new grounds or discrepancies introduced at a later stage. The court referenced its decision in Banyan Real Estate Fund Mauritius, highlighting that reassessment actions must be based on the original reasons provided in the notice and not on subsequently introduced grounds.

Conclusion:
The court quashed the impugned notices issued under Section 148A(b), the order dated 26.04.2023 under Section 148A(d), and the consequential notice under Section 148 of the Act for the Assessment Year 2019-20. The court held that the reasons recorded for issuance of the notice did not conform to principles of natural justice, and the petitioner was not given a proper and adequate opportunity to reply to the allegations. The writ petition was allowed with no orders as to costs.

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