TaxTMI 
TaxTMI 
2016 (11) TMI 1360
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....g such jurisdiction were completely absent thus resulting in the order passed being bad in law. 2. In law and on the facts and circumstances of the case, the learned Principal Commissioner of Income-tax erred in his observation in the order that the issue of tax credit on dividend as per article25(4) of the Double Taxation Avoidance Agreement between Government of India and the Omani Government reflected lack of inquiry and non-application of mind by the Assessing Officer. Further, the learned Principal Commissioner of Income-tax also erred in doubting the intent and purpose of exemption granted on dividend income under the Omani tax laws ignoring the confirmation given by the Omani Tax Authorities. The order of the learned Principal Commissioner of Income-tax on this issue has been passed in complete disregard of the order of the jurisdictional Income-tax Appellate Tribunal in the case of Kribhco (I. T. A. No. 6785/Del/2015) [2016] 67 taxmann.com 138 (Del-Trib) on identical facts. 3. In law and on the facts and circumstances of the case, the learned Principal Commissioner of Income-tax erred in directing the Assessing Officer to examine the applicability of the p....
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....3,16,22,035. Subsequently revised return of income was filed on October 14, 2011, declaring income of Rs. 577,15,94,117. The main reason for the variation in the total income as per the original return and revised return of income was that dividend income received by the appellant-society's Branch in Oman from OMIFCO, Oman amounting to Rs. 144,11,73,150 was excluded on the ground that the said income was earned by the permanent establishment of the appellant-society in Oman and as per the provisions of the Double Taxation Avoidance Agreement read with section 90 of the Income-tax Act, as interpreted by the honourable apex court in India, the said income was assessable only in Oman and not in India. 5. The case of the assessee was picked up for scrutiny and notices under sections 143(2) and 142(1) of the Income-tax Act, were issued by the Assessing Officer along with the detailed questionnaires. During the course of the assessment proceedings, detailed replies were filed along with supporting evidences and the authorised representatives of the assessee- society duly attended before the Assessing Officer from time to time as also acknowledged in the assessment order. All neces....
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....3B Rs. 15,94,113 (c) Disallowance under section 14A read with rule 8D(2)(ii) Rs. 31,33,42,000 (d) Disallowance of horticulture expenses Rs. 60,70,000 Taxable income Rs. 753,37,73,380 2. The Assessing Officer computed the tax as per ITNS 150 (copy placed as annexure). The perusal of Income-tax computation form it is found that the Assessing Officer gave relief under section 90 of Rs. 41,52,45,771 and determined the demand of Rs. 18,27,23,245. The assessee moved an application under section 154. The Assessing Officer passed order under section 154 on March 18, 2014, and again computed income as per ITNS 150 and determined the tax on assessed income of Rs. 238,56,35,456 and gave credit of prepaid taxes and relief under section 90 of Rs. 228,72,86,443 and determined the demand of Rs. 17,44,89,190. Apparently the credit of prepaid taxes and relief includes relief under section 90 of Rs. 41,52,45,771. 3. The assessee went in appeal before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) passed order on March 9, 2015, and upheld the addition of Rs. 144,11,73,150 on account of dividend received from overseas joint ven....
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.... Now, therefore, in exercise of powers conferred by section 90 of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby directs that all the provisions of the said agreement shall be given effect to throughout the territory of India.' The perusal of the notification shows that the agreement has been entered into in exercising powers conferred by section 90 of the Income-tax Act, 1961. The relevant part of section 90 is reproduced as under :- '90. Agreement with foreign countries or specified territories.-(1) The Central Government may enter into an agreement with the Government of any country outside India or specified territory outside India,- (a) for the granting of relief in respect of- (i) income on which have been paid both Income-tax under this Act and Income-tax in that country or specified territory, as the case may be, or (ii) Income-tax chargeable under this Act and under the corresponding law in force in that country or specified territory, as the case may be, to promote mutual economic relations, trade and investment, or (b) for the avoidance of double taxation of income under this Act and und....
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....e. The Assessing Officer did not notice what are the tax incentives which are designed to promote economic Development. In the present case, the dividend income has been made exempt under article 8(BIS) under the OMANI Companies Income- tax Law. This would be a mere assumption that such exemption is designed to promote economic development. The Assessing Officer failed to notice this vital difference. 16. The Assessing Officer failed to examine the fact as to whether article 25(4) of the Double Taxation Avoidance Agreement has been fully complied with by the assessee. It cannot be presumed that the exemption granted under article 8(bis) is meant for economic Development. There has to be strict interpretation of the statute. Article 8(bis) does not indicate that the exemption is designed for economic development. 17. Capitalisation of interest-36(1)(iii) proviso : The perusal of balance-sheet for the assessment year 2010-11 shows that the assessee has shown loan funds of Rs. 11,532.17 crores. Whereas the share capital and reserves and surplus figure is Rs. 4,270.50 crores. The total of the balance-sheet is Rs. 16,319.45 crores. This means the assessee is h....
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....ee has shown investment of Rs. 7,531.28 crores and the detail is given under schedule 7 (43rd annual report). Schedule 7 (43rd annual report) shows that the assessee has made long-term investments. Although the assessee is having borrowed funds to the extent of 74 per cent. yet the Assessing Officer has not raised any query as regards the interest component attributable to such investments and how it is allowable under the business head, i.e., under section 36(1)(iii). The assessee has not established any nexus as regards the utilisation of funds from own sources or funds on which interest is paid by the assessee. 22. Rental income : The assessee has shown income from house property at Rs. 5,71,31,586 after availing of deduction under section 24 of Rs. 61,42,331. The assessee has shown rental income from IFFCO Tower, Gurgaon. From the details it appears that the assessee has rented out certain towers to the telecom companies like Bharti Airtel and M/s. BSNL. Apparently, renting of tower should not come under the head 'income from house property', as it should not come under the purview of property consisting of any buildings or lands appur tenant thereto (....
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....r example, the assessee has simply shown dividend income from OMIFCO Oman but no other document has been asked by the Assessing Officer or given by the assessee. The assessee would be taxable on the global income irrespective of the associates from which the assessee derives income. The assessee may be eligible for any kind of allowance as per the Double Taxation Avoidance Agreement if any with any other country. 4. In para 22 of show cause No. 1175 dated December 22, 2015, it has been asked about the rental income. It is further clarified that the assessee may be showing rental income from communication towers from telecom companies. If that is the case, then the case of the assessee would not fall under the head income from house property as these communication towers cannot be called as buildings or lands appurtenant thereto. 5. Your case is fixed for hearing on January 4, 2016, at 3:30 p.m., as already intimated in show-cause notice under section 263 dated December 22, 2015." 9. In response to the above show-cause notice, the assessee file a detailed reply dated January 11, 2016, as well as January 19, 2016, which are compiled in the paper book filed with u....
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....ake any verification/enquiries as regards the legal value of letters issued by the Secretary General and also did not make any enquiry as regards the designed for economic development. There was lack of inquiry and non-application of mind. 22. If we accept the argument of the assessee that all tax incentives would be deemed as promoting economic development, then there was no need to insert words that the tax incentives granted under the law of the Contracting Sate and which are designed to promote economic development. There was no need to write words 'and which are designed to promote economic development'. The statute has to be read with reference to what has been mentioned. There is no scope of going beyond what has been stated. In paragraph 13 of the letter dated March 10, 2016, it was especially mentioned that the word designed means that there would have to be some conscious effort. Paragraph 13 of the letter dated March 10, 2016, is again reproduced as under : '13. This is a general exemption for every person who so ever earns dividend income. It is not necessary that any shareholder who earns dividend would be promoting the economic developmen....
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.... economic development. If we do not interpret properly the words designed for economic development, then such words would become redundant. This agreement has been entered into by both the countries with all its wisdom for incorporating the words designated for economic development. . . 28. The assessee has further referred to Royal Decree No. 68 of 2000 and stressed upon the words 'in exigencies of public good'. The words exigencies of public good cannot be equated with 'designed for economic development'. Both have different meanings and connotations. Article 25(4) specifically mentions the words designed for economic development. Had there been such intention the Royal Decree could have mentioned the word designed for economic development. In their wisdom they did not think it proper to use the same words as given in article 25(4). In the jurisprudence a particular expression cannot be deemed as covering any other expression. For example, in this case the 'exigency of public good' cannot be equated with 'designated for economic development'. Therefore the assessee cannot take any support from the words 'the exigencies of public goods&....
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....able Income-tax Appellate Tribunal, the decision of the honourable Income-tax Appellate Tribunal may be contested before the honourable High Court. As already explained above, the clarification issued by the Secretary General is at the most an opinion and does not take the shape of law. The Secretary General for taxation in its letters, has not referred to any article of Omani tax law from which the Secretary General derives its authority to issue such letters. It appears that the Secretary General responded to a letter of Omani Oil Company and nothing else. Effectively the Secretary General in its letter has interpreted article 25(4) which is mainly in the domain of two Government, not under any officer, may be a very senior officer under the Omani tax law. The matter has to be settled by the two Governments and not by a single officer of the Omani tax law and that too in response to a letter of a company. 39. The tax credit can be given only with the strict interpretation as held by the apex court in the case of Smt. Tarulata Shyam v. CIT [1977] 108 ITR 345 (SC). 40. The honourable Income-tax Appellate Tribunal did not consider this aspect that the interpretatio....
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.... certain observations as regards the interpretation. It is quite possible that both the Governments, i.e., India and Oman may reach at a conclusion that may be in favour of the Revenue or in favour of the assessee. Pending any communication from the concerned authorities, the view may be that the assessee is not entitled for tax credit. The process should be started in the month of April itself so that necessary communication could come in time as the assessment has to be framed under section 143(3)/263 within the time limited'." 11. In support of ground of appeal raised by the assessee-society, the learned counsel of the assessee filed the paper book comprising detailed written submissions, relevant documents and also relied upon various judicial decisions. For the sake of clarity, the relevant portion of the submissions made by the learned counsel of the assessee from paragraphs 8.3 to 8.11, pages 24 to 72 of the paper book, is reproduced below : "8.3 For better understanding, these grounds have been divided into several categories as mentioned above and it would be convenient to proceed with further elaboration category-wise, in the following submissions : ....
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....cle 25(4) of the Double Taxation Avoidance Agreement read with section 90(1)(a)(ii) of the Income-tax Act. This reply detailed out the relevant provisions of the Omani tax law including article 8 (bis) which governed the dividend exemption after having been specifically amended by Royal Decree 68 of 2000 as a measure to encourage economic development. The reply specifically mentions at point B.2 the rationale for this incentive coming under the ambit of article 25(4) of the Double Taxation Avoidance Agreement. Further, at point A.4 of the reply, reference had been made to the assessment orders passed by the tax authorities in Oman in the assessee's case which specifically recorded the objective for the exemption under article 8 (bis) to promote economic development within Oman to attract investments. It also contained the working of the tax credit and judicial pronouncements in support of the claim. On the date of hearing on February 26, 2014, too, the issue of credit for deemed taxes paid in Oman and the rationale for such a provision was discussed at length with the learned Assessing Officer. 3.1.6 In the assessment order dated February 28, 2014, the learned Assessin....
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....lanation 2 clearly says that "the order is deemed to be erroneous if the order is passed allowing any relief without inquiring into the claim". The substance of the amendment is that only a complete lack of enquiry in contrast to sufficiency of enquiry can be a ground for revision. 3.19 In support of the above legal argument, reliance is placed on the following pronouncements of the judiciary : (Relevant extracts reproduced for ease of reference) : (i) The Supreme Court in CIT v. Max India Ltd. [2007] 295 ITR 282 (SC) affirming the Punjab and Haryana High Court in CIT v. Max India Ltd. [2004] 268 ITR 128 (P&H) and following the Supreme Court in Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 (SC) (page 284 of 295 ITR) : "Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the Revenue. For example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prej....
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....mines the income either by accepting the accounts or by making some estimate himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a figure higher than the one determined by the Income-tax Officer. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. It is because the Income-tax Officer has exercised the quasi-judicial power vested in him in accordance with law and arrived at a conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. It may be said in such a case that in the opinion of the Commissioner the order in question is prejudicial to the interests of the Revenue. But that by itself will not be enough to vest the Commissioner with the power of suo motu revision because the first requirement, viz., that the order is erroneous, is absent." In view of the above submissions, it is prayed that the initiation of proceedings under section 263 is not legally t....
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....on of evasion or avoidance of Income-tax chargeable under this Act or under the corresponding law in force in that country or specified territory, as the case may be, or investigation of cases of such evasion or avoidance, or (d) . . . ." The distinction between sub-clauses (a)(i) and (a)(ii) is clear. While sub-clause (a)(i) requires payment of tax as a prerequisite for claiming relief, no such precondition exists in sub-clause (a)(ii). The condition in sub-clause (a)(ii) is "chargeability or liability to tax". The objective of sub-clause (a)(ii) is to promote mutual economic relations, trade and investment. In other words, the objective of sub-clause (a)(ii) is to use the tax treaty to facilitate policy objectives of the Government of India. Under sub-clause (a)(ii), the power of the Central Government extends to grant relief not only for avoidance of double taxation, but also for granting relief for income exempt from taxation. The inference at point 11 of the show-cause notice looking down on the claim of tax credit without paying tax is erroneous in law as the relevant question is "chargeability/liability to tax" and not "actual payment of tax". 3.2.....
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....r levy of excise duty is the manufacture or production, the realisation of the duty may be postponed for administrative convenience to the date of removal of the goods from the factory. It was held that excisable goods do not become non-excisable merely because of an exemption given under a notification. The exemption merely prevents the excise authorities from collecting tax when the exemption is in operation (see also in this connection the judgment of the Madras High Court in Tamil Nadu (Madras State) Handloom Weavers Co-operative Society Ltd. v. Asst. Collector of Central Excise [1978] ELT 57 (Mad)) In Kasinka Trading v. Union of India [1995] 1 SCC 274 this principle was reiterated in connection with an exemption under the Customs Act. This court observed (page 287) : "The exemption notification issued under section 25 of the Act had the effect of suspending the collection of customs duty. It does not make items which are subject to levy of customs duty, etc., as items not leviable to such duty. It only suspends the levy and collection of customs duty, etc., wholly or partially, and subject to such conditions as may be laid down in the notification by the Government in....
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....redit not only for the tax paid but also for the tax spared by incentive legislation in the developing country . . . While the exemption method of providing relief for double taxation eliminates the undesirable effects of the residence country's taxes on the source country's tax incentive scheme, many developed countries are unprepared to include this system in their treaties. Where the investor's home country applies the principle of foreign tax credit, the most effective method of preserving the effect of the tax incentives and concessions extended by developing countries is a tax- sparing credit." 3.2.5 Article 25 of the Indo-Oman Double Taxation Avoidance Agreement which is at the crux of the issue is reproduced below (page 40) : "Avoidance of double taxation 1. The law in force in either of the Contracting States will continue to govern the taxation of income in the respective Contracting States except where provisions to the contrary are made in this agreement. 2. Where a resident of India derives income which, in accordance with the provisions of this agreement, may be taxed in the Sultanate of Oman, India shall allow ....
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.... treaty partners and as being essentially a bargain between two treaty countries as to the division of tax revenues between them in respect of income falling to be taxed in both jurisdictions . . . ." The significance of the above observations is to appreciate that the primary rationale of article 25(4) is to extend the tax credit already given by article 25(2) even to cases where the tax is not actually paid but would have been payable had it not been exempted under the tax laws of one of the Contracting States. Thus, article 25(4) is a tax sparing provision consciously aimed at giving tax credit even if actual tax is not paid in the Contracting State of source of the income. By this, it is ensured the tax exemption benefit granted by a contracting country is not made "ineffective" by taxation in the Country of Residence (COR) of the foreign investor under the Foreign Tax Credit System. The trade off/rationale for the COR for giving this credit of taxes "spared" is improving the trade/economic relations amongst the contracting countries since the ultimate tax cost in any investment project is reduced/eliminated in the hands of the investor. 3.2.6 From the combine....
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....ce the society's permanent establishment is included in the definition of company under article 2(24). The very purpose of giving the exemption is to carve out an exception from the charging section. If there was no charge in the first place, there would have been no need to insert 8 (bis) to grant the exemption. The charge does not go away merely because exemption is granted at a particular point of time. (iii) It is very significant to note that this issue has also been dealt at length in the clarification dated August 6, 2000 (Annexure-V) given by the Ministry of Finance, Secretariat General for Taxation, Sultanate of Oman, (prior to insertion of article 8 (bis)) wherein it is clearly clarified at point 2 that "income including dividends of a permanent establishment of any foreign enterprise is chargeable to tax and is charged to tax at rates mentioned in paragraph 6(ii) below". Hence it is clear that tax was payable by the Society's permanent establishment on the Dividends received but for the amendment made to article 8 of the Omani tax law." . . . B. The following is relevant to understand the nature of the exemption granted by article 8(bis....
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.... the instant case) to second guess the objectives especially in the light of clear cut clarification given in the above cited letter. Such an attempt would clearly fall foul of the mandate of article 25(4) entered consciously by the Governments of both the countries and has to be repelled. 3.2.8 Without prejudice to the above, it is submitted that though each assessment year is separate and distinct and principle of res judicata does not apply to proceedings for subsequent or other years, decision on an issue or question though not binding should be followed and not ignored unless there is a change in law or facts to take a different view. Reliance is placed in this regard on the decision of the honourable Supreme Court in Radhasoami Satsang v. CIT [1992] 193 ITR 321 (SC), (followed by the apex court in CIT v. Excel Industries Ltd. [2013] 358 ITR 295 (SC)) which held that when a fundamental aspect pervading through different assessment years has been found as a fact in one way or the other, it would be inappropriate to allow the position to be changed in a subsequent year particularly when the said finding has been accepted. The said principle is also based upon the rules ....
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..... The learned Principal Commissioner of Income-tax also referred to the order dated March 9, 2016, passed by the honourable Income-tax Appellate Tribunal, Delhi Bench in the case of KRIBHCO. In this order the honourable Tribunal quashed the order passed by the learned Principal Commissioner of Income-tax under section 263 in similar facts and circumstances. The learned Principal Commissioner of Income-tax observed that the Department may not accept the order of the Income-tax Appellate Tribunal. At paras 15 and 16 of the said letter dated March 10, 2016, the learned Principal Commissioner of Income-tax further observed that the article 6(3) of the Omani Tax Decree relied upon by the appellant-society cannot be construed to grant any power to the Secretary General of Taxation of Sultanate of Oman to issue any clarification regarding interpretation of law. The learned Principal Commissioner of Income-tax at para 13 of his order has mentioned that in response to the aforesaid letter the appellant- society further filed written submissions, vide letter dated March 22, 2016. The learned Principal Commissioner of Income-tax has briefly referred to the contentions of this letter. It would....
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....served by the honourable Tribunal that during the preceding years, in scrutiny assessments passed by the Department, after full application of mind and after detailed discussion in the orders, the Department has been allowing credit for deemed dividend tax. It is respectfully submitted that the case of the assessee-society is covered by the order of the honourable Tribunal in the case of KRIBHCO on all issues, factually as well as legally. It is therefore, respectfully submitted that the notice issued under section 263 may kindly be dropped. Hence, based on the similarity of facts and law, we request your honour to follow the order of the jurisdictional Income-tax Appellate Tribunal and drop the revisionary proceedings. Though your honour is well versed in law and the doctrine of precedent/stare decisis, we would like to rely on the following case law (with relevant extracts) highlighting the binding nature of the jurisdictional Tribunal's orders till the same are stayed/set aside/over- ruled by higher courts : (a) The Madhya Pradesh High Court-Agrawal Warehousing and Leasing Ltd. v. CIT [2002] 257 ITR 235 (MP) relying on the Supreme Court's order in Union....
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....l, he had to follow the order . . ." (b) The Bombay High Court-Bank of Baroda v. H.C. Shrivat sava [2002] 256 ITR 385 (Bom) (page 390) : "At this juncture, we cannot resist observing that the judgment delivered by the Income-tax Tribunal was very much binding on the Assessing Officer. The Assessing Officer was bound to follow the judgments in its true letter and spirit. It was necessary for the judicial unity and discipline that all the authorities below the Tribunal must accept as binding the judgment of the Tribunal. The Assessing Officer being an inferior officer vis-a-vis the Tribunal, was bound by the judgment of the Tribunal and the Assessing Officer should not have tried to distinguish the same on untenable grounds. In this behalf, it will not be out of place to mention that 'in the hierarchical system of courts' which exists in our country, 'it is necessary for each lower tier' including the High Court, 'to accept loyally the decisions of the higher tiers'. 'It is inevitable in hierarchical system of courts that there are decisions of the supreme Appellate Tribunal which do not attract the unanimous approval of all members of th....
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....ncome-tax/Commissioner of Income-tax (Appeals) nor the Tribunal cannot scrutinise the earlier order of the Tribunal, sentence by sentence merely to find out whether all the facts have been set out in detail by the Tribunal or whether some incidental fact which appears on the record has not been noticed by the Tribunal in its judgment. If the authority, on a fair reading of the judgment of the Tribunal, finds that it has taken into account all relevant material and has not taken into account any irrelevant material in basing its conclusion, the decision of the Tribunal is not liable to be interfered with, unless, of course, the conclusions arrived at by the Tribunal are perverse. It is not necessary for the Tribunal in its judgment specifically or any express words that it has taken into account the cumulative effect of the circumstances or has considered the totality of the facts of the case, as if it is a magic formula : if the judgment of the Tribunal shows that it has, in fact, done so, there is no reason to interfere with the decision of the Tribunal. The Commissioner of Income-tax is not justified in finding a hole in the order of the Tribunal so as to disallow the claim of th....
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....so affirms the validity of such a provision before it takes the investment decision ? Is this a reasonable/fair expectation ? (ii) Your kind attention is drawn to article 3 of the Omani tax law (submitted as annexure-IV in the reply dated January 11, 2016) which states that the "The Secretary General shall be responsible for the execution of this law . . .". "Execution" in itself has wide connotations and the power to issue clarifications can be reasonably construed to be included in this power/responsibility itself as in the absence of suitable clarifications, if the intent of some provisions remain uncertain and the investor is unable to calculate the impact of such incentives on the post tax returns on its investments, the incentive provisions would not achieve their purpose thus hindering the effective execution of the law. Your honour would appreciate that execution of tax law is not just collection of revenues but also ensuring that the legislative purpose behind the incentive/exemption provisions of encouraging investment is clarified to all prospective investors. Hence, it is unfair to treat the letter of HS SGT dated December 11, 2000 as "unauthorised in law". ....
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....nd Weaving Co. Ltd., AIR 2001 SC 724 (Constitution Bench). Prior to insertion of article 8(bis) (Previous State of law), the Investors in Oman suffered a tax cost on the returns from their investment if the investee companies income was exempt from tax. The SGT in its letter dated August 6, 2000 and December 11, 2000 (annexures V and VII to our reply dated January 11, 2016) reiterates this factual position and in the letter of December 11, 2000, goes on to say that : "We refer to your letter dated December 2, 2000, and our previous letter dated August 6, 2000 on the above subject. Under article 8 of the Company Income-tax Law of Oman, dividend forms part of the gross income chargeable to tax. The tax law of Oman provides Income-tax exemption to companies undertaking certain identified economic activities considered essential for the country's economic development with a view to encouraging investments in such sectors. Before the recent amendments to the Profit Tax Law on Commercial and Industrial Establishments, article 5 of this law provided for exemption of dividend income in the hands of the recipients if such dividends were received out of the pro....
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....11, 2016) issued by the Sultanate of Oman (which inserted article 8 (bis)) states that the amendments have been done "in exigencies of public good". In law, the preamble to a statute is a well-recognised internal aid to construction/interpretation of the statute. In accordance with the exigencies of public good means a demand for the economic good of the public. Public good corresponds to national needs and self-interest of a country. In a fiscal statute, amendment for public good clearly implies amendment through tax incentives to foster economic Development/job growth through inflow of foreign capital. Thus, from the preamble itself it is clear that the exemption to dividends is a tax incentive measure aimed at fostering economic development. There is no other motive other than economic development which can be reasonably attributed to a tax incentive/exemption measure. Thus, when read in its context, it is clear that the exemption to dividends was given to incentives investors to invest more. The link between investment and economic development is too obvious in economics to be ignored in interpreting article 8(bis) more so when the same is specifically acknowledged by ....
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....ral exemption cannot be for a specific purpose. There is no legal/factual basis for such an observation. In tax laws, each and every incentive provision has a purpose. "Tax incentives" include exemptions, deductions, tax credits, etc. The words "economic development" have a very wide connotation and cannot be given a restricted meaning to confine it to only some sectors of the economy. When the intent is to incentives foreign investment in all the sectors of the economy, a general dividend exemption can be given as a tax incentive across all sectors. Such an exemption would not lose its attribute of encouraging economic development just because it applies across all sectors. If the intention in the Double Taxation Avoidance Agreement was to restrict its meaning to certain specified sectors, suitable qualifiers would have been inserted before the words "economic development" in article 25(4). In conclusion in the light of the above submissions and the decision of the jurisdictional Income-tax Appellate Tribunal in the case of KRIBHCO (supra) both on merits and non-maintainability of the proposed revision under section 263, sufficient enquiry having been done at the assessme....
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....ment starting from the assessment year 2006-07 onwards in scrutiny assessment completed. The Assessing Officer has further taken note of the assessments made in the case of the permanent establishment of the appellant-company wherein also it is unambiguously recorded that exemption has been granted to dividend income for the purpose of economic development. Therefore, no fault can be found in the approach of the Assessing Officer. At paragraph 23 the learned Principal Commissioner of Income-tax has observed that the issue as to whether exemption has been granted for the purpose of economic development, has to be decided not by one country but by both the countries as the Double Taxation Avoidance Agreement is entered into by two countries. It is humbly submitted that this observation made by the learned Principal Commissioner of Income-tax is totally fallacious. If there is some debate about the interpretation of any provision of the Double Taxation Avoidance Agreement only then the two countries would come into picture. However, if the question is confined only to the interpretation of a particular provision of the tax law of one of the countries, it is only that specific country ....
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.... We are at a loss to understand as to how the aforesaid observation of the honourable Supreme Court supports the view taken by the learned Principal Commissioner of Income-tax. As a matter of fact these observations are in assessee's favour. At paragraph 27 the learned Principal Commissioner of Income-tax has further observed that at paragraph 4 of the letter dated August 6, 2000, it is mentioned that exemption was granted initially for a period of five years and this period may be extended for a further period of five years. We are again at loss to understand what is the relevance of these remarks of the learned Principal Commissioner of Income-tax because the exemption continues and has been allowed in respect of the assessment year under appeal and, therefore, the entire controversy has arisen. Further, the insinuation at para 27 of the impugned order that "a response to letter cannot become a law" is uncalled for and not apposite as the law is already laid down in the Royal Decrees of the Omani Government, the letter issued by H. E the Secretary General does not override it is only a clarification on the intent of law to allay any doubts in the minds of the foreign inve....
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.... the incentive provisions would not achieve their purpose thus hindering the effective execution of the law. Your honour would appreciate that execution of tax law is not just collection of Revenues but also ensuring that the legislative purpose behind the incentive/exemption provisions of encouraging investment is clarified to all prospective investors. Hence, in the absence it is unfair and disingenuous to treat the letter of HS SGT dated December 11, 2000, as "unauthorised in law". 8.10 At paragraph 34 the learned Principal Commissioner of Income-tax has relied on the honourable Supreme Court decision in the case of Smt. Tarulata Shyam v. CIT [1977] 108 ITR 345 (SC). The learned Principal Commissioner of Income-tax has relied on the following observations of the honourable Supreme Court in the above judgment (page 356) : It is urged that the principle in the last limb of sub-section (1) of section 108 of the Commonwealth Act should also be read into the Indian statute. It is maintained that the omission of such words from sections 2(6A)(e) and 12(1B) does not show that the intendment of the Indian Legislature was different. According to the counsel what is expl....
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....en the clarification issued by HE the SGT is amply clear and explicit that the amendment to exempt dividends in Oman's Domestic Law was done with the specific objective of reducing the tax cost for the investors so that they are encouraged to invest resulting in furtherance of the aim of economic development of Oman. Further, even if for a moment the clarification issued by HE the SGT is ignored, the scope of "economic development" as used in article 25(4) is so wide that any fiscal incentive aimed at investment promotion directly through lesser taxes/exemption on dividends can have no objective other than economic development. Some of the dictionary meanings are reproduced below which amply clarify that economic development covers job and industrial growth which is a direct result of increase in investment on account of tax incentives like dividend exemption (if a term is not defined in the statute, resort to dictionary is a judicially approved aid to construction) : (a) The scope of economic development includes the process and policies by which a nation improves the economic, political, and social well-being of its people. (https://en.wikipedia.org....
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....and without any disrespect submitted that the learned Principal Commissioner of Income-tax is not supposed to assume that a higher appellate authority has misinterpreted the letter issued by the Secretary General of Oman. 8.10 Again at paragraph 40 of the order the learned Principal Commissioner of Income-tax has repeated that the honourable Tribunal perhaps presumed that the letter was issued by the Sultanate of Oman and that the honourable Tribunal did not consider that the interpretation has to be with reference to the words used in the Act/ Double Taxation Avoidance Agreement. The learned Principal Commissioner of Income-tax has even suggested that the Department may file a miscellaneous application before the honourable Income-tax Appellate Tribunal pointing out that the said letters are just opinion from the officer of the Department of Oman which is a mistake apparent from record in law as well as on facts. He has further observed that the honourable Tribunal did not consider that any interpretation has to be between two Governments under the Double Taxation Avoidance Agreement and not by officer of Oman. It is reiterated that the learned Principal Commissioner of I....
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....come-tax Act while giving the aforesaid directions to the Assessing Officer. He has directed the Assessing Officer to address a letter to the concerned Department perhaps F. T. D. who may request the Omani Government regarding the interpretation of article 25(4) of the Double Taxation Avoidance Agreement. The Assessing Officer has also been directed to send a copy of the learned Principal Commissioner of Income-tax's order passed under section 263. He has further observed that it is quite possible that both the Governments, i.e., India and Oman may reach at a conclusion that may be in favour of Revenue or in favour of assessee. He has further observed that pending any communication from the concerned authority the view should be adopted that the assessee is not entitled to tax credit. The aforesaid directions are full of doubts and suspicions and there is no clarity with regard to the reassessment to be completed by the Assessing Officer. As mentioned above, the question of interpretation of section 25 of the Double Taxation Avoidance Agreement is not at all involved. There is no dispute regarding the interpretation of the aforesaid article 25(4) of the Double Taxation Avoidanc....
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.... finding that the order is erroneous and prejudicial to the interests of the Revenue, exercise of jurisdiction under the said section is not sustainable. . . . The jurisdictional precondition stipulated is that the Commissioner of Income-tax must come to the conclusion that the order is erroneous and is unsustain able in law." 12. In the backdrop of the above facts, the learned counsel of the assessee further submitted that the case of the assessee-society is squarely covered by the order of the honourable Income-tax Appellate Tribunal in the case of Krishak Bharti Co-operative Ltd. v. Asst. CIT [2016] 67 taxmann.com 138 (Delhi-Trib). The said decision is also furnished before us from pages 581 to 608 of the paper book. The relevant portion of the headnotes of this decision is reproduced below : "Section 9, read with section 90, of the Income-tax Act, 1961, and article 25 of the Double Taxation Avoidance Agreement between India and Oman and article 8(bis) of Omani tax laws-Income- Deemed to accrue or arise in India (Method of Elimination of Double Taxation)-Assessment years 2010-11 and 2011-12-Assessee-society received dividend income from an Omani Company-Assessee was ....
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....ncome of Rs. 134.41 crores received by assessee from OMIFCO which was exempt in Oman by virtue of article 8(bis) of Omanian Tax Laws. The said dividend income was simultaneously brought to the charge of tax in the assessment as per the Indian Tax Laws. * However, subsequently, the Commissioner of Income-tax (CIT) was of view that as the assessee did not pay any tax in Oman owing to exemption, no foreign tax credit was available to it. It was observed that article 25(4) requires that in order to claim credit, tax should have been payable in Oman if not for the tax incentives granted in Oman to promote economic development. The Commissioner opined that exemption granted by Oman cannot be treated as a tax incentive as same existed across the board and was simply a feature of Oman's Tax Law which does not tax dividend income. Accordingly the Commissioner revised the order of the Assessing Officer and disallowed the tax credit so claimed by assessee. * On appeal to the Tribunal : Held * With regard to allowing credit for deemed dividend tax which would have been payable in Oman, the relevant provisions of the Double Taxation Avoidance Agreement be....
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....s appeal stands allowed. (Para 21) * Since the facts and circumstances pertaining to the assessment year 2011-12, the grounds of appeal raised by the assessee- society and the arguments and submissions on behalf of the assessee as well as on behalf of the Department are identical and same. Therefore, for the assessment year 2011-12 also the impugned order of the Commissioner is quashed. Similarly, on merits also the Commissioner is not justified in giving directions to the Assessing Officer for withdrawal of tax credit in respect of deemed dividend tax as well as addition with regard to the undistributed profits reflected in the books of the permanent establishment (Para 22) * In the result, both the appeals filed by the assessee stand allowed. (Para 23)." 13. The learned Commissioner of Income-tax (Departmental representative), in support of his contention stated that the order of the Principal Commissioner of Income-tax is correct and has filed further submissions during the course of the hearing. The relevant portion (paragraphs 3 to 5.2) of his submissions is reproduced below : "3. With reference to article 25 of the Double Taxation Avoidance Agree....
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....x credit on the deemed dividend which would have been payable in Oman. The Revenue had taken a conscious view after considering the provisions of the Omani tax laws, section 90 of the Income-tax Act, article 25 of the Double Taxation Avoidance Agreement and the clarifications issued by the Royal Decree of the Omani Government. Copies of the assessment orders for the assessment years 2007-08 to 2009-10 have been placed before us from pages 495 to 558 of the paper book. On perusal of the same, it is seen that the Revenue has, after thoroughly examining the issues on hand and examining the provisions, considered the dividend income as exempt. Further, in respect of the current assessment year, i.e., assessment year 2010-11 which is subject matter of revision and appeal before us the Assessing Officer has adopted the same view in consonance with the view adopted in the past years and for which detailed queries and inquiries were raised and conducted by the Assessing Officer. The learned counsel of the assessee had also invited our attention to page 277 of the paper book wherein the Assessing Officer had vide points Nos. 28 to 31 raised several queries in respect of tax credit claimed b....
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....n under section 263 of the Income-tax Act. Accordingly, the learned Principal Commissioner of Income-tax could have no occasion to have recourse to the revisional powers under section 263 on the very fundamental issue that a consistent view has to be adopted after detailed inquiries by the Revenue for all the earlier years, i.e., the assessment years 2006-07 to 2009-10. Further, as discussed above, we have no hesitation in holding that the order passed by the learned Principal Commissioner of Income-tax is bad in law for the following reasons :- (a) That, detailed inquiries were made by the Assessing Officer at the time of the original assessment proceedings with regard to the tax credit on deemed dividend which would have been payable in Oman but for the exemption granted the assessee had filed detailed replies in response to the query which were duly considered by the Assessing Officer before allowing tax credit. (b) That, such credit was allowed by the Revenue for all the earlier years, i.e., assessment years 2006-07 to 2009-10, therefore, we have no hesitation in holding that there was complete application of mind on the part of the Assessing Officer and that ....
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....unity of being heard before passing an order under section 263. (vii) If the Assessing Officer acts in accordance with law his order cannot be termed as erroneous by the Commissioner, simply because according to him, the order should have been written 'more elaborately'. Recourse cannot be had to section 263 to substitute the view of the Assessing Officer with that of the Commissioner. (viii) The exercise of statutory power under section 263 of the Act is dependent on existence of objective facts ascertained from prima facie material on record. The evaluation of such material should show that tax which was lawfully exigible was not imposed." 14.4 Respectfully following the above decision of the honourable High Court we have no recourse but to hold that the order passed by the learned Principal Commissioner of Income-tax under section 263 is bad in law. Since the order passed by the learned Principal Commissioner of Income-tax which is under appeal has been quashed by us, going into the merits of the issues is only of academic interest. However, since detailed arguments have been raised on the merits of the issues, for the sake of completeness, we proceed to examine and d....
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.... 19. From the above clarifications there remains no doubt regarding the purpose of granting exemption to dividend income. The interpretation of Omani tax laws can be clarified only by the highest tax authorities of Oman and such interpretation given by them must be adopted in India. Further, in the tax assessments made in Oman in respect of the permanent establishment of the assessee-society it is clearly mentioned that the dividend income which is included in the gross total income is, however, exempt in accordance with article 8(bis) and such exemption is granted with the objective of promoting economic developments within Oman by attracting investments. In view of the facts stated above, we are of the considered view that on merits also the assessee-society is entitled to tax credit in respect of deemed dividend tax which would have been payable in Oman. There fore, we hold that on merits also the learned Principal Commissioner of Income-tax was not justified in directing the Assessing Officer to withdraw the aforesaid tax credit. (emphasis supplied)" 14.6 Respectfully following the decision of the co-ordinate Bench of the Delhi Tribunal in the case of Krishak Bharti Co-o....
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....details does not mean that the Assessing Officer has made a particular inquiry which has a bearing on the tax law. Even now the assessee has not given the date-wise calculation as required under section 36(1)(iii) proviso or date-wise investments which could show that the assessee has utilised only the own funds. 70. If the assessee is giving figures based on the balance-sheet, then it is abundantly clear that the assessee is having mixed pool of funds. Effectively the assessee is required primarily to utilise funds for its basic business. The assessee has also demonstrated that the investments are strategic in nature and has a link with its business and those companies where investments have been made are also in the similar business. It may be true that the investments are strategic yet these remain long-term investments and cannot partake the character of business of the assessee. Nowhere the assessee has shown the profits from such investments under the head business. In fact such profits cannot be taxed under the head business, for example dividend income is to be taxed under the head income from other sources. If the assessee sells his investments, the same would be ....
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....ned counsel also pointed out that the internal cash flows as well as profit before depreciation was sufficient enough to meet with the addition in the fixed assets. The learned counsel of the assessee also pointed out that the borrowing cost of Rs. 7.08 crores in respect of the qualifying assets have been capitalised during the year. In this respect he drew our attention to page 258 of the paper book, i.e., Schedule-20-Note No. (v). 15.3 The Assessing Officer also relied upon the synopsis filed vide pages 72 to 214 of the paper book. Relevant part of the synopsis filed is reproduced hereunder for ready reference : "11.15 With regard to the various observations made by the learned Principal Commissioner of Income-tax referred to above, it is humbly submitted with due respect that all these observations are merely on assumptions and suspicion and the learned Principal Commissioner of Income-tax has completely ignored the factual position as thoroughly explained before him. It is reiterated that this relevant issue was fully examined by the Assessing Officer during the course of the assessment proceedings with reference to the annual report containing the audited accounts ....
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....enditure has substantially reduced during the present year. (e) At page 102 of the annual report details of loans and advances given by the assessee are reflected in schedule 11. This shows that the total quantum of such loans and advances as on March 31, 2010 stands at Rs. 3376.87 crores as against preceding year's Rs. 5464.77 crores. Thus, the loans and advances have substantially reduced. (f) At page 110 of the report containing schedule 20 under Sr. No. (iv) it is mentioned that "borrowing cost amounting to Rs. 7.08 crores in respect of qualifying assets has been capitalised during the year." This shows that the relevant component of interest expenditure pertaining to capital asset has already been capitalised by the appellant-society and thus there is no basis for the assumption of the learned Principal Commissioner of Income-tax that the appellant- society has failed to capitalise the cost of borrowing. (g) At pages 98 and 99 of the annual report, complete details of investments have been given in Schedule-7. It is seen that the total investments as on March 31, 2010 stand at Rs. 7531.10 crores as against Rs. 7552.95 crores as on March 31, 2009.....
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....vant material has been ignored. * Under the circumstances, in the absence of any perversity being pointed out in the concurred findings of fact recorded by the Tribunal, no question of law, much less, any substantial question of law can be said to arise out of the impugned order so as to warrant interference. * The appeal, therefore, fails and is accordingly dismissed. (Para 7).' (emphasis supplied) In the above case the honourable Gujarat High Court held that it is the onus of the Revenue to establish that interest bearing funds were diverted for non-business purposes. (ii) CIT v. Ram Kishan Verma [2015] 64 taxmann.com 358 (Raj) The catch-note of this case is reproduced below for ready reference : 'Section 36(1)(iii) of the Income-tax Act, 1961-Interest on borrowed capital (Interest free loans)-Assessment years 2005-06 and 2008-09-Whether where capital of assessee was more than interest free advances made to friends/relatives and Assessing Officer was not able to prove nexus between interest bearing loans having been diverted towards interest free loans/advances, no part of interest paid on loans could be disallowed-Hel....
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....ing to Rs. 19.48 crores thereby totalling shareholders fund to the tune of Rs. 35.73 crores. Even if the debit balance of profit and loss account of Rs. 3.93 crores and the liability of Rs. 24.43 crores towards interest payable not debited to profit and loss account is considered, still there is excess of share capital and reserves to the extent of Rs. 7.37 crores [35.73 crores 28.36 crores (3.93 crores + 24.43 crores)]. As against this excess of shareholders' fund of Rs. 7.37 crores, the assessee advanced interest-free loans to its sister concerns amounting to Rs. 50.29 lakhs. (Para 4) From the decision of the jurisdictional High Court in the case of CIT v. Reliance Utilities and Power Ltd. [2009] 313 ITR 340 (Bom) ; [2009] 178 Taxman 135 (Bom), it is manifest that if the assessee has interest-free funds as well as interest bearing funds at its disposal, then the presumption would be that investments were made from interest-free funds available with the assessee. In the instant case, the interest-free funds available at the disposal of the assessee are far in excess of the interest-free loans advanced to the sister concerns. Therefore, following the mandate of the jur....
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....rectly set aside the order of disallowance under section 14A of the Act in respect of interest expenditure. When the very basis for employing section 14A of the Act on the factual matrix was lacking, the disallowance to the extent of 10 per cent. of the dividend income was not permissible. When it transpired from the record that the asses see's own funds were higher than the investment made by it and with nothing to indicate that the borrowed funds were utilised for the purpose of investment in shares and for earning dividends, the Tribunal committed no error. As far as the other administrative expenses were concerned, to put an end to the entire dispute the assessee agreed to a disallowance of Rs. 5 lakhs. This was reasonable.' (emphasis supplied) (vii) CIT v. Torrent Power Ltd. [2014] 363 ITR 474 (Guj) The relevant part of the headnote of this case is reproduced below for ready reference : 'Held, dismissing the appeal, that the material on record showed that the assessee had shareholding funds to the extent of Rs. 2607.18 crores and the investment made by it was to the extent of Rs. 195.10 crores. In other words, the assessee had sufficient ....
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....if there were funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free funds generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case this presumption was established considering the finding of fact both by the Commissioner (Appeals) and the Tribunal. The interest was deductible. East India Pharmaceutical Works Ltd. v. CIT [1997] 224 ITR 627 (SC) and Woolcombers of India Ltd. v. CIT [1982] 134 ITR 219 (Cal) relied on.' (emphasis1 supplied) (a) The Bombay High Court-CIT v. HDFC Bank Ltd. [2014] 366 ITR 505 (Bom) (page 522) : 'In the present case, undisputedly the assessee's capital, profit reserves, surplus and current account deposits were higher than the investment in the tax-free securities. In view of this factual position, as per the judgment of this court in the case of Reliance Utilities and Power Ltd. (supra), it would have to be presumed that the investment made by the assessee would be out of the interest-free funds available with the assessee. We therefore, are unable to agree ....
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....aka High Court in the case of CIT v. Microlabs Ltd. reported at [2016] 383 ITR 490 (Karn). The consistent view held in the above cases is that if the investments made by the assessee are adequately covered by own funds the presumption would be that no borrowed funds have been diverted for making these investments and further that the onus is on the Revenue to establish nexus between the borrowed funds and the investments made by the assessee. Even if, for the sake of argument, it is assumed that two interpretations on this issue are possible, it is a settled principle that the interpretation which favours the assessee must be adopted. This principle was explained by the honourable Supreme Court in the landmark decision in the case of CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 (SC). Again in the case of Manish Maheshwari v. Asst. CIT [2007] 289 ITR 341 (SC) the honourable Supreme Court observed that where two interpretations are possible the courts should interpret the provisions in favour of the taxpayer and against the Revenue. In the case of Pradip J. Mehta v. CIT [2008] 300 ITR 231 (SC) the honourable Supreme Court reiterated that 'when two interpretations are....
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....he learned Departmental representative has filed the following further submissions during the course of the hearing : "6. On the issue of 36(1)(iii) and 36(1) proviso, there is case of non- enquiry and non-application of mind. Authorised representative could not point-out any material to indicate the contrary. The attempt to say that the provisions of sections 36(1) and 14A are mutually exclusive and the Assessing Officer has discussed issue of 14A, does not prove case of application of mind and any enquiry (much less adequate enquiry). 7. In case of scrutiny the need for calling balance-sheet/profit and loss account, etc., of associate concerns and making reconciliation/ verification cannot be over-emphasised. Any Assessing Officer being a rational person, being informed of the nuances of tax laws is expected to do so. 8. Reliance is placed upon the judgment of the honourable Income-tax Appellate Tribunal Delhi in the case of NIIT v. CIT [2015] 60 taxmann.com 313 (Delhi-Trib.) where after analysing plethora of judgments on the issue the honourable Income-tax Appellate Tribunal has held (in para 28.2) that an inquiry which is just farce or mere pretence o....
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....7.09 crores in the books of account. The learned Principal Commissioner of Income-tax has also not disputed that the total investments were merely 10 per cent. of the interest-free funds available with the assessee-society. We also find that a consistent view has taken by all the judicial authorities that in the event of availability of interest-free funds a presumption would be that investments would be out of interest free funds generated or available with the assessee. In this respect, reliance 16. was placed on the decision of the Bombay High Court in the case of CIT v. Reliance Utilities and Power Ltd. [2009] 313 ITR 340 (Bom). 16.1 In light of the above discussions as well as factual matrix, we have no hesitation in holding that the order passed by the learned Principal Commissioner of Income-tax is bad in law for the following reasons :- (a) That, as discussed above, detailed inquiries were made by the Assessing Officer with regard to the capitalisation of interest to fixed assets as well as capital work-in-progress. (b) That, even on the facts of the case the assessee had sufficient interest-free funds to meet with the capital expenditure and, theref....