UNION OF INDIA AND ANR. vs. AZADI BACHAO ANDOLAN AND ANR.

CIVIL APPEAL No. 8161/2003Supreme Court2003 INSC 52607 October 2003Bench: 2 JudgesAuthor: RUMA PAL, B.N. SRIKRISHNA79 pages
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What did the Supreme Court hold?

The Supreme Court held that the Indo-Mauritius DTAC, notified under Section 90 of the Income Tax Act, 1961, is valid and can override the provisions of the Income Tax Act. The principle of piercing the corporate veil cannot be applied against a valid treaty. The DTAC is not ultra vires due to the susceptibility of 'treaty shopping' by third-party countries, as there are no disabling conditions within the treaty. The motive for taking benefit under the DTAC is irrelevant. CBDT Circular No. 789 dated April 13, 2000, is valid, even if inconsistent with the Income Tax Act, for the implementation of the DTAC. The non-indication of the source of power does not render the circular ultra vires; it was issued to avoid wastage of time and energy. Assessees are considered 'liable to tax' under the Mauritius Income Tax Act, 1995, even if granted exemption, and are therefore entitled to benefits under the DTAC. The Court emphasized that acts valid in law cannot be treated as non-est merely based on a perceived underlying motive or economic detriment to national interests, referencing established legal principles on tax avoidance and the interpretation of legal arrangements. The Delhi High Court erred in quashing the circular, and its judgment was set aside. The circular was declared valid and efficacious. The Court did not expressly leave any issue undecided.

What were the facts?

The Union of India and others (Revenue) appealed against a Delhi High Court judgment that quashed CBDT Circular No. 789 dated April 13, 2000. This circular instructed assessing officers to treat assessees with a 'Certificate of Residence' from Mauritius authorities as residents of Mauritius, enabling them to claim benefits under the India-Mauritius Double Taxation Avoidance Convention (DTAC). The DTAC, notified under Section 90 of the Income Tax Act, 1961, exempts capital gains on the sale of shares of Indian companies for Mauritius residents. The Revenue had issued show cause notices to Foreign Institutional Investors (FIIs) claiming Mauritius residency, alleging they were 'shell companies' controlled by third parties and thus not genuine residents eligible for DTAC benefits. The High Court quashed the circular, deeming it ultra vires and encouraging 'treaty shopping'.

What were the issues?

1. Whether the Indo-Mauritius Double Taxation Avoidance Convention (DTAC), notified under Section 90 of the Income Tax Act, 1961, is valid and can override the provisions of the Income Tax Act, particularly concerning the application of the principle of piercing the corporate veil (Article 73 and 265 of the Constitution of India, Section 4, 5, & 90 of the Income Tax Act, 1961, Articles 3, 4 and 13(4) of the DTAC). 2. Whether CBDT Circular No. 789 dated April 13, 2000, issuing instructions to treat an assessee with a 'Certificate of Residence' from Mauritius authorities as a 'resident' of Mauritius for DTAC benefits, is valid, even if inconsistent with the Income Tax Act, and whether it constitutes an impermissible delegation of power (Section 90 and 119 of the Income Tax Act, 1961). 3. Whether assessees granted exemption under the Mauritius Income Tax Act, 1995, are considered 'liable to tax' under that Act for the purpose of claiming benefits under the DTAC, and if assessees incorporated under the Mauritius Offshore Business Activity Act, 1992 (MOBA), are considered 'residents' of Mauritius under the DTAC (Mauritius Income Tax Act, 1995, Mauritius Offshore Business Activity Act, 1992 - Sections 26 & 27). 4. Whether third-party nations taking the benefit of the DTAC ('treaty shopping') is permissible under the DTAC, and if the motive of taking benefit is relevant (Article 13(4) of the DTAC). Assessee's Contentions (Respondents): The DTAC, as a fiscal treaty, must comply with Article 265 of the Constitution and cannot contradict the Income Tax Act. The Central Government, as a delegatee of legislative power under Section 90, cannot grant exemptions contrary to the Act. The DTAC is ultra vires Section 90 as it encourages 'treaty shopping', which is unethical and fraudulent. Assessees exempted under the Mauritius Income Tax Act are not liable to tax there and should be taxed in India. Those incorporated under MOBA are not 'liable to taxation' in Mauritius and are 'shell' companies, a 'sham' or 'device' to exploit the DTAC. The Central Government cannot claim the absence of anti-abuse provisions by third countries. Revenue's Contentions (Appellants): Several tax treaties with similar terms have been notified under the Income Tax Act and interpreted uniformly by various High Courts, warranting no interference due to the doctrine of stare decisis. Exemption from income tax on capital gains does not mean an assessee is not 'liable to tax' under the Mauritius Income Tax Act. There are no disabling conditions in the DTAC prohibiting third-nation residents from benefiting, and the motive of incorporation is irrelevant.

Which sections of the Income-tax Act were involved?

Section 4,Section 5,Section 90,Section 119,Section 49A

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A B c UNION OF INDIA AND ANR. v. AZADI BACHAO ANDOLAN AND ANR. OCTOBER 7, 2003 [RUMA PAL AND B.N. SRIKRISHNA, JJ.] Constitution of India-Articles 73 and 265-Fncome Tax Act, 1961- Sections 4, 5 & 90-Indo-Mauritius Direct Tax Avoidance Convention (DTAC) dated 1.4.1983-Articles 3, 4 and 13(4)-Exemption to assessees under DTAC on capital gains on sale of shares of Indian companies- Power of Central Government to grant exemption-Validity of-Held, valid DTAC notified under Section 90 of the Income Tax Act-It can override the provisions of the Income Tax Act and hence, the principle of piercing the corporate veil cannot be applied-DTAC cannot be held ultra D vires on suscepiibility of 'treaty shopping' by third party countries- Income Tax Act, 1922-Section 49A.

Section 90-CBDT Circular No. 789 dated 13.4.2000 issuing instructions to Revenue to treat an assessee with a 'Certificate of Residence' E issued by Mauritius authorities as 'resident' of Mauritius-Validity of- Held, valid even if inconsistent with the provisions of the Income Tax Act for implementation of DTAC-Circular does not amount to impermissible delegation of power. F Section 119-CBDT Circular No. 789 dat

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