LINXON PVT LTD. vs. ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE INT. TAX. 2(2)(1)

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W.P.(C)/3321/2024HC DelhiDLHC01011117202409 April 2024Bench: HON'BLE MR. JUSTICE YASHWANT VARMA,HON'BLE MR. JUSTICE PURUSHAINDRA KUMAR KAURAV2 pages
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What did the High Court hold?

The High Court held that the subscription of shares in an Indian entity is a transaction on the capital account and does not give rise to any income. Consequently, it cannot form the basis for initiating reassessment proceedings under Section 148 of the Income Tax Act, 1961, on the ground of income escaping assessment. The Court found resonance with its own decision in Angelantoni Test Technologies SRL vs. Assistant Commissioner of Income Tax, which followed the principle laid down in Nestle SA Versus Assistant Commissioner of Income Tax and the Bombay High Court's decision in Vodafone India Services Pvt. Ltd. v. Union of India, accepted by the CBDT. The Court reasoned that the fundamental premise of the Revenue that such an investment amounted to 'income' was flawed. Therefore, the notices dated 27 February 2023 and 25 March 2023 issued under Section 148A(b) and 148, and the order dated 25 March 2023 issued under Section 148A(d) were unsustainable. The writ petition was allowed, and the impugned notices and order were quashed.

What were the facts?

The petitioner, Linxon Pvt Ltd., filed a writ petition challenging the initiation of action under Section 148 of the Income Tax Act, 1961. The respondent is the Assistant Commissioner of Income Tax. The core of the dispute revolves around the nature of share subscription in an Indian entity. The petitioner argued that such a transaction is on the capital account and therefore not income that could have escaped assessment. The High Court had previously noted the challenge raised by the petitioner. The assessment years are not explicitly stated but the notices under challenge are dated 27 February 2023 and 25 March 2023, with an order under Section 148A(d) also dated 25 March 2023. The amount in dispute is not stated.

What were the issues?

1. Whether the subscription of shares in an Indian entity constitutes a transaction on the capital account and thus cannot be treated as 'income' for the purpose of initiating reassessment proceedings under Section 148 of the Income Tax Act, 1961? The Assessee (Petitioner) contended that the subscription of shares in an Indian entity is a capital account transaction and does not give rise to any income. Therefore, the premise of the Revenue that income had escaped assessment was flawed, rendering the reassessment proceedings invalid. The Assessee relied on the High Court's decision in Angelantoni Test Technologies SRL vs. Assistant Commissioner of Income Tax and the Bombay High Court's decision in Vodafone India Services Pvt. Ltd. v. Union of India, which was accepted by the CBDT via Instruction No.2 of 2015. The Revenue (Respondent) did not dispute that the subscription of shares in an Indian entity would constitute a transaction on the capital account and not fall within the ambit of Section 148. The judgment does not record any specific arguments made by the Revenue beyond this concession.

Which sections of the Income-tax Act were involved?

Section 148,Section 148A(b),Section 148A(d)

AI-generated summary — verify with the full judgment below

$~51 * IN THE HIGH COURT OF DELHI AT NEW DELHI + W.P.(C) 3321/2024 & CM APPL. 13731/2024 (Stay)

LINXON PVT LTD.

..... Petitioner

Through: Mr. Ananya Kapoor, Mr. Vibhu

Jain and Mr. Amandeep Mehta

and Mr. Shivam Yadav, Advs.

Versus

ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE INT. TAX. 2(2)(1)

..... Respondent

Through: Mr. Ruchir Bhatia, Sr. SC

alongwith Ms. Deeksha Gupta,

Advocate.

CORAM:

HON'BLE MR. JUSTICE YASHWANT VARMA

HON'BLE MR. JUSTICE PURUSHAINDRA KUMAR

KAURAV

O R D E R %

09.04.2024

1.

This writ petition impugns the initiation of action under Section 148 of the Income Tax Act, 1961 [“Act”]. We had in terms of our order of 05 March 2024 succinctly noticed the challenge which stood raised. Before us today, it could not be disputed that the subscription of shares in an Indian entity would constitute a transaction on the capital account and thus not fall within the ambit of Section 148. The view as expressed above finds resonance in the decision rendered by the Court in Angelantoni Test Technologies SRL vs. Assistant Commissioner of Income Tax [2023 SCC OnLine Del 8486] where while dealing with an identical question, we had observed as follows:- “6. It is settled law that investment in shares in an Indian subsidiary cannot be treated as „income‟ as the same is in the nature of “capital account transaction” not giving rise to any income. In Nestle SA Versus Assistant Commissioner of Income Tax (W.P.(C) No. 12643/2018), this Court held that the allegation of the Revenue that the investment in the shares of Indian subsidiary amounted to income‟ is flawed. The relevant portion of the said judgment is reproduced hereinunder: This is a digitally signed order. The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 02/05/2024 at 12:43:13

“24. The principal objection of the Petitioner that its investment in the shares of its subsidiary cannot be treated as „income‟ is well founded. The decision of the Bombay High Court in Vodafone India Services Pvt. Ltd. v. Union of India (supra) holding such investment in shares to be a „capital account transaction‟ not giving rise to income was accepted by the CBDT. Para 2 of Instruction No.2 of 2015 dated 29th January, 2015 reads thus:

“2. It is hereby informed that the Board has accepted the decision of the High Court of Bombay in the above mentioned Writ Petition. In view of the acceptance of the above judgment, it is directed that the ratio decidendi of the judgment must be adhered to by the field officers in all cases where this issue is involved. This may also be brought to the notice of the ITAT, DRPs and CIT(Appeals).”

25.

Therefore, the fundamental premise of the Respondent that the above investment by the Petitioner in the shares of its subsidiary amounted to „income‟ which had escaped assessment was flawed. The question of such a transaction forming a live link for reasons to believe that income had escaped assessment is entirely without basis and is rejected as such.”

2.

Following the aforesaid, we find ourselves unable to sustain the impugned notices dated 27 February 2023 and 25 March 2023 issued under Section 148A(b) and 148 respectively and the impugned order dated 25 March 2023 issued under Section 148A(d) of the Act. 3. The writ petition is accordingly allowed. Consequently, the aforenoted impugned notices and the impugned order are hereby quashed.

YASHWANT VARMA, J.

PURUSHAINDRA KUMAR KAURAV, J. APRIL 9, 2024/p This is a digitally signed order. The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 02/05/2024 at 12:43:13

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