NAVILITH HOLDINGS LTD. vs. DEPUTY COMMISSIONER OF INCOME TAX CIRCLE INT. TAX. 2(2)(2) & ORS.

PDF · subscribers
W.P.(C)/5238/2022HC DelhiDLHC01012408202229 July 2024Bench: HON'BLE MR. JUSTICE RAVINDER DUDEJA,HON'BLE MR. JUSTICE YASHWANT VARMA5 pages
AI SummaryAllowed

What did the High Court hold?

The Delhi High Court allowed the writ petition and quashed the reassessment notice and the order disposing of objections. The Court held that once it is established that investments are in the capital account and do not constitute income, the provisions of Section 148 of the Act are not attracted. The Court found that the respondent had perfunctorily brushed aside the petitioner's objection that the investments were on capital account. The Court reasoned that if the investments do not constitute income, then the verification of the source of funds cannot be the basis for continuing reassessment proceedings, especially since the original show cause notice was not premised on the source of funds. The Court relied on its previous decisions in Angelantoni Test Technologies SRL and Divya Capital One Private Limited, which affirmed that capital account transactions do not give rise to income and that the escapement of taxable income is a prerequisite for invoking reassessment powers. The Court also noted the CBDT Instruction No. 2 of 2015 and the Union Cabinet's decision to accept the Bombay High Court's ruling in Vodafone India Services Pvt. Ltd. that share issuances are capital account transactions not giving rise to income.

What were the facts?

The petitioner, Navilith Holdings Ltd., a Cyprus-incorporated company, received a notice under Section 148 of the Income Tax Act, 1961, dated March 28, 2021, for Assessment Year 2014-15. The petitioner filed a "Nil" return and contended that its acquisition of bonds/debentures for INR 50,59,53,000 was a capital account transaction and not income, thus Section 148 was not applicable. The respondent, Deputy Commissioner of Income Tax, rejected these objections, stating that the proceedings should continue due to the absence of disclosures regarding the source of funds for the acquisition, which constituted reason to believe income had escaped assessment. The respondent also noted the petitioner was a non-filer and sought an opportunity to examine the return.

What were the issues?

1. Whether the reassessment proceedings initiated under Section 148 of the Income Tax Act, 1961, are valid when the assessee contends that the investment in bonds/debentures is a capital account transaction and not income. Assessee's Contentions: - The acquisition of bonds/debentures is a transaction on the capital account and therefore not "income" chargeable to tax. - Consequently, the invocation of Section 148 of the Act is untenable. - Relied on the High Court's decision in Angelantoni Test Technologies SRL vs. Assistant Commissioner of Income Tax and the CBDT Instruction No. 2 of 2015, which accepted the Bombay High Court's decision in Vodafone India Services Pvt. Ltd. v. Union of India, holding that investments in shares are capital account transactions not giving rise to income. - Cited Divya Capital One Private Limited v. Assistant Commissioner of Income Tax, holding that "escapement of income chargeable of tax" is a primary condition for invoking Section 147/148. Revenue's Contentions: - The proceedings are liable to be continued because the petitioner did not disclose the source of funds for the acquisition of shares, which constitutes sufficient reason to believe that income had escaped assessment. - As the petitioner was a non-filer, the respondents should be accorded an opportunity to examine the return and the Court should not interdict the inquiry at this stage.

Which sections of the Income-tax Act were involved?

Section 148,Section 147

AI-generated summary — verify with the full judgment below

$~92 * IN THE HIGH COURT OF DELHI AT NEW DELHI + W.P.(C) 5238/2022

NAVILITH HOLDINGS LTD.

.....Petitioner Through: Mr. Gautam Jain & Mr. Manish Yadav, Advs.

versus

DEPUTY COMMISSIONER OF INCOME TAX CIRCLE INT. TAX. 2(2)(2) & ORS. .....Respondents Through: Mr. Debesh Panda, SSC with Ms. Zehra Khan, JSC & Mr. Ojaswa Pathak, Adv.

CORAM:

HON'BLE MR. JUSTICE YASHWANT VARMA

HON'BLE MS. JUSTICE TARA VITASTA GANJU

O R D E R %

29.07.2024

1.

This writ petition impugns the reassessment action initiated by the respondents pursuant to a notice under Section 148 of the Income Tax Act, 19611 dated 28 March 2021 concerning Assessment Year2 2014-15. 2. The petitioner is stated to be a company incorporated on 16 November 2007 under the laws of Cyprus and is a tax resident of that nation. Pursuant to the issuance of notice under Section 148 on 28 March 2021, the petitioner furnished its Return of Income dated 26 April 2021 declaring its income to be “Nil”. 3. While responding to further queries, the petitioner disclosed that while it had acquired bonds/ debentures amounting to INR 50,59,53,000/-, the same would not be subject to tax under the Act and consequently the initiation of proceedings was untenable.

1 Act 2 AY 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 03/07/2025 at 22:45:40

4.

The petitioner in its objections which were filed in response to the notices issued by the respondents had also taken the categorical position that investments in bonds/debentures would be a transaction on the capital account and thus not liable to be construed as “income”. It was on the aforesaid premise that it contended that the question of invocation of Section 148 of the Act would not even arise. 5. The respondents have ultimately and in terms of the order of 16 March 2022, while disposing of the objections which were tendered, observed that notwithstanding the aforesaid stand as struck by the petitioner, in the absence of disclosures having been made with respect to the source of funds for acquisition of the shares in question, the proceedings are liable to be continued and that the same would in any case constitute sufficient reason to believe that income had escaped assessment. 6. In the counter affidavit, it has been additionally averred that since the petitioner was a non-filer, the respondents should be accorded the opportunity to examine and review the Return as submitted and that there would be no justification for this Court to interdict the inquiry by interfering with the impugned proceedings at this stage. 7. We note that insofar as investments in bonds/ debentures or other such securities being transactions of a capital character can no longer be questioned in light of the decision of this Court in Angelantoni Test Technologies SRL vs. Assistant Commissioner of Income Tax3. Our Court, while dealing with this aspect in Angelantoni, had observed as follows:-

3 2023 SCC OnLine Del 8486 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 03/07/2025 at 22:45:40

“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 v. 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: “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.” 7. Further, the action of the Respondents is in contravention of the CBDT Instruction No. 2 of 2015 dated 29th January, 2015 reiterating the view expressed by the Bombay High Court in Vodafone India Services Pvt. Ltd. v. Union of India ((2014) 368 ITR 1 (Bom)) that no income arises on investment in shares since it is a capital account transaction. 8. In fact, the judgment of the Bombay High Court was accepted by the Union Cabinet and a press note dated 28th January, 2015 was issued by the Press Information Bureau, Government of India. The relevant portion of the said press note is reproduced hereinbelow: “Acceptance of the Order of the High Court of Bombay in the case of Vodafone India Services Private Limited 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 03/07/2025 at 22:45:40

The Union Cabinet, chaired by the Prime Minister Shri Narendra Modi, in a major decision, has decided to accept the order of the High Court of Bombay in the case of Vodafone India Services Private Limited (VISPL) dated 10.10.2014. This is a major correction of a tax matter which has adversely affected investor sentiment. Based on the opinion of Chief Commissioner of Income-tax (International Taxation), Chairperson (CBDT) and the Attorney General of India, the Cabinet decided to i. accept the order of the High Court of Bombay in WP No. 871 of 2014, dated 10.10.2014; and not to file SLP against it before the Supreme Court of India; ii. accept of orders of Courts/IT AT/DRP in cases of other taxpayers where similar transfer pricing adjustments have been made and the Courts/IT AT/DRP have decided/decide in favour of the taxpayer. The Cabinet decision will bring greater clarity and predictability for taxpayers as well as tax authorities, thereby facilitating tax compliance and reducing litigation on similar issues. This will also set at rest the uncertainty prevailing in the minds of foreign investors and taxpayers in respect of possible transfer pricing adjustments in India on transactions related to issuance of shares, and thereby improve the investment climate in the country. The Cabinet came to this view as this is a transaction on the capital account and there is no income to be chargeable to tax. So applying any pricing formula is irrelevant. xxxxxxxxx VISPL filed a 2nd Writ Petition in the High Court of Bombay. The High Court, on 10.10.2014, has amongst other things observed: xxxxxxxxx e) The issue of shares at a premium is on Capital account and gives rise to no income. The submission on behalf of the revenue that the shortfall in the ALP as computed for the purposes of Chapter X of the Act is misplaced. The ALP is meant to determine the real value of the transaction entered into between AEs. It is a re-computation exercise to be carried out only when income arises in case of an International transaction between AEs. It does not warrant re-computation of a consideration received/given on capital account.” 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 03/07/2025 at 22:45:40

9.

Further, this Court in Divya Capital One Private Limited (Earlier Known as Divya Portfolio Private Limited) v. Assistant Commissioner of Income Tax Circle 7(1) Delhi, 2022 SCC OnLine Del 1461 held that „Whether it is “information to suggest” under amended law or “reason to believe” under erstwhile law the benchmark of “escapement of income chargeable of tax” still remains the primary condition to be satisfied before invoking powers under Section 147 of the Act‟.”

8.

In our considered opinion, once it was be established that the investments made by the petitioner were in the capital account and would consequently not amount to income, the provisions of Section 148 of the Act would not stand attracted. 9. We additionally note that this objection although specifically taken, has been perfunctorily brushed aside by the respondent by merely observing that further verification with respect to source of funds for the investments made would merit further inquiry. 10. We find ourselves unable to sustain that line of reasoning since once it was admitted that the investments would not constitute income, the question of verification of source of funds could not have been made the basis for continuing the exercise of reassessment. This more so since the original show cause notice was not premised on the source of funds. 11. We consequently allow the instant writ petition and quash the notice referrable to Section 148 of the Act dated 28 March 2021 as well as the order disposing objections dated 16 March 2022.

YASHWANT VARMA, J

TARA VITASTA GANJU, J JULY 29, 2024/neha 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 03/07/2025 at 22:45:40

More judgments on Section 148

All 35,022 judgments and leading authorities on Section 148 →

Recent GST High Court judgments

Search GST case law →