ORIENTAL HOTELS LTD.,CHENNAI vs. DCIT, CHENNAI

1. the Order passed u/s.263 of the IT Act, 1961, by the Principal Commissioner of Income Tax-5 in C.No.2(34)/PCIT-5/263/2016-17/AY 2005-06 dated 20.03.2017 for the AY 2005-06. is an appeal filed by the assessee against the Order passed u/s.263 of the IT Act, 1961, by the Principal Commissioner of Income Tax-5 in C.No.2(34)/PCIT-5/263/2016-17/AY 2006-07 dated 20.03.2017 for the AY 2006-07 and ITA No.1229/Mds/2017 is an appeal filed by the assessee ITA Nos.1227 to 1229/Mds/2017 :- 2 -: against the Order passed u/s.263 of the IT Act, 1961, by the Principal Commissioner of Income Tax-5 in C.No.2(34)/PCIT-5/263/2016-17/AY 2012-13 dated 20.03.2017 for the AY 2012-13.

Shri B.Srinivasa Rao, CIT, represented on behalf of the Revenue and Shri R.Vijayaraghavan, Adv., represented on behalf of the assessee.

As all the three appeals are related to the same assessee and involved identical issues, they are being disposed off by this common

It was submitted by the Ld.AR that the assessee is in the business of running hotel. The assessee had a Wholly Owned Subsidiary at Hongkong named M/s.OHL International (HK) Ltd., (in short ‘M/s.OIHK’) incorporated in Hongkong. M/s.OIHK does not have any business relationship with the assessee. M/s.OIHK had made investments in M/s.St. James Court Hotel Ltd., London. M/s.OIHK had declared dividends which were offered to tax by the assessee in its Return. The assessee had also given loans to M/s.OIHK and it had received interest on the same which had also been offered to tax in India. On the ground that the M/s.OIHK was 100% subsidiary of the assesse for the AYs 2003-04, 2004-05 & 2005-06, the assessment had originally been re-opened to bring to club the income of M/s.OIHK, the company incorporated in Hongkong with the income of the assessee. The same was subject matter of the appeal before the Tribunal to 1229/Mds/2017 :- 3 -: and for the AYs 2003-04 & 2004-05, the assessments had been quashed vide ITA Nos.1232 to 1236/Mds/2013 dated 23.01.2014. For the AYs 2005-06 & 2006-07, the issues were restored to the file of the AO to verify the issue of permanent establishment after detailed investigation and enquiry and for passing detailed order in accordance with the law.

Even though, the assessee is holding 100% shares of subsidiary company, and the WOS is effectively controlled by the assessee the income of the WOS cannot be assessed in the hands of the assessee as both are separate legal entities and were incorporated in different countries and are assessed tax in respective countries. 2. lf there is Double Taxation Avoidance Agreement exists between India and Hong Kong, then the WOS could have been treated as permanent establishment of the assessee and the income also may be assessed in assessee’s hands. Otherwise as per IT Act, 1961, there is no provision exists to assess the income of the WOS. 3. For the reason that in respect of the income, received by OIHK taxes were not paid in Hong Kong, that Income can’t be assessed in India, in the hands of the assessee. 4. And also, it is to be noted that if the WOS is held to be resident of India, it is relevant only for making an assessment on the Hong Kong company and the income of WOS can’t be clubbed with the assessee’s income. 5. Further, from the investments made, the assessee also receive dividend every year from OIHK and that also is subjected to tax.

Against the Assessment Order passed for the AYs 2005-06 & 2006- 07 giving effect to the order of the Tribunal and for the AY 2012-13 being to 1229/Mds/2017 :- 4 -: the regular assessment, where, categorically, the AO has held that the M/s.OIHK is controlled from India and therefore, as per the provisions of Sec.6(3)(ii) of IT Act, it becomes the resident of India as control and management of its affairs is situated wholly in India, the AO further proceeded to hold that even though the assessee is holding 100% shares of the subsidiary company and there is an effective control by the assessee, the income of M/s.OIHK cannot be assessed in the hands of the assessee as both are separate legal entities and were incorporated in different countries and are assessed to tax in the respective countries.

In reply to a specific query, as to whether, as per the provisions of Sec.6(3)(ii) of IT Act, 1961, the income of 100% subsidiary company M/s.OIHK could be clubbed in the hands of the assessee which is a separate legal entity. The Ld.DR was unable to give a reply. It was a submission that in view of the provisions of Sec.6(3)(ii) of IT Act , M/s.OIHK has to be treated as a resident of India.

We have considered the rival submissions. to 1229/Mds/2017 :- 6 -:

A perusal of the Assessment Orders for the AYs 2005-06 & 2006-07 clearly shows that the AO has given categorical findings on the basis of the evidences assimilated by him that M/s.OIHK is to be treated as a resident of India in view of the provisions of Sec.6(3)(ii) of IT Act, 1961. Though, we are unable to fathom, as to how, the residential status of an another assessee being M/s.OIHK can be considered or questioned or decided in the assessment proceedings of the present assessee, even though it is a wholly 100% shares of M/s.OIHK, especially, that too without putting the said separate legal entity M/s.OIHK to notice. In any case, the residency of M/s.OIHK is not the issue before us. The question only remains as to whether the AO has given effect to the order of the Tribunal for the AYs 2005-06 & 2006-07 and as to whether the income of M/s.OIHK should be clubbed in the hands of the assessee for the AYs 2005-06 & 2006-07 & 2012-13. A perusal of the Assessment Orders for the AYs 2005-06 & 2006-07 clearly shows that the AO has complied with the order of the Tribunal and has passed a Speaking Order so also for the AY 2012-13. Coming to the issue, whether the income of M/s.OIHK can be clubbed in the hands of the assessee, it is absolutely clear that the assessee and M/s.OIHK are two separate legal entities incorporated in two different countries and to whom the different taxation laws would apply relating to the respective countries in which they are incorporated. The Revenue has also not been able to point out either in the order u/s.263 or in the submissions before us as to the provisions under the IT Act, 1961, to 1229/Mds/2017 :- 7 -: by which the income of M/s.OIHK can be clubbed in the hands of the assessee. A perusal of the Assessment Order also clearly shows that the assessee has included dividend income received by it from M/s.OIHK as also the interest on the loan given to M/s.OIHK. This being so, we are of the view that as the Ld. Principal CIT-5 has not been able to point out a specific error in the order of the AO which has caused prejudices to the Revenue, the order passed u/s.263 is unsustainable and consequently, quashed.

In the result, the appeals filed by the assessee are allowed.