M/S. KRISHAK BHARATI COOPERATIVE LTD.,NEW DELHI vs. ACIT, NEW DELHI

PER H.S. SIDHU, J.M.

These two appeals filed by the Assessee are directed against the Order dated 02.11.2015 & 29.10.2015 respectively passed by the Ld. Principal Commissioner of Income Tax, Delhi-10, New Delhi u/s 263 of the Income Tax Act, 1961 relevant for the

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assessment years 2010-2011 & 2011-12. Since the issues involved in these appeals are common and identical, therefore, these appeals were heard together and are being disposed of by this common order for the sake of convenience, by dealing with ITA No. 6785/Del/2015 (AY 2010-11).

“(i) The impugned order passed u/s 263 of the I.T. Act is bad in law, being without jurisdiction for the following reasons:-

(a) While the show cause notice referred to only one issue, the final order passed by the learned PCIT is on three issues and thus the appellant- society was denied opportunity which is against the well established principles of natural justice and which vitiates the entire proceedings u/s 263.

(b) At the time of original assessment, there was full application of mind on the part of the Assessing on the same issue with regard to which the show cause notice was issued by the learned PCIT.

(c) After full app1ication of mind and after considering the material on record and the replies filed by the appellant-society, the Assessing Officer has taken a view at the time of original assessment which is a plausible view and under section 263 the learned PCIT cannot substitute his view for the view adopted by the Assessing

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Officer.

(d) The order passed by the learned PCIT is violative of the well established principles of consistency of approach.

(ii) On merits also the directions issued by the learned PCIT arc totally unjustified.”

ITA No. 6785/Del/2015 - A.Y. 2010-11

3.1 The Assessee has established a branch office in Oman to oversee its investment in OMIFCO. The branch office is independently registered as a

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company under the Omani laws and it is an accepted position by the Income Tax Department that the said branch office constitutes Permanent Establishment (PE) in Oman in terms of Article - 25 of Double Taxation Avoidance Agreement (DTAA) between India and Oman. The said branch office maintains its own Books of Account and files, Returns of Income as per the local income tax law of Oman.

3.2 The Return of Income was filed on 24.09.2010. Later on the case was selected for scrutiny and notices under Section 143(2) and 142(1) of the I.T. Act were issued along with detailed questionnaires. During the course of the Assessment Proceedings, detailed replies were filed on behalf of the Assessee. The Authorized Representative of the Assessee duly attended before the Assessing Officer and, as mentioned in the Assessment Order, all the necessary details were furnished, examined and the case was discussed. Thereafter, the assessment was completed under Section 143(3) vide order dated 27.02.2014 by the Assessing Officer. While completing the assessment, inter alia, the Assessing Officer allowed tax credit of a sum of Rs. 41.53 crores in respect of the dividend income of Rs. 134.41 crores received by the Assessee from OMIFCO. The said dividend Income was simultaneously brought to the charge of tax in the assessment as per the Indian Tax Laws. As per the Omani Tax Laws, exemption was granted to dividend income by virtue of the amendments made

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in the Omani Tax Laws with effect from the year 2000. However, by virtue of the provisions of Article - 25 of DTAA referred to above, the Assessing Officer allowed credit for the aforesaid tax which would have been payable in Oman but for the exemption granted.

3.3 After the completion of the assessment, the Ld. Principal Commissioner of Income Tax (hereinafter referred as “Ld. PCIT”), issued a Show Cause Notice dated 28.09.2015 under Section 263 of the I.T. Act, 1961. The ground on the basis of which the said notice was issued is reproduced below for ready reference from the notice itself:

"A perusal of the records indicates that in the computation of income filed by the Assessee, dividend income received from OMIFCO, Oman, of Rs.143,83,99,800 was included in the total income of the Assessee. Thereafter, tax credit of Rs. 41,44,23,149 was claimed as relief u/s 90 of the Income Tax Act, 1961 read with Article 11, 7 and 25 of the India-Oman DTAA. This claim of tax credit was allowed by the Assessing Officer during the Assessment Proceedings. Dividend income received in Oman is exempt from taxation in as per Article 8 (bis) of the Oman Company Income Tax Law, which is reproduced below:

"Tax shall not apply on dividends that the company earns from its ownership of shares in the capital of any other

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company.

Therefore, no tax was payable by KRIBHCO on the dividend receipts of Rs.143,83,99,800 in Oman. The DTAA between India and Oman allows tax credit in India for the taxes payable in Oman. Even though no taxes were actually paid on the dividend income from OMIFCO, the Assessee has claimed tax credit by relying on Article 25(4) of the India-Oman DTAA, which states -

“25(4) The tax payable in a Contracting State mentioned in paragraph 2 and paragraph 3 of this Article shall be deemed to include the tax which would have been payable but for the tax incentives granted under the laws of the Contracting State and which are designed to promote economic development.” Article 25(4) requires that in order to claim credit, tax should have been payable in Om an if not for the tax incentives granted in Oman,. since Article 8(bis) exempts dividend income received in Oman in totality, no tax was payable in Oman at all at any stage and thus no tax was foregone on account of tax incentives by Oman.

Article 3(2) of the India-Oman DTAA provides that if a term used in the agreement is not defined then the term will have the meaning which it has under the Law of that Contracting State concerning the taxes to which this

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Agreement applies (i.e. India). The term 'tax incentive' has not been defined in the India Oman DTAA. The meaning must, therefore, be inferred from Indian Law. The term tax incentive is not defined in the Income Tax Act, 1961. The tax incentive refers to income which would otherwise be taxable but has not been taxed with a view to promote economic activity in certain sectors or in the economy as a whole. Any income which is not taxed at all as per the tax laws cannot be construed as an incentive. The Omani Companies Income Tax Law vide Article 8(bis) exempts dividend income from taxation in Oman. this cannot be interpreted as an incentive as it exists across the board with no exceptions in Oman. It is simply a feature of Oman's Tax Law that does not tax dividend income. Hence, it cannot be construed as an incentive granted under Oman's tax laws.

Consequently, reliance on Article 25(4) of the India Oman DTAA was erroneous in this case and no tax credit was due to the Assessee under Section 90 of the IT Act. The Assessment Order passed, accepting the contentions of the Assessee and allowing tax credit is erroneous as well as prejudicial to the interest of the Revenue. You are, therefore, in terms of provisions of sub-section (1) of Section 263 hereby given an opportunity to furnish justification as to why the tax credit of Rs. 7

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41,44,23,149 should not be withdrawn for A.Y. 2010-11."

(i) Issue of notice under Section 263 is illegal and ab initio void for the reason that on the very specific issue relating to allowing tax credit for the deemed tax paid on dividend income in Oman, was allowed at the time of original assessment. after raising detailed enquiries and after considering the detailed reply filed before the Assessing Officer. It was pointed out that in the query letter issued under Section 142(1) of the I.T. Act, 1961 during the course of Assessment Proceedings, specific query was raised calling upon the Assessee to give a detailed note on the tax credit claimed by the Society in respect of dividend income received from OMIFCO. The Assessee filed a letter dated 11.12.2013 wherein he filed it filed the complete details to the Assessing Officer and the entire factual and legal position was explained with reference to the provisions of Section 90 of the IT Act, 1961 read with Article - 25(4) of the DTAA. On this basis it was pointed out to the Ld. PCIT that after thoroughly examining the issue the Assessing Officer has taken a view which was a plausible or possible view and, therefore, the Ld. PCIT is debarred from substituting his own view in place of the views correctly adopted by the Assessing Officer. Several decisions were also cited in support of this contention.

(ii) On the merits of allowing credit of the deemed tax also, detailed submissions were made. The provisions of DTAA read with the relevant provisions of Omani Tax Laws, as clarified by the

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Ministry of Finance, Secretary General for Taxation, Muscat, Sultanate of Oman, were also referred to and copies of all relevant documents were filed before the Assessing Officer. It was contended in this reply that the tax credit has been allowed by the Assessing Officer after duly considering the merits of the claim made by the Assessee.

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1961, the Ld. PCIT has observed as under in his order passed under Section 263:

"The main point made by the Assessee with regard to non maintainability of notice under Section 263 of the Income Tax Act revolves around the argument that the Assessing Officer has granted relief under Section 90 of the Income Tax Act after considering the provisions of the Act, the treaty and since the order has been passed after making enquiries the order cannot be turned as erroneous. The Assessee has also made reference to the decision of Hon'ble Supreme Court in the case of Malabar Industrial Company Ltd., vis err [2000] 243 ITR 83 (SC) to support its claim. He has also made reference to certain other decisions. The claim of the Assessee that the Assessing Officer has not allowed deduction of tax credit after due application of mind and, therefore, jurisdiction under Section 263 will not lie without merit. The Assessee has erroneously tried to mix up the provisions of Section 147 and Section 263 of the Income Tax Act. Provisions of Section 147 which are initiated by the AO himself do restrict reopening of assessment where as a result of certain application of mind by the AO an opinion is formed. Under Section 147 of the Income Tax Act, the AO cannot change his opinion unless there is a certain new tangible information requiring change of opinion. This also includes a situation when there is application of mind but on account of failure on the point of Assessee to disclose full at time facts and income could not be assessed. The AO in such case would be free to record his reason and initiate action vx] s 147 of the Act. Whereas, under Section 263 after having made enquiries, having applied his mind after taking all facts and the legal position into account the Assessing Officer passes an order which is erroneous and prejudicial to the interest of Revenue, the ClT would be competent to exercise

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jurisdiction under Section 263 of the Act. The jurisdiction under Section 263 is not restricted either to the limitation of Section 147 as claimed by the Assessee nor it can be restricted to the provisions of Section 154 which deal with the mistakes apparent from record only. Therefore, the claim of the Assessee is found to be without this merit and accordingly not maintainable.

Similarly, reliance on the decision in the case of Malabar Industrial Company Ltd., is also misplaced. The decision of Hon'ble Supreme Court very clearly lays down that where two equal views on a given set of facts are possible and the AO has taken one of the views the jurisdiction under Section 263 could not lie. The decision of Hon'ble Supreme Court merely reiterates that position of law which provides for action by the Commissioner in the case where the orders are found be erroneous. In the case where one of the possible views has been taken by the Assessing Officer, after appreciating the position of law and facts of the case, definitely the order could not be considered to be erroneous. However, in order to fall within the benefit of this decision of Hon'ble Supreme Court, the Assessee has to clearly show that the view taken by the Assessing Officer was a possible view as per law. This, however, is not the case as indicated above. In view of the above the claim of the Assessee that the action under Section 263 is not maintainable does not serve any purpose and is accordingly rejected."

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have jurisdiction u/s. 263 of the I.T. Act, if he feels that the view adopted by the Assessing Officer is legally untenable. The Ld. PCIT has, accordingly, made the following observations in his impugned order passed u/s. 263 of the I.T. Act.

"This from the plain and simple reading of both the Oman Tax Law as applicable from 01-01-2010 (Royal Decree No. 28/2009) or the earlier law (Royal Decree 68/2000) effective from the tax year 2000, there is no tax payable on dividend in Oman and accordingly, no tax has been paid. Further, the exemption is not available because of any economic incentive for economic development as the case of the Assessee is not covered under the exemption. The Royal Decree 28/2009, which came into force w.e.f. 01-01-2010 makes the position very clear and reiterates the position of exemption of dividend income provided for in the Article 8 of old Royal Decree 68/2000. The Royal Decree of 2009 also provides for incentive only for a period of five years. In case of Assessee that period has elapsed long back."

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order the learned PCIT has identified this new issue as under:-

" ............ Another interesting feature of the accounts is that Assessee has credited much more income than the dividend received by them. The movement of investment in the final accounts as on 31st December, 2010 in notes to the financial statement No. (4) it has been indicated as below: 31-12-2010 (US$) 31 (US$) Dec 93,521,908 Opening Balance 114,251,371 37,757,271 Share of profit for 59,781,818 the year {17 2027 2271} Dividend received (43 180 000) (114,521,271) Closing balance 130,853,189

The Assessee has, however, declared only its dividend income in its P&L Account written in India as per Indian Tax Laws and accounting standards and submitted to the Department. The accretion and addition to its opening capital in terms of the profit as per account of PE which have been duly audited and submitted during the proceedings are not disclosed in its accounts in India. This makes it abundantly clear that the dividend declared or received only is being shown in its income in India and thus confirming that the income received by the Assessee by its own admission is its dividend income and not business income as claimed by the Assessee."

7.1 The Ld. PCIT held that even the assumed profits reflected in the Books of Account of the PE of the

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Assessee by virtue of undistributed and un-received dividend income, were also chargeable to tax under the provisions of the I.T. Act, 1961.

7.2 At the end of the impugned order under Section 263, the Ld. PCIT directed the Assessing Officer to modify the Assessment Order as under:

" 1. That the tax credit allowed by the A. O. in respect of dividend income in the Assessment Order is not available to Assessee in terms of either para (1) or para (4) of the Article 25 of the Indo-Oman DTAA. 2. The share of profit of its investment in Oman (to the extent it is not declared as dividend) is to be included in the global income of the resident tax payer India as per Section 4 & 5 of the I.T. Act. This part of income would be eligible for allowance of tax credit as per para (4) of Article 25 of the Indo-Oman DTAA to the extent of taxes which would have been payable but for the incentive provided by the Royal Decree No. 28/2009 w.e.f. 01-01-2010 on any other notification,. The Assessee shall provide it to the A. O. if there is any such notification prior to this Royal Decree 28/2009 and still applicable for the current year. The income shall be computed in terms of notes to account of the financial statement of the branch office of the Assessee is Oman. the tax credit would be available for income earned after this date and tax credit shall be computed accordingly. However, the A.O. shall ensure that the Assessee has been granted exemption by the Oman Tax Authority as provided in Article 118 of Royal Decree No. 28/2009.] It is also seen that the Assessee has not furnished complete and true income or particulars of income and, therefore, the A.O. 14

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shall also frame a view thereon and take action as per laws."

(i) Tax credit on dividend is not allowable. (ii) Profits pertaining to undistributed dividend should be brought to charge of tax. (iii) The Assessing Officer should also frame a view with regard to the default of not furnishing complete and true income or particulars of income on the part of the Assessee.

"9. At the very outset, the Assessee 15

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strongly challenges the legality of the order passed the Ld. PCIT under Section 263 of the I.T. Act, 1961. It is submitted that the jurisdictional conditions and the legal requirements of Section 263 arc not satisfied so as to vest the Ld. PCIT with the powers under Section 263 with a view to reverse the concluded scrutiny assessment passed under Section 143(3) after due and full application of mind on the part of the Assessing Officer. In support of the contention that the impugned order under Section 263 is bad in law and ab initio void, the following submissions are made for the kind consideration of this Hon'ble Tribunal:

(i) As mentioned above, the Ld. PCIT issued notice under Section 263 with regard to only one issue but he has passed the order on three issues. He has directed the Assessing Officer to tax the assumed profits on account of the undistributed dividends by OMIFCO as reflected in the Books of Account of the PE. He has also directed the Assessing Officer to frame a view regarding non-furnishing of complete details or furnishing inaccurate particulars by the Assessee. On these two issues, there was complete denial of natural justice on the part of the 16

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Ld. PCIT for the reason that Assessee Society was not allowed any opportunity whatsoever to present its case on these Issues. In these circumstances, the entire order passed by the Ld. PCIT under Section 263 is vitiated and rendered bad in law. It is an established legal position that there must be complete nexus between the reasons or grounds indicated in the Show Cause Notice issued under Section 263 and the final order passed under Section 263. Kind reference is invited to the Hon'ble Delhi High Court judgment in the case of CIT Vs. Ashish Rajpal 320 ITR 674. For ready reference the relevant part of the head note of this case is reproduced below: "Held, dismissing the appeal, that there was nothing on record which would show that the Assessee was given an opportunity to respond to the discrepancies which formed part of the order in revision but were not part of notice dated 11.5.2016. Even though the notice issued by the Commissioner before commencing the proceedings under Section 263 referred to four issues, the final order passed referred

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to nine issues, some of which obviously did not find mention in the earlier notice and hence resulted in the proceedings being vitiated as a result of the breach of the principles of natural justice."

(emphasis supplied)

For the same proposition , the Assessee Society relies on the Hon'ble Mumbai Tribunal decision in the case of Colorcraft V/s ITO 303 ITR (AT) 7. The relevant part of the head notes of this decision is reproduced below for ready reference:

"Held, (i) that the provisions of Section 263 provide that an opportunity is to be provided to the Assessee before passing an order. That means the Assessee is required to reply to the reasons given by the Commissioner in the Show Cause Notice. The opportunity to be granted must be effective and not an empty formality. A person who is required to show cause must know the basis on which action is proposed. Obviously, therefore, the notice issued must indicate the reasons on which the order of assessment is considered to be erroneous and prejudicial to the

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interests of the Revenue. This means there must be nexus between the reasons given in the Show Cause Notice and the order of the Commissioner under section 263. The reason given in the Show Cause Notice to the Assessee was that duty drawback received by the Assessee could not be considered as profit derived from export in view of the Supreme Court judgment and, therefore, the said amount did not qualify for deduction under Section 80HHC. However, the order under Section 263 held the assessment order an erroneous on different grounds, namely, [i] the Assessing Officer should have excluded the export incentives of Rs. 18,99,015 instead of Rs.18,58,350, (ii) Central excise refund and sales tax set off should have been excluded from the business profits under clause (baa) of the Explanation to Section 80HHC, and (iii) Central excise refund and sales tax set off should have been included in the total turnover. This clearly showed that there was no nexus between the reasons given in the Show Cause Notice and the reasons given in the order for holding the order of the Assessment Order erroneous .qua deduction under

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Section 80HHC.: The order of revision was not valid with reference to Section 80HHC." (emphasis supplied)

Similar view has been adopted in the following cases:

a) CIT V/s. Roadmaster Industries of India Limited 40 taxmann. Com 298 (P&H) (b)Synergy Entrepreneur Solutions (P) Ltd vs. CIT 11 taxmann.com 385 (Mum.ITAT)

In the backdrop of the factual and the legal position explained above, it is respectfully submitted that there is an inherent and fatal defect in the order passed by the Ld. PCIT under Section 263 for the reason that on some of the issues covered in the order, the Assessee Society was not given any opportunity. Therefore, on this ground alone the order passed by the Ld. PCIT under Section 263 deserves to be quashed.

(ii) The Assessee Society also challenges the legality of the order passed under Section 263 on the ground that the Ld. PCIT has completely ignored the past history of the case

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and has tried to substitute his arbitrary and unreasonable view in place of the view adopted by thc Department itself consistently for the past several years. The Ld. PCIT has discarded the view adopted by the Department in the past in spite of the fact that the factual and legal position continues to be the same. It is submitted that this very same issue was thoroughly examined in the case of the Assessee Society in the scrutiny assessment made under Section 143(3) of the I.T. Act, 1961 for the A.Y. 2006-07 vide Assessment Order dated 31 st December, 2008 passed by the Additional CIT, Rangc - 24, New Delhi. The relevant part of this order is reproduced below for ready reference:

"9. Tax credit as per DTAA with Oman:

The Assessee has claimed a tax credit of Rs.6,OO,49,920 on the dividend income of Rs. 20,01,66,440 received from Oman India Fertilizer Company SAOC (herein after referred as OMIFCO). It has been submitted that the Assessee is a joint venture partner in the above company. It has received dividend of Rs. 20,01,66,400 during the previous year which has been included in its income under the head Misc. Income under Schedule 7 - 'Other Revenue'. The 21

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Assessee has referred to Section 90 of the Income Tax Act and claimed benefit of deemed tax paid in Oman by its PE in Oman. a reference has further been made to Article 25 of DTAA, Article 7, 11 and 25 of the DTAA between India and Oman.

The Assessee has submitted that it has filed its return for the year ended 31-3-2006 under Oman's Income Tax Law for its branch namely KRIBHCO Musket Branch PE. Reference has further been made to Article 8 (bis) under Oman's Income Tax Law. A copy of the Assessment Order as made in Oman for its PE has been filed to support its contention that the dividend income has been exempted in Oman in accordance with Article 8(bis) of Income 'fax Law of Oman. The Assessee's claim of tax sparing @ 30 as per the Royal Decree No. 68/2000 read with Royal Decree No. 48/81 under Company's Income Tax Law, appears to be justified. The credit for Rs.6,00,49m,920 as deemed tax paid under DTAA in addition to the prepaid taxes as claimed in Return of income is allowed. (emphasis supplied) 10. In respect of the Assessment Years 2007-08 to 2009-10 also assessments

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were made under Section 143(3) of the I.T. Act, 1961 and the Department has consistently adopted the view that the Assessee Society was entitled to tax credit of the deemed tax which would have been payable in Oman. The Department has taken a conscious view after considering the provisions of the Omani Tax Law, Section 90 of the I.T. Act, 1961, Article 25 of the DTAA and the clarifications issued by the Royal Decrees of the Sultanate of Oman. in respect of assessment for A.Y. 2010- 11, which is the subject matter of the present appeal, the Assessing Officer has adopted the same view in consonance with the view adopted in the past and further after full application of mind and after raising detailed queries and after considering the detailed replies filed by the Assessee Society vis-a-vis the provisions of Law and DTAA. Therefore, the view taken by the Ld. PCIT is totally outside the ambit and purview of Section 263 of the I.T. Act, 1961. The Assessee Society strongly relies on the following decision:

(i) Honble Delhi High Court

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judgment in the case of CIT Vs. Escorts Limited 338 ITR 435, the relevant part of which reads as under:

"Where a fundamental aspect of a transaction is found to have been permeated through different assessment years and this fundamental aspect has stood uncontested then the Revenue cannot be allowed to change its view it is able to demonstrate a change in circumstances in the subsequent assessment year. Held, that the Commissioner's order did not contain a finding to the effect that the stand taken by the Assessee that the units purchased from the Unit Trust of India had actually been physically delivered along with executed transfer deed was false. Without such a finding the allegation that the transactions were speculative could not be sustained. The fundamental nature of the transactions was examined year after year more importantly in the Assessment Year 1986-87 it was specifically considered by 24

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the Commissioner (Appeals) and it remained the same. Given the fact that the Assessee had been engaged in these transactions in the preceding Assessment Years, the Commissioner could have had no occasion to have recourse to the revisional powers under section 263 of the Act on the fundamental aspects of the transactions in issue on which a view had been taken and not shown to have been challenged. " (emphasis supplied)

(i) CIT vs. N. P. Mathew (Deed.) [2006] 280 ITR 44 (Ker.) The relevant part of the ratio is reproduced from the Heads note:

"Held, dismissing the appeal, that with regard to another assessee, the

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same view was taken by the Tribunal and the Department accepted it for earlier years in the assessee’s case also. Those orders were allowed to become final. The Department should be consistent at least in respect of the same assessee and it cannot also differentiate between different assessees. The assessee was entitled to the concessional rate of taxation under section 115H for the assessment year 1991-92.

(emphasis supplied)

(ii) The assessee, for the same proposition, also relics on the Hon'ble Supreme Court decision in the case of Radhasoami Satsang v. CIT [1992] 193 ITR 321. This Supreme Court decision together with other judgments of the Supreme Court have been referred to by the Hon'ble Gujarat High Court in the case of Taraben Ramanbhai Patel v. ITO [1995] 215 ITR 323. The observations of the Hon'ble Gujarat High Court may be reproduced below from page 330 of the report:

“……It is no doubt true that the strict rule of the doctrine of res judicata does

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not apply to proceedings under the Income-tax Act. At the same time, it is equally true that unless there is a change of circumstances, the authorities will not depart from previous decisions at their sweet will in the absence of material circumstances or reasons for such departure:"

(iii] The desirability of following the principle of consistency again came up for consideration before the Hon'ble Delhi High Court in the case of Director of Income-tax (Exemptions) vs. Escorts Cardiac Diseases Hospital Society [2008] 300 ITR 75. In this case exemption ujs.l0(22A) was granted from assessment years 1988-89 to 1994-95. There was no change in facts. The Hon'ble High Court held that on the principle of consistency, exemption cannot be denied for the subsequent assessment years. It is further stated that in recent decision Hon'ble Apex court in case of CIT Vs. J .K. Charitable Trust in Civil appeal No. 1698,1699/2008 vide order date 7/11/2008 has also held on similar line as stated herein above on principle of consistency.

(iv) Similar view has been adopted by the Hon'ble Delhi High Court in the case of CIT vs. Dalmia Promoters Developers P. Ltd., [2006] 281 ITR 346. For ready reference, the relevant

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part of the Heads note is reproduced below:

"……For rejecting the view taken for the earlier assessment years, there must be a material change in the fact situation. 'There was no gainsaying that the previous view would have no application even in cases where the law itself had undergone a change but before an earlier view could be upset or digressed from, one of two things must be demonstrated, namely, a change in the fact situation or a material change in law whether enacted or declared by the Supreme Court. In the absence of a change in the facts or any additional input there was no compelling reason for taking a different view. Therefore, the Commissioner (Appeals) and the Tribunal were justified in holding that the view taken for the earlier assessment years continued to be applicable even for the year under consideration.

Radhasoami Satsang v. CIT [1992] 193 ITR 321 (SC), Parashuram Pottery Works Co. Ltd. v. ITO [1977] 106 ITR 1 (SC), CIT v. A.R.J. Security Printers [2003] 264 ITR 276 (Delhi) and CIT v. Neo Poly

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Pack P. Ltd. [2000] 245 ITR 492 (Delhi) followed."

(v) On the rule of consistency, kind reference is invited to the Hon'ble Madras High Court decision in the case of CIT vs. Gopala Naicker Bangaru, 297. [2012] 344 ITR For ready reference, the Heads note of this case is reproduced below:

“The devotees of the assessee spiritual leader, made their offerings voluntarily to him at the time of his birthday. These offerings were accounted as capital receipts and receipts were also issued. In the accounting year relevant to assessment year 2004- 05, an amount of Rs. 1,75,70,347 was received as gifts. The Assessing Officer held that this amount was assessable but the Tribunal held that it was not. On appeal to the High Court: Held, dismissing the appeal, that the assessee as a religious head was not involving himself In any profession or avocation nor performing any religious rituals/ poojas for his devotees for 29

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consideration or other. The amounts or gifts received by the assessee could not be said to have any direct nexus with any of his activities as a religious head. In the absence of a link or connection between the gifts made by the devotees and the profession or avocation carried on by the assessee, the personal gifts could not be termed as income taxable under the Income-tax Act, 1961. In the assessee's own case in assessment year 1988-89, the Department had accepted the position that gifts received by him on birthdays and other occasions were not taxable. Where a fundamental aspect permeating through different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it w01:lld not be appropriate to allow the position to be changed in subsequent years. Since there was no change in the facts and law the amounts were not taxable.

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[The Supreme Court has dismissed the special leave petition filed by the Department against this judgment see [2011] 336 ITR (St.) 15-Ed.

(emphasis supplied) 11.6 The rule of consistency has also been approved by various High Courts in the following cases:

(i) CIT vs. Haryana Tourism Corporation Ltd., [2010] 327 ITR 26 (P&H)

(ii) CIT vs. Haryana State Industrial Development Corporation Ltd., [2010] 326 ITR 640 (P&H)

(iii) CIT vs. Siva Springs, [2008] 304 ITR 24 (Mad.)

(iv) CIT vs. Goel Builders, [2011] 331 ITR 344 (All.)

(v) CIT' Vs. Hitech Arai Limited 368 ITR 577 (Mad)

The relevant part of this judgment is reproduced below from page 587 of the Report:

"We find no justifiable reason to differ with the said finding rendered by the Tribunal, more so taking note

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of the fact that the Department had for the Assessment Years 1986-87 to 1994-95, namely, for a period of nine years, accepted the fact that the payment made towards royalty is revenue expenditure and had not raised dispute thereon. That apart, even for the Assessment Year 1995- 96, the Assessing Officer has partially treated the payment of royalty as revenue expenditure. The sudden volte face by the Department on this issue appears to be on account of a new interpretation by the subsequent Assessing Officer. At this juncture, we would like to observe that the view of the Department, while interpreting the very same agreement, cannot be inconsistent. Unless there is a change in law or on the basis of new and acceptable material which went unnoticed, the opinion should not differ from time to time based on the perception of individual officers. Citizens expect consistency not only in judicial orders, but also in the orders passed by quasi-judicial authorities."

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12.It is respectfully submitted that the order passed by the Ld. PCIT under Section 263 of the I.T. Act, 1961 also suffers from another jurisdictional defect for the reason that the relevant issue regarding tax credit of deemed tax on dividend was not only thoroughly examined and allowed during the preceding Assessment Years 2006-07 to 2009-10, but even during the previous year relevant to the Assessment Year under appeal, this very same issue was further examined by the Assessing Officer and on this Issue detailed questionnaires were issued under Section 142(1) of the I.T. Act, 1961. In the questionnaire, the Assessing Officer raised detailed queries on thirty different issues relevant for the completion of the assessment and with regard to allowing tax credit on deemed dividend tax, enquiries were raised at serial numbers (xxviii) to (xxx). The Assessee Society responded to these queries as per detailed submissions dated 11th December, 2013. The relevant parts of these submissions are reproduced below which contain the points of query and the replies thereto:

"Query No. (xxvii) : Give details of income earned, income assessed, taxes payable and taxes paid in Oman.

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Query No. (xxviii): In respect of any income covered in DTAA, please furnish detailed note with copy of respective agreement and also give reason for claiming relief u/s 90 of the Income Tax Act, 1961.

Query No. (xxix): Please give detailed note on tax credit claimed by the Society in respect of dividend income received from OMIFCO.

Query No. (xxx): Explain as to the condition of carrying on business in Oman through PE and the holding in respect of which the dividends are paid is effectively connected with such permanent establishments; and Article 11 (4) of the DT AA is applicable in your case.

Please refer Note No. 2 of the notes forming part of computation of taxable income annexed to original return of income of the Society at page 40, wherein the details of claim of deemed tax credit on dividend income received from Oman is elaborated. A copy of the notes forming part of computation is herein again enclosed as Annexure 02 to this letter for ready reference.

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The Society by virtue of it being a joint venture partner in Oman in Oman India Fertilizer Company SAOC (hereinafter referred as OMIFCO) has received during the year, dividend US$30.2325 equivalent to Indian Rupees of Rs. 143,83,99,800.

The dividend was received by the Permanent Establishment (PE) namely the Branch Office of the Assessee Society. The dividend was received in Oman and was deposited in the bank account maintained by the (PE) branch office, with Bank of Baroda, London, on 21- 08-2009, 04-01-2010 and 16-03-2010. Later on the dividend was remitted through banking channel into the State Bank of India, NOIDA, INDUSIND Bank, Nehru Place, and ICICI Bank, New Delhi, account of the Assessee.

The dividend is 43.51% of the equity share capital held by the Society in the joint venture OMIFCO, Oman. The Director's Report of OMIFCO, Oman, and the Minutes of 12th Annual General Meeting of OMIFCO, Oman, held on March 10,2010 in support of the amount of dividend declared by OMIFCIO, Oman, are enclosed for ready reference as Annexure 03. The Copy of the certificate

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issued by M/s. OMIFCO SAOC indicating the dividend amount paid is enclosed to this letter as Annexure 04.

The said dividend income of Rs. 143,83,99,800 has been included in the profit taken as starting point of computation. The dividend income from OMIFCO, Oman, is included under the Schedule 7 - "Other Revenue" under the item "Dividend". The said dividend is considered as part of the total income of the Assessee Society. The tax liability has been computed on such total income. Thereafter, the Assessee Society has claimed deemed tax credit of Rs.41,44,23,149 because of the following reasons:

(a) Since the said dividend income is subject matter of taxation in both the countries, one has to read Section 90 of the Income Tax Act, 1961 along with the provisions of DTAA between India and Oman.

(b) The copy of the DTAA agreement between India and Oman is enclosed as Annexure 05 and particular reference is invited to Article 11, 7 and 25 of the DTAA.

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(c) Article 11 (4) of DTAA provides that the provisions of Article 11 (1) shall not apply if the beneficial owner of the dividends being a resident of a contracting state carries on business in the other Contracting States of which the company is paying the dividends is a resident, through a permanent establishment situated therein, then in such a case provisions of Article 7 of DT AA would apply. Since the Assessee Society has a permanent establishment through the branch office, Article 7 would apply.

(d) Article 7 of DTAA deals with business profits and it provides that where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein profits attributed to that permanent establishment to the extent they are attributable directly or indirectly to that permanent establishment may be taxed In the other Contracting State.

(e) The Assessee Society has duly filed

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the Return of Income under the Omani’s Income Tax Law by including the said dividend income as part of its total income, copy of the Income Tax Return filed for the year ended March 31, 2010 under the Omani's Income Tax Law along with a copy of the annual accounts of the Branch (PE) and that of OMIFCO, Oman, are enclosed as Annexure 06.

(f) The dividend received in Oman by the permanent establishment in Oman of the Assessee Society, therefore, can be taxed only by the Omani Tax Law. However, Royal Decree 68/2000 (copy enclosed as Annexure 07) issued by the Omani Authorities, provides that no tax is leviable on dividends, which a company earns from its ownership of shares in the capital of any other ...................... (not legible) in accordance with the exigencies of public good. This tax exemption is, therefore, granted by the Omani Tax Authorities as an incentive for promoting economic development. Further reference is invited to the letter dated 11th December, 2000 of 38

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Secretary General of Taxation, Ministry of Finance, Oman, addressed to the joint venture partner, which clarifies that Article 8 (bis) under the Omani Income Tax Law is for achieving the main objective of promoting economic development with Oman by attracting investment. Copy of the letter is enclosed as Annexure 08.

(g) Now coming to Article 25 of the DTAA it will be noticed that under Article 25(4) the tax payable in a Contracting State (i.e. Oman) shall be deemed to include the tax which would have been payable but for the tax incentive granted under the laws of Oman and which are designed to promote economic development.

(h) The tax treaties provide for such deemed tax credit with respect to tax forgone by the developing countries so that the benefit is retained by the investor. Such credit is known as tax sparing. If the credit is given only to actual tax paid and not for the tax which would have been payable then the benefit which the developing country intended to offer to the concerned tax payer

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would be nullified. The country's sacrifice of the revenue would ultimately accrue to the state of residence. (i) As a consequence of the above, Article 25(4) of the DTAA read with the provisions of Article 8(bis) under the Omani Tax Law and the Royal Decree 68/2000 and the letter dated December 11, 2000 of the Secretary General of Taxation, Ministry of Finance, during the year, Society has received a dividend income of Rs.143,83,99,800 on its equity investment in Oman India Fertilizer Company SAOC (OMIFCO). The break- up of the dividend received date-wise are as under:

Rs 76,20,15,375 - received on 24- 08-2009, Rs.58,14,02,250 - received on 31-12-2009 and Rs.9,49,82,175 - received on 16-03-2010

(j) In view of the changes in the local Omani Income Tax Law with effect from Tax Year 2010, wherein the PE's income is chargeable to tax @ 120/0 instead of 30 as per the old Omani Law applicable upto 31-12- 40

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2009. Accordingly, the deemed tax credit benefit will be available 300/0 for the amount of dividend received upto 31-12-2009 and 12 of the amount of dividend received during January to March 2010. Accordingly, the claim of Deemed Tax Credit is Rs.41,44,23,149 (Rs.403025288 plus Rs.11397861). This may kindly be allowed to the Assessee against the total tax.

Further, we wish to inform you that the Omani Tax Authorities have done the Tax assessment vide their order dated 14-12-2008 of the Permanent Establishment of KRIBHCO at Muscat. The Omani Tax Assessment Order indicates that the "…..Dividend income is exempt from tax in accordance with Article 8 (bis)(1) of the Company Tax Law. The tax exemption on dividend is granted with the objective of promoting economic development within Oman by attracting investments." A copy of the Assessment Order of the Omani Tax Authorities as received by us for the Tax Years 2002 to 2006 is enclosed for your kind perusal. Copy of the Assessment Order for year 2007-08 is also enclosed for your kind reference. 41

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(Annexure 10) The assessment of the Society for the Assessment Year 2006- 07 was completed u/s 143(3) by order dated 31-12-2008 and by a speaking order, the Assessing Officer has accepted the contention of the Society and has granted credit for the tax that is deemed to have been paid in Oman and the same position has been followed in the Assessment Year 2007- 08, 2008-09, 2009-10 also and hence the Income Tax Authorities in India have accepted the above position." (emphasis supplied)

The aforesaid submissions are self- explanatory and reference therein has been made to the relevant Articles of DTAA, the Omani Tax Laws and Royal Decrees and the Clarifications issued by the Omani Tax Authorities as also Assessment Orders passed by them. It was also clearly pointed out in this reply that in respect of A.Y. 2006-07 credit for deemed tax was allowed after thoroughly discussing these issues in the Assessment Order and the same view was adopted during the subsequent Assessment Years and upto the A.Y. 2009-90. This shows that

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during the course of the Assessment Proceedings, there was full application of mind on the part of the Assessing Officer on this issue. The discussion given at paras 4.6 and 4.7 of the Assessment Order also shows application of mind by the Assessing Officer. At para 4.6 the Assessing Officer has referred to Article 8 (bis) which exempts the dividend income which is otherwise taxable by virtue of Article 10. At para 4.7 the Assessing Officer has mentioned that in respect of the deemed dividend tax payable in Oman, the Assessee has claimed relief under Section 90 of the I.T. Act, 1961 read with the relevant provisions of DTAA. He has also observed that by virtue of this claim made by the Assessee, the Assessee Society effectively is not paying any tax on dividend income either in Oman or in India. In the last para of the Assessment Order, he has observed: "Relief under Section 90 of the Income Tax Act, 1961, as claimed by Assessee is also allowed". These facts abundantly prove that the relevant issue has been thoroughly examined by the Assessing Officer during the course

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of the Scrutiny Assessment Proceedings and he has allowed the credit after full application of mind. The Assessing Officer was also fully conscious of the fact that during the preceding Assessment Years such credit was already allowed by the Department and thus, it was a settled issue. 13. The Ld. PCIT in his order under Section 263 has not doubted that on this issue the Assessing Officer raised enquiries and there was full application of mind on his part. He has also not doubted that in preceding Assessment Years such credit of deemed tax has been allowed by the Department consistently after due application of mind. However, the Ld. PCIT has tried to justify the assumption of jurisdiction under Section 263 of the I.T. Act, 1961 by observing that even if there is application of mind by the Assessing Officer, the PCIT has power under Section 263 to set aside his order for the reason that the powers vested under Section 263 cannot be equated with the requirements of Section 147 of the I.T. Act, 1961. This observation by the Ld. PCIT is devoid of any merit and defies the settled legal position which

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emerges from a chain of Supreme Court and High Court decisions to which a reference is made infra. The Ld. PCIT has also observed in his order that as per the provisions of para 4 of Article 25 of the DTAA read with Omani Tax Laws, the exemption in respect of dividend is available only for a period of five years which is long over. Obviously, the Ld. PCIT has misinterpreted the relevant provisions as also the letters and clarifications and Royal Decrees issued by Omani Authorities. The exemption in respect of dividend income under the Omani Tax Laws continues even in the Income Tax Law by the Royal Decree No. 28 of 2009. In any case, this is a totally irrelevant point raised by the Ld. PCIT. The disputed issue pertains to merely the question as to whether deemed tax on dividend payable in Oman is eligible for credit while making the assessment under the Indian Income Tax Act. In any case, the moot point is as to whether the issue was examined by the Assessing Officer and there was full application of mind on his part and whether the view adopted by the Assessing Officer is one of the possible

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views which could have been taken. In he present case, it is a part of record that there was full application of mind on the part of the Assessing Officer and he has adopted a view which is consistent with the various clarifications issued by the Omani Tax Authorities and also which is in consonance with the consistent view adopted by the Department itself in the preceding Assessment Years. In these circumstances, the established position of Law is that the Ld. PCI cannot substitute his view in place of the view taken by the Assessing Officer while exercising powers under Section 263 of the Income Tax Act, 1961.

(i) There is complete lack of opportunity for the reason that there is no nexus between reasons indicated in the Show Cause Notice and the final order passed under Section 263. The legal position on this issue has already

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been explained supra.

(ii) The order passed by Ld. PCIT is against the well established principle of consistency of approach and the legal position on this point is also explained above by citing several cases.

(iii) During the course of original Assessment Proceedings, the relevant issue was thoroughly examined and there was full application of mind on the part of the Assessing Officer who adopted a view which is plausible view and, therefore, the Ld. PCIT has no jurisdiction to substitute his view. For this proposition, the Assessee relies on the legal position as explained below:

(a) The assessee relies on the Hon'ble Gujarat High Court decision in the case of CIT v. Arvind Jewelers 259 ITR 502. The facts and the ratio of this case are reproduced below for your kind consideration:

"The provisions of section 263 of the Income-tax Act, 1961, cannot be invoked to correct each and every type of mistake or error committed by

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the Assessing Officer. It is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. The phrase "prejudicial to the interests of the Revenue" has to be read in conjunction with an erroneous order passed by the Assessing Officer and 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. When an Assessing Officer adopts 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 rejudicial to the interests of

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the Revenue unless the view taken by the Income-tax Officer is unsustainable in law.

The assessee- firm had filed its return of income disclosing a net loss of Rs. 2,777 in the business of purchase and sale of ornaments and jewellery. The Income-tax Officer issued notices under sections 143(2) and 142(1) of the Income-tax Act along with the requirement letter. After considering the material produced by the assessee and the explanation offered, the Income-tax Officer framed the assessment determining the total income at Rs. 32,900. The Commissioner of Income-tax held that the order was erroneous and prejudicial to the interests of the Revenue, in so far as the Income- tax Officer had not carried out any investigation either while adding certain amounts in the total income or while accepting the assessee's 49

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explanations on the various points. The Tribunal set aside the order of the Commissioner of Income-tax. On a reference:

Held, that the finding of fact by the Tribunal was that the assessee had produced relevant material and offered explanations in pursuance of the notices issued under section 142(1) as well as section 143(2) of the Act and after considering the material and explanations, the Income- tax Officer had come to a definite conclusion. Since the material was there on record and the said material was considered by the Income- tax Officer and a particular view was taken, the mere fact that different view can be taken should not be the basis for an action under section 263. The order of revision was not justified." (emphasis supplied)

[Special Leave Petition dismissed vided 266 ITR (St.)

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101]

(b) From the above Gujarat High Court judgment, it is clear that even if two views are possible on merits of a question, and if the Assessing Officer has adopted one view, his order cannot be said to be erroneous and prejudicial to the interests of Revenue. For the same proposition, reliance is placed on the leading Supreme Court decision in the case of Malabar Industrial Company Ltd. v. CIT 243 ITR 83 and the Hon'ble Supreme Court decision in the case of CIT v. G. M. Mittal Stainless Steel P. Ltd. 263 ITR 255.

Reliance is also placed on the Allahabad High Court judgement in the case of CIT v. Mahendrakumar Bansal 297 ITR 99 wherein it has been held that merely because the ITO had not written a lengthy order, it would not establish without bringing on record specific instances that the assessment

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order passed u/s. 143(3) is erroneous and rejudicial to the interests of the Revenue. The assessee strongly relies on the Born bay High Court decision in the case of CIT v. Gabrial [India] Ltd. 203 ITR 108. In this case, it was held that if the Assessing Officer has raised queries and the assessee has reiled written submissions / explanation, merely because there is no discussion in the Assessing Officer's order on the relevant issue, it cannot be said that such order becomes erroneous. Similar view has been taken by the Rajasthan High Court in the case of CIT v. Ganpat Ram Bishnoi 296 ITR 292."

(i) CIT vs. Ashish Rajpal, 320 ITR 674 (Del.) (ii) CIT vs. Hindustan Coco Cola Beverages P. Ltd. 331 ITR 192 (Del.). (iii) CIT vs. Anil Kumar Sharma, 335

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ITR 83 (Del.). (iv) CIT vs. R.K. Construction Co. 313 ITR 65 (Guj.). (v) CIT vs. DLF Ltd., 350 ITR 555 (Del.). (vi) CIT vs. Greenworld Corporation, 314 ITR 81 (SC). (vii) CIT vs. Munjal Castings, 303 ITR 23 (P&H.) (viii) Spectra Shares and Scrips Pvt. Ltd. Vs. CIT, 354 ITR 35 (AP). (ix) Cadila Healthcare Ltd. vs. CIT, 51 taxmann.com 255 (Ahmedabad Trib.). (x) CIT vs. P.D. Abraham, 53 taxmann.com 217 (SC).

(xi) Sterling Construction & Investments vs. ACIT 374 ITR 474 (Born)

(xii) CIT V/s Fine Jewellery (India) Ltd 372 ITR 303 (Born)

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the appellant-society is legally entitled to getting credit for deemed dividend tax. With regard to the merits of the claim, the following submissions have been made in writing:-

"15.1 The factual position has already been explained supra. To recapitulate briefly, the Assessee Society is entitled to tax credit in respect of the deemed tax on dividend received in Oman, having regard to the relevant provisions of the DTAA read with Section 90 of the Income Tax Act, 1961. The relevant provisions of DTAA may be reproduced below for ready reference:

(i) Article - 3(2):

As regards the application of this Agreement by a Contracting State, any term not defined therein shall, unless the context otherwise requires, have the meaning which it has under the Law of that Contracting State concerning the taxes to which this agreement applied.

(ii) Article - 7 -- Business Profits:

The profits of an enterprise of a Contracting State shall be taxable only

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in that State unless the enterprise carried on business in the other Contracting State through a Permanent Establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other Contracting State but only so much of them as is attributable directly or indirectly to that Permanent Establishment.

(iii) Article - 25:

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 as a deduction from the tax on the income of that resident an amount equal to the income-tax paid in the Sultanate of Oman, whether directly or by deduction. Such deduction

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shall not, however, exceed that part of the income-tax (as computed before the deduction is given) whichis attributable to the income which may be taxed in the Sultanate of Oman.

(3) Where a resident of the Sultanate of Oman derives income which, in accordance with the provisions of this Agreement, may be taxed in India, the Sultanate of Oman shall allow as a deduction from the tax on the Income of the resident an amount equal to the income-tax paid in India, whether directly or by deduction. Such deduction shall not, however, exceed that part of the income-tax (as computed before the deduction is given) which IS attributable to the income which may be taxed in India.

(4) The tax payable in a Contracting State mentioned in paragraph 2 and paragraph 3 of this Article shall be deemed to include the tax which would have been payable but for the tax incentive granted under the laws of the Contracting State and which are designed to promote economic

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development.

(5) Income which, in accordance with the provisions of this Agreement, is not to be subjected to tax in a Contracting State, may be taken into account for calculating the rate of tax to be imposed In that Contracting State.

(emphasis supplied)

15.2 Para - 4 of Article - 25 lays down that the tax payable shall be deemed to include the tax which would have been payable but for the tax incentives granted under the Omani Tax Law which are designed to promote economic development. In the present case, dividend income is exempt under the Omani Tax Laws and, therefore, tax payable would include the tax which would have been payable. The only requirement is that such incentive should have been granted with the object of promoting economic development. Therefore, this issue has to be analysed from this angle. It may kindly be noted that till the year 2000 dividend income was chargeable to tax under Omani Tax Laws. By virtue of

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Royal Decree No. 68/2000 read with the consequential Royal Decree No. 47/81, Article 8(bis) was inserted in the Law of Income Tax of Companies whereby dividend income was specifically exempted from the levy of tax. As per Chapter - 3 of the aforesaid Law, all incomes are includable in the total income by virtue of Article 8. Article 8(bis) was inserted with the object of exempting dividend income and his Article reads as under:

Article 8(bis):

In exception to the provisions of Article 8 of this Law, tax shall not apply on the following:

The question is whether this exemption was subsequently granted with the purpose of promoting economic development.

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The expression "incentive" is neither defined in the Omani Tax Laws nor in the Income Tax Act, 1961. Therefore, for clarification as to whether this incentive was for the purpose of promoting economic development, a letter dated 23rd November, 2000 was addressed by OMIFCO to Oman Oil Company SAOC requesting them to obtain authentic clarification from Oman Tax Authorities regarding the purpose of Article 8(bis). This issue was clarified by the Sultanate of Oman, Ministry of Finance, Secretariat General for Taxation, Muscat, vide their letter dated 11th December, 2000 addressed to Oman Oil Company SAOC. Since this letter is a very important document, text of this letter is reproduced below for ready reference:

"We refer to your letter dated 2 December, 2000 and our previous letter dated 6 August, 2000 on the above subject.

Under Article 8 of the

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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 profits on which Omani income tax was paid by distributing companies. It meant that Omani income tax was payable by the recipients on any dividend income received out of the exempt profits from tax exempt companies. As a result, investors in tax exempt 60

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companies that undertake those activities considered essential for the country's economic development suffered a tax cost on their return on investments. the tax treatment under the above mentioned Article 5 had the negative impact on investments in tax exempt project.

The Company Income Tax Law of 1981 was, therefore, recently amended by Royal Decree No. 68/2000 by the insertion of a new Article 8(bis) which is effective as from the tax year 2000.

As per the newly introduced Article 8(bis) of the Company Income Tax Law, dividend distributed by all companies, including the tax exempt companies would be exempt from payment of income tax in the hands of the recipients. In his manner, the Government of Oman would achieve its aim objective of promoting

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economic development within Oman by attracting investments.

We presume from our recent discussions with you that the Indian investors in the above Project would be setting up Permanent Establishment in Oman and that their equity investments in the Project would be effectively connected with such Permanent establishments.

On the above presumption, we confirm that tax would be payable on dividend income earned by the Permanent Establishments of the Indian Investors, as it would form part of their gross income under Article 8, if not for the tax exemption provided under Article 8(bis).

As the introduction of Article 8(bis) is to promote economic development in Oman, the Indian Investors should be able to obtain relief in India 62

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under Article 25(4) of the Agreement for Avoidance of Double Taxation in India.

All other matters covered in our letter No. FT/13/92/, dated 6th August, 2000 remained un-changed. "

From the above, there is no doubt that the purpose of amendment in Omani Tax Laws is to promote economic development in Oman and to encourage investment in Omani companies. From the above it may kindly be appreciated that the Sultanate of Oman itself has clarified the issue regarding interpretation of Article 8(bis). It is an accepted position of interpretation that if there is some doubt about the interpretation of a particular provision of Law, the Competent Authority to clarify that provision is only the Government of that particular country. The Income Tax

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Department of India has no locus standi in this matter. The issue has been clarified by the highest Authority of the Sultanate of Oman through the Secretariat General of Taxation. In this connection, kind reference is invited to the Article (6) of Omani Income Tax Law of Companies No.47 /1981 herein the functions of the Secretariat General are specified. Para 3 of the aforesaid Article (6) is reproduced below for ready reference:

"3 - Any form or notification of document issued or published or delivered by the Secretary General in accordance with this Law shall be considered an official document if it carries the name or description of the Secretary General or the responsible officer who is designated by virtue of Paragraph (2) of Article

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(3) and this shall be whether the name or description is printed, stamped or written."

From the above it is clear that any notification/ document issued by the Secretary General has the force of official document. The position clarified in the Omani letter dated 11th December, 2000 is further authenticated by the assessments made in respect of the Permanent Establishment of the Assessee Society under the Omani Tax Laws. In respect of the tax years 2002 to 2006, a common order has been passed under Article 26 (2) (b) of the Income Tax Law of Oman. The opening para of this order reads as under:

"We refer to the returns of income and determine the taxable income as under:

Kribhco Muscat is a permanent establishment supported by M/s. Krishak Bharati Cooperative Limited, a

ITA NOS. 6785&6786/DEL/2015 (AYRS. 2010-11 & 2011-12) KRISHAK BHARATI CO-OPERATIVE LIMITED VS. ACIT

multi- state cooperative society registered in India. As per the accounts, Kribhco- Muscat is in receipt of dividend income from Omifco, a joint stock company registered in Oman, and that dividend income is connected with the investment of Kribhco-Muscat. The dividend income is, however, exempt from tax in accordance with Article 8(bis)(1) of the Company Income Tax Law. The tax exemption on dividend is granted with the objective of promoting conomic development within Oman by attracting investments."

In the said Order the dividend income is first included in the total income and thereafter deduction is granted. For the subsequent years also, the assessments are made in similar manner. Up to the tax year 2011 dividend has been first included in the total income and thereafter deduction has been granted. The facts mentioned above clearly establish that the Assessee Society is entitled to 66

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getting credit for the deemed dividend tax by virtue of the provisions of DTAA read with Section 90 of the Income Tax Act, 1961 together with the clarifications issued by the Sultanate of Oman and the assessment made under the Omani Laws. In view of the above it is respectfully submitted that on merits also Assessee Society is entitled for the tax credit which has been rightly allowed by the Assessing Officer and, therefore, the Ld. PCIT has completely erred in giving directions to the Assessing Officer under Section 263 to withdraw the said tax credit." 15. As already noted by us above, besides giving directions to the Assessing Officer for withdrawing the tax credit for deemed dividend tax, which forms part of the show cause notice, the learned PCIT further directed the Assessing Officer to bring to the charge of tax, the undistributed share of profit which is reflected in the accounts of the P.E. of the appellant-society in Oman. The learned PCIT has raised this new issue in his order as under:-

"….. Another interesting feature of the accounts is that Assessee has credited much more income than

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the dividend received by them. The movement of investment in the final accounts as on 31st December, 2010 in notes to the financial statement No. (4) it has been indicated as below:

31-12-2010 (US$) 31 (US$) Dec 2011 93,521,908 Opening Balance 114,251,371 37,757,271 Share of profit for the year 59,781,818 {17,027,271} Dividend received (43,180,000) 114,521,271) Closing balance 130,853,189

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to the merits of this issue the following submissions have been made on behalf of the appellant-society:-

"It may kindly be appreciated that the annual accounts of the PE are prepared in accordance with the International Financial Reporting Standards (IFRS). As per the IFRS - 28, the share f PE in the profit/loss in OMIFCO at 25 has to be accounted as income in the Profit & Loss Account of the PE even though such income is neither accrued nor received. The actual income received is only to the extent of dividend declared and distributed. Out of the total distributable profits, OMIFCO is required to transfer a specified amount to reserves under the Omani Law and the remaining profits are distributed to shareholders. Therefore, the PE in Oman offers to taxation the dividend income actually received and not the total share of the PE in the profits of OMIFCO. On the other hand, Books of Account of the Assessee Society in India are prepared in accordance with the Indian Accounting Standards. As per Accounting Standard - 13 read with Accounting Standard - 27, only the

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dividend received is recognised as income and credited to the Profit & Loss Account. The undistributed share of profit reflected in the books of the PE does not partake the character of income under the provisions of the Income Tax Act, 1961. It is a settled position of law that accounting entries are not determinative of taxability under the Income Tax Act, 1961. For this proposition, reference is made to the following Supreme Court decisions which settle this issue:

(i) Sutlej Cotton Mills Limited Vs. CIT 116 ITR 1 (ii) Kedarnath Jug Mfg. Co. Limited vs. CIT 82 ITR 363

Further, it is a well settled principle of taxation that no income can be taxed on hypothetical basis and only real income can be brought to tax under the Income Tax Act. For this proposition, kind reference is invited to the following cases:

(i) Shoorji Vallabhdas & Co. 46 ITR 144 (SC) (ii) Godhra Electricity Company Ltd vs. CIT 225 ITR 746 (SC) (iii) CIT V/s Raman & Co. 67 ITR 11 (SC)

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(iv) UCO Bank V /s CIT 237 ITR 889 (SC) (v) Airports Authority of India V / s CIT 340 ITR 407 (Del)]

It is reiterated that as a shareholder the PE and the Assessee cannot be taxed on the entire income earned by OMIFCO. The PE is only liable to tax in respect of the income distributed by OMIFCO to the shareholder. The share in the undistributed profits of OMIFCO is merely a book entry in the books of the PE and it does not represent any real income earned by the Assessee Society. Such income has neither been credited nor been received by Assessee Society and, therefore, cannot be taxed under the Income Tax Act, 1961. As a matter of fact, even the Oman Tax Authorities have excluded such income while assessing the income of the PE.

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Admittedly, this issue does not find any place in the show cause notice issued by the learned PCIT. With regard to this issue the following submissions have been made on behalf of the assessee:-

"18. Lastly, the Ld. PCIT has directed the Assessing Officer to frame a view regarding non-furnishing on the part of the Assessee complete and true income or particulars of Income. It is respectfully submitted that such directions are totally illegal and invalid. Firstly, there is no mention in the Show Cause Notice regarding this issue, and secondly, initiation of any Penalty Proceedings under Section 271 of the Income Tax Act, 1961 depends upon the satisfaction of the Assessing Officer and the Ld. PCIT has no legal power or authority to influence such satisfaction which is to be arrived at only by the Assessing Officer."

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general exemption across the board and, therefore, it cannot be said that any specific exemption in respect of dividend income was granted for the purpose of achieving economic development of Oman. It was further stated by him that the Assessing Officer while completing the original assessment has taken a view which is unsustainable in law and, therefore, it is contended that the Ld. PCIT is well within his right and jurisdiction to invoke the provisions of section 263 with a view to set right the legal error committed by the Assessing Officer. With regard to the other issue pertaining to undistributed dividend income, the learned CIT(DR) has argued that the learned PCIT has given elaborate reasons in his order to justify such addition. It was argued that the said undistributed dividend income is reflected in the audited accounts of the P.E. of the assessee in Oman and, therefore, there is no reason why such income should not be brought to the charge of tax. It is pointed out that the Assessing Officer completely failed to apply his mind on this issue and, therefore, the assessment order is erroneous and prejudicial to the interest of the revenue. It is reiterated that such income is liable to be brought to the charge of tax under the provisions of the Income-tax Act.

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passed by the Ld. PCIT u/s. 263 of the Act alongwith the legal position on the relevant issues which emanates from the various decisions cited before us. At the threshold, we find that that there is no dispute with regard to the following factual position:-

(i) In this show cause notice issued by the learned PCIT the only issue referred to pertain to allowing tax credit on dividend income earned in Oman.

(ii) At the time of original assessment proceedings detailed inquiry letter was issued by the Assessing Officer with regard to tax credit of deemed dividend tax which would have been payable in Oman but for the exemption granted. The assessee had filed detailed replies which were duly considered by the Assessing Officer before allowing tax credit.

(iii) Such tax credit was also allowed by the Department in respect of the assessment year 2006- 07 as per the assessment order wherein, a detailed discussion on this point has been made which shows that after proper application of mind the tax credit was allowed in the assessment year 2006-07. Further, such tax credit has been consistently allowed in scrutiny assessments made by the Department right up to the assessment year 2009- 10. Thus, in respect of the assessment years 2010- 11 and 2011-12 the Assessing Officer has only

ITA NOS. 6785&6786/DEL/2015 (AYRS. 2010-11 & 2011-12) KRISHAK BHARATI CO-OPERATIVE LIMITED VS. ACIT

followed the view adopted by the Department in the preceding several assessment years.

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first reopening assessment and then granting an opportunity to respond to the issue before the Assessing Officer during the course of the fresh assessment proceedings. Having regard to the legal position emerging from various cases including Hon'ble Jurisdictional High Court case, we are of the view that lack of opportunity on some of the issues in the show cause notice, vitiates the proceedings u/ s.263 and consequently the order u/s. 263 passed by the learned PCIT is also rendered bad in law.

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adopted in the preceding assessment years but has also independently examined this issue by raising detailed inquiries and after considering the replies filed by the assessee-society. Thus, the view adopted by the Assessing Officer is a possible and plausible view and the Assessing Officer has adopted this view having regard to the well established principles of consistency of approach and also after considering the merits of the claim. In view of the legal position which emerges from the various cases cited above, it is an undisputed legal position that the learned PCIT cannot substitute his view for the view of the Assessing Officer by invoking jurisdiction u/s.263 of the I.T. Act. Therefore, for these reasons also the order passed by the learned PCIT u/s. 263 totally fails to meet the jurisdictional requirements of section 263 of the I.T. Act. Therefore, we have no hesitation in holding that the order passed by the learned PCIT u/s.263 is bad in law for the following reasons:-

(i) No opportunity in the show cause notice was allowed on certain issues on which directions have been issued in the order passed u/s. 263. (ii) The issue communicated to the assessee in the show cause notice was thoroughly examined at the time of original assessment and, therefore, there was

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complete application of mind on the part of the Assessing Officer on this issue.

(iii) Further, the Assessing Officer at the time of original assessment has adopted a view which is consistent with the view adopted by the Department itself in the preceding assessment years and, therefore, the view taken by the Assessing Officer gets supported from the principles of consistency of approach when the facts and circumstances are similar.

(iv) Thus, when the Assessing Officer has taken a plausible view after thorough application of mind the learned PCIT cannot substitute his view by assuming jurisdiction u/s.263 of the I.T. Act.

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decide the issues on merits as well.

(a) Under Article-8 of the Omani Tax Laws, dividend forms part of gross income chargeable to tax.

(b) As a result, investors in tax exempt companies that undertake activities

ITA NOS. 6785&6786/DEL/2015 (AYRS. 2010-11 & 2011-12) KRISHAK BHARATI CO-OPERATIVE LIMITED VS. ACIT

considered essential for the country's economic development suffered a tax cost which had the negative impact.

(c) The Company Income-tax Law of 1981 was therefore amended by Royal Decree No.68/2000 by insertion of a new Article 8 (bis).

(d) Thereby the Government of Oman would achieve its main objective of promoting economic development by attracting investments.

(e) Tax would be payable on dividend income if not for the tax exemption provided under Article 8(bis).

(f) As the introduction of Article 8(bis) is to promote economic developments in Oman, the Indian investors should be able to obtain relief in India under Article 25(4) of the Agreement for Avoidance of Double Taxation.

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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 PE 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. Therefore, we hold that on merits also the learned PCIT was not justified in directing the Assessing Officer to withdraw the aforesaid tax credit. Further such credit was allowed by the Assessing Officer during several preceding assessment years and, therefore, when there is no change in the facts and the relevant provisions of law, following the well settled principle of consistency of approach, as emerging from a chain of decisions referred to above, credit for deemed dividend tax is clearly allowable in respect of the assessment year under appeal.

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undistributed dividend from Omani Company as reflected in the Profit and Loss Account of the PE of the assessee in Oman. We have already recorded a finding that the Ld. PCIT has no jurisdiction whatsoever to issue any directions with regard to any issue on which no show cause notice was issued and on that account even the order of the ld. PCIT gets vitiated. Coming to the merits, from the factual position discussed, as aforesaid, it is seen that the annual accounts of the PE are prepared in accordance with the International Financial Reporting Standards (IFRS). As per IFRS-28 the share of PE in the profit / loss in OMIFCO at 25% has to be accounted as income in the Profit and Loss account of the PE even though such income received is only to the extent of dividend declared and distributed. Out of the total distributable profit, OMIFCO is required to transfer a specified amount to reserves under the Omani law and only the remaining profits are distributed to the shareholders. Therefore, even under the Omani Tax Laws, the PE offers for taxation only the dividend income actually received and not the total share of the PE in the profits of OMIFCO. On the other hand, books of account of the assessee in India are required to be prepared in consonance with the Indian Accounting Standards. Obviously, the undistributed share of profit reflected in the books of P.E. cannot be said to partake the character of income under the provisions of the Income-tax Act. It is settled position that accounting

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entries are not determinative of taxability under the Income-tax Act and further only the real income can be brought to the charge of tax. In the present case even the undistributed profits reflected in the books of the P.E. are not brought to the charge of tax under the Omani Tax Laws. In our view having regard to the above mentioned facts the said income by assuming undistributed profit cannot be taxed under the I.T. Act. Therefore, on merits also the directions issued by the learned PCIT on this issue are not justified and the same are hereby vacated.

II. ITA No. 6786/Del/2015 - A.Y. 2011-12

ITA NOS. 6785&6786/DEL/2015 (AYRS. 2010-11 & 2011-12) KRISHAK BHARATI CO-OPERATIVE LIMITED VS. ACIT

suffers from fatal jurisdictional defects and is, therefore not sustainable in the eyes of law, hence, the same is also quashed accordingly. Similarly, on merits also the learned PCIT 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 P.E. Accordingly, for the A.Y. 2011-12 also the impugned order of the Ld. PCIT passed u/s. 263 of the I.T. Act is quashed and accordingly, this Appeal of the Assessee also stands allowed.

Order pronounced in the Open Court on 09-03-2016.

Sd/- Sd/-

(O.P. KANT) (H.S. SIDHU) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 09/03/2016 *SR BHATNAGAR* Copy forwarded to: - 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT TRUE COPY By Order,

ASSISTANT REGISTRAR