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2003 (10) TMI 5 - SC - Income Tax
Validity of Circular No. 789 issued by the Central Board of Direct Taxes (CBDT) - application of the Indo-Mauritius Double Taxation Avoidance Convention (DTAC) 1983 - Violation of the provisions of section 90 and section 119 - Stare decisis - Effect and meaning of the Mauritius Offshore Business Activities Act 1992 ( the MOBA ) - Rule in McDowell s case - principle of piercing the veil of incorporation - Interpretation of treaties - HELD THAT - As early as on March 30 1994 the Central Board of Direct Taxes had issued Circular No. 682 in which it had been emphasised that any resident of Mauritius deriving income from alienation of shares of an Indian company would be liable to capital gains tax only in Mauritius as per Mauritius tax law and would not have any capital gains tax liability in India. This circular was a clear enunciation of the provisions contained in the DT AC which would have overriding effect over the provisions of sections 4 and 5 of the Income-tax Act 1961 by virtue of section 90(1) of the Act. If in the teeth of this clarification the Assessing Officers chose to ignore the guidelines and spent their time talent and energy on inconsequential matters we think that the Central Board of Direct Taxes was justified in issuing appropriate directions vide Circular No. 789 under its powers under section 119 to set things on course by eliminating avoidable wastage of time talent and energy of the Assessing Officers discharging the onerous public duty of collection of revenue. Circular No. 789 does not in any way crib cabin or confine the powers of the Assessing Officer with regard to any particular assessment. It merely formulates broad guidelines to be applied in the matter of assessment of assessees covered by the provisions of the DTAC. We do not think the circular in any way takes away or curtails the jurisdiction of the Assessing Officer to assess the income of the assessee before him. In our view therefore it is erroneous to say that the impugned Circular No. 789 dated April 13 2000 is ultra vires the provisions of section 119 of the Act. In our judgment the powers conferred upon the Central Board of Direct Taxes by sub-sections (1) and (2) of section 119 are wide enough to accommodate such a circular. A perusal of the aforesaid provisions of the Income-tax Act in Mauritius does not lead to the result that tax incentive companies are not liable to taxation although they have been granted exemption from income-tax in respect of a specified head of income namely gains from transactions in shares and securities. The respondents contend that the FIIs are not liable to taxation in Mauritius; hence they are not residents of Mauritius within the meaning of article 4 of the DTAC Consequently it is open to the Assessing Officers under the Indian Income-tax Act 1961 to determine where the taxable entities are really resident by investigating the centre of their management and thereafter to apply the provisions of Income-tax Act 1961 to the global income earned by them by reason of sections 4 and 5 of the Income-tax Act 1961. It is urged by the learned Attorney General and Sri Salve for the appellants that the phrase liable to taxation is not the same as pays tax . The test of liability for taxation is not to be determined on the basis of an exemption granted in respect of any particular source of income but by taking into consideration the totality of the provisions of the income-tax law that prevails in either of the Contracting States. Merely because at a given time there may be an exemption from income-tax in respect of any particular head of income it cannot be contended that the taxable entity is not liable to taxation. They urge that upon a proper construction of the provisions of Mauritian Income-tax Act it is clear that the FIIs incorporated under Mauritius laws are liable to taxation; therefore they are residents in Mauritius within the meaning of the DTAC. In Kasinka Trading v. Union of India 1994 (10) TMI 64 - SUPREME COURT this principle was reiterated in connection with an exemption under the Customs Act. This court observed An exemption notification issued under section 25 of the Act had the effect of suspending the collection of customs duty. It does not make items which are subject to levy of customs duty etc. as items not leviable to such duty. It only suspends the levy and collection of customs duty etc. wholly or partially and subject to such conditions as may be laid down in the notification by the Government in public interest . Such an exemption by its very nature is susceptible of being revoked or modified or subjected to other conditions. We are inclined to agree with the submission of the appellants that merely because exemption has been granted in respect of taxability of a particular source of income it cannot be postulated that the entity is not liable to tax as contended by the respondents. The decision of the Chancery Division in F.G. (Films) Ltd. In re 1953 1 WLR 483 was pressed into service as an example of the mask of corporate entity being lifted and account be taken of what lies behind in order to prevent fraud . This decision only emphasises the doctrine of piercing the veil of incorporation. There is no doubt that where necessary the courts are empowered to lift the veil of incorporation while applying the domestic law. In the situation where the terms of the DTAC have been made applicable by reason of section 90 of the Income-tax Act 1961 even if they derogate from the provisions of the Income-tax Act it is not possible to say that this principle of lifting the veil of incorporation should be applied by the court. As we have already emphasised the whole purpose of the DTAC is to ensure that the benefits thereunder are available even if they are inconsistent with the provisions of the Indian Income-tax Act. In our view therefore the principle of piercing the veil of incorporation can hardly apply to a situation as the one before us. We are afraid that the weighty recommendations of the Working Group on Non-Resident Taxation are again about what the law ought to be and a pointer to Parliament and the executive for incorporating suitable limitation provisions in the treaty itself or by domestic legislation. This per se does not render an attempt by a resident of a third country to take advantage of the existing provisions of the DTAC illegal. In our view the recommendations of the working group of the JPC are intended for Parliament to take appropriate action. The JPC might have noticed certain consequences intended or unintended flowing from the DTAC and has made appropriate recommendations. Based on them it is not possible for us to say that the DTAC or the impugned circular are contrary to law nor would it be possible to interfere with either of them on the basis of the report of the JPC. here are many principles in fiscal economy which though at first blush might appear to be evil are tolerated in a developing economy in the interest of long-term development. Deficit financing for example is one; treaty shopping in our view is another. Despite the sound and fury of the respondents over the so-called abuse of treaty shopping perhaps it may have been intended at the time when the Indo-Mauritius DTAC was entered into. Whether it should continue and if so for how long is a matter which is best left to the discretion of the executive as it is dependent upon several economic and political considerations. This court cannot judge the legality of treaty shopping merely because one section of thought considers it improper. A holistic view has to be taken to adjudge what is perhaps regarded in contemporary thinking as a necessary evil in a developing economy. In the result we are of the view that Delhi High Court erred on all counts in quashing the impugned circular. The judgment under appeal is set aside and it is held and declared that Circular No. 789 dated April 13 2000.