TMI Blog2007 (7) TMI 345X X X X Extracts X X X X X X X X Extracts X X X X ..... contention of the assessee that the decisions regarding investments were taken only by the directors of the company, who were stationed at Mauritius or United States. This plea of the assessee, in our view, has been fairly demonstrated and established. The AO did not choose to examine the persons in India, who were stated to be in effective control and management of the affairs of the assessee in India. The reasons assigned by the AO for coming to the conclusion that the place of effective management of the assessee was situated in India cannot be sustained. The CIT(A), in our view, erred in confirming the order of the AO. We are, therefore, inclined to hold that the assessee was not a resident in India and, therefore, its income could not be taxed in India except to the extent that which accrues or arises in India or is deemed to have accrued or arisen in India, as laid down in s. 5(2) of the Act. It is further, seen that the capital gains on sale of shares fall within the ambit of art. 13(4) of the Indo-Mauritius DTAA and, therefore, such profits are taxable only in the State of Mauritius. In the case of Union of India vs. Azadi Bachao Andolan [ 2003 (10) TMI 5 - SUP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments Scheme through Punjab National Bank, ECE House, K.G. Marg, New Delhi and the RBI had given the said permission to the appellant company vide its letter dt. 27th Nov., 1995. 2.2 The assessee made investments in Indian capital market and derived income in the form of short-term/long-term capital gains. According to the assessee the said transactions are covered by the provisions of Double Taxation Avoidance Agreement (DTAA) between India and Mauritius and as per art. 13 of the said DTAA and Circular Nos. 682 dt. 30th March, 1994 [(1994) 118 CTR (St) 1] and 789 dt. 13 April, 2000 [(2000) 160 CTR (St) 5] issued by the CBDT, the capital gains made on the sale of investments are not taxable in India. 2.3 The assessee filed its return of income for the asst. yr. 2000-01 on 23rd Nov., 2000 declaring nil income, because the capital gains earned by the company was the only income, which is not taxable under the IT Act, 1961 (hereinafter referred to as the Act). 2.4 The Hon'ble Delhi High Court in the case of Shiva Kant Jha vs. Union of India (2002) 175 CTR (Del) 371 : (2002) 122 Taxman 952 (Del) has quashed and set aside the impugned Circular No. 789 dt. 13th April, 2000 issued b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of Union of India vs. Azadi Bachao Andolan (2003) 184 CTR (SC) 450 : (2003) 263 ITR 706 (SC), wherein it has been held that the Circular No. 789 dt. 13th April, 2000 is valid and efficacious. 1.3 That the learned CIT(A) has grossly erred in not admitting the evidence produced before him in the form of photostat copies of appellant company's board resolution dt. 29th Oct., 1995, authorizing Shri Vikas Mehrotra, director of the company, to appoint or execute any documents for the appointment of any person/s in India as the lawful power of attorneys of the appellant to execute necessary documents and details of telephone calls made by Shri Vikas Mehrotra on the ground that this was fresh evidence, not admissible, under r. 46A of IT Rules, 1962." 2.7 The learned counsel for the assessee contended that the AO had erred in law and on facts in assuming jurisdiction on the assessee a registered company of Mauritius and had wrongly invoked the provisions of IT Act, 1961. No income-tax could be levied on the income-capital gains-earned in India as per DTAA entered into between India and Mauritius. Article 13(4) of the DTAA between India and Mauritius provides that the gains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rposes of assessment under the Indian IT Act. It was argued that the de jure as well as de facto control and effective management of the appellant company is completely outside Indian territories. That the AO has failed to establish as to how the company is managed in India. 3.1 The learned Departmental Representative relied on the orders of the Revenue authorities. We have considered the rival submissions. We shall first make a reference to the provisions of the DTAA between India and Mauritius. Articles 4(1) and (3) of the DTAA, read as follows: "4(1) For the purposes of this convention, the term 'resident of a Contracting State' means any person who under the laws of that State, is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of similar nature. The terms 'resident of India' and 'resident of Mauritius' shall be construed accordingly; (3) Where by reason of the provisions of para 1, a person other than an individual is a resident of both the Contracting States, then it shall be deemed to be a resident of the Contracting State in which its place of effective management is situated." 3.2 A reading of cl. 4(1) wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g State in which its place of effective management is situated. The DTAC requires the test of "place of effective management" to be applied only for the purposes of the tie-breaker clause in art. 4(3) which could be applied only when it is found that a person other than an individual is a resident both of India and Mauritius. We see no purpose or justification in the DTAC for application of this test in any other situation." 3.4 In view of the above it was necessary for the Revenue authorities to first establish that the control and management of the affairs of the assessee during the previous year were situated wholly in India. This test laid down in s. 6(3)(ii) is materially different from the test of place of effective management contemplated by art. 4(3) of the DTAA between India and Mauritius. 3.5 Let us analyse the evidence on record, which could justify conclusions that the assessee's effective place of management was only in India. The assessee, as already stated, is a tax resident of Mauritius and copy of the tax resident certificate issued by the CIT, IT Department, Republic of Mauritius, is placed at p. 1 of the assessee's paper book. The assessee was a company incor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, concluded that all the decisions were made only from India. The AO, therefore, concluded that the place of effective management of the assessee was only in India. In our view, the reasons assigned by the AO were not enough even to come to a conclusion that the place of effective management of the assessee was in India. The law is well settled that control and management of affairs does not mean the control and management of the day-to-day affairs of the business. The fact that discretion to conduct operations of business is given to some person in India would not be sufficient. The word 'control and management of affairs' refers to head and brain, which directs the affairs of policy, finance, disposal of profits and such other vital things consisting the general and corporate affairs of the company. 4. We have perused the power of attorney by which persons in India were authorized to conduct the business on behalf of the assessee. In our view, the terms of the said power of attorney merely empowered the persons in India to conduct the day-to-day affairs of the company. It is also noticed that the assessee in support of its claim that the directions were issued from market by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of the companies incorporated in Mauritius. The Hon'ble Supreme Court upheld the validity of this circular and held that such companies were not liable to taxation under the IT Act, 1961 in respect of capital gains on sale of shares. Even on the basis of this decision, the action of the Revenue authorities bringing to tax the capital gains in the hands of the assessee cannot be sustained. We, therefore, hold that the income in the form of capital gains on sale of shares as assessed to tax by the Revenue authorities should be deleted. Ground Nos. 1 to 1.3 are accordingly allowed. 5. Ground Nos. 2 to 2.3 raised by the assessee, read as follows: "2. That the learned CIT(A) has grossly erred both in law and on facts in confirming the addition of Rs. 3,83,11,550 on the ground that this is unexplained investment in purchase of various shares in India; 2.1 That the learned CIT(A) has failed to appreciate the fact that the amount of Rs. 3,83,11,550 was in the form of remittances made by Mauritius office of the appellant company through banking channels for purchase of shares and securities in Indian capital market; 2.2 That the learned CIT(A) has failed to consider the CBDT Cir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing for explanation about it. Funds have been received through banking channels from Mauritius/USA. The appellant, being an accepted foreign body by RBI, the remittances do not call for any investigation/explanation from the assessee. 6.4 The assessee also placed reliance on Circular No. 5 dt. 20th Feb., 1969. The copy of the said circular is placed in the paper book at pp. 73-74. The second and third paras of the said circular are given as under wherein it has been laid down as follows: "Money brought into India by non-residents for investments or other purposes is not liable to Indian income-tax. Therefore, there is no question of a remittance into the country being subjected to income-tax in India. The question of assessment to tax arises only when there is no evidence to show that the amount, in question, in fact represents such remittance. In other words, in the absence of proper supporting evidence, the taxpayer's story that the money has been brought into India from outside may be disbelieved by the ITO who may then proceed to hold that the money had in fact been earned in India." "If the money has been brought into India through banking channels or in the form of asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... burden of proof. Hence, if there is any cash credit in the books of account of the non-resident, then the source and genuineness of the same will have to be proved by him. For the similar reasons, the non-resident would be required to prove the source of investment made by him in India. (para 12) However, the conflict between the provisions is only with reference to the onus and not to the issue of taxability of income. The onus is shifted under s. 68 or s. 69 only with reference to the income, which is otherwise taxable in the hands of non-resident under s. 5(2). Therefore, the issue whether the income of a nonresident is taxable or not is still to be decided with reference to the provisions of s. 5(2) and the provisions of s. 68 or s. 69 cannot enlarge the scope of s. 5(2). What is not taxable under s. 5(2) cannot be taxed under the provisions of s. 68 or s. 69. Under s. 5(2), the income accruing or arising outside India is not taxable unless it is received in India. Similarly, if any income is already received outside India, the same cannot be taxed in India merely on the ground that it is brought into India by way of remittances. If such income is shown in the books of accounts ..... X X X X Extracts X X X X X X X X Extracts X X X X
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