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TMI Blog2016 (9) TMI 158X X X X Extracts X X X X X X X X Extracts X X X X ..... ity of section 147 notice and section 147 assessment order. 2. The CIT(Appeals) erred in holding that income of Rs. 11,71,00,000/- has arisen to the assessee and is taxable in the hands of the assessee as income from other sources and not as capital gain. 3. The CIT(Appeals) failed to appreciate that there was no transfer of shares or any transfer of any sort in Asst. Year 2002-03, and therefore, there is no question of any income arising before that event and in any case even if there was transfer the income will not be taxable on revenue account but will be taxable as capital gain, and therefore, will be exempt under Double Taxation Avoidance Agreement between the Republic of India and the Government of The Republic of Singapore. 4. The CIT(Appeals) failed to appreciate that the residential status of the assessee is "non-resident" and all the documents have been executed abroad, and therefore, even if income has arisen, it has not arisen in India nor through or from any property in India, any asset or source of income in India or transfer of capital asset situated in India. 5. The CIT(Appeals) failed to appreciate that call option agreement does not result into any income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 150 years. 4. Later on, the Department received the information that assessee had received the payments of US $ 24,50,000 in pursuance of aforesaid call option however, the said income was not offered to tax in India. Accordingly, a notice under section 148, dated 26.03.2009 was issued for reopening the case under section 147. The reasons recorded for reopening the case were as under:- "Mr. Praful Chandaria is a non-resident and a tax resident of Singapore. It is seen that he has invested in the shares of the Indian company M/s Purse Holding India Pvt. Ltd (PHIL), a company registered in India and having its office at 402, Vyom Arcade, Tejpal Scheme, Road No.5, Subhash Road, Vile Parle (E), Mumbai. He has purchased 56,60,026 equity shares for Rs. 5,66,00,260/- M/s PHIL was a special purpose vehicle to make investment in ING Baring India Pvt. Ltd and held 25% shareholding (i.e. 84,74,560 shares). The other 75% was held by ING Baring India Mauritius Ltd, a company registered in Mauritius. Subsequently, on 14.12.2001, PHIL entered into a "call option agreement" with ING Baring Mauritius Ltd (BM) giving them an option to purchase all the shares held by PHIL in ING Baring @ Re.1, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion agreement between BI and PHIL. He observed that the Escrow agreement dated 14.12.2011 clearly shows that the original shares certificates have been deposited with the Escrow Agent, that is, have been handed over to them and this Escrow Agreement has been signed by one of the shareholders of the PHIL and Mr. Ajay Sanghavi. That apart, the assessee had given a notarized undertaking dated 19.12.2001, wherein the assessee has clearly stated "for valuable consideration already received by each of the Purse Shareholders". The relevant fact mentioned in the said undertaking has been summarized in the assessment order in the following manner:- (i) Mr. Praful Chandaria holds 99.9% shares; Mr. Ajay Sanghavi holds one share and Mr. Jatin Pandya also holds only one share, who were the shareholders of PHIL. (ii) For valuable consideration already received, each of the PHIL shareholders have agreed with Barring Mauritius to execute and abide by the call option agreement dated 14.12.2001 entered into by the PHIL shareholders with BM in respect of all their shares in PHIL. (iii) For valuable consideration already received, each of the PHIL shareholders have agreed with BM to cause to be ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 50,000 by which the assessee had authorized the Chairman of BM to remit the proceed on behalf of the Purse Finance Ltd with specific details of bank account in which the said amount was to be remitted. The relevant fact on this point as noted by the Ld. AO is as under:- A/C Baring India Investment Ltd (Fund I). US$ 1,000,000.00 A/C Baring India Investment Ltd (Fund II). US$ 1,232,173.61 A/C The Baring Asia Private Equity Fund. - Amount due on 18/06/2001 ... US$ 150,000.00 - Amount due on 05/09/2001 US$ 67,826.39 US$2,450,000.00 Thus from the facts and material which came on record before the AO, he conclusively held that, assessee had received the money, that is, US $ 24,50,000 under the 'call option agreement' entered with BM which is equivalent to Rs. 11,71,00,000/-. Accordingly, he confronted the assessee as to why the said amount should not be treated as income assessable to tax in India under the provisions of section 5(2) r.w.s. 9(1). In response to the show cause notice, the assessee had first objected to the validity of reopening under section 147, which as per the noting in the assessment order, AO has disposed off the said objection vide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were huge accumulated losses as on 31.12.2001 which approximately stood at Rs. 28.7 crores. Thus, about 85% of the paid up capital gain of BI was wiped out, therefore, on such a state of affairs, the call agreement are only make belief arrangement and no actual transaction in pursuance thereof has actually been taken. 7. The Ld. CIT(A) after retreating the facts and materials as discussed by the AO, confirmed the order of the AO that the amount in question is to be taxed as "income from other sources" in terms of section 9(1)(i). As regards the assessee's contention with regard to taxing of the income as 'capital gain' and then giving benefit of Article 13 of India-Singapore DTAA his relevant observation are as under:- "The contention of the Ld. AR, that if all anything is taxable than it is capital gain only which is not taxable because of Article 13 of DTAA is not acceptable due to the fact that the appellant has received valuable consideration in lieu of transfer of the property situated in India through or from an asset and source of income in India from the capital asset situated in India. Therefore, this was not a capital gain in the hands of the appellant as the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o mention about consideration of US $ 2.45 million has been received. He thus submitted that, here in this case, one should not go by the terms of agreement but in terms of actual state of affairs as well as Balance sheet, that is, the substance of the entire transaction. Regarding the remittance of the proceeds as alleged by the AO, he submitted that, the same is on behalf of the Purse Finance, which is different company and entity altogether. He further pointed out that, in the assessment year 2009-10, the AO in the case of PHIL has taxed the amount as capital gain and such an assessment in the case of PHIL has been accepted as per his instruction. From this fact, he contended that the transfer of shares if at all is held to be taxed, then same should be in one year and not in two different years. 9. Without prejudice, Mr. Shah submitted that, if at all the alleged consideration of Rs. 11,17,00,000/- is held to be taxable in the hands of the assessee, then same has to be treated as "capital gain" because valuable right has been assigned by the assessee in favour of BM to transfer the shares which is nothing but a transfer of property within the ambit of section 2(14) r.w.s. 2(47 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... referring to the various observations and findings given by the ld. CIT(A) in the impugned order, submitted that the facts and material clearly point out that, assessee did receive the money in terms of "call option agreement" and if such money has been received by the assessee, then it has to brought to tax under section 9(1)(1), because the same is arising out of transfer of property situated in India or from an asset and source of income in India. Hence it has been rightly taxed as "income from other sources" and not as "capital gain". In a nutshell, he strongly relied upon the order of the CIT(A). As regards, the approval of notice under section 148 by Addl. CIT/DIT, he submitted that under the Income Tax Act, Jt. Commissioner and Addl. Commissioner are inter-changeable authorities and they cannot be reckoned as two different hierarchies or authorities. This is clarified by the statute itself in subsection (28c) of section 2 as well as sub-section (7A) of section 2. Thus, the satisfaction of the Addl. DIT who also acts as Addl. CIT under the Act is well within his competence to give approval in terms of section 151. 11. We have heard the rival submissions and considered the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eit without dejure alienating the shares itself. This aspect of the matter has also been highlighted by the Ld. AO in his order. From the perusal and analysis of the material on record he has concluded that "it is evident that assessee had effectively alienated his shares in PHIL by way of irrevocable undertaking and power of attorney for which consideration was already received". Even the Ld. CIT(A) in his order has reconfirmed the same thing. Thus, here in this case if one goes by the 'call option agreement' and other materials facts on record, it is ostensibly clear that the a valuable and substantive right in the shares of PHIL, namely giving of right to sell shares at a determined price, has been alienated by the assessee and hence it cannot be held merely as a call option agreement simplicitor. 12. Now, the core issue/ question left to be decided is, as to how the amount is to be taxed and whether such an amount would be taxable in the hands of the assessee in India or not and under which head. The revenue's case is that, it is taxable as "income from other sources" and has been brought to tax in India by invoking the deeming provisions of section 9(1)(i). However, the depar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al gain under India- Singapore DTAA has been given in Article 13, which reads as under:- "1. Gains derived by a resident of Contracting State from the alienation of immovable property, referred to in Article 6, and situated in the other Contracting State may be taxed in that other State. 2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a contracting State has in the other Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or together with the whole enterprise) or of such fixed base, may be taxed in that other state. 3. Gains from the alienation of ships or aircraft operated in international traffic or movable property pertaining to the operation of such ships or aircraft shall be taxable only in the Contracting State of which the alienator is a resident. 4. Gains from the alienation of shares of the capital stock of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... grounds of appeal (in case of Purse Holdings India P Ltd), following grounds have been raised:- "1. The CIT(Appeals) erred in upholding the validity of section 147 notice and section 147 assessment order. 2. The CIT(Appeals) failed to appreciate that there is no transfer of any shares happened in Asst. Year 2002-03 and therefore, there is no question of any income arising before happening that event. 3. The CIT(Appeals) failed to appreciate that call option agreement does not result into any income by itself; the income or loss if at all will arise only when the option given under the agreement is exercised and the fact is that the option has not been exercised in Asst. year 2002-03. 4. The CIT(Appeals) erred in holding that income of Rs. 11,75,26,500/- has arisen to the assessee and is taxable in the hands of the assessee as income from capital gain. 5. The CIT(Appeals) erred in holding that the investment by the assessee-company in ING Bearings India Ltd was divested and that it was divested using NRI status of the majority shareholder to include into the said transaction in a manner so as to absolve the assessee company from taxation and accordingly the assessee is liab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares held by PHIL in ING-Barings India Ltd. The consideration for this option was Re.1, the period of option was 150 years. However, on verification of returns filed by the assessee, it is noticed that the consideration accrued by the call option exercised by Investigation has further informed that the assessee has sold the shares @ 0.49/- as against to the striking rate of Re.1/- per share. Apparently there is a gross under valuation of shares which has resulted escapement of capital gains tax. Therefore, I have reason to believe that income of more than Rs. 1 lac has been escaped assessment. Therefore, a proposal to reopen the assessment for the AY 2002-03 is put up for kind consideration and approval". 18. At the outset, the Ld. Counsel for the assessee, Mr. J P Shah submitted that, here in this case, the notice under section 148 has been issued by obtaining the necessary satisfaction of 'Commissioner of Income-tax', who cannot be reckoned as competent authority, authorized to give approval for such satisfaction on the reasons recorded under section 151. Under the provisions of section 151, the necessary satisfaction on the notice has to be obtained from the Joint Comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmissioner is satisfied, on the reasons recorded by such Assessing Officer, that it is a fit case for the issue of such notice. (3) For the purposes of sub-section (1) and sub-section (2), the Principal Chief Commissioner or the Chief Commissioner or the Principal Commissioner or the Commissioner or the Joint Commissioner, as the case may be, being satisfied on the reasons recorded by the Assessing Officer about fitness of a case for the issue of notice under section 148, need not issue such notice himself". 20. Admittedly, in this case, sub-section (1) and sub-section (3) are not applicable, albeit sub-section (2) applies which provides that, no notice shall be issued under section 148 by the AO who is below the rank of Joint Commissioner unless Joint Commissioner is satisfied on the reasons recorded by the AO that it is a fit case for issue of such notice. Here in this case, admittedly, Joint CIT has not given his satisfaction on the reasons recorded by the ITO 7(4)(1), Mumbai but Commissioner of Income Tax, who is not the authority in such case to grant approval on the satisfaction of the reasons recorded by the AO. This aspect of the matter is squarely covered by the decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the issuance of a notice under Section 148. Section 151(2) mandates that the satisfaction has to be of the Joint Commissioner. That expression has a distinct meaning by virtue of the definition in Section 2(28C). The Commissioner of Income Tax is not a Joint Commissioner within the meaning of Section 2(28C). In the present case, the Additional Commissioner of Income Tax forwarded the proposal submitted by the Assessing Officer to the Commissioner of Income Tax. The approval which has been granted is not by the Additional Commissioner of Income Tax but by the Commissioner of Income Tax. There is no statutory provision here under which a power to be exercised by an officer can be exercised by a superior officer. When the statute mandates the satisfaction of a particular functionary for the exercise of a power, the satisfaction must be of that authority. Where a statute requires something to be done in a particular manner, it has to be done in that manner. In a similar situation the Delhi High Court in Commissioner of Income Tax Vs. SPL'S Siddhartha Ltd. (ITA No.836 of 2011 decided on 14 September 2011) held that powers which are conferred upon a particular authority have to be ..... 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