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2016 (11) TMI 1360 - ITAT DELHI

2016 (11) TMI 1360 - ITAT DELHI - [2016] 51 ITR (Trib) 162 - Revision u/s 263 - Held that:- In respect of both the issues, i.e., allowing credit of deemed taxes paid on dividend in Oman as well as capitalisation of interest under section 36(1)(iii) detailed enquiries as well as verification have been made by the Assessing Officer. Further it is also not the case of the learned Principal Commissioner of Income-tax that the order is not in accordance with any instruction/direction issued by the Bo .....

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Decided in favour of assessee - I. T. A. No. 2487/Del/2016 - Dated:- 19-9-2016 - H. S. Sidhu (Judicial Member) And J. S. Reddy (Accountant Member) For the Appellant : Vijay Ranjan, Advocate, Vartik R. Choksi and Ms. Ira R. Kapoor, Chartered Accountants For the Respondent : A. K. Saroha, Commissioner of Income-tax (Departmental Representative) ORDER H. S. Sidhu (Judicial Member) 1. The assessee has filed this appeal against the order dated March 29, 2016, passed by the Principal Commissioner of I .....

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letely absent thus resulting in the order passed being bad in law. 2. In law and on the facts and circumstances of the case, the learned Principal Commissioner of Income-tax erred in his observation in the order that the issue of tax credit on dividend as per article25(4) of the Double Taxation Avoidance Agreement between Government of India and the Omani Government reflected lack of inquiry and non-application of mind by the Assessing Officer. Further, the learned Principal Commissioner of Inco .....

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ircumstances of the case, the learned Principal Commissioner of Income-tax erred in directing the Assessing Officer to examine the applicability of the proviso to section 36(1)(iii) regarding capitalisation of interest expenditure and further erred in observing that part of interest expenditure may pertain to investment not connected with business and consequently may not be deductible under section 36(1)(iii). 4. In law and on the facts and circumstances of the case, the learned Principal Commi .....

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izers like Urea, DAP and Complex Fertilizers. During the year 2002, as a public sector undertaking, pursuant to a memorandum of understanding between the Government of India and the Sultanate of Oman to promote projects of mutual economic interest for both the countries, the assessee along with another Indian Co-operative Society (M/s. Krishak Bharti Co-operative Ltd.) entered into a joint venture with Oman Oil company to form Oman fertilizer company SAOC (OMIFCO), which is a registered company .....

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anch 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 5 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. 4. In this case the assessee has originally filed the return of income for the assessment year 2010-11 on October 13, .....

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t of the appellant-society in Oman and as per the provisions of the Double Taxation Avoidance Agreement read with section 90 of the Income-tax Act, as interpreted by the honourable apex court in India, the said income was assessable only in Oman and not in India. 5. The case of the assessee was picked up for scrutiny and notices under sections 143(2) and 142(1) of the Income-tax Act, were issued by the Assessing Officer along with the detailed questionnaires. During the course of the assessment .....

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x Act, 1961 on February 28, 2014, by the Assessing Officer who made the following additions : (Rs.) 1. Dividend income received from OMIFCO 144,11,73,150 2. Disallowance under section 43B 15,94,113 3. Disallowance under section 14A read with rule 8D of the Income-tax Rules 31,33,42,000 4. Disallowance of horticulture expenses 60,70,000 6. While completing the assessment, inter alia, the Assessing Officer allowed a tax credit of a sum of ₹ 41,52,45,771 in respect of the dividend income of & .....

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visions of article 25(4) of the Double Taxation Avoidance Agreement read with section 90(1)(a)(ii) of the Income-tax Act, the Assessing Officer, after thoroughly examining the issues and after full application of mind allowed credit for the aforesaid tax which would have been payable in Oman but for the exemption granted. 7. Subsequent to the completion of the assessment the learned Principal Commissioner of Income-tax-11, Delhi issued a show-cause notice dated December 22, 2015, under section 2 .....

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Oman (para 3) ₹ 144,11,73,150 (b) Disallowance under section 43B ₹ 15,94,113 (c) Disallowance under section 14A read with rule 8D(2)(ii) ₹ 31,33,42,000 (d) Disallowance of horticulture expenses ₹ 60,70,000 Taxable income ₹ 753,37,73,380 2. The Assessing Officer computed the tax as per ITNS 150 (copy placed as annexure). The perusal of Income-tax computation form it is found that the Assessing Officer gave relief under section 90 of ₹ 41,52,45,771 and determine .....

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7; 41,52,45,771. 3. The assessee went in appeal before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) passed order on March 9, 2015, and upheld the addition of ₹ 144,11,73,150 on account of dividend received from overseas joint venture OMIFCO (Oman). 4. As per order sheet entry the Assessing Officer conducted various hearings wherein Sh. Rawat and Sh. Atul Chhabra attended the proceedings. Vide order sheet entry dated February 20, 2014, the assessee was .....

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tax Act, 1961. Please give a detailed note on tax credit claimed by the society in respect of dividend income received from OMIFCO. 6. The assessee filed reply dated February 26, 2014, and submitted that the tax credit should be allowed if the Department taxes the dividend income. The assessee submitted that the decision of the honourable Supreme Court in Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 (SC) would be applicable for allowing the tax credit. 7. The Assessing Officer did n .....

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23, 1997, which is reproduced as under ([1997] 228 ITR (St.) 21) :- 'Whereas the annexed agreement between the Government of the Sultanate of Oman and the Government of the Republic of India for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to taxes on income has entered into force on the 3rd June, 1997 after the notification by both the Contracting States to each other of the completion of the proceedings required by their laws for bringing into force of .....

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elevant part of section 90 is reproduced as under :- '90. Agreement with foreign countries or specified territories.-(1) The Central Government may enter into an agreement with the Government of any country outside India or specified territory outside India,- (a) for the granting of relief in respect of- (i) income on which have been paid both Income-tax under this Act and Income-tax in that country or specified territory, as the case may be, or (ii) Income-tax chargeable under this Act and .....

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me-tax in that country or specified territory, as the case may be. The section 90(1)(a)(ii) is in regard to the Income-tax chargeable under this Act and under the corresponding law in force in that country and moreover, Income-tax should be chargeable in the Act of either country. 11. From the perusal of record it is found that the assessee has claimed tax credit even though no tax has been paid in either country. 12. The Central Government derives its authority to enter into agreement for avoid .....

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er the law of the contracting State and which are designed to promote economic development. 14. The 'tax incentive' has not been defined in the Double Taxation Avoidance Agreement. Therefore we have to go to article 3(2) which reads as under (page 24 of 228 ITR (St.)) :- '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 c .....

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pply his mind as to the veracity of the statement given by the assessee. The Assessing Officer did not notice what are the tax incentives which are designed to promote economic Development. In the present case, the dividend income has been made exempt under article 8(BIS) under the OMANI Companies Income- tax Law. This would be a mere assumption that such exemption is designed to promote economic development. The Assessing Officer failed to notice this vital difference. 16. The Assessing Officer .....

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010-11 shows that the assessee has shown loan funds of ₹ 11,532.17 crores. Whereas the share capital and reserves and surplus figure is ₹ 4,270.50 crores. The total of the balance-sheet is ₹ 16,319.45 crores. This means the assessee is having only 26.16 per cent. own funds. The perusal of balance-sheet further shows that the assessee has shown capital work-in-progress of ₹ 333 crores. The assessee has not shown any figure of interest pertaining to capital work-in- progres .....

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onent in the capital work-in-progress which is to be calculated for the period beginning from the date on which the capital was borrowed for acquisition of the asset till the date of which such asset was first put to use. The Assessing Officer did not make any inquiry or raised any query for calculating the interest to be capitalised under section 36(1)(iii) proviso. The Assessing Officer did not make any further inquiry as to whether the calculation made by the assessee, if any, is correct or n .....

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these are for business purpose or not. Whether some of the advances are meant for acquisition of capital asset. If that is so, then section 36(1)(iii) proviso would come into operation. No such queries have been raised by the Assessing Officer nor any explanation given by the assessee. 20. The assessee in schedule 20 (43rd annual report), paragraph 1 has mentioned that estimated value of contracts (net of advances) to be executed on capital account and not provided for amount to ₹ 436.36 c .....

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le to such investments and how it is allowable under the business head, i.e., under section 36(1)(iii). The assessee has not established any nexus as regards the utilisation of funds from own sources or funds on which interest is paid by the assessee. 22. Rental income : The assessee has shown income from house property at ₹ 5,71,31,586 after availing of deduction under section 24 of ₹ 61,42,331. The assessee has shown rental income from IFFCO Tower, Gurgaon. From the details it appe .....

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der section 143(3) of the Income-tax Act, 1961, is erroneous in so far as it is prejudicial to the interests of the Revenue. You are given an opportunity of being heard and show cause as to why the impugned order be not enhanced/modified or set-aside for fresh assessment under section 263 of the Income-tax Act, 1961. Your case is fixed for hearing on January 4, 2016, at 3 : 30 p.m." 8. On the very next day, i.e., on December 23, 2015, the learned Principal Commissioner of Income-tax issued .....

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India Fertiliser Co. S.A.O.C. (iii) Jordan India Fertiliser Co., L.L.C. (iv) IFFCO Chhattisgarh Power Ltd. (v) IFFCO Kisan Sanchar Ltd. (vi) IFFCO Kisan SEZ Ltd. (vii) Industries Chimiques Du Senegal (viii) Kisan International Trading, FZE (ix) National Commodity and Derivatives Exchange Ltd. (x) National Collateral Management Services Ltd. (xi) Indian Potash Ltd. (xii) IFFCO Kisan Bazar and Logistics Ltd. (xiii) Indian Farm Forestry Development Co-operative Ltd. (xiv) IFFCO Foundation (xv) Co- .....

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sessee is having interest. For example, the assessee has simply shown dividend income from OMIFCO Oman but no other document has been asked by the Assessing Officer or given by the assessee. The assessee would be taxable on the global income irrespective of the associates from which the assessee derives income. The assessee may be eligible for any kind of allowance as per the Double Taxation Avoidance Agreement if any with any other country. 4. In para 22 of show cause No. 1175 dated December 22 .....

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ted December 22, 2015." 9. In response to the above show-cause notice, the assessee file a detailed reply dated January 11, 2016, as well as January 19, 2016, which are compiled in the paper book filed with us (pages 355-390). To summarise the assessee has raised the following contentions : • That the Assessing Officer has conducted detailed enquiries year after year and it was only after examination of all facts that the credit for deemed tax paid was allowed ; • That the Assessi .....

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Agreement the claim of the asses see ought to have been allowed. • That in respect of capitalisation of interest under section 36(1)(iii) proviso the assessee submitted that the same was in line with accounting policy regularly followed, certificate of statutory auditors, that the free reserves were sufficient enough to cover up the addition of fixed assets as well as CWIP. • That the assessee-company had also capitalised interest of ₹ 7.08 crores following a consistent accounti .....

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x rejected the various submissions made before him. The relevant portion of the finding of the Principal Commissioner of Income-tax with respect to the claim for allowing tax credit for deemed tax paid on dividend income in Oman is reproduced hereunder : "2. I have carefully considered the submissions of the assessee. The main issue in regard to the claim of the tax credit even though the assessee has not paid any tax in Oman. The assessee has relied upon article 25(4) of the Double Taxatio .....

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nted under the law of the Contracting Sate and which are designed to promote economic development. There was no need to write words 'and which are designed to promote economic development'. The statute has to be read with reference to what has been mentioned. There is no scope of going beyond what has been stated. In paragraph 13 of the letter dated March 10, 2016, it was especially mentioned that the word designed means that there would have to be some conscious effort. Paragraph 13 of .....

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. You may kindly note even the word design which means there would have to be some conscious effort. The English meaning of design is to do or plan (something) with a specific purpose in mind. Giving a general exemption does not lead to a specific purpose in mind. General exemption does not show that there is a specific purpose. If that is so, then the same should have been incorporated in the Sultani degree. The Sultani degree till date has not thought upon for the last 16 years, to amend the S .....

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of both the countries who entered into the Double Taxation Avoidance Agreement that the article 25(4) would give tax benefit only when the tax incentive has been designed for economic development. We cannot by any stretch of imagination interpret these words as pointing towards general exemption. The assessee sought a clarification from the Oman Officers whereas it was a matter to be decided by both the countries as it is relating to the Double Taxation Avoidance Agreement which was entered int .....

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c requirement designed for economic development has not been fulfilled. The assessee has to demonstrate that certain investments were designed for economic development. If we do not interpret properly the words designed for economic development, then such words would become redundant. This agreement has been entered into by both the countries with all its wisdom for incorporating the words designated for economic development. . . 28. The assessee has further referred to Royal Decree No. 68 of 20 .....

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e 25(4). In the jurisprudence a particular expression cannot be deemed as covering any other expression. For example, in this case the 'exigency of public good' cannot be equated with 'designated for economic development'. Therefore the assessee cannot take any support from the words 'the exigencies of public goods'. The assessee on page 135 has placed the amendments to the law of Income-tax of company (placed as annexure 2). Article 2). Article 8(Bis) simply says as unde .....

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(SAOC) by the Secretary General for taxation. In this letter it has been mentioned that 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 this manner, the Government of Oman would achieve its main objective of promoting economic development with in Oman by attracting investments. It is further mentioned that the interpret .....

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, it is found that the Secretary General for taxation does not derive any authority for issuing such letter that has the sanctity of a law for interpreting a particular article. Article 4(Bis) has a reference of the Secretary General. As per article 2(6)(Bis) a Secretary General means the Secretary General for taxation at the Ministry of Finance which is mentioned in article 4(Bis) of the law . . . 38. The honourable Income-tax Appellate Tribunal has given relief primarily on the basis of the le .....

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its letters, has not referred to any article of Omani tax law from which the Secretary General derives its authority to issue such letters. It appears that the Secretary General responded to a letter of Omani Oil Company and nothing else. Effectively the Secretary General in its letter has interpreted article 25(4) which is mainly in the domain of two Government, not under any officer, may be a very senior officer under the Omani tax law. The matter has to be settled by the two Governments and n .....

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ps presumed that this is a letter issued by Sultanate of Oman. But the letters were issued by one officer of Oman who has no authority under the law to issue such clarification. If he has issued such clarification, at the most it could be considered as his opinion. The Department may file a miscellaneous application before the honourable Income-tax Appel late Tribunal pointing out that the said letters are just an opinion from the officers of the Department and there was some amendment in the la .....

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w. The honourable Income-tax Appellate Tribunal did not consider the aspect that the letters have not been issued by quoting any article of Omani tax law from which the Secretary General would derive the authority. In the legal jurisprudence this is one of the requirements to show its authority under the Law. 41. In my opinion the matter is unambiguous. However, in view of circumstances of the case justify, the matter is resorted to the file of the Assessing Officer in exercise of my power under .....

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le Taxation Avoidance Agreement with particular emphasis on the word designed for economic development. The Assessing Officer would narrate all the facts and also send a copy of the order under section 263 passed by me wherein I have made certain observations as regards the interpretation. It is quite possible that both the Governments, i.e., India and Oman may reach at a conclusion that may be in favour of the Revenue or in favour of the assessee. Pending any communication from the concerned au .....

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cial decisions. For the sake of clarity, the relevant portion of the submissions made by the learned counsel of the assessee from paragraphs 8.3 to 8.11, pages 24 to 72 of the paper book, is reproduced below : "8.3 For better understanding, these grounds have been divided into several categories as mentioned above and it would be convenient to proceed with further elaboration category-wise, in the following submissions : (a) Deemed tax credit on dividend income from OMIFCO : In response to .....

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nd 30 of the questionnaire issued as part of the scrutiny proceedings on September 30, 2013 : "29. In respect of any income covered in the Double Taxation Avoidance Agreement, please furnish detailed note with copy of respective agreement and also give reasons for claiming relief under section 90 of the Income-tax Act, 1961. 30. Please give a detailed note on tax credit claimed by the society in respect of dividend income received from OMIFCO." 3.1.3 The society, vide its reply dated N .....

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usal of the assessing authority. The issue was also discussed with the learned Assessing Officer in substantive details during the course of the hearing. 3.1.4 Further, in subsequent hearing on February 20, 2014, the learned Assessing Officer specifically expressed disinclination to accept the society's claim for exemption and enquired about substantiating the alternative claim of credit for taxes deemed to have been paid in Oman under article 25 of the Double Taxation Avoidance Agreement on .....

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end exemption after having been specifically amended by Royal Decree 68 of 2000 as a measure to encourage economic development. The reply specifically mentions at point B.2 the rationale for this incentive coming under the ambit of article 25(4) of the Double Taxation Avoidance Agreement. Further, at point A.4 of the reply, reference had been made to the assessment orders passed by the tax authorities in Oman in the assessee's case which specifically recorded the objective for the exemption .....

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cles 25(2) and 25(4) of the Double Taxation Avoidance Agreement and, vide finding at paras 3.3 and 3.4, records that "in view of the above provisions", the tax credit for taxes which would have been payable is being allowed to the assessee. 3.1.7 From the above factual matrix, it is luminescent that the learned Assessing Officer had not only enquired about the tax credit claim in the hearing on February 20, 2014, but also analysed article 25(4) of the Double Taxation Avoidance Agreemen .....

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which highlighted the aim of the amendment as exigencies of public good. (b) The assessment orders passed by the Omani tax authorities recording the objective of the tax exemption being to promote economic development. Thus, it cannot be concluded at this stage now that the learned Assessing Officer has not applied his mind on the merits of the issue. It is incorrect to state that the Assessing Officer has "simply accepted the version of the assessee". It is trite that the only author .....

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tax credit on a combined reading of article 25(2) and 25(4). By taking the only legally plausible view, the order cannot be termed as erroneous in the eyes of the law to fall within the scope of the revisionary power under section 263. 3.1.8 It is pertinent to note that even after the amendment to section 263 by the Finance Act, 2015, Explanation 2 clearly says that "the order is deemed to be erroneous if the order is passed allowing any relief without inquiring into the claim". The su .....

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urt in Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 (SC) (page 284 of 295 ITR) : "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. For example, when an Income-tax Officer adopted 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 tr .....

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#39;prejudicial to the interests of the Revenue' appearing in section 263 has to be read in conjunction with the expression 'erroneous' and that 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. In cases where the Assessing Officer adopts one of the courses permissible in law or where two views are possible and the Income-tax Officer has taken one view, the Commissioner of Income- tax cannot e .....

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erefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. Learned counsel for the assessee is right in his submission that one has to keep in mind the distinction between 'lack of inquiry' and 'inadequate inquiry'. If there was any inquiry, even inadequate that would not by itself give occasion to the Commissioner to pass orders under section 263 of the Act, merely because he has differe .....

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mmissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a figure higher than the one determined by the Income-tax Officer. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. It is because the Income-tax Officer has exercised the quasi-judicial power vested in him in accordance wit .....

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he above submissions, it is prayed that the initiation of proceedings under section 263 is not legally tenable and the same need to be dropped in the instant case since as amply evidenced by the record, the learned Assessing Officer has taken a valid legal stand on the issue of tax credit after full application of his mind. 3.1.10 Without prejudice to the above, it is further submitted that the issue of tax credit is part of the larger issue of the rights of the country of residence to tax incom .....

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of tax credit cannot be subject-matter of revision. 3.2 Reply on merits of the issue 3.2.1 On merits, the crux of the issue is whether the exemption from tax granted under the Omani tax law on dividends earned by the society's permanent establishment in Oman falls within the ambit of article 25(4) of the Double Taxation Avoidance Agreement with Oman read with section 90 of the Income-tax Act, 1961, or not. 3.2.2 To appreciate the background of article 25(4), section 90 which governs the pow .....

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Income-tax chargeable under this Act and under the corresponding law in force in that country or specified territory, as the case may be, to promote mutual economic relations, trade and investment, or (b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country or specified territory, as the case may be, or (c) for exchange of information for the prevention of evasion or avoidance of Income-tax chargeable under this Act or under the c .....

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e mutual economic relations, trade and investment. In other words, the objective of sub-clause (a)(ii) is to use the tax treaty to facilitate policy objectives of the Government of India. Under sub-clause (a)(ii), the power of the Central Government extends to grant relief not only for avoidance of double taxation, but also for granting relief for income exempt from taxation. The inference at point 11 of the show-cause notice looking down on the claim of tax credit without paying tax is erroneou .....

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peal by the Department against an order of the Delhi High Court which had upheld the plea by a bunch of petitioners that the treaty benefits should be denied if the Income-tax has not been paid in one of the contracting countries (Mauritius) and quashed the Central Board of Direct Taxes's Clarificatory Circular No. 789, dated April 13, 2000 ([2000] 243 ITR (St.) 57 ). After exhaustive arguments and analysis, the apex court upheld the plea of the learned Attorney General that merely because a .....

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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 (see in this connection K. V. AL. M. Ramanathan Chettiar v. CIT [1973] 88 ITR 169 (SC)). 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 .....

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d that though the taxable event for levy of excise duty is the manufacture or production, the realisation of the duty may be postponed for administrative convenience to the date of removal of the goods from the factory. It was held that excisable goods do not become non-excisable merely because of an exemption given under a notification. The exemption merely prevents the excise authorities from collecting tax when the exemption is in operation (see also in this connection the judgment of the Mad .....

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stoms 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 ta .....

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se). OECD's glossary of tax terms defines "tax sparing credit as- term used to denote a special form of double taxation relief in tax treaties with developing countries. Where a country grants tax incentives to encourage foreign investment and that company is a resident of another country with which a tax treaty has been concluded, the other country may give a credit against its own tax for the tax which the company would have paid if the tax had not been "spared, (i.e. given up)&q .....

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ease of reference : "The effectiveness of the tax incentive measures introduced by most developing countries thus depends on the interrelationship between the tax systems of the developing countries and those of the capital-exporting countries from which the investment originates. It is of primary importance to developing countries to ensure that the tax incentive measures shall not be made ineffective by taxation in the capital exporting countries using the foreign tax credit system. This .....

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clude this system in their treaties. Where the investor's home country applies the principle of foreign tax credit, the most effective method of preserving the effect of the tax incentives and concessions extended by developing countries is a tax- sparing credit." 3.2.5 Article 25 of the Indo-Oman Double Taxation Avoidance Agreement which is at the crux of the issue is reproduced below (page 40) : "Avoidance of double taxation 1. The law in force in either of the Contracting States .....

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wever, 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 the Sultanate of Oman. . . 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. 5. . . ." Before attempting t .....

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by indirect enactment was described by Lord Wilberforce as being 'unconstrained by technical rules of English law, or by English legal precedent, but conducted on broad principles of general acceptation. This echoes the optimistic dictum of Lord Widgery C. J. that the words 'are to be given their general meaning, general to lawyer and layman alike . . . the meaning of the diplomat rather than the lawyer. (see Francis Bennion, Statutory Interpretation, page 461 (Butter worths, 1992, secon .....

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nd Maxwell, 1985)), points out that the main func tion of a Double Taxation Avoidance Treaty should be seen in the context of aiding commercial relations between treaty partners and as being essentially a bargain between two treaty countries as to the division of tax revenues between them in respect of income falling to be taxed in both jurisdictions . . . ." The significance of the above observations is to appreciate that the primary rationale of article 25(4) is to extend the tax credit a .....

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Residence (COR) of the foreign investor under the Foreign Tax Credit System. The trade off/rationale for the COR for giving this credit of taxes "spared" is improving the trade/economic relations amongst the contracting countries since the ultimate tax cost in any investment project is reduced/eliminated in the hands of the investor. 3.2.6 From the combined reading of article 25(2), 25(4) and section 90(1)(a)(ii), it is clear that actual payment of taxes is not a sine qua non for the c .....

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elevant to the assessment year 2010- 11, the Omani tax law was governed by Royal Decree 47 of 1981. (relevant extracts at annexure IV). Some of the relevant provisions of this law are discussed below : Article 2(4) : The term company includes any permanent establishment in Oman which is supported by a foreign company. Article 2(17) : Tax means any tax payable under this law and includes penalty, interest . . . Article 2(19) : Taxable income means the total amount of gross income less any deducti .....

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other source. Article 8 (bis) inserted by Royal Decree 68/00 effective from 2000 : The tax shall not apply to the dividends received by the company from the shares, portions or stock it owns in the capital of any other company. (ii) A combined reading of the above provisions clearly show that the charge on the income of the permanent establishment is governed by article 8 read with article 2(4) and 2(17). However in the year 2000, article 8(bis) was added to exempt dividends received by the comp .....

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does not go away merely because exemption is granted at a particular point of time. (iii) It is very significant to note that this issue has also been dealt at length in the clarification dated August 6, 2000 (Annexure-V) given by the Ministry of Finance, Secretariat General for Taxation, Sultanate of Oman, (prior to insertion of article 8 (bis)) wherein it is clearly clarified at point 2 that "income including dividends of a permanent establishment of any foreign enterprise is chargeable .....

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e amendments have been done "in exigencies of public good". In law, the preamble to a statute is a well recognised internal tool of interpretation of the statute. In accordance with the exigencies of public good means a demand for the economic good of the public. Public good corresponds to national needs and self-interest of a country. In a fiscal statute, amendment for public good clearly implies amendment through tax incentives to foster economic development/job growth through inflow .....

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Ministry of Finance, Sultanate of Oman, dated December 11, 2000 (annexure- VII) issued in response to a letter written on behalf of the Indian Sponsors (IFFCO/KRIBHCO) by the Omani JV Partner M/s. Oman Oil Company (annexure-VIII) seeking clarifications on the intent of article 8(bis). The said letter clearly explains that : -Before the recent amendments, though the companies engaged in activities considered essential for economic development were given tax exemption, tax was payable by recipien .....

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ent to comment on the rationale of any tax incentive provision in a country's tax law is the authorities/Legislature/judiciary of that country alone. There is no scope for the other country's tax authorities (India in the instant case) to second guess the objectives especially in the light of clear cut clarification given in the above cited letter. Such an attempt would clearly fall foul of the mandate of article 25(4) entered consciously by the Governments of both the countries and has .....

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21 (SC), (followed by the apex court in CIT v. Excel Industries Ltd. [2013] 358 ITR 295 (SC)) which held that when a fundamental aspect pervading through different assessment years has been found as a fact in one way or the other, it would be inappropriate to allow the position to be changed in a subsequent year particularly when the said finding has been accepted. The said principle is also based upon the rules of certainty and consistency that a decision taken after due application of mind sho .....

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issue of revisionary jurisdiction under section 263, in view of the specific enquiry by the Assessing Officer and detailed reply on the issue covering all the aspects of article 25(4). -On facts, based on the clear confirmation on chargeability of Omani tax both before the amendment to article 8(bis) and after the amendment to article 8 confirming the objective of the change in law by the Omani Secretariat General of Taxation. Hence, the proposed revisionary proceedings may kindly be dropped.&qu .....

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ssued by the Secretariat General of Taxation of Oman regarding the purpose for which exemption was granted to dividend income. He opined that the appellant-society is trying to give a shape of law to the letters issued by the Administrative Officer. He further stated that there should be some provision in the Omani Tax decree authorising an officer to issue clarifications about the tax laws. The learned Principal Commissioner of Income-tax has mentioned that in the relevant section 8(Bis) of the .....

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unal quashed the order passed by the learned Principal Commissioner of Income-tax under section 263 in similar facts and circumstances. The learned Principal Commissioner of Income-tax observed that the Department may not accept the order of the Income-tax Appellate Tribunal. At paras 15 and 16 of the said letter dated March 10, 2016, the learned Principal Commissioner of Income-tax further observed that the article 6(3) of the Omani Tax Decree relied upon by the appellant-society cannot be cons .....

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duce below the relevant part of the appellant-society's letter dated March 22, 2016, for the kind consideration and appreciation of this honourable Tribunal : A1. As your honour is already aware, the Income-tax Appellate Tribunal has pronounced its judgment in the case of Krishak Bharti Co-operative Ltd.('KRIBHCO' for short) v. Asst. CIT (I. T. A. Nos. 6785 and 6786/Del/2015, vide its order dated March 9, 2016 [2016] 67 taxmann.com 138 (Delhi-Trib)). As rightly mentioned in your show .....

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g the assessment year 2010-11, being the year under proposed revision). • After discussion of article 25(4) of the Double Taxation Avoidance Agreement, article 8 (bis) of the Omani Law and the assessment orders in Oman which highlighted the objective of the dividend exemption implying proper application of mind, the tax credit was allowed to the society in the scrutiny assessment orders. • View adopted by the Assessing Officer was one of the plausible and possible view (kindly refer pa .....

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- tax cannot invoke his jurisdiction under section 263 merely to substitute his view in place of the view adopted by the Assessing Officer. 2. The order passed under section 263 is also contrary to the well established principle of consistency of approach in the absence of change in the facts or the provision of law. It was observed by the honourable Tribunal that during the preceding years, in scrutiny assessments passed by the Department, after full application of mind and after detailed discu .....

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Appellate Tribunal and drop the revisionary proceedings. Though your honour is well versed in law and the doctrine of precedent/stare decisis, we would like to rely on the following case law (with relevant extracts) highlighting the binding nature of the jurisdictional Tribunal's orders till the same are stayed/set aside/over- ruled by higher courts : (a) The Madhya Pradesh High Court-Agrawal Warehousing and Leasing Ltd. v. CIT [2002] 257 ITR 235 (MP) relying on the Supreme Court's orde .....

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Tribunal has power to pass such orders on such an appeal as it thinks fit. Sub-section (4) of section 254 attaches finality to the orders of the Tribunal subject to the provisions of section 256 (or section 260A). Needless to say the orders passed by the Tribunal are binding on all the Revenue authorities functioning under the jurisdiction of the Tribunal. Dealing with this very aspect of the matter, the Supreme Court in the case of Union of India v. Kamlakshi Finance Corporation Ltd., AIR 1992 .....

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n under the jurisdiction of the Tribunal. The principles of judicial discipline require that the orders of the higher appellate authorities should be followed unreservedly by the subordinate authorities. The mere fact that the order of the appellate authority is not 'acceptable' to the Department-in itself an objectionable phrase-and is the subject-matter of an appeal can furnish no ground for not following it unless its operation has been suspended by a competent court. If this healthy .....

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56 ITR 385 (Bom) (page 390) : "At this juncture, we cannot resist observing that the judgment delivered by the Income-tax Tribunal was very much binding on the Assessing Officer. The Assessing Officer was bound to follow the judgments in its true letter and spirit. It was necessary for the judicial unity and discipline that all the authorities below the Tribunal must accept as binding the judgment of the Tribunal. The Assessing Officer being an inferior officer vis-a-vis the Tribunal, was b .....

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ellate Tribunal which do not attract the unanimous approval of all members of the judiciary. But the judicial system only works if someone is allowed to have the last word, and that last word once spoken is loyally accepted'. The better wisdom of the court below must yield to the higher wisdom of the court above as held by the Supreme Court in the matter of Asst. CCE v. Dunlop India Ltd. [1985] 154 ITR 172 (SC) ; AIR 1985 SC 330." A2. Point Nos. 14 and 15-Sanctity of letter not consider .....

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; has been duly reproduced. At paragraph 13 on page 73, the order of the learned Income-tax Appellate Tribunal states that "we have considered the rival submissions and perused the relevant records available with us". The "Records" include the letters issued by the Secretary General of Taxation (SGT), Ministry of Finance in August and December, 2000. The "submissions" include the reference to article 6(3) of the Omani tax law. Further at paragraph 19, the Income-tax .....

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ent of the dividend exemption. One may or may not agree with the conclusion of the Income-tax Appellate Tribunal but it would be wholly fallacious to presume that the Income- tax Appellate Tribunal has not considered the validity/legality of the letter. In this regard, it may be useful to refer to the following observations of the Income-tax Appellate Tribunal-Hyderabad in the case of Liquors India Ltd. (I. T. A. Nos. 352/Hyd/2013) : "Further, we make it clear that neither the Commissioner .....

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any irrelevant material in basing its conclusion, the decision of the Tribunal is not liable to be interfered with, unless, of course, the conclusions arrived at by the Tribunal are perverse. It is not necessary for the Tribunal in its judgment specifically or any express words that it has taken into account the cumulative effect of the circumstances or has considered the totality of the facts of the case, as if it is a magic formula : if the judgment of the Tribunal shows that it has, in fact, .....

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onourable Income-tax Appellate Tribunal has also decided the issue on merits, it is prayed that the revisionary proceedings may be dropped following the jurisdictional Tribunal's order on the merits of the case too. A3. Points 6 to 9-Sanctity of letter issued by H.E SGT, Ministry of Finance, Oman Though as discussed above, the honourable Income-tax Appellate Tribunal in its wisdom has already decided the issue of validity of the letter issued by the SGT, Ministry of Finance, Oman, in respons .....

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ns in the Finance Bill. However, even in India, there is no constitutional/statutory requirement for intent of each and every change to be explained in the memorandum. Each country's conventions differ. Since there is no such convention in Oman (surely, for no fault of the assessee), a specific clarification was sought from the Ministry of Finance in Oman in the year 2000 which was replied by HE the Secretary General for Taxation, Ministry of Finance, Oman, vide letters dated August 6, 2000, .....

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investor may even have to wait till the other country's judiciary also affirms the validity of such a provision before it takes the investment decision ? Is this a reasonable/fair expectation ? (ii) Your kind attention is drawn to article 3 of the Omani tax law (submitted as annexure-IV in the reply dated January 11, 2016) which states that the "The Secretary General shall be responsible for the execution of this law . . .". "Execution" in itself has wide connotations an .....

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collection of revenues but also ensuring that the legislative purpose behind the incentive/exemption provisions of encouraging investment is clarified to all prospective investors. Hence, it is unfair to treat the letter of HS SGT dated December 11, 2000 as "unauthorised in law". (iii) Further, there is a presumption of regularity expressed by the maxim of law "omnia praesumuntur rite et solemniter esse acta donec probetur in contrarium" implying that all judicial and officia .....

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to call it "mere opinion of an officer". Such an interpretation would imply that no investor would believe the authorities of any country and the tax sparing credit provision enshrined in article 25(4) of the Indo-Oman Double Taxation Avoidance Agreement read with section 90(1)(a)(ii) would be rendered otiose. A.4. Point Nos. 10 to 12-Non mentioning of "Economic Development" in article 8(bis) (i) It is stated in your office's letter that the intent of Economic Developmen .....

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self. As stated earlier, we have to gather the same from the internal and external aids to construction like the explanatory memorandum, the object clause of the Finance Bill, the Minister's Speech, etc. Similarly, just because article 8(bis) does not contain the reference to economic Development, it cannot be presumed that the said exemption is not designed for economic development. (ii) Further, it is a basic principle of construction of statutes that the statute has to be read as a whole .....

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1, 2000 (annexures V and VII to our reply dated January 11, 2016) reiterates this factual position and in the letter of December 11, 2000, goes on to say that : "We refer to your letter dated December 2, 2000, and our previous letter dated August 6, 2000 on the above subject. Under article 8 of the 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 a .....

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y dividend income received out of the exempt profits from tax exempt companies. As a result, investors in tax exempt 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 insert .....

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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 arti .....

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t of that particular country. The Income-tax Department of India has no locus standi in this matter. Also, the preamble to Royal Decree 68 of 2000 (submitted as annexure VI to our reply dated January 11, 2016) issued by the Sultanate of Oman (which inserted article 8 (bis)) states that the amendments have been done "in exigencies of public good". In law, the preamble to a statute is a well-recognised internal aid to construction/interpretation of the statute. In accordance with the exi .....

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economic development which can be reasonably attributed to a tax incentive/exemption measure. Thus, when read in its context, it is clear that the exemption to dividends was given to incentives investors to invest more. The link between investment and economic development is too obvious in economics to be ignored in interpreting article 8(bis) more so when the same is specifically acknowledged by the Ministry of Finance of the country (Oman) itself. A5. Point No. 13-General exemption's link .....

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ividend receipts. It is the act of investment which promotes economic development directly by means of generation of employment and indirectly by its effects on other sectors of the economy having linkages with the industry. For instance, due to the OMIFCO Fertiliser Project coming in Oman, not only people employed in the company but also its vendors, contractors, etc., would earn income which would obviously help in development of Oman economy. From the investor point of view, any prudent inves .....

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aging cross border trade and investment is codified in section 90(1)(a)(ii) of our Income-tax Act too. It is obvious that given the same amount of profits earned by a investee company and dividend pay out ratios, the post tax returns for the investor would be higher in a country which grants the dividend exemption (like article 8 (bis) of Omani tax law) than a country which does not grant an exemption. Hence, the nexus between the dividend exemption and economic development is luminescent and ca .....

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clude exemptions, deductions, tax credits, etc. The words "economic development" have a very wide connotation and cannot be given a restricted meaning to confine it to only some sectors of the economy. When the intent is to incentives foreign investment in all the sectors of the economy, a general dividend exemption can be given as a tax incentive across all sectors. Such an exemption would not lose its attribute of encouraging economic development just because it applies across all se .....

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een done at the assessment stage, we once again pray for dropping the proceedings under section 263 on the issue." (emphasis supplied) 8.5 It may kindly be appreciated that the appellant-society not only strongly relied on the decision rendered by a co-ordinate Bench of the honourable Tribunal on the same issue but also has explained in great detail as to how the Secretary General of Taxation, Oman is fully competent and authorised to clarify the purpose of any amendment made in the Omani t .....

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n, Oman is acting under the authority of the sovereign State of Sultanate of Oman and he is fully competent to issue a clarification whenever there is any doubt raised by the affected company/foreign investors regarding the purpose of any amendment brought about in the Omani tax law. The learned Principal Commissioner of Income-tax has considered the various submissions made on behalf of the appellant-society and has recorded his findings on the relevant issue at paras 20 to 50 of his order. Fir .....

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s erroneous and prejudicial on the ground that the Assessing Officer did not make any verification/inquiry regarding the legal value of the letters issued by the Secretary General of Taxation. In this regard, it is submitted that the Assessing Officer has considered this issue on merits in great detail in a scrutiny assessment order passed by him and he has further followed consistent view taken by the Department starting from the assessment year 2006-07 onwards in scrutiny assessment completed. .....

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economic development, has to be decided not by one country but by both the countries as the Double Taxation Avoidance Agreement is entered into by two countries. It is humbly submitted that this observation made by the learned Principal Commissioner of Income-tax is totally fallacious. If there is some debate about the interpretation of any provision of the Double Taxation Avoidance Agreement only then the two countries would come into picture. However, if the question is confined only to the in .....

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ny provision or purpose which is confined to the Omani tax law, only the Sultanate of Oman through its agency can issue clarification. There is no question of the two countries sitting together on this particular issue. 8.6 At paragraph 24 the learned Principal Commissioner of Income-tax has referred to the honourable Supreme Court decision in the case of Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 (SC) and at para 25, the learned Principal Commissioner of Income-tax has also repro .....

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d with the wisdom of any particular treaty. Whether the Indo-Mauritius DTAC ought to have been enunciated in the present form, or in any other particular form, is none of our concern. Whether section 90 ought to have been placed on the statute book, is also not our concern. Section 90, which delegates powers to the Central Government, has not been challenged before us, and, therefore, we must proceed on the footing that the section is constitutionally valid. The challenge being only to the exerc .....

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We are at a loss to understand as to how the aforesaid observation of the honourable Supreme Court supports the view taken by the learned Principal Commissioner of Income-tax. As a matter of fact these observations are in assessee's favour. At paragraph 27 the learned Principal Commissioner of Income-tax has further observed that at paragraph 4 of the letter dated August 6, 2000, it is mentioned that exemption was granted initially for a period of five years and this period may be extended f .....

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Royal Decrees of the Omani Government, the letter issued by H. E the Secretary General does not override it is only a clarification on the intent of law to allay any doubts in the minds of the foreign investors. There is no requirement in law for a clarification sought by an investor to be made public. 8.7 At paragraph 28, the learned Principal Commissioner of Income-tax has attempted to cast a doubt on the intent of the exemption on the ground that the Royal Decree ought to have mentioned the e .....

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t of the interpretation/construction process having regard to context, history of the law, mischief sought to be remedied and various internal/external aids to construction of statutes. The mere fact that the intent of the change in law was not mentioned in the Royal Decree cannot be held against the appellant. 8.8 At paragraph 30, the learned Principal Commissioner of Income-tax has again repeated that the letter issued by the Secretary General of Taxation is merely an opinion of an officer of .....

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itted that this is a complete misreading of the Omani tax law especially article 3 of Royal Decree 47 which specifically states that the "The Secretary General shall be responsible for the execution of this law . ..". "Execution" in itself has wide connotations and the power to issue clarifications can be reasonably construed to be included in this power/responsibility itself as in the absence of suitable clarifications, if the intent of some provisions remain uncertain and t .....

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and disingenuous to treat the letter of HS SGT dated December 11, 2000, as "unauthorised in law". 8.10 At paragraph 34 the learned Principal Commissioner of Income-tax has relied on the honourable Supreme Court decision in the case of Smt. Tarulata Shyam v. CIT [1977] 108 ITR 345 (SC). The learned Principal Commissioner of Income-tax has relied on the following observations of the honourable Supreme Court in the above judgment (page 356) : It is urged that the principle in the last lim .....

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ome of the whole previous year. Such a view, concludes Mr. Sharma, would also be in consonance with reason and justice. We have given anxious thought to the persuasive arguments of Mr. Sharma. His arguments, if accepted, will certainly soften the rigour of this extremely drastic provision and bring it more in conformity with logic and equity. But the language of sections 2(6A)(e) and 12(1B) is clear and unambiguous. There is no scope for importing into the statute words which are not there. Such .....

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at : ". . . . in a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used." Once it is shown that the case of the assessee comes within the letter of the law, he must be taxed, however great the hardship may appear to the judicial mind to be." (emphasis supplied) We are again .....

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words "designed for economic development" are explicit there is no room for something implicit". With due respect, we are at a loss to understand what is implicit when the clarification issued by HE the SGT is amply clear and explicit that the amendment to exempt dividends in Oman's Domestic Law was done with the specific objective of reducing the tax cost for the investors so that they are encouraged to invest resulting in furtherance of the aim of economic development of Om .....

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in investment on account of tax incentives like dividend exemption (if a term is not defined in the statute, resort to dictionary is a judicially approved aid to construction) : (a) The scope of economic development includes the process and policies by which a nation improves the economic, political, and social well-being of its people. (https://en.wikipedia.org/wiki/ Economic_development) (b) Economic development usually refers to the adoption of new technologies, transition from agriculture-ba .....

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crease of overall wealth and intensive when there is increase of per capita wealth. (http://definitions.uslegal.com/e/ economicdevelopment%20/) When the intent is to incentivise foreign investment in all the sectors of the economy, a general dividend exemption can be given as a tax incentive across all sectors. Such an exemption would not lose its attribute of encouraging economic development just because it applies across all sectors. If the intention in the Double Taxation Avoidance Agreement .....

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cretary General of Taxation to be issued by the Sultanate of Oman. He has again repeated that the letter only contains an opinion of the Secretary General. It is respectfully submitted that the letters referred to above have been officially issued by the Secretary General of Taxation, Oman on the letterheads of the "Ministry of Finance, Sultanate of Oman". Obviously, the sovereign head of the State, i.e., the Sultan of Oman is not supposed to put his personal signature to such letters .....

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aph 40 of the order the learned Principal Commissioner of Income-tax has repeated that the honourable Tribunal perhaps presumed that the letter was issued by the Sultanate of Oman and that the honourable Tribunal did not consider that the interpretation has to be with reference to the words used in the Act/ Double Taxation Avoidance Agreement. The learned Principal Commissioner of Income-tax has even suggested that the Department may file a miscellaneous application before the honourable Income- .....

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incorrect impression or assumption. The specific issue pertained to clarification of the purpose of one of the provisions of the Omani tax law and not the provisions of the Double Taxation Avoidance Agreement. Therefore, the Government of India is obviously functus officio and has no locus standi in this matter. The honourable Tribunal Delhi Bench has decided this issue after considering the entire material and facts which formed part of the record in the case of KRIBHCO. It is true that the De .....

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le of the Assessing Officer with the following directions : "The Assessing Officer would refer the matter to the concerned authorities who are responsible for entering into Double Taxation Avoidance Agreement. The Assessing Officer, through proper channel, would write a letter to the officers of the Department perhaps FTD who may request the Omani Government as regards the interpretation of article 25(4) of the Double Taxation Avoidance Agreement with particular emphasis on the word designe .....

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process should be started in the month of April itself so that necessary communication could come in time as the assessment has to be framed under section 143(3)/263 within the time limited." It is respectfully submitted that the learned Principal Commissioner of Income-tax has exceeded his powers under section 263 of the Income-tax Act while giving the aforesaid directions to the Assessing Officer. He has directed the Assessing Officer to address a letter to the concerned Department perha .....

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pending any communication from the concerned authority the view should be adopted that the assessee is not entitled to tax credit. The aforesaid directions are full of doubts and suspicions and there is no clarity with regard to the reassessment to be completed by the Assessing Officer. As mentioned above, the question of interpretation of section 25 of the Double Taxation Avoidance Agreement is not at all involved. There is no dispute regarding the interpretation of the aforesaid article 25(4) .....

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and such a view is not sustainable in law. Further, the very fact that the Principal Commissioner of Income- tax considers that confirmation of FTD is required to conclude on the issue implies that as on the date of passing of the order, the revisionary authority is unsure as to the basis on which the assessment can be held as erroneous. This is clearly not permissible within the four corners of section 263 as interpreted by various courts including jurisdictional Delhi High Court in the case o .....

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able in law and the said finding must be recorded. The Commissioner of Income-tax cannot remand the matter to the Assessing Officer to decide whether the findings recorded are erroneous . . . . The matter cannot be remit ted for a fresh decision to the Assessing Officer to conduct further enquiries without a finding that the order is erroneous. Finding that the order is erroneous is a condition or requirement which must be satisfied for exercise of jurisdiction under section 263 of the Act. In s .....

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cise of jurisdiction under the said section is not sustainable. . . . The jurisdictional precondition stipulated is that the Commissioner of Income-tax must come to the conclusion that the order is erroneous and is unsustain able in law." 12. In the backdrop of the above facts, the learned counsel of the assessee further submitted that the case of the assessee-society is squarely covered by the order of the honourable Income-tax Appellate Tribunal in the case of Krishak Bharti Co-operative .....

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ment years 2010-11 and 2011-12-Assessee-society received dividend income from an Omani Company-Assessee was liable to pay tax in India on said dividend income as per Indian Income-tax Act, however, it was not liable to pay any tax on such dividend income in Oman by virtue of exemption granted as per article 8(bis) of Omani tax laws-Assessee included dividend income in its total income and, thereafter, claimed credit of tax on ground that article 25 of Double Taxation Avoidance Agreement between .....

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ays down that tax payable shall be deemed to include tax which would have been payable but not paid because of certain tax incentive granted under laws of contracting State designed to promote economic developments-Held, yes- Whether as per letter of Oman, Ministry of Finance exemption granted under article 8(bis) of Omani tax laws was to promote economic developments in Oman and to attract investment, hence, assessee would be entitled to tax credit in respect of deemed dividend tax which would .....

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. The assessee also had a branch office in Oman to oversee its investment in the joint venture company and it constituted permanent establishment (PE) in Oman in terms of India-Oman Double Taxation Avoidance Agreement. • The assessee filed its return of income on September 24, 2010, for relevant assessment year 2010-11. Later on the case was selected for scrutiny and while completing assessment, the Assessing Officer allowed tax credit of ₹ 41.53 crores with respect to dividend income .....

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to claim credit, tax should have been payable in Oman if not for the tax incentives granted in Oman to promote economic development. The Commissioner opined that exemption granted by Oman cannot be treated as a tax incentive as same existed across the board and was simply a feature of Oman's Tax Law which does not tax dividend income. Accordingly the Commissioner revised the order of the Assessing Officer and disallowed the tax credit so claimed by assessee. • On appeal to the Tribunal .....

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s of the contracting State and which are designed to promote economic developments. Thus, the crucial issue to be examined is whether the dividend income was granted exemption in Oman with the purpose of promoting economic development. The exemption has been granted under article 8(bis) of the Omani tax laws. The said provision has been clarified and explained vide letter dated December 11, 2000, issued by the Sultanate of Oman, Ministry of Finance, Secretariat General for Taxation, Muscat. (Par .....

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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, 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, the Commissioner was not justified in directing the Assessing Officer to withdraw the aforesaid tax credit. Further such credit was allowed b .....

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id order is hereby quashed and as a result, the assessee's appeal stands allowed. (Para 21) • Since the facts and circumstances pertaining to the assessment year 2011-12, the grounds of appeal raised by the assessee- society and the arguments and submissions on behalf of the assessee as well as on behalf of the Department are identical and same. Therefore, for the assessment year 2011-12 also the impugned order of the Commissioner is quashed. Similarly, on merits also the Commissioner i .....

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Income-tax is correct and has filed further submissions during the course of the hearing. The relevant portion (paragraphs 3 to 5.2) of his submissions is reproduced below : "3. With reference to article 25 of the Double Taxation Avoidance Agreement, an Assessing Officer knowing nuances of Income-tax would definitely ask the material to be produced to satisfy (the Assessing Officer) that the claimed exemption of tax by Omani Government is 'designed for economic development'. 3. Dur .....

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ther extension of five years subject to decision of Financial Affairs and Energy Resources Council. If this letter dated August 6, 2000, was before Assessing Officer, then an Assessing Officer knowing nuances of Income-tax would definitely ask the material, including decision of Financial Affairs and Energy Resources Council, to be produced to satisfy (the Assessing Officer) that the said exemption of tax by Oman Government was valid for the assessment year under consideration. 5.1 The assessmen .....

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07) will show that it is an example of non- application of mind as well as violation of principles of natural justice." 14. We have carefully considered the rival contentions and perused the records available with us. Before proceeding to the merits of the case, it would be necessary on our part to examine whether the Assessing Officer had taken up an arbitrary and unreasonable view without making any inquiries or not. It is seen from the assessment orders under section 143(3) for the asses .....

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rs 2007-08 to 2009-10 have been placed before us from pages 495 to 558 of the paper book. On perusal of the same, it is seen that the Revenue has, after thoroughly examining the issues on hand and examining the provisions, considered the dividend income as exempt. Further, in respect of the current assessment year, i.e., assessment year 2010-11 which is subject matter of revision and appeal before us the Assessing Officer has adopted the same view in consonance with the view adopted in the past .....

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were made before the Assessing Officer. Therefore, the contentions of the Revenue that no adequate inquiries in respect of the above issue were made is completely misplaced. Therefore, on this ground the jurisdiction under section 263 assumed by the learned Principal Commissioner of Income-tax is incorrect. 14.1 Even otherwise, since the Revenue has allowed the claim of tax credit to the assessee consistently on year-to-year basis the view now proposed to be substituted by the learned Principal .....

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arlier assessment years unless 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 .....

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own to have been challenged." 14.2 Respectfully following the findings of the honourable jurisdictional High Court, the learned Principal Commissioner of Income-tax has erred in assuming jurisdiction under section 263 of the Income-tax Act. Accordingly, the learned Principal Commissioner of Income-tax could have no occasion to have recourse to the revisional powers under section 263 on the very fundamental issue that a consistent view has to be adopted after detailed inquiries by the Revenu .....

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had filed detailed replies in response to the query which were duly considered by the Assessing Officer before allowing tax credit. (b) That, such credit was allowed by the Revenue for all the earlier years, i.e., assessment years 2006-07 to 2009-10, therefore, we have no hesitation in holding that there was complete application of mind on the part of the Assessing Officer and that the Assessing Officer has adopted a view consistent with the preceding years and, therefore, the Assessing Officer .....

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which govern the exercise of power by the Commissioner under the provisions of section 263 of the Income-tax Act, 1961, are : (i) The power is supervisory in nature, whereby the Commissioner can call for and examine the assessment records. (ii) The Commissioner can revise the assessment order if the twin conditions provided in the Act are fulfilled, that is, that the assessment order is not only erroneous but is also prejudicial to the interest of the Revenue. The fulfilment of both the conditi .....

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l to the interest of the Revenue' while not to be confused with the loss of tax will certainly include an erroneous order which results in a person not paying tax which is lawfully payable to the Revenue. (v) Every loss of tax of the Revenue cannot be treated as being 'prejudicial to the interest of the Revenue'. For example, when the Assessing Officer has recourse to one of the two courses possible in law or where there are two views possible and the Commissioner does not agree with .....

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rder should have been written 'more elaborately'. Recourse cannot be had to section 263 to substitute the view of the Assessing Officer with that of the Commissioner. (viii) The exercise of statutory power under section 263 of the Act is dependent on existence of objective facts ascertained from prima facie material on record. The evaluation of such material should show that tax which was lawfully exigible was not imposed." 14.4 Respectfully following the above decision of the honou .....

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merits as well. 14.5 With regard to allowing credit for deemed dividend tax which would have been payable in Oman, the issue now stands covered by the Income-tax Appellate Tribunal decision in the case of Krishak Bharti Co- operative Ltd. [2016] 67 taxmann.com 138 (Delhi-Trib). Relevant para graphs 18 and 19 are reproduced hereunder : "18. With regard to allowing credit for deemed dividend tax which would have been payable in Oman, we have gone through the relevant provisions of the Double .....

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ranted exemption in Oman with the purpose of promoting economic development. The exemption has been granted under article 8(bis) of the Omani tax laws. The said provision has been clarified and explained vide letter dated December 11, 2000 issued by the Sultanate of Oman, Ministry of Finance, Secretariat General for Taxation, Muscat. The text of this letter has already been reproduced (supra). From this letter, the following points emerge : (a) Under article 8 of the Omani tax laws, dividend for .....

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ould 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. 19. From the above clarifications there remains no doubt regarding the purpose of granting exemption to dividend income. The interpretation of Omani tax laws can be clarified only by th .....

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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. There fore, we hold that on merits also the learned Principal Commissioner of Income-tax was not justified in directing the Assessing Officer to withdraw the aforesaid tax credit. (emphasis supplied)" 14.6 Respectfully following the decision of the co-ordinate Bench of the Delhi Tribunal in the case of Krishak .....

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e learned Principal Commissioner of Income-tax is reproduced hereunder for ready reference : "66. The Assessing Officer has failed to allocate or make inquiry as regards the allocation of interest in the particular head of income. For example no interest has been attributed towards the investments which are in the range of ₹ 892.33 crores in the financial year 2009- 10. The assessee simply submitted that in the assessment year only 10 per cent. of the funds have been utilised out of t .....

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roviso the interest is to be capitalised for the period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was put to use. If the assessee himself showing working progress, then it is clear that the said asset has not been put to use. There can be instances that the assessee acquires/purchases the asset and many a times advance payment is to be made for the acquisition of asset. In that case there would be capitalisation of in .....

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Even now the assessee has not given the date-wise calculation as required under section 36(1)(iii) proviso or date-wise investments which could show that the assessee has utilised only the own funds. 70. If the assessee is giving figures based on the balance-sheet, then it is abundantly clear that the assessee is having mixed pool of funds. Effectively the assessee is required primarily to utilise funds for its basic business. The assessee has also demonstrated that the investments are strategi .....

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from other sources. If the assessee sells his investments, the same would be taxed under the head capital gains. Law is very clear as regards the heads of income. There cannot be any kind of deviation from this and the expenses are also to be allocated according to each head of income. Effectively the assessee has claimed interest under the head business even though the funds have been utilised where profits would be taxed under other heads of income. For example income from other sources or cap .....

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f note regarding the capital work- in-progress, the manner in which the depreciation was claimed and the details of secured as well as unsecured loans. Replies of the above queries are also compiled at page 392 of the paper book. Further, the learned counsel referred to the audited financial statements of the assessee which was also compiled before us in the paper book. Reference to page 231 of the paper book comprising significant accounting policies was made wherein the auditor has certified t .....

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or construction of qualifying assets are capitalised as part of cost of such assets. A qualifying asset is one that necessarily takes substantial period of time to get ready for intended use. All other borrowing costs are recognised as an expense in the period of which they are incurred." 15.2 Reference was also made to page 237 of the paper book comprising of the balance-sheet and detailed break-up of the gross block of the addition made to the fixed assets. The learned counsel also pointe .....

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4 of the paper book. Relevant part of the synopsis filed is reproduced hereunder for ready reference : "11.15 With regard to the various observations made by the learned Principal Commissioner of Income-tax referred to above, it is humbly submitted with due respect that all these observations are merely on assumptions and suspicion and the learned Principal Commissioner of Income-tax has completely ignored the factual position as thoroughly explained before him. It is reiterated that this r .....

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audited accounts which were thoroughly examined by the Assessing Officer, would prove that the various assumptions drawn by the learned Principal Commissioner of Income-tax are not inconsonance with the factual position which emerges from the audited accounts. (a) At page 83 of the annual report under the heading 'Significant Policies', against Sr. No. 4 the following remarks : '4. Expenditure incurred during construction period.-In respect of new/major expansion of units, the indir .....

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necessarily takes substantial period of time to get ready for intended use. All other borrowing costs are recognised as an expense in the period in which they are incurred.' (c) At page 89 of the annual report containing the balance-sheet as on March 31, 2010, the value of capital work-in-progress as on March 31, 2010, is shown at ₹ 333 crores whereas the same was ₹ 290 crores as on March 31, 2009. Thus there is accretion of only ₹ 42.02 crores. Further, it is notable that .....

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cial year which show that the total interest expenditure has substantially reduced during the present year. (e) At page 102 of the annual report details of loans and advances given by the assessee are reflected in schedule 11. This shows that the total quantum of such loans and advances as on March 31, 2010 stands at ₹ 3376.87 crores as against preceding year's ₹ 5464.77 crores. Thus, the loans and advances have substantially reduced. (f) At page 110 of the report containing sche .....

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At pages 98 and 99 of the annual report, complete details of investments have been given in Schedule-7. It is seen that the total investments as on March 31, 2010 stand at ₹ 7531.10 crores as against ₹ 7552.95 crores as on March 31, 2009. This shows that the quantum of investment has actually gone down by ₹ 21.67 crores. Thus, it is clear that the apprehension or rather suspicion of the learned Principal Commissioner of Income-tax that borrowed funds have gone into investment .....

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it is assumed that part of the borrowed funds went into these investments, no disallowance can be made under section 36(1)(iii) for the simple reason that such expenditure would be entirely for business purposes. The appellant-society relies on the legal position as discussed below : (i) CIT v. Rajendra Brothers [2014] 52 taxmann.com 334 (Guj) The headnote of this case is reproduced below for ready reference : • Both the Commissioner (Appeals) as well as the Tribunal have recorded concurren .....

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h diversion of interest bearing funds as low/interest-free advances. • The Revenue is not in a position to point out any material to the contrary so as to dislodge the concurrent findings of fact recorded by the Commissioner (Appeals) and the Appellate Tribunal. From the facts noted hereinabove, it is apparent that the Tribunal has based its conclusion on the concurrent findings of fact recorded by it upon appreciation of the evidence on record. It is not the case of the revenue that the Tr .....

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. (Para 7).' (emphasis supplied) In the above case the honourable Gujarat High Court held that it is the onus of the Revenue to establish that interest bearing funds were diverted for non-business purposes. (ii) CIT v. Ram Kishan Verma [2015] 64 taxmann.com 358 (Raj) The catch-note of this case is reproduced below for ready reference : 'Section 36(1)(iii) of the Income-tax Act, 1961-Interest on borrowed capital (Interest free loans)-Assessment years 2005-06 and 2008-09-Whether where capi .....

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ing been diverted towards interest free loans/advances. (iii) CIT v. Vijay Solvex Ltd. [2015] 59 taxmann.com 294 (Raj) The catch-note of this case is reproduced below for ready reference : 'Section 36(1)(iii) of the Income-tax Act, 1961-Interest on borrowed capital (Interest-free advances to sister concerns)-Assessment year 1992-93-During course of assessment proceedings, Assessing Officer noticed that on one hand, assessee-company was making payment of interest to banks, etc., but on other .....

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eleted-Held, yes (paras 16 and 17) (in favour of assessee).' (emphasis supplied) (iv) Pranik Shipping and Services Ltd. v. Asst. CIT [2013] 21 ITR (Trib) 489 (Mum) ; [2012] 19 taxmann.com 107 (Mum) The headnote of this case is reproduced below for ready reference : 'Facts-I During assessment proceedings, the Assessing Officer observed that the assessee had given interest-free advances aggregating to ₹ 50.29 lakhs to its sister concerns whereas substantial amount of interest was pai .....

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assessee has share capital of ₹ 15.25 crores along with reserves and surplus amounting to ₹ 19.48 crores thereby totalling shareholders fund to the tune of ₹ 35.73 crores. Even if the debit balance of profit and loss account of ₹ 3.93 crores and the liability of ₹ 24.43 crores towards interest payable not debited to profit and loss account is considered, still there is excess of share capital and reserves to the extent of ₹ 7.37 crores [35.73 crores 28.36 cror .....

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esumption would be that investments were made from interest-free funds available with the assessee. In the instant case, the interest-free funds available at the disposal of the assessee are far in excess of the interest-free loans advanced to the sister concerns. Therefore, following the mandate of the jurisdictional High Court in the case of Reliance Utilities and Power Ltd. [2009] 313 ITR 340 (Bom) ; [2009] 178 Taxman 135 (Bom), the addition is to be deleted. (Para 6).' (v) CIT v. HDFC Ba .....

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basis for deeming that the assessee had used the borrowed funds for investment in tax-free securities. On this factual aspect, the Income-tax Appellate Tribunal did not find any merit in the contention raised by the Revenue and, therefore, accordingly answered the question in favour of the assessee. On going through the order of the Commissioner of Income-tax (Appeals) dated March 28, 2005 as well as the impugned order, we do not find that the Commissioner of Income-tax (Appeals) or the Income-t .....

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is reproduced below for ready reference : 'Held, that the dividend income earned was ₹ 1,14,43,040 and the estimate of expenditure was assessed at the rate of 10 per cent. of the total income. Had the Department been successful in establishing that the assessee had incurred the expenses to earn the dividend income from the borrowed funds, the entire discussion of application of section 14A of the Act could be understood. However, when both the Commissioner (Appeals) and the Tribunal h .....

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e asses see's own funds were higher than the investment made by it and with nothing to indicate that the borrowed funds were utilised for the purpose of investment in shares and for earning dividends, the Tribunal committed no error. As far as the other administrative expenses were concerned, to put an end to the entire dispute the assessee agreed to a disallowance of ₹ 5 lakhs. This was reasonable.' (emphasis supplied) (vii) CIT v. Torrent Power Ltd. [2014] 363 ITR 474 (Guj) The r .....

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fact any actual expenditure incurred by the assessee for earning tax-free income of ₹ 14 crores. Disallowance of one per cent., of interest expenditure artificially or on the basis of assumption rightly had not been sustained by the Tribunal. The deletion of addition was justified. CIT v. Hero Cycles Ltd. [2010] 323 ITR 518 (P&H) CIT v. Sintex Industries Ltd. [2014] 2 ITR-OL 364 (Guj) CIT v. Suzlon Energy Ltd. [2013] 354 ITR 630 (Guj) CIT v. UTI Bank Ltd. [2014] 2 ITR-OL 366 (Guj) God .....

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2003-04 with respect to the disallowance of interest expenses claimed under section 36(1)(iii) of the Act is concerned, the learned Tribunal has observed that the assessee was having interest-free funds available with it. The learned Tribunal has observed that the advances were given by the assessee to various parties to the extent of ₹ 2,62,48,341 during the financial year 1996-97. The learned Tribunal has also found that even the assessee was having interest-free funds to the extent of .....

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] 178 Taxman 135 (Bom) The relevant part of the headnote of this case is reproduced below for ready reference : 'Held, dismissing the appeal, that if there were funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free funds generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case this presumption was established considering the finding .....

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the tax-free securities. In view of this factual position, as per the judgment of this court in the case of Reliance Utilities and Power Ltd. (supra), it would have to be presumed that the investment made by the assessee would be out of the interest-free funds available with the assessee. We therefore, are unable to agree with the submission of Mr. Suresh Kumar that the Tribunal had erred in dismissing the appeal of the Revenue on this ground. We do not find that question (A) gives rise to any s .....

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153 crores as against the investment in tax-free securities of ₹ 52.02 crores. Consequently, there is a presumption that the investment which has been made in the tax-free securities has come out of the interest-free funds available with the petitioner. This is so as it has been held by this court in the petitioner's own case for an earlier assessment year being HDFC Bank Ltd.(supra). This decision on the above issue has been accepted by the Revenue. This is evidenced by the fact altho .....

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the decision of this court in Reliance Utilities and Power Ltd. (supra) to conclude that where both interest-free funds and interest bearing funds are available and the interest-free funds are more than the investments made, the presumption is that the investment in the tax-free securities would have been made out of the interest-free funds available with the assessee. Though, the decision of this court in Reliance Utilities and Power Ltd. (supra) was rendered in the context of section 36(1)(ii .....

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nvestments and further that the onus is on the Revenue to establish nexus between the borrowed funds and the investments made by the assessee. Even if, for the sake of argument, it is assumed that two interpretations on this issue are possible, it is a settled principle that the interpretation which favours the assessee must be adopted. This principle was explained by the honourable Supreme Court in the landmark decision in the case of CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 (SC). Again .....

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st the Revenue'. 11.17 In the backdrop of the factual and the legal position explained above in detail, it is respectfully submitted that on merits also the learned Principal Commissioner of Income-tax was wholly unjustified in setting aside the assessment order on this issue to the Assessing Officer with directions to go into the records of the preceding 10 years for working out the average and then to apply debt equity formula. On merits, as elaborated in the submissions made before the Pr .....

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onstitute not more than 10 per cent. of the own funds- Presumption to apply in assessee's favour • Even otherwise, there is a business nexus to the investments, thus covered under "for the purpose of business" under section36(1)(iii) as interpreted by the apex court • Alternatively, deduction allowable under section 57(iii) even if presumption of own funds and business nexus is applied against the assessee. Interest cannot be added to "cost" as suggested by the .....

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ese reasons, it is humbly submitted that, the impugned order passed by the learned Principal Commissioner of Income-tax under section 263 on this issue may kindly be held as bad in law and quashed." 15.4 Against the aforesaid contentions of the assessee's counsel, the learned Departmental representative has filed the following further submissions during the course of the hearing : "6. On the issue of 36(1)(iii) and 36(1) proviso, there is case of non- enquiry and non-application of .....

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Any Assessing Officer being a rational person, being informed of the nuances of tax laws is expected to do so. 8. Reliance is placed upon the judgment of the honourable Income-tax Appellate Tribunal Delhi in the case of NIIT v. CIT [2015] 60 taxmann.com 313 (Delhi-Trib.) where after analysing plethora of judgments on the issue the honourable Income-tax Appellate Tribunal has held (in para 28.2) that an inquiry which is just farce or mere pretence of inquiry, cannot be said to be an inquiry at a .....

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. 9. Reliance is also placed on ratio of the honourable Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 (SC) ; [2000] 109 Taxman 66 (SC) which has held that (page 87) : (i) An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. (ii) The phrase 'prejudicial to the int .....

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ck of fixed assets. A brief note on capital work-in- progress was also filed and queries regarding the manner in which the depreciation was claimed was also raised. Further the assessee is following a settled accounting policy/principle for capitalisation of expenses including interest expenses to both the fixed assets as well as capital work-in- progress. This method was forming part of the audited financial statements which were filed before the Assessing Officer as well. We also find that the .....

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nterest-free funds available with the assessee-society. We also find that a consistent view has taken by all the judicial authorities that in the event of availability of interest-free funds a presumption would be that investments would be out of interest free funds generated or available with the assessee. In this respect, reliance 16. was placed on the decision of the Bombay High Court in the case of CIT v. Reliance Utilities and Power Ltd. [2009] 313 ITR 340 (Bom). 16.1 In light of the above .....

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, therefore, following the ratio of the decision of the honourable Bombay High Court in Reliance Utilities and Power Ltd. [2009] 313 ITR 340 (Bom), no disallowance under section 36(1)(iii) is called for. (c) That, the assessee had already discharged its onus of proving non- diversion of funds borrowed for working capital towards capital work-in- progress and fixed assets by submitting a certificate of an independent statutory auditor and proved availability of own funds and internal accruals whi .....

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