Whether filing of return is an admission that notice is valid?

Nestle SA. v. ACIT (2019) 417 ITR 213 / 311 CTR 344 / 181 DTR 211 (Delhi)(HC)

BRIEF FACTS

The assessee was a company incorporated in Switzerland. A notice of reassessment was issued to it. The reasons stated were that the assessee had been identified as a foreign company in the non-filers monitoring system category and that during the financial year 2010-11 relevant to the assessment year 2011-12 it had entered into a share transaction.

The assessee filed a return and raised the following objections :

1. that the assessee’s income from India consisted only of dividend and interest on which tax had been deducted at source in accordance with the Act or the Double Taxation Avoidance Agreement between India and Switzerland ; and
2. that the share transaction was with its subsidiary and no taxable income had been generated.

The objections were rejected by appellant authorities.

ON A WRIT PETITION

Against the order the Court held that the averment of the assessee that during the assessment year 2011-12 its receipts from its Indian subsidiary was comprising only of dividend and interest on which tax was deductible at source and had been deducted in accordance with the provisions of the Act had not been disputed by the Revenue.

It was also not disputed that the assessee was specifically exempted from filing the return under S. 115A(5).

Budget 2020-21 Propose to Exempt non-resident from filing of Income-tax return under sub-section (1) of section 139 in certain conditions

Section 115A

- Of the Act provides for the determination of tax for a non-resident whose total income consists of:

(a) certain dividend or interest income;

(b) royalty or fees for technical services (FTS) received from the Government or Indian concern in pursuance of an agreement made after 31st March 1976, and which is not effectively connected with a PE, if any, of the non-resident in India.

Section 115A (5)

- Of said section provides that a non-resident is not required to furnish its return of income under sub-section (1) of section 139 of the Act, if its total income, consists only of certain dividend or interest income and the TDS on such income has been deducted according to the provisions of Chapter XVII-B of the Act.

Since above exemption for non-filing of Income Tax returns is allowed to non-residents only for incomes consist of dividend and interest ,where TDS has been deducted. The Government on demand of the industry therefore, it is proposed to amend section 115A of the Act in order to provide that a non-resident, shall not be required to file return of income under sub-section (1) of section 139 of the Act if, -

1. His or its total income consists of only dividend or interest income as referred to in clause (a) of sub-section (1) of said section, or royalty or FTS income of the nature specified in clause (b) of sub-section (1) of section 115A; and
2. The TDS on such income has been deducted under the provisions of Chapter XVII-B of the Act at the rates which are not lower than the prescribed rates under sub-section (1) of section 115A.

This amendment will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-21 and subsequent assessment years.

The principal objection of the assessee that its investment in the shares of its subsidiary could not be treated as income was well founded. Therefore the fundamental premise that the investment by the assessee in the shares of its subsidiary amounted to “income” which had escaped assessment was flawed.

The question of such a transaction forming a live link for reasons to believe that income had escaped assessment was entirely without basis.

The notice was not valid. (AY. 2011-12)

CONCLUSION

It is clear from above discussion that a non-resident earning income from dividends, interest on investment, royalty or FTS on which TDS has been deducted is not required to file returns subject to the conditions of provisions of Section 115A of the Income Tax Act,1961 and hence any notice issued for reassessment of income was not valid in law.

DISCLAIMER: The case law produced here is only for information of readers. In case of necessity do consult with tax consultants.