1. This is an appeal by the assessee against the order dt. 22nd Nov., 2004 of the learned CIT(A)-XXIX, New Delhi, relating to asst. yr.
2000-01.
2.1 The assessee is a company, which has been incorporated in Mauritius and holds the tax residence certificate of Mauritius. It was incorporated with the purpose of carrying on business of dealing and making investment in shares and securities etc. For the purpose of doing business in India, the assessee had applied to the RBI for giving permission to invest money in Indian capital market as an 'overseas corporate body' in the Portfolio Investments Scheme through Punjab National Bank, ECE House, K.G. Marg, New Delhi and the RBI had given the said permission to the appellant company vide its letter dt. 27th Nov., 1995.
2.2 The assessee made investments in Indian capital market and derived income in the form of short-term/long-term capital gains. According to the assessee the said transactions are covered by the provisions of Double Taxation Avoidance Agreement (DTAA) between India and Mauritius and as per Article 13 of the said DTAA and Circular Nos. 682 dt. 30th March 1994 (1994) 118 CTR (St) 1 and 789 dt. 13 April 2000 (2000) 160 CTR (St) 5 issued by the CBDT, the capital gains made on the sale of investments are not taxable in India.
2.3 The assessee filed its return of income for the asst. yr. 2000-01 on 23rd Nov., 2000 declaring nil income, because the capital gains earned by the company was the only income, which is not taxable under the IT Act, 1961 (hereinafter referred to as the Act).
2.4 The Hon'ble Delhi High Court in the case of Shiva Kant Jha v. Union of India (2002) 175 CTR (Del) 371 : (2002) 122 Taxman 952 (Del) has quashed and set aside the impugned Circular No. 789 dt. 13th April, 2000 issued by the CBDT accepting the contention that the said circular is ultra vires the provisions of Section 90 and Section 119 of the Act and is also otherwise bad and illegal. There was another circular dt.
10th Feb., 2003 issued by the CBDT viz. Circular No. 1 whereby they had laid down that in a case where an assessee is a resident of both India and Mauritius, then the AO can proceed to treat such assessee as resident in India provided the effective management of the assessee is in India. The AO taking shelter under the decision in the case of Shiva Kant Jha v. Union of India (supra) and also considering the Circular No. 1 of 2003, dt. 10th Feb., 2003 assessed the long-term capital gains at Rs. 80,671 and short-term capital gains at Rs. 33,40,929.
2.5 Besides the above capital gains, the AO had treated the money aggregating to Rs. 3,83,11,550 brought in by the assessee for purchase of investments from time-to-time through international banking channels during the previous year as unexplained cash credit in the books. Thus, the AO assessed the total income of the appellant company at Rs. 4,17,33,150 vide his order dt. 27th March, 2003.
2.6 On appeal by the assessee, the CIT(A) confirmed the order of the AO. Hence, the present appeal by the assessee before the Tribunal.
Ground Nos. 1 to 1.3 of the assessee, read as follows: 1. The learned CIT(A) has grossly erred both in law and on facts in holding that the effective management of the appellant company was in India by relying on CBDT Circular No. 1 of 2003 dt. 10th Feb.
2003 (2003) 180 CTR (St) 1 in determining the residence status under para 4.3 of Article 4 of the Double Taxation Avoidance Agreement (DTAA) between India and Mauritius; 1.1 That the learned CIT(A) has done gross injustice by not relying on the evidence produced before him to prove that the appellant company was Mauritius registered company, a tax resident of Mauritius. As per Article 13 of the DTAA between India and Mauritius, the impugned capital gains of Rs. 33,40,929 (short-term) and Rs. 80,671 (long-term) earned by the appellant company from the transactions in Indian capital market are not at all taxable under the IT Act, 1961.
1.2 That the learned CIT(A) has failed to properly consider CBDT Circular Nos. 682 dt. 30th March 1994 (1994) 118 CTR (St) 1 and 789 dt. 13th April, 2000 (2000) 160 CTR (St) 5 and the decision of the Hon'ble Supreme Court in the case of Union of India v. Azadi Bachao Andolan (2003) 184 CTR (SC) 450 : (2003) 263 ITR 706 (SC), wherein it has been held that the Circular No. 789 dt. 13th April, 2000 is valid and efficacious.
1.3 That the learned CIT(A) has grossly erred in not admitting the evidence produced before him in the form of photostat copies of appellant company's board resolution dt. 29th Oct., 1995, authorizing Shri Vikas Mehrotra, director of the company, to appoint or execute any documents for the appointment of any person/s in India as the lawful power of attorneys of the appellant to execute necessary documents and details of telephone calls made by Shri Vikas Mehrotra on the ground that this was fresh evidence, not admissible, under r. 46A of IT Rules, 1962.
2.7 The learned Counsel for the assessee contended that the AO had erred in law and on facts in assuming jurisdiction on the assessee a registered company of Mauritius and had wrongly invoked the provisions of IT Act, 1961. No income-tax could be levied on the income--capital gains--earned in India as per DTAA entered into between India and Mauritius. Article 13(4) of the DTAA between India and Mauritius provides that the gains derived by a resident of a Contracting State from the alienation of any property other than those mentioned in paras 1.2 and 3 of this article shall be taxable only in that State. In other words, capital gains earned by the Mauritius company from the transactions in Indian capital market are not taxable under the Indian IT Act and shall be taxed in Mauritius only. Further, reference was made to Circular Nos. 682 dt. 30th March, 1994 and 789 dt. 13th April, 2000 and it was submitted that the following clarification in Circular No. 789 puts the matter beyond controversy.
2.8 The provisions of the Indo-Mauritius Double Tax Avoidance Convention (DTAC) of 1983 apply to 'residents' of both India and Mauritius. Article 4 of the DTAC defines a resident of one State to mean 'any person who, under the laws of that State is liable to taxation therein by reason of his domicile, residence, place of management of any other criterion of a similar nature. Foreign Institutional Investors and other investment funds, etc. which are operating from Mauritius are invariably incorporated in that country.
These entities are liable to tax under the Mauritius Tax law and are, therefore, to be considered as residents of Mauritius in accordance with the DTAC.2.9 It was pointed out that the decision of the Hon'ble Delhi High Court in the case of Shiva Kant Jha v. Union of India (supra) has been reversed by the Hon'ble Supreme Court in the case of Union of India v.Azadi Bachao Andolan (2003) 184 CTR (SC) 450 : (2003) 263 ITR 706 (SC) wherein, it has been held by the apex Court that the Circular No. 789 dt. 13th April, 2000 providing that Fits., etc. which are residents of Mauritius would not be taxable in India on income from capital gains arising by sale of shares is valid and efficacious. It has also been held that the double taxation agreement between India and Mauritius is valid in law and an attempt by resident of third party to take advantage of existing provisions of DTAC is not illegal.
2.10 That after the judgment of the apex Court, the said Circular No.789 of CBDT is binding on the IT authorities and therefore, it is applicable in the instant case and as such the capital gains earned by the assessee is not taxable in India.
2.11 Without prejudice to the above contentions, it was also submitted that the AO has wrongly held that the company is a resident of India for the purposes of assessment under the Indian IT Act. It was argued that the de jure as well as de facto control and effective management of the appellant company is completely outside Indian territories. That the AO has failed to establish as to how the company is managed in India.
3.1 The learned Departmental Representative relied on the orders of the Revenue authorities. We have considered the rival submissions. We shall first make a reference to the provisions of the DTAA between India and Mauritius. Articles 4(1) and (3) of the DTAA, read as follows: 4(1) For the purposes of this convention, the term 'resident of a Contracting State' means any person who under the laws of that State, is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of similar nature. The terms 'resident of India' and 'resident of Mauritius' shall be construed accordingly; (3) Where by reason of the provisions of para 1, a person other than an individual is a resident of both the Contracting States, then it shall be deemed to be a resident of the Contracting State in which its place of effective management is situated.
3.2 A reading of Clause 4(1) would show that to determine the residential status of an assessee in a Contracting State one has to necessarily look into the relevant laws of that State and see if the assessee is a resident of that Contracting State within the meaning of the laws of that State. Under Section 6(3) of the IT Act, 1961 the residential status of the company is to be determined for the purpose of the said Act in the following manner: (3) A company is said to be resident in India in any previous year, if-- (ii) during that year, the control and management of its affairs is situated wholly in India.
3.3 In the present case it is noticed that the assessee is a company incorporated in Mauritius. The assessee is not an Indian company.
Therefore, the residential status of the assessee has to be determined on the basis of the test laid down in Section 6(3)(ii) of the Act, which provides that during the previous year the control and management of the affairs of the company should be situated wholly in India. It is only when the above test is satisfied that the provisions of Article 4(3) of the DTAA between India and Mauritius will stand attracted. It is only in such a situation that the test of determining the residential status of the company by looking at the place of day-to-day management of the company can be resorted to. The AO as well as the CIT(A) in total disregard of the above legal position have proceeded to analyse the place of effective management of the assessee. This was impermissible in law. In, fact this aspect has been considered by the Hon'ble Supreme Court in the case of Union of India vs. Azadi Bachao Andolan (supra) and. the Hon'ble Supreme Court has explained the above legal position in the following words: Article 4, which we have already referred to, declares that the term resident of Mauritius means any person who under the laws of Mauritius is "liable to taxation" therein by reason, inter alia, of his residence. Clause (2) of Article 4 enumerates detailed rules as to how the residential status of an individual resident in both Contracting States has to be determined for the purposes of DTAC. Clause (3) of Article 4 provides that if, after application of the detailed rules provided in Article 4, it is found that a person other than an individual is a resident of both the Contracting States, then it shall be deemed to be a resident of the Contracting State in which its place of effective management is situated. The DTAC requires the test of "place of effective management" to be applied only for the purposes of the tie-breaker clause in Article 4(3) which could be applied only when it is found that a person other than an individual is a resident both of India and Mauritius.
We see no purpose or justification in the DTAC for application of this test in any other situation.
3.4 In view of the above it was necessary for the Revenue authorities to first establish that the control and management of the affairs of the assessee during the previous year were situated wholly in India.
This test laid down in Section 6(3)(ii) is materially different from the test of place of effective management contemplated by Article 4(3) of the DTAA between India and Mauritius.
3.5 Let us analyse the evidence on record, which could justify conclusions that the assessee's effective place of management was only in India. The assessee, as already stated, is a tax resident of Mauritius and copy of the tax resident certificate issued by the CIT, IT Department, Republic of Mauritius, is placed at p. 1 of the assessee's paper book. The assessee was a company incorporated with the RoC, Mauritius and the certificate of incorporation is placed at p. 2 of the assessee's paper book. The assessee was also granted status of an off shore company by the Mauritius off-shore business authorities.
The certificate in this regard is placed at p. 3 of the assessee's paper book. The assessee had applied for permission to the RBI under Section 29(1)(b) of the Foreign Exchange Regulation Act, 1973 for permission to purchase shares etc. of Indian companies through stock exchanges with repatriation benefits and the RBI had accorded such permission vide its letter dt. 27th Nov., 1995, copy placed at page Nos. 4 to 7 of the assessee's paper book. These activities were permitted to be carried on through Punjab National Bank, ECE House, 28-K.G. Marg, New Delhi, in which the assessee had held NRE account. It is not in dispute that the assessee purchased and sold shares of Indian companies through the stock markets in India through different share brokers. The assessee had authorized Mr. M.P. Mehrotra, Shri S.K.Aggarwal and Shri Rajesh Jhalani, as their authorized representatives to carry on activities on their behalf through a specific power of attorney dt. 13th May, 1999. It is in the light of the above evidence available on record that the AO came to the conclusion that Mr. M.P.Mehrotra was taking all the important decisions regarding investment and other details. The company had sold shares through M/s VLS Securities and certain other share brokers. According to the AO, M/s VLS Securities was managing the investments made by the assessee company. In coming to the above conclusion the AO has referred to the fact that even when shares were purchased and sold by other brokers on behalf of the assessee, those brokers were sending correspondence to VLS Securities. According to the AO, these broking firms should have interconnection with the assessee at the Mauritius address. Other reasons given by the AO was that the shares were being purchased and sold within a matter of 3 to 4 days and such decisions required close monitoring of the mood of the market. The assessee comprised of two shareholders, Shri Vikas Mehrotra and his wife, Smt. Neelu Mehrotra, who were both in the United States. The assessee did not produce any evidence to show that these decisions to purchase and sell were only at the instance of the shareholders from USA. The AO, therefore, concluded that all the decisions were made only from India. The AO, therefore, concluded that the place of effective management of the assessee was only in India. In our view, the reasons assigned by the AO were not enough even to come to a conclusion that the place of effective management of the assessee was in India. The law is well settled that control and management of affairs does not mean the control and management of the day-to-day affairs of the business. The fact that discretion to conduct operations of business is given to some person in India would not be sufficient. The word 'control and management of affairs' refers to head and brain, which directs the affairs of policy, finance, disposal of profits and such other vital things consisting the general and corporate affairs of the company.
4. We have perused the power of attorney by which persons in India were authorized to conduct the business on behalf of the assessee. In our view, the terms of the said power of attorney merely empowered the persons in India to conduct the day-to-day affairs of the company. It is also noticed that the assessee in support of its claim that the directions were issued from market by the two shareholders sought to file telephone bills recording the calls made to India from time to time. These were sought to be filed as an additional evidence before the CIT(A). The CIT(A) rejected the application for admission of additional grounds. The observation of CIT(A) for rejecting the same was that the conditions and its admissibility were not satisfied by the assessee. In our view, this evidence was admissible under Rule 46A(4) of the rules. The assessee also filed board's resolution, whereby the authority to take decision was only with Shri Vikas Mehrotra, one of the two shareholders of the assessee. In our view, the above evidence prima facie indicate that the control and management of the affairs of the assessee were not wholly in India. It cannot also be said that the place of effective management of the assessee was in India. It has been the contention of the assessee that the decisions regarding investments were taken only by the directors of the company, who were stationed at Mauritius or United States. This plea of the assessee, in our view, has been fairly demonstrated and established. The AO did not choose to examine the persons in India, who were stated to be in effective control and management of the affairs of the assessee in India. The reasons assigned by the AO for coming to the conclusion that the place of effective management of the assessee was situated in India cannot be sustained. The CIT(A), in our view, erred in confirming the order of the AO. We are, therefore, inclined to hold that the assessee was not a resident in India and, therefore, its income could not be taxed in India except to the extent that which accrues or arises in India or is deemed to have accrued or arisen in India, as laid down in Section 5(2) of the Act. It is further, seen that the capital gains on sale of shares fall within the ambit of Article 13(4) of the Indo-Mauritius DTAA and, therefore, such profits are taxable only in the State of Mauritius. In the case of Union of India v. Azadi Bachao Andolan (supra), the Hon'ble Supreme Court had an occasion to analyse Circular No. 789 dt. 13th April, 2000 issued by the CBDT, whereby it had laid down that FIIs operating from Mauritius incorporated in that country are liable to tax under Mauritius Tax Laws and it has to be considered as residents of Mauritius. Thus the AOs were debarred from making any further enquiries in the case of the companies incorporated in Mauritius. The Hon'ble Supreme Court upheld the validity of this circular and held that such companies were not liable to taxation under the IT Act, 1961 in respect of capital gains on sale of shares. Even on the basis of this decision, the action of the Revenue authorities bringing to tax the capital gains in the hands of the assessee cannot be sustained. We, therefore, hold that the income in the form of capital gains on sale of shares as assessed to tax by the Revenue authorities should be deleted. Ground Nos. 1 to 1.3 are accordingly allowed.
2. That the learned CIT(A) has grossly erred both in law and on facts in confirming the addition of Rs. 3,83,11,550 on the ground that this is unexplained investment in purchase of various shares in India; 2.1 That the learned CIT(A) has failed to appreciate the fact that the amount of Rs. 3,83,11,550 was in the form of remittances made by Mauritius office of the appellant company through banking channels for purchase of shares and securities in Indian capital market; 2.2 That the learned CIT(A) has failed to consider the CBDT Circular No. 5 dt. 20th Feb., 1969, which was relied upon by the appellant during the course of hearing of appeal, wherein the instruction was issued to the effect that the money brought into India by non-resident through banking channels for investments or for other purposes is not liable to Indian income-tax; 2.3 That, without prejudice, the CIT(A) has confirmed the gross remittance receipts, completely ignoring the remittances sent from India after the sale of equity shares Under these circumstances, it was only peak credit, which should have been considered. On the basis of peak credit, a sum of Rs. 3,48,20,535 only could have been alleged.
6.1 The AO noticed that the assessee had credited in the books a sum of Rs. 3,83,11,550, which was the amount invested by the assessee in purchase of various shares in India. The assessee claimed that the funds were not arranged in India. The assessee claimed that the funds were arranged from Mauritius office. The AO held that the assessee failed to explain the source of the above funds and brought the above sum to tax as income of the assessee under Section 68 of the Act.
Before the CIT(A), the assessee contended that the AO has no jurisdiction to treat the funds brought into India from Mauritius for purchase of investments as unexplained cash credits under Section 68 of the IT Act. Firstly, there cannot be any cash credit in the books of accounts of the appellant as no books of account are maintained by the assessee company in India. They are maintained in Mauritius only. The company does not have any books in India except the bank statements, and copies of the contract notes issued by the sharebrokers.
6.2 It was further contended that the amount of Rs. 3,83,11,550, which is alleged to be unexplained cash credit by the AO, are the remittances made by the Mauritius office through banking channels for the investment in shares and securities in Indian capital market. These funds have been arranged by the directors of the assessee in Mauritius and USA for investing them in India and necessary details in this regard have been duly filed during the assessment proceedings. These funds have been brought into India through Mauritius office and audited accounts of the appellant are proof of it.
6.3 That on the facts and in the circumstances of the case, the sources of funds are absolutely clear. There is no justification in asking for explanation about it. Funds have been received through banking channels from Mauritius/USA. The appellant, being an accepted foreign body by RBI, the remittances do not call for any investigation/explanation from the assessee.
6.4 The assessee also placed reliance on Circular No. 5 dt. 20th Feb., 1969. The copy of the said circular is placed in the paper book at pp.
73-74. The second and third paras of the said circular are given as under wherein it has been laid down as follows: Money brought into India by non-residents for investments or other purposes is not liable to Indian income-tax. Therefore, there is no question of a remittance into the country being subjected to income-tax in India. The question of assessment to tax arises only when there is no evidence to show that the amount, in question, in fact represents such remittance. In other words, in the absence of proper supporting evidence, the taxpayer's story that the money has been brought into India from outside may be disbelieved by the ITO who may then proceed to hold that the money had in fact been earned in India.
If the money has been brought into India through banking channels or in the form of assets like plant and machinery or stock-in-trade, for which the necessary import permits had been obtained, no question at all are asked by the ITOs as to the origin of the money or assets brought in. It is only in cases where the money is claimed to have been brought from outside otherwise than through banking channels and there is no evidence regarding the transfer of the money, that the Department has to make enquiries about the source thereof.
7. The CIT(A), however, upheld the order of the AO, hence the aforesaid ground of appeal by the assessee before the Tribunal.
8. The learned Counsel for the assessee reiterated the plea as was put-forth before the Revenue authorities and in particular drew our attention to the decision of the Delhi Bench of the Tribunal in the case of Dy. CIT v. Finlay Corporation Ltd. (2004) 84 TTJ (Del) 788 : (2003) 86 LTD 626 (Del). The learned Departmental Representative relied on the orders of the Revenue authorities.
9. We have considered the rival submissions. The fact that these remittances had come through banking channels from outside India is not in dispute. The relevant certificate of foreign inward remittances have been placed by the assessee in his paper book. The question is whether in such circumstances the Revenue could embark upon an enquiry into the source of these remittances. This question had come up for consideration in the case of Dy. CIT v. Finlay Corporation Ltd. (supra), the Tribunal held as follows: As regards the question whether there is any conflict between provisions of Section 5(2) and provisions of Section 68 or Section 69, it is the settled legal position that burden is on the Revenue to prove that income of an assessee falls within the net of taxation. Once it is so proved, then the burden is on the assessee to prove that such income is exempt from taxation. Section 5(2) being charging section, the burden is on the Revenue to prove that the income of the non-resident falls within the ambit of such section. On the other hand, the legislature has cast the onus on the assessee' to explain the source of money falling within the ambit of Section 68 or Section 69. These sections are of universal application and do not make any distinction between a resident or non-resident. Therefore, there is a conflict between the provisions of Section 5(2) on the one hand and the provisions of Section 68 or Section 69 on the other hand with reference to the burden of proof.
Hence, if there is any cash credit in the books of account of the non-resident, then the source and genuineness of the same will have to be proved by him. For the similar reasons, the non-resident would be required to prove the source of investment made by him in India, (para 12) However, the conflict between the provisions is only with reference to the onus and not to the issue of taxability of income. The onus is shifted under Section 68 or Section 69 only with reference to the income, which is otherwise taxable in the hands of non-resident under Section 5(2). Therefore, the issue whether the income of a nonresident is taxable or not is still to be decided with reference to the provisions of Section 5(2) and the provisions of Section 68 or Section 69 cannot enlarge the scope of Section 5(2). What is not taxable under Section 5(2) cannot be taxed under the provisions of Section 68 or Section 69. Under Section 5(2), the income accruing or arising outside India is not taxable unless it is received in India.
Similarly, if any income is already received outside India, the same cannot be taxed in India merely on the ground that it is brought into India by way of remittances. If such income is shown in the books of accounts, then it cannot be taxed in India merely because the assessee is unable to prove the source of such entry. Therefore, the same cannot be taxed under Section 68 merely on the ground that the assessee fails to prove the genuineness and source of such cash credit. Therefore, the provisions of Section 68 or Section 69 would be applicable in the case of non-resident only with reference to those amounts, whose origin of source can be located in India.
Therefore, the provisions of Section 68 or Section 69 have limited application in the case of a nonresident, (para 13) 10. In the light of the above decision of the Tribunal, and Circular No. 5 of CBDT, we are of the view that the action of the Revenue authorities in bringing to tax the sum of Rs. 3,83,11,550 cannot be sustained. We have already held that the assessee is a tax resident of Mauritius. There is no basis for coming to the conclusion that any income of the assessee accrued, arose or was received in India. In these circumstances, we direct that the addition made be deleted.
Ground Nos. 2 to 2.3 raised by the assessee, are allowed.