Facts of the Case
The Assessee entered into a joint venture with Oman Oil Company to form Oman Fertilizer Company SAOC (OMIFCO), which is a registered company in Oman under the Omani Laws. The Assessee holds 25% share in OMIFCO, which is engaged in manufacturing fertilizers. The Assessee has established a branch office in Oman to oversee its investment in OMIFCO.
The Assessing Officer allowed tax credit of a sum of Rs. 41.53 crores in respect of the dividend income of Rs. 134.41 crores received by the Assessee from OMIFCO. The said dividend Income was simultaneously brought to the charge of tax in the assessment as per the Indian Tax Laws. As per the Omani Tax Laws, exemption was granted to dividend income by virtue of the amendments made in the Omani Tax Laws with effect from the year 2000. However, by virtue of the provisions of Article -25 of DTAA referred to above, the Assessing Officer allowed credit for the aforesaid tax which would have been payable in Oman but for the exemption granted.
Issue
Principal Commissioner of Income Tax issued a Show Cause Notice dated 28.09.2015 under Section 263 of the I.T. Act, 1961. holding that since Article 8(bis) exempts dividend income received in Oman in totality, no tax was payable in Oman at all at any stage and thus no tax was foregone on account of tax incentives by Oman.
Held
As per Article 25 of the DTAA it will be noticed that under Article 25(4) the tax payable in a Contracting State (i.e. Oman) shall be deemed to include the tax which would have been payable but for the tax incentive granted under the laws of Oman and which are designed to promote economic development.
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.
Therefore, we hold that on merits also the learned PCIT was not justified in directing the Assessing Officer to withdraw the aforesaid tax credit. Further such credit was allowed by the Assessing Officer during several preceding assessment years and, therefore, when there is no change in the facts and the relevant provisions of law, following the well settled principle of consistency of approach, as emerging from a chain of decisions referred to above, credit for deemed dividend tax is clearly allowable in respect of the assessment year under appeal.
IN THE ITAT DELHI BENCH ‘H’
Krishak Bharati Cooperative Ltd.
v.
Assistant Commissioner of Income-tax, Circle -30(1), New Delhi
H.S. SIDHU, JUDICIAL MEMBER
AND O.P. KANT, ACCOUNTANT MEMBER
IT APPEAL NOS. 6785 & 6786 (DELHI) OF 2015
[ASSESSMENT YEARS 2010-11 & 2011-12]
MARCH 9, 2016
Vijay Ranjan, Adv. Vartik Choksi and K.V.R. Krishna, CA for the Appellant. Amit Mohan Govil for the Respondent.
ORDER
H.S. Sidhu, Judicial Member – These two appeals filed by the Assessee are directed against the Order dated 02.11.2015 & 29.10.2015 respectively passed by the Ld. Principal Commissioner of Income Tax, Delhi-10, New Delhi u/s 263 of the Income Tax Act, 1961 relevant for the assessment years 2010-2011 & 2011-12. Since the issues involved in these appeals are common and identical, therefore, these appeals were heard together and are being disposed of by this common order for the sake of convenience, by dealing with ITA No. 6785/Del/2015 (AY 2010-11).
2. The Assessee has raised as many as 14 grounds of appeal. However, the effective grounds in both the appeals which require to be adjudicated are as under:—
“(i)
The impugned order passed u/s 263 of the I.T. Act is bad in law, being without jurisdiction for the following reasons:—
(a)
While the show cause notice referred to only one issue, the final order passed by the learned PCIT is on three issues and thus the appellant-society was denied opportunity which is against the well established principles of natural justice and which vitiates the entire proceedings u/s 263.
(b)
At the time of original assessment, there was full application of mind on the part of the Assessing on the same issue with regard to which the show cause notice was issued by the learned PCIT.
(c)
After full app1ication of mind and after considering the material on record and the replies filed by the appellant-society, the Assessing Officer has taken a view at the time of original assessment which is a plausible view and under section 263 the learned PCIT cannot substitute his view for the view adopted by the Assessing Officer.
(d)
The order passed by the learned PCIT is violative of the well established principles of consistency of approach.
(ii)
On merits also the directions issued by the learned PCIT arc totally unjustified.”
3. The brief facts of the case are that the assessee is a co-operative society registered in India under the provisions of Multi-State Co-operative Societies Act, 2002, under the administrative control of the Department of Fertilizers, Ministry of Agriculture and Co-operation, Government of India. The principal business of the Assessee is manufacture of fertilizers like urea and ammonia. The Assessee entered into a joint venture with Oman Oil Company to form Oman Fertilizer Company SAOC (OMIFCO), which is a registered company in Oman under the Omani Laws. The Assessee holds 25% share in OMIFCO, which is engaged in manufacturing fertilizers. The fertilizers manufactured by OMIFCO are purchased by the Government of India under a long term agreement.
3.1 The Assessee has established a branch office in Oman to oversee its investment in OMIFCO. The branch office is independently registered as a company 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 – 25 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.
3.2 The Return of Income was filed on 24.09.2010. Later on the case was selected for scrutiny and notices under Section 143(2) and 142(1) of the I.T. Act were issued along with detailed questionnaires. During the course of the Assessment Proceedings, detailed replies were filed on behalf of the Assessee. The Authorized Representative of the Assessee duly attended before the Assessing Officer and, as mentioned in the Assessment Order, all the necessary details were furnished, examined and the case was discussed. Thereafter, the assessment was completed under Section 143(3) vide order dated 27.02.2014 by the Assessing Officer. While completing the assessment, inter alia, the Assessing Officer allowed tax credit of a sum of Rs. 41.53 crores in respect of the dividend income of Rs. 134.41 crores received by the Assessee from OMIFCO. The said dividend Income was simultaneously brought to the charge of tax in the assessment as per the Indian Tax Laws. As per the Omani Tax Laws, exemption was granted to dividend income by virtue of the amendments made in the Omani Tax Laws with effect from the year 2000. However, by virtue of the provisions of Article -25 of DTAA referred to above, the Assessing Officer allowed credit for the aforesaid tax which would have been payable in Oman but for the exemption granted.
3.3 After the completion of the assessment, the Ld. Principal Commissioner of Income Tax (hereinafter referred as “Ld. PCIT”), issued a Show Cause Notice dated 28.09.2015 under Section 263 of the I.T. Act, 1961. The ground on the basis of which the said notice was issued is reproduced below for ready reference from the notice itself:
“A perusal of the records indicates that in the computation of income filed by the Assessee, dividend income received from OMIFCO, Oman, of Rs.143,83,99,800 was included in the total income of the Assessee. Thereafter, tax credit of Rs. 41,44,23,149 was claimed as relief u/s 90 of the Income Tax Act, 1961 read with Article 11, 7 and 25 of the India-Oman DTAA. This claim of tax credit was allowed by the Assessing Officer during the Assessment Proceedings.
Dividend income received in Oman is exempt from taxation in as per Article 8 (bis) of the Oman Company Income Tax Law, which is reproduced below:
“Tax shall not apply on dividends that the company earns from its ownership of shares in the capital of any other company.
Therefore, no tax was payable by KRIBHCO on the dividend receipts of Rs.143,83,99,800 in Oman. The DTAA between India and Oman allows tax credit in India for the taxes payable in Oman. Even though no taxes were actually paid on the dividend income from OMIFCO, the Assessee has claimed tax credit by relying on Article 25(4) of the India-Oman DTAA, which states —
“25(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.”
Article 25(4) requires that in order to claim credit, tax should have been payable in Om an if not for the tax incentives granted in Oman,. since Article 8(bis) exempts dividend income received in Oman in totality, no tax was payable in Oman at all at any stage and thus no tax was foregone on account of tax incentives by Oman.
Article 3(2) of the India-Oman DTAA provides that if a term used in the agreement is not defined then the term will have the meaning which it has under the Law of that Contracting State concerning the taxes to which this Agreement applies (i.e. India). The term ‘tax incentive’ has not been defined in the India Oman DTAA. The meaning must, therefore, be inferred from Indian Law. The term tax incentive is not defined in the Income Tax Act, 1961. The tax incentive refers to income which would otherwise be taxable but has not been taxed with a view to promote economic activity in certain sectors or in the economy as a whole. Any income which is not taxed at all as per the tax laws cannot be construed as an incentive. The Omani Companies Income Tax Law vide Article 8(bis) exempts dividend income from taxation in Oman. this cannot be interpreted as an incentive as it exists across the board with no exceptions in Oman. It is simply a feature of Oman’s Tax Law that does not tax dividend income. Hence, it cannot be construed as an incentive granted under Oman’s tax laws.
Consequently, reliance on Article 25(4) of the India Oman DTAA was erroneous in this case and no tax credit was due to the Assessee under Section 90 of the IT Act. The Assessment Order passed, accepting the contentions of the Assessee and allowing tax credit is erroneous as well as prejudicial to the interest of the Revenue. You are, therefore, in terms of provisions of sub-section (1) of Section 263 hereby given an opportunity to furnish justification as to why the tax credit of Rs. 41,44,23,149 should not be withdrawn for A.Y. 2010-11.”
4. In response to the aforesaid Show Cause Notice, the Assessee has filed a detailed reply dated 13.10.2015 by raising the following contentions:—
(i)
Issue of notice under Section 263 is illegal and ab initio void for the reason that on the very specific issue relating to allowing tax credit for the deemed tax paid on dividend income in Oman, was allowed at the time of original assessment. after raising detailed enquiries and after considering the detailed reply filed before the Assessing Officer. It was pointed out that in the query letter issued under Section 142(1) of the I.T. Act, 1961 during the course of Assessment Proceedings, specific query was raised calling upon the Assessee to give a detailed note on the tax credit claimed by the Society in respect of dividend income received from OMIFCO. The Assessee filed a letter dated 11.12.2013 wherein he filed it filed the complete details to the Assessing Officer and the entire factual and legal position was explained with reference to the provisions of Section 90 of the IT Act, 1961 read with Article – 25(4) of the DTAA. On this basis it was pointed out to the Ld. PCIT that after thoroughly examining the issue the Assessing Officer has taken a view which was a plausible or possible view and, therefore, the Ld. PCIT is debarred from substituting his own view in place of the views correctly adopted by the Assessing Officer. Several decisions were also cited in support of this contention.
(ii)
On the merits of allowing credit of the deemed tax also, detailed submissions were made. The provisions of DTAA read with the relevant provisions of Omani Tax Laws, as clarified by the Ministry of Finance, Secretary General for Taxation, Muscat, Sultanate of Oman, were also referred to and copies of all relevant documents were filed before the Assessing Officer. It was contended in this reply that the tax credit has been allowed by the Assessing Officer after duly considering the merits of the claim made by the Assessee.
5. The Ld. PCIT vide his impugned order passed under Section 263 of the I.T. Act, 1961, has rejected the various submissions made before him. The Ld. PCIT, at the very outset of his order, has reproduced Article – 25 of DTAA which lays down that, Tax payable in a ‘Contracting State’ shall be deemed to include the tax which would have been payable but for the tax incentive granted under the Law of the Contracting State and which are designed to promote economic development”. The Ld. PCIT observed that Article (115) of the Omani Tax Laws exempts from tax dividends received by the establishment, Omani Oil Company or Permanent Establishment from shares, allotments or shareholding it owns in the capital of any Omani Company. He has further observed that Article (116) specifically exempts various business activities from the charge of Omani tax. The Ld. PCIT has opined that under the Omani ‘Tax Laws dividend is absolutely exempt and is not includible in the total income and, therefore, it cannot be said that any specific exemption was granted for the purpose of tax incentives for economic development. Regarding the contention of the Assessee that the Ld. PCIT has no jurisdiction under Section 263 of the I.T. Act, 1961, the Ld. PCIT has observed as under in his order passed under Section 263:
“The main point made by the Assessee with regard to non maintainability of notice under Section 263 of the Income Tax Act revolves around the argument that the Assessing Officer has granted relief under Section 90 of the Income Tax Act after considering the provisions of the Act, the treaty and since the order has been passed after making enquiries the order cannot be turned as erroneous. The Assessee has also made reference to the decision of Hon’ble Supreme Court in the case of Malabar Industrial Company Ltd., v. err [2000] 243 ITR 83 (SC) to support its claim. He has also made reference to certain other decisions. The claim of the Assessee that the Assessing Officer has not allowed deduction of tax credit after due application of mind and, therefore, jurisdiction under Section 263 will not lie without merit. The Assessee has erroneously tried to mix up the provisions of Section 147 and Section 263 of the Income Tax Act. Provisions of Section 147 which are initiated by the AO himself do restrict reopening of assessment where as a result of certain application of mind by the AO an opinion is formed. Under Section 147 of the Income Tax Act, the AO cannot change his opinion unless there is a certain new tangible information requiring change of opinion. This also includes a situation when there is application of mind but on account of failure on the point of Assessee to disclose full at time facts and income could not be assessed. The AO in such case would be free to record his reason and initiate action u/s 147 of the Act. Whereas, under Section 263 after having made enquiries, having applied his mind after taking all facts and the legal position into account the Assessing Officer passes an order which is erroneous and prejudicial to the interest of Revenue, the CIT would be competent to exercise jurisdiction under Section 263 of the Act. The jurisdiction under Section 263 is not restricted either to the limitation of Section 147 as claimed by the Assessee nor it can be restricted to the provisions of Section 154 which deal with the mistakes apparent from record only. Therefore, the claim of the Assessee is found to be without this merit and accordingly not maintainable.
Similarly, reliance on the decision in the case of Malabar Industrial Company Ltd., is also misplaced. The decision of Hon’ble Supreme Court very clearly lays down that where two equal views on a given set of facts are possible and the AO has taken one of the views the jurisdiction under Section 263 could not lie. The decision of Hon’ble Supreme Court merely reiterates that position of law which provides for action by the Commissioner in the case where the orders are found be erroneous. In the case where one of the possible views has been taken by the Assessing Officer, after appreciating the position of law and facts of the case, definitely the order could not be considered to be erroneous. However, in order to fall within the benefit of this decision of Hon’ble Supreme Court, the Assessee has to clearly show that the view taken by the Assessing Officer was a possible view as per law. This, however, is not the case as indicated above. In view of the above the claim of the Assessee that the action under Section 263 is not maintainable does not serve any purpose and is accordingly rejected.”
6. From the factual position as explained above, it was seen that the learned PCIT has taken a view that even if the Assessing Officer, during the course of the original scrutiny assessment proceedings, has fully applied his mind to a particular issue and has made the assessment. Accordingly, the Ld. PCIT would have jurisdiction u/s. 263 of the I.T. Act, if he feels that the view adopted by the Assessing Officer is legally untenable. The Ld. PCIT has, accordingly, made the following observations in his impugned order passed u/s. 263 of the I.T. Act.
“This from the plain and simple reading of both the Oman Tax Law as applicable from 01-01-2010 (Royal Decree No. 28/2009) or the earlier law (Royal Decree 68/2000) effective from the tax year 2000, there is no tax payable on dividend in Oman and accordingly, no tax has been paid. Further, the exemption is not available because of any economic incentive for economic development as the case of the Assessee is not covered under the exemption. The Royal Decree 28/2009, which came into force w.e.f. 01-01-2010 makes the position very clear and reiterates the position of exemption of dividend income provided for in the Article 8 of old Royal Decree 68/2000. The Royal Decree of 2009 also provides for incentive only for a period of five years. In case of Assessee that period has elapsed long back.”
7. Ld. Counsel of the assessee stated that the Ld. PCIT did not confine himself to the particular issue referred to in the show cause notice issued by him u/s.263 of the I.T. Act, but he has also passed order and given directions to the Assessing Officer in respect of a totally new issue which does not find any mention in the aforesaid show cause notice. Thus, apparently with regard to this new issue no opportunity was allowed to the assessee-society. Ld. Counsel of the assessee further stated that in his order the learned PCIT has identified this new issue as under:—
“…………Another interesting feature of the accounts is that Assessee has credited much more income than the dividend received by them. The movement of investment in the final accounts as on 31st December, 2010 in notes to the financial statement No. (4) it has been indicated as below:
31-12-2010 (US$)
(US$) 31 Dec.
93,521,908
Opening Balance
114,251,371
37,757,271
Share of profit for the year
59,781,818
(17 2027 2271)
Dividend received
(43 180 000)
(114,521,271)
Closing balance
130,853,189
The Assessee has, however, declared only its dividend income in its P&L Account written in India as per Indian Tax Laws and accounting standards and submitted to the Department. The accretion and addition to its opening capital in terms of the profit as per account of PE which have been duly audited and submitted during the proceedings are not disclosed in its accounts in India. This makes it abundantly clear that the dividend declared or received only is being shown in its income in India and thus confirming that the income received by the Assessee by its own admission is its dividend income and not business income as claimed by the Assessee.”
7.1 The Ld. PCIT held that even the assumed profits reflected in the Books of Account of the PE of the Assessee by virtue of undistributed and un-received dividend income, were also chargeable to tax under the provisions of the I.T. Act, 1961.
7.2 At the end of the impugned order under Section 263, the Ld. PCIT directed the Assessing Officer to modify the Assessment Order as under:
“1.
That the tax credit allowed by the A. O. in respect of dividend income in the Assessment Order is not available to Assessee in terms of either para (1) or para (4) of the Article 25 of the Indo-Oman DTAA.
2.
The share of profit of its investment in Oman (to the extent it is not declared as dividend) is to be included in the global income of the resident tax payer India as per Section 4 & 5 of the I.T. Act. This part of income would be eligible for allowance of tax credit as per para (4) of Article 25 of the Indo-Oman DTAA to the extent of taxes which would have been payable but for the incentive provided by the Royal Decree No. 28/2009 w.e.f. 01-01-2010 on any other notification,. The Assessee shall provide it to the A. O. if there is any such notification prior to this Royal Decree 28/2009 and still applicable for the current year. The income shall be computed in terms of notes to account of the financial statement of the branch office of the Assessee is Oman. the tax credit would be available for income earned after this date and tax credit shall be computed accordingly. However, the A.O. shall ensure that the Assessee has been granted exemption by the Oman Tax Authority as provided in Article 118 of Royal Decree No. 28/2009.]
It is also seen that the Assessee has not furnished complete and true income or particulars of income and, therefore, the A.O. shall also frame a view thereon and take action as per laws.”
8. From the above it is seen that that the Ld. PCIT gave directions to the Assessing Officer with regard to following three Issues:
(i)
Tax credit on dividend is not allowable.
(ii)
Profits pertaining to undistributed dividend should be brought to charge of tax.
(iii)
The Assessing Officer should also frame a view with regard to the default of not furnishing complete and true income or particulars of income on the part of the Assessee.
9. The factual position which emanates from the aforesaid discussions is that while the show cause notice was issued by the learned PCIT only on one Issue viz. tax credit on dividend, he passed his final order on the aforesaid three issues. The admitted position is that with regard to the other two issues no opportunity was allowed to the assessee before passing the order u/s 263 of the I.T. Act.
10. In support of aforesaid contentions, Ld. Counsel of the assessee has filed detailed written submissions, relevant documents and judicial pronouncements, For the sake of clarity, the relevant part of the written submissions of the Ld. Counsel of the Assessee is reproduced below:—
“9. At the very outset, the Assessee strongly challenges the legality of the order passed the Ld. PCIT under Section 263 of the I.T. Act, 1961. It is submitted that the jurisdictional conditions and the legal requirements of Section 263 arc not satisfied so as to vest the Ld. PCIT with the powers under Section 263 with a view to reverse the concluded scrutiny assessment passed under Section 143(3) after due and full application of mind on the part of the Assessing Officer. In support of the contention that the impugned order under Section 263 is bad in law and ab initio void, the following submissions are made for the kind consideration of this Hon’ble Tribunal:
(i) As mentioned above, the Ld. PCIT issued notice under Section 263 with regard to only one issue but he has passed the order on three issues. He has directed the Assessing Officer to tax the assumed profits on account of the undistributed dividends by OMIFCO as reflected in the Books of Account of the PE. He has also directed the Assessing Officer to frame a view regarding non-furnishing of complete details or furnishing inaccurate particulars by the Assessee. On these two issues, there was complete denial of natural justice on the part of the Ld. PCIT for the reason that Assessee Society was not allowed any opportunity whatsoever to present its case on these Issues. In these circumstances, the entire order passed by the Ld. PCIT under Section 263 is vitiated and rendered bad in law. It is an established legal position that there must be complete nexus between the reasons or grounds indicated in the Show Cause Notice issued under Section 263 and the final order passed under Section 263. Kind reference is invited to the Hon’ble Delhi High Court judgment in the case of CIT v. Ashish Rajpal 320 ITR 674. For ready reference the relevant part of the head note of this case is reproduced below:
“Held, dismissing the appeal, that there was nothing on record which would show that the Assessee was given an opportunity to respond to the discrepancies which formed part of the order in revision but were not part of notice dated 11.5.2016. Even though the notice issued by the Commissioner before commencing the proceedings under Section 263 referred to four issues, the final order passed referred to nine issues, some of which obviously did not find mention in the earlier notice and hence resulted in the proceedings being vitiated as a result of the breach of the principles of natural justice.”
(emphasis supplied)
For the same proposition , the Assessee Society relies on the Hon’ble Mumbai Tribunal decision in the case ofColorcraft v. ITO 303 ITR (AT) 7. The relevant part of the head notes of this decision is reproduced below for ready reference:
“Held, (i) that the provisions of Section 263 provide that an opportunity is to be provided to the Assessee before passing an order. That means the Assessee is required to reply to the reasons given by the Commissioner in the Show Cause Notice. The opportunity to be granted must be effective and not an empty formality. A person who is required to show cause must know the basis on which action is proposed. Obviously, therefore, the notice issued must indicate the reasons on which the order of assessment is considered to be erroneous and prejudicial to the interests of the Revenue. This means there must be nexus between the reasons given in the Show Cause Notice and the order of the Commissioner under section 263. The reason given in the Show Cause Notice to the Assessee was that duty drawback received by the Assessee could not be considered as profit derived from export in view of the Supreme Court judgment and, therefore, the said amount did not qualify for deduction under Section 80HHC. However, the order under Section 263 held the assessment order an erroneous on different grounds, namely, [i] the Assessing Officer should have excluded the export incentives of Rs. 18,99,015 instead of Rs.18,58,350, (ii) Central excise refund and sales tax set off should have been excluded from the business profits under clause (baa) of the Explanation to Section 80HHC, and (iii) Central excise refund and sales tax set off should have been included in the total turnover. This clearly showed that there was no nexus between the reasons given in the Show Cause Notice and the reasons given in the order for holding the order of the Assessment Order erroneous .qua deduction under Section 80HHC.: The order of revision was not valid with reference to Section 80HHC.”
(emphasis supplied)
Similar view has been adopted in the following cases:
(a)
CIT v. Roadmaster Industries of India Limited 40 taxmann. Com 298 (P&H)
(b)
Synergy Entrepreneur Solutions (P) Ltd v. CIT 11 taxmann.com 385 (Mum.ITAT)
In the backdrop of the factual and the legal position explained above, it is respectfully submitted that there is an inherent and fatal defect in the order passed by the Ld. PCIT under Section 263 for the reason that on some of the issues covered in the order, the Assessee Society was not given any opportunity. Therefore, on this ground alone the order passed by the Ld. PCIT under Section 263 deserves to be quashed.
(ii) The Assessee Society also challenges the legality of the order passed under Section 263 on the ground that the Ld. PCIT has completely ignored the past history of the case and has tried to substitute his arbitrary and unreasonable view in place of the view adopted by thc Department itself consistently for the past several years. The Ld. PCIT has discarded the view adopted by the Department in the past in spite of the fact that the factual and legal position continues to be the same. It is submitted that this very same issue was thoroughly examined in the case of the Assessee Society in the scrutiny assessment made under Section 143(3) of the I.T. Act, 1961 for the A.Y. 2006-07 vide Assessment Order dated 31 st December, 2008 passed by the Additional CIT, Rangc – 24, New Delhi. The relevant part of this order is reproduced below for ready reference:
“9. Tax credit as per DTAA with Oman:
The Assessee has claimed a tax credit of Rs.6,OO,49,920 on the dividend income of Rs. 20,01,66,440 received from Oman India Fertilizer Company SAOC (herein after referred as OMIFCO). It has been submitted that the Assessee is a joint venture partner in the above company. It has received dividend of Rs. 20,01,66,400 during the previous year which has been included in its income under the head Misc. Income under Schedule 7 – ‘Other Revenue’. The Assessee has referred to Section 90 of the Income Tax Act and claimed benefit of deemed tax paid in Oman by its PE in Oman. a reference has further been made to Article 25 of DTAA, Article 7, 11 and 25 of the DTAA between India and Oman.
The Assessee has submitted that it has filed its return for the year ended 31-3-2006 under Oman’s Income Tax Law for its branch namely KRIBHCO Musket Branch PE. Reference has further been made to Article 8 (bis) under Oman’s Income Tax Law. A copy of the Assessment Order as made in Oman for its PE has been filed to support its contention that the dividend income has been exempted in Oman in accordance with Article 8(bis) of Income ‘fax Law of Oman. The Assessee’s claim of tax sparing @ 30 as per the Royal Decree No. 68/2000 read with Royal Decree No. 48/81 under Company’s Income Tax Law, appears to be justified. The credit for Rs.6,00,49m,920 as deemed tax paid under DTAA in addition to the prepaid taxes as claimed in Return of income is allowed.
(emphasis supplied)
10. In respect of the Assessment Years 2007-08 to 2009-10 also assessments were made under Section 143(3) of the I.T. Act, 1961 and the Department has consistently adopted the view that the Assessee Society was entitled to tax credit of the deemed tax which would have been payable in Oman. The Department has taken a conscious view after considering the provisions of the Omani Tax Law, Section 90 of the I.T. Act, 1961, Article 25 of the DTAA and the clarifications issued by the Royal Decrees of the Sultanate of Oman. in respect of assessment for A.Y. 2010- 11, which is the subject matter of the present appeal, the Assessing Officer has adopted the same view in consonance with the view adopted in the past and further after full application of mind and after raising detailed queries and after considering the detailed replies filed by the Assessee Society vis-a-vis the provisions of Law and DTAA. Therefore, the view taken by the Ld. PCIT is totally outside the ambit and purview of Section 263 of the I.T. Act, 1961. The Assessee Society strongly relies on the following decision:
(i) Honble Delhi High Court judgment in the case of CIT v. Escorts Limited 338 ITR 435, the relevant part of which reads as under:
“Where a fundamental aspect of a transaction is found to have been permeated through different assessment years and this fundamental aspect has stood uncontested then the Revenue cannot be allowed to change its view 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 the transactions was examined year after year more importantly in the Assessment Year 1986-87 it was specifically considered by the Commissioner (Appeals) and it remained the same. Given the fact that the Assessee had been engaged in these transactions in the preceding Assessment Years, the Commissioner could have had no occasion to have recourse to the revisional powers under section 263 of the Act on the fundamental aspects of the transactions in issue on which a view had been taken and not shown to have been challenged. ”
(emphasis supplied)
11. It is respectfully submitted that even though the principle of res judicata may not be strictly applicable to Income-tax proceedings but, at the same time, consistency in approach in similar facts and circumstances, is very important for the legal system as held by various Courts as below:
(i)
CIT v. N. P. Mathew (Deed.) [2006] 280 ITR 44 (Ker.) The relevant part of the ratio is reproduced from the Heads note:
“Held, dismissing the appeal, that with regard to another assessee, the same view was taken by the Tribunal and the Department accepted it for earlier years in the assessee’s case also. Those orders were allowed to become final. The Department should be consistent at least in respect of the same assessee and it cannot also differentiate between different assessees. The assessee was entitled to the concessional rate of taxation under section 115H for the assessment year 1991-92.
(emphasis supplied)
(ii)
The assessee, for the same proposition, also relics on the Hon’ble Supreme Court decision in the case ofRadhasoami Satsang v. CIT [1992] 193 ITR 321. This Supreme Court decision together with other judgments of the Supreme Court have been referred to by the Hon’ble Gujarat High Court in the case of Taraben Ramanbhai Patel v. ITO [1995] 215 ITR 323. The observations of the Hon’ble Gujarat High Court may be reproduced below from page 330 of the report:
“……It is no doubt true that the strict rule of the doctrine of res judicata does not apply to proceedings under the Income-tax Act. At the same time, it is equally true that unless there is a change of circumstances, the authorities will not depart from previous decisions at their sweet will in the absence of material circumstances or reasons for such departure:”
(iii)
The desirability of following the principle of consistency again came up for consideration before the Hon’ble Delhi High Court in the case of Director of Income-tax (Exemptions) v. Escorts Cardiac Diseases Hospital Society [2008] 300 ITR 75. In this case exemption u/s.10(22A) was granted from assessment years 1988-89 to 1994-95. There was no change in facts. The Hon’ble High Court held that on the principle of consistency, exemption cannot be denied for the subsequent assessment years. It is further stated that in recent decision Hon’ble Apex court in case of CIT v. J .K. Charitable Trust in Civil appeal No. 1698,1699/2008 vide order date 7/11/2008 has also held on similar line as stated herein above on principle of consistency.
(iv)
Similar view has been adopted by the Hon’ble Delhi High Court in the case of CIT v. Dalmia Promoters Developers P. Ltd., [2006] 281 ITR 346. For ready reference, the relevant part of the Heads note is reproduced below:
“……For rejecting the view taken for the earlier assessment years, there must be a material change in the fact situation. ‘There was no gainsaying that the previous view would have no application even in cases where the law itself had undergone a change but before an earlier view could be upset or digressed from, one of two things must be demonstrated, namely, a change in the fact situation or a material change in law whether enacted or declared by the Supreme Court. In the absence of a change in the facts or any additional input there was no compelling reason for taking a different view. Therefore, the Commissioner (Appeals) and the Tribunal were justified in holding that the view taken for the earlier assessment years continued to be applicable even for the year under consideration.
Radhasoami Satsang v. CIT [1992] 193 ITR 321 (SC), Parashuram Pottery Works Co. Ltd. v. ITO [1977] 106 ITR 1 (SC), CIT v. A.R.J. Security Printers [2003] 264 ITR 276 (Delhi) and CIT v. Neo Poly Pack P. Ltd. [2000] 245 ITR 492 (Delhi) followed.”
(v)
On the rule of consistency, kind reference is invited to the Hon’ble Madras High Court decision in the case of CITv. Gopala Naicker Bangaru, [2012] 344 ITR 297. For ready reference, the Heads note of this case is reproduced below:
“The devotees of the assessee spiritual leader, made their offerings voluntarily to him at the time of his birthday. These offerings were accounted as capital receipts and receipts were also issued. In the accounting year relevant to assessment year 2004- 05, an amount of Rs. 1,75,70,347 was received as gifts. The Assessing Officer held that this amount was assessable but the Tribunal held that it was not. On appeal to the High Court:
Held, dismissing the appeal, that the assessee as a religious head was not involving himself In any profession or avocation nor performing any religious rituals/ poojas for his devotees for consideration or other. The amounts or gifts received by the assessee could not be said to have any direct nexus with any of his activities as a religious head. In the absence of a link or connection between the gifts made by the devotees and the profession or avocation carried on by the assessee, the personal gifts could not be termed as income taxable under the Income-tax Act, 1961. In the assessee’s own case in assessment year 1988-89, the Department had accepted the position that gifts received by him on birthdays and other occasions were not taxable. Where a fundamental aspect permeating through different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it w01:lld not be appropriate to allow the position to be changed in subsequent years. Since there was no change in the facts and law the amounts were not taxable.
[The Supreme Court has dismissed the special leave petition filed by the Department against this judgment see [2011] 336 ITR (St.) 15-Ed.
(emphasis supplied)
11.6 The rule of consistency has also been approved by various High Courts in the following cases:
(i)
CIT v. Haryana Tourism Corporation Ltd., [2010] 327 ITR 26 (Punj. & Har.)
(ii)
CIT v. Haryana State Industrial Development Corporation Ltd., [2010] 326 ITR 640 (Punj. & Har.)
(iii)
CIT v. Siva Springs [2008] 304 ITR 24 (Mad.)
(iv)
CIT v. Goel Builders [2011] 331 ITR 344 (All.)
(v)
CIT’ v. Hitech Arai Limited 368 ITR 577 (Mad.)
The relevant part of this judgment is reproduced below from page 587 of the Report:
“We find no justifiable reason to differ with the said finding rendered by the Tribunal, more so taking note of the fact that the Department had for the Assessment Years 1986-87 to 1994-95, namely, for a period of nine years, accepted the fact that the payment made towards royalty is revenue expenditure and had not raised dispute thereon. That apart, even for the Assessment Year 1995-96, the Assessing Officer has partially treated the payment of royalty as revenue expenditure. The sudden volte face by the Department on this issue appears to be on account of a new interpretation by the subsequent Assessing Officer. At this juncture, we would like to observe that the view of the Department, while interpreting the very same agreement, cannot be inconsistent. Unless there is a change in law or on the basis of new and acceptable material which went unnoticed, the opinion should not differ from time to time based on the perception of individual officers. Citizens expect consistency not only in judicial orders, but also in the orders passed by quasi-judicial authorities.”
12.It is respectfully submitted that the order passed by the Ld. PCIT under Section 263 of the I.T. Act, 1961 also suffers from another jurisdictional defect for the reason that the relevant issue regarding tax credit of deemed tax on dividend was not only thoroughly examined and allowed during the preceding Assessment Years 2006-07 to 2009-10, but even during the previous year relevant to the Assessment Year under appeal, this very same issue was further examined by the Assessing Officer and on this Issue detailed questionnaires were issued under Section 142(1) of the I.T. Act, 1961. In the questionnaire, the Assessing Officer raised detailed queries on thirty different issues relevant for the completion of the assessment and with regard to allowing tax credit on deemed dividend tax, enquiries were raised at serial numbers (xxviii) to (xxx). The Assessee Society responded to these queries as per detailed submissions dated 11th December, 2013. The relevant parts of these submissions are reproduced below which contain the points of query and the replies thereto:
“Query No. (xxvii) : Give details of income earned, income assessed, taxes payable and taxes paid in Oman.
Query No. (xxviii): In respect of any income covered in DTAA, please furnish detailed note with copy of respective agreement and also give reason for claiming relief u/s 90 of the Income Tax Act, 1961.
Query No. (xxix): Please give detailed note on tax credit claimed by the Society in respect of dividend income received from OMIFCO.
Query No. (xxx): Explain as to the condition of carrying on business in Oman through PE and the holding in respect of which the dividends are paid is effectively connected with such permanent establishments; and Article 11 (4) of the DT AA is applicable in your case.
Please refer Note No. 2 of the notes forming part of computation of taxable income annexed to original return of income of the Society at page 40, wherein the details of claim of deemed tax credit on dividend income received from Oman is elaborated. A copy of the notes forming part of computation is herein again enclosed as Annexure 02 to this letter for ready reference.
The Society by virtue of it being a joint venture partner in Oman in Oman India Fertilizer Company SAOC (hereinafter referred as OMIFCO) has received during the year, dividend US$30.2325 equivalent to Indian Rupees of Rs. 143,83,99,800.
The dividend was received by the Permanent Establishment (PE) namely the Branch Office of the Assessee Society. The dividend was received in Oman and was deposited in the bank account maintained by the (PE) branch office, with Bank of Baroda, London, on 21-08-2009, 04-01-2010 and 16-03-2010. Later on the dividend was remitted through banking channel into the State Bank of India, NOIDA, INDUSIND Bank, Nehru Place, and ICICI Bank, New Delhi, account of the Assessee.
The dividend is 43.51% of the equity share capital held by the Society in the joint venture OMIFCO, Oman. The Director’s Report of OMIFCO, Oman, and the Minutes of 12th Annual General Meeting of OMIFCO, Oman, held on March 10,2010 in support of the amount of dividend declared by OMIFCIO, Oman, are enclosed for ready reference as Annexure 03. The Copy of the certificate issued by M/s. OMIFCO SAOC indicating the dividend amount paid is enclosed to this letter as Annexure 04.
The said dividend income of Rs. 143,83,99,800 has been included in the profit taken as starting point of computation. The dividend income from OMIFCO, Oman, is included under the Schedule 7 – “Other Revenue” under the item “Dividend”. The said dividend is considered as part of the total income of the Assessee Society. The tax liability has been computed on such total income.
Thereafter, the Assessee Society has claimed deemed tax credit of Rs.41,44,23,149 because of the following reasons:
(a)
Since the said dividend income is subject matter of taxation in both the countries, one has to read Section 90 of the Income Tax Act, 1961 along with the provisions of DTAA between India and Oman.
(b)
The copy of the DTAA agreement between India and Oman is enclosed as Annexure 05 and particular reference is invited to Article 11, 7 and 25 of the DTAA.
(c)
Article 11 (4) of DTAA provides that the provisions of Article 11 (1) shall not apply if the beneficial owner of the dividends being a resident of a contracting state carries on business in the other Contracting States of which the company is paying the dividends is a resident, through a permanent establishment situated therein, then in such a case provisions of Article 7 of DT AA would apply. Since the Assessee Society has a permanent establishment through the branch office, Article 7 would apply.
(d)
Article 7 of DTAA deals with business profits and it provides that where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein profits attributed to that permanent establishment to the extent they are attributable directly or indirectly to that permanent establishment may be taxed In the other Contracting State.
(e)
The Assessee Society has duly filed the Return of Income under the Omani’s Income Tax Law by including the said dividend income as part of its total income, copy of the Income Tax Return filed for the year ended March 31, 2010 under the Omani’s Income Tax Law along with a copy of the annual accounts of the Branch (PE) and that of OMIFCO, Oman, are enclosed as Annexure 06.
(f)
The dividend received in Oman by the permanent establishment in Oman of the Assessee Society, therefore, can be taxed only by the Omani Tax Law. However, Royal Decree 68/2000 (copy enclosed as Annexure 07) issued by the Omani Authorities, provides that no tax is leviable on dividends, which a company earns from its ownership of shares in the capital of any other……………..(not legible) in accordance with the exigencies of public good. This tax exemption is, therefore, granted by the Omani Tax Authorities as an incentive for promoting economic development. Further reference is invited to the letter dated 11th December, 2000 of Secretary General of Taxation, Ministry of Finance, Oman, addressed to the joint venture partner, which clarifies that Article 8 (bis) under the Omani Income Tax Law is for achieving the main objective of promoting economic development with Oman by attracting investment. Copy of the letter is enclosed as Annexure 08.
(g)
Now coming to Article 25 of the DTAA it will be noticed that under Article 25(4) the tax payable in a Contracting State (i.e. Oman) shall be deemed to include the tax which would have been payable but for the tax incentive granted under the laws of Oman and which are designed to promote economic development.
(h)
The tax treaties provide for such deemed tax credit with respect to tax forgone by the developing countries so that the benefit is retained by the investor. Such credit is known as tax sparing. If the credit is given only to actual tax paid and not for the tax which would have been payable then the benefit which the developing country intended to offer to the concerned tax payer would be nullified. The country’s sacrifice of the revenue would ultimately accrue to the state of residence.
(i)
As a consequence of the above, Article 25(4) of the DTAA read with the provisions of Article 8(bis) under the Omani Tax Law and the Royal Decree 68/2000 and the letter dated December 11, 2000 of the Secretary General of Taxation, Ministry of Finance, during the year, Society has received a dividend income of Rs.143,83,99,800 on its equity investment in Oman India Fertilizer Company SAOC (OMIFCO). The breakup of the dividend received date-wise are as under:
Rs 76,20,15,375 – received on 24- 08-2009, Rs.58,14,02,250 – received on 31-12-2009 and Rs.9,49,82,175 – received on 16-03-2010
(j)
In view of the changes in the local Omani Income Tax Law with effect from Tax Year 2010, wherein the PE’s income is chargeable to tax @ 120/0 instead of 30 as per the old Omani Law applicable upto 31-12-2009. Accordingly, the deemed tax credit benefit will be available 300/0 for the amount of dividend received upto 31-12-2009 and 12 of the amount of dividend received during January to March 2010. Accordingly, the claim of Deemed Tax Credit is Rs.41,44,23,149 (Rs.403025288 plus Rs.11397861). This may kindly be allowed to the Assessee against the total tax.
Further, we wish to inform you that the Omani Tax Authorities have done the Tax assessment vide their order dated 14-12-2008 of the Permanent Establishment of KRIBHCO at Muscat. The Omani Tax Assessment Order indicates that the “…..Dividend income is exempt from tax in accordance with Article 8 (bis)(1) of the Company Tax Law. The tax exemption on dividend is granted with the objective of promoting economic development within Oman by attracting investments.” A copy of the Assessment Order of the Omani Tax Authorities as received by us for the Tax Years 2002 to 2006 is enclosed for your kind perusal. Copy of the Assessment Order for year 2007-08 is also enclosed for your kind reference. (Annexure 10) The assessment of the Society for the Assessment Year 2006-07 was completed u/s 143(3) by order dated 31-12-2008 and by a speaking order, the Assessing Officer has accepted the contention of the Society and has granted credit for the tax that is deemed to have been paid in Oman and the same position has been followed in the Assessment Year 2007-08, 2008-09, 2009-10 also and hence the Income Tax Authorities in India have accepted the above position.”
(emphasis supplied)
The aforesaid submissions are self-explanatory and reference therein has been made to the relevant Articles of DTAA, the Omani Tax Laws and Royal Decrees and the Clarifications issued by the Omani Tax Authorities as also Assessment Orders passed by them. It was also clearly pointed out in this reply that in respect of A.Y. 2006-07 credit for deemed tax was allowed after thoroughly discussing these issues in the Assessment Order and the same view was adopted during the subsequent Assessment Years and upto the A.Y. 2009-90. This shows that during the course of the Assessment Proceedings, there was full application of mind on the part of the Assessing Officer on this issue. The discussion given at paras 4.6 and 4.7 of the Assessment Order also shows application of mind by the Assessing Officer. At para 4.6 the Assessing Officer has referred to Article 8 (bis) which exempts the dividend income which is otherwise taxable by virtue of Article 10. At para 4.7 the Assessing Officer has mentioned that in respect of the deemed dividend tax payable in Oman, the Assessee has claimed relief under Section 90 of the I.T. Act, 1961 read with the relevant provisions of DTAA. He has also observed that by virtue of this claim made by the Assessee, the Assessee Society effectively is not paying any tax on dividend income either in Oman or in India. In the last para of the Assessment Order, he has observed: “Relief under Section 90 of the Income Tax Act, 1961, as claimed by Assessee is also allowed”. These facts abundantly prove that the relevant issue has been thoroughly examined by the Assessing Officer during the course of the Scrutiny Assessment Proceedings and he has allowed the credit after full application of mind. The Assessing Officer was also fully conscious of the fact that during the preceding Assessment Years such credit was already allowed by the Department and thus, it was a settled issue.
13. The Ld. PCIT in his order under Section 263 has not doubted that on this issue the Assessing Officer raised enquiries and there was full application of mind on his part. He has also not doubted that in preceding Assessment Years such credit of deemed tax has been allowed by the Department consistently after due application of mind. However, the Ld. PCIT has tried to justify the assumption of jurisdiction under Section 263 of the I.T. Act, 1961 by observing that even if there is application of mind by the Assessing Officer, the PCIT has power under Section 263 to set aside his order for the reason that the powers vested under Section 263 cannot be equated with the requirements of Section 147 of the I.T. Act, 1961. This observation by the Ld. PCIT is devoid of any merit and defies the settled legal position which emerges from a chain of Supreme Court and High Court decisions to which a reference is made infra. The Ld. PCIT has also observed in his order that as per the provisions of para 4 of Article 25 of the DTAA read with Omani Tax Laws, the exemption in respect of dividend is available only for a period of five years which is long over. Obviously, the Ld. PCIT has misinterpreted the relevant provisions as also the letters and clarifications and Royal Decrees issued by Omani Authorities. The exemption in respect of dividend income under the Omani Tax Laws continues even in the Income Tax Law by the Royal Decree No. 28 of 2009. In any case, this is a totally irrelevant point raised by the Ld. PCIT. The disputed issue pertains to merely the question as to whether deemed tax on dividend payable in Oman is eligible for credit while making the assessment under the Indian Income Tax Act. In any case, the moot point is as to whether the issue was examined by the Assessing Officer and there was full application of mind on his part and whether the view adopted by the Assessing Officer is one of the possible views which could have been taken. In he present case, it is a part of record that there was full application of mind on the part of the Assessing Officer and he has adopted a view which is consistent with the various clarificat