Domestic and Direct Tax Updates

Many taxpayers have been suffering from non-disposal of their long-pending appeals filed at the Commissioner of Income Tax (Appeals) level, which is the first level Appellate Authority prescribed under the Income tax scheme of appeals.

To address this serious concern, guidelines have been issued by the CBDT vide a recent Circular, for the disposal of pending appeals at the level of Commissioner of Income Tax (Appeals) [CSIT(A/AU)] and Additional/Joint Commissioners of Income Tax (Appeals). The Circular clarifies that such disposal of appeals, covering genuine and exceptional circumstances raised at the request of appellant or referred to by the Assessing officer (‘AO’)/Range Head may be considered by Principal Chief Commissioners of Income Tax/Chief Commissioners of Income Tax/Directors General of Income Tax, based on recommendations from the jurisdictional Principal Commissioner of Income Tax/Principal Commissioner of Income Tax (Central)/Commissioner of Income Tax (IT). This applies to cases where demand is exceeding INR 10 Million or VIP/Prime Minister's Office references for expeditious disposal or court-directed cases or appeals from senior citizens or super senior citizens, and any other instances of genuine hardship.

For appeals under the jurisdiction of Faceless Commissioner of Income Tax (Appeals), such requests will be forwarded to Principal CCIT (National Faceless Assessment Center - NFAC) for communication to the respective CSIT (A/AU). The move will assist aggrieved taxpayers in whose case appeal matters have been prolonged invariably, for reasons beyond their control.

Mr. Varun Sood was the CEO of M/s Healthfore Technologies Ltd. (shortly ‘Company’) on 1 January 2016 and thereafter appointed as its MD on 2 May 2017. He resigned from MD’s position on 1 March 2018. During Financial Year (‘FY’) 2016-17 and FY 2017-18, the said Company committed default in deposit of TDS. Though he held the office of CEO and MD, he was not in charge of any finance or tax related matters pertaining to the Company. Accordingly, Income Tax Department served with show cause treating him to be the “Principal Officer” in respect of a default by the Company to deposit TDS for FY 2016-17 and FY 2017-18 within the stipulated statutory period. Mr. Varun contended that he could not be considered as principal officer for FY 2016-17 since he was appointed as MD only in 2017 and for FY 2017-18, he was not connected with or in charge of the accounting or financing activities of the Company. However, Revenue considered him as the “Principal Officer” of the Company for the purposes of initiating prosecution proceedings under Section 276B of ITA. Hence, he preferred a writ petition before the Delhi HC, against the order holding him as Principal Officer.

High Court noted that merely because a person holds an office in a corporate entity, it would not be sufficient to place him as a principal officer until and unless person is established to be connected with the management or administration of the company. High Court observed that as per Section 2(35) of ITA, the Secretary, Treasurer, Manager, or Agent thereof would be liable to be treated as the Principal Officer, however concerned person should be “connected with the management or administration of the company”. Hence, it held that merely service notice to any person embodying an intent to treat that person as a Principal Officer would not be sufficient for the purposes of Section 2(35) of ITA. With these observations, High Court has quashed the order and set aside the matter for fresh consideration by the Revenue. 

This judgement would have far reaching impact as merely because a person is a key managerial person cannot be considered as ‘Principal Officer’ unless Revenue establishes that such person is connected with the management or administration of the company.

In recent years, many non-resident taxpayers have faced initiation of reassessment proceedings in their case for past years based on the Non-filers Monitoring System (‘NMS’), where return of income has not been filed. In the instant case, the taxpayer, a resident of Mauritius, sold investments in equity shares and Compulsorily Convertible Debentures (‘CCD’) of an Indian Company during the FY 2016-17. The gains were claimed to be tax exempt in India as per Article 13 of the India-Mauritius Double Taxation Avoidance Agreement (‘DTAA’). The proceeds were remitted to Mauritius and a Form No. 15CA was filed to this effect. However, no return of income was filed by the taxpayer in India for reporting the said transaction as the gains were claimed to be tax exempt in India as per DTAA.

The tax officer initiated reassessment proceedings under section 147 of ITA, alleging that remittance of sale proceeds as evident from Individual Transaction Statement (‘ITS’) – Annual Information Return (‘AIR’) had escaped assessment as no return of income had been filed by the taxpayer for the concerned year. The Income Tax Appellate Tribunal (‘Tribunal’) held that the tax officer needs to form only a prima facie belief that the income has escaped assessment, which was missing in the reasons recorded by the Assessing Officer. Accordingly, the Tribunal concluded that there was no escapement of income and hence, the notice for reassessment was held as void ab initio.

While the Tribunal judgement emphasizes that recording a prima facie satisfaction before reassessment is sine qua non, however, no observation was made on the return filing requirement where a treaty (DTAA) benefit is claimed and whether the same also fails to be a sufficient case for reassessment. In a similar fact pattern, the Delhi High Court has held that the reopening of reassessment proceedings based on flagging of certain remittances in NMS made to head office without deducting TDS was sufficient for initiating reassessment.

The issue of what constitutes an ‘information’ which ‘suggests’ an item of ‘income escaping assessment’ has been a matter of contention before the Courts and there are a plethora of judgements interpreting the law on the matter. Thus, any reliance should be placed thoughtfully in light of the facts at hand and after a careful evaluation of the existing jurisprudence.