Investment in Shares of Indian Subsidiary 'Capital Account Transaction' is not Income: Delhi HC [Read Order]

A Division Bench of the Delhi High Court ruled that the investment in the shares of an Indian subsidiary 'Capital Account Transaction' is not income.

The present writ petitions have been filed seeking quashing of the impugned notices issued under Section 148A (b) of the Income Tax Act, 1961, impugned orders passed under Section 148A(d) of the Income Tax Act, and notices issued under Section 148 of the Income Tax Act, and all consequential actions thereto. The petitioners also challenged the legality and constitutional validity of Explanation 1 to Section 148 of the Income Tax Act.

The assessees are foreign companies who have made remittances/investment in shares of their Indian subsidiaries and the transactions in question are capital account transactions. Though there is a doubt expressed that the transactions in question may be a consequence of round tripping, yet no evidence or proof of the said allegations have been stated or annexed with the impugned orders and notices.

The counsel for the petitioners submitted that the transactions in question are capital account transactions which are incapable of generating any income and that the impugned orders and notices have been passed merely to verify the transactions without any tangible material in possession of the Respondent to indicate escapement of income. They further state that there is no information/ material including the name of the company whose shares were purchased, referred to or relied upon in the impugned notice, which could trigger "suspicion' of escapement of income chargeable to tax.

The Court of Acting Chief Justice Manmohan and Justice Mini Pushkarna observed that “It is settled law that investment in shares in an Indian subsidiary cannot be treated as ‘income’ as the same is in the nature of “capital account transaction” not giving rise to any income. In Nestle SA Versus Assistant Commissioner of Income Tax, this Court held that the allegation of the Revenue that the investment in the shares of Indian subsidiary amounted to ‘income’ is flawed.”

“Consequently, the impugned orders under Section 148A (d) of the Income Tax Act and the notices passed under Section 148 of the Income Tax Act and all consequential action taken thereto are set aside. It is clarified that if any material becomes subsequently available with the Revenue, it shall be open to it to take proceedings in accordance with law. The challenge to the vires to Explanation 1 to Section 148 of the Income Tax Act is left open. With the aforesaid directions, the present batch of writ petitions is disposed of” the Bench concluded.

To Read the full text of the Order CLICK HERE

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates