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ITAT upholds cap-gain exemption to Mauritius entity, for shares acquired prior to April 1, 2017

CA Adityavikram Banka

ITAT upholds cap-gain exemption to Mauritius entity, for shares acquired prior to April 1, 2017

Comstar Mauritius Ltd (ITA No. 1529/Mum/2023)

Facts:

1. Assessee filed an appeal for the assessment year 2018-19 against a revisionary order passed by the Commissioner of Income Tax, Mumbai-2, under Section 263 of the Income-tax Act, 1961.

2. The revisionary order deemed the assessment order passed by the Assistant Commissioner of Income Tax, International Taxation, as erroneous and prejudicial to the interest of the Revenue, and directed a fresh assessment.

3. Comstar Mauritius Ltd, a non-resident foreign company based in Mauritius, is in the business of investment in securities. It filed its return of income declaring nil income, as it earned capital gains from the sale of Indian securities, which it claimed as exempt under the India-Mauritius Double Taxation Avoidance Agreement (DTAA). The assessment order accepted this claim and assessed the income as nil.

4. However, the Commissioner of Income Tax found the assessment order to be erroneous and prejudicial to the Revenue’s interest, as the Assessing Officer allegedly failed to conduct necessary inquiries to ascertain the eligibility of the claimed exemption under Article 13 of the DTAA.

5. The Commissioner noted discrepancies in the company’s financial statements, such as the absence of routine expenses and apparent indications that the company’s affairs were arranged primarily to benefit from the lower tax rate.

6. In response, Comstar Mauritius Ltd provided detailed explanations and documentation supporting its claim for exemption under Article 13 of the DTAA, asserting that the shares were acquired before 1st April 2017 and therefore qualified for the grandfathering provisions. It argued that the assessment order was not erroneous, as the Assessing Officer had conducted sufficient inquiries and accepted the claim based on the information provided.

The ITAT Mumbai held as below:

1. The Assessing Officer had indeed made inquiries and accepted the claim based on the documentation provided by Comstar Mauritius Ltd. Additionally, it observed that the company had provided comprehensive explanations and evidence to support its claim for exemption under the DTAA.

2. The CBDT press release dated 29th August, 2016 had provided for grandfathering of investments prior to 1st April, 2017.

3. The amendment to the Double Taxation Avoidance Agreement limiting the benefit of profit or gains on sale of shares in the hands of the Mauritius entity as per Article 13 (3B) and 27(A) would apply with effect from 1st April, 2017.

4. Considering these factors, the revisionary order passed by the Commissioner of Income Tax, Mumbai-2, is set aside and the original assessment order be reinstated.

CA Adityavikram Banka
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