THE ACIT 16(1), MUMBAI V. SHRI HOMY N.J. DADY, MUMBAI

ITA 470/MUM/2008

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 0928 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 6 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-07-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: L
• Next Hearing Date: 23-12-2009
• Assessment Year: 1999-2000
• Appeal Filed On: 21-01-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: KESHKAMATH
• Assessee Lawyers: P J PARDIWALLA
• Keywords: Residential status; Search and seizure; Double taxation relief; Permanent establishment; Reassessment proceedings
• Section: 143(3); 143(1); 143(2); 147; 148; 90

Judgement Text

1 (12 APPEALS) HOMY N J DADY IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH L MUMBAI BEFORE SHRI R S PADVEKAR, JM & R K PANDA, AM ITA NO. 470/MUM/2008 (ASST YEA R 1999-00) ITA NO. 2325/MUM/2009 (ASST YEAR 2000-01) ITA NO. 2326/MUM/2009 (ASST YEAR 2001-02) ITA NO. 2327/MUM/2009 (ASST YEAR 2002-03) ITA NO. 2328/MUM/2009 (ASST YEAR 2003-04) ITA NO. 471/MUM/2008 (ASST YEA R 2004-05) THE ASST COMMR OF INCOME TAX 16(1), MUMBAI VS HOMY N J DADY 141-E MONTE ROSA DADYSETT HILL AUGUST KARANTI MARG MUMBAI 36 (APPELLANT) (RESPONDENT) ITA NO. 950/MUM/2008 (ASST YEA R 1999-00) ITA NO. 2358/MUM/2009 (ASST YEAR 2000-01) ITA NO. 2359/MUM/2009 (ASST YEAR 2001-02) ITA NO. 2360/MUM/2009 (ASST YEAR 2002-03) ITA NO. 2361/MUM/2009 (ASST YEAR 2003-04) ITA NO. 951/MUM/2008 (ASST YEA R 2004-05) HOMY N J DADY 141-E MONTE ROSA DADYSETT HILL AUGUST KARANTI MARG MUMBAI 36 VS THE ASST COMMR OF INCOME TAX 16(1), MUMBAI (APPELLANT) (RESPONDENT) PAN AACPD9009L ASSESSEE BY: SHRI P J PARDIWALLA REVENUE BY: SHRI KESHKAMATH O R D E R R S PADVEKAR: IN THIS BUNCH OF APPEALS, THERE ARE SIX APPEALS BY THE ASSESSEE AND SIX APPEALS ARE BY THE REVENUE. AS THE ISSUES AS WELL AS FACTS ARE IDENTICAL IN ALL 2 (12 APPEALS) HOMY N J DADY THESE APPEALS; HENCE, THESE APPEALS WERE HEARD TOGE THER AND ARE BEING DISPOSED OFF BY THIS COMMON ORDER FOR THE SAKE OF C ONVENIENCE. 2 THE ASSESSEE HAS CHALLENGED THE LEGALITY AND VALI D OF REASSESSMENT PROCEEDINGS BY TAKING GROUND NO.1 IN ALL THESE APPE ALS PARTICULARLY FOR THE A.YS. 1999-00 TO 2003-04. 3 THE FACTS PERTAINING TO THE ISSUE WHICH REVEAL FR OM THE RECORDS ARE THAT THE ASSESSEE IS AN INDIVIDUAL, WHO IS SHAREHOL DER OF HSBC HOLDING PLC, A FOREIGN COMPANY INCORPORATED IN THE UK. THE ASSES SEE FILED HIS RETURN OF INCOME FOR ALL THE ASSESSMENT YEARS WHICH ARE BEFOR E US UNDOUBTEDLY SHOWING THE DIVIDEND RECEIVED FROM HSBC HOLDING PLC , UK. BUT WHILE DECLARING THE DIVIDEND INCOME OFFERED THE NET AMOUN T OF DIVIDEND WITHOUT ADDITION TAX CREDIT FOR WHICH HE WAS ELIGIBLE SUBJ ECT TO CERTAIN CONDITIONS. HE ALSO CLAIMED THE CREDIT FOR TAX DEDUCTION DEDUCT ED ON THE DIVIDEND IN THE UK AND ALSO RELIEF UNDER DTAA BETWEEN INDIA AND UK. 4 SO FAR AS THE ISSUE REGARDING VALIDITY OF PROCEED INGS U/S 147 IS CONCERNED, IT IS PERTAINING TO A.YRS. 1999-00 TO 20 03-04. SO FAR AS AY 2004- 05 IS CONCERNED, THE REGULAR ASSESSMENT IS MADE U/S 143(3) OF THE ACT. HENCE, THERE IS NO ISSUE OF REASSESSMENT PROCEEDING IN THAT ASSESSMENT I.E. AY 2004-05. 5 THE LD SENIOR COUNSEL SHRI P J PARDIWALLA ARGUES THAT THERE WAS NO MATERIAL BEFORE THE AO FOR FORMING THE BELIEF WHICH IS ONE OF THE ESSENTIAL CONDITION FOR INVOKING THE POWERS U/S 147 OF THE AC T. HE FURTHER ARGUES THAT WHEN THE AO INITIATED PROCEEDINGS U/S 147, AT THAT TIME, THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS AM BALA KILACHAND ( 210 ITR 844) WAS ALREADY IN FAVOUR OF THE ASSESSEE IN W HICH THE HONBLE HIGH 3 (12 APPEALS) HOMY N J DADY COURT HAS HELD THAT IN THE CASE OF DIVIDEND RECEIV ED FROM FOREIGN COMPANY, THE ONLY NET DIVIDEND IS TO BE TAXED IN THE HANDS O F THE ASSESSEE. IT IS FURTHER ARGUED THAT THERE IS NO CHANGE IN LAW. THE LD SENIOR COUNSEL ALSO RELIES ON THE DECISION IN THE CASE OF GERMAN REMEDI ES LTD VS DCIT & OTHERS (285 ITR 26) AND SUBMITS THAT THE JUDGMENT OF THE J URISDICTIONAL HIGH COURT IS BINDING ON ALL THE TAX AUTHORITIES AND THE AO DI SREGARDED THE SAME AND INITIATION OF THE PROCEEDINGS U/S 147 AND HENCE SAM E IS BAD IN LAW. IT IS ARGUED THAT IN THE CASE OF AMBALA KILACHAND (SUPRA) , IN CLEAR TERMS THE HONBLE HIGH COURT HAS HELD THAT TAX DEDUCTED BY TH E FOREIGN COMPANY IN UK ON THE DIVIDEND PAID OR DECLARED TO THE RESIDENT ASSESSEE OF INDIA IS NOT TO BE INCLUDED IN THE CHARGEABLE INCOME OF THE ASSE SSEE I.E. NO GROSSING UP. HE, THEREFORE, ARGUED THAT IN RESPECT OF THE AMENDM ENT TO SEC. 147, W.E.F 1.4.1989, THE LEGISLATURE HAS NOT GIVEN OPEN POWERS TO THE AO AS THE BASIC MANDATE OF SECTION IS RETAINED I.E. IN RESPECT OF F ORMATION OF BELIEF AND THE SAME SHOULD BE FORMED ON SOME COGENT MATERIAL. HE, THEREFORE, PLEADED THAT ON THIS GROUND ALONE, THE REASSESSMENT PROCEEDINGS INITIATED BY THE AO U/S 147 FOR THE AY 199-00 TO 2003-04 MAY BE QUASHED. 5.1 HE FURTHER ARGUES THAT SO FAR THE AY 1999-00 IS CONCERNED; THE ASSESSEE WAS NEVER ISSUED A NOTICE U/S 143(2) BEFOR E PASSING THE ORDER U/S 143(3) R.W.S. 147. HE ARGUED THAT THE ISSUE OF NOT ICE U/S 143(2) IS NOW WELL SETTLED PRINCIPLE BY THE DECISION OF THE JURISDICTI ONAL HIGH COURT IN THE CASE OF CWT VS HUF OF H H LATE J M SCINDIA (300 ITR 193) . HE FURTHER SUBMITS THAT THOUGH THE SAID CASE IS UNDER WEALTH TAX BUT T HE PROVISIONS AND THE PROCEEDINGS OF THE SAID ACT IN RESPECT OF ASSESSMEN T TO BE FRAMED ARE ANALOGUES WITH THE I T ACT. HE, THEREFORE, PLEADED THAT AS THE NOTICE U/S 143(2) WAS NOT ISSUED IN THE AY 1999-00 HENCE, THE ASSESSMENT PROCEEDINGS FOR AY 1999-00 ARE REQUIRED TO BE QUASHED. THE LD SENIOR COUNSEL RELIED ON THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL I N THE CASE OF KUBER TOBACCO PRODUCTS P LTD (117 ITD 273 (DEL)(SB). HE FURTHER ARGUES THAT AMENDMENT MADE TO SEC. 148 IN RESPECT OF DELAY IN S ERVICE OF NOTICE U/S 4 (12 APPEALS) HOMY N J DADY 143(2) IS NOT CONCERNED WITH THE AY 1999-00 AS NO N OTICE WAS SERVED ON THE ASSESSEE. 5.2 PER CONTRA, THE LD DR IN REPLY SUBMITS THAT CBD T HAD ISSUED A CIRCULAR NO. 369 DATED 17.9.1983 IN WHICH THE BOARD HAS GIVEN THE DIRECTIONS THAT DIVIDEND RECEIVED FROM FOREIGN COMP ANY ARE TO BE TAXED ON THE GROSS BASIS. IT IS FURTHER ARGUES THAT SO FAR A S THE CBDT CIRCULAR IS CONCERNED, IT WAS BEFORE THE AO WHEN HE HAS DECIDED TO INITIATE ACTION U/S 147. HE ARGUES THAT THE MATERIAL AVAILABLE AT THE TIME OF INITIATION OF PROCEEDINGS U/S 147 FOR FORMATION OF BELIEF NEED NO T BE CONCLUSIVE. THE LD DR RELIED ON THE FOLLOWING PRECEDENTS : I) RAYMOND WOOLLEN MILLS LTD VS ITO & OTHERS(236 ITR 34(SC) II) ACIT VS RAJESH JHAVERI STOCK BROKERS P LTD (29 1 ITR 500) II) MAHANAGAR TELEPHONE NIGAM LTD VS CHAIRMAN, CBDT & ORS. (246 ITR 173) (DEL) 6 WE HAVE GIVEN OUR CAREFUL CONSIDERATION TO THE RI VAL SUBMISSIONS. FIRST OF ALL, WE WILL CONSIDER THE OBJECTION RAISED BY THE ASSESSEE THAT THERE WAS NO MATERIAL OR INFORMATION BEFORE THE AO FOR IN ITIATING THE PROCEEDINGS U/S 147 OF THE ACT. IN THIS CASE, THERE IS NO DISP UTE ON THE FACT THAT SO FAR AS THE ASSESSMENT YEARS 1999-00 TO 2003-04 ARE CONC ERNED, THE RETURNS FILED BY THE ASSESSEE WERE PROCESSED AND ACCEPTED U /S 143(1) AND THERE WAS NO ASSESSMENT U/S 143(3) OF THE ACT. HENCE, WE NEE D NOT EXAMINE THE TIME LIMIT PUT UNDER THE PROVISO TO SEC. 147. AS PER T HE REASONS RECORDED BY THE AO ON THE BASIS OF THE CBDT CIRCULAR NO.369 DATED 1 7.9.1983, THE AO INITIATED THE PROCEEDINGS UNDER SEC. 147 OF THE ACT AGAINST THE ASSESSEE FOR THE ASSESSMENT YEARS 1999-00 TO 2003-04. THE CBDT CIRCULAR NO.369 IS ON A SPECIFIC ISSUE OF TAXATION OF THE DIVIDEND RECEIV ED FROM THE UK RESIDENT COMPANIES. IN THE SAID CIRCULAR, THE BOARD HAD CON SIDERED THE EARLIER INSTRUCTIONS ISSUED ON 7.3.1968 AND ON 29.1.1976. T HE SAID CIRCULARS PIN POINT WHETHER THE GROSS AMOUNT OF THE DIVIDEND PAID IN UK COMPANIES AFTER 5 (12 APPEALS) HOMY N J DADY 5.4.1965 SHOULD BE CONSIDERED IN THE HANDS OF INDIA N SHARE HOLDERS OR THE NET AMOUNT. THE CBDT HAD EXAMINED THIS ISSUE IN LI GHT OF THE PRINCIPLES LAID DOWN BY THE SUPREME COURT IN THE CASE OF CIT V S CLIVE INSURANCE CO LTD ( 113 ITR 636(SC) AND HAS CONCLUDED THAT EVEN IF T HE SAID DECISION RELATES TO THE PERIOD PRIOR TO 1965, BUT EVEN THE SAID DECI SION IS EQUALLY APPLICABLE WITH GREAT FORCE IN THE POST 1965 PERIOD AND THE DI VIDEND IS TO BE TAXED ON THE GROSS BASIS IN THE HANDS OF THE INDIAN SHARE HO LDERS. THE BOARD HAS ALSO CONSIDERED THE DECISION OF THE HONBLE KERALA HIGH COURT IN THE CASE OF CIT VS Y N S HOBBS (1979) (116 ITR 20). 7 ADMITTEDLY, THE DECISION OF THE HONBLE HIGH COUR T OF BOMBAY, IN THE CASE OF AMBALA KILACHAND (SUPRA) WAS NOT AVAILABLE AT THAT TIME WHEN THE CBDT ISSUED ABOVE REFERRED AS THE SAID JUDGMENT WAS DELIVERED ON 12.4.1994. EVEN IN THE CASE OF AMBALA KILACHAND (S UPRA), IT IS SEEN THAT THOUGH THE HONBLE HIGH COURT HAS REFERRED TO THE D ECISION OF THE SUPREME COURT IN THE CASE OF CLIVE INSURANCE CO LTD (SUPRA) BUT OBSERVED THAT THEY HAVE NOT EXAMINED THE SAID DECISION AT LENGTH AS TH E ISSUE BEFORE THE SUPREME COURT IN THE CASE OF CLIVE INSURANCE CO LTD (SUPRA) WAS WHETHER THE ASSESSEE IS ENTITLED TO DOUBLE TAXABLE RELIEF U /S 91 OR NOT AS THERE WAS NO TREATY BETWEEN INDIA U.K. FOR THE ASSESSMENT YEA RS BEFORE THE HONBLE HIGH COURT. 8 ON PERUSAL OF THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF AMBALA KILACHAND (SUPRA), IT APPEARS THAT T HE CIRCULAR NO.369 DT 17.9.1983 WAS NOT BROUGHT TO THE NOTICE OF THE HON BLE HIGH COUT AT THE TIME OF HEARING. THERE IS NO DISPUTE THAT IT IS WEL L SETTLED LEGAL PRINCILES THAT THE CIRCULARS ISSUED BY THE CBDT ARE BINDING ON AL L THE TAX AUTHORITIES AND SAID PRINCIPLES ARE REITERATED BY THE SUPREME COURT EVEN IN THE CASES OF NAVNIT LAL C JAVERI VS CIT (56 ITR 198(SC) AND EL LERMAN LINES LTD VS CIT ( 82 ITR 913) . 6 (12 APPEALS) HOMY N J DADY 9 THE ARGUMENTS OF THE LD COUNSEL OF THE ASSESSEE I S THAT THE DECISION IN THE CASE OF AMBALA KILACHAND (SUPRA) WAS AVAILABLE TO THE AO ON THIS ISSUE, IN WHICH THE HONBLE BOMBAY HIGH COURT HAD HELD THA T THE DIVIDEND DECLARED BY THE UK COMPANIES AND RECEIVED BY THE IN DIAN SHAREHOLDERS IS TO BE TAXED ON THE NET BASIS AND HENCE, THE AO WAS NOT JUSTIFIED IN DISCARDING THE DECISION OF THE JURISDICTIONAL HIGH COURT. 10 IN THE CASE OF AMBALA KILACHAND (SUPRA), THE AS SESSMENT YEARS INVOLVED WERE 1971-71 TO 19974-75. MOREOVER, THE HO NBLE BOMBAY HIGH COURT HAD EXAMINE THE FINANCE ACT, 1972 OF THE U.K. AS WELL AS SECTION 91 OF THE INDIAN INCOME TAX ACT AND HAS HELD THAT AS THE NON-RESIDENT OF THE UK WAS NOT ENTITLED FOR THE TAX CREDIT; HENCE, WHAT EVER THE INDIAN SHAREHOLDER GETS IS THE NET AMOUNT AND ACCORDINGLY, THE SAME IS TO BE TAXED. IN OUR OPINION, THOUGH THE JURISDICTIONAL HIGH COUR T HAS IN VERY DETAILED MANNER EXAMINED THE ISSUE PERTAINING TO GROSS OR NE T OF THE DIVIDEND TO BE TAX, RECEIVED FROM THE UK COMPANIES BY INDIAN SHARE HOLDERS BUT THE ASSESSMENT YEARS AS WELL AS LAW APPLICABLE WERE TOT ALLY DIFFERENT. 11 IN OUR OPINION, THE AO WAS JUSTIFIED IN INITIATI NG THE PROCEEDINGS U/S 147 ON THE BASIS OF THE CBDT CIRCULAR NO.369 DATED 17.9.1983. WE, THEREFORE, REJECT THE FIRST OBJECTION OF THE ASSESS EE FOR INITIATING PROCEEDINGS U/S 147 OF THE ACT AND HOLD THAT THERE WAS SUFFICIE NT MATERIAL BEFORE THE AO FOR FORMATION OF BELIEF AS CONTEMPLATED SEC.147 OF THE ACT. 12 ANOTHER OBJECTION OF THE ASSESSEE, WHICH IS SPEC IFICALLY RELATED TO THE AY 1999-00 THAT THE AO HAS COMPLETED THE ASSESSMENT U/S 143(3) WITHOUT ISSUING NOTICE U/S 143(2); IN OUR OPINION THERE IS FORCE ON THIS OBJECTION. 7 (12 APPEALS) HOMY N J DADY 12.1 IN THE CASE OF CWT VS HUF OF H H LATE J M SCIN DIA (SUPRA), THE HONBLE HIGH COURT OF BOMBAY HAS EXAMINED THE PROVI SIONS OF SEC. 16(2) OF THE W T ACT AND HAS HELD THAT ISSUANCE OF NOTICE U/ S 16 WITHIN THE TIME LIMIT IS MANDATORY. SO FAR AS SEC. 16(2) OF THE W T ACT IS ANALOGUES TO SEC. 142(2) OF THE I T ACT, THE PRINCIPLES LAID DO WN BY THE HONBLE HIGH COURT IN THE CASE OF CWT VS HUF OF H H LATE J M SCI NDIA (SUPRA) ARE SQUARELY APPLICABLE TO SEC. 143(2) OF THE ACT. MOR EOVER, THE HONBLE HIGH COURT HAS ALSO HELD THAT EVEN IN THE CASE OF REOPEN ING OF THE ASSESSMENT U/S 147, THE AO IS BOUND TO COMPLY WITH THE REQUIREMENT S OF SEC. 143(2) OF THE ACT. THOUGH, THE LD DR TRIED TO ARGUE THAT THE NOT ICE U/S 143(2) IS PROCEDURAL ONE BUT WE REJECT THE SAID ARGUMENTS FOR THE REASONS THAT THE JURISDICTIONAL HIGH COURT HAS EXAMINED THE NATURE O F THE PROVISIONS OF SEC. 143(2). ACCORDINGLY, WE HOLD THAT THE ASSESSMENT F OR THE AYS 1999-00 IS INVALID AND BAD IN LAW; ACCORDINGLY, WE CANCEL THE SAME AND ALLOW THE GROUNDS TAKEN BY THE ASSESSEE ON THIS ISSUE FOR SAI D ASSESSMENT YEAR. AS GROUNDS OF THE ASSESSEE ARE ALLOWED ON THE ISSUE OF VALIDITY OF THE PROCEEDINGS UNDER SEC. 147, IN CONSEQUENCE GROUNDS TAKEN BY THE REVENUE HAVE TO FAIL AND ACCORDINGLY SAME ARE DISMISSED. 13 SO FAR AS THE AY 2001-02 TO 2003-04 ARE CONCERNE D, WE REJECT THE ALL RELEVANT GROUNDS CHALLENGING THE VALID OF THE PROCE EDINGS U/S 147. 14 NOW, WE WILL EXAMINE THE ISSUE ON MERIT. ON MERI T, THE ASSESSEE HAS TAKEN THE FOLLOWING GROUNDS, WHICH ARE COMMON IN AL L THESE APPEALS: THE CIT(A) HAS ERRED IN CONFIRMING THE AOS ACTIO N OF NOT GRANTING RELIEF FROM DOUBLE TAX IN RESPECT OF THE NET DIVIDE ND INCOME RECEIVED BY THE APPELLANT ON SHARES HELD IN A FOREIGN COMPANY. THE APPELLANT SUBMITS THAT CONSIDERING THE FACTS AN D CIRCUMSTANCES OF HIS CASE AND THE LAW PREVAILING ON THE SUBJECT, HE IS ENTITLED TO A RELIEF FROM DOUBLE TAXATION IN RESPECT OF THE SAID DIVIDEN D INCOME IN TERMS OF 8 (12 APPEALS) HOMY N J DADY THE PROVISIONS OF ARTICLE 24 OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT BETWEEN INDIA AND THE UNITED KINGDON AND THE CIT(A) OUGHT TO HAVE HELD AS SUCH. THE APPELLANT SUBMITS THAT THE AO BE DIRECTED TO GR ANT RELIEF FROM DOUBLE TAXATION IN RESPECT OF THE DIVIDEND INCOME A S CLAIMED BY HIM AND TO RE-COMPUTE HIS TAX LIABILITY ACCORDINGLY. 15 THE REVENUE HAS ALSO TAKEN THE FOLLOWING GROUND ON MERIT: WHETHER ON THE FACTS AND IN THE CIRCUMSTANCE OF TH E CASE THE CIT(A) IS CORRECT IN DIRECTING THE AO TO TAX ONLY THE NET AMO UNT OF DIVIDEND RECEIVED BY ASSESSEE FROM A UK BASED COMPANY DISREG ARDING THE BOARDS CIRCULAR NO.369 DATED 17.9.1983 WHICH IS A PPLICABLE FOR THE AY IN QUESTION IN ASSESSEES CASE. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE CIT(A) IS CORRECT IN CONCLUDING THAT, THE TAX DEDU CTED BY THE COMPANY IN THE UK AND PAID INTO THE TREASURY IN THE UK AFTER D EDUCTING THE SAME DIVIDEND PAID TO THE ASSESSEE IN THE UK IS NOT INC LUDABLE IN THE CHARGEABLE INCOME OF THE ASSESSEE 16 THE VERY CONTROVERSY IS ROLLING-ROUND THE ISSUE WHETHER; (I) THE DIVIDEND RECEIVED BY THE ASSESSEE FROM HSBC HOLDING PLC, U K COMPANY IS TO BE TAXED ON THE GROSS BASIS OR NET BASIS WITHOUT ADDITION OF TAX CREDIT ON THE DIVIDEND IN UK (II) WHETHER THE ASSESSEE IS ENT ITLED FOR TAX CREDIT IN INDIA AS PER DTAA BETWEEN INDIA AND UK DATED 11.2.1994; M ORE PARTICULARLY, IN TERMS OF ARTICLE 24 OF THE DTAA. THE ASSESSEE HAS OFFERED THE DIVIDEND NET OF THE TAX WHICH WAS IN THE FORM OF TAX CREDIT (AND NOT TAX DEDUCTED BY THE U.K. COMPANY) AND HAS FURTHER CLAIMED THE TAX CR EDIT. 9 (12 APPEALS) HOMY N J DADY 17 IN THE CASE OF AMBALA KILACHAND (SUPRA), THE HON BLE BOMBAY HIGH COURT HAS CONSIDERED THE MODALITY OF TAXATION OF TH E DIVIDEND PAID TO THE RESIDENT OF THE UK AND NON-RESIDENT OF THE UK. 18 SO FAR AS THE ASSESSEE IS CONCERNED, THERE IS NO DISPUTE ON THE ISSUE THAT THE DIVIDEND RECEIVED BY THE ASSESSEE FROM HSB C HOLDING PLC, UK IS TAXABLE IN INDIA EVEN UNDER THE NORMAL PROVISIONS O F THE ACT, HE BEING THE RESIDENT OF INDIA. 18.1 THE MODALITY OF THE TAXATION UNDER THE UK LAW HAS BEEN CHANGED FROM TIME TO TIME PRIOR TO AND AFTER 1965. THE UNITED KI NGDOM (U.K.) FINANCE ACT 1965 PROVIDED THAT THE CORPORATION TAX SHALL NOT BE CHARGED ON DIVIDEND AND OTHER DISTRIBUTION OF A COMPANY. IN RESPECT OF THE RESIDENT COMPANY IN THE UK ANY SUCH DIVIDEND OR DISTRIBUTION WOULD NOT BE T AKEN INTO ACCOUNT IN COMPUTING THE CORPORATION TAX. BUT, AFTER 1965-66, THE SAME WOULD BE CHARGEABLE IN RESPECT OF THE DIVIDEND AND OTHER DIS TRIBUTION IN RESPECT OF THE COMPANY RESIDENT IN UK AND FOR THE PURPOSES OF INCO ME TAX ACT, SUCH DISTRIBUTION SHOULD BE REGARDED AS THE INCOME IN TH E UK IN THE HANDS OF THE RECIPIENT. THE PROVISIONS IN RESPECT OF THE TAX CR EDIT WAS ALSO MADE ONLY TO A COMPANY OR PERSON RESIDENT IN UK BUT IN THE CASE OF A PERSON OR A COMPANY, WHO WERE NOT RESIDENT IN UK, IF THE INCOME INCLUDES DISTRIBUTION IN RESPECT OF WHICH, THE SAID PERSON WAS NOT ENTITLED TO TAX C REDIT THEN NO ASSESSMENT WAS MADE ON SUCH PERSON UNDER I T ACT WITH THAT AMO UNT I.E. ON THE DISTRIBUTION AND DIVIDEND. BUT AT THE SAME TIME, T HE NON-RESIDENT IN UK WAS NOT GIVEN ANY TAX CREDIT. 18.2 THE TAX LAW IN THE UK HAS UNDERGONE A FURTHER CHANGE BY FINANCE ACT, 1972. IT WAS PROVIDED THAT IF THE UK RESIDENT COMP ANY MAKE QUALIFY DISTRIBUTION THEN, THE SAID COMPANY WAS LIABLE TO PAY CORPORATION TAX, WHICH WAS ALSO KNOWN AS ADVANCE CORPORATION TAX. THE CORPORATION TAX 10 (12 APPEALS) HOMY N J DADY PAID BY THE UK COMPANY IN RESPECT OF ANY DISTRIBUT ION WAS PROVIDED TO BE THE SAME AGAIN THEN THE LIABILITY TO PAY CORPORATI ON TAX ON ANY INCOME CHARGEABLE TO CORPORATION TAX FOR THAT ACCOUNTING P ERIOD. THE PERSON RECEIVING THE DISTRIBUTION OR DIVIDEND WAS ENTITLED FOR TAX CREDIT BUT THE PERSON WHO IS NON-RESIDENT IN THE UK WAS NOT ENTITL ED FOR THE TAX CREDIT. 19 IN SUM AND SUBSTANCE, THE LAW IN UK PROVIDED THE TAX CREDIT FOR THE RESIDENT OF THE UK AND NO TAX CREDIT FOR NON-RESIDE NT OF UK. AFTER EXAMINING THE LAW APPLICABLE IN UK FINANCE ACT, 1972 IN THE C ASE OF AMBALA KILACHAND (SUPRA), IT WAS HELD THAT AS THE SHARE HOLDER WHO I S NON- RESIDENT UK CANNOT CLAIM ANY CREDIT TOWARDS THE TAX PAID BY THE COMPANY. THE ONLY AMOUNT RECEIVED TOWARDS DIVIDEND AFTER REDUCING THE CORPORATION TAX IS TO BE CONSIDERED AS INCOME ACCRUED TO THE RESIDENT IN IND IA. THE SAID MODALITY OF TAXATION WAS APPLICABLE PRIOR TO 6.4.1999, WHICH IS KNOWN AS IMPUTATION SYSTEM WHEN THE COMPANY PAID THE DIVIDEND, 20% GRO SS DIVIDEND WAS DEDUCTED FROM THE PAYMENT AND THE SAME WAS PAID TO INLAND REVENUE (NOW HMRC) AND THE NET DIVIDEND WAS PAID TO THE SHAREHOL DERS. THE DISTRIBUTION WAS THEN SUBJECT TO INCOME TAX ON GROSS DIVIDEND SO FAR AS THE UK RESIDENT IS CONCERNED AND COULD CLAIM THE DEDUCTION FOR THE TAX WITHHELD BY THE COMPANY. 19.1 THE IMPUTATION SYSTEM CHANGED FROM 6.04.1999 A ND THE COMPANY ON THEIR DISTRIBUTION WAS NO LONGER REQUIRED TO PAY TA X BUT THE INDIVIDUAL SHAREHOLDER IS DEEMED TO SUFFER A TAX OF 1/9 TH OF THE DIVIDEND RECEIVED 20 DUE TO THE TREATY BETWEEN INDIA AND UK, WHICH CA ME TO OPERATION BY NOTIFICATION DATED 11.2.1994, THE MODALITY OF TAXAT ION OF THE DIVIDEND INCOME HAS AGAIN UNDER GONE CHANGE. ADMITTEDLY, IN THE CA SE OF AMBALA KILACHAND (SUPRA), THE LAW APPLICABLE TO THE ASSESSMENT YEAR S 1970-71 TO 1973-74 WAS CONSIDERED AND THE DTAA BETWEEN INDIA AND UK WA S NOT THE SUBJECT 11 (12 APPEALS) HOMY N J DADY MATTER OF THE INTERPRETATION BEFORE THE HONBLE HIG H COURT. SAME WAY, THE CIRCULAR NO 369 DATED 1/7/1983 ISSUED BY THE BOARD, WHICH IS PRIOR TO DTAA (TREATY) BETWEEN INDIA AND UNITED KINGDOM. 21 SO FAR AS THE PRESENT ASSESSMENT YEARS ARE CONCE RNED, ADMITTEDLY, THE DTAA IS APPLICABLE AND WE HAVE TO EXAMINE THE ISSUE AS PER THE ARTICLES OF THE TREATY. THE ARTICLE 11 PROVIDES FOR THE MODALIT Y OF THE TAXATION OF THE DIVIDEND AND THE ARTICLE 11 READS AS UNDER: 1(A) A DIVIDEND PAID BY A COMPANY WHICH IS A RESIDE NT OF THE UNITED KINGDOM TO A RESIDENT OF INDIA MAY BE TAXED IN INDIA. (B) WHERE UNDER PARAGRAPH 2 OF THIS ARTICLE, A RESI DENT OF INDIA IS ENTITLED TO TAX CREDIT IN RESPECT OF TH AT DIVIDEND, TAX MAY ALSO BE CHARGED IN THE UK AND ACCORDING TO THE LAWS OF THE UK ON THE AGGREGATE OF THE AMOUNT OR VALUE OF THE DIVIDEND AND THE AMOUNT OF T HE TAX CREDIT, AT A RATE NOT EXCEEDING 15%. C) EXCEPT AS PROVIDED IN SUB-PARAGRAPH (B) OF THIS PARAGRAPH, A DIVIDEND DERIVED FROM A COMPANY WHICH IS A RESIDENT OF THE UK BY A RESIDENT OF INDIA, WHO IS THE BENEFICIAL OWNER OF THE DIVIDEND, SHALL BE EXEMPT F ROM ANY TAX IN THE UK WHICH IS CHARGEABLE ON DIVIDENDS. 2. AN INDIVIDUAL WHO IS A RESIDENT OF INDIA AND WHO RECEIVES A DIVIDEND FROM A COMPANY WHICH IS A RESID ENT OF THE UK SHALL PROVIDE HE IS THE BENEFICIAL OWNER OF THE DIVIDEND, BE ENTITLED TO THE TAX CREDIT IN RESPECT OF THAT DIVIDEND WHICH AN INDIVIDUAL RESIDENT IN THE UK WOU LD HAVE BEEN ENTITLED TO HAD HE RECEIVED THAT DIVIDE ND AND TO THE PAYMENT OF ANY EXCESS OF THAT TAX CREDIT OVE R HIS LIABILITY TO UK TAX. 3 A DIVIDEND PAID BY A COMPANY WHICH IS A RESIDENT OF INDIA TO A RESIDENT OF THE UK MAY BE TAXED IN THE U K. THE 12 (12 APPEALS) HOMY N J DADY DIVIDEND MAY ALSO BE TAXED IN INDIA BUT THE INDIAN TAX SO CHARGED SHALL NOT EXCEED 15 PERCENT OF THE GROSS AM OUNT OF THE DIVIDEND. 4. THE PRECEDING PARAGRAPHS OF THIS ARTICLE SHALL N OT AFFECT THE TAXATION OF THE COMPANY IN RESPECT OF THE PROFI TS OUT OF WHICH THE DIVIDEND IS PAID. 5. THE PROVISIONS OF PARAGRAPHS 1 AND 2 OR AS THE C ASE MAY BE, PARAGRAPH3 OF THIS ARTICLE SHALL NOT APPLY IF THE BENEFICIAL OWNER OF THE DIVIDEND, BEING A RESIDENT OF A CONTRACTING STATE, HAS, IN THE OTHER CONTRACTING ST ATE OF WHICH THE COMPANY PAYING THE DIVIDEND IS A RESIDENT A PERMANENT ESTABLISHMENT OR FIXED BASE WITH WHICH TH E HOLDING BY VIRTUE OF WHICH THE DIVIDEND IS PAID IS EFFECTIVELY CONNECTED. IN SUCH A CASE, THE PROVISIO NS OF ARTICLE 7 (BUSINESS PROFITS) OR ARTICLE 15 (INDEPEN DENT PERSONAL SERVICES) OF THIS CONVENTION, AS THE CASE MAYBE, SHALL APPLY. 6. WHERE A COMPANY WHICH IS A RESIDENT OF A CONTACT ING STATE DERIVES PROFITS OR INCOME FROM THE OTHER CONT RACTING STAGE, THAT OTHER STATE MAY NOT IMPOSE ANY TAX ON T HE DIVIDENDS PAID BY THE COMPANY, EXCEPT IN SO FAR AS SUCH DIVIDENDS ARE PAID TO A RESIDENT OF THAT OTHER STAT E OR IN SO FAR AS THE HOLDING IN RESPECT OF WHICH THE DIVIDEND S ARE PAID IS EFFECTIVELY CONNECTED WITH A PERMANENT ESTABLISHMENT OR A FIXED BASE SITUATED IN THAT OTHE R STAGE, NOR SUBJECT THE COMPANYS UNDISTRIBUTED PROFITS TO A TAX ON THE COMPANYS UNDISTRIBUTED PROFITS, EVEN IF THE DI VIDENDS PAID OR THE UNDISTRIBUTED PROFITS CONSIST WHOLLY OR PARTLY OF PROFITS OR INCOME ARISING IN THAT OTHER STATE. 7 AS USED IN THIS ARTICLE THE TERM DIVIDEND MEANS INCOME FROM SHARES OR OTHER RIGHTS, NOT BEING DEBT CLAIMS, PARTICIPATING IN PROFITS, AS WELL AS INCOME FROM OT HER CORPORATE RIGHTS TREATED IN THE SAME MANNER AS INCO ME FROM SHARES BY THE TAXATION LAW OF THE STATE OF WHI CH THE COMPANY MAKING THE DISTRIBUTION IS A RESIDENT AND A NY 13 (12 APPEALS) HOMY N J DADY OTHER ITEM TREATED AS A DIVIDEND OR DISTRIBUTION UN DER THAT LAW. 22 WE DO NOT DESIRE TO ENLARGE THE AREA FOR EXAMIN ING ENTIRE ARTICLE 11 AS THE ONLY ISSUE IN CONTROVERSY IS WHETHER THE ASSESS EE IS ENTITLED FOR THE TAX CREDIT AND WHETHER THE DIVIDEND INCOME RECEIVED BY THE ASSESSEE IS TO BE ASSESSED ON THE GROSS OR ON THE NET BASIS; AFTER EN HANCING AMOUNT OF DIVIDEND RECEIVED OR NOT. 23 AS PER PARA 2 TO ARTICLE 11, DISPARITY BETWEEN R ESIDENT OF THE UK AND NON RESIDENT OF THE UK IS IN RESPECT OF TREATMENT O F TAX CREDIT HAS BEEN REMOVED AND A NON-RESIDENT INDIVIDUAL OF THE UK IS BROUGHT AT PAR WITH THE RESIDENT OF THE UK FOR GETTING THE BENEFIT OF THE T AX CREDIT. 24. SO FAR AS THE ARTICLE 11(2) IS CONCERNED, AN I NDIVIDUAL WHO IS A RESIDENT OF INDIA, IS ENTITLED TO TAX CREDIT ON TH E SAME FOOTING, WHICH AN INDIVIDUAL RESIDENT IN THE UK IS ENTITLED TO IF HE RECEIVES THE DIVIDEND. PRIOR TO 6.4.99, THERE WAS IMPUTATION SYSTEM OF TAX FOR INDIVIDUAL RECIPIENT OF DIVIDEND, DECLARED OR PAID BY UK COMPANY. WHEN A COMPANY PAID A DIVIDEND, 20% GROSS DIVIDEND WAS DEDUCTED FROM THE PAYMENTS. THE TAX DEDUCTED WAS PAID TO THE INLAND REVENUE AND THE NET DIVIDEND WAS PAID TO THE SHARE HOLDER. THE SHARE HOLDER WAS SUBJECTED TO THE INCOME TAX ON THE GROSS DIVIDEND AND HE COULD CLAIM THE DEDUCTION FOR THE TAX WITHHELD BY THE COMPANY. 24.1 THERE WAS A CHANGE IN THE SYSTEM FROM 6.4.99 A ND FROM THE SAID DATE, AN INDIVIDUAL WHO IS BENEFICIAL OWNER OF THE SHARES , IS DEEMED TO SUFFER TAX DEDUCTION OF 1/9 TH OF THE DIVIDEND PAID AND THE SYSTEM OF DEDUCTING T HE TAX WHILE PAYING THE DIVIDEND WAS DONE-AWAY WITH. THE DIVIDEND RECEIVED IS 14 (12 APPEALS) HOMY N J DADY THEN DEEMED TO INCREASE BY 1/9 TH AND THE INDIVIDUAL IS SUBJECTED TO INCOME TAX ON THE GROSS DIVIDEND . A HIGHER RATE TAX PAYER IS AN ADDITIONAL TAX LIABILITY BUT A SHAREHOLDER WHO IS NOT A HIGHER RAT E TAXPAYER HAS NO FURTHER TAX TO PAY. IF TAX CREDIT EXCEEDS THE U.K. INCOME T AX LIABILITY, NO REPAYMENT IS MADE TO THE TAX PAYER. IT MEANS ASSESSEE CAN NOT CLAIM ANY REFUND OUT OF TAX CREDIT WHICH IS ONLY ADJUSTED AGAINST HIS TAX L IABILITY. HENCE, AS PER THE LAW APPLICABLE FOR THE ASSESSMENT YEARS FROM 2000- 01 TO 2004-05, IF THE ASSESSEE IS DESIRING TO GET THE BENEFIT OF THE TAX CREDIT AS AVAILABLE AS PER U.K. LAW THEN HE WILL BE TREATED AT PAR WITH THE RESIDENT OF THE UK AND THE AMOUNT RECEIVED BY THE ASSESSEE IS THEN DEEMED TO I NCREASE BY 1/9 TH OF DIVIDEND RECEIVED FROM THE U.K. COMPANY FOR THE PUR POSE OF TAXATION UNDER INDIAN INCOME TAX ACT AND TAX CREDIT CAN ONLY BE AD JUSTED AGAINST HIS TAX LIABILITY IN INDIA BUT HE CAN NOT CLAIM REFUND, IF ANY, IN CASE HIS TAX CREDIT IS MORE THAN HIS TAX LIABILITY. 25. THE ASSESSEE HAS FILED A COPY OF ONE TAX CREDIT CERTIFICATE ISSUED BY HSBC, U.K.. IN THE TAX CREDIT COLUMN, THE AMOUNT S HOWN IS 1/9 TH OF THE AMOUNT OF DIVIDEND PAID TO THE ASSESSEE. IF THE ASS ESSEE DESIRES TO AVAIL BENEFIT OF THE TAX CREDIT, AS AVAIL BY THE INDIVIDU AL RESIDENT OF U.K., THEN 1/9 TH OF THE DIVIDEND SHOULD BE ADDED IN THE AMOUNT OF T HE DIVIDEND RECEIVED BY THE ASSESSEE AND THEN GROSS AMOUNT IS T O BE TREATED AS THE DIVIDEND RECEIVED BY THE ASSESSEE. IF THE RESIDENT OF THE CONTRACTING STATE IS GIVEN SOME BENEFIT UNDER THE TREATY BUT WITH CONDIT IONS THEN THOSE CONDITIONS ARE ALSO BINDING FOR AVAILING THE BENEFI TS. IN OUR OPINION, THE DIVIDEND RECEIVED BY THE ASSESSEE IS TO BE INCREASE D BY 1/9 TH OF THE SAME AND ON THE INCREASED AMOUNT, WHICH IS A GROSS DIVID END, THE SAME IS TO BE CONSIDERED AS DIVIDEND RECEIVED BY THE ASSESSEE FOR THE PURPOSE OF INDIAN INCOME TAX ACT. AT THE SAME TIME TAX CREDIT AVAILAB LE TO THE ASSESSEE IS ONLY TO THE EXTENT OF REDUCING HIS TAX LIABILITY BUT HE CAN NOT CLAIM ANY REFUND OUT OF THE SAME, THOUGH TAX CREDIT AVAILABLE IS MORE TH AN HIS TAX LIABILITY UNDER THE INDIAN INCOME TAX ACT. 15 (12 APPEALS) HOMY N J DADY 25.1 THE LD COUNSEL FOR THE ASSESSEE ARGUES THAT AS PER ARTICLE 24 OF THE TREATY, IF THE INCOME HAS ALREADY SUFFERED THE TAX IN THE UK, THEN THE SAID INCOME SHOULD NOT BE AGAIN MADE TO SUFFER TAX IN IN DIA. 25.2 FROM 6.4.99, ADMITTEDLY, THE TAX IS NOT DEDUCT ED AT THE TIME OF PAYMENT OF THE DIVIDEND. THERE IS A CORPORATION TAX , WHICH THE COMPANY IS LIABLE TO PAY. BUT THE CORPORATION TAX PAID BY THE COMPANY HAS NO IMPLICATION ON THE AMOUNT RECEIVED BY THE ASSESSEE. IN OUR OPINION, THE PURPOSE OF ARTICLE 24 IS TOTALLY DIFFERENT IN THE S ENSE THAT THE ARTICLE 24 COMES TO AID WHERE THE SAME PROFIT OR INCOME IS TAX ED IN SOURCING COUNTRY AS WELL AS IN ANOTHER CONTRACTING STATE. 26. ANOTHER ARGUMENT OF THE LD COUNSEL IS THAT AS P ER ARTICLE 23 OF THE TREATY, THE PRO-RATA CREDIT IS AVAILABLE TO THE ASS ESSEE AND HENCE, IN THE CASE OF THE ASSESSEE ONLY NET DIVIDEND SHOULD BE TAKEN I NTO CONSIDERATION AFTER DEDUCTING 15% TAX AND ON PRO-RATA BASIS, THE BENEF IT MAY BE GIVEN TO THE TAX CREDIT. WE ARE AFRAID THAT SAID SUBMISSION CAN NOT BE ACCEPTED FOR THE REASONS THAT NO TAX IS DEDUCTED BY THE U.K COMPANY AS PER TAX LAW OF THE U.K. WHILE PAYING DIVIDEND TO THE ASSESSEE AS BENEF ICIAL SHAREHOLDER BUT HE IS ENTITLED FOR TAX CREDIT ON THE BASIS THAT HE HAS DEEMED TO HAVE SUFFERED TAX AT 1/9 TH OF THE DIVIDEND PAID. 27. SO FAR AS SEC. 91 IS CONCERNED, THE SAID SECTI ON HAS NO APPLICATION TO THE ASSESSEES CASE AS ADMITTEDLY, T HERE IS AN EXISTING TREATY BETWEEN INDIA AND UK AND THE SAID SECTION APPLIES W HERE THERE IS NO TREATY OR AGREEMENT UNDER SEC 90 OF THE INCOME TAX ACT. WE , THEREFORE, DIRECT THE AO TO ASSESS THE DIVIDEND AFTER INCREASING BY 1/9 TH TAX CREDIT AS DISCUSSED HEREIN ABOVE ON DEEMED GROSS BASIS IN THE HANDS OF THE ASSESSEE AND ALSO 16 (12 APPEALS) HOMY N J DADY ALLOW THE TAX CREDIT AS PER ARTICLE 11 (2) FOR THE A. YRS. 2000-01 TO 2004 IN TERMS OF OUR DISCUSSION IN PARA NO. 25 OF THIS ORDE R. 28. IN THE RESULT, THE APPEAL FOR THE A. Y. 1999-00 FILED BY THE ASSESSEE IS ALLOWED AND REVENUES APPEAL FOR A.Y. 1999-00 IS DI SMISSED. THE APPEALS FOR REMAINING ASSESSMENT YEARS I.E. A. YRS. 2000-01,200 1-02, 2002-03, 2003-04 AND 2004-05 FILED BY THE ASSESSEE AND THE REVENUE ARE PARTLY ALLOWED. ORDER PRONOUNCED ON THE 30 TH DAY OF JULY 2010. SD/- SD/- ( R K PANDA ) ACCOUNTANT MEMBER (R S PADVEKAR ) JUDICIAL MEMBER PLACE: MUMBAI : DATED:30 TH , JULY 2010 RAJ* COPY FORWARDED TO: 1 APPELLANT 2 RESPONDENT 3 CIT 4 CIT(A) 5 DR /TRUE COPY/ BY ORDER DY /AR, ITAT, MUMBAI