AO Was Not Intimated About Removal Of Company's Name From ROC, Draft Assessment Can't Be Said To Have Passed In Name Of Non-existent Entity: Delhi ITAT

Further, pointing that the objections of non-existence of company were filed only on the day on which the Registrar of Companies, Mauritius had removed the name of the company u/s 308 of the Mauritius Companies Act, the Tribunal stated that such was an attempt of the erstwhile company to combat the assessment proceedings with self-inflicted harm, of closing the business and getting name struck off, leaving Indian Tax Authorities, frustrated.

The Division Bench of Dr. B.R.R. Kumar (Accountant Member) and Anubhav Sharma (Judicial Member) observed that “where a corporate entity voluntarily opts for discontinuance of business and prefers to get the name of the company struck off and dissolve the company, after distributing its assets, the provisions of section 176 may become applicable and without any specific notice in terms of section 176(3) informing the AO of discontinuance of the business, the erstwhile company cannot claim that the assessment order was passed against the non-existing entity”.

Facts of the case

The Assessee (Red Fort Mauritius - Appellant) /assessee) was incorporated with the specific purpose of making investment in the securities of Prestige Projects Pvt Ltd. The beneficial shareholding of the company was held by Red Fort India Real Estate Fund LP situated in Cayman Islands. During the financial year 2008-09, the assessee had made investment in 11,22,000 Class A Equity Shares of Prestige India, for an aggregate amount of Rs.1,12,00,000, under the Foreign Direct Investment (FDF) route. In addition to investment made by the assessee, another entity namely Alena Investments Limited situated in Cyprus, wholly owned subsidiary of the assessee, also made an aggregate investment of Rs.106,35,13,000 in various instruments of Prestige India, to earn long term capital appreciation and the investment were held by the entities for almost ten years.

Subsequently, during the AY 2018-19, the assessee received an offer to sell its stake/investment in Prestige India. However, the buyer i.e. Prestige Builders and Developers (Indian Buyer) wanted to conclude transaction with a single seller. Therefore, the securities/shares of Prestige India held by Alena Cyprus were transferred to the assessee for a total consideration of Rs.200,61,39,424/-, as against the original cost of Rs.106,35,13,000. Subsequently, the assessee sold the entire securities held in Prestige India to the Indian Buyer.

In its return filed by the assessee, out of the total capital gains of Rs.4,85,87,899, gains aggregating to Rs.4,85,78,113/- were claimed as not chargeable to tax under Article 13(4) of the India-Mauritius DTAA and the balance gains of Rs.9785 were offered to tax. The Alena Cyprus had also filed its return where the long term capital gains of Rs. 80,86,75,225 arising from sale of shares to the assessee were declared exempted under Article 13 of the India-Cyprus DTAA. The return filed by Alena Cyprus was duly processed and stood concluded. However, return filed by assessee was selected for complete scrutiny. Since the specific purpose of making investment in Prestige India was achieved, the assessee filed an application before the Financial Services Commission, Mauritius (during the pendency of assessment proceedings) for dissolution and removal of the company from Register of Companies, Mauritius. The above fact was also intimated to the AO.

In the meanwhile, the AO denied benefit of exemption under Article 13(4) of the Indo- Mauritius DTAA to the assessee, holding that there was no commercial/ economic substance behind the existence of that Company in Mauritius and, therefore, benefit of Treaty cannot be applied, simply on the basis of TRC issued by the Revenue authorities of Mauritius to that company. Additionally, the AO disregarded the separate legal existence of Alena Cyprus, holding the same also to be a mere arrangement to take benefit of India Cyprus Treaty and added the entire capital gains derived by Alena Cyprus, on sale of securities/shares of Prestige India, to the income of the assessee. Accordingly, the AO proposed assessment at total income of Rs.97,14,67,000 under the head capital gains on sale of securities/shares of Prestige India in the hands of the assessee.

When the objections were pending before the DRP, the Registrar of Companies, Mauritius, removed the name of the company under section 308 of the (Mauritius) Companies Act 2001, and the assessee ceased to exist as a legal entity. Said fact was duly informed to the DRP, however the DRP proceeded to issue directions u/s 144C(5) in the name of non-existent entity.

Observation of the Tribunal

The Bench found that the assessee filed an application before the Financial Services Commission, Mauritius, as well as before the Registrar of Companies, Mauritius for removing the name of the company from the Register of companies as per section 309(1)(d) of the Mauritius Companies Act 2001.

The Bench also found that assessee had filed disclosure that the company has ceased to carry on business, has discharged in full all its liabilities to all known creditors and has distributed its assets in accordance with its constitution/the Companies Act, 2001, intimating the said authority the intent to remove the company from Register of Companies of Mauritius and obtaining No Objection.

The Bench explained section 163 to define as to who can be considered as 'agent' for Non-Resident Indian and Section 166 provides for direct assessment in case of assessee on whose behalf representative assessee have been appointed or for whose benefit income therein referred to is receivable.

Since none of these provisions came to help the AO in regard to erstwhile company, the Bench found that the remedies of the AO against the property in cases of representative assessee u/s 167 have no application in the case where, a foreign company opts for voluntarily closure of business and getting name struck off with ROC.

However, the Bench noted section 176(1) of the Act, which provides for the assessment in case of 'discontinued business' and the section is meant for those circumstances where any business or profession is discontinued during the assessment year and subsection (1) of section 176 provides that the income of the period from the expiry of the previous year for that assessment year up-to the date of such discontinuance may, at the discretion of the AO, be charged to tax in the assessment year.

As far as the claim of the erstwhile company that it had informed the AO of filing of an application for removal of the name of the assessee from Registrar of Companies, the Bench found that it was in response to a notice u/s 142(1), where 14 questionnaires were raised and the reply was filed.

“The question no. 13 related to the status of the company as on date i.e whether the same was wound up or active and the erstwhile company had informed the AO that on 28.12.2020 an application is moved to the Financial Services Commission, Mauritius for the purpose of removing it from Register of Companies, Mauritius”, added the Bench.

Hence, the Bench stated that as per the reply, the company was in the process of being wound up, and there was no mention as to who would be the successor of the company or authorized representative or agent to contest the assessment order further after the name of company is struck off.

The Bench thus found that at the time of passing draft assessment, the company was very much in existence, and actually no application was moved to the Registrar of Companies, Mauritius for getting struck off the name of the company from Register of Companies so as to expect the AO to have taken any recourse under the Income tax Act.

The Bench also found that the application, to the Registrar of Companies, Mauritius for getting struck off the name of the company from ROC, was not intimated to the AO at any time.

Taking into consideration the definition of 'assessee', the Bench opined that the return is filed by erstwhile company and consequent to the assessment concluded by the AO, the tax demand is payable by the erstwhile company.

So, by merely being a 'former director', Mr. Boopendradas (Vikash) Sungker-Assessee, had no contingent liability as a 'person' by whom demand of tax is payable, added the Bench.

The Bench clarified that the demand is against the erstwhile company and AO has recourse available to make recovery of tax demand by invoking one of the powers of section 173 of the Act, which provides for recovery of tax in respect of non-resident from his assets.

However, based on section 179, the Bench opined that it is only when the AO, proceeds against the former director for making a recovery of tax payable by the erstwhile company, the former director will be aggrieved with the recovery.

Hence, the ITAT dismissed the Assessee's appeal.

Counsel for Appellant/ Assessee: Gaurav Jain and Vibhu Gupta

Counsel for Respondent/ Revenue: Vijay B. Vasanta

Case Title: Boopendradas (Vikash) Sungker versus DCIT

Case Number: ITA No.1866/Del/2022

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