Delhi High Court Quashes Order In Revision In Respect Of Rs.1,000 Cr. LTCG Exemption Passed Against Buyer Of Non-Existing Seller

The Delhi High Court has held that a revisionary order under Section 263 of the Income Tax Act could not be passed against a non-existing seller entity by invoking Section 163 against the buyer.

The bench of Justice Rajiv Shakdher and Justice Girish Kathpalia has observed that the expression “agent” suggests that there is a principal in existence on whose behalf the agent acts. However, the buyer could not be considered an agent under Section 163 when the seller itself was not in existence.

A share purchase agreement was executed between three entities, i.e., Cairnhill CIPEF Ltd., Cairnhill CGPE Ltd., and Monet Ltd., concerning the shares of a public limited company incorporated in India named Mankind Pharmaceutical Ltd., for the sale of shares to Cairnhill CIPEF Ltd. and Cairnhill CGPE Ltd.

The record shows that on 12.12.2018, an assessment order was passed qua Monet Ltd., which had sold the shares to Cairnhill CIPEF Ltd. and Cairnhill CGPE Ltd.

The record also shows that Monet Ltd. was, at the relevant time, a 100% subsidiary of another entity company incorporated in Mauritius, i.e., Chryscapital IV LLC.

As a result of the sale of shares, Monet Ltd. registered a long-term capital gain (LTCG) after setting off a loss. Monet Ltd., however, set off the LTCG against the brought-forward loss. Consequently, Monet Ltd. had declared its income as “NIL” for the AY in issue, i.e., AY 2016–17. The Return of Income (ROI) for which the aforementioned assessment order was framed was filed on September 28, 2016. Importantly, insofar as the LTCG was concerned, Monet Ltd. claimed exemption by taking recourse to Article 13 of the India-Mauritius Double Taxation Avoidance Agreement (DTAA).

The record also shows that the appellant/revenue avers that the Commissioner of Income Tax (CIT) passed an order under Section 163 of the Act concerning the respondent/assessee. Inter alia, via this order, which, however, has not been placed on record, the assessee, i.e., Cairnhill CIPEF Ltd., was treated as an agent of Monet Ltd. Having treated the assessee, i.e., Cairnhill CIPEF Ltd., as an agent of Monet Ltd., the CIT revised the assessment order.

Being aggrieved, the respondent/assessee, i.e., Cairnhill CIPEF Ltd., preferred an appeal with the Tribunal. The tribunal allowed the appeal. The tribunal held that the order under Section 263 was passed against the assessee when Monet Ltd. had already ceased to exist. The order under Section 163 was passed by the Commissioner, who, according to the Tribunal, did not have the requisite authority.

The department contended that the CIT has concurrent powers with those vested in the AO and, therefore, he could have taken recourse to the provisions under Section 163.

The court held that the buyer ceased to exist after an assessment order accepting LTCG of Rs. 1002.92 crore as an exemption under the India-Mauritius DTAA was passed, whereafter CIT exercised and invoked Section 263 against the assessee.

The court dismissed the appeal of the department and stated that no substantial question of law arises for the consideration.

Counsel For Petitioner: Sanjay Kumar

Counsel For Respondent: Snigdha Gautam

Case Title: CIT Versus Cairnhill Cipef Ltd.

Citation: 2023 LiveLaw (Del) 1257

Case No.: ITA 610/2023

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