Vildirect: IncomeTax-caselaws-2016-VIL-977-ITAT-DEL

2016-VIL-977-ITAT-DEL

Equivalent Citation: [2016] 51 ITR (Trib) 162

Income Tax Appellate Tribunal DELHI

I. T. A. No. 2487/Del/2016

Date: 19.09.2016

INDIAN FARMERS FERTILIZERS CO-OPERATIVE LTD.

PRINCIPAL COMMISSIONER OF INCOME-TAX

For the Appellant : Vijay Ranjan, Advocate, Vartik R. Choksi and Ms. Ira R. Kapoor, Chartered Accountants
For the Respondent : A. K. Saroha, Commissioner of Income-tax (Departmental Representative)

BENCH

H. S. Sidhu (Judicial Member) And J. S. Reddy (Accountant Member)

JUDGMENT

H. S. Sidhu (Judicial Member)

1. The assessee has filed this appeal against the order dated March 29, 2016, passed by the Principal Commissioner of Income-tax-11, Delhi, under section 263 of the Income-tax Act, 1961, relevant to the assessment year 2010-11.

2. The assessee has raised 11 grounds which are repetitive in nature, but it has filed concise grounds of appeal as detailed below :

"1. In law and on the facts and circumstances of the case, the learned Principal Commissioner of Income-tax erred in assuming jurisdiction under section 263 of the Income-tax Act, whereas the mandatory conditions for assuming such jurisdiction were completely absent thus resulting in the order passed being bad in law.

2. In law and on the facts and circumstances of the case, the learned Principal Commissioner of Income-tax erred in his observation in the order that the issue of tax credit on dividend as per article25(4) of the Double Taxation Avoidance Agreement between Government of India and the Omani Government reflected lack of inquiry and non-application of mind by the Assessing Officer. Further, the learned Principal Commissioner of Income-tax also erred in doubting the intent and purpose of exemption granted on dividend income under the Omani tax laws ignoring the confirmation given by the Omani Tax Authorities. The order of the learned Principal Commissioner of Income-tax on this issue has been passed in complete disregard of the order of the jurisdictional Income-tax Appellate Tribunal in the case of Kribhco (I. T. A. No. 6785/Del/2015) [2016] 67 taxmann.com 138 (Del-Trib) on identical facts.

3. In law and on the facts and circumstances of the case, the learned Principal Commissioner of Income-tax erred in directing the Assessing Officer to examine the applicability of the proviso to section 36(1)(iii) regarding capitalisation of interest expenditure and further erred in observing that part of interest expenditure may pertain to investment not connected with business and consequently may not be deductible under section 36(1)(iii).

4. In law and on the facts and circumstances of the case, the learned Principal Commissioner of Income-tax erred in restoring to the Assessing Officer, his order, observing that there was a 'possibility' of income other than dividend, an observation completely impermissible in law to be a basis for an order under section 263."

3. The brief facts of the case are that the assessee is a co-operative society registered in India under the provisions of Multi-State Co-operative Societies Act, 2002. The principal business of the assessee is manufacture and import of fertilizers like Urea, DAP and Complex Fertilizers. During the year 2002, as a public sector undertaking, pursuant to a memorandum of understanding between the Government of India and the Sultanate of Oman to promote projects of mutual economic interest for both the countries, the assessee along with another Indian Co-operative Society (M/s. Krishak Bharti Co-operative Ltd.) entered into a joint venture with Oman Oil company to form Oman fertilizer company SAOC (OMIFCO), which is a registered company in Oman under the Omani Laws. The assessee-society holds 25 per cent. share in OMIFCO, which is engaged in manufacturing urea and ammonia. The urea manufactured by OMIFCO is purchased by the Government of India under a long-term agreement.

3.1 The assessee-society has established a branch office in Oman to oversee its investment in OMIFCO and to facilitate rendering of personnel placement and technical services to M/s. OMIFCO. The branch office is independently registered as a foreign company branch under the Omani laws and it is an accepted position by the Income-tax Department that the said branch office constitutes permanent establishment (PE) in Oman in terms of article 5 of Double Taxation Avoidance Agreement (DTAA) between India and Oman. The said branch office maintains its own books of account and files returns of income as per the local Income-tax law of Oman.

4. In this case the assessee has originally filed the return of income for the assessment year 2010-11 on October 13, 2010, declaring a total income of Rs. 723,16,22,035. Subsequently revised return of income was filed on October 14, 2011, declaring income of Rs. 577,15,94,117. The main reason for the variation in the total income as per the original return and revised return of income was that dividend income received by the appellant-society's Branch in Oman from OMIFCO, Oman amounting to Rs. 144,11,73,150 was excluded on the ground that the said income was earned by the permanent establishment of the appellant-society in Oman and as per the provisions of the Double Taxation Avoidance Agreement read with section 90 of the Income-tax Act, as interpreted by the honourable apex court in India, the said income was assessable only in Oman and not in India.

5. The case of the assessee was picked up for scrutiny and notices under sections 143(2) and 142(1) of the Income-tax Act, were issued by the Assessing Officer along with the detailed questionnaires. During the course of the assessment proceedings, detailed replies were filed along with supporting evidences and the authorised representatives of the assessee- society duly attended before the Assessing Officer from time to time as also acknowledged in the assessment order. All necessary details and particulars were duly furnished and the case was examined minutely by the Assessing Officer and discussed with the authorised representatives of the appellant-society. The assessment was completed under section 143(3) of the Income-tax Act, 1961 on February 28, 2014, by the Assessing Officer who made the following additions :

		(Rs.)
1.	Dividend income received from OMIFCO	144,11,73,150
2.	Disallowance under section 43B	15,94,113
3.	Disallowance under section 14A read with rule 8D of the Income-tax Rules	31,33,42,000
4.	Disallowance of horticulture expenses	60,70,000

6. While completing the assessment, inter alia, the Assessing Officer allowed a tax credit of a sum of Rs. 41,52,45,771 in respect of the dividend income of Rs. 144,11,73,150 received by the appellant-society from OMIFCO. As mentioned above, the aforesaid dividend income was simultaneously brought to the charge of tax by the Assessing Officer after rejecting the assessee's claim that the said income could not be taxed under the Indian Income-tax law. It may be mentioned that as per the Omani tax laws, exemption was granted to the dividend income by virtue of amendments made in the OmanI tax laws in the year 2000. However, by virtue of the provisions of article 25(4) of the Double Taxation Avoidance Agreement read with section 90(1)(a)(ii) of the Income-tax Act, the Assessing Officer, after thoroughly examining the issues and after full application of mind allowed credit for the aforesaid tax which would have been payable in Oman but for the exemption granted.

7. Subsequent to the completion of the assessment the learned Principal Commissioner of Income-tax-11, Delhi issued a show-cause notice dated December 22, 2015, under section 263 of the Income-tax Act. For ready reference, the contents of the show-cause notice are reproduced below :

"The assessment records of M/s. Indian Farmers Fertiliser Co- operative Ltd. for the assessment year 2010-11 were called for and examined. The Assessing Officer framed assessment on February 28, 2014. The Assessing Officer computed the income of the assessee as under :-

Net taxable income as shown in revised return	Rs. 577,15,94,117
Add :
(a) Dividend income received from OMIFCO, Oman (para 3)	Rs. 144,11,73,150
(b) Disallowance under section 43B	Rs. 15,94,113
(c) Disallowance under section 14A read with rule 8D(2)(ii)	Rs. 31,33,42,000
(d) Disallowance of horticulture expenses	Rs. 60,70,000
Taxable income	Rs. 753,37,73,380

2. The Assessing Officer computed the tax as per ITNS 150 (copy placed as annexure). The perusal of Income-tax computation form it is found that the Assessing Officer gave relief under section 90 of Rs. 41,52,45,771 and determined the demand of Rs. 18,27,23,245. The assessee moved an application under section 154. The Assessing Officer passed order under section 154 on March 18, 2014, and again computed income as per ITNS 150 and determined the tax on assessed income of Rs. 238,56,35,456 and gave credit of prepaid taxes and relief under section 90 of Rs. 228,72,86,443 and determined the demand of Rs. 17,44,89,190. Apparently the credit of prepaid taxes and relief includes relief under section 90 of Rs. 41,52,45,771.

3. The assessee went in appeal before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) passed order on March 9, 2015, and upheld the addition of Rs. 144,11,73,150 on account of dividend received from overseas joint venture OMIFCO (Oman).

4. As per order sheet entry the Assessing Officer conducted various hearings wherein Sh. Rawat and Sh. Atul Chhabra attended the proceedings. Vide order sheet entry dated February 20, 2014, the assessee was asked as regards the justification for non-taxability of income from 'Oman' division with details of dividends received.

5. The Assessing Officer issued questionnaire dated September 30, 2013, and has asked on 37 points. Vide point Nos. 29 and 30 asked the following questions :

In respect of any income covered in the Double Taxation Avoidance Agreement, please furnish detailed note with copy of respective agreement and also give reasons for claiming relief under section 90 of the Income-tax Act, 1961.

Please give a detailed note on tax credit claimed by the society in respect of dividend income received from OMIFCO.

6. The assessee filed reply dated February 26, 2014, and submitted that the tax credit should be allowed if the Department taxes the dividend income. The assessee submitted that the decision of the honourable Supreme Court in Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 (SC) would be applicable for allowing the tax credit.

7. The Assessing Officer did not accept the contention of the asses see and taxed the dividend income. The Assessing Officer did not apply his mind as where the assessee has not paid any tax in Oman/ and there should not be any question of giving credit of Rs. 41,52,45,771.

8. The Assessing Officer did not apply his mind in regard to section 90 which authorises the two Governments to enter into an agreement for avoidance of double taxation.

9. The Government issued a Notification No. G. S. R. No. 563(E), dated September 23, 1997, which is reproduced as under ([1997] 228 ITR (St.) 21) :-

'Whereas the annexed agreement between the Government of the Sultanate of Oman and the Government of the Republic of India for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to taxes on income has entered into force on the 3rd June, 1997 after the notification by both the Contracting States to each other of the completion of the proceedings required by their laws for bringing into force of the said agreement in accordance with paragraph I of article 29 of the said agreement ;

Now, therefore, in exercise of powers conferred by section 90 of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby directs that all the provisions of the said agreement shall be given effect to throughout the territory of India.'

The perusal of the notification shows that the agreement has been entered into in exercising powers conferred by section 90 of the Income-tax Act, 1961. The relevant part of section 90 is reproduced as under :-

'90. Agreement with foreign countries or specified territories.-(1) The Central Government may enter into an agreement with the Government of any country outside India or specified territory outside India,-

(a) for the granting of relief in respect of-

(i) income on which have been paid both Income-tax under this Act and Income-tax in that country or specified territory, as the case may be, or

(ii) Income-tax chargeable under this Act and under the corresponding law in force in that country or specified territory, as the case may be, to promote mutual economic relations, trade and investment, or

(b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country or specified territory, as the case may be, or.'

10. Section 90 clearly mentions that the relief is to be granted in respect of income on which have been paid both Income-tax under this Act and Income-tax and Income-tax in that country or specified territory, as the case may be. The section 90(1)(a)(ii) is in regard to the Income-tax chargeable under this Act and under the corresponding law in force in that country and moreover, Income-tax should be chargeable in the Act of either country.

11. From the perusal of record it is found that the assessee has claimed tax credit even though no tax has been paid in either country.

12. The Central Government derives its authority to enter into agreement for avoidance of double taxation from section 90 of the Income-tax Act. The primary objective is not to tax the same income in both the countries. The Assessing Officer failed to notice this bare provision of section 90 that the assessee should have paid the taxes. In the present case there is no dispute that the assessee has not paid any tax on the dividend income.

13. The assessee has placed reliance on article 25(4) of the Double Taxation Avoidance Agreement. It refers to the tax incentive granted under the law of the contracting State and which are designed to promote economic development.

14. The 'tax incentive' has not been defined in the Double Taxation Avoidance Agreement. Therefore we have to go to article 3(2) which reads as under (page 24 of 228 ITR (St.)) :-

'As regards the application of this agreement by a Contracting State, any term not defined therein shall, unless the context otherwise requires, have the meaning which it has under the law of that Contracting State concerning the taxes to which this agreement applies.'

15. As per article 3(2) the meaning of expression 'tax incentive' has to be taken from meaning given in the Income-tax Act. Even in the Income-tax Act, the term 'tax incentive' has not been defined. The Assessing Officer did not notice the primary condition of article 25(4) that tax incentive should be designed to promote economic development. The Assessing Officer simply accepted the version of the asses see and did not apply his mind as to the veracity of the statement given by the assessee. The Assessing Officer did not notice what are the tax incentives which are designed to promote economic Development. In the present case, the dividend income has been made exempt under article 8(BIS) under the OMANI Companies Income- tax Law. This would be a mere assumption that such exemption is designed to promote economic development. The Assessing Officer failed to notice this vital difference.

16. The Assessing Officer failed to examine the fact as to whether article 25(4) of the Double Taxation Avoidance Agreement has been fully complied with by the assessee. It cannot be presumed that the exemption granted under article 8(bis) is meant for economic Development. There has to be strict interpretation of the statute. Article 8(bis) does not indicate that the exemption is designed for economic development.

17. Capitalisation of interest-36(1)(iii) proviso :

The perusal of balance-sheet for the assessment year 2010-11 shows that the assessee has shown loan funds of Rs. 11,532.17 crores. Whereas the share capital and reserves and surplus figure is Rs. 4,270.50 crores. The total of the balance-sheet is Rs. 16,319.45 crores. This means the assessee is having only 26.16 per cent. own funds. The perusal of balance-sheet further shows that the assessee has shown capital work-in-progress of Rs. 333 crores. The assessee has not shown any figure of interest pertaining to capital work-in- progress. The schedule 6 (43rd annual report) showing capital work- in-progress does not show any interest component. The Assessing Officer did not make any inquiry as regards the application of section 36(1)(iii) proviso. As per paragraphs 13 of significant accounting rules, the assessee has mentioned that borrowing costs that are attributable to the acquisition or contract of qualifying asset are capitalised as per the cost of such assets. But the assessee has not given any detail about interest component in the capital work-in-progress which is to be calculated for the period beginning from the date on which the capital was borrowed for acquisition of the asset till the date of which such asset was first put to use. The Assessing Officer did not make any inquiry or raised any query for calculating the interest to be capitalised under section 36(1)(iii) proviso. The Assessing Officer did not make any further inquiry as to whether the calculation made by the assessee, if any, is correct or not.

18. The assessee has attached annexure E as major additions to fixed assets in the assessment year 2010-11. The total amount is Rs. 37.67 crores. The Assessing Officer has not made any inquiry as regards the interest component which would be liable to be capitalised as per section 36(1)(iii) proviso.

19. The assessee has shown loans and advances under schedule 11 (43rd annual report) of Rs. 27 crores. The Assessing Officer has not asked for the purpose of such advances as to whether these are for business purpose or not. Whether some of the advances are meant for acquisition of capital asset. If that is so, then section 36(1)(iii) proviso would come into operation. No such queries have been raised by the Assessing Officer nor any explanation given by the assessee.

20. The assessee in schedule 20 (43rd annual report), paragraph 1 has mentioned that estimated value of contracts (net of advances) to be executed on capital account and not provided for amount to Rs. 436.36 crores. Again the assessee has not mentioned the element of interest pertaining to these contracts.

21. 36(1)(iii) :

The assessee has shown investment of Rs. 7,531.28 crores and the detail is given under schedule 7 (43rd annual report). Schedule 7 (43rd annual report) shows that the assessee has made long-term investments. Although the assessee is having borrowed funds to the extent of 74 per cent. yet the Assessing Officer has not raised any query as regards the interest component attributable to such investments and how it is allowable under the business head, i.e., under section 36(1)(iii). The assessee has not established any nexus as regards the utilisation of funds from own sources or funds on which interest is paid by the assessee.

22. Rental income :

The assessee has shown income from house property at Rs. 5,71,31,586 after availing of deduction under section 24 of Rs. 61,42,331. The assessee has shown rental income from IFFCO Tower, Gurgaon. From the details it appears that the assessee has rented out certain towers to the telecom companies like Bharti Airtel and M/s. BSNL. Apparently, renting of tower should not come under the head 'income from house property', as it should not come under the purview of property consisting of any buildings or lands appur tenant thereto (refer section 22). No enquiry has been made by the Assessing Officer on this aspect.

23. In view of the above, I am of the opinion that the order passed by the Assessing Officer under section 143(3) of the Income-tax Act, 1961, is erroneous in so far as it is prejudicial to the interests of the Revenue. You are given an opportunity of being heard and show cause as to why the impugned order be not enhanced/modified or set-aside for fresh assessment under section 263 of the Income-tax Act, 1961. Your case is fixed for hearing on January 4, 2016, at 3 : 30 p.m."

8. On the very next day, i.e., on December 23, 2015, the learned Principal Commissioner of Income-tax issued a letter purported to be a second show-cause notice under section 263, the contents of which are reproduced below :-

"In continuation to this office show-cause notice under section 263 for the assessment year 2010-11 dated December 22, 2015, issued vide F. No. Principal CIT-11/Show cause/263/2015-16/1175 the following observations are also made.

2. Ongoing through the annual report it is found that the assessee has following associates :-

(i) IFFCO-Tokio General Insurance Co. Ltd.

(ii) Oman India Fertiliser Co. S.A.O.C.

(iii) Jordan India Fertiliser Co., L.L.C.

(iv) IFFCO Chhattisgarh Power Ltd.

(v) IFFCO Kisan Sanchar Ltd.

(vi) IFFCO Kisan SEZ Ltd.

(vii) Industries Chimiques Du Senegal

(viii) Kisan International Trading, FZE

(ix) National Commodity and Derivatives Exchange Ltd.

(x) National Collateral Management Services Ltd.

(xi) Indian Potash Ltd.

(xii) IFFCO Kisan Bazar and Logistics Ltd.

(xiii) Indian Farm Forestry Development Co-operative Ltd.

(xiv) IFFCO Foundation

(xv) Co-operative Rural Development Trust

(xvi) IFFCO Kisan Sewa Trust

(xvii) GrowMax Agri Corp.

(xviii) Aria Chemicals (Orissa) Ltd.

3. The assessee has shown dividend income from OMIFCO Oman, Indian Potash Ltd. The Assessing Officer has not made any inquiry as regards the income which might have been received or due to the assessee from associates as mentioned above. The assessee has also not attached any documents as regards the balance-sheet, profit and loss account, etc., of associates where the assessee is having interest. For example, the assessee has simply shown dividend income from OMIFCO Oman but no other document has been asked by the Assessing Officer or given by the assessee. The assessee would be taxable on the global income irrespective of the associates from which the assessee derives income. The assessee may be eligible for any kind of allowance as per the Double Taxation Avoidance Agreement if any with any other country.

4. In para 22 of show cause No. 1175 dated December 22, 2015, it has been asked about the rental income. It is further clarified that the assessee may be showing rental income from communication towers from telecom companies. If that is the case, then the case of the assessee would not fall under the head income from house property as these communication towers cannot be called as buildings or lands appurtenant thereto.

5. Your case is fixed for hearing on January 4, 2016, at 3:30 p.m., as already intimated in show-cause notice under section 263 dated December 22, 2015."

9. In response to the above show-cause notice, the assessee file a detailed reply dated January 11, 2016, as well as January 19, 2016, which are compiled in the paper book filed with us (pages 355-390). To summarise the assessee has raised the following contentions :

• That the Assessing Officer has conducted detailed enquiries year after year and it was only after examination of all facts that the credit for deemed tax paid was allowed ;

• That the Assessing Officer had examined the claim in the light of article 25(4) of India-Oman Double Taxation Avoidance Agreement as well as section 90 of the Income-tax Act, 1961 ;

• That in light of the above fact the Assessing Officer had taken a plausible view which the learned Principal Commissioner of Income-tax cannot substitute. Several case law were cited and compiled in support of this contention.

• That on merits as well on analysis of the provisions of India- Oman Double Taxation Avoidance Agreement the claim of the asses see ought to have been allowed.

• That in respect of capitalisation of interest under section 36(1)(iii) proviso the assessee submitted that the same was in line with accounting policy regularly followed, certificate of statutory auditors, that the free reserves were sufficient enough to cover up the addition of fixed assets as well as CWIP.

• That the assessee-company had also capitalised interest of Rs. 7.08 crores following a consistent accounting policy, as disclosed at page 258 of the paper book, in the audited financial statements from year to year.

• Further the assessee has also stated that detailed material was called for and submitted before the Assessing Officer. The assessee has also cited several case law supporting its contention that on merits no disallowance under section 36(1)(iii) is called for.

10. Vide his impugned order under section 263 of the Income-tax Act, 1961, the learned Principal Commissioner of Income-tax rejected the various submissions made before him. The relevant portion of the finding of the Principal Commissioner of Income-tax with respect to the claim for allowing tax credit for deemed tax paid on dividend income in Oman is reproduced hereunder :

"2. I have carefully considered the submissions of the assessee. The main issue in regard to the claim of the tax credit even though the assessee has not paid any tax in Oman. The assessee has relied upon article 25(4) of the Double Taxation Avoidance Agreement.

21. In my opinion, the Assessing Officer did not make any verification/enquiries as regards the legal value of letters issued by the Secretary General and also did not make any enquiry as regards the designed for economic development. There was lack of inquiry and non-application of mind.

22. If we accept the argument of the assessee that all tax incentives would be deemed as promoting economic development, then there was no need to insert words that the tax incentives granted under the law of the Contracting Sate and which are designed to promote economic development. There was no need to write words 'and which are designed to promote economic development'. The statute has to be read with reference to what has been mentioned. There is no scope of going beyond what has been stated. In paragraph 13 of the letter dated March 10, 2016, it was especially mentioned that the word designed means that there would have to be some conscious effort. Paragraph 13 of the letter dated March 10, 2016, is again reproduced as under :

'13. This is a general exemption for every person who so ever earns dividend income. It is not necessary that any shareholder who earns dividend would be promoting the economic development. It is mere investment in a particular company. A general exemption cannot be stretched to say that this is designed for economic development whereas article 25(4) clearly mentions that the incentive should be designed for economic development. You may kindly note even the word design which means there would have to be some conscious effort. The English meaning of design is to do or plan (something) with a specific purpose in mind. Giving a general exemption does not lead to a specific purpose in mind. General exemption does not show that there is a specific purpose. If that is so, then the same should have been incorporated in the Sultani degree. The Sultani degree till date has not thought upon for the last 16 years, to amend the Sultani degree so as to incorporate that exemption given to dividend income is designed for economic development within the purview of article 25(4) of the Double Taxation Avoidance Agreement. Please offer your comments.'

23. The assessee has not given any specific reply to this para of my letter which explains word designed for economic development has a particular meaning. Therefore, we cannot say that any general exemption would be meant designed for economic development. It was the wisdom of both the countries who entered into the Double Taxation Avoidance Agreement that the article 25(4) would give tax benefit only when the tax incentive has been designed for economic development. We cannot by any stretch of imagination interpret these words as pointing towards general exemption. The assessee sought a clarification from the Oman Officers whereas it was a matter to be decided by both the countries as it is relating to the Double Taxation Avoidance Agreement which was entered into by both the countries. That means the issue has to be decided not by one country but by both the countries as the Double Taxation Avoidance Agreement is entered into by two countries. There could have been certain schemes which are designed for economic development. The interpretation of the words 'designed for economic development' could not be brushed aside by simple saying that any investment is for economic development. Even if we agree that the contention of the assessee, the basic requirement designed for economic development has not been fulfilled. The assessee has to demonstrate that certain investments were designed for economic development. If we do not interpret properly the words designed for economic development, then such words would become redundant. This agreement has been entered into by both the countries with all its wisdom for incorporating the words designated for economic development. . .

28. The assessee has further referred to Royal Decree No. 68 of 2000 and stressed upon the words 'in exigencies of public good'. The words exigencies of public good cannot be equated with 'designed for economic development'. Both have different meanings and connotations. Article 25(4) specifically mentions the words designed for economic development. Had there been such intention the Royal Decree could have mentioned the word designed for economic development. In their wisdom they did not think it proper to use the same words as given in article 25(4). In the jurisprudence a particular expression cannot be deemed as covering any other expression. For example, in this case the 'exigency of public good' cannot be equated with 'designated for economic development'. Therefore the assessee cannot take any support from the words 'the exigencies of public goods'. The assessee on page 135 has placed the amendments to the law of Income-tax of company (placed as annexure 2). Article 2). Article 8(Bis) simply says as under :

'As an exception from the provisions of article (8) of this law, tax shall not apply to the following :-

(3) Dividends received by the company from its ownership of shares, portions or shareholding in the share capital of any other company.

(4) Profits or gains realised by the company from the sale or disposal of securities registered in Muscat Securities Market.'

29. The assessee has again relied upon a letter dated December 11, 2000 (placed as annexure 3) issued to Oman Oil Company (SAOC) by the Secretary General for taxation. In this letter it has been mentioned that as per the newly introduced article 8(bis) of the Company Income-tax Law, dividend distributed by all companies, including the tax exempt companies would be exempt from payment of Income-tax in the hands of the recipients. In this manner, the Government of Oman would achieve its main objective of promoting economic development with in Oman by attracting investments. It is further mentioned that the interpretation of article 8(Bis) is to promote economic development in Oman in the Indian Investors should be able to obtain relief in India under article 25(4) of the Agreement for Avoidance of Double Taxation in India.

30. In the opinion of the Revenue it is just an opinion from an officer of the Oman in regard to interpretation of article 8(bis) and cannot take the form of a statute until and unless the officer is authorised or derives authority from the Omani tax law.

31.1 On perusal of Omani tax law, it is found that the Secretary General for taxation does not derive any authority for issuing such letter that has the sanctity of a law for interpreting a particular article. Article 4(Bis) has a reference of the Secretary General. As per article 2(6)(Bis) a Secretary General means the Secretary General for taxation at the Ministry of Finance which is mentioned in article 4(Bis) of the law . . .

38. The honourable Income-tax Appellate Tribunal has given relief primarily on the basis of the letter issued by Secretary General vide letter dated December 11, 2000. It has been perhaps misinterpreted to be issued by the Sultanate of Oman. With due respect to the honourable Income-tax Appellate Tribunal, the decision of the honourable Income-tax Appellate Tribunal may be contested before the honourable High Court. As already explained above, the clarification issued by the Secretary General is at the most an opinion and does not take the shape of law. The Secretary General for taxation in its letters, has not referred to any article of Omani tax law from which the Secretary General derives its authority to issue such letters. It appears that the Secretary General responded to a letter of Omani Oil Company and nothing else. Effectively the Secretary General in its letter has interpreted article 25(4) which is mainly in the domain of two Government, not under any officer, may be a very senior officer under the Omani tax law. The matter has to be settled by the two Governments and not by a single officer of the Omani tax law and that too in response to a letter of a company.

39. The tax credit can be given only with the strict interpretation as held by the apex court in the case of Smt. Tarulata Shyam v. CIT [1977] 108 ITR 345 (SC).

40. The honourable Income-tax Appellate Tribunal did not consider this aspect that the interpretation has to be with reference to the words used in the Act/Double Taxation Avoidance Agreement. The honourable Income-tax Appellate Tribunal, perhaps presumed that this is a letter issued by Sultanate of Oman. But the letters were issued by one officer of Oman who has no authority under the law to issue such clarification. If he has issued such clarification, at the most it could be considered as his opinion. The Department may file a miscellaneous application before the honourable Income-tax Appel late Tribunal pointing out that the said letters are just an opinion from the officers of the Department and there was some amendment in the law. This is apparent mistake of law as well as mistake on the face of facts. The honourable Income-tax Appellate Tribunal did not consider the aspect that any interpretation has to be between two Governments under the Double Taxation Avoidance Agreement, not by one officer of Oman and that too in response to a letter. It is unconceivable that any interpretation of law could be in response to a letter of a company and then it is to be treated as if it is Omani Law. This is a mistake of fact and law. The honourable Income-tax Appellate Tribunal did not consider the aspect that the letters have not been issued by quoting any article of Omani tax law from which the Secretary General would derive the authority. In the legal jurisprudence this is one of the requirements to show its authority under the Law.

41. In my opinion the matter is unambiguous. However, in view of circumstances of the case justify, the matter is resorted to the file of the Assessing Officer in exercise of my power under section 263 that says that 'pass such order thereon as the circumstances of the case justify' with following observations :

'The Assessing Officer would refer the matter to the concerned authorities who are responsible for entering into the Double Taxation Avoidance Agreement. The Assessing Officer, through proper channel, would write a letter to the officers of the Department perhaps FTD who may request the Omani Government as regards the interpretation of article 25(4) of the Double Taxation Avoidance Agreement with particular emphasis on the word designed for economic development. The Assessing Officer would narrate all the facts and also send a copy of the order under section 263 passed by me wherein I have made certain observations as regards the interpretation. It is quite possible that both the Governments, i.e., India and Oman may reach at a conclusion that may be in favour of the Revenue or in favour of the assessee. Pending any communication from the concerned authorities, the view may be that the assessee is not entitled for tax credit. The process should be started in the month of April itself so that necessary communication could come in time as the assessment has to be framed under section 143(3)/263 within the time limited'."

11. In support of ground of appeal raised by the assessee-society, the learned counsel of the assessee filed the paper book comprising detailed written submissions, relevant documents and also relied upon various judicial decisions. For the sake of clarity, the relevant portion of the submissions made by the learned counsel of the assessee from paragraphs 8.3 to 8.11, pages 24 to 72 of the paper book, is reproduced below :

"8.3 For better understanding, these grounds have been divided into several categories as mentioned above and it would be convenient to proceed with further elaboration category-wise, in the following submissions :

(a) Deemed tax credit on dividend income from OMIFCO :

In response to the show-cause notice issued by the learned Principal Commissioner of Income-tax, the appellant-society filed a comprehensive written reply dated January 11, 2016, wherein the factual and the legal position was fully explained and it would be worthwhile to reproduce below the relevant part of this written reply :

'3.1.2 On the facts in our case, as pointed out in the notice itself, the learned Assessing Officer had specifically enquired from the society the following questions at points 29 and 30 of the questionnaire issued as part of the scrutiny proceedings on September 30, 2013 :

"29. In respect of any income covered in the Double Taxation Avoidance Agreement, please furnish detailed note with copy of respective agreement and also give reasons for claiming relief under section 90 of the Income-tax Act, 1961.

30. Please give a detailed note on tax credit claimed by the society in respect of dividend income received from OMIFCO."

3.1.3 The society, vide its reply dated November 12, 2013, (relevant extracts enclosed as annexure I) gave a detailed reply high lighting the relevant provisions of the Income-tax Act, the Agreement for Avoidance of Double Taxation and Prevention of Fiscal Evasion with Oman, and the judicial pronouncements in support of the society's claim as to non-taxability of the same in India. A copy of the Double Taxation Avoidance Agreement and the commercial registration certificate issued by the Government of Oman was also enclosed for perusal of the assessing authority. The issue was also discussed with the learned Assessing Officer in substantive details during the course of the hearing.

3.1.4 Further, in subsequent hearing on February 20, 2014, the learned Assessing Officer specifically expressed disinclination to accept the society's claim for exemption and enquired about substantiating the alternative claim of credit for taxes deemed to have been paid in Oman under article 25 of the Double Taxation Avoidance Agreement on the lines of the earlier years (from financial year 2005- 06 to the financial year 2008-09).

3.1.5 Accordingly, the society made alternative submissions vide its letter dated February 26, 2014 (copy enclosed as annexure II) in support of its claim for tax credit under article 25(4) of the Double Taxation Avoidance Agreement read with section 90(1)(a)(ii) of the Income-tax Act. This reply detailed out the relevant provisions of the Omani tax law including article 8 (bis) which governed the dividend exemption after having been specifically amended by Royal Decree 68 of 2000 as a measure to encourage economic development. The reply specifically mentions at point B.2 the rationale for this incentive coming under the ambit of article 25(4) of the Double Taxation Avoidance Agreement. Further, at point A.4 of the reply, reference had been made to the assessment orders passed by the tax authorities in Oman in the assessee's case which specifically recorded the objective for the exemption under article 8 (bis) to promote economic development within Oman to attract investments. It also contained the working of the tax credit and judicial pronouncements in support of the claim. On the date of hearing on February 26, 2014, too, the issue of credit for deemed taxes paid in Oman and the rationale for such a provision was discussed at length with the learned Assessing Officer.

3.1.6 In the assessment order dated February 28, 2014, the learned Assessing Officer specifically records articles 25(2) and 25(4) of the Double Taxation Avoidance Agreement and, vide finding at paras 3.3 and 3.4, records that "in view of the above provisions", the tax credit for taxes which would have been payable is being allowed to the assessee.

3.1.7 From the above factual matrix, it is luminescent that the learned Assessing Officer had not only enquired about the tax credit claim in the hearing on February 20, 2014, but also analysed article 25(4) of the Double Taxation Avoidance Agreement (reproduced in the assessment order) in the light of our reply containing reasons for the claim as per the Royal Decree 68 of 2000 which amended article 8 of the Omani tax law. After having analysed our reply only, the learned Assessing Officer had allowed the tax credit in the assessment order specifically giving reference to articles 25(4) and 25(2) of the Double Taxation Avoidance Agreement. In our reply, there was a specific reference to the following :

(a) The preamble of the Royal Decree which highlighted the aim of the amendment as exigencies of public good.

(b) The assessment orders passed by the Omani tax authorities recording the objective of the tax exemption being to promote economic development.

Thus, it cannot be concluded at this stage now that the learned Assessing Officer has not applied his mind on the merits of the issue. It is incorrect to state that the Assessing Officer has "simply accepted the version of the assessee". It is trite that the only authority competent to comment/clarify on the objective of the tax exemption given by the Omani tax law can be the Omani tax authorities only. By believing the objective of the tax incentive as stated in the assessment order issued by the Omani tax authorities, the Assessing Officer has believed the Omani tax authorities and not the assessee alone as claimed in the show-cause notice. By believing the Omani tax authorities, the learned Assessing Officer has taken a perfectly legal view of allowing the tax credit on a combined reading of article 25(2) and 25(4). By taking the only legally plausible view, the order cannot be termed as erroneous in the eyes of the law to fall within the scope of the revisionary power under section 263.

3.1.8 It is pertinent to note that even after the amendment to section 263 by the Finance Act, 2015, Explanation 2 clearly says that "the order is deemed to be erroneous if the order is passed allowing any relief without inquiring into the claim". The substance of the amendment is that only a complete lack of enquiry in contrast to sufficiency of enquiry can be a ground for revision.

3.19 In support of the above legal argument, reliance is placed on the following pronouncements of the judiciary : (Relevant extracts reproduced for ease of reference) :

(i) The Supreme Court in CIT v. Max India Ltd. [2007] 295 ITR 282 (SC) affirming the Punjab and Haryana High Court in CIT v. Max India Ltd. [2004] 268 ITR 128 (P&H) and following the Supreme Court in Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 (SC) (page 284 of 295 ITR) :

"Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the Revenue. For example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue, unless the view taken by the Income-tax Officer is unsustainable in law."

(ii) The Delhi High Court in CIT-LTU v. Power Finance Corporation Ltd. [2015] 378 ITR 619 (Delhi) ; [2015-TIOL-2414- HC-DEL] following the co-ordinate Bench in CIT v. Honda Siel Power Products Ltd. [2011] 333 ITR 547 (Delhi) ; [2010-TIOL-468- HC-DEL] (page 558 of 333 ITR) :

"From the aforesaid discussion, it is apparent that the expression 'prejudicial to the interests of the Revenue' appearing in section 263 has to be read in conjunction with the expression 'erroneous' and that every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the Revenue. In cases where the Assessing Officer adopts one of the courses permissible in law or where two views are possible and the Income-tax Officer has taken one view, the Commissioner of Income- tax cannot exercise his powers under section 263 to differ with the view of the Assessing Officer even if there has been a loss of revenue. Of course, if the Assessing Officer takes a view which is patently unsustainable in law, the Commissioner of Income-tax can exercise his powers under section 263 where a loss of Revenue results as a consequence of the view adopted by the Assessing Officer."

(iii) The Delhi High Court in CIT v. Sunbeam Auto Ltd. [2011] 332 ITR 167 (Delhi) (page 179) :

". . . Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. Learned counsel for the assessee is right in his submission that one has to keep in mind the distinction between 'lack of inquiry' and 'inadequate inquiry'. If there was any inquiry, even inadequate that would not by itself give occasion to the Commissioner to pass orders under section 263 of the Act, merely because he has different opinion in the matter. It is only in cases of 'lack of inquiry' that such a course of action would be open."

(iv) Bombay High Court-CIT v. Gabriel India Ltd. [1993] 203 ITR 108 (Bom) (page 115) :

"Cases may be visualised where the Income-tax Officer while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and deter mines the income either by accepting the accounts or by making some estimate himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a figure higher than the one determined by the Income-tax Officer. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. It is because the Income-tax Officer has exercised the quasi-judicial power vested in him in accordance with law and arrived at a conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. It may be said in such a case that in the opinion of the Commissioner the order in question is prejudicial to the interests of the Revenue. But that by itself will not be enough to vest the Commissioner with the power of suo motu revision because the first requirement, viz., that the order is erroneous, is absent."

In view of the above submissions, it is prayed that the initiation of proceedings under section 263 is not legally tenable and the same need to be dropped in the instant case since as amply evidenced by the record, the learned Assessing Officer has taken a valid legal stand on the issue of tax credit after full application of his mind.

3.1.10 Without prejudice to the above, it is further submitted that the issue of tax credit is part of the larger issue of the rights of the country of residence to tax income already subjected to tax under article 7 of the Double Taxation Avoidance Agreement in the country of source which is a subject-matter of appeal filed by the society before the honourable Income-tax Appellate Tribunal under section 253 of the Income-tax Act, 1961. The subject of exemption includes an interpretation to the entire treaty provisions which include article 25 too which is the subject-matter of the proposed revision. Hence, in view of Explanation 1(c) under section 263(1), the issue of tax credit cannot be subject-matter of revision.

3.2 Reply on merits of the issue

3.2.1 On merits, the crux of the issue is whether the exemption from tax granted under the Omani tax law on dividends earned by the society's permanent establishment in Oman falls within the ambit of article 25(4) of the Double Taxation Avoidance Agreement with Oman read with section 90 of the Income-tax Act, 1961, or not.

3.2.2 To appreciate the background of article 25(4), section 90 which governs the power of the Central Government to enter into agreement with another country is analysed below.

"90. Agreement with foreign countries or specified territories.-(1) The Central Government may enter into an agreement with the Government of any country outside India or specified territory outside India,-

(a) for the granting of relief in respect of-

(i) income on which have been paid both Income-tax under this Act and Income-tax in that country or specified territory, as the case may be, or

(b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country or specified territory, as the case may be, or

(c) for exchange of information for the prevention of evasion or avoidance of Income-tax chargeable under this Act or under the corresponding law in force in that country or specified territory, as the case may be, or investigation of cases of such evasion or avoidance, or

(d) . . . ."

The distinction between sub-clauses (a)(i) and (a)(ii) is clear. While sub-clause (a)(i) requires payment of tax as a prerequisite for claiming relief, no such precondition exists in sub-clause (a)(ii). The condition in sub-clause (a)(ii) is "chargeability or liability to tax". The objective of sub-clause (a)(ii) is to promote mutual economic relations, trade and investment. In other words, the objective of sub-clause (a)(ii) is to use the tax treaty to facilitate policy objectives of the Government of India. Under sub-clause (a)(ii), the power of the Central Government extends to grant relief not only for avoidance of double taxation, but also for granting relief for income exempt from taxation. The inference at point 11 of the show-cause notice looking down on the claim of tax credit without paying tax is erroneous in law as the relevant question is "chargeability/liability to tax" and not "actual payment of tax".

3.2.3 The question whether an income which is exempt is eligible to be classified as "chargeable/liable to tax" or not is no longer res integra as the issue has been decided by no less than the apex court in the case of Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 (SC) (copy at annexure III). Interestingly in this case, the apex court was hearing an appeal by the Department against an order of the Delhi High Court which had upheld the plea by a bunch of petitioners that the treaty benefits should be denied if the Income-tax has not been paid in one of the contracting countries (Mauritius) and quashed the Central Board of Direct Taxes's Clarificatory Circular No. 789, dated April 13, 2000 ([2000] 243 ITR (St.) 57 ). After exhaustive arguments and analysis, the apex court upheld the plea of the learned Attorney General that merely because a source of income is exempt at a particular point of time, it cannot be construed that tax is not payable/liability from the charging section is not there. In fact the very need for giving exemption arises since there is a "charge" in the first place. Relevant paragraphs of the judgment are reproduced below (page 738) :

"It is urged by the learned Attorney General and Shri Salve for the appellants that the phrase 'liable to taxation' is not the same as 'pays tax'. The test of liability for taxation is not to be determined on the basis of an exemption granted in respect of any particular source of income, but by taking into consideration the totality of the provisions of the Income-tax law that prevails in either of the Contracting States (see in this connection K. V. AL. M. Ramanathan Chettiar v. CIT [1973] 88 ITR 169 (SC)). Merely because, at a given time, there may be an exemption from Income-tax in respect of any particular head of income, it cannot be contended that the taxable entity is not liable to taxation. They urge that upon a proper construction of the provisions of Mauritian Income-tax Act it is clear that the FIIs incorporated under Mauritius laws are liable to taxation ; therefore, they are 'residents' in Mauritius within the meaning of the DTAC.

For the appellants reliance is placed on the judgment of this court in Wallace Flour Mills Company Ltd. v. CCE [1989] 4 SCC 592, a case under the Central Excise Act. This court held that though the taxable event for levy of excise duty is the manufacture or production, the realisation of the duty may be postponed for administrative convenience to the date of removal of the goods from the factory. It was held that excisable goods do not become non-excisable merely because of an exemption given under a notification. The exemption merely prevents the excise authorities from collecting tax when the exemption is in operation (see also in this connection the judgment of the Madras High Court in Tamil Nadu (Madras State) Handloom Weavers Co-operative Society Ltd. v. Asst. Collector of Central Excise [1978] ELT 57 (Mad))

In Kasinka Trading v. Union of India [1995] 1 SCC 274 this principle was reiterated in connection with an exemption under the Customs Act. This court observed (page 287) : "The exemption notification issued under section 25 of the Act had the effect of suspending the collection of customs duty. It does not make items which are subject to levy of customs duty, etc., as items not leviable to such duty. It only suspends the levy and collection of customs duty, etc., wholly or partially, and subject to such conditions as may be laid down in the notification by the Government in 'public interest'. Such an exemption by its very nature is susceptible of being revoked or modified or subjected to other conditions.

We are inclined to agree with the submission of the appellants that, merely because exemption has been granted in respect of taxability of a particular source of income, it cannot be postulated that the entity is not "liable to tax" as contended by the respondents."

3.2.4 Tax sparing credit-purpose : The United Nations Model Tax Convention (2011) defines tax sparing credit as credit granted by a developed country (capital exporting country-India in the instant case) in respect of tax "spared" by the incentive legislation in the developing country (capital importing country-Oman in the instant case). OECD's glossary of tax terms defines "tax sparing credit as- term used to denote a special form of double taxation relief in tax treaties with developing countries. Where a country grants tax incentives to encourage foreign investment and that company is a resident of another country with which a tax treaty has been concluded, the other country may give a credit against its own tax for the tax which the company would have paid if the tax had not been "spared, (i.e. given up)" under the provisions of the tax incentives.

The purpose of adopting this provision in the Double Taxation Avoidance Agreements is to ensure that the tax incentives granted in a country (say S) for foreign investors are not rendered ineffective in the hands of the foreign investor by home country (of the foreign investor) denying the credit for the taxes foregone but not actually paid in the country S. The relevant paragraphs of the UN Model Tax Convention Commentary are reproduced below for ease of reference :

"The effectiveness of the tax incentive measures introduced by most developing countries thus depends on the interrelationship between the tax systems of the developing countries and those of the capital-exporting countries from which the investment originates. It is of primary importance to developing countries to ensure that the tax incentive measures shall not be made ineffective by taxation in the capital exporting countries using the foreign tax credit system. This undesirable result is to some extent avoided in bilateral treaties through a "tax-sparing" credit, by which a developed country grants a credit not only for the tax paid but also for the tax spared by incentive legislation in the developing country . . .

While the exemption method of providing relief for double taxation eliminates the undesirable effects of the residence country's taxes on the source country's tax incentive scheme, many developed countries are unprepared to include this system in their treaties. Where the investor's home country applies the principle of foreign tax credit, the most effective method of preserving the effect of the tax incentives and concessions extended by developing countries is a tax- sparing credit."

3.2.5 Article 25 of the Indo-Oman Double Taxation Avoidance Agreement which is at the crux of the issue is reproduced below (page 40) :

"Avoidance of double taxation

1. The law in force in either of the Contracting States will continue to govern the taxation of income in the respective Contracting States except where provisions to the contrary are made in this agreement.

2. Where a resident of India derives income which, in accordance with the provisions of this agreement, may be taxed in the Sultanate of Oman, India shall allow as a deduction from the tax on the income of that resident an amount equal to the Income-tax paid in the Sultanate of Oman, whether directly or by deduction. Such deduction shall not, however, exceed that part of the Income-tax (as computed before the deduction is given) which is attributable to the income which may be taxed in the Sultanate of Oman. . .

4. The tax payable in a Contracting State mentioned in paragraph 2 and paragraph 3 of this article shall be deemed to include the tax which would have been payable but for the tax incentives granted under the laws of the Contracting State and which are designed to promote economic development.

5. . . ."

Before attempting to interpret the provisions of the Double Taxation Avoidance Agreement, it will be useful to refer to the following observations of the apex court in Azadi Bachao Andolan [2003] 263 ITR 706 (SC) on the principles to be kept in mind while interpreting a treaty (page 751) :

"Interpretation of treaties

The principles adopted in interpretation of treaties are not the same as those in interpretation of statutory legislation . . .

. . . . The interpretation of a treaty imported into municipal law by indirect enactment was described by Lord Wilberforce as being 'unconstrained by technical rules of English law, or by English legal precedent, but conducted on broad principles of general acceptation. This echoes the optimistic dictum of Lord Widgery C. J. that the words 'are to be given their general meaning, general to lawyer and layman alike . . . the meaning of the diplomat rather than the lawyer. (see Francis Bennion, Statutory Interpretation, page 461 (Butter worths, 1992, second edition))

An important principle which needs to be kept in mind in the interpretation of the provisions of an international treaty, including one for double taxation relief, is that treaties are negotiated and entered into at a political level and have several considerations as their bases. Commenting on this aspect of the matter, David R. Davis in Principles of International Double Taxation Relief (see David R. Davis, Principles of International Double Taxation Relief, page 4 (London, Sweet and Maxwell, 1985)), points out that the main func tion of a Double Taxation Avoidance Treaty should be seen in the context of aiding commercial relations between treaty partners and as being essentially a bargain between two treaty countries as to the division of tax revenues between them in respect of income falling to be taxed in both jurisdictions . . . ."

The significance of the above observations is to appreciate that the primary rationale of article 25(4) is to extend the tax credit already given by article 25(2) even to cases where the tax is not actually paid but would have been payable had it not been exempted under the tax laws of one of the Contracting States. Thus, article 25(4) is a tax sparing provision consciously aimed at giving tax credit even if actual tax is not paid in the Contracting State of source of the income. By this, it is ensured the tax exemption benefit granted by a contracting country is not made "ineffective" by taxation in the Country of Residence (COR) of the foreign investor under the Foreign Tax Credit System. The trade off/rationale for the COR for giving this credit of taxes "spared" is improving the trade/economic relations amongst the contracting countries since the ultimate tax cost in any investment project is reduced/eliminated in the hands of the investor.

3.2.6 From the combined reading of article 25(2), 25(4) and section 90(1)(a)(ii), it is clear that actual payment of taxes is not a sine qua non for the claim of the tax credit. However, the following two conditions still need to be satisfied for the claim of the tax credit :

A. The tax should have been "payable" and

B. The tax is not actually paid on account of the tax incentive provisions aimed at promoting economic development.

The satisfaction of both these conditions in the society's case is discussed below :

A. Whether tax was "payable" by the society's permanent establishment in Oman ?

(i) In the previous year relevant to the assessment year 2010- 11, the Omani tax law was governed by Royal Decree 47 of 1981. (relevant extracts at annexure IV). Some of the relevant provisions of this law are discussed below :

Article 2(4) : The term company includes any permanent establishment in Oman which is supported by a foreign company.

Article 2(17) : Tax means any tax payable under this law and includes penalty, interest . . .

Article 2(19) : Taxable income means the total amount of gross income less any deductions allowed therefrom.

Article 4(Bis) : The Secretariat General shall primarily be competent of :

(a) Taking the procedures necessary for making the tax assessments and the exemption therefrom in the manner specified in the law . . .

Article 8 (Charging section) : Subject to this law, tax shall be charged for each taxable year upon the taxable income of any company which accrues or arises in Oman or is deemed by the Secretary General to so accrue or arise in respect of . . . any income from any other source.

Article 8 (bis) inserted by Royal Decree 68/00 effective from 2000 : The tax shall not apply to the dividends received by the company from the shares, portions or stock it owns in the capital of any other company.

(ii) A combined reading of the above provisions clearly show that the charge on the income of the permanent establishment is governed by article 8 read with article 2(4) and 2(17). However in the year 2000, article 8(bis) was added to exempt dividends received by the company including the society's permanent establishment. If the amendment had not taken place, the dividend income accrued/earned in Oman would have been taxed in Oman since the society's permanent establishment is included in the definition of company under article 2(24). The very purpose of giving the exemption is to carve out an exception from the charging section. If there was no charge in the first place, there would have been no need to insert 8 (bis) to grant the exemption. The charge does not go away merely because exemption is granted at a particular point of time.

(iii) It is very significant to note that this issue has also been dealt at length in the clarification dated August 6, 2000 (Annexure-V) given by the Ministry of Finance, Secretariat General for Taxation, Sultanate of Oman, (prior to insertion of article 8 (bis)) wherein it is clearly clarified at point 2 that "income including dividends of a permanent establishment of any foreign enterprise is chargeable to tax and is charged to tax at rates mentioned in paragraph 6(ii) below". Hence it is clear that tax was payable by the Society's permanent establishment on the Dividends received but for the amendment made to article 8 of the Omani tax law."

. . .

B. The following is relevant to understand the nature of the exemption granted by article 8(bis) :

(i) The preamble to Royal Decree 68 of 2000 (Annexure-VI) issued by the Sultanate of Oman (which inserted article 8 (bis)) states that the amendments have been done "in exigencies of public good". In law, the preamble to a statute is a well recognised internal tool of interpretation of the statute. In accordance with the exigencies of public good means a demand for the economic good of the public. Public good corresponds to national needs and self-interest of a country. In a fiscal statute, amendment for public good clearly implies amendment through tax incentives to foster economic development/job growth through inflow of foreign capital. Thus, from the preamble itself it is clear that the exemption to dividends is a tax incentive measure aimed at fostering economic development. There is no other motive other than economic development which can be reasonably attributed to a tax incentive/exemption measure. Hence, the requirement of article 25(4) is fulfilled in the case of the society.

(ii) The above conclusion is fortified beyond doubt by a clarificatory letter issued by the Secretariat General for Taxation, Ministry of Finance, Sultanate of Oman, dated December 11, 2000 (annexure- VII) issued in response to a letter written on behalf of the Indian Sponsors (IFFCO/KRIBHCO) by the Omani JV Partner M/s. Oman Oil Company (annexure-VIII) seeking clarifications on the intent of article 8(bis). The said letter clearly explains that :

-Before the recent amendments, though the companies engaged in activities considered essential for economic development were given tax exemption, tax was payable by recipients of dividends from these companies.

-This implied that the investors had a tax cost in their hands resulting in negative impact on investments thus adversely affecting the objective of economic development

-To obliterate the above cited negative effect, the exemption is now granted in the hands of recipients' too "so that the Government of Oman would achieve its main objective of promoting economic development by attracting investments".

It is trite that the only authority competent to comment on the rationale of any tax incentive provision in a country's tax law is the authorities/Legislature/judiciary of that country alone. There is no scope for the other country's tax authorities (India in the instant case) to second guess the objectives especially in the light of clear cut clarification given in the above cited letter. Such an attempt would clearly fall foul of the mandate of article 25(4) entered consciously by the Governments of both the countries and has to be repelled.

3.2.8 Without prejudice to the above, it is submitted that though each assessment year is separate and distinct and principle of res judicata does not apply to proceedings for subsequent or other years, decision on an issue or question though not binding should be followed and not ignored unless there is a change in law or facts to take a different view. Reliance is placed in this regard on the decision of the honourable Supreme Court in Radhasoami Satsang v. CIT [1992] 193 ITR 321 (SC), (followed by the apex court in CIT v. Excel Industries Ltd. [2013] 358 ITR 295 (SC)) which held that when a fundamental aspect pervading through different assessment years has been found as a fact in one way or the other, it would be inappropriate to allow the position to be changed in a subsequent year particularly when the said finding has been accepted. The said principle is also based upon the rules of certainty and consistency that a decision taken after due application of mind should be followed consistently. On the facts in our case, neither the law (Domestic Law/ Treaty) nor the facts have changed from the earlier years wherein the Revenue has allowed the claim of tax credit from assessment year 2006-07 to assessment year 2011-12. Hence, the settled position should be followed for the sake of consistency too.'

In the light of the above it is prayed that the proposed revisionary proceedings are not sustainable in law or facts in view of the following:

-On the legal issue of revisionary jurisdiction under section 263, in view of the specific enquiry by the Assessing Officer and detailed reply on the issue covering all the aspects of article 25(4).

-On facts, based on the clear confirmation on chargeability of Omani tax both before the amendment to article 8(bis) and after the amendment to article 8 confirming the objective of the change in law by the Omani Secretariat General of Taxation.

Hence, the proposed revisionary proceedings may kindly be dropped." (emphasis supplied)

8.4 The learned Principal Commissioner of Income-tax has considered the submissions made by the appellant-society vide letter dated January 11, 2016, relevant parts of which have been reproduced above. However, he communicated to the appellant-society vide further letter dated March 10, 2016, that he was not satisfied with the reply given. Vide para 6 of this letter the learned Principal Commissioner of Income-tax conveyed that no sanctity can be attached to the letters issued by the Secretariat General of Taxation of Oman regarding the purpose for which exemption was granted to dividend income. He opined that the appellant-society is trying to give a shape of law to the letters issued by the Administrative Officer. He further stated that there should be some provision in the Omani Tax decree authorising an officer to issue clarifications about the tax laws. The learned Principal Commissioner of Income-tax has mentioned that in the relevant section 8(Bis) of the Omani tax law, there is no reference that exemption to dividend income was designed for economic development. The learned Principal Commissioner of Income-tax further conveyed that mere investment in a company to earn dividend income does not result into economic development. The learned Principal Commissioner of Income-tax also referred to the order dated March 9, 2016, passed by the honourable Income-tax Appellate Tribunal, Delhi Bench in the case of KRIBHCO. In this order the honourable Tribunal quashed the order passed by the learned Principal Commissioner of Income-tax under section 263 in similar facts and circumstances. The learned Principal Commissioner of Income-tax observed that the Department may not accept the order of the Income-tax Appellate Tribunal. At paras 15 and 16 of the said letter dated March 10, 2016, the learned Principal Commissioner of Income-tax further observed that the article 6(3) of the Omani Tax Decree relied upon by the appellant-society cannot be construed to grant any power to the Secretary General of Taxation of Sultanate of Oman to issue any clarification regarding interpretation of law. The learned Principal Commissioner of Income-tax at para 13 of his order has mentioned that in response to the aforesaid letter the appellant- society further filed written submissions, vide letter dated March 22, 2016. The learned Principal Commissioner of Income-tax has briefly referred to the contentions of this letter. It would be appropriate to reproduce below the relevant part of the appellant-society's letter dated March 22, 2016, for the kind consideration and appreciation of this honourable Tribunal :

A1. As your honour is already aware, the Income-tax Appellate Tribunal has pronounced its judgment in the case of Krishak Bharti Co-operative Ltd.('KRIBHCO' for short) v. Asst. CIT (I. T. A. Nos. 6785 and 6786/Del/2015, vide its order dated March 9, 2016 [2016] 67 taxmann.com 138 (Delhi-Trib)). As rightly mentioned in your show- cause notice, each case law turns on its own facts. The Income-tax Appellate Tribunal has quashed the revisionary order both on the grounds of jurisdiction, consistency and on merits too. The facts in our case are on all fours covered by the said decision. Similar to KRIBHCO's case, in our case too, as submitted in our reply dated January 11, 2016 :

• Detailed enquiry letters were issued by the Assessing Officer from the assessment year 2006-07 to the assessment year 2011-12 (including the assessment year 2010-11, being the year under proposed revision).

• After discussion of article 25(4) of the Double Taxation Avoidance Agreement, article 8 (bis) of the Omani Law and the assessment orders in Oman which highlighted the objective of the dividend exemption implying proper application of mind, the tax credit was allowed to the society in the scrutiny assessment orders.

• View adopted by the Assessing Officer was one of the plausible and possible view (kindly refer paragraph 15 of the Income-tax Appellate Tribunal order)

It may kindly be noted that the honourable Tribunal has also recorded an unambiguous finding that the order passed under section 263 is also bad in law on the following two grounds :

1. There was full application of mind on the part of the Assessing Officer at the time of original assessment and he has adopted a view which is a possible view and therefore, having regard to the established position of law, the Principal Commissioner of Income- tax cannot invoke his jurisdiction under section 263 merely to substitute his view in place of the view adopted by the Assessing Officer.

2. The order passed under section 263 is also contrary to the well established principle of consistency of approach in the absence of change in the facts or the provision of law. It was observed by the honourable Tribunal that during the preceding years, in scrutiny assessments passed by the Department, after full application of mind and after detailed discussion in the orders, the Department has been allowing credit for deemed dividend tax.

It is respectfully submitted that the case of the assessee-society is covered by the order of the honourable Tribunal in the case of KRIBHCO on all issues, factually as well as legally. It is therefore, respectfully submitted that the notice issued under section 263 may kindly be dropped. Hence, based on the similarity of facts and law, we request your honour to follow the order of the jurisdictional Income-tax Appellate Tribunal and drop the revisionary proceedings. Though your honour is well versed in law and the doctrine of precedent/stare decisis, we would like to rely on the following case law (with relevant extracts) highlighting the binding nature of the jurisdictional Tribunal's orders till the same are stayed/set aside/over- ruled by higher courts :

(a) The Madhya Pradesh High Court-Agrawal Warehousing and Leasing Ltd. v. CIT [2002] 257 ITR 235 (MP) relying on the Supreme Court's order in Union of India v. Kamlakshi Finance Corporation Ltd. (page 239) :

"The Tribunal is created under section 252 of the Income-tax Act, consisting of as many judicial and accountant members as may be appointed by the Central Government. One such judicial member of the Tribunal is normally appointed as the President thereof. Any assessee aggrieved by the orders passed by the authorities as enumerated under clauses (a) to (c) of sub-section (1) of section 253 may appeal to the Tribunal. The Tribunal has power to pass such orders on such an appeal as it thinks fit. Sub-section (4) of section 254 attaches finality to the orders of the Tribunal subject to the provisions of section 256 (or section 260A). Needless to say the orders passed by the Tribunal are binding on all the Revenue authorities functioning under the jurisdiction of the Tribunal. Dealing with this very aspect of the matter, the Supreme Court in the case of Union of India v. Kamlakshi Finance Corporation Ltd., AIR 1992 SC 711 ; [1991] 55 ELT 433 (SC) emphasised (page 712 of AIR 1992 SC) :

'It cannot be too vehemently emphasised that it is of utmost importance that, in disposing of the quasi-judicial issues before them revenue officers are bound by the decisions of the appellate authorities. The order of the Appellate Collector is binding on the Assistant Collectors working within his jurisdiction and the order of the Tribunal is binding upon the Assistant Collectors and the Appellate Collectors who function under the jurisdiction of the Tribunal. The principles of judicial discipline require that the orders of the higher appellate authorities should be followed unreservedly by the subordinate authorities. The mere fact that the order of the appellate authority is not 'acceptable' to the Department-in itself an objectionable phrase-and is the subject-matter of an appeal can furnish no ground for not following it unless its operation has been suspended by a competent court. If this healthy rule is not followed, the result will only be undue harassment to assessees and chaos in administration of tax laws.'

Obviously, the Commissioner of Income-tax (Appeals) not only committed judicial impropriety but also erred in law in refusing to follow the order of the Appellate Tribunal. Even where he may have some reservations about the correctness of the decision of the Tribunal, he had to follow the order . . ."

(b) The Bombay High Court-Bank of Baroda v. H.C. Shrivat sava [2002] 256 ITR 385 (Bom) (page 390) :

"At this juncture, we cannot resist observing that the judgment delivered by the Income-tax Tribunal was very much binding on the Assessing Officer. The Assessing Officer was bound to follow the judgments in its true letter and spirit. It was necessary for the judicial unity and discipline that all the authorities below the Tribunal must accept as binding the judgment of the Tribunal. The Assessing Officer being an inferior officer vis-a-vis the Tribunal, was bound by the judgment of the Tribunal and the Assessing Officer should not have tried to distinguish the same on untenable grounds. In this behalf, it will not be out of place to mention that 'in the hierarchical system of courts' which exists in our country, 'it is necessary for each lower tier' including the High Court, 'to accept loyally the decisions of the higher tiers'. 'It is inevitable in hierarchical system of courts that there are decisions of the supreme Appellate Tribunal which do not attract the unanimous approval of all members of the judiciary. But the judicial system only works if someone is allowed to have the last word, and that last word once spoken is loyally accepted'. The better wisdom of the court below must yield to the higher wisdom of the court above as held by the Supreme Court in the matter of Asst. CCE v. Dunlop India Ltd. [1985] 154 ITR 172 (SC) ; AIR 1985 SC 330."

A2. Point Nos. 14 and 15-Sanctity of letter not considered by the Income-tax Appellate Tribunal

At point 14 of your office's letter dated March 11, 2016, it is stated that the Income-tax Appellate Tribunal in its order has not considered the sanctity of letter issued by the Secretary General of Taxation to a "single company". It is humbly submitted that at page 64 of the Order, clause 6(3) of the Omani law stating that "any document issued by the Secretary General shall be considered an official document if it carries its name" has been duly reproduced. At paragraph 13 on page 73, the order of the learned Income-tax Appellate Tribunal states that "we have considered the rival submissions and perused the relevant records available with us". The "Records" include the letters issued by the Secretary General of Taxation (SGT), Ministry of Finance in August and December, 2000. The "submissions" include the reference to article 6(3) of the Omani tax law. Further at paragraph 19, the Income-tax Appellate Tribunal states that interpretation of Omani tax laws can be clarified only by the highest tax authorities of Oman and such interpretation given by them must be adopted in India.

Hence, from the above facts, since article 6(3) was very much before the Income-tax Appellate Tribunal, it is clear that the Income- tax Appellate Tribunal has considered the letter/document of H.E the SGT in the context of article 6(3) and has concluded the letters to be a sufficient aid to interpret the intent of the dividend exemption. One may or may not agree with the conclusion of the Income-tax Appellate Tribunal but it would be wholly fallacious to presume that the Income- tax Appellate Tribunal has not considered the validity/legality of the letter. In this regard, it may be useful to refer to the following observations of the Income-tax Appellate Tribunal-Hyderabad in the case of Liquors India Ltd. (I. T. A. Nos. 352/Hyd/2013) :

"Further, we make it clear that neither the Commissioner of Income-tax/Commissioner of Income-tax (Appeals) nor the Tribunal cannot scrutinise the earlier order of the Tribunal, sentence by sentence merely to find out whether all the facts have been set out in detail by the Tribunal or whether some incidental fact which appears on the record has not been noticed by the Tribunal in its judgment. If the authority, on a fair reading of the judgment of the Tribunal, finds that it has taken into account all relevant material and has not taken into account any irrelevant material in basing its conclusion, the decision of the Tribunal is not liable to be interfered with, unless, of course, the conclusions arrived at by the Tribunal are perverse. It is not necessary for the Tribunal in its judgment specifically or any express words that it has taken into account the cumulative effect of the circumstances or has considered the totality of the facts of the case, as if it is a magic formula : if the judgment of the Tribunal shows that it has, in fact, done so, there is no reason to interfere with the decision of the Tribunal. The Commissioner of Income-tax is not justified in finding a hole in the order of the Tribunal so as to disallow the claim of the assessee towards trade scheme expenditure. In our opinion, the comments of the Commissioner of Income-tax regarding the interpretation taken by the Tribunal on earlier occasion deserves to be repudiated as a fact of gross judicial indiscipline."

Hence, since at para 17 of the order, the honourable Income-tax Appellate Tribunal has also decided the issue on merits, it is prayed that the revisionary proceedings may be dropped following the jurisdictional Tribunal's order on the merits of the case too.

A3. Points 6 to 9-Sanctity of letter issued by H.E SGT, Ministry of Finance, Oman

Though as discussed above, the honourable Income-tax Appellate Tribunal in its wisdom has already decided the issue of validity of the letter issued by the SGT, Ministry of Finance, Oman, in response to the doubts in your office's letter dated March 11, 2016, we make the following additional submissions in continuation to our submissions dated January 11, 19, 2016, for your honour's kind perusal :

(i) Each country is sovereign in deciding the branches of its Government, structure of its laws, conventions, extent of delegated legislation, etc. In India, as a matter of convention, the intent of changes in tax law are explained in the relevant year's memorandum explaining provisions in the Finance Bill. However, even in India, there is no constitutional/statutory requirement for intent of each and every change to be explained in the memorandum. Each country's conventions differ. Since there is no such convention in Oman (surely, for no fault of the assessee), a specific clarification was sought from the Ministry of Finance in Oman in the year 2000 which was replied by HE the Secretary General for Taxation, Ministry of Finance, Oman, vide letters dated August 6, 2000, and December 11, 2000. In the absence of any cogent material, there was and is absolutely no basis for us or any Indian Authority to doubt the Authority of the Secretary General for Taxation, Ministry of Finance, Oman, to issue such a letter. Can it be reasonably expected that as an investor, we will first ask the Oman Government to amend its laws authorising the SGT to specifically issue clarification/letter to us before we rely on such a clarification ? If that be so, going a step further, an investor may even have to wait till the other country's judiciary also affirms the validity of such a provision before it takes the investment decision ? Is this a reasonable/fair expectation ?

(ii) Your kind attention is drawn to article 3 of the Omani tax law (submitted as annexure-IV in the reply dated January 11, 2016) which states that the "The Secretary General shall be responsible for the execution of this law . . .". "Execution" in itself has wide connotations and the power to issue clarifications can be reasonably construed to be included in this power/responsibility itself as in the absence of suitable clarifications, if the intent of some provisions remain uncertain and the investor is unable to calculate the impact of such incentives on the post tax returns on its investments, the incentive provisions would not achieve their purpose thus hindering the effective execution of the law. Your honour would appreciate that execution of tax law is not just collection of revenues but also ensuring that the legislative purpose behind the incentive/exemption provisions of encouraging investment is clarified to all prospective investors. Hence, it is unfair to treat the letter of HS SGT dated December 11, 2000 as "unauthorised in law".

(iii) Further, there is a presumption of regularity expressed by the maxim of law "omnia praesumuntur rite et solemniter esse acta donec probetur in contrarium" implying that all judicial and official acts are presumed to be having been rightly and regularly done. Neither motive can be presumed nor bad faith nor abuse of power. This maxim is codified in section 114(e) of the Indian Evidence Act, 1872, too. Hence, the regularity/legal validity of the official letters should be respected.

(iv) In the absence of any explicit limitation on the authority of the SGT in the Omani tax law and in view of the powers of the HE the SGT in the overall scheme of the Omani tax law, it is unjust and unfair to call it "mere opinion of an officer". Such an interpretation would imply that no investor would believe the authorities of any country and the tax sparing credit provision enshrined in article 25(4) of the Indo-Oman Double Taxation Avoidance Agreement read with section 90(1)(a)(ii) would be rendered otiose.

A.4. Point Nos. 10 to 12-Non mentioning of "Economic Development" in article 8(bis)

(i) It is stated in your office's letter that the intent of Economic Development is not explicitly written in article 8(bis) and the assessee is trying to insert economic development in the same. It is humbly submitted that there is no such attempt by us. The intent of law may or may not be mentioned in a legal provision depending upon the individual practices/conventions of each country. Even in India, we find so many tax incentives aimed at economic development contained in section 10 and Chapter VI-A without explicitly mentioning the aim/intent of them in the section itself. As stated earlier, we have to gather the same from the internal and external aids to construction like the explanatory memorandum, the object clause of the Finance Bill, the Minister's Speech, etc. Similarly, just because article 8(bis) does not contain the reference to economic Development, it cannot be presumed that the said exemption is not designed for economic development.

(ii) Further, it is a basic principle of construction of statutes that the statute has to be read as a whole in its context. "Context" includes the previous State of law, the preamble, object sought to be achieved, mischief sought to be remedied. (Union of India v. Elphinstone Spinning and Weaving Co. Ltd., AIR 2001 SC 724 (Constitution Bench). Prior to insertion of article 8(bis) (Previous State of law), the Investors in Oman suffered a tax cost on the returns from their investment if the investee companies income was exempt from tax. The SGT in its letter dated August 6, 2000 and December 11, 2000 (annexures V and VII to our reply dated January 11, 2016) reiterates this factual position and in the letter of December 11, 2000, goes on to say that :

"We refer to your letter dated December 2, 2000, and our previous letter dated August 6, 2000 on the above subject.

Under article 8 of the Company Income-tax Law of Oman, dividend forms part of the gross income chargeable to tax. The tax law of Oman provides Income-tax exemption to companies undertaking certain identified economic activities considered essential for the country's economic development with a view to encouraging investments in such sectors.

Before the recent amendments to the Profit Tax Law on Commercial and Industrial Establishments, article 5 of this law provided for exemption of dividend income in the hands of the recipients if such dividends were received out of the profits on which Omani Income-tax was paid by distributing companies. It meant that Omani Income-tax was payable by the recipients on any dividend income received out of the exempt profits from tax exempt companies. As a result, investors in tax exempt companies that undertake those activities considered essential for the country's economic Development suffered a tax cost on their return on investments. The tax treatment under the above mentioned article 5 had the negative impact on investments in tax exempt project.

The Company Income-tax Law of 1981 was, therefore, recently amended by Royal Decree No. 68/2000 by the insertion of a new article 8(bis), which is effective as from the tax year 2000.

As per the newly introduced article 8(bis) of the Company Income-tax Law, dividend distributed by all companies, including the tax exempt companies would be exempt from payment of Income-tax in the hands of the recipients. In this manner, the Government of Oman would achieve its main objective of promoting economic Development within Oman by attracting investments.

We presume from our recent discussions with you that the Indian investors in the above project would be setting up permanent establishment in Oman and that their equity investments in the project would be effectively connected with such permanent establishments.

On the above presumption, we confirm that tax would be payable on dividend income earned by the permanent establishments of the Indian investors, as it would form part of their gross income under article 8, if not for the tax exemption provided under article 8(bis).

As the introduction of article 8(bis) is to promote economic development in Oman, the Indian investors should be able to obtain relief in India under article 25(4) of the agreement for Avoidance of Double Taxation in India.

All other matters covered in our letter No. FT/13/92/, dated August 6, 2000 remain unchanged."

It is an accepted position of interpretation that if there is some doubt about the interpretation of a particular provision of law, the competent authority to clarify that provision is only the Government of that particular country. The Income-tax Department of India has no locus standi in this matter.

Also, the preamble to Royal Decree 68 of 2000 (submitted as annexure VI to our reply dated January 11, 2016) issued by the Sultanate of Oman (which inserted article 8 (bis)) states that the amendments have been done "in exigencies of public good". In law, the preamble to a statute is a well-recognised internal aid to construction/interpretation of the statute. In accordance with the exigencies of public good means a demand for the economic good of the public. Public good corresponds to national needs and self-interest of a country. In a fiscal statute, amendment for public good clearly implies amendment through tax incentives to foster economic Development/job growth through inflow of foreign capital. Thus, from the preamble itself it is clear that the exemption to dividends is a tax incentive measure aimed at fostering economic development. There is no other motive other than economic development which can be reasonably attributed to a tax incentive/exemption measure.

Thus, when read in its context, it is clear that the exemption to dividends was given to incentives investors to invest more. The link between investment and economic development is too obvious in economics to be ignored in interpreting article 8(bis) more so when the same is specifically acknowledged by the Ministry of Finance of the country (Oman) itself.

A5. Point No. 13-General exemption's link with economic Development

(i) It is stated in your office letter that "It is not necessary that any shareholder who earns dividend would be promoting the economic development. It is mere investment in a particular company. . . .". We humbly submit that we agree that the act of receiving dividends cannot promote economic development but we cannot lose sight of the fact that receipt of dividend is a consequence of investment. Economic development takes place qua investment and not qua dividend receipts. It is the act of investment which promotes economic development directly by means of generation of employment and indirectly by its effects on other sectors of the economy having linkages with the industry. For instance, due to the OMIFCO Fertiliser Project coming in Oman, not only people employed in the company but also its vendors, contractors, etc., would earn income which would obviously help in development of Oman economy. From the investor point of view, any prudent investor comparing investment options before making a final decision will obviously compare the "post tax returns" on its investments among various competing countries/investment options. The post tax returns would necessarily take into account the tax on projected dividends in source country and home country based on the respective domestic tax laws and the provisions of the Double Tax Avoidance Agreements. The relevance of the Double Taxation Avoidance Agreement's as a means of encouraging cross border trade and investment is codified in section 90(1)(a)(ii) of our Income-tax Act too. It is obvious that given the same amount of profits earned by a investee company and dividend pay out ratios, the post tax returns for the investor would be higher in a country which grants the dividend exemption (like article 8 (bis) of Omani tax law) than a country which does not grant an exemption. Hence, the nexus between the dividend exemption and economic development is luminescent and cannot be brushed aside. Even if for a moment the explicit letters of HE the SGT and the assessment orders in Oman are ignored, the only reasonable interpretation as to the intent of the dividend exemption can be as an incentive aimed as an economic development measure only. (ii) It is not true that general exemption cannot be for a specific purpose. There is no legal/factual basis for such an observation. In tax laws, each and every incentive provision has a purpose. "Tax incentives" include exemptions, deductions, tax credits, etc. The words "economic development" have a very wide connotation and cannot be given a restricted meaning to confine it to only some sectors of the economy. When the intent is to incentives foreign investment in all the sectors of the economy, a general dividend exemption can be given as a tax incentive across all sectors. Such an exemption would not lose its attribute of encouraging economic development just because it applies across all sectors. If the intention in the Double Taxation Avoidance Agreement was to restrict its meaning to certain specified sectors, suitable qualifiers would have been inserted before the words "economic development" in article 25(4).

In conclusion in the light of the above submissions and the decision of the jurisdictional Income-tax Appellate Tribunal in the case of KRIBHCO (supra) both on merits and non-maintainability of the proposed revision under section 263, sufficient enquiry having been done at the assessment stage, we once again pray for dropping the proceedings under section 263 on the issue." (emphasis supplied)

8.5 It may kindly be appreciated that the appellant-society not only strongly relied on the decision rendered by a co-ordinate Bench of the honourable Tribunal on the same issue but also has explained in great detail as to how the Secretary General of Taxation, Oman is fully competent and authorised to clarify the purpose of any amendment made in the Omani tax law and also demonstrated the inextricable link between investment and economic development on the one hand and between the post tax returns for an investor and investment on the other hand. The learned Principal Commissioner of Income- tax has merely assumed that the relevant letters issued by the Secretary General of Taxation can be considered as letters/opinion issued by an officer which have no sanctity in the eyes of law. It is respectfully submitted that the Secretary General of Taxation, Oman is acting under the authority of the sovereign State of Sultanate of Oman and he is fully competent to issue a clarification whenever there is any doubt raised by the affected company/foreign investors regarding the purpose of any amendment brought about in the Omani tax law. The learned Principal Commissioner of Income-tax has considered the various submissions made on behalf of the appellant-society and has recorded his findings on the relevant issue at paras 20 to 50 of his order. First of all, at para 21 he has made the following sweeping remark.

"21. In my opinion, the Assessing Officer did not make any verification/enquiries as regards the legal value of letters issued by the Secretary General and also did not make any enquiry as regards the designed economic development. There was lack of inquiry and non- application of mind."

From the above, it may kindly be seen that the learned Principal Commissioner of Income-tax has proposed to treat the assessment order as erroneous and prejudicial on the ground that the Assessing Officer did not make any verification/inquiry regarding the legal value of the letters issued by the Secretary General of Taxation. In this regard, it is submitted that the Assessing Officer has considered this issue on merits in great detail in a scrutiny assessment order passed by him and he has further followed consistent view taken by the Department starting from the assessment year 2006-07 onwards in scrutiny assessment completed. The Assessing Officer has further taken note of the assessments made in the case of the permanent establishment of the appellant-company wherein also it is unambiguously recorded that exemption has been granted to dividend income for the purpose of economic development. Therefore, no fault can be found in the approach of the Assessing Officer. At paragraph 23 the learned Principal Commissioner of Income-tax has observed that the issue as to whether exemption has been granted for the purpose of economic development, has to be decided not by one country but by both the countries as the Double Taxation Avoidance Agreement is entered into by two countries. It is humbly submitted that this observation made by the learned Principal Commissioner of Income-tax is totally fallacious. If there is some debate about the interpretation of any provision of the Double Taxation Avoidance Agreement only then the two countries would come into picture. However, if the question is confined only to the interpretation of a particular provision of the tax law of one of the countries, it is only that specific country which can issue any clarification regarding the interpretation. The other country obviously does not have any locus standi in this matter. For example, if there is any doubt regarding the interpretation of any provisions of the Income-tax Act, only the Government of India through its agency can clarify such provision. Similarly, if there is some debate regarding the interpretation of any provision or purpose which is confined to the Omani tax law, only the Sultanate of Oman through its agency can issue clarification. There is no question of the two countries sitting together on this particular issue.

8.6 At paragraph 24 the learned Principal Commissioner of Income-tax has referred to the honourable Supreme Court decision in the case of Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 (SC) and at para 25, the learned Principal Commissioner of Income-tax has also reproduced the following part of the honourable Supreme Court's order (page 726) :

"The niceties of the OECD model of tax treaties or the report of the Joint Parliamentary Committee on the Stock Market Scam and Matters Relating thereto, on which considerable time was spent by Mr. Jha, who appeared in person, need not detain us for too long, though we shall advert to them later. This court is not concerned with the manner in which tax treaties are negotiated or enunciated ; nor is it concerned with the wisdom of any particular treaty. Whether the Indo-Mauritius DTAC ought to have been enunciated in the present form, or in any other particular form, is none of our concern. Whether section 90 ought to have been placed on the statute book, is also not our concern. Section 90, which delegates powers to the Central Government, has not been challenged before us, and, therefore, we must proceed on the footing that the section is constitutionally valid. The challenge being only to the exercise of the power emanating from the section, we are of the view that section 90 enables the Central Government to enter into a DTAC with the foreign Government. When the requisite notification has been issued thereunder, the provisions of sub-section (2) of section 90 spring into operation and an assessee who is covered by the provisions of the DTAC is entitled to seek benefits thereunder, even if the provisions of the DTAC are inconsistent with the provisions of the Income-tax Act, 1961."

We are at a loss to understand as to how the aforesaid observation of the honourable Supreme Court supports the view taken by the learned Principal Commissioner of Income-tax. As a matter of fact these observations are in assessee's favour. At paragraph 27 the learned Principal Commissioner of Income-tax has further observed that at paragraph 4 of the letter dated August 6, 2000, it is mentioned that exemption was granted initially for a period of five years and this period may be extended for a further period of five years. We are again at loss to understand what is the relevance of these remarks of the learned Principal Commissioner of Income-tax because the exemption continues and has been allowed in respect of the assessment year under appeal and, therefore, the entire controversy has arisen. Further, the insinuation at para 27 of the impugned order that "a response to letter cannot become a law" is uncalled for and not apposite as the law is already laid down in the Royal Decrees of the Omani Government, the letter issued by H. E the Secretary General does not override it is only a clarification on the intent of law to allay any doubts in the minds of the foreign investors. There is no requirement in law for a clarification sought by an investor to be made public.

8.7 At paragraph 28, the learned Principal Commissioner of Income-tax has attempted to cast a doubt on the intent of the exemption on the ground that the Royal Decree ought to have mentioned the exact words "designed for economic development" in the Decree itself and in its absence, the assessee cannot presume the same as designed for economic development. It is humbly submitted that with due respect, this is unjustified and is in ignorance of the legislative process. There is no Constitutional/legal requirement in the Sultanate of Oman (or for that matter even India) for the intent of the law to be mentioned in the law itself. The intent has to be gathered by the courts as part of the interpretation/construction process having regard to context, history of the law, mischief sought to be remedied and various internal/external aids to construction of statutes. The mere fact that the intent of the change in law was not mentioned in the Royal Decree cannot be held against the appellant.

8.8 At paragraph 30, the learned Principal Commissioner of Income-tax has again repeated that the letter issued by the Secretary General of Taxation is merely an opinion of an officer of Oman which cannot be accepted. The learned Principal Commissioner of Income- tax has refused to accept detailed submissions made before him that the Secretary General of Taxation, Oman is fully competent and authorised to issue any clarification regarding the purpose of any provision of Omani tax law.

8.9 At para 33, the learned Principal Commissioner of Income-tax has concluded that there is no article in the Omani tax law which empowers the SGT for interpreting a particular article. It is submitted that this is a complete misreading of the Omani tax law especially article 3 of Royal Decree 47 which specifically states that the "The Secretary General shall be responsible for the execution of this law . ..". "Execution" in itself has wide connotations and the power to issue clarifications can be reasonably construed to be included in this power/responsibility itself as in the absence of suitable clarifications, if the intent of some provisions remain uncertain and the investor is unable to calculate the impact of such incentives on the post tax returns on its investments, the incentive provisions would not achieve their purpose thus hindering the effective execution of the law. Your honour would appreciate that execution of tax law is not just collection of Revenues but also ensuring that the legislative purpose behind the incentive/exemption provisions of encouraging investment is clarified to all prospective investors. Hence, in the absence it is unfair and disingenuous to treat the letter of HS SGT dated December 11, 2000, as "unauthorised in law".

8.10 At paragraph 34 the learned Principal Commissioner of Income-tax has relied on the honourable Supreme Court decision in the case of Smt. Tarulata Shyam v. CIT [1977] 108 ITR 345 (SC). The learned Principal Commissioner of Income-tax has relied on the following observations of the honourable Supreme Court in the above judgment (page 356) :

It is urged that the principle in the last limb of sub-section (1) of section 108 of the Commonwealth Act should also be read into the Indian statute. It is maintained that the omission of such words from sections 2(6A)(e) and 12(1B) does not show that the intendment of the Indian Legislature was different. According to the counsel what is explicit in section 108(1) of the Commonwealth Act, is implicit in sections 2(6A)(e) and 12(1B) and the general scheme of the Act which requires that the assessment is to be made on the basis of total income of the whole previous year. Such a view, concludes Mr. Sharma, would also be in consonance with reason and justice.

We have given anxious thought to the persuasive arguments of Mr. Sharma. His arguments, if accepted, will certainly soften the rigour of this extremely drastic provision and bring it more in conformity with logic and equity. But the language of sections 2(6A)(e) and 12(1B) is clear and unambiguous. There is no scope for importing into the statute words which are not there. Such importation would be, not to construe, but to amend the statute. Even if there be a casus omissus, the defect can be remedied only by legislation and not by judicial interpretation.

To us, there appears no justification to depart from the normal rule of construction according to which the intention of the Legislature is primarily to be gathered from the words used in the statute. It will be well to recall the words of Rowlatt J. in Cape Brandy Syndicate v. IRC [1921] 1 KB 64 (KB) at page 71, that :

". . . . in a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used."

Once it is shown that the case of the assessee comes within the letter of the law, he must be taxed, however great the hardship may appear to the judicial mind to be." (emphasis supplied)

We are again at a loss to understand the relevance of this case for the purpose of deciding as to whether the Secretary General of Taxation, Oman is competent to issue a clarification or not. There can be no quarrel about the principle of jurisprudence laid down by the honourable Supreme Court in the above case but how it supports the view adopted by the learned Principal Commissioner of Income-tax is not clear.

8.11 At para 36, the learned Principal Commissioner of Income-tax has averred that "what the words "designed for economic development" are explicit there is no room for something implicit". With due respect, we are at a loss to understand what is implicit when the clarification issued by HE the SGT is amply clear and explicit that the amendment to exempt dividends in Oman's Domestic Law was done with the specific objective of reducing the tax cost for the investors so that they are encouraged to invest resulting in furtherance of the aim of economic development of Oman.

Further, even if for a moment the clarification issued by HE the SGT is ignored, the scope of "economic development" as used in article 25(4) is so wide that any fiscal incentive aimed at investment promotion directly through lesser taxes/exemption on dividends can have no objective other than economic development.

Some of the dictionary meanings are reproduced below which amply clarify that economic development covers job and industrial growth which is a direct result of increase in investment on account of tax incentives like dividend exemption (if a term is not defined in the statute, resort to dictionary is a judicially approved aid to construction) :

(a) The scope of economic development includes the process and policies by which a nation improves the economic, political, and social well-being of its people. (https://en.wikipedia.org/wiki/ Economic_development)

(b) Economic development usually refers to the adoption of new technologies, transition from agriculture-based to industry based economy, and general improvement in living standards. (http:// www.businessdictionary.com/definition/economicdevelopment.html)

(c) Economic development refers to the increase in the standard of living in a nation's population with sustained growth from a simple, low-income economy to a modern, high-income economy. Economic development is enhanced when the local quality of life improves. Economic development can be extensive or intensive. It is extensive when there is increase of overall wealth and intensive when there is increase of per capita wealth. (http://definitions.uslegal.com/e/ economicdevelopment%20/)

When the intent is to incentivise foreign investment in all the sectors of the economy, a general dividend exemption can be given as a tax incentive across all sectors. Such an exemption would not lose its attribute of encouraging economic development just because it applies across all sectors. If the intention in the Double Taxation Avoidance Agreement was to restrict its meaning to certain specified sectors, suitable qualifiers would have been inserted before the words "economic development" in article 25(4).

8.9 At para 38 the learned Principal Commissioner of Income-tax has again referred to the honourable Delhi Income-tax Appellate Tribunal decision in the case of KRIBCHO and he has assumed that probably the honourable Income-tax Appellate Tribunal has "misinterpreted" the letter dated December 11, 2000 issued by the Secretary General of Taxation to be issued by the Sultanate of Oman. He has again repeated that the letter only contains an opinion of the Secretary General. It is respectfully submitted that the letters referred to above have been officially issued by the Secretary General of Taxation, Oman on the letterheads of the "Ministry of Finance, Sultanate of Oman". Obviously, the sovereign head of the State, i.e., the Sultan of Oman is not supposed to put his personal signature to such letters of clarification. The Secretary General of Taxation, Oman is the highest authority appointed for execution and for issuing various notifications, forms and documents and he draws authority from the sovereign State of the Sultanate of Oman. It is most humbly and without any disrespect submitted that the learned Principal Commissioner of Income-tax is not supposed to assume that a higher appellate authority has misinterpreted the letter issued by the Secretary General of Oman.

8.10 Again at paragraph 40 of the order the learned Principal Commissioner of Income-tax has repeated that the honourable Tribunal perhaps presumed that the letter was issued by the Sultanate of Oman and that the honourable Tribunal did not consider that the interpretation has to be with reference to the words used in the Act/ Double Taxation Avoidance Agreement. The learned Principal Commissioner of Income-tax has even suggested that the Department may file a miscellaneous application before the honourable Income-tax Appellate Tribunal pointing out that the said letters are just opinion from the officer of the Department of Oman which is a mistake apparent from record in law as well as on facts. He has further observed that the honourable Tribunal did not consider that any interpretation has to be between two Governments under the Double Taxation Avoidance Agreement and not by officer of Oman. It is reiterated that the learned Principal Commissioner of Income-tax has entirely proceeded on the basis of an incorrect impression or assumption. The specific issue pertained to clarification of the purpose of one of the provisions of the Omani tax law and not the provisions of the Double Taxation Avoidance Agreement. Therefore, the Government of India is obviously functus officio and has no locus standi in this matter. The honourable Tribunal Delhi Bench has decided this issue after considering the entire material and facts which formed part of the record in the case of KRIBHCO. It is true that the Department would be within its right to file or not to file any appeal against the aforesaid order of the honourable Tribunal but this does not detract from the merits of the order passed by the honour able Tribunal which must be accepted by the lower authorities till such order is reversed or stayed by a superior appellate forum.

8.11 At paragraph 41 of the order the learned Principal Commissioner of Income-tax has set aside the assessment order on this issue and has restored the matter to the file of the Assessing Officer with the following directions :

"The Assessing Officer would refer the matter to the concerned authorities who are responsible for entering into Double Taxation Avoidance Agreement. The Assessing Officer, through proper channel, would write a letter to the officers of the Department perhaps FTD who may request the Omani Government as regards the interpretation of article 25(4) of the Double Taxation Avoidance Agreement with particular emphasis on the word designed for economic development. The Assessing Officer would narrate all the facts and also send a copy of the order under section 263 passed by me wherein I have made certain observations as regards the interpretation. It is quite possible that both the Governments, i.e., India and Oman may reach at a conclusion that may be in favour of Revenue or in favour of the assessee. Pending any communication from the concerned authorities, the view may be that the assessee is not entitled for tax credit. The process should be started in the month of April itself so that necessary communication could come in time as the assessment has to be framed under section 143(3)/263 within the time limited."

It is respectfully submitted that the learned Principal Commissioner of Income-tax has exceeded his powers under section 263 of the Income-tax Act while giving the aforesaid directions to the Assessing Officer. He has directed the Assessing Officer to address a letter to the concerned Department perhaps F. T. D. who may request the Omani Government regarding the interpretation of article 25(4) of the Double Taxation Avoidance Agreement. The Assessing Officer has also been directed to send a copy of the learned Principal Commissioner of Income-tax's order passed under section 263. He has further observed that it is quite possible that both the Governments, i.e., India and Oman may reach at a conclusion that may be in favour of Revenue or in favour of assessee. He has further observed that pending any communication from the concerned authority the view should be adopted that the assessee is not entitled to tax credit. The aforesaid directions are full of doubts and suspicions and there is no clarity with regard to the reassessment to be completed by the Assessing Officer. As mentioned above, the question of interpretation of section 25 of the Double Taxation Avoidance Agreement is not at all involved. There is no dispute regarding the interpretation of the aforesaid article 25(4) of the Double Taxation Avoidance Agreement. The only dispute is regarding the purpose of article 8(Bis) of the Omani tax law and for such interpretation as already explained above, the Government of India or FTD (Foreign Tax Division) of Central Board of Direct Taxes has no role to play. It is respectfully submitted that the learned Principal Commissioner of Income-tax has invoked a jurisdiction under section 263 with regard to this particular issue merely on assumptions, suspicion and surmises and such a view is not sustainable in law.

Further, the very fact that the Principal Commissioner of Income- tax considers that confirmation of FTD is required to conclude on the issue implies that as on the date of passing of the order, the revisionary authority is unsure as to the basis on which the assessment can be held as erroneous. This is clearly not permissible within the four corners of section 263 as interpreted by various courts including jurisdictional Delhi High Court in the case of Globus Infocom Ltd. v. CIT [2014] 369 ITR 14 (Delhi), relevant extracts from which are reproduced below (page 24) :

"Thus, in cases of wrong opinion or finding on merits, the Commissioner of Income-tax has to come to the conclusion and himself decide that the order is erroneous, by conducting necessary enquiry, if required and necessary, before the order under section 263 is passed. In such cases, the order of the Assessing Officer will be erroneous because the order passed is not sustainable in law and the said finding must be recorded. The Commissioner of Income-tax cannot remand the matter to the Assessing Officer to decide whether the findings recorded are erroneous . . . . The matter cannot be remit ted for a fresh decision to the Assessing Officer to conduct further enquiries without a finding that the order is erroneous. Finding that the order is erroneous is a condition or requirement which must be satisfied for exercise of jurisdiction under section 263 of the Act. In such matters, to remand the matter/issue to the Assessing Officer would imply and mean the Commissioner of Income-tax has not examined and decided whether or not the order is erroneous but has directed the Assessing Officer to decide the aspect/question.

This distinction must be kept in mind by the Commissioner of Income-tax while exercising jurisdiction under section 263 of the Act and in the absence of the finding that the order is erroneous and prejudicial to the interests of the Revenue, exercise of jurisdiction under the said section is not sustainable. . . . The jurisdictional precondition stipulated is that the Commissioner of Income-tax must come to the conclusion that the order is erroneous and is unsustain able in law."

12. In the backdrop of the above facts, the learned counsel of the assessee further submitted that the case of the assessee-society is squarely covered by the order of the honourable Income-tax Appellate Tribunal in the case of Krishak Bharti Co-operative Ltd. v. Asst. CIT [2016] 67 taxmann.com 138 (Delhi-Trib). The said decision is also furnished before us from pages 581 to 608 of the paper book. The relevant portion of the headnotes of this decision is reproduced below :

"Section 9, read with section 90, of the Income-tax Act, 1961, and article 25 of the Double Taxation Avoidance Agreement between India and Oman and article 8(bis) of Omani tax laws-Income- Deemed to accrue or arise in India (Method of Elimination of Double Taxation)-Assessment years 2010-11 and 2011-12-Assessee-society received dividend income from an Omani Company-Assessee was liable to pay tax in India on said dividend income as per Indian Income-tax Act, however, it was not liable to pay any tax on such dividend income in Oman by virtue of exemption granted as per article 8(bis) of Omani tax laws-Assessee included dividend income in its total income and, thereafter, claimed credit of tax on ground that article 25 of Double Taxation Avoidance Agreement between India and Oman allows tax credit in India for taxes payable in Oman, even though no taxes were actually paid in Oman by virtue of exemption-Revenue contended that article 8(bis) exemption cannot be construed as an incentive granted under Oman's tax laws so as to qualify for article 25(4) benefit as it exists across board with no exceptions in Oman and it is merely a feature of Oman's Tax Law- Whether clause (4) of article 25 of Double Taxation Avoidance Agreement between India and Oman lays down that tax payable shall be deemed to include tax which would have been payable but not paid because of certain tax incentive granted under laws of contracting State designed to promote economic developments-Held, yes- Whether as per letter of Oman, Ministry of Finance exemption granted under article 8(bis) of Omani tax laws was to promote economic developments in Oman and to attract investment, hence, assessee would be entitled to tax credit in respect of deemed dividend tax which would have been payable in Oman-Held, yes (paras 19 and 20) (in favour of assessee)

Facts

• The assessee, a co-operative society, was primarily engaged in manufacture of fertilizers like urea and ammonia. It entered into a joint venture with Oman oil company to form a fertilizer company OMIFCO and got the same registered under Omani Laws. The assessee held 25 per cent. shares in OMIFCO and the fertilizers manufactured by OMIFCO were purchased by the Government of India under a long term agreement. The assessee also had a branch office in Oman to oversee its investment in the joint venture company and it constituted permanent establishment (PE) in Oman in terms of India-Oman Double Taxation Avoidance Agreement.

• The assessee filed its return of income on September 24, 2010, for relevant assessment year 2010-11. Later on the case was selected for scrutiny and while completing assessment, the Assessing Officer allowed tax credit of Rs. 41.53 crores with respect to dividend income of Rs. 134.41 crores received by assessee from OMIFCO which was exempt in Oman by virtue of article 8(bis) of Omanian Tax Laws. The said dividend income was simultaneously brought to the charge of tax in the assessment as per the Indian Tax Laws.

• However, subsequently, the Commissioner of Income-tax (CIT) was of view that as the assessee did not pay any tax in Oman owing to exemption, no foreign tax credit was available to it. It was observed that article 25(4) requires that in order to claim credit, tax should have been payable in Oman if not for the tax incentives granted in Oman to promote economic development. The Commissioner opined that exemption granted by Oman cannot be treated as a tax incentive as same existed across the board and was simply a feature of Oman's Tax Law which does not tax dividend income. Accordingly the Commissioner revised the order of the Assessing Officer and disallowed the tax credit so claimed by assessee.

• On appeal to the Tribunal :

Held

• With regard to allowing credit for deemed dividend tax which would have been payable in Oman, the relevant provisions of the Double Taxation Avoidance Agreement between the Republic of India and the Sultanate of Oman, read with section 90 of the Income-tax Act were considered. Clause (4) of article 25 of Double Taxation Avoidance Agreement lays down that the tax payable shall be deemed to include the tax which would have been payable but for the tax incentive granted under the laws of the contracting State and which are designed to promote economic developments. Thus, the crucial issue to be examined is whether the dividend income was granted exemption in Oman with the purpose of promoting economic development. The exemption has been granted under article 8(bis) of the Omani tax laws. The said provision has been clarified and explained vide letter dated December 11, 2000, issued by the Sultanate of Oman, Ministry of Finance, Secretariat General for Taxation, Muscat. (Para 18)

• From the perusal of clarifications there remains no doubt regarding the purpose of granting exemption to dividend income. The interpretation of Omani tax laws can be clarified only by the highest tax authorities of Oman and such interpretation given by them must be adopted in India. Further, in the tax assessments made in Oman in respect of the permanent establishment of the assessee-society it is clearly mentioned that the dividend income which is included in the gross total income is, however, exempt in accordance with article 8(bis) and such exemption is granted with the objective of promoting economic developments within Oman by attracting investments. In view of the facts stated above, on merits also the assessee-society is entitled to tax credit in respect of deemed dividend tax which would have been payable in Oman. Therefore, the Commissioner was not justified in directing the Assessing Officer to withdraw the aforesaid tax credit. Further such credit was allowed by the Assessing Officer during several preceding assessment years and, therefore, when there is no change in the facts and the relevant provisions of law, following the well settled principle of consistency of approach, credit for deemed dividend tax is clearly allowable in respect of the assessment year under appeal. (Para 19)

. . .

• In view of the above, the impugned order passed by the Commissioner under section 263 is without jurisdiction and not sustainable in law. Accordingly, the said order is hereby quashed and as a result, the assessee's appeal stands allowed. (Para 21)

• Since the facts and circumstances pertaining to the assessment year 2011-12, the grounds of appeal raised by the assessee- society and the arguments and submissions on behalf of the assessee as well as on behalf of the Department are identical and same. Therefore, for the assessment year 2011-12 also the impugned order of the Commissioner is quashed. Similarly, on merits also the Commissioner is not justified in giving directions to the Assessing Officer for withdrawal of tax credit in respect of deemed dividend tax as well as addition with regard to the undistributed profits reflected in the books of the permanent establishment (Para 22)

• In the result, both the appeals filed by the assessee stand allowed. (Para 23)."

13. The learned Commissioner of Income-tax (Departmental representative), in support of his contention stated that the order of the Principal Commissioner of Income-tax is correct and has filed further submissions during the course of the hearing. The relevant portion (paragraphs 3 to 5.2) of his submissions is reproduced below :

"3. With reference to article 25 of the Double Taxation Avoidance Agreement, an Assessing Officer knowing nuances of Income-tax would definitely ask the material to be produced to satisfy (the Assessing Officer) that the claimed exemption of tax by Omani Government is 'designed for economic development'.

3. During the assessment proceedings, the letters dated August 6, 2000, and December 11, 2000, issued by Secretary General for Taxation, Sultanate of Oman were neither asked by the Assessing Officer nor produced by the assessee (these were first time filed by the assessee before the Principal Commissioner of Income-tax). A copy of letter dated July 11, 2016, from the Assessing Officer produced in support.

4. The letter dated August 6, 2000, only talks of possibility of exemption for five years and further extension of five years subject to decision of Financial Affairs and Energy Resources Council. If this letter dated August 6, 2000, was before Assessing Officer, then an Assessing Officer knowing nuances of Income-tax would definitely ask the material, including decision of Financial Affairs and Energy Resources Council, to be produced to satisfy (the Assessing Officer) that the said exemption of tax by Oman Government was valid for the assessment year under consideration.

5.1 The assessment order does not make any enquiry regarding the issue of credit of tax paid in Oman, directly. In fact the reference in the assessment order about the issue is in the context of dealing with the claim of assessee that the dividend income received from OMIFCO is exempt all together.

5.2 Ref. of dealing about the issue of credit of tax paid in Oman case in assessment year 2006-07 does not help the assessee because a bare reading of relevant portion of the assessment order (of assessment year 2006-07) will show that it is an example of non- application of mind as well as violation of principles of natural justice."

14. We have carefully considered the rival contentions and perused the records available with us. Before proceeding to the merits of the case, it would be necessary on our part to examine whether the Assessing Officer had taken up an arbitrary and unreasonable view without making any inquiries or not. It is seen from the assessment orders under section 143(3) for the assessment years 2008-09 to 2009-10 that the Revenue had consistently adopted the view that the assessee is entitled to tax credit on the deemed dividend which would have been payable in Oman. The Revenue had taken a conscious view after considering the provisions of the Omani tax laws, section 90 of the Income-tax Act, article 25 of the Double Taxation Avoidance Agreement and the clarifications issued by the Royal Decree of the Omani Government. Copies of the assessment orders for the assessment years 2007-08 to 2009-10 have been placed before us from pages 495 to 558 of the paper book. On perusal of the same, it is seen that the Revenue has, after thoroughly examining the issues on hand and examining the provisions, considered the dividend income as exempt. Further, in respect of the current assessment year, i.e., assessment year 2010-11 which is subject matter of revision and appeal before us the Assessing Officer has adopted the same view in consonance with the view adopted in the past years and for which detailed queries and inquiries were raised and conducted by the Assessing Officer. The learned counsel of the assessee had also invited our attention to page 277 of the paper book wherein the Assessing Officer had vide points Nos. 28 to 31 raised several queries in respect of tax credit claimed by the assessee for dividend income received from OMIFCO. Our attention was also invited to pages 393 to 397 as well as pages 408 to 410 of the paper book wherein detailed submissions were made before the Assessing Officer. Therefore, the contentions of the Revenue that no adequate inquiries in respect of the above issue were made is completely misplaced. Therefore, on this ground the jurisdiction under section 263 assumed by the learned Principal Commissioner of Income-tax is incorrect.

14.1 Even otherwise, since the Revenue has allowed the claim of tax credit to the assessee consistently on year-to-year basis the view now proposed to be substituted by the learned Principal Commissioner of Income-tax is totally outside the ambit of the provisions of section 263 following the decision of the honourable jurisdictional High Court in the case of CIT v. Escorts Ltd. [2011] 338 ITR 435 (Delhi), the relevant part of which reads as under (headnote) :

"Where a fundamental aspect of a transaction is found to have permeated through different assessment years and this fundamental aspect has stood uncontested then the Revenue cannot be allowed to change its view taken in earlier assessment years unless it is able to demonstrate a change in circumstances in the subsequent assessment year.

Held, that the Commissioner's order did not contain a finding to the effect that the stand taken by the assessee that the units purchased from the Unit Trust of India had actually been physically delivered along with executed transfer deed was false. Without such a finding the allegation that the transactions were speculative could not be sustained. The fundamental nature of the transactions was examined year after year more importantly in the assessment year 1986-87 it was specifically considered by the Commissioner (Appeals) and it remained the same. Given the fact that the assessee had been engaged in these transactions in the preceding assessment years, the Commissioner could have had no occasion to have recourse to the revisional powers under section 263 of the Act on the fundamental aspects of the transactions in issue on which a view had been taken and not shown to have been challenged."

14.2 Respectfully following the findings of the honourable jurisdictional High Court, the learned Principal Commissioner of Income-tax has erred in assuming jurisdiction under section 263 of the Income-tax Act. Accordingly, the learned Principal Commissioner of Income-tax could have no occasion to have recourse to the revisional powers under section 263 on the very fundamental issue that a consistent view has to be adopted after detailed inquiries by the Revenue for all the earlier years, i.e., the assessment years 2006-07 to 2009-10. Further, as discussed above, we have no hesitation in holding that the order passed by the learned Principal Commissioner of Income-tax is bad in law for the following reasons :-

(a) That, detailed inquiries were made by the Assessing Officer at the time of the original assessment proceedings with regard to the tax credit on deemed dividend which would have been payable in Oman but for the exemption granted the assessee had filed detailed replies in response to the query which were duly considered by the Assessing Officer before allowing tax credit.

(b) That, such credit was allowed by the Revenue for all the earlier years, i.e., assessment years 2006-07 to 2009-10, therefore, we have no hesitation in holding that there was complete application of mind on the part of the Assessing Officer and that the Assessing Officer has adopted a view consistent with the preceding years and, therefore, the Assessing Officer having taken a plausible view after full application of mind, the view of the learned Principal Commissioner of Income-tax cannot substitute his view by assuming jurisdiction under section 263 of the Act.

14.3 In this respect we would like to place reliance on the decision of the honourable Delhi High Court in the case of CIT v. Ashish Rajpal [2010] 320 ITR 674 (Delhi), the headnote of which is reproduced hereunder for ready reference :

"The parameters and principles laid down by the courts which govern the exercise of power by the Commissioner under the provisions of section 263 of the Income-tax Act, 1961, are : (i) The power is supervisory in nature, whereby the Commissioner can call for and examine the assessment records. (ii) The Commissioner can revise the assessment order if the twin conditions provided in the Act are fulfilled, that is, that the assessment order is not only erroneous but is also prejudicial to the interest of the Revenue. The fulfilment of both the conditions is an essential prerequisite. (iii) An order is erroneous when it is contrary to law or proceeds on an incorrect assumption of facts or is in breach of the principles of natural justice or is passed without application of mind, that is, is stereo-typed, inasmuch as, the Assessing Officer, accepts what is stated in the return of the assessee without making any enquiry called for in the circumstances of the case, that is, proceeds with 'undue haste'. (iv) The expression 'prejudicial to the interest of the Revenue' while not to be confused with the loss of tax will certainly include an erroneous order which results in a person not paying tax which is lawfully payable to the Revenue. (v) Every loss of tax of the Revenue cannot be treated as being 'prejudicial to the interest of the Revenue'. For example, when the Assessing Officer has recourse to one of the two courses possible in law or where there are two views possible and the Commissioner does not agree with the view taken by the Assessing Officer which has resulted in a loss. (vi) There is no requirement of issuance of a notice before commencing proceedings under section 263. What is required is adherence to the principles of natural justice by granting to the asses see an opportunity of being heard before passing an order under section 263. (vii) If the Assessing Officer acts in accordance with law his order cannot be termed as erroneous by the Commissioner, simply because according to him, the order should have been written 'more elaborately'. Recourse cannot be had to section 263 to substitute the view of the Assessing Officer with that of the Commissioner. (viii) The exercise of statutory power under section 263 of the Act is dependent on existence of objective facts ascertained from prima facie material on record. The evaluation of such material should show that tax which was lawfully exigible was not imposed."

14.4 Respectfully following the above decision of the honourable High Court we have no recourse but to hold that the order passed by the learned Principal Commissioner of Income-tax under section 263 is bad in law. Since the order passed by the learned Principal Commissioner of Income-tax which is under appeal has been quashed by us, going into the merits of the issues is only of academic interest. However, since detailed arguments have been raised on the merits of the issues, for the sake of completeness, we proceed to examine and decide the issues on merits as well.

14.5 With regard to allowing credit for deemed dividend tax which would have been payable in Oman, the issue now stands covered by the Income-tax Appellate Tribunal decision in the case of Krishak Bharti Co- operative Ltd. [2016] 67 taxmann.com 138 (Delhi-Trib). Relevant para graphs 18 and 19 are reproduced hereunder :

"18. With regard to allowing credit for deemed dividend tax which would have been payable in Oman, we have gone through the relevant provisions of the Double Taxation Avoidance Agreement between the Republic of India and the Sultanate of Oman, read with section 90 of the Income-tax Act. Clause (4) of article 25 of the Double Taxation Avoidance Agreement lays down that the tax payable shall be deemed to include the tax which would have been payable but for the tax incentive granted under the laws of the contracting State and which are designed to promote economic developments. Thus, the crucial issue to be examined is whether the dividend income was granted exemption in Oman with the purpose of promoting economic development. The exemption has been granted under article 8(bis) of the Omani tax laws. The said provision has been clarified and explained vide letter dated December 11, 2000 issued by the Sultanate of Oman, Ministry of Finance, Secretariat General for Taxation, Muscat. The text of this letter has already been reproduced (supra). From this letter, the following points emerge :

(a) Under article 8 of the Omani tax laws, dividend forms part of gross income chargeable to tax.

(b) As a result, investors in tax exempt companies that undertake activities considered essential for the country's economic development suffered a tax cost which had the negative impact.

(c) The Company Income-tax Law of 1981 was therefore amended by Royal Decree No. 68/2000 by insertion of a new article 8(bis).

(d) Thereby the Government of Oman would achieve its main objective of promoting economic development by attracting investments.

(e) Tax would be payable on dividend income if not for the tax exemption provided under article 8(bis).

(f) As the introduction of article 8(bis) is to promote economic developments in Oman, the Indian investors should be able to obtain relief in India under article 25(4) of the Agreement for Avoidance of Double Taxation.

19. From the above clarifications there remains no doubt regarding the purpose of granting exemption to dividend income. The interpretation of Omani tax laws can be clarified only by the highest tax authorities of Oman and such interpretation given by them must be adopted in India. Further, in the tax assessments made in Oman in respect of the permanent establishment of the assessee-society it is clearly mentioned that the dividend income which is included in the gross total income is, however, exempt in accordance with article 8(bis) and such exemption is granted with the objective of promoting economic developments within Oman by attracting investments. In view of the facts stated above, we are of the considered view that on merits also the assessee-society is entitled to tax credit in respect of deemed dividend tax which would have been payable in Oman. There fore, we hold that on merits also the learned Principal Commissioner of Income-tax was not justified in directing the Assessing Officer to withdraw the aforesaid tax credit. (emphasis supplied)"

14.6 Respectfully following the decision of the co-ordinate Bench of the Delhi Tribunal in the case of Krishak Bharti Co-operative Ltd. (supra), we are of the considered view that on merit also the assessee is entitled to tax credit in respect of the deemed dividend tax which would have been payable in Oman.

15. We note that in the impugned order passed under section 263 the learned Principal Commissioner of Income-tax has also given directions to the Assessing Officer on another issue, i.e., issue of capitalisation of interest in the particular head of income. The relevant portion of the findings of the learned Principal Commissioner of Income-tax is reproduced hereunder for ready reference :

"66. The Assessing Officer has failed to allocate or make inquiry as regards the allocation of interest in the particular head of income. For example no interest has been attributed towards the investments which are in the range of Rs. 892.33 crores in the financial year 2009- 10. The assessee simply submitted that in the assessment year only 10 per cent. of the funds have been utilised out of the total own funds of Rs. 8,171 crores but without establishing the nexus. Similarly if there is working progress, it cannot be presumed that only own funds have been utilised. The working progress ultimately becomes that asset. The assessee has himself admitted that there are interest bearing borrowings for fixed assets. As per section 36(1)(iii) proviso, there has to be date-wise calculation as the law is clear. The relevant section is reproduced as under :-

67. As per section 36(1)(iii) proviso the interest is to be capitalised for the period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was put to use. If the assessee himself showing working progress, then it is clear that the said asset has not been put to use. There can be instances that the assessee acquires/purchases the asset and many a times advance payment is to be made for the acquisition of asset. In that case there would be capitalisation of interest till the assessee acquires the asset and also put to use. The interest would start from the date of payment.

68. The assessee has not placed on record any such kind of calculation either for 36(1)(iii) proviso or for its investments as regards the allocation of interest is concerned.

69. The Assessing Officer has not applied his mind on this aspect. Simply calling for certain details does not mean that the Assessing Officer has made a particular inquiry which has a bearing on the tax law. Even now the assessee has not given the date-wise calculation as required under section 36(1)(iii) proviso or date-wise investments which could show that the assessee has utilised only the own funds.

70. If the assessee is giving figures based on the balance-sheet, then it is abundantly clear that the assessee is having mixed pool of funds. Effectively the assessee is required primarily to utilise funds for its basic business. The assessee has also demonstrated that the investments are strategic in nature and has a link with its business and those companies where investments have been made are also in the similar business. It may be true that the investments are strategic yet these remain long-term investments and cannot partake the character of business of the assessee. Nowhere the assessee has shown the profits from such investments under the head business. In fact such profits cannot be taxed under the head business, for example dividend income is to be taxed under the head income from other sources. If the assessee sells his investments, the same would be taxed under the head capital gains. Law is very clear as regards the heads of income. There cannot be any kind of deviation from this and the expenses are also to be allocated according to each head of income. Effectively the assessee has claimed interest under the head business even though the funds have been utilised where profits would be taxed under other heads of income. For example income from other sources or capital gains."

15.1 In this respect, the learned counsel of the assessee submitted that detailed inquiries were made by the Assessing Officer in respect of the expenditure incurred by it on the fixed assets. Reference was made to the notice issued under section 142(1) of the Act, which is compiled at pages 275 to 278 of the paper book (refer points Nos. 9, 10, 14, 15 and 19) wherein the Assessing Officer had raised queries in respect of the details of major additions to the fixed assets, brief note regarding the capital work- in-progress, the manner in which the depreciation was claimed and the details of secured as well as unsecured loans. Replies of the above queries are also compiled at page 392 of the paper book. Further, the learned counsel referred to the audited financial statements of the assessee which was also compiled before us in the paper book. Reference to page 231 of the paper book comprising significant accounting policies was made wherein the auditor has certified that all indirect expenditure are incurred during the period up to the date of commercial production attributable to the construction of the project was capitalised on proportionate basis. Further, reference was also made to the Significant Accounting Policies in the auditors' report compiled at page 235 of the paper book in respect of the borrowing cost which is reproduced hereunder for the sake of brevity :-

"13. Borrowing cost.-Borrowing costs that are attributable to the acquisition or construction of qualifying assets are capitalised as part of cost of such assets. A qualifying asset is one that necessarily takes substantial period of time to get ready for intended use. All other borrowing costs are recognised as an expense in the period of which they are incurred."

15.2 Reference was also made to page 237 of the paper book comprising of the balance-sheet and detailed break-up of the gross block of the addition made to the fixed assets. The learned counsel also pointed out that the internal cash flows as well as profit before depreciation was sufficient enough to meet with the addition in the fixed assets. The learned counsel of the assessee also pointed out that the borrowing cost of Rs. 7.08 crores in respect of the qualifying assets have been capitalised during the year. In this respect he drew our attention to page 258 of the paper book, i.e., Schedule-20-Note No. (v).

15.3 The Assessing Officer also relied upon the synopsis filed vide pages 72 to 214 of the paper book. Relevant part of the synopsis filed is reproduced hereunder for ready reference :

"11.15 With regard to the various observations made by the learned Principal Commissioner of Income-tax referred to above, it is humbly submitted with due respect that all these observations are merely on assumptions and suspicion and the learned Principal Commissioner of Income-tax has completely ignored the factual position as thoroughly explained before him. It is reiterated that this relevant issue was fully examined by the Assessing Officer during the course of the assessment proceedings with reference to the annual report containing the audited accounts with schedules and notes thereto. The Assessing Officer, as mentioned above, raised queries and replies were filed which were examined by the Assessing Officer which proves that there was full application of mind on the part of the Assessing Officer. The following factual position which emerges from the annual report and the audited accounts which were thoroughly examined by the Assessing Officer, would prove that the various assumptions drawn by the learned Principal Commissioner of Income-tax are not inconsonance with the factual position which emerges from the audited accounts.

(a) At page 83 of the annual report under the heading 'Significant Policies', against Sr. No. 4 the following remarks :

'4. Expenditure incurred during construction period.-In respect of new/major expansion of units, the indirect expenditure incurred during construction period up to the date of the commencement of commercial production which is attributable to the construction of the project, is capitalised on proportionate basis.'

(b) At page 87 of the annual report under Sr. No. 13 the following statement is made :-

'13. Borrowing cost.-Borrowing costs that are attributable to the acquisition or construction of qualifying assets are capitalised as part of cost of such assets. A qualifying asset is one that necessarily takes substantial period of time to get ready for intended use. All other borrowing costs are recognised as an expense in the period in which they are incurred.'

(c) At page 89 of the annual report containing the balance-sheet as on March 31, 2010, the value of capital work-in-progress as on March 31, 2010, is shown at Rs. 333 crores whereas the same was Rs. 290 crores as on March 31, 2009. Thus there is accretion of only Rs. 42.02 crores. Further, it is notable that the total value of fixed assets as on March 31, 2010 is Rs. 7531.28 crores as against Rs. 7552.95 crores as on March 31, 2009 which proves that the value of fixed assets has actually gone down and there has been no accretion whatsoever.

(d) At page 90 of the annual report containing the profit and loss account for the financial year 2009-10 the total interest expenditure is debited at Rs. 764.98 crores as against the total expenditure of Rs. 1023.20 crores for the preceding financial year which show that the total interest expenditure has substantially reduced during the present year.

(e) At page 102 of the annual report details of loans and advances given by the assessee are reflected in schedule 11. This shows that the total quantum of such loans and advances as on March 31, 2010 stands at Rs. 3376.87 crores as against preceding year's Rs. 5464.77 crores. Thus, the loans and advances have substantially reduced.

(f) At page 110 of the report containing schedule 20 under Sr. No. (iv) it is mentioned that "borrowing cost amounting to Rs. 7.08 crores in respect of qualifying assets has been capitalised during the year." This shows that the relevant component of interest expenditure pertaining to capital asset has already been capitalised by the appellant-society and thus there is no basis for the assumption of the learned Principal Commissioner of Income-tax that the appellant- society has failed to capitalise the cost of borrowing.

(g) At pages 98 and 99 of the annual report, complete details of investments have been given in Schedule-7. It is seen that the total investments as on March 31, 2010 stand at Rs. 7531.10 crores as against Rs. 7552.95 crores as on March 31, 2009. This shows that the quantum of investment has actually gone down by Rs. 21.67 crores. Thus, it is clear that the apprehension or rather suspicion of the learned Principal Commissioner of Income-tax that borrowed funds have gone into investment during the present year is against the correct factual position which was thoroughly examined by the Assessing Officer.

11.16 To reiterate, even the learned Principal Commissioner of Income-tax has not disputed that the total investments are merely 10 per cent. of the interest-free own funds available with the appellant- society. The primary claim of the appellant-society is that even these investments were in the nature of strategic investments for business purpose only and, therefore, even if it is assumed that part of the borrowed funds went into these investments, no disallowance can be made under section 36(1)(iii) for the simple reason that such expenditure would be entirely for business purposes. The appellant-society relies on the legal position as discussed below :

(i) CIT v. Rajendra Brothers [2014] 52 taxmann.com 334 (Guj)

The headnote of this case is reproduced below for ready reference :

• Both the Commissioner (Appeals) as well as the Tribunal have recorded concurrent findings of fact to the effect that the assessee was also running a sarafi business and the funds obtained from the bank had got merged with the funds of other businesses. Having regard to the total funds available from the sarafi business, the Tribunal has found no reason to believe that bank funds have been diverted as interest-free/ lower interest advances. Moreover, no material has been brought on record by the Revenue either to demonstrate that the sarafi business was bogus or to establish diversion of interest bearing funds as low/interest-free advances.

• The Revenue is not in a position to point out any material to the contrary so as to dislodge the concurrent findings of fact recorded by the Commissioner (Appeals) and the Appellate Tribunal. From the facts noted hereinabove, it is apparent that the Tribunal has based its conclusion on the concurrent findings of fact recorded by it upon appreciation of the evidence on record. It is not the case of the revenue that the Tribunal, while appreciating the evidence on record has taken into consideration any irrelevant material, or that any relevant material has been ignored.

• Under the circumstances, in the absence of any perversity being pointed out in the concurred findings of fact recorded by the Tribunal, no question of law, much less, any substantial question of law can be said to arise out of the impugned order so as to warrant interference.

• The appeal, therefore, fails and is accordingly dismissed. (Para 7).' (emphasis supplied)

In the above case the honourable Gujarat High Court held that it is the onus of the Revenue to establish that interest bearing funds were diverted for non-business purposes.

(ii) CIT v. Ram Kishan Verma [2015] 64 taxmann.com 358 (Raj)

The catch-note of this case is reproduced below for ready reference :

'Section 36(1)(iii) of the Income-tax Act, 1961-Interest on borrowed capital (Interest free loans)-Assessment years 2005-06 and 2008-09-Whether where capital of assessee was more than interest free advances made to friends/relatives and Assessing Officer was not able to prove nexus between interest bearing loans having been diverted towards interest free loans/advances, no part of interest paid on loans could be disallowed-Held, yes [Paras 12, 13 and 14] (In favour of assessee).' (emphasis1 supplied)

In the above case also it was held that the onus is on the Assessing Officer or the Department to prove nexus between interest bearing loans having been diverted towards interest free loans/advances.

(iii) CIT v. Vijay Solvex Ltd. [2015] 59 taxmann.com 294 (Raj)

The catch-note of this case is reproduced below for ready reference :

'Section 36(1)(iii) of the Income-tax Act, 1961-Interest on borrowed capital (Interest-free advances to sister concerns)-Assessment year 1992-93-During course of assessment proceedings, Assessing Officer noticed that on one hand, assessee-company was making payment of interest to banks, etc., but on other hand, it had advanced money to sister concerns on which no interest was charged-Assessing Officer was of view that interest bearing loans had been diverted to non-business purposes and, accordingly, he disallowed interest on interest-free advances given to sister concerns-It was observed that assessee-company had its own sufficient funds and Revenue was unable to prove nexus between borrowed funds and advances given-Whether, on facts, notional interest disallowed by Assessing Officer was to be deleted-Held, yes (paras 16 and 17) (in favour of assessee).' (emphasis supplied)

(iv) Pranik Shipping and Services Ltd. v. Asst. CIT [2013] 21 ITR (Trib) 489 (Mum) ; [2012] 19 taxmann.com 107 (Mum)

The headnote of this case is reproduced below for ready reference :

'Facts-I

During assessment proceedings, the Assessing Officer observed that the assessee had given interest-free advances aggregating to Rs. 50.29 lakhs to its sister concerns whereas substantial amount of interest was paid on the funds borrowed. On being show caused as to why the proportionate disallowance of interest be not made, the assessee justified its claim by stating that it had share capital, reserves and surplus and unsecured loans amounting to Rs. 3544.64 lakhs on which no interest was payable. The Assessing Officer, however made disallowance under section 36(1)(iii) by applying 15 per cent. rate of interest. The Commissioner (Appeals) upheld the disallowance.

On assessee's appeal :

Held-I

The assessee has share capital of Rs. 15.25 crores along with reserves and surplus amounting to Rs. 19.48 crores thereby totalling shareholders fund to the tune of Rs. 35.73 crores. Even if the debit balance of profit and loss account of Rs. 3.93 crores and the liability of Rs. 24.43 crores towards interest payable not debited to profit and loss account is considered, still there is excess of share capital and reserves to the extent of Rs. 7.37 crores [35.73 crores 28.36 crores (3.93 crores + 24.43 crores)]. As against this excess of shareholders' fund of Rs. 7.37 crores, the assessee advanced interest-free loans to its sister concerns amounting to Rs. 50.29 lakhs. (Para 4)

From the decision of the jurisdictional High Court in the case of CIT v. Reliance Utilities and Power Ltd. [2009] 313 ITR 340 (Bom) ; [2009] 178 Taxman 135 (Bom), it is manifest that if the assessee has interest-free funds as well as interest bearing funds at its disposal, then the presumption would be that investments were made from interest-free funds available with the assessee. In the instant case, the interest-free funds available at the disposal of the assessee are far in excess of the interest-free loans advanced to the sister concerns. Therefore, following the mandate of the jurisdictional High Court in the case of Reliance Utilities and Power Ltd. [2009] 313 ITR 340 (Bom) ; [2009] 178 Taxman 135 (Bom), the addition is to be deleted. (Para 6).'

(v) CIT v. HDFC Bank Ltd. [2014] 366 ITR 505 (Bom) ; [2014] 49 taxmann.com 335 (Bom). The relevant observations of the honourable Bombay High Court are reproduced below from para 4 of the judgment (page 520 of 366 ITR) :

'We do not agree. In the case at hand, as recorded by the Income-tax Appellate Tribunal, undisputedly the assessee's own funds and other non-interest bearing funds were more than the investment in the tax-free securities. The Income-tax Appellate Tribunal therefore held that there was no basis for deeming that the assessee had used the borrowed funds for investment in tax-free securities. On this factual aspect, the Income-tax Appellate Tribunal did not find any merit in the contention raised by the Revenue and, therefore, accordingly answered the question in favour of the assessee. On going through the order of the Commissioner of Income-tax (Appeals) dated March 28, 2005 as well as the impugned order, we do not find that the Commissioner of Income-tax (Appeals) or the Income-tax Appellate Tribunal erred in holding in favour of the assessee. In this regard, the submission of Mr. Mistry, the learned senior counsel appearing on behalf of the assessee, that this issue is squarely covered by a judgment of this court in the case of CIT v. Reliance Utilities and Power Ltd. [2009] 313 ITR 340 (Bom) ; [2009] 178 Taxman 135 (Bom) is well founded.' (emphasis supplied)

(vi) CIT v. Gujarat State Fertilizers and Chemicals Ltd. [2013] 358 ITR 323 (Guj)

The headnote of this case is reproduced below for ready reference :

'Held, that the dividend income earned was Rs. 1,14,43,040 and the estimate of expenditure was assessed at the rate of 10 per cent. of the total income. Had the Department been successful in establishing that the assessee had incurred the expenses to earn the dividend income from the borrowed funds, the entire discussion of application of section 14A of the Act could be understood. However, when both the Commissioner (Appeals) and the Tribunal had noted that the assessee had sufficient funds available with it, which were more than the amount it invested for earning the dividend income, the authorities had correctly set aside the order of disallowance under section 14A of the Act in respect of interest expenditure. When the very basis for employing section 14A of the Act on the factual matrix was lacking, the disallowance to the extent of 10 per cent. of the dividend income was not permissible. When it transpired from the record that the asses see's own funds were higher than the investment made by it and with nothing to indicate that the borrowed funds were utilised for the purpose of investment in shares and for earning dividends, the Tribunal committed no error. As far as the other administrative expenses were concerned, to put an end to the entire dispute the assessee agreed to a disallowance of Rs. 5 lakhs. This was reasonable.' (emphasis supplied)

(vii) CIT v. Torrent Power Ltd. [2014] 363 ITR 474 (Guj)

The relevant part of the headnote of this case is reproduced below for ready reference :

'Held, dismissing the appeal, that the material on record showed that the assessee had shareholding funds to the extent of Rs. 2607.18 crores and the investment made by it was to the extent of Rs. 195.10 crores. In other words, the assessee had sufficient funds for making the investments and it had not used borrowed funds for such purpose. There was nothing on record to indicate that there had been in fact any actual expenditure incurred by the assessee for earning tax-free income of Rs. 14 crores. Disallowance of one per cent., of interest expenditure artificially or on the basis of assumption rightly had not been sustained by the Tribunal. The deletion of addition was justified.

CIT v. Hero Cycles Ltd. [2010] 323 ITR 518 (P&H)

CIT v. Sintex Industries Ltd. [2014] 2 ITR-OL 364 (Guj)

CIT v. Suzlon Energy Ltd. [2013] 354 ITR 630 (Guj)

CIT v. UTI Bank Ltd. [2014] 2 ITR-OL 366 (Guj)

Godrej and Boyce Mfg. Co. Ltd. v. Deputy CIT [2010] 328 ITR 81 (Bom)

ITO v. Daga Capital Management Pvt. Ltd. [2009] 312 ITR (AT) 1 (Mum) [SB]

Maxopp Investment Ltd. v. CIT [2012] 347 ITR 272 (Delhi).' (emphasis1 supplied)

(viii) CIT v. Gujarat Foils Ltd. [2015] 377 ITR 324 (Guj)

The relevant part of this judgment is reproduced below from page 334 of the report :

'Now, so far as Tax Appeal No. 963 of 2008 for the assessment year 2002-03 and Tax Appeal No. 964 of 2008 for the assessment year 2003-04 with respect to the disallowance of interest expenses claimed under section 36(1)(iii) of the Act is concerned, the learned Tribunal has observed that the assessee was having interest-free funds available with it. The learned Tribunal has observed that the advances were given by the assessee to various parties to the extent of Rs. 2,62,48,341 during the financial year 1996-97. The learned Tribunal has also found that even the assessee was having interest-free funds to the extent of Rs. 3,93,65,572 as on March 31, 2002. It is required to be noted that in the earlier preceding year no disallowance was made out of the interest claimed by the assessee. Considering the aforesaid facts and circumstances of the case, the learned Tribunal has rightly deleted the disallowance on interest expenses. We are in complete agreement with the view taken by the learned Tribunal . . .' (empha sis supplied)

(ix) CIT v. Reliance Utilities and Power Ltd. [2009] 313 ITR 340 (Bom) ; [2009] 178 Taxman 135 (Bom)

The relevant part of the headnote of this case is reproduced below for ready reference :

'Held, dismissing the appeal, that if there were funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free funds generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case this presumption was established considering the finding of fact both by the Commissioner (Appeals) and the Tribunal. The interest was deductible.

East India Pharmaceutical Works Ltd. v. CIT [1997] 224 ITR 627 (SC) and Woolcombers of India Ltd. v. CIT [1982] 134 ITR 219 (Cal) relied on.' (emphasis1 supplied)

(a) The Bombay High Court-CIT v. HDFC Bank Ltd. [2014] 366 ITR 505 (Bom) (page 522) :

'In the present case, undisputedly the assessee's capital, profit reserves, surplus and current account deposits were higher than the investment in the tax-free securities. In view of this factual position, as per the judgment of this court in the case of Reliance Utilities and Power Ltd. (supra), it would have to be presumed that the investment made by the assessee would be out of the interest-free funds available with the assessee. We therefore, are unable to agree with the submission of Mr. Suresh Kumar that the Tribunal had erred in dismissing the appeal of the Revenue on this ground. We do not find that question (A) gives rise to any substantial question of law and is therefore rejected.'

The above ratio has been reiterated recently by the honourable Bombay High Court again in the case of the same assessee CCE v. Indian Petrochemicals Corporation Ltd. [2016-TIOL-408-Cestat- MUM] has reiterated the above ratio laid down by it again in the following words castigating the Income-tax Appellate Tribunal, Mumbai for deviating from the same :

11(a) . . . The petitioner was possessed of sufficient interest-free funds of Rs. 2153 crores as against the investment in tax-free securities of Rs. 52.02 crores. Consequently, there is a presumption that the investment which has been made in the tax-free securities has come out of the interest-free funds available with the petitioner. This is so as it has been held by this court in the petitioner's own case for an earlier assessment year being HDFC Bank Ltd.(supra). This decision on the above issue has been accepted by the Revenue. This is evidenced by the fact although an appeal has been filed to the Supreme Court with regard to another issue arising from the order in HDFC Bank Ltd.(supra) namely broken period interest, no appeal on this issue as raised before the Tribunal has been challenged before the Supreme Court . . .

14. The only basis for proceeding on the basis that there is a conflict between the two decisions of this court which emerges from the impugned order is that in petitioner's own case in HDFC Bank Ltd.(supra), reliance was placed upon the decision of this court in Reliance Utilities and Power Ltd. (supra) to conclude that where both interest-free funds and interest bearing funds are available and the interest-free funds are more than the investments made, the presumption is that the investment in the tax-free securities would have been made out of the interest-free funds available with the assessee. Though, the decision of this court in Reliance Utilities and Power Ltd. (supra) was rendered in the context of section 36(1)(iii) of the Act, it was consciously applied by this court while interpreting section 14A of the Act in HDFC Bank Ltd. (supra) . . .'

The above ratio has also been recently followed by the Karnataka High Court in the case of CIT v. Microlabs Ltd. reported at [2016] 383 ITR 490 (Karn).

The consistent view held in the above cases is that if the investments made by the assessee are adequately covered by own funds the presumption would be that no borrowed funds have been diverted for making these investments and further that the onus is on the Revenue to establish nexus between the borrowed funds and the investments made by the assessee. Even if, for the sake of argument, it is assumed that two interpretations on this issue are possible, it is a settled principle that the interpretation which favours the assessee must be adopted. This principle was explained by the honourable Supreme Court in the landmark decision in the case of CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 (SC). Again in the case of Manish Maheshwari v. Asst. CIT [2007] 289 ITR 341 (SC) the honourable Supreme Court observed that where two interpretations are possible the courts should interpret the provisions in favour of the taxpayer and against the Revenue. In the case of Pradip J. Mehta v. CIT [2008] 300 ITR 231 (SC) the honourable Supreme Court reiterated that 'when two interpretations are possible, then invariably the court would adopt that interpretation which is in favour of the taxpayer and against the Revenue'.

11.17 In the backdrop of the factual and the legal position explained above in detail, it is respectfully submitted that on merits also the learned Principal Commissioner of Income-tax was wholly unjustified in setting aside the assessment order on this issue to the Assessing Officer with directions to go into the records of the preceding 10 years for working out the average and then to apply debt equity formula. On merits, as elaborated in the submissions made before the Principal Commissioner of Income-tax (reproduced at para 11.4), looking at the issue from various angles, the proposed disallowance under section 36(1)(iii) cannot be sustained as summarised below :

• Onus of proving non-diversion of funds borrowed for working capital towards CWIP and fixed assets discharged by assessee by submission of independent statutory auditor certificate and availability of own funds and internal accruals

• Investments are financed from own funds given that they constitute not more than 10 per cent. of the own funds- Presumption to apply in assessee's favour

• Even otherwise, there is a business nexus to the investments, thus covered under "for the purpose of business" under section36(1)(iii) as interpreted by the apex court

• Alternatively, deduction allowable under section 57(iii) even if presumption of own funds and business nexus is applied against the assessee. Interest cannot be added to "cost" as suggested by the learned Principal Commissioner of Income-tax in view of express provisions to the contrary in the Income-tax Act.

Further, there is abundant evidence that all these issues pertaining to section 36(1)(iii) were thoroughly examined by the Assessing Officer and there was full application of mind by him during the course of the assessment proceedings and therefore the learned Principal Commissioner of Income-tax has no jurisdiction to invoke his powers under section 263 of the Income-tax Act. For these reasons, it is humbly submitted that, the impugned order passed by the learned Principal Commissioner of Income-tax under section 263 on this issue may kindly be held as bad in law and quashed."

15.4 Against the aforesaid contentions of the assessee's counsel, the learned Departmental representative has filed the following further submissions during the course of the hearing :

"6. On the issue of 36(1)(iii) and 36(1) proviso, there is case of non- enquiry and non-application of mind. Authorised representative could not point-out any material to indicate the contrary. The attempt to say that the provisions of sections 36(1) and 14A are mutually exclusive and the Assessing Officer has discussed issue of 14A, does not prove case of application of mind and any enquiry (much less adequate enquiry).

7. In case of scrutiny the need for calling balance-sheet/profit and loss account, etc., of associate concerns and making reconciliation/ verification cannot be over-emphasised. Any Assessing Officer being a rational person, being informed of the nuances of tax laws is expected to do so.

8. Reliance is placed upon the judgment of the honourable Income-tax Appellate Tribunal Delhi in the case of NIIT v. CIT [2015] 60 taxmann.com 313 (Delhi-Trib.) where after analysing plethora of judgments on the issue the honourable Income-tax Appellate Tribunal has held (in para 28.2) that an inquiry which is just farce or mere pretence of inquiry, cannot be said to be an inquiry at all, much less an inquiry needed to reach the level of satisfaction of the Assessing Officer on the given issue. The level of satisfaction would obviously mean that he has conducted the inquiry in a manner whereby he places on record the material enough to reach the satisfaction, which a rational person, being informed of the nuances of tax laws would reach after due appreciation of such material. If this component is missing, it will always be a case of lack of inquiry and not inadequate inquiry.

9. Reliance is also placed on ratio of the honourable Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 (SC) ; [2000] 109 Taxman 66 (SC) which has held that (page 87) :

(i) An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind.

(ii) The phrase 'prejudicial to the interests of the Revenue' is not an expression of art and is not defined in the Act. Understood in its ordinary meaning, it is of wide import and is not confined to loss of tax."

16. We have carefully considered the submissions and arguments made by the learned counsel of the assessee as well as the learned Commissioner of Income-tax (Departmental representative) and heard both the parties at length. We find that the Assessing Officer had made detailed inquiries and examined the entire block of fixed assets. A brief note on capital work-in- progress was also filed and queries regarding the manner in which the depreciation was claimed was also raised. Further the assessee is following a settled accounting policy/principle for capitalisation of expenses including interest expenses to both the fixed assets as well as capital work-in- progress. This method was forming part of the audited financial statements which were filed before the Assessing Officer as well. We also find that the free reserves were also more than sufficient to cover up the investment in fixed assets/capital work-in-progress. Further the assessee-society has generated sufficient internal cash flows to meet with the cost of fixed assets as well as capital work-in-progress. In spite of this fact the assessee has capitalised a sum of Rs. 7.09 crores in the books of account. The learned Principal Commissioner of Income-tax has also not disputed that the total investments were merely 10 per cent. of the interest-free funds available with the assessee-society. We also find that a consistent view has taken by all the judicial authorities that in the event of availability of interest-free funds a presumption would be that investments would be out of interest free funds generated or available with the assessee. In this respect, reliance

16. was placed on the decision of the Bombay High Court in the case of CIT v. Reliance Utilities and Power Ltd. [2009] 313 ITR 340 (Bom).

16.1 In light of the above discussions as well as factual matrix, we have no hesitation in holding that the order passed by the learned Principal Commissioner of Income-tax is bad in law for the following reasons :-

(a) That, as discussed above, detailed inquiries were made by the Assessing Officer with regard to the capitalisation of interest to fixed assets as well as capital work-in-progress.

(b) That, even on the facts of the case the assessee had sufficient interest-free funds to meet with the capital expenditure and, therefore, following the ratio of the decision of the honourable Bombay High Court in Reliance Utilities and Power Ltd. [2009] 313 ITR 340 (Bom), no disallowance under section 36(1)(iii) is called for.

(c) That, the assessee had already discharged its onus of proving non- diversion of funds borrowed for working capital towards capital work-in- progress and fixed assets by submitting a certificate of an independent statutory auditor and proved availability of own funds and internal accruals which was not rebutted by the learned Principal Commissioner of Income- tax.

16.2 Therefore, since there was full application of mind on the part of the Assessing Officer during the course of the assessment proceedings as well as based on the above evidences placed before him, the learned Principal Commissioner of Income-tax has no jurisdiction to invoke the provisions to pass an order under section 263 of the Income-tax Act. For this reason, we hold that the order passed by the learned Principal Commissioner of Income-tax under section 263 on this issue is bad in law and set aside.

17. Before concluding we would also like to deal with the recent insertion of Explanation 2 to section 263 of the Act. We have already held above that in respect of both the issues, i.e., allowing credit of deemed taxes paid on dividend in Oman as well as capitalisation of interest under section 36(1)(iii) detailed enquiries as well as verification have been made by the Assessing Officer. Further it is also not the case of the learned Principal Commissioner of Income-tax that the order is not in accordance with any instruction/direction issued by the Board or is not in accordance with any decision of the honourable Delhi High Court or the apex court of India. Accordingly the order passed by the Assessing Officer cannot be regarded as deemed to be erroneous or prejudicial to the interests of the Revenue under Explanation 2 of the Act.

18. In view of the above, we hold that the impugned order passed by the learned Principal Commissioner of Income-tax under section 263 of the Income-tax Act is without jurisdiction and not sustainable in law. Accordingly, the said order is hereby quashed and as a result, the assessee's appeal stands allowed.

19. In the result, the appeal filed by the assessee stands allowed.

20. Order pronounced in the open court on September 19, 2016.

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