Investment In Shares In Indian Subsidiary 'Capital Account Transaction', Not Income: Delhi High Court

The Delhi High Court has held that investment in shares by a company in its Indian subsidiary is a “capital account transaction” which does not give rise to any income. Therefore, the same cannot be treated as income for taxation.

Placing reliance on the earlier decision of Delhi High Court in Nestle SA v. Assistant Commissioner of Income Tax, the bench comprising of Acting Chief Justice Manmohan and Justice Mini Pushkarna held

“It is settled law that investment in shares in an Indian subsidiary cannot be treated as 'income' as the same is in the nature of “capital account transaction” not giving rise to any income.”

Factual Background

The petitioner in leading petition, M/s Angelantoni Test Technologies SRL, is a foreign company and is a resident of Italy. It was argued that in financial year 2018-19, petitioner had subscribed to 15,00,000 shares at face value of Rs. 10 each by making foreign inward remittance of Rs. 1,50,00,000 in its wholly owned Indian subsidiary namely, Angelantoni Test Technologies India Pvt. Ltd. in accordance with applicable regulations. It was submitted that the petitioner had not filed nay return of income in India as it had not earned any income from any source in India.

Counsel for petitioners argued that the transactions in question are capital account transactions which are incapable of generating any income. It was argued that there was no information or tangible material to indicate escapement of income. The details of the company whose shares were allegedly purchased, referred to or relied upon in the impugned notice was not available with the respondent.

It was argued that “investment of shares of another entity cannot be construed as income which is chargeable to tax and/or has escaped assessment.”

Counsel for the respondents submitted that notices under Section 148A(b) were according to the Risk Management Strategy formulated by the Central Board of Direct Taxes in terms of Explanation 1 to Section 148 of the Act. Accordingly, the notices were valid.

High Court Verdict

The Court observed that investment in shares in an Indian subsidiary cannot be treated as 'income' as it is a “capital account transaction” which does not give rise to any income.

Reliance was placed on Nestle SA v. Assistant Commissioner of Income Tax, wherein the Delhi High Court held

“Therefore, the fundamental premise of the Respondent that the above investment by the Petitioner in the shares of its subsidiary amounted to 'income' which had escaped assessment was flawed. The question of such a transaction forming a live link for reasons to believe that income had escaped assessment is entirely without basis and is rejected as such.”

In Nestle SA, the Delhi High Court relied on the decision of Bombay High Court in Vodafone India Services Pvt. Ltd. v. Union of India which has been adopted by the Union Cabinet in a a press note dated 28th January, 2015.

Further, reliance was placed on Divya Capital One Private Limited (Earlier Known as Divya Portfolio Private Limited) vs. Assistant Commissioner of Income Tax Circle 7(1) Delhi & Anr., wherein the Delhi High Court had held

“'Whether it is “information to suggest” under amended law or “reason to believe” under erstwhile law the benchmark of “escapement of income chargeable to tax” still remains the primary condition to be satisfied before invoking powers under Section 147 of the Act'.”

Accordingly, the Court set aside the notices issued under Section 148A(d) of the Income Tax Act and all consequential proceedings. However, the Court left open the challenge to vires of Explanation 1 to Section 148 of the Act.

Case Title: M/S Angelantoni Test Technologies Srl V. Assistant Commissioner Of Income Tax, Circle Int Tax 1(1)(1) & Ors 

Citation: 2024 LiveLaw (Del) 25

Counsel for Petitioners: Mr. Ved Jain, Ms. Nischay Kantoor, Ms. Soniya Dodeja, Mr. Salil Kapoor, Ms. Ananya Kapoor, Mr. Sumit Lalchandani, Mr. Vibhu Jain, Mr. Kamal Sawhney, Mr. Nikhil Agarwal, Mr. Nishank Vashishtha, Mr. Tarun Gulati, Sr. Advocate with Ms. Ishita Farsaiya, Mr. Apoorv Shukla, Mr. Pursoth Kannan, Mr. Kumar Visalaksh, Mr. Udit Jain, Mr. Arihant Tater, Mr. Ajitesh Dayal Singh.

Counsel for Respondents: Mr. Ruchir Bhatia, Mr. Aseem Chawla, Ms. Pratishtha Choudhary, Ms. Nivedita, Mr. Aditya Gupta, Mr. Sunil Agarwal, Mr. Shivansh B. Pandya, Mr. Utkarsh Tiwari.

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