Investment in shares of Indian Company by Foreign Company shall not be considered as Income

Held by Hon’ble High Court of Delhi

In the matter of

M/S Angelantoni Technologies SRL Vs Assistant Commissioner of Income Tax (W.P.(C) 15928/2023 & CM APPL. 64160-64161/2023)

The Petitioner is a foreign company and remitted INR 1,50,00,000 to its wholly owned subsidiary company for issuance of shares. Since the petitioner has not earned any income in India during the year therefore, the petitioner did not file any return of Income in India. The petitioner received the notice of income escaping assessment alleging such amount has Income which has escaped assessment.

Hon’ble High Court of Delhi has held that the transaction of making investment in an Indian subsidiary is a capital account transaction. It is settled law that investment in shares in an Indian subsidiary Company cannot be treated as ‘income’ as the same is in the nature of “capital account transaction” and it does not give rise to any income. Same position was also confirmed by CBDT through Para 2 of Instruction No.2 of 2015 dated 29th January, 2015. Therefore, the action of the Respondents is in contravention of the CBDT Instruction No. 2 of 2015 dated 29th January, 2015. Consequently, the impugned orders under Section 148A (d) of the Act and the notices passed under Section 148 of the Act are set aside.

1. Brief Facts of the case

M/s Angelantoni Test Technologies SRL (“The petitioner”) is a foreign company and resident of Italy.
During FY 2018-19, the petitioner subscribed 15,00,000 shares at the face value of INR 10/- of its wholly owned Indian subsidiary Company namely, M/s Angelantoni Test Technologies India Pvt. Ltd.
For this purpose, the petitioner did foreign remittance to Indian subsidiary bank account of INR 1,50,00,000 in accordance with applicable regulations.
Since the Petitioner had not earned any income from any source in India, the Petitioner did not file return of income in India.
The petitioner received the notice under Section 148A(b) of Income Tax Act and impugned orders passed under Section 148A(d) of the Act.
The writ petition is filed for the quashing of impugned notice and order.

2. Contention of the Petitioners

The Petitioner contended that:

The transactions in dispute are capital account transactions which are incapable of generating any income.
Impugned orders and notices have been passed merely to verify the transactions without any tangible material to indicate escapement of income.
Common argument in the given case is that the investment of shares of another entity cannot be construed as income which is chargeable to tax or has escaped assessment.

3. Contention of the Respondent

The respondent contended that:

In the given case, Notice under Section 148A(b) of Income Tax Act, 1961 had been issued in accordance with the Risk Management Strategy formulated by the Central Board of Direct Taxes (“CBDT”) in terms of Explanation 1 to Section 148 of the Act.

4. Analysis by Hon’ble High Court

The Hon’ble High Court of Delhi contended that:

In the given case, the assessee have made remittances/investment in shares of their Indian subsidiaries. It is an admitted position that the transactions in question are capital account transactions.
It is settled law that investment in shares in an Indian subsidiary Company cannot be treated as ‘income’ as the same is in the nature of “capital account transaction” and it does not give rise to any income.
In the matter of Nestle SA Versus Assistant Commissioner of Income Tax (W.P.(C) No. 12643/2018), this Court held that:
- The principal objection of the Petitioner that its investment in the shares of its subsidiary cannot be treated as ‘income’ is well founded.
- The decision of the Bombay High Court in Vodafone India Services Pvt. Ltd. v. Union of India (supra) holding such investment in shares to be a ‘capital account transaction’ not giving rise to income was accepted by the CBDT.
- Further, such a position was also confirmed by CBDT through Para 2 of Instruction No.2 of 2015 dated 29th January, 2015.
- As per Para 2 of Instructions, CBDT confirmed the acceptance of board of the decision of the High Court of Bombay in the above mentioned Writ Petition. Same judgment is to be adhered to in all cases where this issue is involved.
- Therefore, the contention 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.

Therefore, in the given case, the action of the Respondents is in contravention of the CBDT Instruction No. 2 of 2015 dated 29th January, 2015 reiterating the view expressed by the Bombay High Court in Vodafone India Services Pvt. Ltd. Versus Union of India.
The judgment of the Bombay High Court was also accepted by the Union Cabinet and a press note dated 28th January, 2015 was issued by the Press Information Bureau, Government of India. The relevant portion of the said press note is reproduced hereinbelow:
- Acceptance of the Order of the High Court of Bombay in the case of Vodafone India Services Private Limited
- This is a major correction of a tax matter which has adversely affected investor sentiment.
- The Cabinet decided to accept the order of the High Court of Bombay and not to file SLP against it before the Supreme Court of India;
- This decision will bring greater clarity and predictability for taxpayers as well as tax authorities, thereby facilitating tax compliance and reducing litigation on similar issues.
- This will also put to rest the uncertainty prevailing in the minds of foreign investors and taxpayers in respect of possible transfer pricing adjustments in India on transactions related to issuance of shares, and thereby improve the investment climate in the country.
- The issue of shares at a premium is on a Capital account and gives rise to no income.
- Further, The submission of the revenue that the shortfall in the ALP as computed for the purposes of Chapter X of the Act is misplaced. The ALP is meant to determine the real value of the transaction entered into between AEs. It is a re-computation exercise to be carried out only when income arises in case of an International transaction between AEs. It does not warrant re-computation of a consideration received / given on capital account.

Further, in the matter of Divya Capital One Private Limited vs. Assistant Commissioner of Income Tax Circle 7(1) Delhi & Anr., 2022 SCC, this court has held that the benchmark of “escapement of income chargeable of tax” still remains the primary condition to be satisfied before invoking powers under Section 147 of the Act’.
Consequently, the impugned orders under Section 148A (d) of the Act and the notices passed under Section 148 of the Act are set aside.

5. Order

The Hon’ble Delhi high court has held that It is settled law that investment in shares in an Indian subsidiary Company cannot be treated as ‘income’ as the same is in the nature of “capital account transaction” and it does not give rise to any income. Therefore, Impugned order and notices are liable to be set aside.