Delhi High Court Says Impermissible Foreign Tax Reference Can't Extend Limitation For Search Assessments

The Delhi High Court has ruled that the Income Tax Department cannot extend the time limit for completing search assessments merely by making a reference to a foreign tax authority if the information sought is not permissible under the applicable tax treaty.

Dismissing a batch of appeals filed by the Revenue, a Division Bench of Justices Dinesh Mehta and Vinod Kumar upheld the Income Tax Appellate Tribunal's finding that assessment orders passed for Assessment Years 2011–12 to 2017–18 were barred by limitation, after holding that the reference made to the Foreign Tax and Tax Research Division in this case was legally impermissible.

The case arose from a search conducted on the AMQ Group in February 2017, following which proceedings were initiated against the assessee.

While the normal limitation period for completing the search assessments was to expire on December 31, 2018, the Assessing Officer made a reference on December 4, 2018, to the FT&TR seeking information from Hong Kong authorities.

Relying on this reference, the Department claimed an extended limitation up to December 31, 2019, under clause (ix) of the Explanation to Section 153B of the Income Tax Act, 1961.

The High Court examined whether such an extension was legally available in light of the protocol to Article 26 (Exchange of Information) of the India–Hong Kong tax treaty.

Revenue argued that unlike the India–Switzerland treaty considered earlier in PCIT v. Sneh Lata Sawhney, the Hong Kong treaty permitted exchange of information relating to periods preceding the date of the treaty.

Rejecting this contention, the Court undertook a comparative analysis of the two treaties and held that while the India–Hong Kong treaty does permit disclosure of information that precedes the date on which the agreement came into force, such disclosure is qualified and limited to information that is foreseeably relevant for a fiscal year or taxable event occurring after the treaty became effective.

“Needless to observe that in the case of tax under the Income Tax Act, the taxable event is the first day of the assessment year or in other words first date following the end of financial year,” the Court said.

Since the India–Hong Kong treaty came into force on November 30, 2018, the court held that the authorities could at best seek information relevant to transactions having taxable events after that date, and not for Assessment Year 2017–18.

Accordingly, it held that the reference made by the Assessing Officer to FT&TR was “improper and impermissible in the eye of law” insofar as it related to the assessment years in question.

“If the aforesaid Clause 5(c) of Article 26 of the treaty between India and Hong Kong is taken into account, it clearly postulates that the Income Tax Department can elicit any information relevant to Financial Year 2019- 20 or for the Assessment Year 2020-21 in respect of the transaction taking place after 01.04.2019 or a transaction qua which the taxable event is 01.12.2018 24. As an upshot of the discussion foregoing, we are of the considered view that the AO could not demand any information for the Assessment Year 2017-18,” the Court observed.

As such, it held that the Revenue could not take advantage of the extended limitation period under Section 153B, and the assessments were rightly held to be time-barred.

For Appellant: Advocate Puneet Rai, SSC with Mr. Ashvini Kr. JSC.