ITAT Delhi Quashes Section 263 Revision: MAT Not Applicable on Foreign Entity in Absence of PE

The Income Tax Appellate Tribunal (ITAT) Delhi Bench “D” has delivered its judgement on an appeal filed by Sandstone Investment Partners I against the DCIT (Deputy Commissioner of Income Tax), challenging an order dated March 24, 2022, passed by the CIT(A) under Section 263 of the Income Tax Act. The case belongs to the Assessment Year 2017-18.

The assessee had earned a long-term capital gain (LTCG) amounting to Rs 149.37 crore from the sale of listed shares in India. The assessee had paid Securities Transaction Tax (STT) on this sale. The assessee claimed exemption on this gain under Article 13(4) of the India-Mauritius Double Taxation Avoidance Agreement (DTAA) and also under Section 10(38) of the Income Tax Act. The assessee filed its income tax return (ITR) for the year in consideration, declaring NIL income. The Assessing Officer (AO) accepted the assessee’s return after inspection.

However, the Commissioner later revised the assessee’s assessment under Section 263, raising allegations against the AO that he did not properly scrutinise the assessee’s return and holding that the LTCG should be taxed under Section 115JB (Minimum Alternate Tax provisions). The Commissioner also challenged the company’s eligibility for treaty benefits, alleging treaty shopping and a lack of commercial substance.

The assessee, aggrieved with the aforementioned action, filed an appeal before the ITAT Delhi. When the tribunal analysed the facts, it noted that AO had properly examined the case and all the documents related to the case. Therefore, the tribunal quashed the impugned revision order, holding that Section 263 can be invoked only if the assessment order is both erroneous and prejudicial to revenue, which was not the case here.

The key point flagged by the tribunal in the present case is that Explanation 4 to Section 115JB clearly provides that MAT provisions do not apply to a foreign company having no Permanent Establishment (PE) in India. Therefore, Section 115JB was not applicable. Since the assessee did not possess any PE in India and the gains were otherwise exempt under Section 10(38), the capital gains were not taxable. Accordingly, the appeal was allowed in favour of the assessee.