rediff.com: HC allows probe against Mauritius-based FIIs by I-T department

Taking a serious view of tax sops to Mauritius-based foreign institutional investors under the double taxation avoidance treaty, the Delhi high court has allowed the Income Tax authorities to initiate probe against such companies.

"If assessing authorities intend to open any proceedings (against such FIIs) they would be entitled to take recourse to such proceedings as are open to them under law," a division bench comprising Chief Justice S B Sinha and Justice A K Sikri said in its judgement.

While allowing two public interest litigations challenging April 13, 2000 circular by Central Board of Direct Taxes putting an embargo on investigation by the income-tax officers against Mauritius-based FIIs if they produced a certificate about their residential status in that country, the court said CBDT had exceeded its powers.

Imposing a litigation cost of Rs 10,000 on the government, the court said the assessing powers of ITOs, which are quasi-judicial in nature "cannot be taken away by such a circular."

The court, while quashing the circular, said CBDT's powers in this regard were "limited" and "it must act within the law."

"Mere production of a certificate by a company that it was registered in Mauritius is not sufficient proof for claiming the benefit under DTAT," for tax on capital gains, the court said, adding that the government owed an explanation how the country "has been losing millions of rupees by allowing the opaque system to operate."

The court said the government would be "well advised to consider the question raised by the petitioners, who have done a noble job in brining into focus how India has been losing millions."

It said no attempt was made on behalf of the government to answer the question as to how the power of assessing authorities to probe tax matters could be taken away by mere production of a certificate and how such a document could be accepted as "conclusive proof."

There was no provision in DTAT between the two countries to accept "the conclusiveness of the certificate by Mauritius" as proof of residential status of a company or a person, the court said.

Rejecting the contention of the government that the treaty was beyond the scope of judicial review because of political and economic reasons, the bench said the courts have powers to "lift the veil in tax matters if transaction is sham or illusory."

The ITOs have power under law to verify genuineness or validity of any document while probing tax cases, it said.

The DTAT provides for payment of tax in either of the two countries by the FIIs, the PILs filed by former Income Tax Commissioner S K Jha and an NGO, Azadi Bachao Andolan, alleged.

The FIIs were paying a nominal tax in Mauritius and enjoying huge tax exemption in India on the capital gains, the PILs had said.

The circular was issued only after the I-T department had issued notices to over 30 companies which were involved in evasion of tax worth over Rs 30 billion during 1999-2000 alone, Jha and ABA counsel Prashant Bhushan had alleged.



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