The Income Tax Department has issued reassessment notices under Section 148 to several foreign investors who only purchased Indian shares without earning income.
Authorities seek details such as valuation reports, TDS records and Form 15CA/CB, suspecting possible tax escapement, undervaluation or round tripping. Experts warn this increases compliance burden and uncertainty.
Opinion: Reassessment should target genuine tax evasion, not create avoidable compliance hurdles for investors with no taxable income.
Mumbai: At a time when the cen- tral government and the central bank are luring foreign funds, the taxman has its own story to chase shooting occasional missives that never fail to surprise. The la- test is a flurry of notices to foreign investors who are suspected to ha- ve dodged tax even though they ha- ve earned nothing.
In recent weeks, different offsho- re investors companies, invest- ment vehicles, fund houses, as well as some foreign portfolio in- vestors-many of whom have on- ly bought either listed or unlisted shares but neither booked profits nor received dividends, received notices under Section 148 of the In- come tax (I-T) Act, persons aware of the matter told ET.
Such notices are I-T depart- ment’s communique for initiating ‘reassessment proceedings’: reo- pening old books when there are reasons to believe that some past income has escaped tax.
“What’s striking is that several no- tices relate to purchase transac- tions, and not exits. Here, a non-re- sident merely acquired Indian sha-
turn by these investors along with information from remittance docu- ments. This is difficult to justify: a share purchase by a non-resident does not, by itself, result in income and there was no obligation to file ITR. A reassessment regime meant to tax escaped income should not be used to question a transaction which produced no income in the first place,” said Aditi Goyal, partner at Trilegal, a law firm.
However, there may be cases where the department thinks un- listed stocks were acquired be- low fair value or there was fund round-tripping.
Many investors were asked why no ITR was filed. They have to sha- re TDS documents (for capital ga- in tax deducted before paying sel-ler), valuation report, share certi- ficate, and board minutes mentio- ning them as purchaser, and copies of 15 CA/CBforms (submit- ted for outward remittance and al- so filed by purchaser when seller is non-resident).
Investors need ‘permanent acco- unt number’ (PAN) for stock de- mat account, but opinions vary on mandatory ITR filing if there’s no income. A strict reading of the law requires all local and foreign com- panies to do so, but some differen- tiate between foreign investors with no earnings and those avai- ling treaty benefits to avoid tax.
These weren’t system-driven no- tices: senior I-T officers approve Section 148 notices and are prece- ded by 148A notices giving assesse- es a chance to explain. Since the department wasn’t convinced,
148A notices were escalated to 148 notices which can be issued up to five years three months from the end of the assessment year if esca- ped income is 50 lakh or more. The current notices pertain to FYs 2019-20, 2020-21 and 2021-22.
“A reassessment notice opens the door to wider scrutiny. Once initi- ated, the department can examine not only issues that triggered the reopening but also other transac- tions. Taxpayers must respond comprehensively to any prelimi- nary enquiry by providing comp- lete documentation on transac- tions involved, valuation reports, fund source, and reasons for non- filing of returns, where applicab- le. This may help to avoid reassess- ment,” said Ashish Mehta, part- ner at the law firm Khaitan & Co.
Some foreign investors don’t file returns to hold back information on significant shareholders and di- rectors. “Sometimes, the notices, designed for genuine income esca- pement, may have been triggered by Form 15CA/CB data, without considering the transaction year. A transaction that has already be- come time-barred should not ordi- narily be reopened merely because it was reported next year. This cau-ses uncertainty and raises compli- ance burden,” said chartered accountant Ashish Karundia.