(2023) 452 ITR 111 (Del)
Double taxation relief; income escaping assessment
No. A validly issued residency certificate is sufficient evidence of residence, beneficial ownership and legal ownership for treaty purposes, and reassessment cannot be founded on looking behind it.
Can the Assessing Officer go behind a valid tax residency certificate to question residence, beneficial ownership and the commercial substance of the holding structure?
The petitioner, a Singapore resident company, sold shares of an Indian company and claimed exemption from capital gains tax under the India–Singapore treaty, relying on the grandfathering of investments made before the treaty was amended. It held a valid tax residency certificate issued by the Singapore authorities. The Assessing Officer initiated reassessment on the footing that the petitioner was a conduit lacking commercial substance, that its beneficial owners were elsewhere, and that the structure had been interposed to obtain treaty benefits, contending that the residency certificate did not preclude an enquiry into these matters.
The petitioner challenged the reassessment notice and the order rejecting its objections by writ petition before the Delhi High Court, which quashed the proceedings.
For the assessee
The residency certificate is conclusive of residence for treaty purposes, and the Board's circulars and press releases confirm that it is sufficient evidence of beneficial ownership and legal ownership. The investments predated the treaty amendment and were expressly grandfathered. Reassessment cannot be founded on a ground the law forecloses.
For the Revenue
The entity had no employees, no independent decision-making and negligible presence in Singapore. Treaty benefits are intended for genuine residents, and the Assessing Officer is entitled to examine whether the claimed residence is real before allowing an exemption of this magnitude.
The Court held that the Assessing Officer could not go behind the residency certificate. It relied on the line of authority beginning with Azadi Bachao Andolan, on the Board's circular treating such a certificate as sufficient evidence of residence and beneficial ownership, and on the press release issued when the Singapore treaty was amended, which reiterated that position. Circulars of that kind are binding on the Revenue, and an Assessing Officer cannot act contrary to them. The Court further held that the grandfathering of investments made before the specified date was a deliberate feature of the renegotiated treaty and had to be given effect according to its terms; permitting the Revenue to defeat it by questioning substance would undermine the certainty the provision was designed to confer. Since the reassessment rested entirely on grounds that were not open to the Assessing Officer, there could be no valid reason to believe income had escaped assessment, and the proceedings were quashed at the threshold.
A recent and frequently cited application of the residency certificate principle to private equity and fund structures in the era of grandfathered investments. It sits at the intersection of treaty relief under Section 159 and the reassessment framework in Section 279 of the IT Act 2025. Its reach should be assessed against the general anti-avoidance rules, which operate on a different footing and were not in issue.