Facts of the Case

Krishak Bharati Cooperative Ltd. (KRIBHCO), a multi-state cooperative society engaged in fertilizer manufacturing, entered into a joint venture with Oman Oil Company for incorporation of Oman India Fertilizer Company SAOC (OMIFCO). KRIBHCO held 25% equity in OMIFCO.

To oversee its investment, KRIBHCO established a branch office in Oman constituting a Permanent Establishment (PE). Dividend income received from OMIFCO was assessed in India, and KRIBHCO claimed tax credit under Section 90 read with Article 25(4) of the India–Oman DTAA on the basis of “deemed tax” (tax spared by Oman through exemption).

The Assessing Officer allowed the credit. Subsequently, the Principal Commissioner invoked Section 263 alleging that since dividend income was exempt in Oman, no tax was actually payable and therefore no tax credit should have been granted.

 Issues Involved

  1. Whether tax sparing credit under Article 25(4) of the India–Oman DTAA is allowable where dividend income is exempt under Omani law?
  2. Whether the assessment order allowing such tax credit was erroneous and prejudicial to the interests of Revenue under Section 263?
  3. Whether the Principal Commissioner could travel beyond the show cause notice while exercising revisional jurisdiction under Section 263?
  4. Whether undistributed profits of OMIFCO could be taxed in India in the hands of KRIBHCO?

 Petitioner’s Arguments (Revenue’s Arguments)

The Revenue contended that:

  • Tax credit under Section 90 read with DTAA can only be granted against tax actually paid or payable.
  • Since dividend income was wholly exempt in Oman, no tax was payable there.
  • Article 25(4) applies only to tax incentives specifically designed for economic development, not to general statutory exemptions.
  • The Assessing Officer failed to properly examine the applicability of Article 25(4).
  • The assessment order was therefore erroneous and prejudicial to Revenue.
  • Undistributed profits reflected in the branch accounts should also be taxed in India.

 Respondent’s Arguments (Assessee’s Arguments)

The assessee argued that:

  • The Assessing Officer had examined the issue in detail during assessment proceedings.
  • Similar claims had been accepted in earlier assessment years.
  • Omani authorities had expressly clarified that dividend exemption under Article 8(bis) was introduced to promote economic development by attracting investment.
  • Article 25(4) specifically grants tax sparing credit even where tax is not actually paid but would have been payable but for incentives.
  • The Principal Commissioner exceeded jurisdiction by raising fresh issues not mentioned in the show cause notice.

 Court Findings / Court Order

1. Tax Sparing Credit Allowed

The Court upheld the Tribunal’s view that tax sparing credit was correctly allowed. It held that:

  • Dividend income was otherwise taxable under Omani law.
  • Exemption under Article 8(bis) was introduced as an economic development incentive.
  • Such exemption squarely falls within Article 25(4) of the India–Oman DTAA.

Thus, tax credit for tax “deemed to have been paid” was valid.

 2. Section 263 Revision Invalid

The Court held that where the Assessing Officer has examined the issue and adopted a plausible view, Section 263 cannot be invoked merely because the Commissioner prefers another view.

 3. Commissioner Cannot Travel Beyond Show Cause Notice

The Court held that introducing new issues beyond the original Section 263 notice violates principles of natural justice.

 4. Undistributed Profits Not Taxable

The Court held that undistributed profits recorded for accounting purposes do not constitute real income taxable under the Income Tax Act.

 Important Clarifications


Tax Sparing Credit Principle

Tax sparing provisions protect investment incentives granted by developing countries so that the tax benefit remains with the investor and is not neutralized by taxation in the residence country.

Scope of Section 263

Revision under Section 263 requires:

  • an erroneous order, and
  • prejudice to Revenue

Both conditions must coexist.

Plausible View Doctrine

If the Assessing Officer adopts one legally permissible view after inquiry, revision cannot be exercised merely because another view exists.

Natural Justice under Section 263

No revision can be made on issues not forming part of the show cause notice.

Sections Involved

  • Section 90 – Double Taxation Relief
  • Section 143(3) – Scrutiny Assessment
  • Section 142(1) – Inquiry before Assessment
  • Section 263 – Revision of Orders Prejudicial to Revenue
  • Section 260A – Appeal before High Court

DTAA Provisions Involved

  • Article 7 – Business Profits
  • Article 11 – Dividends
  • Article 25 – Avoidance of Double Taxation (Tax Sparing Credit)

 Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2017:DHC:2113-DB/SRB21042017ITA5782016.pdf


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