Reassessment Without Jurisdiction: A Non-Resident Share Transfer That Should Never Have Been Reopened

  

 

By Adv Sreeraj Muralidharan 

BBM, FCS, LLB, CFORA

advsreerajm@gmail.com 

 

In advisory work, certain patterns repeat themselves with uncomfortable consistency. The transaction is usually legitimate, the structure is not adventurous, and the parties have taken reasonable care to ensure that the regulatory framework is complied with. In cross-border deals, especially, one often sees parties being more cautious than necessary on FEMA, routing, documentation and banking channels. The deal closes, the consideration moves, filings are made where required, and from a commercial standpoint, the matter ends there. The problem, however, increasingly begins after that point, when the transaction is reduced into fragments of data and enters systems that are not designed to understand the legal character of what has taken place.

A Japanese client reached out in that exact situation. The notice received was under Section 148A. The language was entirely predictable. There was a reference to “information” suggesting that income chargeable to tax had escaped assessment. There was no attempt to explain what that information actually meant in legal terms. There was no discussion on the nature of the transaction. There was no articulation of why the amount referred to in the notice should be treated as income in India. The entire foundation of the notice rested on a data point—specifically, a reporting trail through Form 15CA—coupled with the absence of a return of income for the relevant assessment year.

When one reads such a notice from a litigation perspective, the issue becomes immediately clear. The department has not begun with a legal inquiry. It has begun with a data mismatch. A remittance is visible. A return is not. From that, a conclusion has been drawn that income must have escaped assessment. That conclusion is then presented as a basis to initiate proceedings. The sequence is efficient, but it is legally incomplete.

The underlying transaction, in this case, was a non-resident to non-resident transfer of shares between two Japanese entities, executed offshore. FEMA compliance had been undertaken in full. The banking trail was clean. The documentation was not in dispute. There was nothing about the structure that would ordinarily invite scrutiny from a tax perspective. Yet, none of these aspects find place in the notice. The question that ought to have been examined at the outset—whether the transaction gives rise to income chargeable to tax in India—has not been addressed at all.

This is where the proceeding becomes vulnerable at inception. The jurisdiction to reopen an assessment is not triggered by the existence of a transaction or even by the quantum involved. It is triggered by the existence of income chargeable to tax that has escaped assessment. In the absence of a prima facie view on chargeability, the entire exercise becomes mechanical. A capital transaction between two non-residents cannot be assumed, by default, to generate taxable income in India. The situs of the shares, the nature of the asset, and the applicability of treaty provisions are not peripheral considerations. They are central to the question of jurisdiction. If, on a proper application of these principles, the transaction does not result in income chargeable to tax in India, the absence of a return of income is not a failure of compliance. It is a reflection of the correct legal position.

What is troubling in such cases is not that a notice has been issued, but the manner in which the foundational requirement of application of mind is diluted. Section 148A was introduced precisely to ensure that reassessment proceedings are not triggered mechanically. The expectation was that before issuing a notice under Section 148, the Assessing Officer would examine the material available and form a considered view on escapement of income. In practice, what one increasingly sees is that the “information” generated by the system becomes the starting point as well as the conclusion. The officer’s role is reduced to carrying that information forward into a statutory notice, without an independent examination of whether the legal threshold for reopening is satisfied.

At this stage, the instinctive response is often to explain the transaction in detail. Parties tend to produce agreements, valuation reports, FEMA filings and bank documents in an attempt to demonstrate that the transaction is genuine and compliant. While all of this is relevant, it does not address the central issue. The problem is not that the department has misunderstood the facts. The problem is that it has proceeded without first determining whether those facts give rise to taxable income in India. Unless that threshold is crossed, the question of explaining the transaction does not arise.

The response, therefore, has to be structured around jurisdiction rather than justification. The correct approach is to establish, at the outset, that the transaction in question does not result in income chargeable to tax in India, either by its nature or by virtue of applicable treaty provisions. Once that position is demonstrated, it follows that there was no obligation on the non-resident to file a return of income. In the absence of such an obligation, the assumption that income has escaped assessment becomes unsustainable. The proceeding, in effect, loses its foundation.

What this episode reflects more broadly is a shift in how reassessment is being triggered. The process is no longer anchored in a prior examination of taxability. It is increasingly driven by data points that appear inconsistent when viewed in isolation. A remittance is captured in one system. The absence of a return is noted in another. The legal context that connects the two is not evaluated at that stage. The gap is filled by an assumption, and that assumption takes the form of a notice.

For cross-border businesses, this creates a different kind of risk. Compliance with law, by itself, is no longer sufficient to avoid scrutiny. Transactions must also withstand being interpreted through fragmented data. Where the legal position is clear but the data does not narrate that position coherently, the likelihood of such proceedings increases.

In the matter at hand, the position remains straightforward. This is not a case of disputed facts or aggressive structuring. It is a case where a jurisdictional requirement has not been satisfied at the threshold. If addressed at that stage, the proceeding ought not to travel further. If, however, it is treated as a routine notice and responded to as a matter of factual clarification, a proceeding that should not have been initiated acquires a degree of legitimacy that it did not originally possess. That distinction, in tax litigation, often determines how long the matter survives.