UNION OF INDIA AND ANR. versus AZADI BACHAO ANDOLAN AND ANR.

Citation: [2003] SUPP. 4 S.C.R. 222 · Decided: 07-10-2003 · Supreme Court of India · Bench: RUMA PAL · Disposal: Appeal(s) allowed

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Judgment (excerpt)

A 
B 
c 
UNION OF INDIA AND ANR. 
v. 
AZADI BACHAO ANDOLAN AND ANR. 
OCTOBER 7, 2003 
[RUMA PAL AND B.N. SRIKRISHNA, JJ.] 
Constitution of India-Articles 73 and 265-Fncome Tax Act, 1961-
Sections 4, 5 & 90-Indo-Mauritius Direct Tax Avoidance Convention 
(DTAC) dated 1.4.1983-Articles 3, 4 and 13(4)-Exemption to assessees 
under DTAC on capital gains on sale of shares of Indian companies-
Power of Central Government to grant exemption-Validity of-Held, 
valid DTAC notified under Section 90 of the Income Tax Act-It can 
override the provisions of the Income Tax Act and hence, the principle of 
piercing the corporate veil cannot be applied-DTAC cannot be held ultra 
D vires on suscepiibility of 'treaty shopping' by third party countries-
Income Tax Act, 1922-Section 49A. 
Section 90-CBDT Circular No. 789 dated 13.4.2000 issuing 
instructions to Revenue to treat an assessee with a 'Certificate of Residence' 
E issued by Mauritius authorities as 'resident' of Mauritius-Validity of-
Held, valid even if inconsistent with the provisions of the Income Tax Act 
for implementation of DTAC-Circular does not amount to impermissible 
delegation of power. 
F 
Section 119-CBDT Circular No. 789 dated 13.4.2000-Validity of-
Held, valid-Non-indication of the source of power does not render the 
Circular ultra vires-Circular intended to avoid wastage of time and 
energy of the assessing officers and not issued to crib, cabin or confine 
the powers of the assessing officer in particular assessment. 
G 
Income Tax Act, I961-Liability to taxation-Grant to exemption 
under the Mauritius Income Tax Act, 1995-Entitlement of benefit under 
DTAC-Held, they are 'liable to tax' under the latter Act even though 
granted exemption-Hence, they are entitled to benefit under DTAC being 
liable to tax under the former Act-Mauritius Offshore Business Activity 
H Act, 1992 (MOBA)-Sections 26 & 27. 
222 
U.0.I. v. AZADI BA CHAO ANDO LAN 
223 
'Treaty Shopping '-Etitlement of third party nation taking the benefit A 
of DTAC-Held, is entitled since there are no disabling or disentitling 
conditions under the DTAC-Motive of taking benefit under the DTAC is 
irrelevant. 
Doctrine of stare decisis-Applicability of 
B 
The Government of India and the Government of Mauritius 
entered into a Double Taxation Avoidance Convention (DTAC) on 
1.4.1983 for the avoidance of double taxation and prevention of fiscal 
evasion with respect to taxes on income and capital gains and for the 
encouragement of mutual trade and investment. The DTAC was C 
notified under Section 90 of the Income Tax Act, 1961 on 6.12.1983. 
According to Article 13(4) of the DTAC, the capital gains derived by 
a 'resident' of a Contractng State from the alienation of any property 
other than those mentioned in Article 13(1), (2) and (3) shall be taxable 
only in that State. The Central Board of Direct Taxes (CBDT) issued D 
a Circular No. 682 dated 30th March, 1994 clarifying Article 13(4) of 
the DTAC that the income derived by a 'resident' of Mauritius by 
alienation of shares of India companies will be liable to capital gains 
tax only in Mauritius as per Mauritius tax law and will not have any 
tax liability under the Indian Income Tax Act. Relying on the Circular, E 
a large number of assessees, mainly Foreign Institutional Investors 
(Fiis) and claiming to be' residents' of Mauritius, invested huge capital 
in the shares of Indian companies with a view to make profits without 
attracting capital gains tax in India. 
The Revenue issued show cause notices to some Flis functioning F 
in India for taxing profits and dividends accrued to them by sale/ 
holding of shares under the Income Tax Act holding that the Flis are 
not eligible for the benefits under the DTAC since they are not true 
'residents' of Mauritius and are 'shell companies' incorporated in 
Mauritius, controlled and managed by third party countries. The show G 
cause notices issued by the Revenue created panic in the Indian stock 
market and consequent hasty withdrawal of funds by the Flis. CBDT 
issued Circular No. 789 dated 13.4.2000 clarifying to the assessing 
officers that wherever a 'Certificate of Residence' is issued to an 
assessee by the Mauritius Authorities, such assessee can claim to be a H 
.. 
224 
SUPREME COURT REPORTS (2003] SUPP. 4 S.C.R. 
A 'resident' of Mauritius and avail the benefits under the DTAC. 
Two Writ Petitions, by way of Public Interest Litigation, were 
itkd before High Court of quashing the CBDT Ci

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