2014 (1) TMI 127 - AT - Income Tax

Tribunal affirms CIT(A)'s decision on income tax additions, finding no TDS required for payments to non-residents.

The Tribunal upheld the CIT(A)'s decision to delete additions under sections 36(1)(iii) and 40(1)(ia) of the Income Tax Act. The Tribunal found that the ... Interest liability under section 36(1)(iii) – Held that:- Following assessee's own case for A.Y. 2005-06 - The assessee has placed on record copy of the CC A/c and demonstrated that debit balance was not on account of purchase of the assets - The assessee has a substantial profit which was deposited in this very account - The assessee has declared income which suggest that it has excess interest free funds, then the investment made in the acquisition of the assets - Proviso to section 36(1)(iii) is not applicable on the facts of the present case. Non-deduction of tax out of the payment – Held that:- Following assessee's own case for A.Y. 2005-06 – As per article 15 of DTAA between India and Italy - Income derived by a resident of a contracting state in respect of professional services or other independent activities of a similar character may be taxed in that State - Such income may also be taxed in India but subject to fulfillment of conditions of clauses (a) and (b) of Article 15 - Mr. Andrea Bonotto is entitled for the beneficial provisions of the DTAA - He is covered by Article 15 of the DTAA - The income would not be taxable in his hand in India and, therefore, no TDS would be deductible – Decided against Revenue. Issues Involved:1. Deletion of addition made under section 36(1)(iii) of the Income Tax Act.2. Deletion of addition made under section 40(1)(ia) of the Income Tax Act for non-deduction of tax at source.Detailed Analysis:1. Deletion of Addition Made Under Section 36(1)(iii) of the Income Tax ActThe Revenue contended that the CIT(A) erred in deleting the addition of Rs. 10,52,537/- made by the Assessing Officer (AO) under section 36(1)(iii) of the Income Tax Act. The AO had added this amount as interest liability, arguing that the interest paid on borrowed capital for acquiring an asset should be capitalized until the asset is put to use, as per the proviso to section 36(1)(iii). The AO noted that the assessee had made payments from an overdraft account for acquiring an industrial plot, which was not put to use during the assessment year.The assessee's counsel argued that this issue was already decided in favor of the assessee for the Assessment Year 2005-06 by the ITAT. The ITAT had upheld the CIT(A)'s order, which deleted a similar addition made by the AO. The CIT(A) had observed that the assessee had sufficient interest-free funds and substantial profits, which were used to acquire the capital assets, and thus, the proviso to section 36(1)(iii) was not applicable.The Tribunal, after considering the rival contentions and reviewing the records, found that the facts of the current assessment year were similar to those of the previous year. The Tribunal noted that the assessee had demonstrated that the payments for the acquisition of the industrial plot were made from funds deposited in the CC account, which were not interest-bearing. Therefore, the Tribunal dismissed the Revenue's grounds and confirmed the CIT(A)'s order deleting the addition of Rs. 10,52,537/-.2. Deletion of Addition Made Under Section 40(1)(ia) of the Income Tax Act for Non-Deduction of Tax at SourceThe Revenue argued that the CIT(A) erred in deleting the addition of Rs. 11,00,293/- made by the AO under section 40(1)(ia) of the Income Tax Act. The AO had disallowed the payment made to a non-resident for consultancy services, invoking section 40(1)(ia) due to the assessee's failure to deduct tax at source under section 195.The ITAT had previously dealt with a similar issue for the Assessment Year 2005-06. The AO had disallowed payments made to non-residents for designing and development services, treating them as fees for technical services under section 9 of the Act. The AO argued that TDS should have been deducted as per Article 13 of the DTAA between India and Italy.The CIT(A), however, held that the payments fell under Article 15 of the DTAA, which deals with independent personal services. According to Article 15, income from professional services or other independent activities performed by a resident of a contracting state is taxable in that state unless the individual has a fixed base in the other state or stays there for more than 183 days. The CIT(A) found that the non-residents did not have a fixed base in India and did not stay for more than 183 days, thus, the payments were not taxable in India, and no TDS was required.The Tribunal agreed with the CIT(A)'s findings and noted that the AO had not considered Article 15. The Tribunal concluded that the payments did not involve an element of income taxable in India, and therefore, no TDS was required. Consequently, the Tribunal dismissed the Revenue's ground and upheld the CIT(A)'s order deleting the addition of Rs. 11,00,293/-.ConclusionIn conclusion, the Tribunal dismissed the Revenue's appeal and confirmed the CIT(A)'s order in deleting the additions made under sections 36(1)(iii) and 40(1)(ia) of the Income Tax Act. The Tribunal's decision was based on the findings that the assessee had sufficient interest-free funds and that the payments to non-residents did not involve taxable income in India, thus, no TDS was required.