Treaty benefit and receipt basis for interest upheld under the India-Cyprus DTAA despite a return-form omission.

A bona fide treaty claim under the India-Cyprus DTAA could not be denied merely because the assessee omitted the Special Income schedule in the return, where residency evidence and computation records showed a clear claim to the 10% treaty rate under Article 11. The omission was treated as an inadvertent technical defect, and the concessional rate was upheld. On interest from compulsory convertible debentures, Article 11 was read as taxing interest on a payment or receipt basis, not on accrual basis. The Revenue's accrual-based addition was therefore not sustained, and the interest was held taxable on receipt basis.

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Issues: (i) Whether the assessee was entitled to the concessional rate of tax under the India-Cyprus Double Taxation Avoidance Agreement despite not filling the Special Income schedule in the return of income. (ii) Whether the interest income from compulsory convertible debentures was taxable on accrual basis or on receipt basis under the treaty.

Issue (i): Whether the assessee was entitled to the concessional rate of tax under the India-Cyprus Double Taxation Avoidance Agreement despite not filling the Special Income schedule in the return of income.

Analysis: The assessee was a tax resident of Cyprus and had placed the residency certificate and return computation on record showing a clear claim to treaty benefit. The computation itself reflected taxation of the interest income at 10% under Article 11 of the treaty. The omission to fill the Special Income schedule was treated as an inadvertent mistake, especially since the same benefit had been accepted in the preceding assessment year and in later processing years. A mere technical lapse in the return form could not defeat an otherwise lawful treaty claim.

Conclusion: The assessee was held entitled to the concessional rate of 10% under the India-Cyprus Double Taxation Avoidance Agreement.

Issue (ii): Whether the interest income from compulsory convertible debentures was taxable on accrual basis or on receipt basis under the treaty.

Analysis: Article 11(1) of the treaty uses the expression that interest arising in a contracting state and paid to a resident of the other contracting state may be taxed in that other state. On that footing, the treaty was understood to govern taxation on a payment or receipt basis and not merely on accrual basis. The Revenue's objection based on one item being reflected on accrual basis was treated as an inadvertent solitary error that did not alter the governing legal position. The treaty language was given effect over the accrual method adopted by the Assessing Officer.

Conclusion: The interest income was held taxable on receipt basis and the addition made on accrual basis was not sustained.

Final Conclusion: The appeal succeeded in full, and the assessee obtained both the treaty rate benefit and the correction of the method of taxation of interest income.

Ratio Decidendi: A bona fide and otherwise supportable treaty claim cannot be denied on a mere technical defect in the return form, and where the applicable treaty taxes interest on payment basis, the income cannot be brought to tax on accrual basis contrary to the treaty language.

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