2025 (9) TMI 435 - AT - Income Tax

Revisional proceedings under s.263 quashed as post-amalgamation interest already taxed in Netherlands not taxable here

ITAT KOLKATA - AT held the revisional proceedings under s.263 were without merit and quashed them, allowing the assessee's appeal. The tribunal found the ... Revision u/s 263 - taxability of income in India - tax had been paid at special/ lower rate at 10% as per Double Taxation Avoidance Agreement (DTAA) in the return of Royal bank of Scotland NV against normal rate of 40% plus surcharge/ cess. HELD THAT:- As decided in own case [2025 (1) TMI 1604 - ITAT KOLKATA] held mere fact that the refund as well as interest was credited in the bank account of the assessee post amalgamation would not decide the nature of the receipt in the hands of the assessee. In our opinion, it is a unequivocal and settled position that the same income cannot be taxed twice first in the hands of the same assessee and secondly hands of some different assessee. In the present case, the income has been assessed in the hand of Netherlands entity and therefore it is not open to the Revenue to assess the same income in the hands of two different persons. Therefore, for this reason also the addition has to be deleted. Also entries in the books of accounts would not establish the taxability of the receipt. Considering the above fact, we are inclined to hold that the interest credited in the bank account of the assessee which is in respect of Indian branch which were belonging to Netherland Entity prior to 27.02.2017, is not taxable in the hands of assessee as the same has been assessed in the hands of Netherlands Entity by the department and the assessment has attained its finality. Thus, assessment order is neither erroneous nor prejudicial to the interest of the revenue. Accordingly, we quash the revisionary proceedings initiated by the ld. PCIT u/s 263 of the Act and consequent order. Appeal of the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the Revisory authority's exercise of jurisdiction under section 263 of the Income-tax Act, 1961 was valid in setting aside an assessment framed under section 143(3) as erroneous and prejudicial to the interests of the Revenue. 2. Whether interest under section 244A (interest on income-tax refund) credited to the assessee's bank account but offered to tax and assessed in the hands of a foreign entity (which owned the Indian branches prior to amalgamation) is taxable in the hands of the assessee. 3. Whether taxing the same item of income in the hands of two different persons is permissible where the foreign entity's assessments in respect of that income have attained finality. 4. Whether, if the income were to be assessable to the assessee, the rate of tax to be applied would be the domestic rate or the reduced rate under the applicable Double Taxation Avoidance Agreement (DTAA). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of exercise of jurisdiction under section 263 Legal framework: Section 263 empowers the Revisory authority to call for and examine records of any proceedings and if satisfied that any order passed by an assessing officer is erroneous in so far as it is prejudicial to the interests of the Revenue, to revise such order. The power is to be exercised where the AO's order is shown to be legally erroneous and prejudicial. Precedent Treatment: The Court applied the coordinate-bench decisions in the assessee's own earlier years which held that the AO's order was not erroneous or prejudicial. Interpretation and reasoning: The Tribunal found that the assessment under section 143(3) had been framed after statutory notices and inquiry, and the Revisory order under section 263 set aside that assessment on the ground that interest on refund was deductible because it was offered to tax by another entity. The Tribunal examined whether the AO's treatment was legally untenable; finding the facts and legal conclusions in prior coordinate-bench decisions to be dispositive, it concluded that the AO's order was not shown to be erroneous or prejudicial. The Tribunal held that where co-ordinate bench decisions in identical factual matrix have upheld the AO's order, the Revisory authority's intervention was not justified. Ratio vs. Obiter: Ratio - section 263 cannot be exercised where the AO's order conforms to law and settled precedent; Revisory jurisdiction requires demonstration of legal error prejudicial to Revenue. Obiter - none on this point beyond application of precedent. Conclusions: The exercise of jurisdiction under section 263 in the present facts was invalid; the revisionary order was quashed and the assessment restored. Issue 2 - Taxability of section 244A interest credited to assessee but offered to tax by foreign entity Legal framework: Taxation of income is governed by the Act's charging provisions; entries in books or bank credits are not definitive of tax incidence. Section 244A provides for interest on income-tax refund. Principles against double taxation and correct person to be assessed are relevant; DTAA provisions govern taxability and rate where applicable. Precedent Treatment: The Tribunal relied on earlier coordinate-bench decisions in the assessee's own case and invoked authorities holding that entries in books of account do not conclusively determine taxability (citing apex-court authorities referenced in the judgment). The Tribunal also referred to decisions holding that once income is assessed in the hands of one person and the assessment attains finality, taxing the same income in another person's hands is impermissible. Interpretation and reasoning: The Tribunal examined documentary material (returns/acknowledgements) showing that the foreign entity had offered and been assessed to tax the interest under section 244A in India for the relevant years, and those assessments had become final (processed under section 143(1)). The assessee's receipt of refund and interest into its bank account post-amalgamation resulted from bank-account vesting under the amalgamation scheme, but factual origin of the income traced to the foreign entity's pre-amalgamation operations. The Tribunal reasoned that mere credit to the assessee's bank account and reflection in its books does not alter the legal incidence of tax where the income vested and was assessed in the foreign entity. Applying the settled principle that the same income cannot be taxed twice (either against the same person or, in this context, against a different person where the prior assessment is final), the Tribunal held the interest was not taxable in the assessee's hands. Ratio vs. Obiter: Ratio - where interest under section 244A has been offered to tax and assessed in the hands of a different person and that assessment has attained finality, the same income cannot subsequently be taxed in the hands of the assessee merely because it was credited to the assessee's bank account post-amalgamation; entries in books/bank credits are not determinative of tax incidence. Obiter - observations on amalgamation mechanics and vesting of bank accounts are explanatory. Conclusions: The addition of interest under section 244A to the assessee's income was unjustified; such interest had been assessed in the hands of the foreign entity and therefore must be deleted from the assessee's assessment. Issue 3 - Prohibition on taxing same item of income in hands of two different persons where prior assessment is final Legal framework: Principle against double taxation and finality of assessments; legal maxim that an item of income once assessed cannot be taxed again in respect of the same period or by way of taxing the same income in another person when the earlier assessment has attained finality unless the prior assessment is set aside. Precedent Treatment: The Tribunal relied on earlier authorities (including cited Supreme Court and High Court precedents in the extracted reasoning) that entries in books or subsequent receipts do not permit re-taxation where the income has already been assessed and the earlier assessment is final. Interpretation and reasoning: The Tribunal emphasized that the foreign entity's returns showed the interest offered to tax and tax determined in accordance with applicable DTAA provisions; those returns were processed and assessments final. The Tribunal held that because the income had already been assessed in the hands of the foreign entity, it could not be validly assessed again in the hands of the assessee without vacating the prior assessment. Ratio vs. Obiter: Ratio - taxing the same income twice in hands of different persons is impermissible where the prior assessment in respect of that income has attained finality. Obiter - none beyond application of principle. Conclusions: The Revenue cannot assess the same interest amount in the assessee's hands where it has been finally assessed in the hands of the foreign entity; deletion of the addition is warranted. Issue 4 - Applicability of DTAA and appropriate tax rate if the income were to be assessed Legal framework: Where income is attributable to or received by a non-resident, DTAA provisions (as incorporated into domestic law) determine taxing rights and applicable rates; article-based reduced rates may apply to interest. Precedent Treatment: The Tribunal noted submissions and authorities (including tribunal and High Court decisions referenced by counsel) that interest earned from the tax department should be assessed in accordance with the relevant DTAA article and at the reduced treaty rate rather than the domestic maximum rate. Interpretation and reasoning: While the Tribunal did not need to apply the DTAA rate because it held the income was already assessed in the hands of the foreign entity, it recorded that even if the income were to be taxable in the assessee, the correct tax incidence and rate would hinge on the applicable DTAA article (and not simply the domestic rate), as argued and supported by precedent cited in the earlier coordinate-bench orders. Ratio vs. Obiter: Obiter - observations on treaty rate applicability are ancillary since the Tribunal's disposal did not require re-assessment of tax rate in the assessee's hands. Conclusions: No adjustment of the tax rate was necessary given deletion of the addition; however, if the income were to be assessable to a foreign resident, the DTAA rate would govern taxability and rate.