TaxTMI 
TaxTMI 
2024 (10) TMI 1654
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.... the notice under Section 263 IT. Act under the facts and circumstances of the case. The notice issued under section 263 was without jurisdiction and without authority of law, hence the order passed deserves to be set side. 2. That the learned Principal Commissioner of Income Tax, Udaipur passed the order dated 20/03/2024 under Section 263 of the L.T. Act, erred in remanding the ground of revision to the Assessing Officer passed by the ld. Assessing Officer on the issue relating to Non- Deduction of TDS on Rs.23,09,26,264/- being bank interest paid outside India. The interest was paid on foreign currency loan taken from Foreign Branches of Indian Banks which were Domestic Companies. Hence TDS was neither required to be deducted under Section 194A nor under Section 195, hence the order passed under Section 263 deserves to be set aside on this issue. 3. That the learned Principal Commissioner of Income Tax, Udaipur vide order dated 20/03/2024 passed under Section 263 of the LT. Act, erred in remanding the ground of revision to the Assessing Officer passed by the ld. Assessing Officer on the issue relating to treatment of dividend received from Foreign Joint Venture ....
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....t order noted that the assessee submitted replies which were examined and kept on record. After examination of the replies submitted by the assessee, ld. AO concluded that explanation offered by the assessee was satisfactory and no adverse inference was drawn. Ld. AO also noted that assessee on 24.02.2021 filed the revised computation of income and offered the GST provision of Rs. 16,30,91,496 for taxation purpose which was added back to the total income of the assessee. Accordingly, against the returned of income of Rs. 5,93,12,42,630/- assessed income was determined at Rs. 6,09,43,34,126/- vide order dated 19.04.2021. 4. On culmination of the assessment proceedings, the ld. PCIT called for the assessment records as per power vested upon her in terms of provision of section 263 of the Act. Upon examination of records ld. PCIT noted that; a) The assessee company claimed an expenditure of Rs.5,92,10,074/- related to Education-Cess for the A.Y. 2009-10 on the basis of order passed by High Court of Rajasthan on 31.07.2018. This expenditure was not allowable in view of explanation 3 to section 40(a)(ii) inserted by Finance Act 2022 w.e.f. 01.04.2005. Further, the Hon'....
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....the provisions of Act, 1961. This amount of Interest payment was required to be disallowed and hence, added to the declared total income for the A.Y. under consideration. However, the AO/NaFAC didn't consider the same while passing the assessment order on 19.04.2021 further rectified u/s 154 on 21.05.2021. Chambal Fertilizers and Chemicals Ltd vs. PCIT Thus, ld. PCIT noted that the FAO didn't examine the issue of expenditure of Rs.5,92,10,074/- related to Education-Cess of A.Y. 2009-10 (supra), on the basis of order passed by High Court of Rajasthan on 31.07.2018. The AO/NaFAC didn't disallow this expenditure in view of explanation 3 to section 40(a)(ii) inserted by Finance Act 2022 w.e.f. 01.04.2005, accordingly as such, the income has been under computed/assessed by this amount of Rs.5,92,10,074/- 4.1 Since the AO didn't apply/consider correct appreciation of fact as well as law w.r.t. chargeability of tax rate on the income derived by CFCL from business activities of the Joint Venture with JV IMACID of Kingdom of Morocco in view of the provisions of Article 9 (Associated enterprises) of the Convention between the Republic of India and the Kingdom of Morocco....
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.... the Speed Post as well. As per the Notice, the assessee was required to file its reply by 05.10.2023. Assessee filed reply through e-proceedings as well as through the e-mail. After considering the detailed reply of the queries raised by ld. PCIT and the discussion recorded in the order of ld. PCIT, she hold that the assessment order passed by the FAO in the case of the assessee is set aside (partly) to AO on the two issue i.e. The issue of Non-Deduction of TDS on Interest paid outside India or paid in India to a non-resident other than a company or a foreign company (Rs.23,09,26,264/-) and The issue of Dividend (as per section 115BBD) vs. Business Income (Rs. 9,82,58,313/-) to complete the assessment u/s 263/143(3)/142(1) of the Act, considering the observations made in para 6[B] & 6[C] in her order. Thereafter, based on outcome of such enquiries and verification, necessary additions, wherever required, may be made to the total income of the assessee as per law by modifying the assessment order u/s 143(3) of the Act dated 19.04.2021. Therefore, she holds that assessment order passed is liable to revision under clause (a) & (b) of the explanation 2 of section 263 of the Act and....
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....ertain disallowances. 5. The order passed by Ld. AO was taken up by Ld. PCIT by impugned exercise of jurisdiction u/s 263 of the Act, thereafter, passing the Impugned Order dated 20.03.2024. Issues in the Order passed by the L.D. PCIT dated 20.03.24: • Issue I - Interest paid outside India was Rs. 25,56,23,509/- whereas TDS was deducted on a sum of Rs. 13,92,83,709/- only and hence the differential amount of Rs. 11,33,39,800/- is to be disallowed. • Issue II - Dividend income of Rs 9,82,58,313/- earned from the assessee company's JV in Morocco was to be taxed as business profit subject to 30% tax instead of dividend income subject to 15% tax u/s 115BBD. Pointers For Arguments: A. The Notice dated 20.09.2023 issued by the L.D. PCIT under Section 263 and consequential Order is not valid: 1. For, a Notice issued under section 263 will be a valid notice only if both the conditions mentioned under the said section are duly complied, they are: i). The original order must be erroneous in law; and ii). The order should be prejudicial to the interest of the revenue. 2. The assessee through ....
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....nce the differential amount of Rs. 11,33,39,800/- is to be disallowed. 6. That, the Ld. PCIT failed to appreciate the fact that that the amount of Rs. 13,92,83,709/- on which TDS was deducted is not entirely the amount of payment of foreign interest. Because out of Rs. 13,92,83,709/-, an amount of Rs 11,70,05,416 was paid as a Fees for Technical Services and undisputedly TDS was deducted on it. Further, an amount of Rs. 38,41,373 was paid as a Royalty on which TDS was also deducted. Similarly, an amount of Rs. 2,39,757 was paid for other services and on this also TDS was deducted. It is to be noted that out of Rs. 13,92,83,709/- the amount of foreign interest on which TDS was deducted was only Rs. 1,81,97,163. Further for more clarification concerning the query of Interest Expenses kindly refer the Page No. 186 of the Supplementary Paper Book filed on 17.09.2024. 7. Further as far as the break up on the amount of Rs. 25,56,23,509/- reported as interest paid by Assessee Company, is concerned, the same is as follows: • . Interest paid to Indian Banking Companies amounting Rs. 23,09,26,264: With respect to this payment of interest amounting 23,09,26,264 ....
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....n following judicial precedent, by which the case of the Appellant is squarely covered: • "Bank of India v. Assistant Commissioner of Income Tax, Circle 2(1)(1), Mumbai [2020] 122 taxmann.com 247 (Mumbai - Trib.)" Income earned by assessee, an Indian bank, from its foreign branches which were subjected to tax abroad under respective tax treaties, would be included in assessee's taxable income in India and credit for taxes so paid abroad is to be given to assessee in computation of its Indian income tax liability in accordance with provisions of related tax treaty. • . "Commissioner of Income-tax (TDS)-1 v. State Bank of Patiala [2017] 80 taxmann.com 254 (Punjab & Haryana)": According to section 194A(3)(iii)(p), the provisions of tax deducted at source are not applicable to income credited or paid to any institution, association of body or class by institutions, associations or bodies where the Central Government after recording the reasons in writing notifies them in the Official Gazette. The Notification No. S.O. 3489 [No. 170 F. No. 12/164/68-ITCC/ITJ], dated 22-10-1970 issued by the Central Government under section 194A(3)(iii)(f) ....
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....f taxes. (emphasis supplied by Finance Act, 2011). 12. The assessee through its submissions and replies dated: . • 20.10.2023 (Page No. 11-17 of Order of PCIT dated 20-03-2024), . • 04.01.2024(Page No. 23-25 of Order of PCIT dated 20-03-2024) (Personal Hearing), • 31.01.2024 (Page No. 27-28 of Order of PCIT dated 20-03-2024) • 06.03.2024 (Page No. 29 of Order of PCIT dated 20-03-2024) and • 13.03.2024(Page No. 29-32 of Order of PCIT dated 20-03-2024) (Personal Hearing), Has duly established that the investment made by the assessee was a strategic long-term investment, which is classified as a "Non-current Investment" and was accordingly shown in the annual accounts of the assessee, hence the income of the assessee will be in the form of "dividend" only. 13. Ld. PCIT contends that the dividend income earned by the assessee from its JV in Morocco was to be taxed as business profit subject to 30% tax instead of dividend income subject to 15% tax u/s 115BBD. The said contention is against the law and plain reading of provision of Section 115BD read with Section 90(2) of the Act. The Ld. PCIT has....
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.... as prejudicial to the interests of the revenue. The commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of revenue. If one of them is absent - if the order of the Assessing Officer is erroneous but is not prejudicial to the interests of revenue - recourse cannot be had to section 263 (1). There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer; it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category falls orders passed without applying the principles of natural justice or without application of mind. [Para 6] The phrase 'prejudicial to the interests of revenue' has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of the order of the Assessing Officer cannot be treated as prejudicial to the interests of revenue. For example, i....
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....find out if any order passed by the assessing officer is erroneous insofar as it is prejudicial to the interests of the revenue. After examining the record and after making or causing to be made an enquiry if he considers the order to be erroneous then he can pass the order thereon as the circumstances of the case justify. Obviously, as a result of the enquiry he may come in possession of new material and he would be entitled to take that new material into account. If the material, which was not available to the Income-Tax Officer when he made the assessment could thus be taken into consideration by the Commissioner after holding an enquiry, there is no reason why the material which had already come on record though subsequently to the making of the assessment cannot be taken into consideration by him. Moreover, in view of the clear words used in clause (b) of the explanation to Section 263(1), it has to he held that while calling for and examining the record of any proceeding under Section 263(1) it is and it was open to the Commissioner not only consider the record of that proceeding but also the record relating to that proceeding available to him at the time of examination. [Par....
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.... 8. Commissioner of Income-tax (TDS)-1, Chandigarh v. Canara Bank [2017] 79 taxmann.com 342 (Punjab & Haryana) Section 194A of the Income-tax Act, 1961 - Deduction of tax at source - Interest other than interest on securities - Assessment year 2012- 13 - If organisation to which assessee paid interest was exempted from payment of tax, there was no need for deduction of tax at source by assessee. 48-50 9. Commissioner of Income Tax (TDS), Kanpur v. Canara Bank [2018] 95 taxmann.com 81 (SC)] This Court having already laid down in Dalco Engg. (P.) Ltd. case (supra) that establishment of various financial corporations under State Financial Corporation Act, 1951 is establishment of a Corporation by an Act or under an Act. We are of the view that the above ratio fully covers the present case and we have no doubt that the Authority have been established by the 1976 Act and it is clearly covered by the Notification dated 22.10.1970. It is further relevant to note that composition of the Authority is statutorily provided by Section 3 of 1976 Act itself, hence, there is no denying that Authority has been constituted by Act itself. [Para 31] 51-63 Special rate of ta....
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....0 S.O. 710.-In pursuance of sub-clause (f) of clause (iii) of sub-section (3) of section 194A of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby notify with effect from the 19th July, 1969 the following banks for the purposes of the said sub-clause :- 1. **** 2. ***** 3. Allahabad Bank, 14, India Exchange Place, Calcutta-1. 4. ************ 5. ************** 6. Union Bank of India, 66/80, Apollo Street, Fort, Bombay-1. 7.*************. 8. Bank of Baroda, 3, Walchand, Hirachand Marg, Bombay-1. 9. ********. 10. Bank of India, ***** 109-110 15. DTAA Agreement For Avoidance of Double Taxation and Prevention of Fiscal Evasion with Germany. 111-123 16. DTAA Agreement For Avoidance of Double Taxation and Prevention of Fiscal Evasion with Morocco. 124-135 7. The ld. AR of the assessee also filed a chart explaining the issue raised by the PCIT with that of the facts of the case and whether the issue raised makes the order of the ld. AO erroneous and prejudicial to the interest of the revenue or not, that chart is reproduced here in below : Issue Ld. PCIT Summary of Grounds Judgments Paper Book Reference Ground No. 1 of F....
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....rson specific d. Nothing prejudicial established. e. AO passed order in accordance with law as applicable No TDS required on notified Institutions a. Commissioner of Income-tax (TDS)-1 v. State Bank of Patiala [2017] 80 taxmann.com 254 (Punjab & Haryana). b. Commissioner of Income-tax (TDS)-1, Chandigarh v. Canara Bank [2017] 79 taxmann.com 342 (Punjab & Haryana). c. Commissioner of Income Tax (TDS), Kanpur v. Canara Bank [2018] 95 taxmann.com 81 (SC). a. Press release at page no. 70-71 b. TRC of SBI Tokyo PB No. 80 c. Break Up - PB No. 68-69 d. DTAA Germany* e. TRC Additional* Ground No. 3 of the form 36 (Dividen d) a. AO didn't consider the point of taxation of dividend at rates of business income. b. Investment was trade investment yielding profits. c. Section 115BBD not applicable in view Article 9 of convention Para No. 6 [C] Page No. 53-57 onwards, conclusion Para No. 56-57 a. Factually incorrect finding b. Section 115BBD is applicable and all conditions being fulfilled. c. It requires, holding of minimum 26% in equity, whereas, the Apppellant is holding 33.33% in foreign company d. Dividend income is supported by documents e....
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....es 9. Copy of details of interest of Rs. 25,56,23,509/- paid outside India 69 Yes 10. Copy of press release dated 10.05.2016 70-71 Yes TDS Issue 11. Copy of additional submission filed on 01.02.2024 72-73 Yes Dividend 12. Copy of reply dated 13.03.2024 74-76 Yes Both issue 13. Copy of reply dated 13.03.2024 77-79 Yes Both issue 14. Copy of Tax Residency Certificate of SBI, Tokyo Branch 80 Yes TDS Issue 15. Copy of balance sheet reflecting that investment in IMACID is not a trade investment and rather non-current investment 81-82 yes Dividend Issue 16. Copy of shareholder agreement dated 02.05.2005 83-153 Yes Dividend Issue 17 Copy of minutes of meeting dated 31.05.2017 of the shareholder of IMACID 154-157 Yes Dividend Issue 18. Copy of TDS certificates issued by IMACID 158 Yes Dividend Issue 19. Copy of Audit performance report of IMACID dated 28.12.2018 submitted by RBI 159-164 Yes Dividend Iss....
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....s given vague reason that the explanation furnished by the assessee was not fully acceptable. Considering the explanation and evidence placed on record she has to either accept the explanation or reject the same with the reasons. Whereas she has directed the ld. AO to make further examination / verification, but as per the case laws relied upon for verification on the concluded assessment provision of section 263 of the Act cannot be invoked. Ld. AR further submitted that ld. PCIT failed to demonstrate as to whether the order of Assessing Officer is erroneous and prejudicial to the interest of the revenue. 9.2 As regards the 2nd issue, of charging of tax on the dividend income ld. AR of the assessee submitted when there is specific provision u/s 115BBD, the ld. PCIT cannot direct the ld. AO to charge the said income which is covered by the specific provisions under the head business Income. The assessee offers dividend income as per provision of section 115BBD of the Act regularly every year and that has been accepted in the past years too. Thus, there is no reason as to suggest that on the issue to hold another view. 9.3 As regards issue of tax deduction of education cess cl....
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....ome from other source. After filling the return of income by the assessee the case was selected for complete scrutiny assessment under the E-assessment Scheme, 2019. Ld. AO in the assessment order noted that the assessee submitted replies which were examined and kept on record. After examination of the replies submitted by the assessee, ld. AO concluded that explanation offered by the assessee was satisfactory and no adverse inference was drawn. At last ld. AO noted assessee on 24.02.2021 filed the revised computation of income and offered the GST provision of Rs. 16,30,91,496/- for taxation purpose which was added back to the total income of the assessee. Accordingly, against the returned of income of Rs. 5,93,12,42,630/- assessed income was determined at Rs. 6,09,43,34,126/- vide order dated 19.04.2021. After completion of assessment proceedings, ld. PCIT called for the assessment records for examination. That examination of records was as per provision of section 263 of the Act. While doing so ld. PCIT raised three issues in the proceeding initiated against the assessee and to this effect she issued a notice dated 20.09.2023 giving opportunity of being heard as well as requir....
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....der DTAA 52,11,831 (iv) Foreign Currency Exchange Rate Translation 12,88,250 Total 25,56,23,509 The assessee already filed a detailed summary chart showing the names of payee for an amount of Rs. 1,81,97,163/- for which there is not dispute as the TDS as per provision of the Act has already been deducted. Now so far as the balance amount is concerned as is evident from the above chart that Rs. 23,09,26,264 being the interest paid to Indian Banking companies for which provision of section 194A(3)(iii) would apply. So far as the foreign bank payment of Rs. 52,11,831/- paid by the assessee, the same has been paid to KFW (Germany) and HSBC Bank (Mauritius) Ltd., As regards the payment made to KFW (Germany) same is covered by the DTAA agreement between India and Germany interest paid to KFW Bank was not taxable in India and hence no TDS wasrequired to be deducted. As regards the interest paid to HSBC Bank (Mauritius) Ltd., a press release dated 10.05.2016 states that interest income of Mauritian resident banks in respect of debts claims existing on or before 31st March 2017 shall be exempt from tax in India and the payment made for the debt taken before 31....
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....94LC or section 194LD) or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries") shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force. In this case the payment is made by the assessee to Foreign branch of Indian Bank. The nature of payment is interest but is not paid to foreign company. Further these banks are also not a company. Therefore, if there recipient interest non-resident, then only tax is required to be deducted. The term non-resident is defined in section 2(30) which says that non- resident means a person who is not the resident includes a person who is not ordinary resident within the meaning of clause 6 of section 6. The term resident is defined in section 6(4) of the Act which says that every other person is said to be resident in India in any previous year. In every case, except where during that year the control and management of his affairs is situated holly outside India whereas in the case of banking companies effectiv....
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.... Assessing Officer is erroneous and prejudicial to the interest of the revenue. 13. As regards the issue of charging of dividend income as per section 115BBD Vs. Business income, the brief fact connected to the issue is that the assessee hold 33.33 % shares in the Joint Venture in Morocco namely Indo Maroc Phosphore SA (IMACID) along with two other partners (33.33 % of shareholding of each) i.e. Tata Chemicals Limited (TCL) and OCP, Morocco. For the year under consideration the assessee has accounted income of Rs. 9,82,58,313/- being the amount of dividend received from IMACID. In support the assessee filed a dividend certificate, annual report, minutes of meeting of share holders and balance sheet. None of the documents were discussed or considering while holding that as to why the dividend income should not be considered as such and be considered as business income. But she contended that the assessee has joint venture in Morocco as share @ 33.33 % it is a trade investment and joint control and business is carried to pool the resources by each partners. She also noted that the assessee had invested in this JV in form of trade investment, income derived from this investment is ....
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.... is both effective and just. In essence, Section 263 is a response to the complexities of the tax landscape, acknowledging the delicate balance needed between empowering tax authorities and preventing potential errors. Through its existence, the section reflects commitment to maintaining integrity of the tax assessment process, acknowledging the ever-evolving nature of tax laws and the need for a mechanism that can adapt to changes in interpretations and protect the revenue's interests. Section 263 is not merely a provision for revision but very crucial component of Act ensuring that tax administration system remains robust, fair, and equipped to address the challenges arising in the course of tax assessments. Main objective of Section 263 is to rectify orders that are not only erroneous but also have the potential to adversely affect the revenue's interests. It provides a mechanism for the Commissioner to ensure correctness of orders passed by subordinate officers. The Commissioner's role extends beyond mere oversight; they serve as custodians of revenue. When an order is deemed "erroneous" and "prejudicial to the interests of the revenue," the Commissioner's revis....
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....as to establish that on both the issue the order is not erroneous and that of the matter has not been challenged by the ld. DR so far the as merits of the case. The bench also noted that on two issues even on the ld. PCIT noted that the issue requires the verification by the ld. AO. Thus, when based on the submission and discussion so recorded as is evident that on all of the aspect of the matter the assessment order is not erroneous and prejudicial to the interest of the revenue. In our considered view, the PCIT had to reach a conclusion that in the fact situation obtaining in the instant case, that the assessment order was erroneous by conducting an enquiry before passing an order under Section 263 of the Act. Therefore, the order passed by the ld. PCIT dated 20.03.2024 cannot be sustained in law merely because the original assessment order does not exactly advert to the issue which the ld. PCIT is seeing. Moreover, we note that both the issue that she has discussed ld. DR did not demonstrate as to the facts as argued by ld. AR that the view on the issue is erroneous or prejudicial to the interest of the revenue. Hence, the PCIT could not have exercised the powers conferred upon ....