2005 (12) TMI 465 - AT - Income Tax

Powers Of Appellate Tribunal - whether or not the assessee, if it is to be taxed on the same rate as an Indian company, should have been taxed at the rate applicable for a closely held domestic company or at a rate applicable for a company in which public are substantially interested ? - HELD THAT - The powers of the Tribunal are not confined to deal with the issues arising out of the orders of the authorities below. As long an issue has relevance to the correct determination of taxes in respect of the year, and particularly when relevant facts can be found from the material already on record, it is open to the appellant and the cross objector, whether assessee or revenue, to raise that issue, provided the issue so raised is bona fide and the same could not have been raised earlier for good reasons. There is no difference between the assessee and the revenue on this issue as both of these parties are equal parties before us and their rights are the same. We are of the considered opinion that the Tribunal is not always prevented from passing orders which may result in enhancement of the assessee s tax liability beyond the tax liability determined by the Assessing Officer. In other words, it is not always necessary that as a result of the proceeding following assessee having been carried in appeal, the assessee cannot be worse off vis-a-vis the position in the event of his having simply accepted the order which is so carried in appeal. The rule preventing enhancement of assessee s tax liability, beyond the liability fixed by the Assessing Officer, is not universal and without exceptions to the said rule. The reason for revenue not taking up this plea earlier is the retrospective amendment in law. There can be any lack of bona fides in this reason; nobody can be expected to have the clairvoyance of knowing as to what the amendments in the statute will be in future. When the law so permitted, the Assessing Officer happily gave the relief prayed for. The legal position has changed now. The appellate proceedings are still on and there cannot be any excuse for any appellate authority to decide the issue in any manner except in accordance with the law as is in existence at the point of time, for the relevant assessment year, when the appeal is being heard. The appeal before us, even in original grounds of appeal, seeks us to decide what is correct rate of tax chargeable on the income of the appellant. If the correct rate of tax is the rate which neither the Assessing Officer nor the CIT(A) has applied, we have no option except to remit the matter to the file of the Assessing Officer to decide in accordance with the law. We are dealing with a purely legal question which, on being decided in accordance with the law, could result in enhancement of tax liability vis-a-vis the tax liability as a result of appeal effect order but neither there is an enhancement of income, nor there is an enhancement in the tax liability vis-a-vis the tax liability determined by the Assessing Officer in the assessment order u/s 143(3) of the Act as framed by him originally. Thus, we deem it fit and proper to vacate the order of the CIT(A) which is not in accordance with the correct legal position now in force. The matter shall now be sent back to the Assessing Officer for fresh adjudication in accordance with the law. While doing so, he will give due and fair opportunity of hearing to the assessee and decide the matter by way of a speaking order. The appeal filed by the revenue is allowed for statistical purposes in the terms indicated above.

Issues Involved:
1. Tax rate applicable to the foreign bank.
2. Interpretation of the Double Taxation Avoidance Agreement (DTAA) between India and Japan.
3. Retrospective amendment to Section 90 of the Income-tax Act, 1961.
4. Tribunal's powers to consider new legal issues and enhancement of tax liability.

Detailed Analysis:

1. Tax Rate Applicable to the Foreign Bank:
The core issue was whether the foreign bank should be taxed at the rate applicable to domestic companies or foreign companies. The CIT(A) directed the Assessing Officer to tax the foreign bank at the rate applicable to domestic companies, i.e., 45%, without surcharge. The Revenue contended that the tax rate should be as per the Finance Act for foreign companies.

2. Interpretation of the Double Taxation Avoidance Agreement (DTAA) Between India and Japan:
The CIT(A) initially remitted the matter back to the Assessing Officer, emphasizing the need to consider the DTAA between India and Japan. The Assessing Officer, upon reconsideration, upheld the assessee's contention that under the non-discrimination clause of the DTAA, the foreign bank should be taxed at the same rate as domestic companies, which was 50% at that time.

3. Retrospective Amendment to Section 90 of the Income-tax Act, 1961:
The Revenue argued that the CIT(A) and the Assessing Officer had erroneously interpreted the provisions of law regarding the taxation of foreign companies. The insertion of an Explanation to Section 90 by the Finance Act, 2001, with retrospective effect from 1-4-1962, clarified that charging a higher tax rate for foreign companies than for domestic companies does not constitute a less favorable charge. This amendment rendered the non-discrimination clauses in DTAAs ineffective concerning tax rates.

4. Tribunal's Powers to Consider New Legal Issues and Enhancement of Tax Liability:
The Tribunal examined whether it could apply the retrospective amendment to Section 90 and whether it had the power to enhance the tax liability. The Tribunal referred to the Supreme Court's judgment in National Thermal Power Corpn. Ltd. v. CIT, which allows the Tribunal to consider new legal issues arising from the facts on record to correctly assess the tax liability. The Tribunal concluded that it is not always prevented from passing orders that may result in an enhancement of the assessee's tax liability beyond what was determined by the Assessing Officer.

Conclusion:
The Tribunal vacated the CIT(A)'s order, which was not in accordance with the current legal position. The matter was remitted back to the Assessing Officer for fresh adjudication in light of the retrospective amendment to Section 90. The Assessing Officer was directed to provide a fair opportunity of hearing to the assessee and decide the matter via a speaking order. The appeal filed by the Revenue was allowed for statistical purposes.

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