2005 (11) TMI 375 - AT - Income Tax

Summary

Issues Involved:
1. Tax rate applicable to interest income under Section 115AD of the Income-tax Act, 1961 versus Article 11 of the Tax Treaty between India and the USA.
2. Non-grant of proper credit for taxes deducted at source (TDS).
3. Charging of interest under Section 234C of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Tax Rate Applicable to Interest Income:

The primary issue in this appeal is whether the interest income should be taxed at 20% as per Section 115AD of the Income-tax Act, 1961, or at 15% as per Article 11 of the Double Taxation Avoidance Agreement (DTAA) between India and the USA. The appellant contends that the Treaty provisions override the provisions of the Income-tax Act and that the lower rate of 15% under the treaty should be applied. The appellant relies on the decisions of the Calcutta High Court in CIT v. Davy Ashmore India Ltd. (190 ITR 626) and the Andhra Pradesh High Court in CIT v. Vishakhapatnam Port Trust (144 ITR 146), along with CBDT's circular No. 333 dated April 2, 1982.

The facts reveal that the assessee, a company incorporated in the USA, had income from capital gains, dividends, and interest. The Assessing Officer taxed the interest income at 20%, which was upheld by the CIT(A) on the grounds that the assessee cannot selectively apply the rates from the Income-tax Act and the DTAA. However, the Tribunal found that for all three sources of income (dividend, capital gains, and interest), Articles 10, 11, and 13 of the DTAA provide that these incomes are taxable as per domestic law, with caps provided in Articles 10 and 11.

The Tribunal concluded that the assessee has not adopted a 'pick and choose policy' and has applied the tax rates as per the combined reading of the Income-tax Act and the DTAA. Therefore, the Tribunal held that the assessee is liable to pay tax at the rate of 15% on interest income, being the maximum rate provided in the DTAA for interest income. This ground of the assessee was allowed.

2. Non-grant of Proper Credit for Taxes Deducted at Source (TDS):

The second issue pertains to the non-grant of proper credit for TDS. The learned counsel of the assessee argued that this ground is consequential and that the Assessing Officer should be directed to allow credit for TDS as per law. The Tribunal set aside the order of the CIT(A) on this issue and restored the matter back to the file of the Assessing Officer with a direction to allow credit of TDS as per law after providing adequate opportunity of being heard to the assessee.

3. Charging of Interest under Section 234C:

The third issue involves the charging of interest under Section 234C of the Income-tax Act. The appellant contended that the total income included capital gains arising in different periods, and they had correctly paid advance tax in the relevant instalments. The Tribunal noted that, in view of the direction of the CIT(A), this ground is academic. Consequently, this ground was rejected as it was of academic interest only.

Conclusion:

In conclusion, the appeal was partly allowed. The Tribunal ruled in favor of the assessee on the issue of the tax rate applicable to interest income, directing that the interest income be taxed at 15% as per the DTAA. The issue of TDS credit was remanded back to the Assessing Officer for proper adjudication, while the issue of interest under Section 234C was dismissed as academic.