2014 (11) TMI 984 - AT - Income Tax

Disallowance of interest - Whether CIT(A) is correct in holding that Article under which interest u/s. 244A of I.T. Act 1961 is taxable cannot be decided in proceedings u/s 154 without appreciating the fact that interest issued u/s. 244A being apparently not in the nature of interest on debt is clearly taxable under Article 23 of the India-USA DTAA - Held that - Following decision of Asstt. CIT Versus Clough Engineering Ltd. 2011 (5) TMI 562 - ITAT DELHI - issue is at least a debatable one and hence beyond the pale of section 154 of the Act. We therefore do not find any reason to interfere with the order passed by CIT(A). - Decided against Revenue.

Summary

Issues:
1. Taxability of interest under section 244A of the Income Tax Act, 1961 in proceedings under section 154 without appreciating the applicability of the Double Taxation Avoidance Agreement (DTAA) between India and USA.

Analysis:
The appeal pertains to the assessment year 2007-08, where the Revenue raised a ground questioning the correctness of the Commissioner of Income Tax (Appeals) [CIT(A)] in holding that interest under section 244A of the Income Tax Act, 1961 is taxable under Article 23 of the India-USA DTAA. The case involved a non-resident corporate entity registered as a Foreign Institutional Investor (FII) in the USA. The Assessing Officer (AO) initially granted a refund to the assessee, which included interest under section 244A. Subsequently, the AO sought to tax this interest income under Article 23 of the DTAA, initiating proceedings under section 154 of the Act. The assessee contended that interest on refund falls under Article 11 of the DTAA, not Article 23. The AO disagreed, leading to a dispute.

Upon appeal, the CIT(A) referred to the decision of the ITAT Special Bench in the case of Clough Engineering Ltd., holding that income tax refund is taxable under Article 11 of the DTAA. The CIT(A) deemed the taxability of interest under Article 11 or Article 23 as a debatable issue, beyond the scope of section 154 proceedings. Consequently, the order passed under section 154 was annulled. The Revenue challenged this decision before the ITAT Mumbai.

During the proceedings, with no representation from the assessee, the Departmental Representative (D.R.) acknowledged that the issue aligns with the ITAT Special Bench decision. However, the Revenue maintained that Article 23 should apply in this case. After reviewing the arguments, the ITAT concurred with the CIT(A) and the decision of the ITAT Special Bench, considering the issue as debatable and outside the purview of section 154. Consequently, the ITAT dismissed the Revenue's appeal, upholding the CIT(A)'s order.

In conclusion, the ITAT Mumbai upheld the CIT(A)'s decision, emphasizing that the taxability of interest under section 244A in the context of the DTAA is a debatable issue, falling beyond the scope of section 154 proceedings. The appeal by the Revenue was thus dismissed, affirming the annulment of the order passed under section 154.