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Issues Involved:
1. Allowability of interest paid on foreign borrowing. 2. Applicability of Section 58(1)(a)(ii) of the Income-tax Act. 3. Applicability of Section 195 of the Income-tax Act. 4. Applicability of Section 9(1)(v) of the Income-tax Act. 5. Classification of transactions as business or investment. 6. Jurisdiction of the Commissioner of Income-tax under Section 263. Issue-wise Detailed Analysis: 1. Allowability of Interest Paid on Foreign Borrowing: The primary issue in this appeal is the allowability of interest paid on foreign borrowing, which was disallowed by the Assessing Officer on the grounds that the tax was not deducted by the assessee as required under Section 58(1)(a)(ii) of the Act. The assessee argued that the interest payable is not taxable under the Act in the hands of the non-resident, either under Section 5 or Section 9, and that the payment was not made in India, hence the provisions of Section 195 do not apply. The revenue contended that if any interest is paid to a non-resident, the provisions of Section 195 apply, and the assessee was liable to deduct tax thereon. 2. Applicability of Section 58(1)(a)(ii) of the Income-tax Act: Section 58(1)(a)(ii) disallows any interest chargeable under the Act, payable outside India, on which tax has not been paid or deducted under Chapter XVII-B. The CIT held that the interest was not allowable under Section 58 as no tax was deducted or paid. However, the Tribunal noted that the chargeability of interest to income of the non-resident cannot be considered in the hands of the person paying the interest, citing decisions of the Bombay High Court and the Andhra Pradesh High Court. 3. Applicability of Section 195 of the Income-tax Act: Section 195 mandates the deduction of income-tax at the time of payment to a non-resident if the sum is chargeable under the Act. The Tribunal found that Section 195 is not applicable as the payment was made outside India. The assessee transferred funds to his account in the State Bank of India and from there made the payment outside India. Therefore, there was no liability to deduct tax under Section 195. 4. Applicability of Section 9(1)(v) of the Income-tax Act: Section 9(1)(v) specifies the conditions under which interest income is deemed to accrue or arise in India. The CIT argued that the provisions of Section 9(1)(v) apply as the assessee engaged in the business of purchase and sale of shares/debentures. The Tribunal, however, concluded that the assessee, being a non-resident, cannot carry on business in India without approval from the Reserve Bank of India under Sections 28 and 29 of the Foreign Exchange Regulation Act. The assessee had not obtained any such approval, and the transactions were not in the ordinary line of business. Hence, Section 9(1)(v) does not apply. 5. Classification of Transactions as Business or Investment: The CIT classified the transactions as an adventure in the nature of business based on the short span of transactions and the profit made. The assessee contended that the transactions were investments, not business activities, supported by various reasons, including the lack of regularity in transactions and the fact that the assessee did not carry on any business in shares/securities. The Tribunal agreed with the assessee, noting that the solitary transaction of two scrips does not indicate a business venture, and the assessee was debarred from carrying on business in India without RBI approval. 6. Jurisdiction of the Commissioner of Income-tax under Section 263: The CIT exercised powers under Section 263, holding that the interest was not allowable. The Tribunal found that the CIT's order was not in accordance with law, as the interest payment was not chargeable to tax in India, and the assessee was not liable to deduct tax under Section 195. Consequently, the Tribunal vacated the CIT's order and restored that of the Assessing Officer. Conclusion: The appeal was allowed, and the order of the CIT under Section 263 was vacated, restoring the original assessment by the Assessing Officer. The Tribunal concluded that the interest paid on foreign borrowing was allowable, and the provisions of Sections 58(1)(a)(ii), 195, and 9(1)(v) did not apply to disallow the interest payment.
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