2011 (5) TMI 588 - AT - Income Tax

Notional interest on deposit - India USA DTAA - Held that - CIT(A) in assessment years 1993-94 to 1999-2000 stated that when the recovery of principal amounts itself is doubtful to be realized from the debtors, there is no justification to contemplate any notional interest by way of income in the hands of the assessee company - in favour of the assessee Tax paid in USA on the income accrued to the assessee - CIT(A) directed to tax the foreign dividend in net amount after deducting the foreign tax - Held that - There is no justification in straightaway excluding the tax withheld in those countries from the dividend income to be included in the impugned assessments - Appeal is allowed by way of remand

Summary

Issues:
1. Deletion of addition of notional interest on deposit with a company.
2. Tax treatment of amount deducted by a foreign company on royalty and fees for technical services.

Analysis:

*Issue 1: Deletion of addition of notional interest on deposit with a company*

The appeal filed by the Revenue challenged the deletion of an addition of Rs. 17,50,000 representing notional interest on a deposit of Rs. One Crore placed with a company. The Ld. CIT(A) deleted the addition, citing previous decisions in favor of the assessee for earlier assessment years. The ITAT upheld the decision, referencing a Co-ordinate Bench decision and concluded that there was no justification for contemplating notional interest as income in the hands of the assessee company. Therefore, the deletion of notional interest was upheld, and the ground was dismissed.

*Issue 2: Tax treatment of amount deducted by a foreign company on royalty and fees for technical services*

The second issue involved the deletion of Rs. 15,11,295, which was deducted by a foreign company from the assessee while remitting the amount. The Assessing Officer added this amount under the IT Act, but the Ld. CIT(A) ruled in favor of the assessee, stating that the tax on royalty and fees for technical services was borne by the foreign company. The assessee relied on legal precedents and the decision of the Ld. CIT(A) in earlier years where similar additions were deleted. However, the ITAT found in favor of the Revenue, setting aside the Ld. CIT(A)'s decision. The ITAT directed the Assessing Officer to give the assessee the benefit of tax credit paid in respect of these incomes while computing the tax liability of the assessee company. Consequently, the appeal was partly allowed.

In conclusion, the judgment addressed the issues of notional interest on a deposit and the tax treatment of amounts deducted by a foreign company, providing detailed analysis and legal interpretations for each issue, resulting in a partial allowance of the appeal.