2014 (1) TMI 34 - AT - Income Tax

Exemption From capital gains u/s 10(23G) of the Act Held that - Explanation 2 to section 10(23G) inserted by the Finance Act, 1999 is declaratory, thus, retrospective in operation - the assessee was entitled to exemption under section 10(23G) on long-term capital gains arising on infrastructure capital fund invested before 1st June, 1998 - Following Vbc Ferro Alloys Limited. Versus Assistant Commissioner Of Income-tax, Circle 3(4), Hyderabad. 2005 (9) TMI 253 - ITAT HYDERABAD-B - The Assessing Officer and the Commissioner of Income-tax (Appeals) erred in rejecting the exemption provided under the statute to the assessee on the reason that the investments made prior to April 1, 2002 are not eligible for exemption - the Indian company was already approved as an infrastructural company and was allowed deduction under section 80-IA and further at the time of sale the conditions as provided under section 10(23G) are satisfied Thus, the sale of shares of an infrastructural company is eligible for exemption as provided under section 10(23G) - on both the counts, i.e., by virtue of the Double Taxation Avoidance Agreement as well as by virtue of section 10(23G), the assessee's claim of exemption from capital gain is to be upheld - The Assessing Officer is directed to treat the amount as exempt from tax under the income-tax provisions. Issue of interest received on delayed payment - Sale consideration paid by the buyer Applicability of Section 9(1)(v) of the Act - Held that - Payment of sale consideration and payment of interest are of two different transactions - The interest was calculated for the period of delay on the balance amount of sale consideration which was due on a given day - The Assessing Officer as well as the Commissioner of Income-tax (Appeals) relied on section 9(1)(v) of the Act to consider that this amount is taxable as per the provisions of the Act - Sub-clause (c) only is applicable in respect of income by way of interest under section 9(1)(v) - the interest payment payable on any debt incurred or moneys borrowed and used for the purpose of a business or profession carried on by such persons in India - neither assessee nor the purchaser is carrying on any business in India nor the interest is payable in respect of any debt incurred or moneys borrowed and used for the purpose of business - the interest payment received by the assessee was received outside India and the payment was made by a non-resident neither in relation to any debt incurred or moneys borrowed nor used for the purpose of business or profession in India. The interest income cannot be considered as received or deemed to have received or accrued or arising or deemed to have accrued or arise as provided by section 9 of the Act - by virtue of the provisions of section 5 interest income received abroad and paid by a non-resident cannot be brought to tax under the Income-tax Act the interest was paid by the purchaser to compensate the delay in discharging the consideration and cannot be considered as part of consideration - If it were to be considered as part of consideration, then it becomes part of the sale consideration which was already considered as exempt from the long-term capital gain. - Thus, the interest received by the assessee abroad from a non-resident cannot be brought to tax as the provisions of section 9 or section 5 are not applicable to the transaction - the Assessing Officer is directed to exclude the interest amount Decided in favour of Assessee.

Summary

Issues Involved:
1. Taxability of capital gains on the sale of shares.
2. Applicability of Double Taxation Avoidance Agreement (DTAA) provisions.
3. Eligibility for exemption under section 10(23G) of the Income-tax Act.
4. Taxability of interest received on delayed payment of sale consideration.
5. Validity of reassessment proceedings under section 147.
6. Allowance of expenses incurred in connection with the sale of shares.
7. Levy of surcharge and education cess on tax.
8. Entitlement to interest under section 244A on refundable tax.
9. Initiation of penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Taxability of Capital Gains on the Sale of Shares:
The assessee, a Netherlands-based company, sold its entire shareholding in an Indian company, resulting in long-term capital gains. The Assessing Officer (AO) taxed these gains in India, invoking Article 13(1) of the DTAA, treating the shares as immovable property under section 269UA(d) of the Income-tax Act.

2. Applicability of DTAA Provisions:
The assessee claimed that the capital gains were exempt under Articles 13(4) and 13(5) of the India-Netherlands DTAA. The Tribunal held that Article 13(1) was not applicable as the shares did not constitute immovable property. Article 13(4) was also inapplicable as the shares were used in the business of the company. Therefore, under Article 13(5), the gains were taxable only in the Netherlands, not in India.

3. Eligibility for Exemption under Section 10(23G):
The assessee alternatively claimed exemption under section 10(23G), arguing that the Indian company was an approved infrastructure facility. The Tribunal agreed, noting that the exemption applied to investments made before June 1, 1998, and that the industrial park was notified as an infrastructure facility. The Tribunal cited precedents supporting the retrospective application of section 10(23G).

4. Taxability of Interest Received on Delayed Payment of Sale Consideration:
The interest received from the Singapore-based buyer for delayed payment was contested. The AO and Commissioner of Income-tax (Appeals) (CIT(A)) deemed it taxable in India under section 9(1)(v). The Tribunal disagreed, stating that the interest was not related to any debt incurred or moneys borrowed for business in India. Hence, it was not taxable in India under section 9 or section 5.

5. Validity of Reassessment Proceedings under Section 147:
The reassessment was initiated due to discrepancies in the sale consideration and the expenses claimed. The Tribunal did not delve into the merits of reassessment, as the primary issues of capital gains and interest taxability were resolved in favor of the assessee.

6. Allowance of Expenses Incurred in Connection with the Sale of Shares:
The AO restricted the allowance of expenses to those debited in the profit and loss account. The Tribunal did not specifically address this issue, as the capital gains were held exempt.

7. Levy of Surcharge and Education Cess on Tax:
This issue became moot as the capital gains and interest were not taxable in India.

8. Entitlement to Interest under Section 244A on Refundable Tax:
The Tribunal did not specifically address this issue, as it was contingent on the taxability of the capital gains and interest.

9. Initiation of Penalty Proceedings under Section 271(1)(c):
The Tribunal did not specifically address this issue, as the primary taxability issues were resolved in favor of the assessee.

Conclusion:
The Tribunal allowed the appeals, holding that the capital gains and interest were not taxable in India, thus addressing the primary issues in favor of the assessee. The reassessment issues and other related matters were rendered academic.