2015 (7) TMI 911 - AT - Income Tax

Liability to deduct tax u/s 195 - AO had levied interest u/s 201(1A) in respect of capital gain accrued to assessee on 8-6-2005 till the date on which capital gain tax was deposited i.e. 28-9-2007 - CIT(A) upheld the assessee s contention that in view of non-discriminating clause in Article 26 of the DTAA between India and USA, the assessee was not obliged to deduct tax at source u/s 195 - Held that - CIT(A) rightly held that in view of Article 26 of DTAA between USA and India, since no TDS is required to be made in case of sale of immovable properties within India, therefore, an assessee could not be burdened while making the payment to a non-resident for deducting tax at source. Also there was no revenue loss to department as Jasbir Singh Sarkaria had paid taxes and the assessee was entitled to the benefit of Article 26 of DTAA between USA and India. - Decided in favour of assessee.

Summary

Issues:
1. Liability to deduct tax under section 195 of the Income Tax Act.
2. Applicability of Article 26 of the Double Taxation Avoidance Agreement (DTAA) between India and USA.

Issue 1: Liability to deduct tax under section 195 of the Income Tax Act:
The case involved a dispute regarding the liability to deduct tax under section 195 of the Income Tax Act. The Assessing Officer (AO) had levied interest under section 201(1A) in relation to capital gains accrued to the assessee until the date the capital gain tax was deposited. The AO contended that the assessee was required to deduct tax under section 195 when making payments to a non-resident. The AO rejected the assessee's argument that no deduction was required as all payments were made in Indian rupees. The AO also cited section 2(24)(vi) to include capital gains for tax deduction purposes. The AO further noted that even if the tax was deposited by the non-resident, the liability for interest under section 201(1A) remained. The CIT(A) partially allowed the assessee's appeal, ruling that the assessee was not liable to deduct tax under section 195.

Issue 2: Applicability of Article 26 of the DTAA:
The second issue revolved around the applicability of Article 26 of the DTAA between India and USA. The CIT(A) upheld the assessee's contention that, due to the non-discriminatory clause in Article 26 of the DTAA, the assessee was not obligated to deduct tax at source under section 195. The CIT(A) reasoned that since there was no provision in the Income Tax Act mandating a resident to deduct tax from sale proceeds payable to another resident, the assessee was not burdened with TDS requirements. The department challenged this decision, arguing that the provisions of section 195 necessitated TDS. However, the tribunal dismissed the department's appeal, affirming that Article 26 of the DTAA exempted the assessee from the TDS requirement in this case.

In conclusion, the tribunal dismissed the department's appeal, affirming the CIT(A)'s decision that the assessee was not liable to deduct tax under section 195 and was entitled to the benefit of Article 26 of the DTAA between India and the USA. The tribunal held that since there was no TDS requirement for sale proceeds of land payable to another resident under the Income Tax Act, the assessee was not burdened with TDS obligations. The tribunal's decision was based on the non-discriminatory clause in Article 26 of the DTAA, which prevented imposing more burdensome taxation requirements on the assessee.