2017 (8) TMI 1591 - AT - Income Tax

Rectification u/s. 154 - AO has held that interest granted to the assessee u/s. 244A of the Act is liable to be taxed under Article 22 of Indo-Australia DTAA and accordingly raised demand upon the assessee - HELD THAT - Special Bench has held in the case of Clough Engineering Ltd. 2011 (5) TMI 562 - ITAT, DELHI that interest on income tax refund is taxable under Article 11 of the DTAA. The Revenue has originally deducted TDS on the interest granted u/s. 244A of the Act at the rate prescribed under Article 11 of DTAA, which is correct as per the decision rendered by the Special bench. Further the Coordinate Bench has held in the case of Principal Life-International Emerging Markets Separate Account 2014 (11) TMI 984 - ITAT MUMBAI that question as to whether interest on income tax refund is liable to tax under Article 11 or Article 23 of DTAA was a debatable one. The facts of the said decision shall squarely apply to the facts of the present case also. Hence there is merit in the contentions of the assessee both on merits and on legal point. We hold that rectification order passed by the Assessing Officer is beyond the scope of provisions of section 154. Accordingly, we are of the view that the learned CIT(A) was not justified in confirming the order passed by the Assessing Officer u/s. 154 of the Act. Accordingly, we quash the orders passed by the tax authorities on this issue. Appeal filed by the assessee is allowed.

Summary

Issues:
1. Taxability of interest granted to the assessee under section 244A of the Act under Article 22 of IndoAustralia DTAA.
2. Validity of the rectification order passed by the Assessing Officer under section 154 of the Act.
3. Decision of the learned CIT(A) in upholding the revision order passed by the Assessing Officer.
4. Applicability of the decision of the Coordinate Bench of the ITAT in similar cases.

Analysis:

1. The appeal pertains to the taxability of interest granted to the assessee under section 244A of the Act under Article 22 of IndoAustralia DTAA. The Assessing Officer held that the interest is liable to be taxed under Article 22 of the DTAA and raised a demand upon the assessee. The assessee, a nonresident corporate entity registered with SEBI as a FII and resident of Australia, contended that the interest should be taxed under Article 11 of the DTAA at a lower rate. The Assessing Officer passed a rectification order under section 154 of the Act, raising a demand of ?24,25,676. The learned CIT(A) upheld this decision, leading to the appeal before the ITAT.

2. The ITAT reviewed the case and observed that the Special Bench had previously held that interest on income tax refund is taxable under Article 11 of the DTAA. The Revenue had initially deducted TDS on the interest at the rate prescribed under Article 11 of the DTAA, which was deemed correct. The ITAT also considered a decision by a Coordinate Bench that the question of taxability under Article 11 or Article 23 of the DTAA was debatable. The ITAT found merit in the assessee's contentions both on legal and merit points.

3. The ITAT referenced the decision of the Coordinate Bench in a similar case and held that the rectification order passed by the Assessing Officer went beyond the scope of section 154 of the Act. Consequently, the learned CIT(A) was deemed unjustified in confirming the order passed by the Assessing Officer. Therefore, the ITAT quashed the orders passed by the tax authorities on this issue.

4. Ultimately, the ITAT allowed the appeal filed by the assessee, pronouncing the order in court on 2.8.2017. The judgment emphasized the correct application of the DTAA provisions in determining the taxability of the interest granted to the assessee under section 244A of the Act, highlighting the importance of legal interpretations in such matters.