2022 (3) TMI 1419 - AT - Income Tax

Benefit of tax credit - whether exemption to dividend was granted to dividends with a view to promote economic development and consequently holding that the assessee was entitled to tax credit under Article 25(4) of the DTAA? - ITAT had accepted the letter of Secretary General of taxation that interpreted the Article 25(4) of DTAA which is within the domain of two Governments and thus inserted words designed for economic development in Omani Tax Law - as per revenue F.A.A. has failed to take note of correct position of law and gave benefit to the assessee on the basis of letter of Secretary General of Taxation - HELD THAT - As letter of Secretary General of Taxation, which goes to the core of controvery, it was observed in para no. 26 that the clarification given by Secretary General of Taxation has to be regarded as conclusive. If the tax authorities had any doubts they could not have proceeded to elevate them into findings, but rather addressed them to Omani Authorities, if not directly then through Indian Diplomatic Channels. In not doing so, but proceeding to interpret the laws and the certificate of Omani Authorities, the revenue, specially the Commissioner fell into error. In assessee s own case of AY 2010-11 2016 (11) TMI 1360 - ITAT DELHI a Cordinate Bench has held It is seen from the assessment orders u/s.143(3) for the assessment years 2008-09 to 2009- 10 that the Revenue had consistently adopted the view that the assessee is entitled to tax credit on the deemed dividend which would have been payable in Oman. The Revenue had taken a conscious view after considering the provisions of the Omani Tax Laws, Section 90 of the I.T. Act, Article-25 of the DRAA and the clarifications issued by the Royal decree of the Omani Government. Copies of the assessment orders for A.Ys. 2007-08 to 2009- 10 have been placed before us from pages 495 to 558 of the Paper Book. On perusal of the same, it is seen that the Revenue has, after thoroughly examining the issues on hand and examining the provisions, considered the dividend income as exempt. Thus, this bench of considered opinion that matter rests at peace in regard to these grounds no. 1, 2 3 by assessee s own case for the assessment year 2010-11, accordingly these grounds are decided against the revenue. Disallowance/reallocation of interest under section 36(1 )(iii) under the head Work-in-capital/ Investments - application of debt-equity ratio for calculation of interest to be capitalised/disallowed on addition made to fixed assets and capital work in progress and amount of investment - HELD THAT - As in appellant s own case for assessment year 2010-11 2016 (11) TMI 1360 - ITAT DELHI Closing CWIP and Investments (excluding GOI Bonds issued in lieu of Subsidy in the nature of Trade Receivable ) are less than the Own Funds available with the assessee, thus no amount of Interest on such borrowings can be notionally disallowed under Section 36(l)(iii). Revenue appeal dismissed.

Summary

Issues:
1. Allowance of tax credit under Article 25(4) of the DTAA.
2. Interpretation of Omani Tax Law.
3. Disallowance/reallocation of interest under section 36(1)(iii).
4. Application of debt-equity ratio for interest calculation.
5. Funding of investments with interest-free funds.

Analysis:

Issue 1 - Tax Credit under Article 25(4) of DTAA:
The appeal by the revenue was against the order allowing tax credit under Article 25(4) of the DTAA. The First Appellate Authority partially allowed the appeal against the assessment order. The revenue contended that no taxes were paid by the assessee in either country. However, the Assessee argued that the case was covered by previous judgments. The Tribunal referred to the judgment in PCIT vs. Krisha Bharti Cooperative Ltd., emphasizing the conclusive nature of the clarification by the Secretary General of Taxation. The Tribunal also cited a previous case where the Revenue accepted the dividend income as exempt, leading to a decision against the revenue on this issue.

Issue 2 - Interpretation of Omani Tax Law:
The revenue raised concerns regarding the interpretation of Omani Tax Law by the First Appellate Authority. The Tribunal found that the matter was settled based on previous judgments and the Revenue's failure to address doubts through proper channels. The Tribunal relied on past decisions to rule against the revenue on this issue as well.

Issue 3 - Disallowance/Reallocation of Interest under Section 36(1)(iii):
The revenue argued that the First Appellate Authority erred in allowing relief on the disallowance/reallocation of interest. However, the Tribunal found that the Authority correctly considered the assessee's sufficient own funds to finance investments. The Tribunal referenced specific findings from a previous case to support the decision against the revenue on this issue.

Issue 4 - Application of Debt-Equity Ratio for Interest Calculation:
The revenue contested the application of debt-equity ratio for interest calculation by the First Appellate Authority. The Tribunal observed that the Authority had followed legal principles and factual analysis from a previous case involving the appellant. The Tribunal found no grounds for interference on this issue.

Issue 5 - Funding of Investments with Interest-Free Funds:
The revenue raised concerns about the funding of investments with interest-free funds. The Tribunal noted that the Authority had examined the available interest-free funds and the working capital needs of the business. Based on the findings and analysis, the Tribunal concluded that there was no basis for interference on this issue.

In conclusion, the Tribunal dismissed the appeal of the revenue, upholding the decisions made by the First Appellate Authority based on legal principles, factual analysis, and precedents from previous cases.