2016 (4) TMI 337 - AT - Income Tax

Applicable rate of tax - India-Cyprus DTAA - as per revenue the benefit of the lower rate of tax prescribed in India-Cyprus Double Taxation Avoidance Agreement (DTAA) could not be allowed since assessee has failed to file any revised return to show that the non-filling of the schedule of S.I in the return of income was an inadvertent mistake - Held that - Assessee is entitled to the benefits of the India-Cyprus Double Taxation Avoidance Agreement ( DTAA ) and its income is liable to be taxed at the lower rate of 10% as per India- Cyprus Double Taxation Avoidance Agreement (DTAA), mere technical error would not defeat the claim of the assessee, which is otherwise in accordance with law. In the case of CIT vs. Rajasthan Fasteners (P) Ltd., 2014 (6) TMI 291 - RAJASTHAN HIGH COURT the assessee s claim for exemption under section 10B of the Act was sought to be denied by the Revenue on the ground that while E-filing the return of income, the claim was wrongly mentioned as being under section 80IB of the Act, which was sought to be explained by the assessee as a mere typographical error. The Hon ble High Court affirmed the stand of the Tribunal, whereby the claim of the assessee for exemption under section 10B of the Act was allowed considering that a mere typographical error in mentioning section 80IB of the Act in the return of income would not disentitle the assessee s claim for exemption under section 10B of the Act. - Decided in favour of assessee Addition on interest income - interest income was liable to be assessed on accrual basis or receipt basis - Held that - As relying on Article 11(1) of the India-Cyprus Double Taxation Avoidance Agreement (DTAA) to mean that the interest income in question is liable to be taxed on payment/receipt basis and not on accrual basis, as sought to be made out by the Assessing Officer. The plea of the assessee that by an inadvertent error such amount has been included as income on accrual basis, such solitary error cannot be construed to mean that assessee has not been following the cash basis of accounting regularly. In our considered opinion, the plea of the assessee is quite justified, and in any case, the applicable legal position on any point has to be arrived at by keeping in mind the relevant provisions of law and not merely by the conduct of the parties. Ostensibly, Article 11(1) of India-Cyprus Double Taxation Avoidance Agreement (DTAA), which covers the instant situation provides for taxation of interest income on payment/receipt basis and not on accrual basis.- Decided in favour of assessee

Summary

Issues Involved:
1. Applicable rate of tax on interest income under the India-Cyprus Double Taxation Avoidance Agreement (DTAA).
2. Basis of taxation for interest income - accrual basis vs. receipt basis.

Issue-Wise Detailed Analysis:

1. Applicable Rate of Tax on Interest Income:

The primary issue was whether the interest income earned by the appellant should be taxed at the normal rate of 43.23% or the lower rate of 10% as prescribed under Article 11(2) of the India-Cyprus DTAA. The Assessing Officer (AO) taxed the income at the higher rate due to the appellant's failure to fill the 'Special Income' (SI) schedule in the return of income. The appellant contended that this was an inadvertent mistake and that they had consistently claimed and been granted the benefit of the DTAA in previous and subsequent assessments.

The tribunal noted that the appellant is a tax resident of Cyprus, supported by a Tax Residency Certificate, and thus eligible for the benefits of the India-Cyprus DTAA. The tribunal found that the omission to fill the SI schedule was indeed an inadvertent mistake, as evidenced by the consistent history of the appellant's tax filings and the computation of income provided to the AO. The tribunal concluded that the lower authorities misdirected themselves by denying the benefit based solely on a technical error. Citing the judgment in CIT vs. Rajasthan Fasteners (P) Ltd., the tribunal emphasized that a mere typographical error should not defeat a legitimate claim. Consequently, the tribunal allowed the appellant's claim for taxation at the concessional rate of 10%.

2. Basis of Taxation for Interest Income:

The second issue was whether the interest income should be taxed on an accrual basis, as done by the AO, or on a receipt basis, as claimed by the appellant. The AO added Rs. 8,37,49,570 to the returned income, assessing the interest on an accrual basis. The appellant argued that under Article 11(1) of the India-Cyprus DTAA, interest income should be taxed on a payment/receipt basis.

The tribunal considered precedents such as DIT v. Siemens Aktiengesellschaft and National Organic Chemical Industries Ltd. vs. DCIT, which supported the interpretation that income should be taxed on a payment basis under similar DTAA provisions. The tribunal upheld the appellant's plea, stating that the interest income should be taxed on a receipt basis as per the DTAA. The tribunal also addressed the Revenue's point about the appellant's inconsistency in offering interest income by noting that a solitary error does not negate the consistent practice of following the cash basis of accounting. The tribunal directed the AO to accept the interest income on a cash basis.

Conclusion:

The tribunal allowed the appeal, directing the AO to tax the interest income at the lower rate of 10% as per the India-Cyprus DTAA and to accept the interest income on a receipt basis. The decision emphasized the importance of substance over form and the need to avoid over-technical approaches that defeat legitimate claims. The order was pronounced in the open court on 29/02/2016.