2005 (2) TMI 445 - AT - Income Tax

Summary

Issues Involved:
1. Legality of the CIT(A)'s order confirming the AO's stand under Section 248 of the IT Act.
2. Legality of the direction to deduct tax at source at 20% while remitting funds to Deutsche Bank, UK.
3. Rejection of the application for remitting funds without deducting tax at source following the withdrawal of exemption under Section 10(15)(iv)(f).
4. Absence of direction regarding the taxability of interest payable on loans.
5. Direction to deduct tax at 20% on future interest payments on the loan.

Detailed Analysis:

1. Legality of the CIT(A)'s Order Confirming the AO's Stand under Section 248:
The appellant-company challenged the CIT(A)'s order which confirmed the AO's direction under Section 195(2) to deduct tax at source at 20% on remittance to Deutsche Bank, UK. The appellant argued that the CIT(A)'s order was "bad in law, illegal and without application of proper facts." The Tribunal noted that the CIT(A) had dismissed the grounds of appeal in a cursory manner, simply affirming the AO's direction without thorough consideration of the appellant's submissions.

2. Legality of the Direction to Deduct Tax at Source at 20%:
The Tribunal examined the facts leading to the AO's order under Section 195(2), which directed the appellant to remit interest to Deutsche Bank after deducting withholding tax at 20%. This direction was based on the withdrawal of exemption under Section 10(15)(iv)(f) by the Government of India. The Tribunal noted that the appellant had raised foreign currency loans for financing its projects and had been remitting interest without deducting withholding tax until the exemption was withdrawn. The Tribunal found that the CIT(A) had not adequately addressed the appellant's argument that the withdrawal of exemption was unjustified and legally incorrect.

3. Rejection of Application for Remitting Funds Without Deducting Tax:
The appellant contended that the withdrawal of the exemption by the Government of India was not permissible under Section 10(15)(iv)(f), which did not provide for such withdrawal. The Tribunal noted that the CIT(A) had dismissed this ground, stating that the power to grant and withdraw exemptions rested with the Government. However, the Tribunal found that the CIT(A) had not properly considered the appellant's argument regarding the legality of the withdrawal of exemption.

4. Absence of Direction Regarding Taxability of Interest:
The appellant argued that the CIT(A) had erred in not giving direction regarding the taxability of interest payable on the loans. The Tribunal noted that the CIT(A) had dismissed this ground on the basis that the exemption had been withdrawn, and therefore, the appellant was liable to deduct tax on any future interest payments. The Tribunal found that the CIT(A) had not fully addressed the appellant's concerns regarding the taxability of interest.

5. Direction to Deduct Tax at 20% on Future Interest Payments:
The appellant challenged the CIT(A)'s direction to deduct tax at 20% on all future interest payments on the loan. The Tribunal noted that the CIT(A) had upheld the AO's direction without adequately considering the appellant's arguments regarding the legality of the withdrawal of exemption and the applicability of Section 10(15)(iv)(f).

Conclusion:
The Tribunal found that the withdrawal of exemption under Section 10(15)(iv)(f) was unjustified and illegal, as the section did not provide for such withdrawal. Consequently, the Tribunal held that the appellant was not liable to deduct withholding tax at 20% on the interest payment to Deutsche Bank. The Tribunal quashed the AO's order under Section 195(2) and reversed the CIT(A)'s findings, allowing the appellant's appeal.