1987 (7) TMI 175 - AT - Income Tax

Issues Involved:

1. Validity of the rectification order under Section 154.
2. Applicability of the Double Taxation Avoidance Agreement (DTAA) between India and Sri Lanka.
3. Computation of taxable income and demand.
4. Consideration of stay of recovery proceedings.

Detailed Analysis:

1. Validity of the Rectification Order under Section 154:

The rectification order dated 24-3-1987 was issued by the ITO, revising the taxable income to Rs. 88,24,460 and raising a demand of Rs. 66,40,617. The assessee challenged this order, arguing that the DTAA between India and Sri Lanka exempted the income. The appeal against this rectification was dismissed.

2. Applicability of the Double Taxation Avoidance Agreement (DTAA) between India and Sri Lanka:

The assessee, a non-resident company incorporated in Sri Lanka, claimed exemption based on the DTAA. The DTAA was notified on 19-4-1983, and the assessee argued that it applied from 1-4-1980. However, the ITO contended that the DTAA provisions came into effect only from 1-4-1981, applicable to the assessment year 1981-82. The Tribunal considered the official version of the DTAA published in India, which supported the ITO's stance that the DTAA applied from 1-4-1981.

3. Computation of Taxable Income and Demand:

The ITO computed the taxable income based on gross Indian earnings of Rs. 92,89,200, allowing expenses under Section 44C of Rs. 4,64,460, resulting in a taxable income of Rs. 88,24,460. The tax demand was calculated at 70% of the taxable income, amounting to Rs. 66,40,617, with additional interest under Sections 139(8) and 217(1A), making the total tax payable Rs. 1,00,93,729.

4. Consideration of Stay of Recovery Proceedings:

The assessee sought a stay on the recovery of the demand, arguing a fair chance of success in appeal and lack of liquid resources. The Tribunal considered the rival submissions and the principles laid down in various judicial precedents. The Tribunal noted that the official version of the DTAA indicated its applicability from 1-4-1981, supporting the Revenue's position. However, the Tribunal also acknowledged the existence of the earlier DTAA between India and Ceylon, which might still apply for the assessment year 1980-81.

The Tribunal referred to Circular No. 333 issued by the CBDT, which emphasized that specific provisions in a DTAA prevail over general provisions in the Income-tax Act. The Tribunal also cited the Supreme Court's judgment in O.A.P. Andiappan v. CIT, which highlighted the need to consider all statutory provisions, including exemptions and allowances, in determining tax liability.

The Tribunal concluded that the ITO's computation of taxable income did not appear to have fully considered all applicable exemptions and deductions. Therefore, the Tribunal granted a stay on the recovery of the demand, subject to certain conditions: (a) furnishing a bank guarantee for Rs. 66,40,617, (b) no repatriation of funds out of India, and (c) payment of Rs. 10 lakhs by the 14th of every month starting from July 1987.

The Tribunal scheduled the appeal for hearing in the third week of August 1987 and directed immediate issuance of notice to the respondent for filing any cross-objections.

Conclusion:

The Tribunal granted a conditional stay on the recovery of the tax demand, considering the complexities of the DTAA's applicability and the need to ensure that all statutory exemptions and deductions were fully accounted for in the computation of taxable income. The appeal was scheduled for hearing, providing an opportunity for further examination of the issues involved.

← Previous Next →