2002 (4) TMI 252 - AT - Income Tax

Summary

Issues Involved:
1. Applicability of Section 40(a)(i) of the Income-tax Act, 1961.
2. Determination of whether the interest paid on the purchase of ships qualifies as "interest" under the Income-tax Act and the Double Taxation Avoidance Agreement (DTAA).
3. Obligation to deduct tax at source under Section 195 of the Income-tax Act.

Detailed Analysis:

1. Applicability of Section 40(a)(i) of the Income-tax Act, 1961:
The primary issue was whether the interest paid by the assessee on the purchase of ships should be disallowed under Section 40(a)(i) for non-deduction of tax at source. The assessee argued that the interest was part of the purchase price and not a separate interest payment, thereby not attracting the provisions of Section 40(a)(i). The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] disagreed, stating that the interest was distinct from the purchase price and hence liable for tax deduction at source.

2. Determination of whether the interest paid on the purchase of ships qualifies as "interest" under the Income-tax Act and the Double Taxation Avoidance Agreement (DTAA):
The assessee contended that the interest was part of the purchase price and not a separate interest payment. The AO and CIT(A) held that the interest was a separate payment and fell under the definition of "interest" as per Section 2(28A) of the Income-tax Act, which includes "debt incurred." The Tribunal, however, examined the DTAA definitions, which define "interest" as income from debt claims of every kind, and concluded that the interest in question did not arise from a debt claim but was part of the purchase transaction. The Tribunal emphasized that the DTAA provisions override the Income-tax Act, and thus, the interest did not qualify as "interest" under the DTAA.

3. Obligation to deduct tax at source under Section 195 of the Income-tax Act:
The AO and CIT(A) held that the assessee was liable to deduct tax at source on the interest payments under Section 195. The assessee argued that since the interest was part of the purchase price and the payment was made to a resident bank (SBI), there was no obligation to deduct tax. The Tribunal agreed with the assessee, stating that the interest was part of the purchase price and not a separate payment, and thus, there was no obligation to deduct tax at source.

Conclusion:
The Tribunal concluded that the interest paid by the assessee on the purchase of ships was part of the purchase price and did not qualify as "interest" under the DTAA. Consequently, the assessee was not liable to deduct tax at source under Section 195, and the disallowance under Section 40(a)(i) was unwarranted. The Tribunal directed that the assessee be allowed the deduction of the interest amount.