2013 (9) TMI 526 - AT - Income Tax

Exemption u/s 10(15)(iv)(f) - interest income - Withdrawal of exemption by Central Government - Utilization of ECB - foreign currency loans - Interest income being exempt in the hands of non-resident investors - Withholding tax u/s 195 - Held That - by imposing a condition by Dy. Director (ECB) during the progress of the scheme was like changing the rules of the game in mid-way and the change of the rule was in respect of a game already played to alter its outcome. A retrospective or ex post facto change in such a manner is an arbitrary approach having no legal sanctity. Decision in the case of Reliance Industries Ltd V/s Dy. Director of Income Tax (IT) 2005 (2) TMI 445 - ITAT BOMBAY-I Disallowance of Interest u/s 10(15)(iv)(f) - It was catastrophic to withdraw the exemption already granted u/s.10(15)(iv)(f) - Due to the withdrawal of the exemption the impugned order u/s.195 (2), now under dispute was passed directing to deduct withholding tax @ 20% - Held that - conditions of the scheme, evidences of utility of the funds and the legal matrix of the case, the withdrawal of exemption was unwarranted - the appellant company was not liable to deduct withholding tax in respect of the interest payment. So the basic question was that once because of the letter or notification the provisions of the statute have been negated or diminished by an executive order then what was the course left to a tax payer - Naturally the answer was that a tax payer had no option but to knock the door of the judiciary - In a plethora of decisions it was unequivocally held that the full effect of the provision had to be given in preference to supporting legislature such as rules, notifications, approvals etc. The Tribunal does have the power to deal with the validity of such rules or notification and by applying the doctrine of reading down can strike down such rules if held to be in contradiction with the provisions of the statute itself - the rules were made only for the purpose of carrying out the provisions of the Act which cannot be taken away or whittle down the effect conferred by the statute - ITAT had both the power and duty to deal with such rules or notification and decide whether the same were in agreement with the main provisions of the statute - The provision of the statute provides in an unambiguous terms to grant exemption in respect of interest payable to an international investor who has lent money to industrial undertaking in India under a loan agreement as approved by the Central Government - The Government of India had properly regarded the need for industrial development only thereafter issued the notification and floated this scheme of ECB. Relying upon Radhasoami Satsang V/s CIT 1991 (11) TMI 2 - SUPREME Court - Strictly speaking, res judicata does not apply to income-tax proceedings - Though, each assessment year being a unit, what was decided in one year might not apply in the following year; where a fundamental aspect permeating through the different assessment years had been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year - in the absence of any material change justifying the Revenue to take a different view of the matter and, if there was no change, it was in support of the assessee-we do not think the question should have been reopened and contrary to what had been decided by the Commissioner of Income-tax in the earlier proceedings, a different and contradictory stand should have been taken. Decided in favor of assessee.

Summary

Issues Involved:
1. Whether the CIT(A) erred in holding that the withdrawal order issued by the Central Government, which stated that interest payable by the assessee is not exempt under section 10(15)(iv)(f) of the Income Tax Act, should be ignored.
2. Whether the interest payment by the assessee to non-resident lenders as per ECB loan approved by the Central Government would continue to be exempt, despite the withdrawal of exemption by the Government of India.

Issue-wise Detailed Analysis:

Issue 1: Withdrawal of Exemption under Section 10(15)(iv)(f)
The revenue appealed against the CIT(A)'s decision which held that the withdrawal order by the Central Government, stating that interest payable by the assessee is not exempt under section 10(15)(iv)(f), should be ignored. The revenue argued that the exemption was withdrawn because the assessee did not comply with the conditions laid down in the approval letter. The AO followed up on this withdrawal by assessing the tax liability under sections 201 and 201(1A) of the Income Tax Act.

The Tribunal noted that this issue had been previously adjudicated in favor of the assessee by the ITAT in multiple cases involving similar facts. The Tribunal referenced these decisions, particularly emphasizing the findings in the case of Reliance Industries Ltd. v. Dy. Director of Income Tax (IT), where it was held that the exemption under section 10(15)(iv)(f) was wrongly withdrawn by the Government of India. The Tribunal reiterated that the withdrawal of exemption was not justified as the loan agreements were approved by the Central Government, and the conditions for exemption were met.

Issue 2: Continuation of Exemption for Interest Payment
The Tribunal examined whether the interest payments made by the assessee to non-resident lenders under the ECB loan, which was approved by the Central Government, should continue to be exempt from tax. The Tribunal highlighted that the CIT(A) had allowed the assessee's appeal based on previous ITAT decisions, which consistently held that the interest payments were exempt under section 10(15)(iv)(f).

The Tribunal reviewed the relevant facts, including the approval of the foreign currency loans by the Government of India and the subsequent remittance of interest without deduction of tax at source. The AO had computed the tax to be deducted and held the assessee liable for default under section 201, along with interest under section 201(1A). However, the Tribunal found that the CIT(A) had correctly analyzed the issue and followed the ITAT's previous decisions, which were also upheld by the Hon'ble Jurisdictional High Court.

The Tribunal emphasized that the Hon'ble Supreme Court in Radhasoami Satsang v. CIT held that while res judicata does not strictly apply to income-tax proceedings, a consistent position sustained over different assessment years should not be changed arbitrarily. Therefore, the Tribunal upheld the CIT(A)'s decision, dismissing the revenue's appeal.

Conclusion:
The Tribunal dismissed the revenue's appeal, affirming the CIT(A)'s order that the interest payments made by the assessee to non-resident lenders under the approved ECB loan continued to be exempt under section 10(15)(iv)(f) of the Income Tax Act. The Tribunal found no merit in the revenue's grounds and maintained consistency with previous ITAT decisions and the Hon'ble Supreme Court's principles.