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2020 (1) TMI 218 - AT - Income TaxIncome accrued in India - Addition of interest income earned on foreign currency loan given to Indian Corporates and on debt securities - HELD THAT - As decided in own case we hold that the interest income earned by the assessee is not taxable in India as the assessee is a beneficial owner as per Article 11(3)(c) of the India Mauritius Tax Treaty. Accordingly, grounds no.1 and 2 are allowed. Levy of interest u/s 234B - HELD THAT - While deciding grounds no.1 and 2 we have deleted the addition made on account of interest income earned by the assessee. Consequently, there may not be any occasion for levy of interest under section 234B of the Act. Suffice to say, while deciding identical issue relating to levy of interest under section 234B of the Act, the Tribunal in assessee s own case for the assessment year 2013 14 has held that no such interest can be levied as the payer of such interest is obliged under the Act to deduct tax at source.
Issues Involved:
1. Taxability of interest income earned on foreign currency loans given to Indian Corporates. 2. Taxability of interest income earned on debt securities. 3. Levy of interest under section 234B of the Income Tax Act. 4. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act. Issue-wise Detailed Analysis: 1. Taxability of Interest Income Earned on Foreign Currency Loans Given to Indian Corporates: The assessee, a Limited Liability Company incorporated in Mauritius and a Foreign Industrial Investor (FII) approved by SEBI, filed its return of income declaring nil income. The Assessing Officer (AO) noted that the assessee earned interest on foreign currency loans given to Indian Corporates and on debt securities, but did not offer this income for tax in India. The assessee argued that as a tax resident of Mauritius, it is governed by the India-Mauritius Double Taxation Avoidance Agreement (DTAA), and the interest income is not taxable in India under Article 11(3)(c) of the DTAA, as the assessee is the beneficial owner. The AO, however, taxed the interest income. The Commissioner of Income Tax (Appeals) upheld the AO's decision for the interest income on foreign currency loans. The Tribunal, following its decisions in the assessee’s own case for previous years, held that the interest income is derived from bona fide banking business, and the assessee is the beneficial owner, thus, not taxable in India under Article 11(3)(c) of the DTAA. 2. Taxability of Interest Income Earned on Debt Securities: The Commissioner (Appeals) directed the AO to decide the issue of interest income on debt securities following his decision for the assessment year 2013-14. The Tribunal noted that in the assessment year 2011-12, it had accepted the assessee’s claim that the interest income was derived from bona fide banking business and the assessee is the beneficial owner of such interest income. The Tribunal followed its previous decisions and held that the interest income earned on debt securities is not taxable in India under Article 11(3)(c) of the DTAA. 3. Levy of Interest Under Section 234B of the Income Tax Act: The assessee challenged the levy of interest under section 234B, arguing that as a non-resident, the obligation to deduct tax at source lies with the payer. The Tribunal, agreeing with the assessee, noted that since the addition on account of interest income was deleted, there would be no occasion for the levy of interest under section 234B. The Tribunal also referred to its decision in the assessee’s own case for the assessment year 2013-14, where it held that no interest under section 234B can be levied as the payer is obliged to deduct tax at source. 4. Initiation of Penalty Proceedings Under Section 271(1)(c) of the Income Tax Act: The assessee’s ground challenging the initiation of penalty proceedings under section 271(1)(c) was dismissed as premature and did not require adjudication at this stage. Conclusion: The assessee’s appeal was partly allowed, and the Revenue’s appeal was dismissed. The Tribunal upheld that the interest income earned by the assessee on foreign currency loans and debt securities is not taxable in India under the India-Mauritius DTAA, and no interest under section 234B can be levied. The ground challenging the initiation of penalty proceedings was dismissed as premature.
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