Domestic and Direct Tax News

No higher TDS/TCS liability shall arise:

The Assessing Officer (‘AO’) held that interest receipts were taxable under the head ‘Income from Other Sources’ and not as business income. Therefore, the interest expense cannot be set-off against interest income. The AO also held that the business of the taxpayer had not commenced, since it had not received any rent from Citibank, with whom the taxpayer had entered into an agreement during the year, for letting out a business centre and taxed the entire interest income under the Income from Other Sources.

On appeal to the Commissioner of Income-tax (Appeals) [‘CIT(A)’], the CIT(A) held that since the taxpayer was in the process of converting the premises into modern business centre, it cannot be said that the business has not commenced and deleted the addition of interest income. The Income Tax Appellate Tribunal (‘ITAT’) overturned the order of the CIT(A) and restored the order of the AO.

On further appeal by the taxpayer, the HC ruled in favour of the taxpayer. Based on past judicial precedents of the Supreme Court and High Courts, the Bombay HC held that a business would commence right from the stage of repairing and furnishing of the premises for being rented out and cannot be treated as commenced only when the premises are actually let-out. Further, the HC observed that for subsequent assessment years, the ITAT had analysed the activities of the taxpayer in detail and had held that lending of money to sister concerns and others had not only continued but had intensified. Therefore, for subsequent years the ITAT had affirmed the lending of money as business activity and allowed the claim of interest expense against interest income. The HC held that though the findings of subsequent years were being made applicable in respect of previous year, the fact remained that inconsistent findings were recorded by the ITAT on the basis of the same material and thus the assessment for AY 1992-93 needed to be brought in tune with the orders passed for subsequent years which had attained finality. Therefore, the Bombay HC set aside the order of the ITAT and restored the order of the CIT(A), accepting the position of the taxpayer.

Before the ITAT, SBI argued that a deductor can be deemed an ‘assessee-in-default’ under Section 201(1) only when the payee has failed to discharge its tax liability. It was submitted that MasterCard International USA had duly reported the income received from SBI and paid taxes for AYs 2013-14 to 2015-16, and that the taxability of payments to Visa International Trust Ltd. had already been resolved under the Mutual Agreement Procedure (‘MAP’) between Indian and Singaporean authorities, which the AO had implemented. Therefore, SBI could not be treated as an assessee-in-default. The Tribunal, referring to Section 191 and relying on the Supreme Court ruling in Hindustan Coca Cola Beverages Pvt. Ltd. vs. CIT (163 Taxmann.com 355) and CBDT Circular No. 275/201/95-IT(B) dated 29 January 1997, held that if the payee has paid the tax, the payer cannot be deemed an ‘assessee-in-default’. The AO was directed to verify the actual dates of tax payment by the payees and compute interest under Section 201(1A) of the Act only up to those dates.

HC emphasized that the tax department must treat software as a “tool, not a master”. The Revenue’s dependence on the Insight Portal, without verification, led to erroneous proceedings against amalgamated or inactive entities. The Court appreciated the Director General of Income Tax (Systems)’ assurance that new ITBA 2.0, PAN 2.0, and Insight 2.0 projects are being developed to synchronize taxpayer data and prevent such cases. The petition was disposed of with token costs payable of INR 10,000 to the Gujarat State Legal Services Authority instead of INR 10 million.​