DCIT, CHENNAI V. M/s. Bharat Overseas Bank Ltd., CHENNAI

ITA 213/CHNY/2010

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 64499 (ITAT-CHENNAI)
• Duration Of Justice: 2 year(s) 8 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-10-2012
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 04-10-2012
• Assessment Year: 1993-1994
• Appeal Filed On: 25-02-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Capital asset; Business income; Depreciation; Residential status; Double taxation relief; Permanent establishment; Bad and doubtful debts
• Section: 244A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH CHENNAI BEFORE DR. O. K. NARAYANAN, VICE PRESIDENT AND SHRI V. DURGA RAO, JUDICIAL MEMBER ------- ITA NOS. 213, 214 & 215/MDS/2010 ASSESSMENT YEARS : 1993-94, 2004-05 & 2006-07 THE DY. COMMISSIONER OF INCOME TAX, COMPANY CIRCLE-I(2), CHENNAI. V. M/S. BHARAT OVERSEAS BANK LTD., HABEEB TOWERS, 763 ANNA SALAI, CHENNAI-600 002. (PAN :AAACB1374M) (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI SHAJI P. JACOB, ADDL. CIT RESPONDENT BY : SHRI C. NARESH, CA DATE OF HEARING : 04.1 0.2012 DATE OF PRONOUNCEMENT : 30.10.201 2 O R D E R PER V. DURGA RAO, JUDICIAL MEMBER : THESE APPEALS BY THE REVENUE ARE DIRECTED AGAINST THE ORDERS OF THE CIT(APPEALS)-III, CHENNAI DATED 30-11 -2009 FOR THE ASSESSMENT YEARS 1993-94, 2004-05 AND 200-607. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS : ITA NOS.213-215 /MDS /2010 2 ITA NO. 213/MDS/2010 : 1. THE ORDER OF THE LEARNED COMMISSIONER OF INCOM E TAX(APPEALS) IS CONTRARY TO THE LAW AND FACTS OF TH E CASE. 2. THE LEARNED CIT(A) HAS ERRED IN DIRECTING THE ASSESSING OFFICER TO ALLOW DOUBLE INCOME-TAX RELIEF IN FULL OF ` 1,86,74,470/- INSTEAD OF ` 1,08,25,780/- ALLOWED BY THE ASSESSING OFFICER. 3. THE LEARNED CIT(A) HAS FAILED TO NOTE THAT THE FACT THAT AS PER THE ARTICLE 23(3) OF THE DTAA BETWEEN I NDIA AND THAILAND WHICH CLEARLY STATES THAT THE QUANTUM OF C REDIT TO BE ALLOWED IS THAT ANY AMOUNT WHICH WOULD HAVE BEEN P AYABLE AS THAI TAX FOR ANY YEAR. HENCE ONLY THE ELIGIBLE DITR OF ` 1,08,25,780/- WAS ALLOWED AND NOT THE ENTIRE CLAIM OF ` 2,86,74,470/-. 4. THE LEARNED CIT(APPEALS) HAS ERRED IN DIRECTING THE ASSESSING OFFICER TO ALLOW INTEREST ON ANY AMOUNT I NCLUDING INTEREST U/S 244A. 5. IT IS SUBMITTED THAT IN THE DECISION OF THE HON 'BLE SUPREME COURT IN THE CASE OF SANDVIK ASIA LTD. VS. CIT(280 ITR 643) RELIED ON BY THE CIT(A) , THE COURT HAS AL LOWED ONLY COMPENSATION AT 9% ON THE AMOUNT DUE TO THE ASSESSE E. THE LEARNED CIT(APPEALS) HAS FAILED TO NOTE THAT THE WO RD REFUND MEANS AN AMOUNT PREVIOUSLY PAID BY AN ASSESSEE AND DOES NOT RELATE TO AN AMOUNT PAYABLE BY THE REVENUE BY WAY O F INTEREST ON SUCH SUMS. THERE IS NO PROVISION IN TH E INCOME- TAX ACT TO ALLOW COMPENSATION AS SUGGESTED BY THE L EARNED CIT(APPEALS) BASED ON THE DECISION OF THE HON'BLE SUPREME COURT. 6. FOR THESE AND OTHER GROUNDS THAT MAY BE ADDUCED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) BE SET ASIDE AND THAT OF THE ASSESSING OFFICER. ITA NO. 214/MDS/2010: 1. THE ORDER OF THE LEARNED COMMISSIONER OF INCOM E TAX(APPEALS) IS CONTRARY TO THE LAW AND FACTS OF TH E CASE. ITA NOS.213-215 /MDS /2010 3 2. THE LEARNED CIT(APPEALS) HAS ERRED IN DIRECTING THE ASSESSING OFFICER TO ALLOW THE INTEREST ON ANY AMOU NT INCLUDING INTEREST U/S 244(1A). 3. IT IS SUBMITTED THAT IN THE DECISION OF THE HON 'BLE SUPREME COURT IN THE CASE OF SANDVIK ASIA LTD. VS. CIT(280 ITR 643) RELIED ON BY THE CIT(A) , THE COURT HAS AL LOWED ONLY COMPENSATION AT 9% ON THE AMOUNT DUE TO THE ASSESSE E AND NOT THE INTEREST U/S 244(1A). 4. THE LEARNED CIT(A) OUGHT TO HAVE NOTED THAT THE WORD REFUND MEANS AN AMOUNT PREVIOUSLY PAID BY AN ASSESSEE AND DOES NOT RELATE TO AN AMOUNT PAYABLE B Y THE REVENUE BYWAY OF INTEREST ON SUCH SUMS. THERE IS N O PROVISION IN THE INCOME-TAX ACT TO ALLOW COMPENSATI ON AS SUGGESTED BY THE LEARNED CIT(A) BASED ON THE DECISI ON OF THE HON'BLE SUPREME COURT. 5. FOR THESE AND OTHER GROUNDS THAT MAY BE ADDUCED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) BE SET ASIDE AND THAT OF THE ASSESSING OFFICER. ITA NO. 215/MDS/2010: 1. THE ORDER OF THE LEARNED COMMISSIONER OF INCOM E TAX(APPEALS) IS CONTRARY TO THE LAW AND FACTS OF TH E CASE. 2. THE LEARNED CIT(A) HAS ERRED IN DIRECTING THE ASSESSING OFFICER TO ALLOW THE ENTIRE BAD DEBT RELA TING TO NON- RURAL ADVANCES. 3. THE LEARNED CIT(A) HAS ERRED IN DIRECTING THE ASSESSING OFFICER TO WORK OUT THE CREDIT BALANCE PE RTAINING TO PROVISION FOR BAD AND DOUBTFUL DEBTS RELATING TO RU RAL ADVANCES AND ALLOW BAD DEBT IF IT EXCEEDS THE CREDIT BALANCE IN THE PROVISIONS U/S 36(1)(VIIA). 4. IT IS SUBMITTED THAT THIS DISALLOWANCE HAS BEEN MADE FROM YEAR TO YEAR AND THE CIT(A)S FINDINGS HA VE BEEN CONTESTED BEFORE ITAT. ITA NOS.213-215 /MDS /2010 4 5. THE LEARNED CIT(A) HAS ERRED IN DIRECTING THE ASSESSING OFFICER TO ALLOW LOSS ON REVALUATION OF A SSETS OF ` 27,76,08,025/-. 6. THE LEARNED CIT(A) HAS FAILED TO NOTE THAT THE ASSESSEE HAS KEPT THEIR PORTION OF THEIR INVESTMENT S AS HELD TO MATURITY WHICH IS RELATIVELY A LONG TERM INVEST MENT WHICH MAY NOT BE CONSIDERED AS STOCK IN TRADE. HENCE C LAIM OF ASSESSEES INVESTMENT IN SECURITIES AS STOCK IN TRA DE CANNOT BE ACCEPTED. 7. THE LEARNED CIT(A) HAS ERRED IN DIRECTING THE ASSESSING OFFICER TO ALLOW DITR IN FULL AS CLAIMED BY THE ASSESSEE WITHOUT ANY RESTRICTION. 8. THE LEARNED CIT(A) HAS FAILED TO NOTE THE FACT THAT WHERE THE PROFITS OR INCOME HAS BEEN SUBJECTED TO T AX BOTH IN INDIA AND IN THAILAND, THERE SHALL BE ALLOWED AS A CREDIT IN THE FORM OF DITR RELIEF AGAINST THE INDIAN TAX PAYABL E IN RESPECT OF SUCH PROFITS OR INCOME EARNED IN THAILAND. IT I S AMPLY MADE CLEAR VIDE ARTICLE 23(3) OF DTAA THAT THE QUANTUM O F CREDIT TO BE ALLOWED IS THAT ANY AMOUNT WHICH WOULD HAVE BEE N PAYABLE AS THAI TAX FOR ANY YEAR. 9. FOR THESE AND OTHER GROUNDS THAT MAY BE ADDUCED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) BE SET ASIDE AND THAT OF THE ASSESSING OFFICER. 2. GROUND NO.1 IN ALL THE APPEALS IS COMMON AND NEE DS NO ADJUDICATION. 3. ITA NO. 213/MDS/2010: GROUNDS 2 AND 3 RELATE TO DOUBLE TAXATION RELIEF IN RESPECT OF THE INCOME FROM BANGKOK BRANCH. THE ASSESSEE IS A BANKING COMPANY AND HAS CLAIMED DITR IN RESPECT OF FOREIGN INCOME TAXED ITA NOS.213-215 /MDS /2010 5 IN INDIA AT THE RATE OF TAX IN INDIA. DURING THE COURSE OF THE ORIGINAL ASSESSMENT PROCEEDINGS THE ASSESSING OFFIC ER OBSERVED THAT THE ASSESSEE BANK HAD CLAIMED DITR IN RESPECT OF FO REIGN INCOME TAXED IN INDIA AT INDIAN TAX RATE. HOWEVER, FOR TH E REASONS STATED IN THE EARLIER YEARS ORDERS THE ASSESSING OFFICER HELD THAT THE DITR WILL BE ALLOWED ONLY AT THE LOWER RATE THE BANGKOK I NCOME TAXED IN INDIA OR TAXED AT BANGKOK. ACCORDING TO THE ASSESS ING OFFICER IT IS AMPLY MADE CLEAR VIDE ARTICLE 23(3) OF DTAA THAT TH E QUANTUM OF CREDIT TO BE ALLOWED IS THAT ANY AMOUNT WHICH WOUL D HAVE BEEN PAYABLE AS THAI TAX FOR ANY YEAR. IN THIS CASE TH E ASSESSEES BANGKOK INCOME SUFFERING TAX IN INDIA WAS ` 3,60,85,934/-. THAI TAX ON THAT ABOUT AT 30% WORKS OUT TO ` 1,08,25,780/-. THIS IS THE CREDIT AVAILABLE TO THE ASSESSEE AGAINST THE INDIAN TAX PAYABLE IN RESPECT OF THAI INCOME. ACCORDINGLY, THE ASSESSING OFFICER HAS ALLOWED ` 1,08,25,780/- AS DITR RELIEF. 4. ON BEING AGGRIEVED, THE ASSESSEE CARRIED THE MAT TER BEFORE THE CIT(APPEALS). THE LEARNED CIT(APPEALS) ALLOWED THE CLAIM OF THE ASSESSEE AT ` 1,86,74,470/-. 5. AGGRIEVED, THE REVENUE CARRIED THE MATTER BEFORE THE TRIBUNAL. THE TRIBUNAL VIDE ORDER DATED 30-11-2004 IN ITA NOS. 299, 300, 301 & 605/MDS/2001 FOR THE ASSESSMENT YEA RS 1995-96, ITA NOS.213-215 /MDS /2010 6 1996-97, 1997-98 AND 1993-94 DIRECTED THE ASSESSING OFFICER TO ENQUIRE INTO THE EXISTENCE OF DOUBLE TAXATION AVOID ANCE AGREEMENT (DTAA FOR SHORT) BETWEEN INDIAN AND BANGKOK. 6. IN ACCORDANCE WITH THE DIRECTIONS GIVEN BY THE T RIBUNAL, THE ASSESSING OFFICER HAS COMPLETED THE ASSESSMENT BY O BSERVING AS UNDER : ACCORDINGLY, THE DTAA ISSUED VIDE NOTIFICATION NO. GSR 915(E) DATED 27.6.1986 WAS EXAMINED. ARTICLE 23(2) OF THE DTAA READ AS UNDER: THAT THE AMOUNT OF THAILAND TAX PAYABLE UNDER THE LAWS OF THAILAND AND IN ACCORDANCE WITH THE PROVISI ONS OF THE CONVENTION WHETHER DIRECTLY OR BY DEDUCTION, BY A RESIDENT OF INDIA, IN RESPECT OF PROFITS OR INCOME ARISING IN THAILAND, WHICH HAS BEEN SUBJECTED TO TAX BOTH I N INDIA AND IN THAILAND SHALL BE ALLOWED AS A CREDIT AGAINST THE INDIAN TAX PAYABLE IN RESPECT OF SUCH P ROFITS OR INCOME PROVIDED THAT SUCH CREDIT SHALL NOT EXCEE D THE INDIAN TAX (AS COMPUTED BEFORE ALLOWING ANY SUCH CREDIT) WHICH IS APPROPRIATE TO THE PROFITS OR INCO ME ARISING IN THAILAND. ACCORDING TO ARTICLE 23(3) OF THE DTAA, FOR THE PURPOSES OF THE CREDIT REFERRED TO IN PARAGRAPH (2) , THE TERM THAI TAX PAYABLE SHALL BE DEEMED TO INCLUDE ANY AMOUNT WHICH WOULD HAVE BEEN PAYABLE AS THAI TAX FO R ANY YEAR ITA NOS.213-215 /MDS /2010 7 IT IS CLEAR FROM THE ABOVE THAT WHERE THE PROFITS OR INCOME HAS BEEN SUBJECTED TO TAX BOTH IN INDIA A ND IN THAILAND, THERE SHALL BE ALLOWED AS A CREDIT IN THE FORM OF DITR RELIEF AGAINST THE INDIAN TAX PAYABL E IN RESPECT OF SUCH PROFITS OR INCOME EARNED IN THAILAN D. IT IS AMPLY CLEAR MADE CLEAR VIDE ARTICLE 23(3) OF DTA A THAT THE QUANTUM OF CREDIT TO BE ALLOWED IS THAT ANY AM OUNT WHICH WOULD HAVE BEEN PAYABLE AS THAI TAX FOR ANY YEAR. IN THIS CASE, THE ASSESSEES BANGKOK INCOME SUFFERING TAX IN INDIA WAS ` 3,60,85,934/-. THAI TAX ON ` 3,60,85,934/- AT 30% WORKS OUTTO ` 1,08,25,780/-. THIS IS THE CREDIT AVAILABLE TO THE ASSESSEE AGAINS T THE INDIAN TAX PAYABLE IN RESPECT OF THAI INCOME. ACCORDINGLY, THE ASSESSING OFFICER ALLOWED A SUM OF RS1,08,25,780/- AS DITR RELIEF. 7. ON BEING AGGRIEVED, THE ASSESSEE CARRIED THE MAT TER BEFORE THE CIT(APPEALS). IT WAS SUBMITTED BEFORE THE LEARN ED CIT(APPEALS) THAT THE ORDER OF THE TRIBUNAL DATED 30-11-2004 IN ITA NOS. 299, 300, 301 & 605/MDS/2001, SUPRA, DIRECTED THE ASSESS ING OFFICER TO ENQUIRE INTO THE EXISTENCE OF DTAA BETWEEN INDIA AN D BANGKOK. THE ASSESSING OFFICER WAS ONLY TO ENQUIRE WHETHER T HERE IS A DTAA BETWEEN INDIA AND BANGKOK AND RELIEF HAS TO BE GRANT ED. THE ASSESSING OFFICER INSTEAD OF MAKING ENQUIRY CAME TO THE CONCLUSION ITA NOS.213-215 /MDS /2010 8 THAT THERE IS A DTAA AGREEMENT EXISTED BETWEEN INDI A AND BANGKOK AND INTERPRETED IT AND IT IS NOT IN ACCORDANCE WITH THE DIRECTIONS OF THE TRIBUNAL. THE LEARNED CIT(APPEALS) BY CONSIDER ING THE SUBMISSIONS OF THE ASSESSEE HAS OBSERVED THAT THE TRIBUNAL HAD ALLOWED THE CLAIM OF THE ASSESSEE BY UPHOLDING THE ORDER OF THE LEARNED CIT(APPEALS) AND THE ASSESSING OFFICER WAS ONLY REQUIRED TO ENQUIRE INTO THE EXISTENCE OF DTA AGREEMENT BETWEEN INDIA AND BANGKOK. ONCE THE AGREEMENT EXISTS, THE AO HAS TO A LLOW THE RELIEF AS CLAIMED BY THE ASSESSEE. THE QUESTION OF AGAIN GOING INTO THE VARIOUS ARTICLES OF DTAA DID NOT ARISE. THEREFORE ONCE THE AO HAD CONCLUDED THAT THE DTA AGREEMENT EXISTED, THE RELIE F AS DIRECTED BY THE CIT(A) AND CONFIRMED BY ITAT OUGHT TO HAVE BEE N GRANTED. EVEN OTHERWISE, THE BUSINESS PROFIT OF BANGKOK BRANC H ARE GOVERNED BY ARTICLE 7 OF DTAA BETWEEN INDIA AND THAILAND ACC ORDING TO WHICH THE INCOME BANGKOK BRANCH CAN BE TAXED ONLY IN THAT COUNTRY. THE AO WAS THEREFORE DIRECTED TO GRANT THE RELIEF AS CL AIMED BY THE ASSESSEE AND DIRECTED BY THE ITAT. THE LEARNED CIT (APPEALS) ALLOWED THE GROUND RAISED BY THE ASSESSEE. 8. ON BEING AGGRIEVED, THE REVENUE HAS COME UP IN A PPEAL BEFORE THE TRIBUNAL. THE LEARNED DR HAS SUBMITTED THAT THE ONLY DISPUTE BETWEEN THE ASSESSEE AND THE REVENUE IS THA T ACCORDING TO ITA NOS.213-215 /MDS /2010 9 THE ASSESSEE THE DITR RELIEF HAS TO BE ALLOWED AT ` 1,86,74,470/- AS PER THE TAX RATE PAYABLE IN INDIA. ACCORDING TO TH E ASSESSING OFFICER THE DITR RELIEF CAN BE ALLOWED AT THE LOWER OF THE BANGKOK INCOME TAXED IN INDIA OR TAXED AT BANGKOK. THE LEAR NED DR RELIED ON THE DEPARTMENTAL CIRCULAR NO. 91/2008 DATED 28-0 8-2008 AND SUBMITTED THAT WHERE AN AGREEMENT ENTERED INTO BY T HE CENTRAL GOVERNMENT WITH THE GOVERNMENT OF ANY COUNTRY OUTSI DE INDIA FOR GRANTING RELIEF OF TAX, OR AS THE CASE MAY BE, AVOI DANCE OF DOUBLE TAXATION, PROVIDES THAT ANY INCOME OF A RESIDENT OF INDIA MAY BE TAXED IN THE OTHER COUNTRY, SUCH INCOME SHALL BE I NCLUDED IN HIS TOTAL INCOME CHARGEABLE TO TAX IN INDIA IN ACCORDAN CE WITH THE PROVISIONS OF THE INCOME-TAX ACT, 1961 (43 OF 1961) , AND RELIEF SHALL BE GRANTED IN ACCORDANCE WITH THE METHOD FOR ELIMIN ATION OR AVOIDANCE OF DOUBLE TAXATION PROVIDED IN SUCH AGREE MENT. IT WAS FURTHER SUBMITTED THAT WHATEVER THE ASSESSEE PAID I N THAILAND CREDIT WAS GIVEN IN INDIA. THEREFORE, THE ASSESSEE HAS NO GRIEVANCE. HE RELIED ON THE DECISION OF THE TRIBUNAL IN THE CASE OF ITO V. M/S. DATA SOFTWARE RESEARCH CO. P. LTD. IN ITA NO. 2072/MDS/2 006 DATED 27- 11-2007, WHEREIN IT WAS HELD THAT AS PER THE TREAT Y BETWEEN INDIA AND USA, THE TAX WHICH THE ASSESSEE DID PAY IN THE USA BE DEDUCTED FROM THE INCOME COMPUTED ON GLOBAL BASIS. THE TRIBUNAL ITA NOS.213-215 /MDS /2010 10 HELD THAT AS SUCH THE ASSESSING OFFICER HAD RIGHTLY FOLLOWED THE TAX CREDIT METHOD FOR ELIMINATION OF DOUBLE TAXATION. THE TRIBUNAL THEREFORE DECIDED THE ISSUE IN FAVOUR OF THE REVENU E AND AGAINST THE ASSESSEE. RELYING ON THE ABOVE ORDER OF THE TR IBUNAL IT WAS SUBMITTED BY THE LEARNED DR THAT IN THE PRESENT CAS E THE TAX CREDIT METHOD FOR ELIMINATION OF DOUBLE TAXATION ADOPTED B Y THE ASSESSING OFFICER IS CORRECT AND JUSTIFIED. SO FAR AS THE M ERITS OF THE CASE IS CONCERNED, HE SUBMITTED THAT THE ISSUE INVOLVED IN THIS APPEAL IS SQUARELY COVERED BY THE DECISION OF THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF M/S. TELECOMMUNICATIONS CONSULTANTS INDIA LTD. V. ADDL. CIT IN ITA NOS. 1293 & 1294/DEL/2009 DATED 29 -03-2012. 9. ON THE OTHER HAND, THE LEARNED COUNSEL FOR THE A SSESSEE HAS SUBMITTED THAT THE TRIBUNAL HAD REMITTED THE MATTER BACK TO THE ASSESSING OFFICER IN ITA NOS. 299, 300, 301 & 605/M DS/2001 DT. 30- 11-2004 ONLY TO ENQUIRE WHETHER THERE IS AN AGREEME NT BETWEEN INDIA AND BANGKOK. IF THERE IS AN AGREEMENT, THE AS SESSING OFFICER HAS NO JURISDICTION TO GO BEYOND THAT AND ENQUIRE I NTO THE ISSUE AND TO PASS A FRESH ORDER. THEREFORE THE ORDER PASSED BY THE ASSESSING OFFICER IS NOT CORRECT AND CONTRARY TO THE DIRECTIO NS GIVEN BY THE TRIBUNAL. SECONDLY, ON MERITS THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT AS PER THE DTAA IT IS WELL KNOWN THA T THERE ARE TWO ITA NOS.213-215 /MDS /2010 11 TYPES OF ELIMINATION OF DOUBLE TAXATION, ONE BY EX EMPTION METHOD AND THE OTHER BY TAX CREDIT METHOD. AS PER ARTIC LE 7 OF THE DTAA THE INCOME EARNED BY THE ASSESSEE IN BANGKOK BRANCH WILL BE TAXED ONLY IN BANGKOK AND NOT IN INDIA. FURTHER HE HAS RE LIED ON THE DECISIONS IN THE CASES OF P.V.A.L. KULANDAGAN CHETT IAR (267 ITR 654) (SC) AND CIT V. VR.SR.M. FIRM AND OTHERS (208 ITR 400) (MAD). 10. WE HAVE HEARD BOTH THE SIDES, PERUSED THE RECOR DS AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. IN THIS CASE THE ASSESSEE IS A BANKING COMPANY AND ALSO HAVING A BRA NCH OFFICE AT BANGKOK. THE ASSESSING OFFICER IN THE ORIGINAL ASSE SSMENT ORDER GAVE TAX CREDIT TO THE ASSESSEE ON THE TAX PAID AT BANGKOK AT ` 1,08,25,780/-. ACCORDING TO THE ASSESSEE HE IS ENT ITLED FOR THE TAX RATE PAYABLE IN INDIA AND CLAIMED AT ` 1,86,74,470/-. THE MATTER WENT TO THE CIT(A). THE LEARNED CIT(APPEALS) ALLOW ED THE CLAIM OF THE ASSESSEE. THE REVENUE CARRIED THE MATTER BEFOR E THE TRIBUNAL. THE TRIBUNAL VIDE ORDER DATED 30-11-2004 DIRECTED T HE ASSESSING OFFICER TO ENQUIRE WHETHER THERE IS A DTAA BETWEEN INDIA AND BANGKOK. THE ASSESSING OFFICER IN ACCORDANCE WITH T HE DIRECTIONS GIVEN BY THE ITAT ENQUIRED ALL THE PROVISIONS OF TH E DTAA BETWEEN INDIA AND THAILAND AND AS PER ARTICLE 23(3) BY FOLL OWING THE TAX ITA NOS.213-215 /MDS /2010 12 CREDIT METHOD WHATEVER TAX WAS PAID BY THE ASSESSEE IN THAILAND WAS GIVEN CREDIT TO THE ASSESSEE. AGGRIEVED, THE A SSESSEE CARRIED THE MATTER BEFORE THE LEARNED CIT(APPEALS). THE LE ARNED CIT(APPEALS) HYPER TECHNICALLY HELD THAT THE ONLY J OB OF THE ASSESSING OFFICER WAS TO SEE WHETHER THERE IS A DTA A BETWEEN INDIA AND THAILAND. WE ARE UNABLE TO UNDERSTAND TH E ABOVE CONCLUSION MADE BY THE LEARNED CIT(APPEALS) THAT TH E JOB OF THE ASSESSING OFFICER IS JUST TO SEE WHETHER THERE IS A DTAA BETWEEN INDIA AND THAILAND. IF THERE IS A DTAA, THE ASSESSI NG OFFICER HAS TO ALLOW THE RELIEF CLAIMED BY THE ASSESSEE. THAT BEI NG SO, IN OUR OPINION, THE TRIBUNAL NEED NOT REFER IT TO THE ASSE SSING OFFICER AS WELL JUST TO SEE AND PASS AN ORDER. THE TRIBUNAL C LEARLY DIRECTED THE ASSESSING OFFICER TO ENQUIRE INTO THE EXISTENCE OF A DTAA BETWEEN INDIA AND BANGKOK. ENQUIRY MEANS TO INVESTIGATE A ND APPLY THE SAME. IN OUR OPINION, THE ASSESSING OFFICER HAS RI GHTLY INVESTIGATED AND APPLIED THE SAME AND DECIDED THE ISSUE. WE THE REFORE HOLD THAT THE FINDING GIVEN BY THE LEARNED CIT(APPEALS) IS NOT CORRECT. ACCORDINGLY, WE REVERSE THE ORDER PASSED BY THE LEA RNED CIT(APPEALS) ON THIS COUNT AND UPHOLD THE ORDER OF THE ASSESSING OFFICER. ITA NOS.213-215 /MDS /2010 13 11. INSOFAR AS OTHER ASPECT IS CONCERNED, THE ASSES SEE HAVING ACCEPTED THE TAX CREDIT METHOD ONLY, THE ASSESSEE S GRIEVANCE THAT THE TAX RATE PAYABLE IN INDIA IS TO BE ALLOWED, WE ARE UNABLE TO UNDERSTAND ON WHAT BASIS THE ASSESSEE IS MAKING THI S CLAIM. THEREFORE, WE HOLD THAT THE ASSESSING OFFICER HAS R IGHTLY DECIDED THE ISSUE AS PER ARTICLE 23(3) OF THE DTAA BETWEEN INDIA AND THAILAND. EVEN AS PER THE DEPARTMENTAL CIRCULAR NO . 91/2008 DATED 28-08-2008, SUPRA, THE ASSESSING OFFICER HAS CORREC TLY APPLIED THE TAX CREDIT METHOD AND HIS VIEW HAS BEEN SUPPORTED E VEN BY THE TRIBUNAL IN ITA NO.2072(MDS)/2006 DATED 27-11-2007, SUPRA. IN THAT CASE THE DTAA IS BETWEEN INDIA AND USA. THEREF ORE, THE ASSESSING OFFICER HAS RIGHTLY FOLLOWED THE TAX CRED IT METHOD. 12. SO FAR AS THE MERITS OF THE CASE IS CONCERNED, WHETHER THE TAX CREDIT METHOD HAS TO BE FOLLOWED OR EXEMPT M ETHOD HAS TO BE FOLLOWED, THIS HAS BEEN DISCUSSED IN DETAIL BY THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF M/S. TELECOMMUNICATIONS CON SULTANTS INDIA LTD. IN ITA NOS. 1293 & 1294/DEL/2009 (SUPRA), CONS IDERING VARIOUS CASE LAWS. SIMILAR ISSUE WAS THE ISSUE BEFORE THE DELHI BENCH OF THE TRIBUNAL AND THE TRIBUNAL HAS ELABORATELY EXAMINED THE DTAA BETWEEN INDIA AND OTHER COUNTRIES AND HELD AS UNDER : ITA NOS.213-215 /MDS /2010 14 21. WE HAVE HEARD BOTH THE SIDES IN DETAIL. WE HAV E ALSO PERUSED THE CASE LAWS RELIED UPON. THE ASSESSEE IS A PUBLI C SECTOR COMPANY INCORPORATED IN INDIA AND ASSESSED TO TAX IN INDIA AS TAX RESIDENT. THE ASSESSEE IS HAVING DOMESTIC OPERATIONS AS WELL AS OVERSEAS OPERATIONS AND DERIVES INCOME FROM BOTH KINDS OF OP ERATION. SINCE THE ASSESSEE COMPANY IS INCORPORATED IN INDIA, THE PROVISIONS OF INCOME-TAX ACT, BEING A DOMESTIC LAW, IS APPLICABLE TO THE ASSESSEE. ACCORDINGLY, ALL THE INCOMES OF THE ASSESSEE COMPAN Y INCLUDING THE GLOBAL INCOME ARE LIABLE TO BE TAXED IN INDIA. SEC TION 4 OF THE INCOME-TAX ACT IS A CHARGING SECTION OF INCOME-TAX WHICH PROVIDES THAT WHERE ANY CENTRAL ACT ENACTS THAT INCOME-TAX S HALL BE CHARGED FOR ANY ASSESSMENT YEAR AT ANY RATE OR RATES, INCOM E-TAX AT THE RATE OR THOSE RATES SHALL BE CHARGED FOR THAT YEAR IN AC CORDANCE WITH, AND [SUBJECT TO THE PROVISIONS (INCLUDING PROVISION S FOR THE LEVY OF ADDITIONAL INCOME-TAX) OF, THIS ACT] IN RESPECT OF THE TOTAL INCOME OF THE PREVIOUS YEAR OF EVERY PERSON. THE PROVISIONS OF THIS SECTION ALSO PROVIDE THAT WHERE BY VIRTUE OF ANY PROVISION OF THIS ACT INCOME-TAX IS TO BE CHARGED IN RESPECT OF INCOME OF A PERIOD OTHER THAN THE PREVIOUS YEAR, NOTWITHSTANDING SHALL BE CH ARGED ACCORDINGLY. SECTION 5 OF THE INCOME-TAX ACT DEFIN ES THE SCOPE OF THE TOTAL INCOME WHICH READ AS UNDER :- 5. (1) SUBJECT TO THE PROVISIONS OF THIS ACT, THE TOTAL INCOME OF ANY PREVIOUS YEAR OF A PERSON WHO IS A RESIDENT INCLUDE S ALL INCOME FROM WHATEVER SOURCE DERIVED WHICH (A) IS RECEIVED OR IS DEEMED TO BE RECEIVED IN INDI A IN SUCH YEAR BY OR ON BEHALF OF SUCH PERSON ; OR (B) ACCRUES OR ARISES OR IS DEEMED TO ACCRUE OR ARI SE TO HIM IN INDIA DURING SUCH YEAR ; OR (C) ACCRUES OR ARISES TO HIM OUTSIDE INDIA DURING SUCH YEAR : PROVIDED THAT, IN THE CASE OF A PERSON NOT ORDINARI LY RESIDENT IN INDIA WITHIN THE MEANING OF SUB-SECTION (6) OF SECT ION 6, THE INCOME WHICH ACCRUES OR ARISES TO HIM OUTSIDE INDIA SHALL NOT BE SO INCLUDED UNLESS IT IS DERIVED FROM A BUSINESS CONTR OLLED IN OR A PROFESSION SET UP IN INDIA. (2) SUBJECT TO THE PROVISIONS OF THIS ACT, THE TOT AL INCOME OF ANY PREVIOUS YEAR OF A PERSON WHO IS A NON-RESIDENT INC LUDES ALL INCOME FROM WHATEVER SOURCE DERIVED WHICH (A) IS RECEIVED OR IS DEEMED TO BE RECEIVED IN IND IA IN SUCH YEAR BY OR ON BEHALF OF SUCH PERSON ; OR ITA NOS.213-215 /MDS /2010 15 (B) ACCRUES OR ARISES OR IS DEEMED TO ACCRUE OR ARI SE TO HIM IN INDIA DURING SUCH YEAR. THUS, THE SUB-CLAUSE (C) OF CLAUSE (1) TO SECTION 5 PROVIDES THAT THE TOTAL INCOME OF ANY PREVIOUS YEAR OF A PERSON WHO I S A RESIDENT INCLUDES ALL INCOME FROM WHATEVER SOURCE DERIVED WH ICH ACCRUES OR ARISES TO HIM OUTSIDE INDIA DURING SUCH YEAR. AS P ER THE PROVISIONS OF INCOME-TAX ACT, THE ASSESSEE IS A RESIDENT OF IN DIA. DUE TO STATE OF RESIDENCY, INDIA HAS INHERENT RIGHT TO TAX THE G LOBAL INCOME OF THE ASSESSEE AS PER PROVISIONS OF SECTION 5 OF INCOME-T AX ACT, 1961. THE ASSESSEE HAS PERMANENT ESTABLISHMENT IN THE FOR EIGN COUNTRIES FROM WHERE THE PROJECT INCOME HAVE BEEN DERIVED AND WITH WHOM INDIA HAS ENTERED INTO DOUBLE TAXATION AVOIDANCE AG REEMENT. THE ASSESSEE HAS OPTED FOR APPLICATION OF DTAA UNDER SE CTION 90(2) OF THE INCOME-TAX ACT. THE CHARACTER OF THE INCOME EA RNED BY THE ASSESSEE IS INCOME FROM BUSINESS. ARTICLE 7 OF R ELEVANT DTAAS WHICH ARE APPLICABLE IN THE ASSESSEES CASE ARE SIM ILARLY WORDED. IN THESE DTAAS, IT HAVE BEEN PROVIDED THAT THE PROF IT OF AN ENTERPRISE OF CONTRACTING STATE SHALL BE TAXABLE ON LY IN THAT STATE UNLESS THE ENTERPRISE CARRIES ON BUSINESS IN OTHER CONTRACTING STATE THROUGH A PERMANENT ESTABLISHMENT SITUATED THEREIN. IF THE ENTERPRISE CARRIES ON BUSINESS AS AFORESAID, THE PR OFITS OF THE ENTERPRISES MAY BE TAXED IN THE OTHER CONTRACTING S TATE BUT ONLY SO MUCH OF THEM AS IS ATTRIBUTABLE DIRECTLY OR INDIREC TLY TO THAT PERMANENT ESTABLISHMENT. THIS ARTICLE 7 OF THE ALL RELEVANT DTAA IS CONSISTING OF TWO PARTS, I.E., ONE IS THAT THE PROF IT OF AN ENTERPRISE OF A CONTRACTING STATE SHALL BE TAXABLE ONLY IN THAT S TATE; AND, THE SECOND PART IS THAT WHEN THE ENTERPRISE CARRIES ON BUSINESS IN THE OTHER CONTRACTING STATE THROUGH A PERMANENT ESTABLI SHMENT. IN THAT SITUATION, THE PROFITS OF ENTERPRISE MAY BE TAXED I N THE OTHER CONTRACTING STATE BUT ONLY SO MUCH OF THEM AS IS AT TRIBUTABLE TO THAT PERMANENT ESTABLISHMENT. THUS, THE FIRST PART OF T HE ARTICLE GIVES EXCLUSIVE RIGHT TO THE TAXATION OF BUSINESS INCOME TO THE STATE OF RESIDENCY AS THE PHRASE USED AS SHALL BE TAXABLE O NLY. THE SECOND PART OF THIS ARTICLE 7 OF THE RELEVANT DTAA PROVIDES RIGHT TO TAXATION OF THE STATE OF RESIDENCY AS WELL AS TO TH E OTHER CONTRACTING STATE WHEREIN THE PERMANENT ESTABLISHMENT SITUATED. THUS, THE ARTICLE 7 PROVIDES THAT IN SUCH A SITUATION, THE ST ATE OF THE RESIDENTS DOES NOT HAVE EXCLUSIVE RIGHT TO TAX BUT IT HAS INH ERENT RIGHT TO TAX SUCH INCOME. THE ARTICLE ALSO PROVIDES THAT THE ST ATE OF THE SOURCE HAS ALSO RIGHT TO TAX THE BUSINESS INCOME. IT IS A NON-EXCLUSIVE RIGHT IN CASE THERE EXIST A PERMANENT ESTABLISHMENT. THE PHRASE USED MAY BE TAXED. THEREFORE, THE COMBINED READING OF THE SENTENCES OF ARTICLE 7 OF RELEVANT DTAA MEANS THAT THE STATE OF SOURCE HAS NON-EXCLUSIVE RIGHT TO TAX OF BUSINESS INCOME ATTRI BUTABLE TO PERMANENT ESTABLISHMENT. IN VIEW OF THIS, SUCH INC OME MAY BE TAXED AS PER THE DOMESTIC LAWS. THIS NON-EXCLUSIVE RIGHT OF STATE OF ITA NOS.213-215 /MDS /2010 16 SOURCE DOES NOT EXTINGUISH THE INHERENT RIGHT OF ST ATE OF RESIDENCY TO TAX GLOBAL INCOME OF ITS RESIDENTS. IN THE CIRCUMS TANCES, WHERE THE STATE OF THE RESIDENTS OF THE TAXPAYER HAD GIVEN UP ITS INHERENT RIGHT TO TAX THE GLOBAL INCOME, IN SUCH SITUATION, THE PH RASE USED IN ARTICLE 7 OF THE DTAA IS SHALL BE TAXABLE ONLY. SINCE ALL THE DTAA APPLICABLE IN THE CASE OF ASSESSEE THE PHRASE USED MAY BE TAXED, THEREFORE, INHERENT RIGHT OF TAXATION OF GL OBAL BUSINESS INCOME IN INDIA IS NOT LOST. 21.1 CASE LAWS RELIED UPON BY ASSESSEE ARE BASICALL Y BASED ON THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF CI T VS. P.V.A.L. KULANDAGAN CHETTIAR, CITED SUPRA. IN THE CASE, HON 'BLE APEX COURT HAD STATED GENERAL PRINCIPLES GOVERNING TAXATION OF GLOBAL INCOME. IN THIS CASE, HON'BLE APEX COURT HAD UPHELD THE DEC ISION OF HON'BLE HIGH COURT WHERE HIGH COURT TOOK A VIEW THAT INDIAN TAX AUTHORITIES COULD NOT TAX THE INCOME OF THE APPLICA NT ON THE TEST OF CLOSE PERSONAL AND ECONOMIC RELATIONS. HON'BLE SUP REME COURT CLARIFIED THAT IT AFFIRMED THE JUDGMENT OF HON'BLE HIGH COURT FOR DIFFERENT REASONS. HON'BLE SUPREME COURT OBSERVED AS UNDER :- HERE, IN THESE APPEALS, WE ARE CONCERNED WITH INC OME ARISING FROM IMMOVABLE PROPERTY. WE WILL PROCEED ON THE BAS IS THAT FISCAL CONNECTION ARISES IN RELATION TO TAXATION EITHER BY REASON OF RESIDENCE OF THE ASSESSEE OR BY REASON OF THE LOCAT ION OF THE IMMOVABLE PROPERTY WHICH IS THE SOURCE OF INCOME. I N THE CLAUSES WHICH WE HAVE SET OUT ABOVE, FISCAL DOMICILE IS SET OUT IN ART. IV WHICH STATES THAT IN A CASE WHERE THE PERSON IS A R ESIDENT IN BOTH THE CONTRACTING STATES, FISCAL DOMICILE WILL HAVE T O BE DETERMINED WITH REFERENCE TO THE FACT THAT IF THE CONTRACTING STATE WITH WHICH HIS PERSONAL AND ECONOMIC RELATIONS ARE CLOSER, HE SHALL BE DEEMED TO BE A RESIDENT OF THE CONTRACTING STATE IN WHICH HE HAS AN HABITUAL ABODE. THIS IMPLIES THAT TAX LIABILITY ARI SES IN RESPECT OF A PERSON RESIDING IN BOTH THE CONTRACTING STATES HAS TO BE DETERMINED WITH REFERENCE TO HIS CLOSE PERSONAL AND ECONOMIC R ELATIONS WITH ONE OR THE OTHER. THE IMMOVABLE PROPERTY IN QUESTI ON IS SITUATE IN MALAYSIA AND INCOME IS DERIVED FROM THAT PROPERTY. FURTHER, IT HAS ALSO BEEN HELD AS A MATTER OF FACT THAT THERE IS NO PERMANENT ESTABLISHMENT IN INDIA IN REGARD TO CARRYING ON THE BUSINESS OF RUBBER PLANTATIONS IN MALAYSIA OUT OF WHICH INCOME IS DERIVED AND THAT FINDING OF FACT HAS BEEN RECORDED BY ALL THE A UTHORITIES AND AFFIRMED BY THE HIGH COURT. WE, THEREFORE, DO NOT P ROPOSE TO RE- EXAMINE THE QUESTION WHETHER THE FINDING IS CORRECT OR NOT. PROCEEDING ON THAT BASIS, WE HOLD THAT BUSINESS INC OME OUT OF RUBBER PLANTATIONS CANNOT BE TAXED IN INDIA BECAUSE OF CLOSER ECONOMIC RELATIONS BETWEEN THE ASSESSEE AND MALAYSI A IN WHICH THE PROPERTY IS LOCATED AND WHERE THE PERMANENT ESTABLI SHMENT HAS BEEN SET UP WILL DETERMINE THE FISCAL DOMICILE. ON THE FIRST ISSUE, THE ITA NOS.213-215 /MDS /2010 17 VIEW TAKEN BY THE HIGH COURT IS CORRECT. WE NEED NO T ENTER INTO AN EXERCISE IN SEMANTICS AS TO WHETHER THE EXPRESSION 'MAY BE' WILL MEAN ALLOCATION OF POWER TO TAX OR IS ONLY ONE OF T HE OPTIONS AND IT ONLY GRANTS POWER TO TAX IN THAT STATE AND UNLESS T AX IS IMPOSED AND PAID, NO RELIEF CAN BE SOUGHT. READING THE TREATY I N QUESTION AS A WHOLE WHEN IT IS INTENDED THAT EVEN THOUGH IT IS PO SSIBLE FOR A RESIDENT IN INDIA TO BE TAXED IN TERMS OF SS. 4 AND 5, IF HE IS DEEMED TO BE A RESIDENT OF A CONTRACTING STATE WHERE HIS P ERSONAL AND ECONOMIC RELATIONS ARE CLOSER, THEN HIS RESIDENCE I N INDIA WILL BECOME IRRELEVANT. THE TREATY WILL HAVE TO BE INTER PRETED AS SUCH AND PREVAILS OVER SS. 4 AND 5 OF THE ACT. THEREFORE , WE ARE OF THE VIEW THAT THE HIGH COURT IS JUSTIFIED IN REACHING I TS CONCLUSION, THOUGH FOR DIFFERENT REASONS FROM THOSE STATED BY T HE HIGH COURT. THE CONTENTION PUT FORTH BY THE LEARNED ATTORNEY GE NERAL THAT CAPITAL GAINS IS NOT INCOME AND, THEREFORE, IS NOT COVERED BY THE TREATY CANNOT BE ACCEPTED AT ALL BECAUSE FOR PURPOS ES OF THE ACT CAPITAL GAINS IS ALWAYS TREATED AS INCOME ARISING O UT OF IMMOVABLE PROPERTY THOUGH SUBJECT TO DIFFERENT KIND OF TREATM ENT. THEREFORE, THE CONTENTION ADVANCED BY THE LEARNED ATTORNEY GEN ERAL THAT IT IS NOT A PART OF THE TREATY CANNOT BE ACCEPTED BECAUSE IN THE TERMS OF TREATY WHEREVER ANY EXPRESSION IS NOT DEFINED, THE EXPRESSION DEFINED IN THE IT ACT WOULD BE ATTRACTED. THE DEFIN ITION OF INCOME WOULD, THEREFORE, INCLUDE CAPITAL GAINS. THUS, CAPI TAL GAINS DERIVED FROM IMMOVABLE PROPERTY IS INCOME AND, THEREFORE, A RT. 6 WOULD BE ATTRACTED. HON'BLE SUPREME COURTS CONCLUSIONS REST ON THE FA CT THAT THE PERSONAL AND ECONOMIC RELATIONS OF THE ASSESSEE IN RELATION TO CAPITAL ASSET WERE FAR CLOSER IN THE STATE OF MALAY SIA THAN IN INDIA. IN VIEW OF THESE FACTS, THE RESIDENCY OF INDIA WAS HELD TO BE IRRELEVANT. 21.2 THE FISCAL DOMICILE OF THE ASSESSEE HAD TO BE DECIDED IN VIEW OF THE PROVISIONS OF TREATY. IN THE CASE OF CIT VS . P.V.A.L. KULANDAGAN CHETTIAR, THERE WAS DUAL RESIDENCY AND I N THAT VIEW OF MATTER, ISSUE WAS SO DECIDED. ASSESSEES CONTENTION THAT ITS FOREIGN INCOME IS TAXABLE INCOME IN FOREIGN COUNTRIES AND I T CANNOT BE TAXED IN INDIA IS AN UNTENABLE CONTENTION. IT IS A FALLACIOUS VIEW TAKEN BY THE ASSESSEE BY WRONG INTERPRETATION OF AR TICLE 7 OF RELEVANT DTAA. 21.3 WE WOULD ALSO LIKE TO MENTION THAT IN THE SPHE RE OF INTERNATIONAL TAXATION, THERE ARE TWO FUNDAMENTAL S YSTEMS OF TAXATION, ONE IS BASED ON RESIDENCY OF THE TAXPAYER AND THE OTHER IS BASED ON THE SOURCE OF THE INCOME. IN THE INTERNATI ONAL ARENA, MOST OF THE COUNTRIES FOLLOW THE RESIDENCY BASED TAXATIO N SYSTEM. ACCORDING TO THIS SYSTEM, A COUNTRY CAN TAX ITS RES IDENTS ON THE ITA NOS.213-215 /MDS /2010 18 GLOBAL INCOME OF THE TAXPAYER WHILE THE NON-RESIDEN TS ARE TAXED ONLY ON THE INCOME SOURCED INSIDE THE COUNTRY. TH E PROVISIONS OF SECTION 5 OF INCOME-TAX ACT, 1961 AS ENUMERATED ABO VE GIVE A SCOPE OF A TOTAL INCOME OF THE ASSESSEE WHO IS RESI DENT OF INDIA. AS PER THESE PROVISIONS, THE INCOME OF THE RESIDENT TA XABLE IN INDIA INCLUDES ALL INCOME FROM WHATEVER SOURCE DERIVED WH ICH IS RECEIVED OR IS DEEMED TO BE RECEIVED IN INDIA IN SUCH YEAR B Y OR ON BEHALF OF SUCH PERSON OR ACCRUES OR ARISES OR IS DEEMED TO AC CRUE OR ARISE IN INDIA DURING SUCH YEAR OR ACCRUES OR ARISES TO HIM OUTSIDE INDIA DURING SUCH YEAR. THUS, THE SCOPE OF THE TOTAL INC OME IN THE CASE OF A RESIDENT ALSO EXTENDED TO THE INCOME ACCRUES OR A RISES TO HIM OUTSIDE INDIA DURING SUCH YEAR. UNDER THE SOURCE B ASED SYSTEM, A COUNTRY CAN TAX A PERSON WHETHER RESIDENT OR NON-RE SIDENT, ONLY ON INCOME SOURCED INSIDE THE COUNTRY. HAD ALL THE COU NTRIES IN THE WORLD FOLLOWING SOURCE BASED TAXATION SYSTEM THEN T HE PROBLEM OF DOUBLE TAXATION WOULD NOT HAVE ARISEN. HOWEVER, U NDER THE RESIDENT BASED SYSTEM, THERE ARISES A SITUATION OF DOUBLE TAXATION BECAUSE COUNTRIES WHERE THE TAXPAYER IS A RESIDENT THEN IT WILL HAVE TO PAY TAX ON ITS GLOBAL INCOME. TO AVOID THE DOUB LE TAXATION, TWO RULES ARE DEVISED IN THE DTAAS, I.E., ONE IS BY WA Y OF PROVIDING DISTRIBUTIVE RULES UNDER WHICH TAXING RIGHTS ALLOCA TED BETWEEN CONTRACTING STATE WITH RESPECT TO VARIOUS KINDS OF INCOME; AND THE SECOND RULE IS TO PUT STATE OF RESIDENCE UNDER AN O BLIGATION TO GIVE EITHER CREDIT FOR TAXES PAID IN THE SOURCE STATE OR TO EXEMPT THE INCOME WHICH IS TAXED IN SOURCE STATE. THESE T WO RULES HAVE ALSO BEEN EXPLAINED IN PARA 19 OF OECD COMMENTARY W HICH READS AS UNDER :- 19. FOR THE PURPOSE OF ELIMINATING DOUBLE TAXATION , THE CONVENTION ESTABLISHES TWO CATEGORIES OF RULES. FIR ST, ARTICLES 6 TO 21 DETERMINE, WITH REGARD TO DIFFEREN T CLASSES OF INCOME, THE RESPECTIVE RIGHTS TO TAX OF THE STATE O F SOURCE OR SITUS AND OF THE STATE OF RESIDENCE, AND ARTICLE 22 DOES THE SAME WITH REGARD TO CAPITAL. IN THE CASE OF A NUMBE R OF ITEMS OF INCOME AND CAPITAL, AN EXCLUSIVE RIGHT TO TAX IS CONFERRED ON ONE OF THE CONTRACTING STATES. THE OTHER CONTRAC TING STATE IS THEREBY PREVENTED FROM TAXING THOSE ITEMS AND DOUBLE TAXATION IS AVOIDED. AS A RULE, THIS EXCLUSI VE RIGHT TO TAX IS CONFERRED ON THE STATE OF RESIDENCE. IN THE CASE OF OTHER ITEMS OF INCOME AND CAPITAL, THE RIGHT TO TAX IS NOT AN EXCLUSIVE ONE. AS REGARDS TWO CLASSES OF INCOME (DI VIDENDS AND INTEREST), ALTHOUGH BOTH STATES ARE GIVEN THE R IGHT TO TAX, THE AMOUNT OF TAX THAT MAY BE IMPOSED IN THE STATE OF SOURCE IS LIMITED. SECOND, INSOFAR AS THESE PROVISIONS CON FER ON THE STATE OF SOURCE OR SITUS A FULL OR LIMITED RIGHT TO TAX, THE STATE OF RESIDENCE MUST ALLOW RELIEF SO AS TO AVOID DOUBL E TAXATION; THIS IS THE PURPOSE OF ARTICLES 23 A AND 23 B. THE CONVENTION ITA NOS.213-215 /MDS /2010 19 LEAVES IT TO THE CONTRACTING STATES TO CHOOSE BETWE EN TWO METHODS OF RELIEF, I.E. THE EXEMPTION METHOD AND TH E CREDIT METHOD. THE TAXATION LAW IN INDIA FOLLOWS THE CREDIT METHOD FOR RELIEVING THE BURDEN OF DOUBLE TAXATION. UNDER THE DISTRIBUTIVE RULES, THE TAXING RIGHTS ARE DISTRIBUTED BETWEEN THE CONTRACTING STAT ES. EXCLUSIVE RIGHTS TO TAXATION IN RESPECT OF CERTAIN INCOMES AR E GIVEN TO ONE STATE AND THUS OTHER STATE IS PRECLUDED FROM TAXING THOSE INCOMES AND THEREFORE THE DOUBLE TAXATION IS AVOIDED. AS A RULE, SUCH EXCLUSIVE RIGHTS ARE GIVEN TO STATE OF RESIDENCE. IN RESPECT OF THE OTHER TYPES OF INCOME, THE RIGHT TO TAX IS NOT EXCL USIVE ONE. THE OTHER STATE MAY ALSO TAX THAT INCOME AND DEPENDING UPON TAXING RIGHTS OF THE SOURCE STATE, INCOME ARE CLASSIFIED I NTO THREE CATEGORIES AND SUCH CLASSIFICATION ARE PROVIDED IN PARA 20 TO 23 OF THE OECD COMMENTARY WHICH READ AS UNDER:- 20. INCOME AND CAPITAL MAY BE CLASSIFIED INTO THRE E CLASSES, DEPENDING ON THE TREATMENT APPLICABLE TO EACH CLASS IN THE STATE OF SOURCE OR SITUS: - INCOME AND CAPITAL THA T MAY BE TAXED WITHOUT ANY LIMITATION IN THE STATE OF SOURCE OR SITUS, - INCOME THAT MAY BE SUBJECTED TO LIMITED TAXATION IN THE STATE OF SOURCE, AND - INCOME AND CAPITAL THAT MAY NOT BE TAXED IN THE STATE OF SOURCE OR SITUS. 21. THE FOLLOWING ARE THE CLASSES OF INCOME AND CAP ITAL THAT MAY BE TAXED WITHOUT ANY LIMITATION IN THE STATE OF SOURCE OR SITUS: - INCOME FROM IMMOVABLE PROPERTY SITUATED IN THAT STATE (INCLUDING INCOME FROM AGRICULTURE OR FORESTR Y), GAINS FROM THE ALIENATION OF SUCH PROPERTY, AND CAPITAL REPRESENTING IT (ARTICLE 6 AND PARAGRAPH 1 OF ARTICLES 13 AND 22); - PROFITS OF A PERMANENT ESTABLISHMENT SITUATED IN THAT STATE, GAINS FROM THE ALIENATION OF SUCH A PERMANEN T ESTABLISHMENT, AND CAPITAL REPRESENTING MOVABLE PROPERTY FORMING PART OF THE BUSINESS PROPERTY OF S UCH A PERMANENT ESTABLISHMENT (ARTICLE 7 AND PARAGRAPH 2 OF ARTICLES 13 AND 22); AN EXCEPTION IS MADE, HOWEVER, IF THE PERMANENT ESTABLISHMENT IS MAINTAINED FOR THE PURPOSES OF INTERNATIONAL SHIPPI NG, INLAND WATERWAYS TRANSPORT, AND INTERNATIONAL AIR TRANSPORT (CF. PARAGRAPH 23 BELOW); ITA NOS.213-215 /MDS /2010 20 - INCOME FROM THE ACTIVITIES OF ARTISTES AND SPORTS MEN EXERCISED IN THAT STATE, IRRESPECTIVE OF WHETHER SU CH INCOME ACCRUES TO THE ARTISTE OR SPORTSMAN HIMSELF OR TO ANOTHER PERSON (ARTICLE 17) ; - DIRECTORS' FEES PAID BY A COMPANY THAT IS A RESID ENT OF THAT STATE (ARTICLE 16); - REMUNERATION IN RESPECT OF AN EMPLOYMENT IN THE PRIVATE SECTOR, EXERCISED IN THAT STATE, UNLESS THE EMPLOYEE IS PRESENT THEREIN FOR A PERIOD NOT EXCEEDING 183 DAYS IN ANY TWELVE MONTH PERIOD COMMENCING OR ENDING IN THE FISCAL YEAR CONCERNED AND CERTAIN CONDITIONS ARE MET; AND REMUNERATION IN RESPECT OF AN EMPLOYMENT EXERCISED ABOARD A SHIP OR AIRCRAFT OPERATED INTERNATIONALLY OR ABOARD A BOAT, IF THE PLACE OF EFFECTIVE MANAGEMENT OF THE ENTERPRISE IS SITUATED IN THAT STATE (ARTICLE 15); - SUBJECT TO CERTAIN CONDITIONS, REMUNERATION AND PENSIONS PAID IN RESPECT OF GOVERNMENT SERVICE (ARTICLE 19). 22. THE FOLLOWING ARE THE CLASSES OF INCOME THAT MA Y BE SUBJECTED TO LIMITED TAXATION IN THE STATE OF SOURC E: - DIVIDENDS: PROVIDED THE HOLDING IN RESPECT OF WHI CH THE DIVIDENDS ARE PAID IS NOT EFFECTIVELY CONNECTED WITH A PERMANENT ESTABLISHMENT IN THE STATE OF SOUR CE, THAT STATE MUST LIMIT ITS TAX TO 5 PER CENT OF THE GROSS AMOUNT OF THE DIVIDENDS, WHERE THE BENEFICIAL OWNER IS A COMPANY THAT HOLDS DIRECTLY AT LEAST 25 PER CE NT OF THE CAPITAL OF THE COMPANY PAYING THE DIVIDENDS, A ND TO 15 PER CENT OF THEIR GROSS AMOUNT IN OTHER CASES (ARTICLE 10); - INTEREST: SUBJECT TO THE SAME PROVISO AS IN THE C ASE OF DIVIDENDS, THE STATE OF SOURCE MUST LIMIT ITS TAX T O 10 PER CENT OF THE GROSS AMOUNT OF THE INTEREST, EXCEP T FOR ANY INTEREST IN EXCESS OF A NORMAL AMOUNT (ARTICLE 11). 23. OTHER ITEMS OF INCOME OR CAPITAL MAY NOT BE TAX ED IN THE STATE OF SOURCE OR SITUS; AS A RULE THEY ARE TAXABL E ONLY IN THE STATE OF RESIDENCE OF THE TAXPAYER. THIS APPLIES, F OR EXAMPLE, TO ROYALTIES (ARTICLE 12), GAINS FROM THE ALIENATIO N OF SHARES OR SECURITIES (PARAGRAPH 5 OF ARTICLE B), PRIVATE S ECTOR ITA NOS.213-215 /MDS /2010 21 PENSIONS (ARTICLE 18), PAYMENTS RECEIVED BY A STUDE NT FOR THE PURPOSES OF HIS EDUCATION OR TRAINING (ARTICLE 20), AND CAPITAL REPRESENTED BY SHARES OR SECURITIES (PARAGR APH 4 OF ARTICLE 22). PROFITS FROM THE OPERATION OF SHIPS OR AIRCRAFT IN INTERNATIONAL TRAFFIC OR OF BOATS ENGAGED IN INLAND WATERWAYS TRANSPORT, GAINS FROM THE ALIENATION OF SUCH SHIPS, BOATS, OR AIRCRAFT, AND CAPITAL REPRESENTED BY THEM, ARE TAXA BLE ONLY IN THE STATE IN WHICH THE PLACE OF EFFECTIVE MANAGEMEN T OF THE ENTERPRISE IS SITUATED (ARTICLE 8 AND PARAGRAPH 3 O F ARTICLES 13 AND 22). BUSINESS PROFITS THAT ARE NOT ATTRIBUTA BLE TO A PERMANENT ESTABLISHMENT IN THE STATE OF SOURCE ARE TAXABLE ONLY IN THE STATE OF RESIDENCE (PARAGRAPH 1 OF ARTI CLE 7). THE DISTRIBUTIVE RULES USES THE WORD SHALL BE TAX ED ONLY, MAY BE TAXED AND MAY ALSO BE TAXED. THUS, IF A CONT RACTING STATE IS TO GIVE EXCLUSIVE RIGHT TO TAX A PARTICULAR KIND OF AN INCOME, THEN RELEVANT ARTICLE OF CONVENTION USES THE PHRASE SHA LL BE TAXED ONLY. AS A RULE, SUCH EXCLUSIVE RIGHT IS GIVEN TO STATE OF RESIDENCE, THOUGH THERE ARE A FEW ARTICLES WHERE EXCLUSIVE RIG HT TO TAX IS GIVEN TO STATE OF SOURCE. THE PHRASE SHALL BE TAXED ONL Y PRECLUDES OTHER CONTRACTING STATE FROM TAXING THAT INCOME. I N THE CASES, WHERE DISTRIBUTION OF RIGHT TO TAX IS NOT EXCLUSIVE , THE CONVENTION USES THE PHRASE MAY BE TAXED. IN SUCH MODEL OF C ONVENTION, THE USE OF THE PHRASE MAY BE TAXED DOES NOT GIVE EXCL USIVE RIGHT OF TAXATION TO STATE OF RESIDENCE. AS PER THESE MODEL OF CONVENTION, THE WORD MAY BE TAXED AND MAY ALSO BE TAXED GIV ES SIMULTANEOUS TAXING RIGHTS TO STATE OF SOURCE. IF , IN THE DTAA, AN ITEM OF INCOME IS MAY BE TAXED IN STATE OF SOURCE AND NOTHING IS MENTIONED ABOUT TAXING RIGHT OF STATE OF RESIDENCE IN CONVENTION ITSELF, THEN STATE OF RESIDENCE IS NOT PRECLUDED FR OM TAXING SUCH INCOME AND CAN TAX SUCH INCOME USING INHERENT RIGHT OF STATE OF RESIDENCE TO TAX SUCH GLOBAL INCOME OF ITS RESIDENT . ONLY IN THE CASE OF PHRASE SHALL BE TAXED ONLY USED, THEN ONLY THE STATE OF RESIDENCE IS PRECLUDED FROM TAXING IT. IN SUCH CAS ES, WHERE THE PHRASE MAY BE TAXED USED, THE STATE OF RESIDENCE HAS BEEN GIVEN ITS INHERENT RIGHT TO TAX. IN THE ASSESSEES CASE, THE CLAIM OF THE ASSESSEE IS FOR INCOME TAXABLE IN FOREIGN COUNTRIES AND IT SHOULD NOT BE TAXED IN INDIA, CANNOT BE ACCEPTED AS THE PHRASE USED IS MAY BE TAXED AND IN SUCH CASES, THE STATE OF RESIDENCE HA S INHERENT POWER TO TAX SUCH INCOME WHICH HAS BEEN CLEARLY PROVIDED IN THE DTAA ITSELF. DOMESTIC LAW ALSO PROVIDES FOR TAXING SUCH INCOME. THEREFORE, THERE IS NO CONTRADICTION BETWEEN THE PR OVISIONS OF DTAA AND THE DOMESTIC TAX LAWS. AS WE HAVE ALREADY STATED ABOVE, INDIA HAS NOT WAIVED ALL THE RIGHTS TO TAX UNDER AR TICLE 7 OF THE RELEVANT DTAA WHICH PROVIDES THAT INDIA SHALL GIVE CREDIT TO THE TAXES PAID IN THE COUNTRY OF SOURCE. THE FOLLOWING CASE LAWS RELIED UPON BY ASSESSEE ARE BASED ON THE DECISION OF HON'B LE SUPREME ITA NOS.213-215 /MDS /2010 22 COURT IN THE CASE OF CIT VS. P.V.A.L. KULANDAGAN CH ETTIAR, CITED SUPRA :- (I) CIT V TORQOUISE INVESTMENT AND FINANCE LTD. 300 ITR 1 (SC) (II) DCIT V MIDEAST INDIA LTD. 28 SOT 395 (DE) (III) MS POOJA BHATT V DCIT 26 SOT 574 (MUM) (IV) CIT V ESSAR OIL (ITA. NO. 135 OF2008) BORN. THE FACTS OF ASSESSEES CASE ARE COMPLETELY DIFFERE NT SET OF FACTS THAN THE DECISION OF HONBLE SUPREME COURT IN THE C ASE OF CIT VS. P.V.A.L. KULANDAGAN CHETTIAR, CITED SUPRA. THE FAC TS OF THAT CASE ARE NOT RELEVANT TO THE ASSESSEES CASE. IN THAT C ASE, ASSESSEE SOUGHT A RELIEF UNDER THE DTAA BETWEEN THE INDIA AN D MALAYSIA. IN THAT CASE, THE HON'BLE SUPREME COURT HELD THAT IT WAS A CASE OF DUAL RESIDENCY. THE HON'BLE SUPREME COURTS CONCLU SION RESTS ON THE FACT THAT PERSONAL AND ECONOMIC RELATIONS OF TH E ASSESSEE IN RELATION TO CAPITAL ASSET WERE FAR CLOSER IN THE ST ATE OF MALAYSIA THAN IN INDIA AND IN THESE FACTS, THE RESIDENCE OF INDIA BECAME IRRELEVANT. THE ASSESSEE WAS NOT HAVING PERMANENT ESTABLISHMENT IN INDIA IN RESPECT OF THAT SOURCE OF INCOME. ON T HE ASPECT AND SCOPE OF THE EXPRESSION MAY BE TAXED, HON'BLE SUP REME COURT HAD NOT EXPRESSED ANY OPINION. THEREFORE, THE INCO MES DERIVED FROM RUBBER PLANTATIONS OF MALAYSIA WERE HELD TO BE NOT ASSESSABLE IN INDIA. SIMILARLY, THE CAPITAL GAIN ARISING ON T HE SALE OF IMMOVABLE PROPERTY IN MALAYSIA WAS HELD TO BE NOT A SSESSABLE INCOME IN INDIA AND BUSINESS INCOME FOR NOT HAVING PERMANENT ESTABLISHMENT IN INDIA. THE INCOME DERIVED FROM BU SINESS IN MALAYSIA NOT ASSESSABLE IN INDIA. THUS, THE FACTS OF THAT CASE ARE COMPLETELY AT VARIANCE TO THE FACTS OF ASSESSEES C ASE. 21.3 IN THE CASE OF CIT VS. S.R.M. FIRM & OTHERS 208 ITR 400, THE SUBJECT MATTER WAS TAXABILITY AND COMPUTATION O F INCOME DEPENDING UPON THE AGREEMENT ENTERED INTO BETWEEN T HE GOVERNMENT OF INDIA AND GOVERNMENT OF MALAYSIA FOR AVOIDANCE OF DOUBLE TAXATION. INCOME FROM RUBBER ESTATE IN MALA YSIA AND THERE WAS NO SEPARATE ESTABLISHMENT MAINTAINED IN INDIA I N RESPECT OF THE RUBBER ESTATE IN MALAYSIA. THUS, FACTS OF THAT CAS E ARE ALSO AT VARIANCE TO THE FACTS OF ASSESSEES CASE. 21.4 IN THE CASE OF L.G. CABLE VS. DDIT(INTERNATION AL TAXATION) REPORTED IN 314 ITR (AT) 301 (DELHI), THE FACTS ARE DIFFERENT. IN THAT CASE, THE ASSESSEE WAS A NON-RESIDENT COMPANY OF KOREA. THE ASSESSEE (NON-RESIDENT) ENTERED INTO TWO CONTRACTS WITH POWER GRID CORPORATION OF INDIA, ONE FOR ONSHORE EXCAVATION OF FIBRE OPTICS PROJECT AND SECOND FOR OFFSHORE SUPPLY OF EQUIPMENT . THE INCOME FOR ONSHORE WAS OFFERED FOR TAX. THE CONTRACT FOR OFFSHORE SUPPLY OF EQUIPMENT WAS CARRIED OUT IN KOREA. THE BILL OF LA DING WAS ISSUED ITA NOS.213-215 /MDS /2010 23 IN KOREA IN FAVOUR OF POWER GRID CORPORATION OF IND IA. THE PAYMENTS WERE REMITTED DIRECTLY TO KOREA THROUGH AN IRRECOVERABLE LETTER OF CREDIT. IN THAT SITUATION, IT WAS HELD T HAT NO PART OF INCOME ARISING FROM SUPPLY OF OFFSHORE EQUIPMENT WAS ASSES SABLE IN INDIA. THUS, FACTS OF THE CASE ARE COMPLETELY AT VARIANCE TO THE FACTS OF ASSESSEES CASE. 21.5 IN THE CASE OF MANPREET SINGH GAMBHIR VS. DCIT 119 TTJ 615, THE ISSUES AND FACTS ARE COMPLETELY DIFFERENT IN COMPARISON TO ASSESSEES CASE. IN THAT CASE, ISSUE WAS OF SALARY EARNED IN USA AND ALSO IN INDIA AND ISSUE AS TAX CREDIT WHICH WAS DECIDED AS UNDER :- WE ARE THEREFORE OF THE OPINION THAT THE ASSESSEE CAN GET ONLY PROPORTIONATE TAX CREDIT WHICH WAS RIGHTLY COM PUTED BY THE ASSESSING OFFICER. AS REGARDS CONTENTION OF THE LEARNED DR THAT THE LEARNED CIT(A) WAS NOT JUSTIFIED IN GRA NTING CREDIT OF TAX ALSO FOR STATE INCOME-TAX, WE ARE IN AGREEMENT WITH HIS SUBMISSION. THOUGH THE APPEAL IS NOT FILED BY THE REVENUE, A RESPONDENT CAN SUPPORT THE ORDER APPEALE D AGAINST ON ANY OF THE GROUND DECIDED AGAINST HIM IN TERMS OF RULE 27 OF THE INCOMETAX APPELLATE TRIBUNAL) RULES, 1963. REFERRING TO ARTICLE 2, THE TAXES COVERED UNDER THE OT M ARE IN RESPECT OF TAXES PAID IN UNITED STATES ONLY FOR FEDERAL INCOME-TAX IMPOSED BY INTERNAL REVENUE CODE AND NOT THE STATE INCOME-TAX. TO THIS EXTENT THE FINDING OF THE LEARNED CIT(A) IS NOT IN ACCORDANCE WITH THE TREATY PROVIS ION. WE, THEREFORE, RESTORE THE ORDER OF THE ASSESSING OFFIC ER IN THIS REGARD. THUS, THERE IS NO COMPARISON OF FACTS AND ISSUE IN VOLVED OF ASSESSEES CASE. IN OUR CONSIDERED VIEW, WE FIND N O MERITS IN THE ASSESSEES APPEAL ON THIS ISSUE. 22. IN THE RESULT, THIS GROUND OF APPEAL INVOLVED I N ALL THE THREE APPEALS STANDS DISMISSED. ALL THESE THREE APPEALS STAND DISMISSED. 13. INSOFAR AS THE CASE LAWS RELIED ON BY THE LEARN ED COUNSEL FOR THE ASSESSEE, THE DELHI BENCH OF THE TRIBUNAL H AS ALREADY CONSIDERED ALL THE CASE LAWS IN THIS CONNECTION. R ESPECTFULLY FOLLOWING THE ABOVE DECISION, WE REVERSE THE ORDER PASSED BY ITA NOS.213-215 /MDS /2010 24 THE LEARNED CIT(APPEALS) AND UPHOLD THE ORDER PASSE D BY THE ASSESSING OFFICER. THEREFORE, THIS GROUND OF APPEAL RAISED BY THE REVENUE IS ALLOWED. 14. THE NEXT GROUND OF APPEAL RELATES TO THE TAXABILITY OF INCOME UNDER SECTION 244A OF THE ACT . THIS ISSUE WAS NOT DISCUSSED BY THE ASSESSING OFFICER IN HIS ORDER . HOWEVER, IT WAS SUBMITTED BY THE ASSESSEE BEFORE THE CIT(APP EALS) THAT THE ASSESSING OFFICER HAS NOT GRANTED INTEREST ON I NTEREST DUE AND CONSEQUENTLY INTEREST HAS BEEN GRANTED AT ` 68,73,774/- AS AGAINST ` 94,99,482/-. ON THE BASIS OF THE SUBMISSIONS MADE BY THE ASSESSEE THE LEARNED CIT(APPEALS) DIREC TED THE ASSESSING OFFICER TO ALLOW THE INTEREST ON INTEREST . 15. AGAINST THAT THE REVENUE HAS COME UP IN APPEAL BEFORE US. THE LEARNED DR HAS RELIED ON THE DECISION OF T HE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT V. WH EELS INDIA LTD. IN TAX CASE (APPEAL) NOS. 76 & 77 OF 2008 DATE D 27-04- 2011. 16. ON THE OTHER HAND, THE LEARNED COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT THE ASSESSING OFFICER IS ADOPTIN G TWO DIFFERENT METHODS WHILE CALCULATING THE TAX, I.E IN TEREST ON TAX RATE FOR THE ASSESSEE ADOPTING A DIFFERENT METHOD A ND SO FAR ITA NOS.213-215 /MDS /2010 25 AS REFUND IS CONCERNED THE ASSESSING OFFICER IS ADO PTING ANOTHER METHOD. THE LEARNED COUNSEL FOR THE ASSESSE E RELIED ON THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF SANDVIK ASIA LIMITED V. CIT (280 ITR 643). 17. WE HAVE HEARD BOTH THE SIDES, PERUSED THE RECOR DS AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. THERE IS NOTHING ON RECORD TO VERIFY HOW THE ASSESSING OFFIC ER AND THE LEARNED CIT(APPEALS) CALCULATED THE INTEREST. RELE VANT MATERIAL FACTS ARE NOT AVAILABLE ON RECORD TO DECID E THIS ISSUE. WE THEREFORE DIRECT THE ASSESSING OFFICER TO EXAMIN E THE ENTIRE FACTS AND DECIDE THE ISSUE AFRESH KEEPING IN VIEW T HE DECISIONS RELIED ON BY BOTH THE SIDES, AFTER PROVIDING REASON ABLE OPPORTUNITY TO THE ASSESSEE OF BEING HEARD. 18. IN THE CIRCUMSTANCES, ITA NO. 213/MDS/2010 FILE D BY THE REVENUE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 19. ITA NO. 214/MDS/2010: IN THIS APPEAL THE ONLY ISSUE INVOLVED RELATES TO SECTION 244A. THIS ISSUE HAS ALREADY BEEN REMITTED BACK TO THE ASSESSING OFFICER IN THE APPEAL IN ITA NO. 213/MDS/2010, ABOVE. FOR THE REASONS DISCU SSED THEREIN, WE DIRECT THE ASSESSING OFFICER TO DECIDE THIS ISSUE ON THE SAME LINES. ITA NOS.213-215 /MDS /2010 26 20. IN THE CIRCUMSTANCES, THE APPEAL FILED BY THE R EVENUE IS THEREFORE ALLOWED FOR STATISTICAL PURPOSES. 21. ITA NO. 215/MDS/2010: GROUNDS 2, 3 AND 4 RELATE TO PROVISION OF BAD AND DOUBTFUL DEBTS. DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER OB SERVED THAT FROM THE COMPUTATION OF THE STATEMENT THAT THE ASSESSEE HAD ADDED BACK A SUM OF ` 4,28,73,068/- BEING THE PROVISION FOR BAD AND DOUBTFUL DEBTS TO THE PROFIT & LOSS ACC OUNT. HOWEVER, IN THE SAID COMPUTATION THE ASSESSEE HAS C LAIMED A SUM OF ` 7,59,24,503/- BEING BAD DEBTS WRITTEN OFF IN EXCES S OF CREDIT BALANCE IN PROVISION FOR BAD AND DOUBTFUL DEBTS MADE UNDER SECTION 36(1)(VIIA) OF THE ACT. THE ASSESSIN G OFFICER AFTER CALLING FOR THE EXPLANATION OF THE ASSESSEE D ISALLOWED THE SAME. 22. ON BEING AGGRIEVED, THE ASSESSEE CARRIED THE MA TTER BEFORE THE CIT(APPEALS). BEFORE THE LEARNED CIT(APP EALS) THE ASSESSEE HAS RELIED ON VARIOUS CASE LAWS, VIZ. I) SOUTH INDIAN BANK LTD. V. CIT (262 ITR 579) (KER ) II)DHANALAKSHMI BANK LTD. V. CIT [(131 TAXMAN 774 (KER)]. III) DCIT V. CATHOLIC SYRIAN BANK LTD. (88 ITD SB COC H) IV) ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 200 3-04 IN ITA NO. 93/MDS/2007 DT. 14.12.2007. ITA NOS.213-215 /MDS /2010 27 THE LEARNED CIT(APPEALS) AFTER CONSIDERING THE SUBM ISSIONS OF THE ASSESSEE ALLOWED THE GROUNDS OF APPEAL RAISED B Y THE ASSESSEE BY OBSERVING AS UNDER : 2.3 I HAVE CAREFULLY CONSIDERED VARIOUS SUBMISSIONS OF THE LEARNED AR AND PERUSED THE FACTS PERTAINING TO THIS ISSUE. THE ISSUE OF ARRIVING AT THE CREDIT BALANCE IN THE PROVISION ACCOUNT HAS BEEN EXPLAINED IN THE ORDER OF LEARNED CIT(A) FOR THE ASSESSMENT YEAR 2003- 04, WHEREIN IT HAS BEEN HELD AS UNDER: I AM OF THE CONSIDERED VIEW THAT THE AO HAD CHOSEN TO ALLOW CLAIM OF DEDUCTION FOR BAD DEBT BASED ON THE DECISION OF JURISDICTIONAL ITAT IN CASE OF KARUR VYSYS BANK (SUPRA) AND BASED ON WHICH THE APPELLANT WAS GRANTED DEDUCTION IN EARLIER YEARS. ON THER SAME FACTS, THE CHENNAI TRIBUNAL HAS DECIDED THE ISSUEIN FAVOUR OF THE APPELLANT FOR ASSESSMENT YEAR 1999-2000 IN ITA NO. 421/MDS/2003 VIDE ORDER DATED 30-0-2006. THERE BEING NO CHANGE OF FACTS, THE RATIO OF THE SAID DECISION IS REQUIRED TO BE APPLIED IN THE CURRENT YEAR ALSO. THE DECISION OF THE SPECIAL BENCH, COCHIN IN THE CASE OF CATHOLIC SYRIAN BANK (SUPRA) ALSO SUPPORT THE CONTENTIONS OF THE APPELLANT. THEREFORE, AS CONTENDED BY THE APPELLANT, THE DEDUCTION UNDER SECTION 36(1)(VII) IS REQUIRED TO BE WORKED OUT BY FIRST ITA NOS.213-215 /MDS /2010 28 ARRIVING AT THE BALANCE IN THE PROVISION FOR BAD AND DOUBTFUL DEBT CONSISTING SOLELY OF RURAL BRANCHES. BAD DEBT WRITTEN OFF RELATING TO RURAL BRANCHES HAVE TO BE ALLOWED TO THE EXTENT IT EXCEEDED THE CREDIT BALANCE. AS FAR AS NON RURAL BAD DEBTS ARE CONCERNED, THE SAME HAVE TO BE ALLOWED IN FULL. 2.4 THIS DECISION WAS FOLLOWED BY MY LEARNED PREDECESSOR FOR THE ASSESSMENT YEARS 2004-05 AND 2005-06. AS HELD BY MY LEARNED PREDECESSORS, THE CREDIT BALANCE HAS TO BE WORKED OUT BY CONSIDERING THE BALANCE IN THE PROVISION FOR BAD AND DOUBTFUL DEBT ACCOUNT CONSISTING SOLELY OF RURAL BRANCHES. IN RESPECT OF BAD DEBTS WRITTEN OFF RELATING TO NON RURAL BRANCHES THE JURISDICTIONAL ITAT IN APPELLANTS OWN CASE CITED ABOVE HAD HELD THAT DEBTS ACTUALLY WRITTEN OFF WHICH DO NOT ARISE OUT OF RURAL ADVANCES ARE NOT AFFECTED BY THE PROVISO TO SECTION 36(1)(VII)A. RESPECTFULLY FOLLOWING THE SAID DECISION, I HOLD THAT THE BAD DEBTS WRITTEN OFF RELATING TO NON RURAL ADVANCES HAS TO BE ALLOWED IN FULL. ACCORDINGLY, THE AO IS DIRECTED TO ALLOW BAD DEBTS WRITTEN OFF IN RESPECT OF NON RURAL BRANCHES SEPARATELY. WITH REGARD TO WRITE OFF RELATING TO RURAL BRANCHES, THE AO IS DIRECTED TO WORK OUT THE CREDIT BALANCE PERTAINING TO PROVISION FOR BAD AND ITA NOS.213-215 /MDS /2010 29 DOUBTFUL DEBTS RELATING TO RURAL BRANCHES. THE DEDUCTION UNDER SECTION 36(1)(VII) IN RESPECT OF RURAL BRANCHES WILL BE ALLOWED IF IT EXCEEDS THE CREDIT BALANCE IN THE PROVISION ACCOUNT UNDER SECTION 36(1)(VIIA) COMPUTED IN THE MANNER DETAILED EARLIER. THE APPELLANT SUCCEEDS PARTLY ON THIS GROUND. 23. ON BEING AGGRIEVED, THE REVENUE HAS CARRIED THE MATTER BEFORE THE TRIBUNAL. THE LEARNED DR SUPPORTED THE ORDER PASSED BY THE ASSESSING OFFICER. ON THE OTHER HAND , THE LEARNED COUNSEL FOR THE ASSESSEE SUPPORTED THE ORDE R PASSED BY THE LEARNED CIT(APPEALS). 24. WE HAVE HEARD BOTH THE SIDES, PERUSED THE RECOR DS AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. THE LEARNED CIT(APPEALS) HAS ONLY FOLLOWED THE ORDE R OF THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE ASSESSM ENT YEAR 2003-04 IN ITA NO. 93/MDS/2007 DATED 14-12-2007. W E FIND NO INFIRMITY IN THE ORDER PASSED BY THE LEARNED CIT (APPEALS). THEREFORE, THIS GROUND OF APPEAL RAISED BY THE REVE NUE IS DISMISSED. 25. THE NEXT GROUND OF APPEAL (GROUND NOS. 5 & 6) R ELATES TO LOSS OF REVALUATION OF ASSETS. DURING THE COURS E OF THE ITA NOS.213-215 /MDS /2010 30 ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER OBSERV ED AS UNDER : 5. THE ASSESSEE HAD REDUCED ` 27,76,08,025/- FROM THE NET PROFIT AS PER P&L A/C CLAIMING AS LOSS ON REVALUATION OF INVESTMENTS BEING STOCK IN TRADE AS PER ANNEXURE. IN THE ANNEXURE THEY PRODUCED THE PARTICULARS OF SECURITIES AND THEY CLASSIFIED ALL THESE SECURITIES UNDER THE HEAD INVESTMENTS. THE ASSESSEE WAS ASKED TO EXPLAIN WHY THIS LOSS ON REVALUATION OF INVESTMENTS SHOULD NOT BE ADDED TO THE TOTAL INCOME OF THE ASSESSEE FOR THE REASONS MENTIONED IN THE ASSESSMENT ORDER FOR THE ASSESSMENT YEAR 1996-97 WHICH IS FURTHER CONFIRMED BY THE HONOURABLE CIT(A) IN HIS ORDER DATED 15/11/2000 REFERRING THE DECISION IN INDIAN BANK CASE IN ITA NO. 71/00-01 OF 19/9/2000 FOR THE ASSESSMENT YEAR 1993-94. THE ASSESSEE VIDE ITS REPLY RELIED ON VARIOUS JUDICIAL PRONOUNCEMENTS OF HONOURABLE COURTS. FURTHER IN ITAT ALSO DECIDED IN FAVOUR OF THE ASSESSEE. BUT THIS YEAR THE ASSESSEE BANK HAD KEPT THEIR PORTION OF THEIR INVESTMENTS AS HELD TO MATURITY WHICH IS RELATIVELY LONG TERM INVESTMENT WHICH MAY NOT BE CONSIDERED AS STOCK IN TRADE. NOTWITHSTANDING WITH THE ABOVE, AND BY GIVING DUE RESPECT OF THE ABOVE DECISIONS, I PROPOSE TO ITA NOS.213-215 /MDS /2010 31 DISALLOW THE LOSS ON REVALUATION OF INVESTMENT SINCE IT IS LEARNT THAT THE ISSUE HAS BEEN TAKEN BY THE DEPARTMENT IN THE HONOURABLE MADRAS HIGH COURT AND THE ISSUE IS NOT YET DECIDED. THEREFORE ` 27,76,08,025/- IS DISALLOWED AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE. 26. THE ASSESSEE CARRIED THE MATTER BEFORE THE CIT(APPEALS). BEFORE THE LEARNED CIT(APPEALS) THE A SSESSEE HAS RELIED ON THE DECISIONS IN THE CASES OF UCO BANK V. CIT (240 ITR 355) (SC) AND CIT V. CITY UNION BANK LTD. ( 292=1 ITR 144) (MAD). THE ASSESSEE ALSO RELIED ON THE DE CISION IN THE ASSESSEES OWN CASE IN ITA NO. 239/MDS/2001 DAT ED 7-1- 2005 FOR THE ASSESSMENT YEAR 1994-95. THE LEARNED CIT(APPEALS) AFTER CONSIDERING ALL THE DECISIONS OB SERVED AS UNDER : 5.2 I HAVE CAREFULLY CONSIDERED THE FACTS PERTAINING TO THE CASE ON THE VARIOUS SUBMISSIONS MADE BY THE LEARNED AR. I FIND THAT THIS ISSUE HAS BEEN ELABORATELY DISCUSSED BY MY LEARNED PREDECESSOR IN THE ASSESSMENT YEAR 2005-06, WHERE AFTER CONSIDERING THE VARIOUS JUDICIAL PRECEDENTS A ND THE FACTS OF THE CASE THE ISSUE HAD BEEN DECIDED IN FAVOUR OF THE APPELLANT. THE FACTS BEING IDENTICAL , FOLLOWING THE VARIOUS JUDICIAL PRECEDENTS, I AM OF THE OPINION THAT THE APPELLANT IS ENTITLED TO ITA NOS.213-215 /MDS /2010 32 DEPRECIATION ON INVESTMENTS AMOUNTING TO ` 27,76,08,025/-. THE AO IS DIRECTED TO ALLOW THIS CLAIM OF THE APPELLANT. THE APPELLANT SUCCEEDS ON THIS GROUND. 27. BEING AGGRIEVED, THE REVENUE HAS CARRIED THE MAT TER BEFORE THE TRIBUNAL. THE LEARNED DR STRONGLY SUPP ORTED THE ORDER PASSED BY THE ASSESSING OFFICER. HE RELIED O N THE DECISION OF THE KARNATAKA HIGH COURT IN THE CASE OF CIT V. ING VYSYA BANK LTD. (2012) 208 TAXMAN 511. 29. ON THE OTHER HAND, THE LEARNED COUNSEL FOR THE ASSESSEE PLACED RELIED ON THE DECISION IN THE CASE OF THE AS SESSEES OWN CASE IN ITA NOS. 231 TO 237 AND 239 TO 242/MDS/2001 AND 907/MDS/98 DATED 30-06-2011. IT WAS ARGUED THAT TH E ASSESSEE HAS BEEN CONSISTENTLY FOLLOWING THE METHOD AND CANNOT BE DISTURBED. 28. WE HAVE HEARD BOTH THE SIDES, PERUSED THE RECOR DS AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. THE TRIBUNAL IN THE ASSESSEES OWN CASE HAS CONSIDERED THE ISSUE AND FOLLOWING THE DECISION OF THE HONBLE SUPREME C OURT IN THE CASE OF UCO BANK V. CIT (SUPRA) ALLOWED THE CLAIM OF THE ASSESSEE. THE RELEVANT PORTION OF THE ORDER OF THE TRIBUNAL IS EXTRACTED HEREUNDER : ITA NOS.213-215 /MDS /2010 33 11. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. IN SO FAR AS INVESTMENTS HELD AS 'CURR ENT', THERE IS NO DISPUTE AMONG BOTH PARTIES THAT IT HAS TO BE VAL UED AT LOWER OF COST OR MARKET PRICE. THE QUESTION IN DISPUTE IS , THEREFORE, REGARDING VALUATION OF INVESTMENT HELD UNDER 'PERMA NENT' CATEGORY. AS PER LEARNED D.R., SUCH 'PERMANENT' CAT EGORY WAS TO MAINTAIN SLR REQUIREMENTS AND IT HAD TO BE VALUE D AT COST ONLY. THOUGH IN THE CASE OF UCO BANK (SUPRA), HON'B LE APEX COURT WAS DEALING WITH ASSESSMENT YEAR 1982- 83, WHE N THE RBI CIRCULAR REGARDING BIFURCATION OF INVESTMENTS I NTO 'PERMANENT' AND 'CURRENT' WAS NOT THERE, WE FIND TH AT IN SUBSEQUENT DECISIONS OF VARIOUS HIGH COURTS, INCLUD ING THAT OF KERALA HIGH COURT IN THE CASE OF NEDUNGADI BANK LTD . (SUPRA) AND THAT OF HON'BLE KARNATAKA HIGH COURT IN THE CAS E OF CIT V. KARNATAKA STATE CO- OPERATIVE APEX BANK (251 ITR 194) , NO SUCH BIFURCATION WAS ATTEMPTED BETWEEN 'PERMANENT' AND 'CURRENT' CATEGORY FOR VALUATION. THE COURTS HAVE C ONSISTENTLY HELD THAT INVESTMENT HELD BY BANK HAD TO BE VALUED AT LOWER OF COST OR MARKET PRICE. A BANK BY VIRTUE OF BANKING R EGULATION ACT, HAS TO MAINTAIN ITS ACCOUNTS AS PER SECTION 29 AND 30 THEREOF AND SCHEDULE III MENTIONED THEREUNDER, GIVE S THE ASSESSEE AN OPTION TO GIVE THE VALUE OF INVESTMENT AT COST OR MARKET PRICE. HENCE, IN OUR OPINION, DIFFERENTIATIO N ATTEMPTED BY LD. CIT(APPEALS) BETWEEN 'PERMANENT' AND 'CURREN T' CATEGORIES OF INVESTMENTS WAS NOT WARRANTED. IN TAK ING THIS VIEW, WE ARE FORTIFIED BY THE DECISION OF CO-ORDINA TE BENCH OF THIS TRIBUNAL IN THE CASE OF BHARAT OVERSEAS BANK L TD. (SUPRA). ON THE SAME ISSUE, AFTER CONSIDERING ARGUMENTS OF B OTH PARTIES, THE TRIBUNAL AT PARA 11 HELD AS UNDER:- '11. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND RELE VANT MATERIAL ON RECORD, WE FIND FORCE IN THE CONTENTION S OF THE LEARNED AUTHORIZED REPRESENTATIVE OF THE ASSESSEE. THE HON'BLE SUPREME COURT IN THE CASE OF UNITED COMMERC IAL BANK V. CIT SUPRA, HAD CLEARLY HELD THAT EVEN IF TH E SECURITIES ARE VALUED AT COST IN THE BALANCE SHEET IN ACCORDANCE WITH THE STATUTORY PROVISION, THIS ACTIO N WOULD NOT DISENTITLE THE ASSESSEE BY SUBMITTING THE INCOME-TAX RETURNS ON THE REAL TAXABLE INCOME IN ITA NOS.213-215 /MDS /2010 34 ACCORDANCE WITH THE METHOD OF ACCOUNTING ADOPTED BY THE ASSESSEE CONSISTENTLY AND REGULARLY. THE COURT FURT HER APPROVED THAT IF SECURITIES WERE VALUED ON COST OR MARKET VALUE WHICHEVER IS LOWER, THE SAME SHOULD BE ACCEPT ED BY THE ASSESSING AUTHORITIES IF THE SAME METHOD HAS BE EN CONSISTENTLY FOLLOWED. BEFORE US THE REVENUE HAS NO T DISPUTED THAT THE ASSESSEE HAS NOT ADOPTED THE SAME METHOD OF ACCOUNTING CONSISTENTLY. WE FIND THAT EVE N THE RBI HAD ALLOWED DISCRETION TO THE BANKS TO VALUE EV EN THE PERMANENT CATEGORY OF SECURITIES ON THE COST OR MAR KET VALUE. RESPECTFULLY FOLLOWING THE DECISION OF THE H ON'BLE SUPREME COURT, WE DECIDE THIS ISSUE IN FAVOUR OF TH E ASSESSEE, SET ASIDE THE ORDER OF THE LEARNED CIT(AP PEALS) AND DIRECT THE ASSESSING OFFICER TO ALLOW DEPRECIAT ION ON SECURITIES WHICH HAS BEEN CLAIMED ON THE BASIS OF M ARKET VALUE OF THE SECURITIES.' WE ARE, THEREFORE, OF THE OPINION THAT ASSESSEE HA S TO SUCCEED IN THIS GROUND. ITS INVESTMENTS CAN BE VALUED AT COST OR MA RKET VALUE WHICHEVER IS LOWER AND DEPRECIATION ARISING CAN BE DEDUCTED FROM ITS PROFIT BEFORE ARRIVING AT ITS TOTAL INCOME. SIMILAR LY, IF SUCH VALUATION RESULTS IN APPRECIATION, THE PROFITS WOULD ALSO GO TO INCREASE ITS TOTAL INCOME. THE ISSUE REGARDING DEPRECIATION ON SECURIT IES IS DECIDED IN FAVOUR OF ASSESSEE. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL IN THE ASSESSEES OWN CASE, THIS GROUND OF APPEAL RAISED B Y THE REVENUE IS THEREFORE DISMISSED. 29. GROUND NOS. 7 & 8 RELATE TO DITR RELIEF. THIS ISSUE HAS ALREADY BEEN DEALT WITH ELABORATELY IN ITA NO. 213/ MDS/2010 ABOVE. FOR THE REASONS STATED THEREIN, THESE GROUN DS RAISED BY THE REVENUE ARE ALLOWED. ITA NOS.213-215 /MDS /2010 35 30. IN THE RESULT, THE REVENUES APPEALS IN ITA NOS . 213 & 215/MDS/2010 ARE PARTLY ALLOWED FOR STATISTICAL PUR POSES AND THE APPEAL IN ITA NO. 214/MDS/2010 IS ALLOWED FOR S TATISTICAL PURPOSES ORDER PRONOUNCED ON TUESDAY, THE 30 TH OF OCTOBER, 2012, AT CHENNAI. SD/- SD/- (DR. O. K. NARAYANAN) ( V.DURGA RAO ) VICE PRESIDENT JUDICIAL MEMBER CHENNAI, DATED THE 30 TH OCTOBER, 2012 H. COPY TO: ASSESSEE/AO/CIT (A)/CIT/D.R./GUARD FILE