M/s.Kenton Leisure services P.Ltd, Trivandrum V. DCIT, Trivandrum

ITA 686/COCH/2010

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 64994 (ITAT-COCHIN)
• Duration Of Justice: 1 year(s) 11 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-11-2012
• Appeal Filed By: Assessee
• Bench Allotted: DB
• Next Hearing Date: 13-09-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 17-12-2010
• Court: TRIBUNAL
• Department Lawyers: S SREENIVSAU KOLLIPAKA
• Assessee Lawyers: PREETHA S NAIR
• Keywords: Business income; Double taxation relief; Opportunity of being heard; Permanent establishment
• Section: 90

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE S/SHRI N.R.S.GANESAN, JM AND B.R.BASKAR AN, AM I.T.A. NO. 686/COCH/2010 ASSESSMENT YEAR : 2007-08 M/S. KENTON LEISURE SERVICES (P) LTD., TCS EXECUTIVE HOSTEL, ATTINKUZHY, KAZHAKOOTTOM, THIRUVANANTHAPURAM. [PAN: AABCK 1608G] VS. THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-1(1), TRIVANDRUM. (ASSESSEE -APPELLANT) (REVENUE-RESP ONDENT) ASSESSEE BY SMT. PREETHA S. NAIR, ADV. REVENUE BY SHRI S. SREENIVSAU KOLLIPAKA, JR. DR DATE OF HEARING 13/09/2012 DATE OF PRONOUNCEMENT 20/11/2012 O R D E R PER B.R.BASKARAN, ACCOUNTANT MEMBER: THE APPEAL OF THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 06-09-2010 PASSED BY THE LD. CIT(A)-I, TRIVANDRUM AND IT RELATES TO T HE ASSESSMENT YEAR 2007-08. 2. THE GROUNDS OF APPEAL URGED BY THE ASSESSEE GIVE RISE TO THE FOLLOWING TWO ISSUES:- A) WHETHER THE LD. CIT(A) IS JUSTIFIED IN CONFIRMI NG THE ACTION OF THE ASSESSING OFFICER IN BIFURCATING A PART OF ITS BUSINESS INCO ME AS INCOME FROM HOUSE PROPERTY. B) WHETHER THE LD. CIT(A) IS JUSTIFIED IN CONFIRMI NG THE DISALLOWANCE MADE U/S. 40(A)(I) OF THE ACT. I.T.A. NO.686/COCH/2010 2 3. THE FACTS RELATING TO THE CASE ARE STATED IN BRI EF. THE ASSESSEE-COMPANY IS ENGAGED IN THE BUSINESS OF PROVIDING HOSPITALITY SE RVICES TO THE TRAINEES RECRUITED BY M/S. TATA SONS LTD. AND IN THIS REGARD THE ASSESSEE ENTERED INTO A LEASE AGREEMENT WITH M/S. TATA SONS LTD. THE ASSESSEE PROVIDED CATERING SERVICES ALSO. THE ASSESSEE OFFERED THE ENTIRE LEASE RENTAL INCOME AS ITS BUSINESS INCO ME, ON THE REASONING THAT IT IS PROVIDING COMPREHENSIVE SERVICES LIKE LETTING OF HO STEL ROOMS, PROVIDING FOOD, LAUNDRY SERVICES, MAINTAINING AND RUNNING OF SHOPS IN THE B UILDING ETC. DURING THE COURSE OF ASSESSMENT PROCEEDING, THE ASSESSING OFFICER NOTICE D THAT THE RENTAL INCOME OFFERED BY THE ASSESSEE WAS BIFURCATED INTO HOUSE PROPERTY IN COME AND BUSINESS INCOME BY HIS PREDECESSORS SINCE THE ASSESSMENT YEAR 2003-04 ONWA RDS. ACCORDINGLY, THE AO ASSESSED 60% OF THE RENTAL RECEIPTS AS INCOME FROM HOUSE PROPERTY AND BALANCE AMOUNT AS INCOME FROM BUSINESS. THE ASSESSING OFFIC ER ALSO NOTICED THAT THE ASSESSEE HAS PAID A SUM OF RS. 23.56 LAKHS AS INTEREST ON EXT ERNAL COMMERCIAL BORROWINGS (ECB) DURING THE YEAR UNDER CONSIDERATION. IT WAS NOTICE D THAT THE LOAN UNDER ECB WAS BORROWED FROM THE MANAGING DIRECTOR OF THE COMPANY NAMED SHRI GEORGE M THOMAS, WHO HAPPENED TO BE A NRI RESIDING IN OMAN. THE ASS ESSEE HAD DEDUCTED TAX AT SOURCE ON THE ABOVE SAID INTEREST PAYMENT AT THE RATE OF 1 0%. HOWEVER, THE AO FELT THAT THE TAX AT SOURCE SHOULD HAVE BEEN DEDUCTED AT 30%, AS PER THE PROVISIONS OF SEC. 195 OF THE ACT. ON BEING QUESTIONED ABOUT THE SAID SHORTF ALL IN DEDUCTION OF TDS, THE ASSESSEE SUBMITTED THAT THE RECIPIENT OF INTEREST IS A RESID ENT OF SULTANATE OF OMAN AND AS PER THE DTAA AGREEMENT ENTERED INTO BY INDIA WITH SULTA NATE OF OMAN, THE RATE OF TAX ON SUCH INTEREST PAYMENTS SHALL NOT EXCEED 10%. ACCO RDINGLY, IT WAS SUBMITTED THAT TDS WAS ALSO DEDUCTED AT THE RATE OF 10% AS PER THE PRO VISIONS OF DTAA. HOWEVER, THE ASSESSING OFFICER TOOK THE VIEW THAT THE PROVISIONS OF DTAA SHALL NOT APPLY TO THE FACTS OF THE INSTANT CASE, AS THE RECIPIENT OF INTEREST W AS HAVING A PERMANENT ESTABLISHMENT IN INDIA. ACCORDINGLY, THE ASSESSING OFFICER DISAL LOWED A SUM OF RS. 15.70 LAKHS U/S 40(A)(I) OF THE ACT OUT OF THE TOTAL INTEREST PAYME NT OF RS.23.56 LAKHS. 4. THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LD. CIT(A). THE FIRST APPELLATE AUTHORITY CONFIRMED THE DECISION OF THE A SSESSING OFFICER IN SPLITTING THE RENTAL RECEIPTS INTO INCOME FROM HOUSE PROPERTY AND BUSINE SS INCOME AND FOR THAT PURPOSE, I.T.A. NO.686/COCH/2010 3 THE LD. CIT(A) RELIED ON THE DECISION OF HONBLE SU PREME COURT IN THE CASE OF SHAMBHU INVESTMENTS P. LTD. VS. CIT, (2003) 263 ITR 143 AND HONBLE KERALA HIGH COURT IN THE CASE OF ATTUKAL SHOPPING COMPLEX P. LTD. VS. CIT (2 003) 259 ITR 567. 5. WITH REGARD TO THE ISSUE OF SHORT DEDUCTION OF T AX AT SOURCE FROM INTEREST PAYMENTS, THE LD. CIT(A) TOOK AN ALTOGETHER DIFFERE NT VIEW, I.E., THE LD CIT(A) TOOK THE VIEW THAT THE PROVISIONS OF DTAA DID NOT OVERRIDE T HE RATES PRESCRIBED UNDER CHAPTER XVII RELATING TO TDS. THE LD CIT(A) NOTICED THAT T HE AO HAD ALLOWED 1/3 RD PORTION OF INTEREST EXPENDITURE CLAIM, I.E., INTEREST ATTRIBUT ABLE TO THE AMOUNT OF TDS DEDUCTED @ 10% AND HE HAD DISALLOWED 2/3 RD PORTION OF INTEREST CLAIM, I.E., INTEREST PERTAININ G TO THE DEFAULT PORTION OF 20%. HOWEVER, THE LD. CIT( A) TOOK THE VIEW THAT THE ASSESSING OFFICER WAS WRONG IN MAKING PROPORTIONATE ALLOWANCE /DISALLOWANCE AND ACCORDINGLY DIRECTED THE ASSESSING OFFICER TO DISALLOW THE ENTI RE INTEREST PAYMENT OF RS. 23.56 LAKHS. IN EFFECT, THE LD CIT(A) DID NOT ADDRESS THE PLANK OF THE AO, I.E., THE RECIPIENT OF INTEREST WAS HAVING A PERMANENT ESTABLISHMENT IN IN DIA AND HENCE THE PROVISIONS OF DTAA SHALL NOT APPLY TO HIM. AGGRIEVED BY THE ORDER OF THE LD. CIT(A), THE ASSESSEE IS IN APPEAL BEFORE US. 6. WE HAVE HEARD THE RIVAL CONTENTIONS AND CAREFULL Y PERUSED THE RECORD. THE COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSE E HAS BEEN AGITATING THE ISSUE OF BIFURCATION OF THE LEASE RENTAL RECEIPTS INTO INCOM E FROM HOUSE PROPERTY AND BUSINESS INCOME BEFORE THE TRIBUNAL SINCE ASST. YEAR 2004-05 ONWARDS. SHE SUBMITTED THAT THE ITAT, VIDE ITS ORDER DATED 30-12-2011, PASSED IN TH E ASSESSEES OWN CASE IN I.T.A. NOS. 171/COCH/2009 AND 291/COCH/2010 RELATING TO ASST. Y EAR 2004-05 AND 2006-07 HAS HELD THAT THERE IS NO SCOPE FOR SEGREGATION OF THE INCOME INTO TWO SEPARATE STREAMS AND THE ENTIRE INCOME, THE NET OF EXPENSES HAS TO BE TR EATED AS BUSINESS INCOME. THE LD A.R SUBMITTED THAT THERE IS NO CHANGE IN THE FACTS SURROUNDING THE INSTANT ISSUE DURING THE YEAR UNDER CONSIDERATION ALSO. ACCORDINGLY, TH E LD A.R SUBMITTED THAT THE DECISION RENDERED BY THE TRIBUNAL IN THE ASSESSEES OWN CASE IN THE EARLIER YEARS MAY BE FOLLOWED IN THE INSTANT YEAR ALSO. I.T.A. NO.686/COCH/2010 4 7. THE LD. DR DID NOT OBJECT TO THE FACTS PRESE NTED BY THE LD. AR. WE HAVE GONE THROUGH THE ORDER OF THE TRIBUNAL DATED 30-12-2011, REFERRED SUPRA. WE NOTICE THAT THE CO-ORDINATE BENCH OF THE TRIBUNAL HAS CONSIDERED TH E DECISIONS OF THE HONBLE KERALA HIGH COURT IN THE CASE OF ATTUKAL SHOPPING COMPLEX P. LTD. VS. CIT, (SUPRA) AND THE HONBLE SUPREME COURT IN THE CASE OF SHAMBHU INVEST MENTS P. LTD. VS. CIT, (SUPRA) AND AFTER CONSIDERING THE AGREEMENT ENTERED INTO BY THE PARTIES IN THIS REGARD, HAS COME TO THE CONCLUSION THAT THE ENTIRE INCOME NET O F EXPENSES HAS TO BE TREATED AS BUSINESS INCOME AS THE ASSESSEE CARRIES ON THE ACTI VITIES IN THE FORM OF A BUSINESS ORGANISATION. CONSISTENT WITH THE VIEW TAKEN THEREI N, WE ALSO HOLD THAT THE ENTIRE INCOME OF THE ASSESSEE HAS TO BE TREATED AS BUSINES S INCOME WITHOUT SPLITTING IT INTO INCOME FROM HOUSE PROPERTY AND BUSINESS INCOME. WE SET ASIDE THE ORDER OF THE LD. CIT(A) ON THIS ISSUE AND DIRECT THE ASSESSING OFFIC ER TO ASSESS THE ENTIRE RENTAL INCOME UNDER THE HEAD INCOME FROM BUSINESS. 8. THE NEXT ISSUE RELATES TO THE DISALLOWANCE OF I NTEREST EXPENSES U/S. 40(A)(I) OF THE ACT FOR SHORT DEDUCTION OF TDS. WE HAVE ALREAD Y STATED THAT THE ASSESSING OFFICER HAS HELD THAT THE PROVISIONS OF DTAA SHALL NOT APPL Y TO THE INSTANT CASE, AS THE RECIPIENT OF INTEREST HAD A PERMANENT ESTABLISHMENT IN THE IN STANT YEAR AND ACCORDINGLY MADE DISALLOWANCE U/S 40(A)(I) OF THE ACT FOR SHORT DEDU CTION OF TAX AT SOURCE FROM THE INTEREST PAYMENTS. WE HAVE ALSO NOTICED THAT THE LD. CIT(A) DID NOT ADDRESS THE SPECIFIC VIEW TAKEN BY THE ASSESSING OFFICER AND IN STEAD PROCEEDED TO CONFIRM THE DISALLOWANCE ON THE GROUND THAT THE PROVISIONS OF D TAA DID NOT OVERRIDE THE RATES PRESCRIBED UNDER CHAPER XVII OF THE ACT. IN THIS R EGARD, WE NOTICE THAT CBDT HAS ISSUED CIRCULAR ON THE ISSUE OF DEDUCTION OF TAX AT SOURCE U/S. 195 OF THE ACT, I.E., CIRCULAR NO. 728 DATED 30 TH OCTOBER, 1995 REPORTED IN 216 ITR STATUTE 141 AND IT READS AS UNDER: SUBJECT: DEDUCTION OF TAX AT SOURCE U/S. 195 OF T HE INCOME-TAX ACT, 1961 CORRECT RATES OF TAX APPLICABLE REGARDING. 1. IT HAS BEEN REPRESENTED TO THE BOARD THAT WHEN MAKING REMITTANCES OF THE NATURE OF ROYALTIES AND TECHNICAL FEES, TAX IS BEI NG DEDUCTED AT SOURCE AT THE RATES SPECIFIED IN THE FINANCE ACT OF THE RELEVANT YEAR, WITHOUT TAKING INTO I.T.A. NO.686/COCH/2010 5 ACCOUNT THE SPECIAL RATES FOR TAXATION OF SUCH INC OME PROVIDED FOR UNDER THE DOUBLE TAXATION AVOIDANCE AGREEMENT WITH THE COUNT RY CONCERNED. 2. THE EXPRESSION RATES IN FORCE HAS BEEN DEFINE D IN SECTION 2(37A) OF THE INCOME-TAX ACT. UNDER SUB-CLAUSE (III) OF SECTION 2(37A) FOR THE PURPOSES OF DEDUCTION OF TAX U/S. 195, THE EXPRESSION IS TO ME AN THE RATE OR RATES OF INCOME- TAX SPECIFIED IN THIS BEHALF IN THE FINANCE ACT IN THE RELEVANT YEAR OR THE RATES OF TAX SPECIFIED IN THE DOUBLE TAXATION AVOIDANCE AGR EEMENT ENTERED INTO BY THE CENTRAL GOVERNMENT WHICHEVER IS APPLICABLE BY VIRT UE OF THE PROVISIONS OF SECTION 90 OF THE INCOME-TAX ACT, 1961. 3. IT IS HEREBY CLARIFIED THAT IN VIEW OF THE PROV ISIONS OF SUB-SECTION (2) OF SECTION 90 OF THE ACT, IN THE CASE OF A REMITTANCE TO A CO UNTRY WITH WHICH A DOUBLE TAXATION AVOIDANCE AGREEMENT IS IN FORCE, TAX SHOU LD BE DEDUCTED AT THE RATE PRESCRIBED IN THE FINANCE ACT OF THE RELEVANT YEAR OR THE RATE PROVIDED IN HE DTAA WHICHEVER IS MORE BENEFICIAL TO THE ASSESSEE . THUS, WE NOTICE THAT THE VIEW EXPRESSED BY THE LD. CIT(A) IS AGAINST THE CLARIFICATION ISSUED BY THE CBDT IN THE CIRCULAR REFERRED ABOVE. THERE SHOULD NOT BE ANY DISPUTE THAT THE CIRCULARS ISSUED BY CBDT IS BINDING ON THE TAX AUTHORITIES. 9. AS ALREADY STATED, THE CRUX OF THE ISSUE IS WHETHER THE RECIPIENT OF INTEREST CAN BE SAID TO HAVE A PERMANENT ESTABLISHMENT IN INDIA, IN THE FACTS AND CIRCUMSTANCES OF THE CASE AND CONSEQUENTLY WHETHER THE RECIPIENT OF INTE REST CAN TAKE THE BENEFIT PROVIDED UNDER DTAA ENTERED WITH THE SULTANATE OF OMAN. THE LD. CIT(A) HAS FAILED TO ADDRESS THIS POINT IN HIS ORDER. ACCORDINGLY, WE ARE OF TH E VIEW THAT THE MATTER IS REQUIRED TO BE SET ASIDE TO HIS FILE IN ORDER TO ENABLE HIM TO EXA MINE THIS ISSUE AND RENDER HIS OPINION. ACCORDINGLY, WE SET ASIDE THE ORDER OF THE LD. CIT( A) ON THIS ISSUE AND RESTORE THE SAME TO HIS FILE WITH A DIRECTION TO EXAMINE THE FINDING S GIVEN BY THE ASSESSING OFFICER AND DECIDE THE SAME IN ACCORDANCE WITH LAW, AFTER AFFOR DING NECESSARY OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 10. DURING THE COURSE OF HEARING, THE LD. COUNSEL F OR THE ASSESSEE RELIED ON VARIOUS CASE LAW IN SUPPORT OF THE ACTION OF THE ASSESSEE. SINCE THE MATTER RELATING TO DISALLOWANCE U/S 40(A)(I) WAS SET ASIDE TO THE FILE OF THE LD. CIT(A), THE ASSESSEE IS FREE TO CITE ALL THOSE CASE LAW IN THE HEARING BEFORE TH E LD. CIT(A). I.T.A. NO.686/COCH/2010 6 11. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS TR EATED AS ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED ACCORDINGLY ON 20-11-2 012. SD/- SD/- (N.R.S.GANESAN) (B.R.BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: KOCHI DATED: 20TH NOVEMBER, 2012 GJ COPY TO: 1. M/S. KENTON LEISURE SERVICES (P) LTD., TCS EXECUT IVE HOSTEL, ATTINKUZHY, KAZHAKOOTTOM, THIRUVANANTHAPURAM. 2. THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-1( 1),TRIVANDRUM. 3. THE COMMISSIONER OF INCOME-TAX (APPEALS)-I, TRIV ANDRUM. 4.THE COMMISSIONER OF INCOME-TAX, TRIVANDRUM. 5. D.R., I.T.A.T., COCHIN BENCH, COCHIN. 6. GUARD FILE. BY ORDER (ASSISTANT REGISTRAR) I.T.A.T, COCHIN