2018 (10) TMI 2056 - AT - Income Tax

Taxability of salary income for services rendered outside India - scope of provisions of section 5(2) - Income deemed to accrue or arise in India - whether failure to submit TRC is a bar to the grant of benefits under DTAA? - HELD THAT - The facts of the case on hand are similar to that of the aforesaid case of Bholanath Pal 2012 (7) TMI 657 - ITAT BANGALORE and therefore the above findings are squarely applicable to the case on hand. The contention that the assessee did not furnish TRC and therefore it cannot be allowed the exemption is not correct. The furnishing of TRC is applicable only to cases where the benefits under the DTAA are claimed; as can be made out from a plain reading of Sec.90(1) - in the decision cited by the learned Departmental Representative Skaps Industries India Pvt. Ltd. 2018 (6) TMI 1276 - ITAT AHMEDABAD the Tribunal had held that absence of TRC cannot be a ground for denying the benefit of DTAA. It has only held that the assessee should furnish evidence for the claim of exemption. In the case on hand the assessee has furnished evidence of her stay abroad in the year under consideration before the AO and as the salary for services rendered did not accrue in India for that period of stay outside India that salary income is not taxable in India. We are inclined to agree with the assessee s contention that the finding of the CIT(Appeals) - 12 is based on application of sound principles to the facts of the assessee s case and no useful purpose would be served by remanding the case to the CIT(Appeals)-10 Bangalore as sought by DR. We hold that the addition made by the AO to the salary income of the assessee is incorrect - Decided in favour of assessee. Computing the assessee s Income from House Property - whether CIT(Appeals) has erred in not taking cognizance of the fact that the residential property was let out only for part of the year? - HELD THAT - AO has not discussed the addition in the body of the order of assessment. CIT(A)-12 Bangalore in order has examined the issue and held that the assessee did not furnish any evidence to show that the House Property was let out only for a part of the year under consideration and therefore sustained this addition. Before us also neither has any evidence in this regard been brought on record nor any arguments urged on this issue. In the absence of any evidence being put forth by the assessee find no merit in this ground raised by the assessee and consequently dismiss Ground No.12.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal include:

• Whether the Commissioner of Income Tax (Appeals)-10 had jurisdiction to entertain and decide the appeal when another Commissioner of Income Tax (Appeals)-12 had already passed a reasoned order on the same appeal for the same assessment year.
• Whether salary income earned by the assessee for services rendered outside India during an international assignment is taxable in India, particularly when the assessee qualifies as a Non-Resident under the Income Tax Act, 1961.
• The applicability of the provisions of Section 5(2) read with Section 15 of the Income Tax Act concerning the place of accrual of salary and the consequent taxability of salary income.
• Whether the absence of a Tax Residency Certificate (TRC) from the foreign country (USA) disentitles the assessee from claiming exemption of salary income earned abroad under domestic law or the India-USA Double Taxation Avoidance Agreement (DTAA).
• Whether the Assessing Officer and the CIT(Appeals)-10 were justified in taxing the entire salary income including that earned abroad, despite the assessee's claim of exemption.
• Whether the addition made by the Assessing Officer under the head 'Income from House Property' was justified, given the assessee's claim that the property was let out only for part of the year.
• The propriety of passing an ex-parte order by the CIT(Appeals)-10 without affording the assessee an opportunity of hearing.
• The validity of the attempt by CIT(Appeals)-12 to invalidate its own earlier order by invoking Section 154 of the Income Tax Act.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Jurisdiction of CIT(Appeals)-10 to pass order when CIT(Appeals)-12 had already passed order on same appeal

Legal Framework and Precedents: The Income Tax Act does not envisage two appellate orders on the same appeal by two different Commissioners of Income Tax (Appeals). Section 154 of the Act allows rectification of mistakes apparent from the record but does not confer power to nullify or invalidate an order.

Court's Reasoning: The Tribunal observed that the order passed by CIT(Appeals)-12 on 31.10.2017 was a reasoned and speaking order, duly considering the facts, submissions, and legal precedents. The subsequent ex-parte order passed by CIT(Appeals)-10 on 28.2.2018 was passed without jurisdiction since the earlier order was in existence and valid at that time. The attempt by CIT(Appeals)-12 to invalidate its own order by invoking Section 154 was held to be untenable because Section 154 is intended only for correction of mistakes apparent on the face of the record and not for recalling or nullifying orders.

Application of Law to Facts: The Tribunal held that there cannot be two appellate orders on the same appeal for the same assessment year simultaneously. The second order by CIT(Appeals)-10 was therefore invalid and liable to be quashed. The confusion was attributed to internal departmental miscommunication or administrative error, for which the assessee should not suffer.

Conclusion: The Tribunal quashed the ex-parte order of CIT(Appeals)-10 on grounds of non-maintainability and upheld the jurisdiction and validity of the order passed by CIT(Appeals)-12.

Issue 2: Taxability of salary income earned abroad by a Non-Resident assessee

Legal Framework and Precedents: Section 5(2) of the Income Tax Act provides that income accruing or arising outside India is taxable only if it is received or deemed to be received in India or accrues or arises in India. Section 15 provides that salary is taxable on accrual basis, i.e., where services are rendered. The India-USA DTAA provisions are relevant if benefits thereunder are claimed, which requires furnishing of a TRC under Section 90(1).

Judicial precedents relied upon include:

• DIT vs. Prahlad Vijendra Rao (Karnataka High Court)
• ITO vs. Bholanath Pal (ITAT Bangalore)
• CIT v Nippon (Calcutta High Court)
• CIT v Khambaty (Bombay High Court)
• Ranjit Kumar Bose v ITO (Calcutta ITAT)
• CIT v Avtar Singh Wadhwan (Bombay High Court)
• Sreenivas Kumar Sistla (AAR)

Court's Interpretation and Reasoning: The Tribunal noted that the assessee was a salaried employee deputed abroad (USA) by her employer and was a Non-Resident in India for the relevant year. The salary income for the period of services rendered abroad accrued outside India and was not taxable in India. The salary credited in India does not alter the place of accrual under the Income Tax Act. The assessee had furnished passport and visa details, USA tax returns, and other evidence to establish her stay and tax payments abroad. The Tribunal distinguished between claims under domestic law and under DTAA, noting that the assessee claimed exemption under domestic provisions (Section 5(2) read with Section 15) and not under DTAA; hence, absence of TRC is immaterial.

Application of Law to Facts: The Tribunal applied the principles established in the cited precedents, holding that salary income for services rendered outside India by a Non-Resident does not accrue or arise in India and is thus not taxable in India. The Assessing Officer's disallowance and taxation of the entire salary income, including that earned abroad, was held to be incorrect. The CIT(Appeals)-12's order granting relief to the assessee was upheld.

Treatment of Competing Arguments: The Revenue contended that absence of TRC disentitles the assessee from exemption and sought remand to CIT(Appeals)-10 for fresh adjudication. The Tribunal rejected this, holding that absence of TRC is not a bar under domestic law and that the issue had been fully examined by CIT(Appeals)-12 in a reasoned order. The Tribunal also rejected the Revenue's contention that CIT(Appeals)-12's order was invalid, finding the rectification attempt under Section 154 to be improper.

Conclusion: The Tribunal held that the addition of Rs.36,39,516 to the salary income was incorrect and cancelled the ex-parte order of CIT(Appeals)-10 confirming the addition. The assessee's claim of exemption for salary earned abroad was accepted.

Issue 3: Requirement of Tax Residency Certificate (TRC) for claiming exemption

Legal Framework: Section 90(1) of the Income Tax Act provides that the provisions of a DTAA shall apply only if the assessee is a resident of the other country as per the DTAA and furnishes a TRC. However, where exemption is claimed under domestic law, TRC is not mandatory.

Court's Reasoning: The Tribunal clarified that the assessee did not claim exemption under the DTAA but under domestic provisions. Thus, the absence of TRC cannot be a ground for denying exemption. The Tribunal also referred to a precedent where the failure to furnish TRC was held not to bar DTAA benefits if entitlement is otherwise established.

Conclusion: The absence of TRC was not a valid reason for taxing salary income earned abroad under domestic law.

Issue 4: Addition under Income from House Property

Legal Framework: Income from House Property is taxable based on actual rent received or deemed to be received. The assessee contended that the property was let out only for part of the year.

Court's Reasoning: The Assessing Officer made an addition of Rs.5,541 without detailed discussion. The CIT(Appeals)-12 sustained the addition due to lack of evidence from the assessee to prove the property was vacant for part of the year. The assessee failed to produce any evidence or arguments before the Tribunal on this issue.

Conclusion: The Tribunal found no merit in the ground challenging the addition and dismissed it.

Issue 5: Passing of ex-parte order by CIT(Appeals)-10 without opportunity to be heard

Legal Framework: Natural justice principles require that an assessee be given an opportunity of hearing before adverse orders are passed.

Court's Reasoning: The CIT(Appeals)-10 passed the order ex-parte, citing issuance of notices to the assessee. The assessee contended non-receipt of notices and absence from hearings. The Tribunal found that the order was passed mechanically without considering the assessee's submissions, and such ex-parte confirmation of additions was untenable.

Conclusion: The ex-parte order of CIT(Appeals)-10 was invalid and liable to be quashed.

Issue 6: Condonation of delay in filing appeal before the Tribunal

Legal Framework: The Supreme Court has held that the expression "sufficient cause" for condonation of delay should be liberally construed to advance substantial justice and that a litigant does not benefit from delay.

Court's Reasoning: The assessee explained the delay was due to confusion caused by two appellate orders for the same assessment year and lack of clarity on the final order to be followed. The Tribunal accepted the explanation as sufficient cause and condoned the delay of 112 days.

Conclusion: Delay in filing the appeal was condoned to avoid defeating substantial justice.

3. SIGNIFICANT HOLDINGS

"There cannot be two appellate orders of two different CIT(Appeals) on the same appeal at the same time on the very same assessee and therefore, obviously, the subsequent order of the CIT(Appeals)-10, Bangalore dt.28.2.2018 is not a valid order in the eyes of law."

"The attempt by the CIT(Appeals)-12 to invoke the provisions of Sec. 154 of the Act to deem her order dt.31.10.2017 as invalid is not tenable."

"Salary is accrued where the employment services are rendered. In the instant case, for the assessee, the normal place where the employment services rendered is in USA and not in India... Hence, there is no accrual of salary in India."

"The furnishing of TRC is applicable only to cases where the benefits under the DTAA are claimed... The absence of TRC cannot be a ground for denying the benefit of DTAA."

"The addition made by the Assessing Officer to the salary income of the assessee is incorrect and the action of the CIT(Appeals)-10 in confirming the said addition ex-parte, without examining the facts and underlying principles of the case and judicial pronouncements in this regard is untenable and is therefore cancelled."

"The words 'sufficient cause' should receive liberal construction so as to advance substantial justice to the parties."

Final determinations:

• The ex-parte order passed by CIT(Appeals)-10 was quashed for lack of jurisdiction and procedural infirmity.
• The reasoned order of CIT(Appeals)-12 granting relief to the assessee on the taxability of salary income earned abroad was upheld.
• The salary income earned abroad by the assessee during deputation to the USA is not taxable in India, as the services were rendered outside India and the assessee was a Non-Resident.
• Absence of TRC does not disentitle exemption under domestic law; the assessee's claim under Sections 5(2) and 15 was valid.
• The addition under Income from House Property was sustained due to lack of evidence from the assessee.
• Delay in filing the appeal before the Tribunal was condoned in the interest of justice.