1989 (12) TMI 81 - AT - Income Tax

Summary

Issues:
1. Incorrect application of tax rate by the Income Tax Officer.
2. Interpretation of Article 12(2) of the D.T.A. Convention.
3. Validity of the Commissioner's order under section 263.

Analysis:
1. The appeal was filed against the Commissioner's order dated 14-3-1988 under section 263 of the Income-tax Act, 1961, which deemed the assessment order for the assessment year 1985-86 as erroneous due to an incorrect application of the tax rate by the Income Tax Officer. The Commissioner found that the ITO had applied an incorrect rate of tax, resulting in an undercharge of tax. The Commissioner initiated proceedings under section 263 and set aside the assessment order, directing the ITO to frame a fresh assessment. The assessee challenged this decision before the Tribunal.

2. The crux of the issue revolved around the interpretation of Article 12(2) of the D.T.A. Convention between India and the UK. The Commissioner contended that the deposits renewed by the assessee with HDFC after 23-11-1981 could not be considered as fresh deposits within the meaning of Article 12(2). The Commissioner's argument was based on the premise that a renewal does not constitute a fresh deposit. However, the assessee's counsel argued that each renewal of the deposit with HDFC amounted to a fresh deposit, as supported by the terms and conditions of the Deposit Scheme and expert opinions. The Tribunal analyzed the provisions of the Convention and legal interpretations to conclude that the renewed deposits should be treated as loans "first created" after the Convention's entry into force, thereby justifying the application of a tax rate not exceeding 15%.

3. The Tribunal considered the submissions of both parties and examined the relevant documents, including the Convention itself and expert opinions on the interpretation of "renewal" in the context of deposits. The Tribunal found merit in the assessee's argument that each renewal constituted a fresh deposit, aligning with the conditions specified in the Deposit Scheme with HDFC. Consequently, the Tribunal held that there was no error in the assessment order of the ITO and annulled the Commissioner's order under section 263 dated 14-3-1988. The appeal was allowed in favor of the assessee, overturning the Commissioner's decision and upholding the application of the tax rate not exceeding 15% on the interest derived from the renewed deposits with HDFC.