IN THE ITAT BANGALORE BENCH 'C' A.

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1 IT/ILT : Where on date of purchase of house property from non-resident vendor, assessee was aware of fact that capital gain was not taxable in vendor's hands due to availability of deduction under section 54, he was not required to deduct tax at source while making payment of sales consideration [2015] 53 taxmann.com 102 (Bangalore - Trib.) IN THE ITAT BANGALORE BENCH 'C' A. Mohiuddin v. Additional Director of Income-tax (International Taxation), Mangalore* RAJPAL YADAV, JUDICIAL MEMBER AND JASON P. BOAZ, ACCOUNTANT MEMBER S.P. NOS. 223 TO 225 (BANG.) OF 2014 [ASSESSMENT YEAR ] NOVEMBER 14, 2014 Section 9, read with section 54, of the Income-tax Act, 1961 and article 6 of the OECD Model Convention - Income - Deemed to accrue or arise in India (Income from immovable property) - Assessment year Whether where assessee purchased a property from a non-resident, since assessee was aware of fact that capital gain arising from sale of said property was not taxable in hands of vendor as he had already invested amount in purchase of another residential property within time period prescribed under section 54, assessee was not required to deduct tax at source while making payment of sales consideration to non-resident vendor - Held, yes [Para 10] [In favour of assessee] Circulars, Notifications and Instructions : Instruction No. 2/2014, dated FACTS HELD During relevant year, assessee purchased a residential property from a non-resident. The assessee's case was that in respect of payments made by him, the nature of income chargeable to tax ought to be embedded, only then he was required to deduct the TDS. The assessee further explained that since non-resident vendor was eligible to claim deduction under section 54 in respect of capital gain arising from sale of property, he was not required to deduct tax at source while making payment in question. The Assessing Officer opined that on sale of the house property, capital gain tax would be chargeable in the hands of the recipient, therefore, the element of income was quite involved in the payment. It was a different matter that the recipient was entitled for deduction under section 54. He thus held the assessees was in default and raised a demand under section 201. The Commissioner (Appeals) confirmed the order of Assessing Officer. On second appeal:

2 The ultimate levy of taxes is dependent upon many circumstances such as exemption, deduction etc. However, in the present case when the assessee has made payments,he was sure because of the facts brought to his notice that these payments does not involve payment of taxes, as the vendor is entitled for exemption. The vendors are the family members. They have apprised the assessee's about the investment. They must have pointed out that no liability of taxes would be there. Therefore, there was no need to deduct the TDS. The facts of the present case ought to be seen by the Commissioner (Appeals) in the light of the Instruction No. 2/2014 dated [Para 8] If one examines the facts of the present case in the light of paragraph No. 3 of said instruction, then it would indicate that the Assessing Officer is required to determine the appropriate propotion of the sum chargeable to tax as mentioned in sub section (1) of section 195 to ascertain the tax liability on which the deductor shall be deemed to be an assessee in default under section 201 and the appropriate proportion of the sum will depend on the facts and circumstances of each case. In the present case from the date of the payment assessee was aware that the amount will qualify for exemption under section 54 because the vendors has already made investment in purchase of the house property. She has represented these facts to the assessee. [Para 9] The facts on record indicate that from the date of payments, parties were aware that these payments would not be subject to taxes, because of exemption. Therefore, there was no need to deduct the taxes. In view of the above, the appeal is allowed by holding that the assessee cannot be treated as assessee in default under section 201. Consequently, no interest under section 201(1A) will be imposable upon them. [Para 10] CASE REVIEW GE India Technology Cen. (R) Ltd. v. CIT [2010] 327 ITR 456/193 Taxman 234/7 taxmann.com 18 (SC) (para 1) followed. CASES REFERRED TO GE India Technology Cen. (R) Ltd. v. CIT [2010] 327 ITR 456/193 Taxman 234/7 taxmann.com 18 (SC) (Para 1). V. Srinivasan, CA for the Appellant. Dr. Shankar Prasad, (DR) for the Respondent. ORDER 1. The present stay applications are directed at the instance of the appellants for grant of ad interim stay of the outstanding demand during the pendency of appeals. However, while going through the record, we deem it appropriate to hear the appeals itself, because the issue involved in all the three appeals is common and covered by the decision of the Hon'ble Supreme Court in the case of GE India Technology Cen. (P) Ltd. v. CIT [2010] 327 ITR 456/193 Taxman 234/7 taxmann.com 18 r.w. instruction No.2/2014 dated issued by the Board. Therefore, with the consent of both the representatives, we heard the appeals itself. 2. The common question involved in all the appeals is whether the appellants can be treated in default for not deducting the TDS while making payments to the non resident Mrs.Zohra Moidin, resulting the demand of tax against the assessees as well as interest u/s 201(1A) of the Income Tax Act.

3 3. The brief facts of the case are that Mr. Ahmed Mohiuddin and Mrs. Shahanaz Mohiuddin are the directors of the Company M/s Sami Reality and Infrastructures (P) Ltd. They have jointly executed a purchase deed on with the vendors of the property at Mangalore which was jointly owned by Mrs. Zohra Moidin and Mrs. Sayeeda Amir Ali. The property was purchased for a consideration of Rs.2,57,24,000. The dispute is that Mrs. Zohra Moidin is a non resident and before making payment to her, the TDS u/s 195(1) ought to have been deducted by the assessee. Since they failed to deduct the TDS, therefore, they are "assessee in default" and a notice u/s 201 was served upon the assessee. The contention of the assessees before the learned Asstt. Director of Income Tax (International Taxation) was that at the time of execution of sale deed and payments of consideration, it was represented by Mrs. Zohra Moidum that she had purchased a house property on which is within one year prior to the date of sale deed being executed She has represented that the consideration paid for acquisition of residential hosue was of Rs.1.50 crores and the cost of stamp paper and registration charges was a sum of Rs.12,30,475/-. Thus, she had made investment in the new residential house at Rs.1,62,30,475/- which was eligible for exemption u/s 54 of the Income Tax Act. Thus according to the assessee, in the payments made by them, the nature of income chargeable to tax ought to be embedded, only then they are required to deduct the TDS, since no such income was embedded upon which the taxes are to be levied. Therefore, they have not deducted the TDS. 4. The learned Assessing Officer has observed that section 195 contain in itself a procedure where an assessee feels necessity of any clarification on account of non deduction of taxes, he can move an application u/s 195(2) or 195(3). Section 195(1) mandate the assessee to deduct the TDS while making payment to any non resident. With regard to assessee's contention that element of income ought to be involved in the payment is concerned, the learned Assessing Officer has observed that there is a perceptional difference between construction of this expression available in section 195(1) of the Act, the expression "sum chargeable to tax", is not dependent upon the ultimately payment of tax by the receipient. There can be so many reasons, where receipient can be exempted from payment of taxes like deduction, exemption etc., but the element of income in the payment is involved. The Assessing Officer has emphasized that on sale of the house property, capital gain tax would be chargeable in the hands of the receipient, therefore, the element of income is quite involved in the payment. It is a different matter that the receipient was entitle for exemption u/s 54. In this way the Assessing Officer has held the assessees in default and raised a demand u/s 201. He also charged interest u/s 201(1A). 5. Appeals to the CIT (A) did not bring any relief to the assessee. 6. Before us the learned Counsel for the assessee placed on record copy of the assessment order passed in the case of Mrs. Zohra Moidin. He also placed on record copy of the circular No.2/2014 issued on He pointed out that after the decision of the Hon'ble Supreme Court in the case of GE India Technology Cen (P) Ltd (supra), the TDS in the payments required to be made u/s 195(1) ought to be deducted, if the element of income in such payment is involved. The Board has considered this aspect and thereafter laid down the guidelines. The Board has appriased its Officers that while treating any assessee in default u/s 201 of the Act and determination of appropriate portion of the sum will depend on the facts and circumstances of each case taking into account the nature of remitance. In this case the vendors have made investment in house property in the month of May, This investment was made within the window period for claiming exemption u/s 54 of the Act. Therefore, when they sold the property they were aware that the amount which the vendors are receiving will not be charged to capital gain tax. The assessee was also aware that the payments does not involve any sum upon which taxes would be levied. In such situation, the assessee cannot be treated in default u/s 201 of the Income Tax Act. 7. The learned DR on the other hand relied upon the assessment order. He pointed out that there is a basic difference between the taxes required to be paid ultimately by an assessee vis-à-vis the income accrued or arising to such an assessee. In the payments made by the assessees, the element of income was very much

4 there. It is a different matter that the vendors have made investment, therefore, that would qualify for exemption under other sections of the Income Tax Act. He further pointed out that, had the vendors have not purchased in the month of May, 2011 and they had intention to purchase in subsequetn year within the limitation provided in section 54, then what would be the situation. The assessee's ought to have deducted the tax in that circumstance. Thus, the assessees ought to have not taken a decision at their own level. They should have approacehd the Income Tax Officer u/s 195(2) or 195(3). 8. We have duly considered the rival contentions and gone through the record carefully. We appreciate the approach of the learned Assessing Officer that ultimate payments of tax by the recipient may not be the criteria for arriving at a conclusion; whether the payments involved element of taxes or not. The ultimate levy of taxes is dependent upon many circumstances such as exemption, deduction etc. However, in the present case when the appellants have made payments, they were sure because of the facts brought to their notice that these payments does not involve payment of taxes. The vendor is entitled for exemption. There could be a circumstance; where vendors have some other capital gain which could be adjusted against the investment in house property?, but the vendors are the family members. They have apprised the assessee's about the investment. They must have pointed out that no liablity of taxes would be there. Therefore, no need to deduct the TDS. The facts of the present case ought to be seen by the learned CIT (A) in the light of the circular issued by the Board because before the Assessing Officer the circular was not in the picture. The circular read as under: "Instruction No. 02/2014, Dated Sub: Deduction of tax at source under Section 195 read with Sections 201 of the Income-tax Act, 1961 relating to payment made to a non-resident-reg. Section 195 of the Income-tax Act (hereafter referred to as 'the Act') provides that any person, responsible for paying to a non-resident not being a company or to a foreign company, any sum chargeable under the provisions of this Act, shall at the time of credit of such income to the account of the payee or at the time of payment thereof, whichever is earlier, deduct income-tax thereon at the rates in force. Section 201 of the Act inter alia provides that any person who is required to deduct tax in accordance with the provisions of the Act, does not do so, shall he deemed to be an assessee in default and shall also be liable to pay simple interest at the specified rate. 2. References were received from field officers on the issue of deduction of tax at source under section 195 of the Income-tax Act, 1961 in the light of the decisions of the Supreme Court of India in the case of GE India Technology Private Limited v. CIT 327 (ITR) 456 and Transmission Corporation of AP Ltd. v. CIT [1999] 299 ITR 587 (SC), and the decision of the Madras High Court in CIT v. Chennai Metropolitan Water Tax Cases Appeals Nos of 2005, with a request for clarification as to whether the tax is to be deducted under subsection (1) of section 195 on the whole sum being remitted to a non-resident or only the portion representing the sum chargeable to tax, particularly if no application has been made under subsection 2) of section 195 of the Act to determine the sum. 3. The matter has been examined in the Board and accordingly, in exercise of powers vested under Section 119 of the Act, the Board hereby directs that in a case where the assessee fails to deduct tax under section 195 of the Act, the Assessing Officer shall determine the appropriate proportion of the sum chargeable to tax as mentioned in subsection (1) of section 195 to ascertain the tax liability on which the deductor shall be deemed to be an assessee in default under section 201 of the Act, and the appropriate proportion of the sum will depend on the facts and circumstances of each case taking into account nature of remittances, income component therein or any other fact relevant to determine such appropriate proportion.

5 4. The undersigned is directed to state that the above position may be brought to the notice of all officers concerned. F. No. 500/33/2013-FTD-I Yours faithfully, (Satya Pal Kumar) Under Secretary-1(2) [FT&TR-l]" 9. If we examine the facts of the present case in the light of paragraph No.3 of the circular, then it could indicate that the Assessing Officer is required to determine the appropriate proportion of the sum chargeable to tax as mentioned in sub-section (1) of section 195 to ascertain the tax liability on which the deductor shal be deemed to be an assessee in default u/s 201 of the Act and the appropriate proportion of the sum will depend on the facts and circumstances of each case. In the present case from the date of the payment vendees were aware that the amount will qualify for exemption u/s 54 because the vendors has already made investment in purchase of the house property. She has represented these facts to the assessee. At this stage, it is pertinent to make reference of the assessment order passed in the case of Smt. Zohra Moidin u/s 143(3). The relevant part read as under: "3. During the coruse of proceedings, it has been observed that the assessee along with her siser Mrs. Saida Amir Ali had sold immovable properties inherited from her father for a total sale consideration of rs.2,57,24,000/- during the relevant previous eyar. The transctions were registered vide two sale deeds both dated (Regd. As Doc. No.5062 and Doc. No.5065) in respect of land to the extent of acres and residential building with appurtenant land measuring 1.73 acres respectively. As per the affidavit submitted by the assessee, she had 2/3rd right in the said properties and her sister Mrs. Saida Amir Ali had 1/3rd right. The property comprising land only has been sold for a consideration of Rs.2,00,00,000/- and the second property comprising residential buildign and land has been sold for a consideration of Rs.57,24,000/-. The total capital gains has been shown at Rs.2,25,55,466/- after claiming expenses incurred for conversion fees and brokerage to the extent of Rs.8,00,000/- and indexed cost of acquisition of Rs.23,68,534/-. The assessee has declared her share (2/3) of LTCG at Rs.1,50,36,977/-. As she has purchased a residential house with land for Rs.1,50,00,000/- within one year (on ) before the date of sale ( ) of the said properties for which she has incurred stamp and registration charges of Rs.12,30,475/- she has declared the total cost of the new asst at Rs.1,62,30,475/- and claimed the entire amount of her share of LTCG of Rs.1,50,36,977/- as exempt u/s 54 and 54F. 4. After considering the details furnished and the submissions of the assessee, the assessment is concluded by accepting the income as per the return filed on Subject to the above remarks and the data made available, the total income and tax payable by the assessee is computed as under: Long term capital gains Total Income Less: Pre-paid taxes Balance refundable/payable 10. The above facts indicate that from the date of payments, parties were aware that these payments would not be subject to taxes, because of exemption. Therefore, there was no need to deduct the taxes. In view of the above facts, we allow all the three appeals and hold that the appellants cannot be treated as assessee in default u/s 201. Consequently no interest u/s 201(1A) will be imposable upon them. 11. Since we have decided the appeals, therefore, the stay applications become redundant and dismissed. Nil Nil Nil Nil"

6 SUNIL *In favour of assessee.