Long-term capital gain from sale of house property by NRI isn’t tax free and is liable to TDS under Sec. 195
IT/ILT : Resident-firm which buys house property from NRI cannot escape consequences of non-deduction of TDS u/s 195 from payments to NRI-vendor by claiming that long-term capital gains from sale of house property by NRI are tax-exempt under Chapter-XIIA contrary to the provisions of section 115E especially when NRI himself offered the amount as taxable in his income-tax return and paid tax thereon
IN THE ITAT HYDERABAD BENCH ‘A’
New Vistas Constructions, Hyderabad
Income Tax Officer-II (International Taxation), Hyderabad
P.M. JAGTAP, ACCOUNTANT MEMBER
AND SAKTIJIT DEY, JUDICIAL MEMBER
IT APPEAL NO. 522 (HYD) OF 2013
[ASSESSMENT YEAR 2009-10]
JULY 15, 2015
Saktijit Dey, Judicial Member – This appeal by assessee is directed against the order dated 28/02/2013 of ld. CIT(A)-V, Hyderabad for the AY 2009-10.
2. The only dispute in the aforesaid appeal relates to levy of interest of Rs. 19,68,283 u/s 201(1A) of the Act.
3. Briefly the facts relating to the issue in dispute are, on the basis of information on record, it was found that assessee during the relevant PY purchased a house property bearing No. 12-2-710 to 712 admeasuring 8850 sq.yds. with ground and first floor in Sy. No. 289/7, Ward No. 21, Block C, situated at Gudimalkapur, Asifnagar Mandal, Hyderabad from Sri Murali Mohan Kosaraju, a non-resident Indian for a total consideration of Rs. 22,42,00,000. On the basis of the aforesaid information, a letter dated 25/10/2010 was issued to assessee calling upon him to furnish the details of TDS made u/s 195 on the payment made to non-resident towards sale consideration. Assessee was further called upon that in the event no tax was deducted he should explain why orders u/s 201(1) and 201(1A) should not be passed for not withholding tax u/s 195. In response to show cause notice, assessee vide letter dated 20/11/2011 submitted as under:
The sale deed in respect of the property acquired by the firm was executed and registered on 09-04-2008.
In the sale deed, the description of the vendor was mentioned as ………..at present resident of H. No. 12-2-71/A, Berban, Hyderabad.
In view of the above description, the firm treated the Vendor as an Indian Resident and no tax was deducted from the payment
Further the Vendor has given us an oral assurance and under taking that he would pay the tax due on the capital gains under the Provisions of the Income Tax Act.
Accordingly, the Vendor calculated and paid the entire tax of Rs.32804770I- due on the capital gains earned by him before the due date of first installment of Advance tax (i.e. on 10-09-2008)
In this, connection, we wish to draw your kind attention to the decision of the Gujarat High Court in the case of CIT vRishikesh Apartments Cooperative Housing Society Ltd., reported in ITR Vol 253 Page 310, wherein their Lord ships have held.
“That it was not in’ dispute that RB on whose behalf tax was to be deducted and paid u/s.194C of the Act, has paid more amount of tax by way of Advance tax, than what was payable and has also paid tax on self Assessment. There was no question of levying any interest on the assessee as the amount which was payable to the revenue has been duly paid”.
Since the vendor has paid the entire tax due on the Capital gains earned by him sufficiently in advance before the due date of advance tax, the firm cannot be treated as an assessee in default and interest need not be charged u/s 201(1A) in view of the decision of the Gujarat High Court.”
It was further explained by assessee that the said non-resident, who purchased the property has paid entire tax due on the capital gain by way of advance tax on 10/09/08 and also filed his return of income for the relevant AY disclosing capital gain. It was submitted that as per the return of income, assessee has paid excess tax of Rs. 27.60 lakhs, which he has claimed as refund. Thus, it was submitted that as there is no loss of revenue to the department, interest u/s 201(1A) should not be levied. In support of such contention, assessee also relied upon a number of judicial precedents. AO after considering the submissions of assessee and verifying the facts and materials on record, accepted that the purchaser of the property has not only paid the taxes on the capital gain, but, has also filed return of income before the ADIT(IT), Hyderabad on 22/12/2009. Therefore, he opined that since seller has already paid taxes on capital gain, no demand u/s 201(1) is to be made. However, as far as levy of interest u/s 201(1A) is concerned, AO referring to CBDT Circular dated 29/01/07 vide Circular No. 275/201/95-IT(B), dated 29/01/1997 held that charging of interest u/s 201(1A) till the date of payment of taxes by deductee is mandatory. In this context, AO also referred to the decision of Hon’ble Supreme Court in case of Hindustan Coca Cola Beverage P. Ltd. v. CIT, 293. Thus on the basis of the aforesaid observations, AO holding that assessee is liable to pay interest u/s 201(1A) of the Act quantified interest chargeable u/s 201(1A) at Rs. 19,68,283.
3.1 Being aggrieved of the levy of interest u/s 201(1A), assessee preferred appeal before ld. CIT(A). Ld. CIT(A) having confirmed levy of interest, assessee preferred appeal before us. Ld. AR in course of hearing of appeal before ITAT, apart from challenging the levy of interest on merit, also raised additional ground challenging the jurisdiction of AO in passing order u/s 201(1A) of the Act. As far as the issue raised in additional ground challenging the jurisdiction of AO, ITAT did not entertain by refusing to admit the additional ground. However, as far as the merits of levy of interest u/s 201(1A) is concerned, Tribunal remitted the matter back to the file of the CIT(A) to decide assessee’s claim that seller being a non-resident not liable to tax u/s 115E(a)(i) of the Act, there is no requirement to deduct tax u/s 195.
4. In pursuance to the directions of the Tribunal, appeal was again heard by ld. CIT(A). After hearing the submissions of assessee on the issue of applicability of provisions of section 115E(1)(a), ld. CIT(A) did not find any merit in the same and accordingly, rejected assessee’s claim with regard to non-application of provisions of section 195 in view of the provision contained u/s 115E(a)(i) of the Act.
5. Ld. AR submitted before us, the officer, who passed the order u/s 201(1A) having no jurisdiction, the order passed is invalid in law. As far as the legality of levy of interest u/s 201(1A) is concerned, ld. AR reiterating the submissions made before ld. CIT(A), submitted, assessee being a non-resident, provisions of section 115E are applicable. He submitted, as per clause (a) of section 115E any income from investment or income from long term capital gain other than specified asset, though, forms part of the total income of assessee, but, no tax can be levied as Clause (i) of section 115E only prescribes the rate of calculation of income tax in respect of investment income referred to in clause (a) and is totally silent about the long term capital gain. Thus, ld. AR submitted, when no rate for taxation of long term capital gain is prescribed u/s 115E, which is applicable to a non-resident, provisions of section 195 will not apply. Therefore, he submitted, when the capital gain itself is not taxable at the hands of the recipient, there is no burden on assessee to deduct tax in terms with section 195. In these circumstances, no interest can be charged u/s 201(1A). Alternatively, ld. AR also submitted, when payee has admitted the amount of capital gain in the return filed and also paid advance tax before the due date in September, there is no loss to the revenue. Therefore, levy of interest u/s 201(1A) is without any basis. In support of such contention, he relied upon the following decisions:
1. Madhav Marbles and Granites v. ITAT & Anr,  362 ITR 674 (Raj.)
2. Indian News Paper v. ITO & Anr.,  339 ITR 365 (Bom.)
3. CIT v. Rishikesh Apartments Cooperative Housing Society Ltd.,  253 ITR 310 (Guj.)
4. CIT v. Rajasthan Rajya Vidyut Prasaran Nigam Ltd.,  287 ITR 354 (Raj. [Jaipur Bench)
6. Ld. DR, on the other hand, submitted, assessee being a non resident, capital gain accruing to him is chargeable to income tax as per section 9 of the Act as the income not only arises in India but was also received in India. It was submitted, for this reason alone, non-resident recipient offered the capital gain to tax in the return filed and also paid taxes. He, therefore, submitted, assessee’s claim that capital gain is not taxable cannot be accepted. As far as the issue relating to applicability of provisions of section 115E(1)(a) is concerned, ld. DR referring to the definition of ‘long term capital gain’ as provided u/s 115C(d) of the Act as well as the definition of specified asset in clause (f) of 115C, submitted, ‘long term capital gain’ under the said chapter specifically refers to a capital asset being a foreign exchange asset and not the capital asset of the nature sold by assessee i.e. immovable property. Thus, ld. DR submitted, provisions of section 115E is not applicable to assessee. As far as assessee’s contention that deductee having paid the tax, there is no loss to revenue, hence, interest is not chargeable, ld. DR strongly relying upon the decision of Hon’ble Supreme Court in case of Hindustan Coca Cola Beverages Pvt. Ltd. (supra) submitted, the issue is clearly settled and assessee has to pay interest.
7. We have considered the submissions of the parties and perused the orders of revenue authorities as well as other materials on record. We have also carefully applied our mind to the decisions relied upon by parties. At the outset, we propose to deal with assessee’s ground relating to jurisdiction of AO in passing order u/s 201(1A). It is to be noted, this very ground was raised by assessee as additional ground in the first round of litigation before ITAT. As can be seen from the perusal of the order in ITA No. 1977/Hyd/2011, dated 14/09/12, jurisdictional issue raised in the additional ground was not admitted by ITAT and the ITAT while remitting the matter back to the file of ld. CIT(A), directed him to consider assessee’s ground raised on applicability of section 115E of the Act. The finding of the Tribunal in this regard is extracted below:
“15. We have heard the arguments of both the parties, perused the record and gone through the orders of the authorities below. We find that ground No. 1 raised by the assessee that the non-resident is not liable to tax u/s 115E a(1) of the IT Act, has not been dealt with by the CIT(A) and the CIT(A) has failed to consider this ground. In these circumstances, we deem it fit to restore the matter to the file of the CIT(A) to adjudicate upon the ground raised by the assessee with respect to the liability to tax in the case of non-resident u/s 115E a(1) and decide the issue in accordance with law. At this stage, we refrain from going into the grounds raised by the assessee.”
7.1 As the present proceeding arises out of the direction of the Tribunal in the earlier round, wherein assessee’s ground on jurisdictional issue was not entertained, assessee cannot again raise the issue before this forum. In the aforesaid facts and circumstances, we decline to entertain assessee’s ground on jurisdiction.
7.2 The next issue which arises for consideration is applicability of section 115E to non-resident to whom assessee has made the payment. It is the contention of ld. AR before us, since under clause (i) of section 115E(a), rate prescribed is only for investment made and not towards long term capital gain, the non-resident is not liable to pay tax on capital gain. It was submitted, when the long term capital gain is not taxable at the hands of the recipient there is no requirement in law for the assessee to deduct tax on payment made to the non-resident.
7.3 After perusing the facts on record, we fail to understand the rationale or logic behind such argument of ld. AR. As could be seen, in course of proceeding before AO assessee took a specific plea that on the assurance of recipient-deductee that he will file his return declaring capital gain and pay tax, assessee did not deduct tax in terms with section 195 of the Act. This statement of the assessee clearly demonstrate, from the very beginning both the assessee as well as the recipient were conscious of the fact that payment made towards sale of property was subject to capital gain tax in India. In fact, keeping with the assurance given to assessee recipient deductee has filed a return of income declaring capital gain and also paid the taxes. When the recipient has not made any claim of exemption, assessee who is only payer of the money cannot assume upon itself the burden of deciding the taxability of payment at the hands of the non-resident recipient. At least, the statutory provision does not permit assessee to do so. Even otherwise also, after careful analysis of the relevant statutory provision we find the submissions of ld. AR unacceptable. On perusal of the definition of ‘long term capital gain’ as provided u/s 115C(d), it is seen that it only refers to foreign exchange assets, meaning thereby, any specified asset purchased with convertible foreign exchange. Therefore, ‘long term capital gain’ referred to in section 115E(a) will only apply to certain transactions as specified under Chapter XIIA and not to a transaction of the nature entered into between present assessee and non resident. Moreover, section 9 of the Act makes it clear that any income arising and received in India is taxable under the Income Tax Act. The non-resident recipient, in our view, having correctly understood the provisions of the Act has filed his return declaring capital gain. In the aforesaid facts and circumstances, assessee’s claim that capital gain is exempt from taxation at the hands of the non-resident recipient, is only a desperate attempt to escape from the rigours of section 201(1A). Under the circumstances, we do not find any merit in submissions of ld. AR.
7.4 The third issue which remains to be decided is in relation to the contention of ld. AR that as recipient has paid the entire tax by way of advance tax there is no loss to the revenue, hence, levy of interest u/s 201(1A) cannot be made. In our view, this issue also has to be decided against assessee in view of the ratio laid down by Hon’ble Supreme Court in case ofHindustan Coca Cola Beverages Pvt. Ltd. v. CIT (supra) wherein the Hon’ble Supreme Court held that liability to pay interest u/s 201(1A) till the date of payment of tax by deductee assessee remains unaltered. In view of the aforesaid decision of the Hon’ble Supreme Court, we do not see any reason to interfere with the order of ld. CIT(A)in sustaining the levy of interest u/s 201(1A). As far as decisions relied upon by ld. AR, on careful analysis, we do not find them applicable to the facts of the present case. Accordingly, grounds raised are dismissed.
8. In the result, assessee’s appeal is dismissed.