NATWEST MARKETS PLC,KOLKATA vs. ASSISTANT COMMISSIONER OF INCOME TAX, INTERNATIONAL TAXATION - 1(2), KOLKATA

The only issue pressed at the time of hearing is against the order of the ld. AO passed in accordance with the action of the ld. DRP direction, treating the interest on income tax refund amounting to ₹6,18,50,000/- as income of the assessee / appellant.

The facts in brief are that the AO passed the draft assessment order u/s 144C of the Income-tax Act, 1961 (the Act) dated 23.03.2022. The assessee / appellant is a company that is incorporated in the United Kingdom and is a tax resident of the United Kingdom. During

Since, the assessee had taken over all the bank accounts of the Netherlands Entity with effect from the appointed date, the refund so determined by the Revenue was credited to one such bank account. Accordingly, the appellant/ assessee had credited the interest that was determined by the department to its profit and loss account. However, while filing the return income in its computation for A.Y. 2020-21, sum of ₹5,21,98,000/- was excluded with the explanation “Interest on tax refund” was offered to tax in earlier assessment year. Further, assessee excluded a sum of ₹96,52,000/- towards TDS credit with the explanation “Interest on tax refund” in RBS NV in A.Y. 2019-20. A copy of the computation was available at page 1 of the Paper Book.

The AO called for an explanation from the assessee as to why the same was excluded and the assessee in this reply vide letter dated 25.02.2022, explained as to why the interest was not offered to tax. A copy of the said letter is available at page 4 of the Paper Book.

The AO passed the draft assessment order on 23rd March, 2022, in terms of Section 144C of the act, where the ld. AO came to the conclusion that income credited to the Profit and Loss account by way of interest was liable to be taxed in the assessee’s hands and the assessee has to explain as to why the refund received was not taxable in India. Accordingly, the AO treated the said sum of ₹6,18,50,000/- as an unexplained tax credit u/s 68 of the Act read with section 115BBE of the Act vide order dated 23.03.2022.

Being aggrieved by the said order, the assessee had preferred an appeal before the ld. Dispute Resolution Panel and the ld. Dispute Resolution Panel vide its order restored the issue to the file of the ld. AO directing to decide the same after taking into account the contentions of the assessee. The ld. Dispute Resolution Panel while restoring the issue by observing as under:-

The ld. AR vehemently submitted that having regard to the factual scenario as narrated hereinabove it is clear that no part of the interest granted under section 244A of the Act accrued to the assessee as the refund and interest was determined in the case of Netherlands Entity and not to the assessee. The ld. AR submitted that the assessee had taken over all assets and liabilities of the Indian branches that were in existence on 27.02.2017 and any amount which accrued thereafter to the Netherlands entity solely belonged to the Netherlands entity. The ld. AR submitted that the only reason why it was credited to the bank account and reflected in the books of account of the assessee was that because of Indian bank accounts of Netherlands entity that existed on 27.02.2017 vested in the assessee consequent to amalgamation and

The ld. DR on the other hand relied heavily on the final assessment order by submitting that the income has been correctly assessed in the hands of the assessee on the basis of credit being given in the bank account of the assessee besides the income tax refund and corresponding entities being accounted in the books of accounts and also in the profit and loss account. The ld. DR submitted that when the interest has been credited in the bank account of the assessee it is obvious and apparent that same has to be assessed in the hands of the assessee and not in the hands of the Netherlands entity which owned and operated all the branches in India till 27.02.2017 when the Indian branches amalgamated with the assessee though the ld. DR

After hearing the rival contentions and perusing the materials available on record, the undisputed facts are that the assessee was incorporated in United Kingdom and is a tax resident of the United Kingdom. During the previous year, relevant to A.Y. 2020-21, the assessee carried out its business activities through its branches which had merged in a scheme of amalgamation sanctioned by the RBI. Prior to 27.02.2017, Indian Branches i.e. these branches were owned by R.B.S. N.V. The said foreign entity used to file its return of income in India qua the income that are attributable to the activities of the permanent establishment in India as well as in respect of its income which accrued or rose in India. While giving appeal effect for A.Y. 2014-15, the Revenue determines that the tax refund of ₹40,76,1390/- which is included in interest of ₹9,65,18,062/- u/s 244A of the Act of which tax at source of ₹96,51,807/- was directed by the revenue during the previous year relevant to A.Y. 2019-20. Similarly, pursuant to certain appeal effect orders passed for various assessment years, the revenue determined a refund of ₹28,21,23,127/-, which included interest of ₹5,21,98,081/- in terms of Sectio 244A on which tax at source was directed by the Revenue of ₹56,39,097/- in A.Y. 2020-21. We note that the Netherland entity had offered to tax the interest income u/s 244A of the Act in the previous year relevant to A.Y. 2019-20 and copy of acknowledgement of ITR is available at page no.143, wherein interest of ₹9,65,18,062/- offered to tax and in accordance with the Article 11(2) of the Double Taxation

In the result the appeal of the assessee is allowed.