- (1.) THIS appeal by the Revenue is directed against the order of the CIT(A), dt. 22nd March, 1990. The first ground taken in this appeal is as under : "On the facts and in the circumstances of the case and in law the learned CIT(A) erred in directing the AO to allow deduction of interest of Rs. 7,06,824 paid by the assessee abroad on the loan incurred for the purpose of Indian shares and debentures though tax on the same has not been deducted ignoring the specific provisions of s. 58(1)(a)(ii) and s. 21 in this regard."
(2.) We have heard the learned Departmental Representative as well as the learned assessee's counsel. The learned Departmental Representative has submitted that the concessional rate of income-tax provided for non-residents has been prescribed after considering all the deductions allowable to such persons, i.e., in case of non-residents, expenses on account of interest, etc., are not allowable. He has further submitted that the having not deducted tax at source from the payment of interest made to non-residents, as required under s. 195, the AO was right in disallowing the deduction of the same from capital gain. He further submitted that the assessee's case before the AO was deduction from capital gains whereas before the CIT(A) the assessee made alternative plea for claiming deduction out of her income from other sources which the CIT(A) has accepted without allowing the AO an opportunity of being heard. The counsel for the assessee, on the other hand, submitted that the assessee was not liable to deduct tax at source under s. 195 because the interest paid to non-residents had neither been paid in India nor it had accrued to non-residents in India and, therefore, was not taxable in India. In view of this claim the assessee's counsel submitted that the provisions of s. 40A(2) were not applicable. In support of this proposition he has relied on the decision of Madras High Court in the case of C. G. K. Naidu vs. CIT (1968) 69 ITR 696 (Mad). As regards the acceptance of alternate plea of the assessee by the CIT(A), the assessee's counsel has supported the order of CIT(A). We have considered the rival submissions and have gone through the orders of the lower authorities. From the facts and circumstances of the case it is noticed that at the time of assessment the assessee had claimed deduction of interest paid on loans taken from non-residents against her income from capital gains whereas before the CIT(A), she made an alternate plea for deduction of expenditure against her income from other sources. It is also noticed that the AO disallowed the assessee's claim by invoking the provisions of s. 40A(2) whereas the CIT(A) has allowed the assessee's claim on the basis of the alternate plea after relying on the decision of Bombay High Court in the case of CIT vs. Public Utilities Investment Trust Ltd. (1983) 143 ITR 236 (Bom) and after holding that the assessee was not doing any business or profession and, therefore, the provisions of s. 40A(2) were not applicable. The other facts relating to this issue are that the assessee's who was a NRI had raised certain income from NRIs in USA for the purpose of investment in shares of the Indian companies in India. The source of assessee's income in India were capital gains on sale of securities and shares, dividend and interest from bank. During the period relevant to the asst. yr. 1988-89 the assessee had paid interest of Rs. 7,06,824 on the loans raised in USA from NRIs and claimed deduction of the same against her income earned in India.
(3.) AFTER considering the facts and circumstances of the case we are of the opinion that as far as the order of the CIT(A) relating to applicability of provisions of s. 40A(2) is concerned, he was right in holding so because when the assessee was not carrying on any business or profession (neither the assessee had shown any income from business or profession nor the AO has held so) then the provisions of s. 40A(2) were rightly held to be not applicable but as far as the consideration of the assessee's alternate plea, which was absolutely a fresh one, and the AO had no chance to deal with the same, should not have been accepted without allowing the AO an opportunity of being heard.;