ORDER
R.P. Garg, A.M.
1. This is an appeal by the assessee against the order of the CIT for asst. yr. 1987-88.
2. The short question in this appeal is regarding the allowability of interest paid on the foreign borrowing, which was disallowed by the AO on the ground that the tax thereon was not deducted by the assessee as provided under s. 58(1)(a)(ii) of the Act. The assessee’s contention is that the interest payable by the assessee is not taxable under the Act, in the hands of the non-resident either under s. 5 or s. 9 of the Act, and that the payment was not made in India and, therefore, the question of deduction of tax and payment of tax thereon under s. 195 does not arise. Reliance was placed on the decision of the Madras High Court in the case of C. G. Krishnaswami Naidu vs. CIT (1966) 62 ITR 686 (Mad); decision of the Bombay High Court in the case of CIT vs. Public Utilities Investment Trust Ltd. (1983) 143 ITR 236 (Bom) and in the case of CIT vs. Cooper Engineering Ltd. (1968) 68 ITR 457 (Bom), and the decision of the Andhra Pradesh High Court in the case of Addl. CIT vs. K. Ramabrahmam & Sons (P) Ltd. (1978) 115 ITR 369 (AP). Sec. 9 is claimed to be not applicable because the money is not utilised in any business or profession carried on by such a person in India. The Revenue’s claim on the other hand is that if any interest is paid to a non-resident, therefore, provisions of s. 195 apply and the assessee was liable to deduct tax thereon irrespective of the fact that the interest was not taxable in non-resident’s hands in India. Reference in this connection was invited to the decisions of the Supreme Court in the case of Aggarwal Chamber of Commerce Ltd. vs. Ganpat Rai Hira Lal (1958) 33 ITR 245 (SC) observations at p. 253, and in the case of Associated Cement Co. Ltd. vs. CIT (1993) 201 ITR 435 (SC). It was further submitted that the money borrowed was utilised in India and, therefore, the income accrued in India and taxable under s. 5 itself; purchase of shares with the borrowed money itself is a fact evidencing the assessee’s dealing in shares and this connection reference was invited to the decision of the Supreme Court in the case of Dalhousie Investment Trust Co. Ltd. vs. CIT (1968) 68 ITR 486 (SC) observation at 490.
3. We have heard the parties and considered their rival submissions. The assessee is a non-resident and raised loan outside India from Educational Subscription Service Inc. and East Lansing State Bank of East Lansing, Michigan. The borrowed money was brought to India and was utilised by the assessee in purchasing shares/securities therewith. The assessee claimed deduction of interest paid at Rs. 6,82,140 against the capital gain on the sale of the shares purchased from out of this borrowed money. It was disallowed by the AO in absence of any provision under s. 48 therefor but a deduction thereof was allowed under s. 57(iii) of the Act, to the assessee by him in the original assessment. The CIT, in exercise of the powers under s. 263, held that the interest was not allowable under s. 58 as no tax therefrom was deducted or paid. He held in para 5 of his order as under :
“5. I have also considered the submissions of the assessee’s counsel that the said interest income could not be deemed to accrue or arise under s. 9(1). Without prejudice to the earlier stand taken that the chargeability has to be considered only on an application under s. 195, it may be pointed out that in this case sequence of events could be said to lead to a conclusion that the assessee was only indulging in an adventure in the nature of business, while indulging in these transactions. The assessee had taken the loan in U.S.A., brought the loan amount to India, invested them in shares and debentures and sold the shares and debentures at various intervals of time. The assessee has also sold shares from these companies at huge profits and losses also. There has been a net gain. It has to be pointed out that all these transactions have been done over a period of the year. Even in the last assessment year, the assessee had indulged in transaction of shares. The sale of shares of the Reliance Industries Ltd. was over a period of two months from 9th May, 1986, to 8th July, 1996, at different lots. If a composite view is to be taken of the nature of these transactions, one could only come to the conclusion that it is just not an investment but a business of purchase and sale of shares. One has to look to the provisions of IT Act only, to ascertain whether such transaction could be said to be in the nature of business. Sec. 29 of the FERA refers only to business activities other than approval under s. 28. In such a situation the interest income will definitely be chargeable to tax in the hands of the lender and being a non-resident lender, tax should have been deducted at source. In this view of the matter also, there is no scope for allowance of the deduction of the interest payment to the non-resident.”
4. The relevant s. 58(1)(a)(ii) reads as under :
“58(1)(a)(ii). Any interest chargeable under this Act which is payable outside India (not being interest on a loan issued for public subscription before the 1st day of April, 1938; on which tax has not been paid or deducted under Chapter XVII-B'”
5. Sec. 195 reads as under :
“195(1). Any person responsible for paying to a non-resident, not being a company, or to a company which is neither an Indian company nor a company which has made the prescribed arrangements for the declaration and payment of dividends within India, any interest, not being “Interest on securities”, or any other sum, not being dividends, chargeable under the provisions of this Act, shall, at the time of payment, unless he is himself liable to pay any income-tax thereon as an agent, deduct income-tax thereon at the rates in force;
(2) Where the person responsible for paying any such sum chargeable under this Act (other than interest on securities and salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the AO to determine, by general or special order, the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub-s. (1) only on that proportion of the sum which is so chargeable.
……………………………………”
6. Sec. 5(2) reads as under :
“5(2). Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which –
(a) is received or is deemed to be received in India in such year by or on behalf of such person; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year.”
7. Sec. 9(1)(v) reads as under :
“9(1)(v). Income by way of interest payable by –
(a) the Government; or
(b) a person who is a resident, except where the interest is payable in respect of any debt incurred, or money borrowed and used, for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or
(c) a person who is a non-resident, where the interest is payable in respect of any debt incurred, or moneys borrowed and used, for the purposes of a business or profession carried on by such person in India;”
8. On a careful reading of s. 58(1)(a)(ii), it is evident that that interest paid is disallowed which is chargeable under the IT Act and on which no tax has been paid or deducted. The observation of the CIT that chargeability of interest to income of the non-resident cannot be considered in the hands of the person paying the interest, in our opinion, has no force and seems apparently contrary to the plain language of s. 58(1) of the Act. The decision of the Bombay High Court in the case of CIT vs. Cooper Engg. Ltd. (supra), and the decision of the Andhra Pradesh High Court in the case of Addl. CIT vs. K. Ramabrahmam & Sons (P) Ltd. (supra) are the authorities for this proposition, wherein it was held that there was no liability to deduct tax if the payment is chargeable to tax under the Act. We, therefore, have to see whether the interest paid by the assessee non-resident to another non-resident company is chargeable to tax under the IT Act.
9. The CIT states that the provisions of s. 9(1)(v) apply as the assessee is engaged in the business of purchase and sale of shares/debentures and he justified himself by pointing out the short span of the transaction of the purchase and sale and making of profit therefrom. The learned Departmental Representative supports this finding of the CIT by relying upon the aforesaid decision of the Supreme Court in the case of Dalhousie Investment Trust Co. Ltd. vs. CIT (supra). The assessee’s contention is that the shares/debentures were purchased only on account of investment and the profit has been assessed as capital gain in the original assessment as well as in the revised assessment order giving effect to the impugned order of the CIT, presumably because the assessment under capital gain was not revised or directed to be revised by the CIT under s. 263. If the transaction of purchase and sale are subject to approval of Reserve Bank of India as investment and the assessee being a non-resident cannot indulge into business by virtue of the provisions of s. 28 and s. 29 of the FERA. He has given the following 9 reasons in support of his claim :
“1. The appellant was a non-resident Indian staying in Lansing, Michigan, U.S.A. and had earned moneys by acting as an agent for enrolment of subscribers for life – Time and other magazines”. He was not carrying on any business of dealings in shares of securities in Lansing, U.S.A.
2. The shares debentures were sold by him on the advice of the brokers of the stock exchange through whom the shares were sold by his constituted attorney and mother, Mrs. Rukmanidevi Poddar.
3. The appellant had brought funds in India for investment in primary or secondary market in accordance with the scheme of Reserve Bank of India for portfolio investment. The letters showing approval of Reserve Bank of India for investment in India are filed in the course of hearing, which brings out the position that the appellant can invest the fund so brought as per the approval, but cannot carry on business of dealings in shares/debentures as that was prohibited by s. 29 of FERA. To carry on business, the appellant would be required to obtain permission from the RBI as per s. 28 of FERA and the appellant had not obtained any such permission, as he was only an investor.
4. The intention of the appellant in making the investments was, apart from earning dividend/interest, to avail of the capital appreciation on the rise in the value of investments. However, as held by Supreme Court in Rajabahadur Kamakhya Narain Singh vs. CIT (1970) 77 ITR 253 (SC), that where a person in selling his investments realises an enhanced price in excess over his purchase price, is not profit assessable to tax except as capital gains.
5. The funds brought into India by the appellant were invested in 43 different scrips, out of which he had sold only three scrips yielding capital gain and 5 scrips resulting in capital loss. Even out of the total short-term capital gain of Rs. 20,45,350 on three scrips only, the appellant made capital gain of Rs. 20,21,850 on a single scrip, viz., the ‘F’ Series Debentures of Reliance Industries Ltd. which constitutes nearly 99 per cent of total short-term capital gain. The gain on the other two scrips of Kinetic Honda and Orkay Silk Mills was Rs. 25,700 only.
6. The appellant had sold in a period of two months only his large investment of 37,650 debentures of Reliance as he learnt that the price of the debentures would go down as the non-convertible debentures of ‘F’ series will not be allowed to change to convertible debentures for issue of equity shares and therefore, the price would go down substantially. He, therefore, sold the debentures at prices ranging from Rs. 200 to Rs. 120 between 8th May, 1986, to 8th July, 1986. The appellant could not sell such large number of debentures, viz., 37,650 debentures in one day or even a week. The learned CIT had wrongly stated in his order under s. 263 that all these transactions have been done over a period of the year.
7. The tests laid down by three Courts judgements in (1970) 77 ITR 253 (SC) (supra), H. Holck Larsen vs. CIT (1972) 85 ITR 285 (Bom) and CIT vs. Trustee of Lady Wadia (1963) 48 ITR 500 (Bom) p. Nos. 7 and 8 of the first compilation), regarding intention to invest for earning dividend/interest and capital appreciation, frequency being not a conclusive test, though one of the tests, and regularity are fulfilled, as the appellant had not sold the investments regularly throughout the year.
8. In the preceding two years, there was sale of only one scrip in 1985-86 assessment year and two scrips in 1987-88 assessment year. We have submitted the details of sale of investments in subsequent two years also, i.e., asst. yrs. 1988-89 and 1989-90 where the number of scrips sold during the year is larger and without prejudice to the submission that even in subsequent two years he did not cease to be an investor, even if it is held to the contrary in the subsequent two years, it cannot affect the conclusion on the facts of the year under appeal, viz., 1987-88 assessment year, each year being a self-contained unit of assessment.
9. The Supreme Court held in (1970) 77 ITR 253 (SC) (supra) ‘if the transaction is in ordinary line of the assessee’s business, there would hardly be any difficulty in concluding that it was a trading transaction’. In the appellant’s case, he did not carry on any business, nor did he carry on any business in shares, securities even in U.S.A. where he was resident and therefore, this test also would establish that the appellant was only an investor and not dealer in shares.”
10. The interest which is chargeable under s. 9(1)(v) is that interest which is utilised in the business carried on in India and that is how we have to determine whether the assessee carried on any business in purchase and sale of the shares, in the course of which interest on borrowing was paid. It is true that the borrowings made for the purchase of the shares is a prima facie indication of the assessee’s indulging in the business venture, but the assessee being a non-resident cannot carry on and is debarred to carry on any business in India without any approval of the RBI under ss. 28 and 29 of the FERA, 1973. The assessee in this case had not obtained or being granted any such approval. It is not the assessee’s line of business. No business either in India or abroad is stated to have been carried on by the assessee for dealing in shares/securities or debentures. The solitary transaction of 2 scrips in this year does not give an impression of any business venture undertaken by the assessee in violation of the provisions of FERA. Sec. 9(1)(v), therefore, does not make the interest payment chargeable to tax in India.
11. The learned Departmental Representative made a point that interest accrued in India on the utilisation of money and therefore, tax was chargeable under s. 5 itself. Firstly it is not the case of the CIT and his order cannot be supported on a new ground not taken by him, and secondly in view of the decision of the Madras High Court in the case of C. G. Krishnaswami Naidu vs. CIT (supra), the interest accrues where the loan transaction is entered into and not where it is utilised. Here, in this case the loan is taken outside India and, therefore, the interest thereon cannot be held to have accrued in India merely on the ground that the utilisation of the loan was in India.
12. Sec. 195, even otherwise, we find, is not applicable as the payment is made outside India. The assessee transferred the funds to his account in the State Bank of India and from that account the payment is made outside India. Therefore, if the payment is not made in India and the same is made out of India, provisions of s. 195 cannot be applied to such a payment and consequently there would be no liability to deduct tax by a non-resident out of the payment made to a non-resident outside India. On all these counts, in our opinion, the assessee was not liable to deduct tax under s. 195 and consequently the payment made to the non-resident cannot be disallowed under s. 58(1)(a)(ii) of the Act. We accordingly hold that the order of the CIT under s. 263 is not in accordance with law. We accordingly, vacate the same and restore that of the AO.
13. In the result, the appeal is allowed.