Capital Gain on sale of Property by NRI & Section 195

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Capital Gain on sale of Property by NRI & Section 195

 

1.    As per Section 195, tax is required to be deducted at source from “sums chargeable to tax” before making the payment to a non-resident. Deduction has to be only on “sum chargeable to tax”.

2.    Logically, if the payment does not include any income chargeable to tax, no deduction of tax at source is required.

3.    However, there are many issues related to deduction of tax at source and the divergent view of the judiciary on the issue.

 

The main issue is whether deduction of tax is required on the capital gain or gross consideration?

One view is that tax is required to be deducted under Section 195 only on the capital gain, or on the whole amount of consideration paid to a non-resident?

 

The Karnataka High Court in CIT (International Taxation) vs. Samsung Electronics Co. Ltd. [2009] 185 Taxman 313 has held that deduction of tax at source was required on each remittance on the gross sum payable.

However, it appears that it has incorrectly applied the Supreme Court ruling in Transmission Corpn. of A.P. Ltd. vs. CIT [1999] 239 ITR 587that at the time of deduction of tax at source, the taxpayer needs to obtain an order under Section 195(2) to determine the amount of taxable income forming part of a composite payment.

The Supreme Court in GE India Technology Cen. (P.) Ltd. vs. CIT [2010] 193 TAXMAN 234 (SC) has corrected this ruling and held that “The obligation to deduct tax at source is, however, limited to the appropriate proportion of income chargeable under the Act forming part of the gross sum of money payable to the non- resident.”

 

One may note that there are a couple of recent decisions of the Bengaluru Tribunal which have not applied the above Supreme Court ruling.

 

 

In Syed Aslam Hashmi vs. ITO [2013] 55 SOT 441, the ITAT taking support of the Karnataka High Court decision in Samsung Electronics, has held that tax needs to be deducted at source on the whole of the consideration.

 

In R. Prakash vs. ITO [2013] 38 123 (Bangalore – Trib.) the ITAT has upheld the computation of interest under Section 201(1A) on tax payable on the whole amount of consideration instead of on the amount of gain.
Both the above decisions of the Bengaluru Tribunal, in our humble submission,  are not correct in law as they have not considered the decision of the Supreme Court in GE Technology Cen. P. Ltd., which has clearly stated that deduction of tax at source is required only on the portion of income embedded in the payment.

 

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