I. S. VERMA, J.M. :
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 assessees 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 assessees 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 assessees 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 . As regards the acceptance of alternate plea of the assessee by the CIT(A), the assessees counsel has supported the order of CIT(A).
3. 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 assessees claim by invoking the provisions of s. 40A(2) whereas the CIT(A) has allowed the assessees 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. : 143ITR236(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 assessees 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 assessees 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.
4. 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 assessees 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.
5. Even otherwise, we are of the opinion that for acceptance of the assessees alternate plea the provisions of s. 195 and s. 58(1)(a)(ii) requires to be considered in detail. Under the provisions of s. 195 the person concerned is under obligation to deduct tax at source and is not empowered to decide as to whether the said income is taxable in India or not. If such person thinks that he is not liable to deduct the tax at source, then the proper course is to approach the concerned IT authority for seeking permission to remit the income to non-residents without deducting the tax at source. If this procedure is not followed then the Revenue will be justified in holding the person concerned as defaulter for contravention of the provisions of s. 195 and will be justified in taking of consequential actions such as recovery of TDS or disallowance of expenditure by invoking the provisions of s. 40A(2) or s. 58(1)(a)(ii) as the case may be.
6. Similarly, if the person concerned is aggrieved by the decision of IT authorities holding him defaulter for not deducting tax at source, as required under s. 195, then, the person has only one remedial recourse which is in the form of appeal under s. 248 of the IT Act and nothing else, i.e., the person concerned cannot challenge the subsequent consequential actions for recovery of TDS or disallowance of expenditure without preferring an appeal under s. 248 challenging the order holding the person as defaulter for contravention of the provisions of s. 195.
7. In view of our aforesaid discussion, we remand the matter back to the file of the CIT(A) with direction to decide the appeal afresh in accordance with law and in the light of our aforesaid observations after allowing the assessee an opportunity of being heard.
8. Ground No. 2 :
'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 Rs. 19,108 for loss on account of changes in foreign exchange rate and deduction from the capital gain ignoring the fact that the subsequent remittance has no nexus with the transfer of shares and securities.'
We have heard the learned Departmental Representative as well as the assessees counsel in the matter. The learned Departmental Representative has relied on the AO whereas the assessees counsel relied on the order of the CIT(A). The assessees counsel also relied on the decision of Karnataka High Court in the case of Kirloskar Asea Ltd. vs . CIT : 117ITR82(KAR) , decisions in the cases of CIT vs . Cooper Engineers Ltd. : 68ITR457(Bom) , Addl. CIT vs . K. Ramabrahmam & Sons P. Ltd. : 115ITR369(AP) , CIT vs . Mithlesh Kumar : 92ITR9(Delhi) , Addl. CIT vs . K. S. Gupta : 119ITR372(AP) and CIT vs . Maithreyi Pai : 152ITR247(KAR) .
9. We have considered the rival submissions as well as the facts and circumstances of the case. We have also gone though the cases relied on by the assessees counsel. After careful consideration of the material before us, we are of the opinion that the CIT(A) was justified in allowing the assessees claim because, as has been held by the Karnataka High Court in the case of Kirloskar Asea Ltd. (supra), foreign currency was a capital asset and, therefore, any profit or loss due to fluctuations in the conversion rate has to be considered as capital gain or loss.
This ground of appeal is rejected.
10. Ground No. 3 :
'On the facts and in the circumstances of the case and in law the learned CIT(A) erred in entertaining the objections of the assessee on both the above mentioned points without taking into account the facts that neither of them was a ground of objection in Form No. 6A filed on 13th April, 1989 which alone had the effect of opening the already completed assessment under s. 143(1).'
The learned Departmental Representative has submitted that the issues agitated by the assessee before the CIT(A) were not raised while objecting the assessment framed under s. 143(1) and, therefore, the assessee could not agitate the same in appeal against the order under s. 143(3). The assessees counsel, on the other hand, submitted that the ground raised by the Revenue do not arise out of the order of the CIT(A) and, therefore, the Revenue cannot be allowed to agitate the issue at this stage. On merits, the assessees counsel has submitted that once an assessment is framed under s. 143(3) the assessee has all rights to challenge the whole of assessment and its objections raised against the assessment under s. 143(1) cannot be a hindrance against the assessees rights.
11. After considering the rival submissions and the provisions of s. 143(2)(a) as well as of s. 143(3) as they exist at the relevant time, we are of the opinion that once assessment framed under s. 143(1) was either objected by the assessee as provided under s. 143(2)(a) as the AO wanted to verify the correctness or completeness of the return by invoking the provisions s. 143(2)(b) the AO has no option but to make a fresh assessment on the total income or loss of the assessee by making an order under s. 143(3) and while doing so the AO was not precluded from making an addition or disallowance as may be warranted on the facts and circumstances of the case and such an assessment was an assessment under s. 143(3) which is appealable under s. 246(1) or s. 246(2) as the case may be meaning thereby in such cases neither the AO is precluded from making any addition nor the assessee is precluded from agitating such an assessment either wholly or partly by way of appeal and the nature of objections raised in Form No. 6A filed as provided under s. 143(2)(a) were not any hindrance in this respect. We, therefore, hold that the assessee had right to challenge the assessment framed under s. 143(3) fully or partly. This ground of appeal is rejected.
12. In the result the appeal is partly allowed.