1. The limited issue that we are required to adjudicate in this appeal is whether or not, the CIT(A) was justified in upholding the AO's action of declining to rectify the rate at which the interest income is taxed in India in the hands of this American company. The, assessee's contention is that in the hands of the assessee, this income is taxable @ 15 per cent in terms of Article 11(2) of the India USA DTAA [Notification No. 990(E), dt. 20th Nov., 1990; 187 ITR (St) 102], and therefore, taxing the same @ 20 per cent in the impugned intimation under Section 143(1)(a) constitutes a mistake apparent from the records which the AO ought to have rectified under Section 154. The AO's justification for his inertia is that in the computation sheet attached to the IT return, the assessee itself claimed the tax rate on interest at 15 per cent. There cannot be a mistake, according to the AO, in accepting assessee's own computation of income.
2. In the rectification petition dt. 21st Aug., 1997, which has lead to this litigation before us it was contended that the correct rate at which interest income was required to be taxed in the hands of the assessee-company is 15 per cent and not 20 per cent as is the rate taken in the intimation under Section 143(1)(a) of the IT Act, 1961.
The AO was, accordingly, requested to rectify this mistake. The AO turned down the request on the ground that in the computation sheet attached to the IT return, it was assessee's claim that the rate at which interest income is required to be taxed in the hands of the assessee is 20 per cent. Therefore, in the opinion of the AO, there was no such mistake apparent from the records liable to be rectified under Section 154 of the Act. Aggrieved, assessee carried the matter in appeal before the CIT(A) but in vain. The CIT(A) confirmed and justified the action of the AO on the ground that only mistakes which can be rectified under Section 154 are the mistakes apparent from record (which) are obvious or patent mistakes, and would not include 'a mistake which can be established following a process of reasoning'. It was noted that the mistake as pointed out, even if a mistake, could only be established by a long drawn process of reasoning. While commiserating with the assessee and acknowledging the possibility that "paying tax at higher rate, despite having the benefit of a lower rate, will be unfair to the appellant", learned CIT(A) expressed his helplessness that "the fiscal statutes do not take into account equity and justice". The CIT(A) concluded that "the AO was justified in holding that there was no mistake apparent from record in the intimation, and, therefore, he could not have rectified it through the impugned order under Section 154". The assessee is not satisfied by the order of the CIT(A) also, and is in second appeal before us.
3. We have heard the rival contentions, perused the material on record and duly considered the factual matrix of the case as also the applicable legal position.
4. We find that the mandate of Section 143(1)(a) is quite clear and unambiguous inasmuch as "where a return has been made under Section 139, or in response to notice under Sub-section (1) of Section 142,...if any refund is due on the basis of such return, it shall be granted to the assessee...". The only thing which entitles an assessee to refund of excess tax due to him is such a refund being due to him' on the basis of such a return. Now, the question is how this exercise is to be carried out. It presupposes that the AO has to first compute the tax payable by the assessee, and in case the sum so arrived at is in excess of the aggregate of prepaid and self-assessment taxes, the excess amount is to be refunded. The tax so payable has to be worked out in accordance with the law as in force. In this process, it is not open to the Revenue authorities to take advantage of mistakes committed by the assessee or to deprive the assessees of a fair and reasonable opportunity, even when specifically prayed for, of correcting their inadvertent errors. A tax cannot be levied on an assessee at a higher rate merely because the assessee, under a mistaken belief, offered the income for taxation at that rate. It can only be levied when it is authorised by the law, as is the mandate of Article 265 of the Constitution of India. A sense of fairplay by the field officers towards the taxpayers is not an act of benevolence by the field officers, but it is the minimum civilized behaviour that is required to be extended to the taxpayers. If authority is needed even for justifying this basic civilized behaviour towards the taxpayers, one need not look beyond the circulars issued by the CBDT itself. In Circular No. 14, which has been taken note of by the Hon'ble jurisdictional High Court in the case of Dattatraya Gopal Bhotte v. CIT , the Board has these words of advice for the field "...Officers of the Department must not take advantage of ignorance of an assessee as to his rights. It is one of their duties to assist taxpayer in every reasonable way, particularly in the matter of claiming and securing any relief and in this regard the officers should take initiative in guiding the taxpayer where proceedings or other particulars before them indicate that some refund or relief is due to him. This attitude would in the long run benefit the Department for it would inspire confidence in him that he may be sure of getting a square deal from the Government...." It is heartening to note that the CBDT has given such humane guidance to the field officers. The best thing that the field officers can do to enhance the respect for and trust in the Department, is to follow these valuable words of advice in letter and in spirit, but then, sometime overzealous, even if well meaning, efforts to collect the revenue end up sacrificing these humane niceties on the way, and thus derail the efforts of the CBDT to earn taxpayer's confidence and trust. That must not be allowed to happen. An action or inaction which erodes any taxpayer's faith, and particularly of a non-resident taxpayer's faith which is now so important for attracting the much needed foreign investment, in Indian tax and judicial system does not do any Indian any good. The well meaning advice given by the CBDT must be implemented to the fullest extent. As to what is binding nature of this advice, we may only refer to Section 119 of the Act and Hon'ble Supreme Court's judgment in the case of UCO Bank v. CIT . Hon'ble Supreme Court has time and again held that the circulars of the CBDT are legally binding on the Revenue and that this binding character attaches to the circular even if they be found not in accordance with the correct interpretation of section or they depart or deviate from such construction. The advice contained in the circular, which is reproduced above, is also legally binding on all the field officers.
5. Let us come back to the specific facts of the case before us. There is no dispute that the assessee is a company incorporated in the United States of America. The fact that the assessee is a USA based company was also evident from the SEBI approval dt. 15th Oct., 1993, and RBI approval dt. 14th Oct., 1993, which were filed along with the return of income. This is stated in para Nos. 1 to 4 of the statement of facts filed before the CIT(A), which have not been disputed or controverted.
This fact is also said to be recorded in the assessment order for the asst. yr. 1994-95. There is no dispute that the return was filed on 30th June, 1995, and that before it could be processed under Section 143(1)(a) of the Act, and on 8th July, 1996, the assessee filed a letter, inter alia, pointing out as follows : "...Moreover at the time of filing of IT return, our client had offered interest on debentures from companies on Rs. 15,50,466 on which, through oversight, tax was calculated at 20 per cent under the IT Act, 1961, instead of a lower rate of 15 per cent prescribed under Article 11(2) of the DTAA between India and the USA. Since the provisions of the DTAA override the provisions of the IT Act, such interest income is taxable @ 15 per cent ... would, therefore, request you to finalize the assessment ... and after charging the correct rate of tax on the interest income...." It is unambiguous position that under Article 11(2) of the India USA DTAA, interest income is to be charged to tax in the source country but the rate of tax is provided as 15 per cent. There can also not be any dispute that in terms of Section 90 of the IT Act, in a case India has entered into a DTAA with any other country, in respect of the persons covered by such an agreement, the provisions of the IT Act apply only to the extent the same are more beneficial to the assessee. Therefore, it is free from any doubt or controversy that interest income in the hands of a resident of the USA cannot be taxed at a rate higher than 15 per cent. No two views are possible about this legal position. Levy of tax on interest income in the hands of a US company at a rate higher than 15 per cent is, therefore, a mistake apparent from record within meaning of that expression under Section 154 of the Act. It does not need any long drawn process of reasoning, as is the case of the CIT(A), to come to this conclusion; all it needs is a plain reading of Section 90 of the Act and of the applicable DTAA notified under that section.
It is bounden duty of the AO to compute the tax liability in accordance with the law, which essentially implies that the tax liability is to be computed in accordance with the IT Act, and other applicable legal provisions-including, of course, notifications issued under the Act. It is futile to suggest, as has been strenuously argued before us by the enthusiastic Departmental Representative, that the notifications issued under Section 90 and duly notified in the Official Gazette need not necessarily be taken into account by the AO while computing the tax liability of the assessee, unless the claim in respect of the same has been made in the IT return itself. This argument, in our understanding, belittles the all important role played by an AO whose job is to levy the tax only in accordance with the law. Can it be said that a levy of tax which is contradictory to the DTAA entered into by India with a foreign country, and which is duly notified in the Official Gazette under Section 90 of the Act, is in accordance with the law The answer is obvious. The AO was too hyper- technical and pedantic in his approach. As for learned CIT(A)'s words of helplessness, we can only say that he was perhaps taking too modest and a somewhat superficial a view of the AO's powers and, correspondingly, of his duties as well.
For the reasons set out above, we are not in his agreement CIT(A)'s perceptions on the issue and we find the same to be unsustainable in law.
6. In the light of the above discussions, we find it a fit case to uphold the assessee's grievance. The AO shall give effect to the correct rate in accordance with the law, and recompute the tax liability on that basis. The assesses gets the resultant relief.