DATE OF INCOME, NOT INVESTMENT DETERMINING INCOME TAX RATE

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In a verdict that will have a bearing on the taxability of dividends from investments made in India by foreign entities, a Mumbai tax tribunal has held that the current provisions of the Double Taxation Avoidance Agreement (DTAA) are applicable even in case of investments made before the current treaty came into effect. What matters is not the treaty on the date of investment, but the treaty in force on the date earnings from investment accrued, the ITAT held.

The ITAT gave this verdict on an appeal filed by the I-T department against Castrol. In this case the company had earned dividend income on investments made before November 23, 1981, from when the current DTAA between India and the UK became operational.
The tax rate applicable before this date was 25% while the current provisions warrant a lesser rate, 15%.

The assessing officer levied tax at the rate of 25%, but the Commissioner, Income Tax (Appeals), allowed the rate of 15% as under the new provisions of DTAA. This decision has now been upheld by the ITAT. The important point here is that the date on which income arises from the investment is more important in determining the rate applicable, rather than the date on which the investment was made.

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