2007 (1) TMI 289 - AT - Income Tax

Summary

Issues Involved:
1. Treatment of expenses incurred for mobilization of deposits of Non-resident Indians (NRIs) as 'head-office' expenses u/s 44C of the Income-tax Act, 1961.
2. Conditional allowability of NRI expenses based on proof of non-claim in overseas returns.
3. Disallowance of deduction claimed on account of refund of interest on minimum balances to RBI.
4. Nature of interest refunded to RBI'whether penal or compensatory.

Summary:

Issue 1 & 2: Treatment of NRI Expenses as 'Head-Office' Expenses u/s 44C

Both counsels agreed that the issue is covered in favor of the assessee by the decision of this Tribunal in the assessee's case for assessment years 1993-94 to 1995-96. The Tribunal had held that the funds mobilized abroad were brought to India for the Indian business of the assessee bank, and the benefits reaped by the Indian branch were accounted for as Indian income. Therefore, the deduction of expenditure should be allowed, and these expenses incurred for procurement of business cannot be understood as Head Office expenses within the meaning of section 44 of the Act. The Tribunal directed the Assessing Officer to allow the deduction of actual expenditure basis and, if necessary, withdraw corresponding deduction allowed under section 44C.

Issue 3 & 4: Disallowance of Refund of Interest to RBI

The revenue contended that the amount paid to RBI was a penalty for infraction of law and hence not eligible for deduction. The assessee argued that the amount paid was merely a recovery of interest earlier paid by RBI, which was not found to be payable. The Tribunal noted that the amount paid was a refund of interest received earlier from RBI under section 42(1B) of the RBI Act, 1934, and not a penalty for any infraction of law. The Tribunal cited several Supreme Court decisions, including Mahalakshmi Sugar Mills Co. v. CIT and Prakash Cotton Mills (P.) Ltd. v. CIT, to support the view that the payment was compensatory in nature and not penal. Therefore, the amount paid was allowable as a deduction under section 37(1) of the Income-tax Act.

Conclusion:

The appeal was allowed, and the Tribunal directed the Assessing Officer to allow the deductions as claimed by the assessee, treating the expenses as compensatory and not penal in nature.