2015 (1) TMI 1255 - AT - Income Tax

Disallowance of deduction of head office expenses allocated to Indian branches - whether entire amount should be allowed as per the provisions of Article 7(3) of the convention between the Government of India and the Government of UAE? - whether or not the disallowances set out under section 44C, or for that purpose- any artificial disallowances under the provisions of the Income Tax Act as applicable to a resident assessee, will come into play in computation of taxable income of the assessee under Article 7 also? - Held that - Reverse discrimination, which would have resulted by not restricting the deductions in the light of the provisions of the Act for nonresidents assessees, was not permissible under the Indo UAE treaty prior to the protocol amendment in question, and such a reverse discrimination is permissible even now as specifically provided for in the said protocol amendment in the Indo UAE tax treaty itself. That is what is clearly discernable from the Indian tax treaty approach and is completely in harmony with the judicial precedents and the best practices in well developed international tax jurisdictions. The issue is squarely covered by the decision of this Tribunal, in assessee s own case for the assessment year 1996-97. This stand has now been specifically accepted in the protocol to the India UAE tax treaty. Just because there is a more specific and more unambiguous provisions post the protocol amendment, one cannot come to the conclusion that the judicial precedent, rendered by a coordinate bench, even without these specific and unambiguous expressions, cases to hold good. That will be stretching the things too far and will also be contrary to approach adopted by a very large number of judicial precedents set out earlier in this order. Thus we approve the conclusions arrived at by the CIT(A) and decline to interfere in the matter. The claim made by the assessee, by way of note to the income tax return, is rejected. As the assessee has incurred loss in this year, no part of head office expenses is allowable under section 44C. As the assessee has not anyway claimed any deduction in the income tax return in this respect, no disallowance is warranted. - Decided in favour of assessee MAT applicability - whether the provisions of Section 115 JB will apply to the assessee? - Held that - In the case of Krung Thai Bank (2010 (9) TMI 18 - ITAT, MUMBAI ), a coordinate bench of this Tribunal has, inter alia, held that the provisions of Section 115JB come into play only when the assessee is required to prepare its profit and loss account in accordance with the provisions of Part II and III of Schedule VI to the Act, but then since banking companies, under Section 211(2) of the Act, are not covered by this requirement, the provisions of Section115JB cannot be applied in the case of the banking companies. Of course, there is an amendment in Section 115JB which extends applicability of this section to the cases in which the accounts are not prepared in accordance with the Schedule VI requirements as well, but then this amendment is effective from 1st April 2013. The assessment year before us is 2002-03 and it remains unaffected by this legislative amendment. In view of these discussions, as also bearing in mind entirety of the case, we uphold the grievance of the assessee. We, accordingly, direct the Assessing Officer to delete the impugned levy of MAT under section 115 JB. - Decided in favour of assessee

Issues Involved:
1. Condonation of delay in filing the appeal.
2. Disallowance of head office expenses allocated to Indian branches.
3. Applicability of Section 44C and Article 7(3) of the Indo-UAE tax treaty.
4. Disallowance of provision for gratuity.
5. Disallowance under Section 37 for expenses incurred outside India.
6. Applicability of Section 115JB (Minimum Alternate Tax) to the assessee.

Condonation of Delay in Filing the Appeal:
The appeal was filed with a delay of 7 days. The assessee moved a condonation petition. After considering the rival contentions, the delay was condoned, and the matter was decided on merits.

Disallowance of Head Office Expenses Allocated to Indian Branches:
The assessee, a banking company incorporated in UAE, claimed a deduction for head office expenses allocated to its Indian branches. The Assessing Officer (AO) disallowed the claim based on Section 44C of the Income Tax Act, which restricts such deductions to 5% of the profits. The CIT(A) upheld the disallowance, noting that similar claims had been consistently disallowed in preceding years. The Tribunal considered whether disallowances under Section 44C or any artificial disallowances under the Income Tax Act apply to the computation of taxable income under Article 7 of the Indo-UAE tax treaty. It was held that domestic tax laws continue to apply unless specifically overridden by the tax treaty. The Tribunal confirmed that the restrictions on deductibility under domestic law apply, and the assessee's plea was rejected.

Applicability of Section 44C and Article 7(3) of the Indo-UAE Tax Treaty:
The Tribunal examined whether the provisions of Section 44C, which limit the deduction of head office expenses, are overridden by Article 7(3) of the Indo-UAE tax treaty. The Tribunal referred to previous decisions, including the case of Mashreq Bank, and concluded that the limitations under domestic tax laws are applicable unless explicitly stated otherwise in the tax treaty. The Tribunal rejected the assessee's contention that Article 7(3) allows for deductions without the limitations of Section 44C.

Disallowance of Provision for Gratuity:
The assessee's claim for a deduction of Rs. 86,033 on account of provision for gratuity was disallowed by the AO. The CIT(A) upheld the disallowance based on the specific disabling provisions under the domestic law. The Tribunal, following its decision on the first ground, dismissed this ground as well.

Disallowance under Section 37 for Expenses Incurred Outside India:
The assessee claimed a deduction of Rs. 3,58,421 under Section 37 for expenses incurred outside India for its Indian branches. The AO disallowed this amount, treating it under Section 44C. The Tribunal, consistent with its decision on the first ground, dismissed this ground of appeal.

Applicability of Section 115JB (Minimum Alternate Tax) to the Assessee:
The assessee contended that Section 115JB, which deals with Minimum Alternate Tax (MAT), does not apply to banking companies. The Tribunal referred to the case of Krung Thai Bank, where it was held that Section 115JB applies only when the profit and loss account is prepared in accordance with Schedule VI of the Companies Act. Since banking companies are not required to follow this schedule, the provisions of Section 115JB do not apply. The Tribunal upheld the assessee's contention and directed the AO to delete the MAT levy.

Conclusion:
The appeal was partly allowed. The Tribunal dismissed the grounds related to the disallowance of head office expenses, provision for gratuity, and expenses incurred outside India. However, it allowed the additional ground regarding the applicability of Section 115JB, providing relief to the assessee by deleting the MAT levy.

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