2013 (11) TMI 1640 - AT - Income Tax

Addition on account of interest received from the Head Office - Held that - The interest received by the Indian branch of a foreign bank from its Head Office, therefore, did not give rise to any income which was taxable in India since one could not make profit out of himself. Claim for deduction of bad debts - Held that - This issue now stands squarely covered by the decision of Hon ble Supreme Court in the case of TRF Limited vs. CIT (2010 (2) TMI 211 - SUPREME COURT ) wherein it has been held that as per the amended provisions of section 36(1)(vii), it is not necessary for the assessee to establish that the debt in fact has become irrecoverable and it is enough to claim deduction under the said provision if the relevant debt is written off by the assessee as irrecoverable in its books of account. Respectfully following the said decision of Hon ble Supreme Court in the case of TRF Ltd. (supra), we uphold the impugned order of the ld. CIT(A) deleting the addition made by the A.O. on account of bad debts written off Disallowance of transaction charges on Nostro account u/s 40(a)(i) - Held that - Transaction charges paid on Nostro Account were in the nature of bank charges for maintaining the accounts with banks outside India. These charges were recovered directly by way of debits to the concerned accounts of the assessee with these banks and the same represented business income of those banks which accrued/arisen outside India. As held by the Tribunal, no tax therefore was required to be deducted at source from the transaction charges paid on Nostro account and the disallowance made by the A.O. u/s 40(a)(i) of the Act was not sustainable. Respectfully following the orders of the Tribunal on the similar issue involved in earlier years, we uphold the impugned order of the ld. CIT(A) deleting the disallowance made by the A.O. on account of transaction charges u/s 40(a)(i) of the Act Traveling expenses incurred by the Head Office on traveling of its own staff and directly in connection with India branch are allowable u/s 37(1) of the Act and section 44-C has no application to such expenses

Issues Involved:
1. Addition of interest received from Head Office.
2. Taxation of interest paid to Head Office.
3. Addition on account of excess provision for expenses.
4. Treatment of broken period interest.
5. Disallowance of bad debts written off.
6. Disallowance of transaction charges on Nostro account.
7. Disallowance of traveling expenses and certified fees.
8. Repeat claim for deduction on account of bad debts written off.
9. Applicability of section 14A.
10. Alternative claim on account of broken period interest.

Detailed Analysis:

1. Addition of Interest Received from Head Office:
The first issue concerns the addition of Rs. 21,34,411/- made by the A.O. and confirmed by the CIT(A) on account of interest received from the Head Office. The assessee, a branch of a foreign bank, claimed that the interest received from its Head Office was not taxable in India as it was a transaction with itself. The Tribunal agreed with the assessee, citing the Special Bench decision in Sumitomo Mitsui Banking Corpn. vs. Dy. Director of Income Tax, which held that interest received by an Indian branch from its Head Office does not constitute taxable income in India. Consequently, the addition was deleted.

2. Taxation of Interest Paid to Head Office:
The second issue involves the taxation of Rs. 86,23,836/- interest paid by the Indian branch to its Head Office. The Tribunal, referencing the same Sumitomo Mitsui Banking Corpn. case, held that such interest payments are not taxable in India as they do not generate income. The addition was therefore deleted.

3. Addition on Account of Excess Provision for Expenses:
The third issue involves the addition of Rs. 58,948/- for excess provision for expenses. The assessee contended that this amount was offered in the subsequent year's return. The Tribunal noted that appropriate relief for the subsequent year had already been directed by the D.R.P. and dismissed this ground.

4. Treatment of Broken Period Interest:
The fourth issue concerns the treatment of broken period interest. The CIT(A) directed the A.O. to classify the interest as either capital expenditure or revenue expenditure based on whether the income from the sale of securities was treated as capital gains or business income. The Tribunal upheld this direction, referencing decisions from the Bombay High Court and the Supreme Court.

5. Disallowance of Bad Debts Written Off:
The fifth issue pertains to the disallowance of Rs. 16,35,60,206/- on account of bad debts written off. The CIT(A) allowed the deduction, citing the Special Bench decision in the assessee's own case, which stated that writing off debts in the books satisfies section 36(1)(vi). The Tribunal upheld this decision, referencing the Supreme Court ruling in TRF Limited vs. CIT.

6. Disallowance of Transaction Charges on Nostro Account:
The sixth issue involves the disallowance of Rs. 5,19,297/- transaction charges on the Nostro account under section 40(a)(i). The Tribunal noted that similar issues in earlier years were consistently decided in favor of the assessee, holding that such charges, being bank charges for maintaining accounts outside India, did not require tax deduction at source. The disallowance was thus deleted.

7. Disallowance of Traveling Expenses and Certified Fees:
The seventh issue concerns the disallowance of Rs. 9,09,333/- for traveling expenses and certified fees. The CIT(A) deleted the disallowance, following earlier appellate orders. The Tribunal upheld this decision, referencing the Bombay High Court ruling in Commissioner of Income-tax v. Emirates Commercial Bank Ltd., which allowed such expenses under section 37(1).

8. Repeat Claim for Deduction on Account of Bad Debts Written Off:
The eighth issue involves the repeat claim for bad debts written off amounting to Rs. 21,75,000/-. The CIT(A) directed the A.O. to allow the claim in the current year if the Tribunal's decision for A.Y. 1995-96 was reversed. The Tribunal found this direction improper, stating that the deduction could not be allowed in A.Y. 2005-06 as the debts were written off in A.Y. 1995-96. The direction was set aside.

9. Applicability of Section 14A:
The ninth issue involves the applicability of section 14A concerning the interest received from the Head Office. The Tribunal admitted the additional ground and decided in principle that section 14A applies to exempt interest income from the Head Office. The matter was remitted to the A.O. to determine the quantum of disallowance.

10. Alternative Claim on Account of Broken Period Interest:
The tenth issue, raised in the assessee's cross-objection, became infructuous due to the decision on the broken period interest in the Revenue's appeal. Consequently, the cross-objection was dismissed.

Conclusion:
The appeals were partly allowed, with several additions and disallowances being deleted or upheld based on judicial precedents and consistent Tribunal decisions. The cross-objection was dismissed as infructuous.

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