2006 (8) TMI 612 - SC - Income Tax

Applicability of Section 44C or 37(1) - In respect of head office expenditure - HELD THAT - In the absence of the original file showing that the revenue did not file any appeal by taking a conscious decision against the decision of the Calcutta High Court in the case of Rupenjuli Tea Co. Ltd.(supra) we assume that the revenue had accepted the ratio of the aforesaid case in Rupenjuli Tea Co. Ltd.(supra) and accordingly answer the question regarding the applicability of Section 44C of the Act against the revenue and in favour of the assessee. Learned counsel appearing for the revenue does not challenge that in the absence of applicability of Section 44C of the Act Section 37(1) would apply. Accordingly we answer question No.2 as well against the revenue and in favour of the assessee regarding the applicability of Section 44C of the Act as well as allow the HO expenditure u/s 37(1) of the Act. The Appeals are dismissed accordingly.

Summary

Issues:
- Interpretation of Income Tax Act, 1961 regarding deduction of salary and perquisite under "interest on securities" and disallowance under section 40A(5).
- Interpretation of Section 44C of the Income Tax Act and its applicability to head office expenses.

Analysis:

Issue 1: Interpretation of Income Tax Act regarding deduction of salary and perquisite under "interest on securities" and disallowance under section 40A(5).
The Supreme Court addressed the issue of whether each portion of salary and perquisite allowable under "interest on securities" should be reduced from the disallowance under section 40A(5) of the Income Tax Act. The assessee, a Foreign Bank, revised its income tax return claiming a deduction of head office expenses under Section 37(1) of the Act. The Tribunal accepted the assessee's position, prompting the revenue to appeal. The Court concluded that the question was decided in favor of the assessee in a previous order. Therefore, the first question was resolved against the revenue.

Issue 2: Interpretation of Section 44C of the Income Tax Act and its applicability to head office expenses.
The Court deliberated on the applicability of Section 44C of the Income Tax Act to the head office expenses of the assessee. The revenue argued that the entire case before the High Court revolved around the applicability of Section 44C. Despite the Tribunal's decision that Section 44C was not applicable, the revenue did not appeal a similar decision by the Calcutta High Court. The Court cited a three-judge bench decision emphasizing that the revenue is not precluded from filing an appeal even if no appeal was filed against similar orders. As the revenue failed to produce evidence of a conscious decision not to appeal the Calcutta High Court's decision, the Court assumed the revenue accepted the decision. Consequently, the Court ruled in favor of the assessee regarding the applicability of Section 44C and allowed the head office expenditure under Section 37(1) of the Act.

In conclusion, the Supreme Court dismissed the appeals, holding in favor of the assessee on both issues. The parties were directed to bear their own costs.