2015 (12) TMI 1586 - AT - Income Tax

Assessee s claim of relief u/s 90 - CIT(A) erred in restricting the assessee s claim of relief u/s 90 to the extent of tax payable in India on net income i.e difference between interest earned from M/s AHPL and interest paid on borrowings made for advancing the loans to M/s AHPL - Held that - The provisions of sec. 90 of the Act and clauses of DTAA between India and Singapore clarify that tax credit to the extent of income derived in Singapore and offered to tax in India should be granted. Relief from double taxation is provided by abatement on the basis of mutual agreement between the two States concerned whereby the assessee is given relief by credit in a particular manner even though he is taxed in both the countries. Relief can be in the form of credit for tax payable in another country or by charging tax at lower rate. The procedure to be adopted by the Assessing Officer for granting relief is to determine in the first place the total income of the person liable to tax in India in accordance with the provisions of the Act and then allow relief as per the terms of the tax treaty entered with the other contracting country where the income has suffered double taxation. Article 25 of the DTAA between India and Singapore deals with relief to be granted in respect of double taxed income. The said Article restricts the allowability of credit to an amount not exceeding the tax payable in India in respect of such income from Singapore. In similar circumstances the Mumbai Bench of the Tribunal in the case of JCIT vs Digital Equipments India Ltd 2004 (3) TMI 711 - ITAT MUMBAI has observed that credit of tax paid in USA cannot exceed the income tax liability payable in India in view of clause 25(2)(a) of DTAA between India and USA. Thus we remit this issue in dispute to the file of the Assessing Officer for reconsideration. Addition towards loss on foreign exchange derivatives transactions - Hel that - We remit this issue back to the file of the Assessing Officer. The Assessing Officer shall reconsider the issue afresh in the light of the above order of this Tribunal in Deputy Commissioner Of Income Tax Company Circle-I (1) Chennai Versus M/s Asvini Fisheries Pvt Ltd 2016 (1) TMI 538 - ITAT CHENNAI after giving adequate opportunity to the assessee wherein held Assessing Officer has to consider the foreign exchange derivative in proportion to export turnover as regular business transaction of the assessee. If the derivative transaction undertaken by the assessee is in excess of export turnover then that loss suffered in respect of that portion of excess transaction has to be considered as speculative loss only and that excess derivative transaction has no proximity with export turnover and the Assessing Officer is directed to compute accordingly. Further the Assessing Officer has to see whether there is any premature cancellation of forward contract of foreign exchange and that transaction should be taken out for the purpose of considering the business loss and only the transactions which are completed to be considered for the purpose of determining the business loss from these foreign exchange forward contract. With this observation we remand this issue to the file of the Assessing Officer for fresh consideration. Addition u/s 14A - Held that - We make it clear that if the assessee has already disallowed more than 5% of the exempted income the same has to be sustained. Ordered accordingly. This ground of appeal is partly allowed. Eligibility for deduction u/s 35D in respect of total expenditure incurred towards share issue - Held that - Extension of the industrial undertaking cannot be considered as complete in the relevant previous year. Ld. CIT(Appeals) was justified in denying assessee claim under Section 35D of the Act for the impugned assessment year. Disallowance u/s 40(a)(ia) on payment of catering charges to catering contractor - Held that - This issue is squarely covered in favour of the assessee by the decision of Special Bench in the case of Merilyn Shipping and Transports vs Addl. CIT 2012 (4) TMI 290 - ITAT VISAKHAPATNAM wherein it was held that only the amount outstanding at the close of the financial year has to be disallowed u/s 40(a)(ia) of the Act. Being so in our opinion the Assessing Officer has to see whether any amount is outstanding at the close of the financial year and that portion is to be disallowed. Accordingly this issue is remitted back to the file of the Assessing Officer with the above direction. Disallowance u/s 40(a)(i) - payments made to non-residents in respect of which tax deduction has been made at lower rates without obtaining a certificate u/s 195(2)- Held that - Assessee was right in effecting deduction of tax at source considering se 44BB of the Act. The disallowance was rightly deleted by the ld. CIT (Appeals) Disallowance u/s 40(a)(i) in respect of dry-docking charges paid to Fair Mount Marine BV Netherlands - Held that - The assessee took the plea for the first time that the said service was covered under Article 8A of DTAA before the CIT(A) and there was no such claim made before the Assessing Officer. In our opinion the Assessing Officer has to examine the issue whether Article 8A of India-Netherlands DTAA is applicable to the assessee s case or not. Accordingly this issue is remitted back to the file of the Assessing Officer for fresh consideration.

Summary

Issues Involved:
1. Restriction of relief under Section 90 of the Income Tax Act.
2. Deletion of addition towards loss on foreign exchange derivatives transactions.
3. Deletion of disallowance of interest under Section 14A read with Rule 8D(2)(ii).
4. Deletion of disallowance of depreciation under Section 32.
5. Eligibility for deduction under Section 35D for share issue expenses.
6. Deletion of disallowance under Section 40(a)(ia) for catering charges.
7. Deletion of disallowance under Section 40(a)(i) for payments to non-residents with lower TDS.
8. Deletion of disallowance under Section 40(a)(i) for payments made from Dubai Branch without TDS.
9. Deletion of disallowance under Section 40(a)(i) for dry-docking charges.

Detailed Analysis:

1. Restriction of Relief under Section 90 of the Income Tax Act:
The assessee claimed relief under Section 90 for tax withheld by Singapore authorities on interest income earned from Aban Holdings Pte Ltd (AHPL). The Assessing Officer (AO) restricted the relief to the tax payable in India on net income, i.e., the difference between interest earned and interest paid on borrowings for advancing loans to AHPL. The CIT(A) upheld this view, directing the AO to compute tax liability on net income and allow relief accordingly. The Tribunal, referencing the DTAA between India and Singapore, remitted the issue to the AO for reconsideration, noting that relief should be granted to the extent of income derived in Singapore and offered to tax in India.

2. Deletion of Addition towards Loss on Foreign Exchange Derivatives Transactions:
The AO disallowed a loss claimed by the assessee on derivative contracts, considering it notional as the contracts were not concluded by the valuation date. The CIT(A) favored the assessee, and the Tribunal referenced similar cases, noting that derivative transactions related to export turnover should be considered regular business transactions. The Tribunal remanded the issue back to the AO to determine if the derivative transactions were proportionate to the export turnover and to exclude any prematurely canceled contracts.

3. Deletion of Disallowance of Interest under Section 14A read with Rule 8D(2)(ii):
The AO disallowed a portion of interest expenses under Section 14A, applying Rule 8D, as the assessee had received exempt dividend income. The CIT(A) reduced the disallowance, and the Tribunal upheld this, noting that Rule 8D was not applicable for the assessment year 2008-09. Instead, it directed disallowance of 5% of the exempt income as a reasonable expenditure towards earning the exempted income.

4. Deletion of Disallowance of Depreciation under Section 32:
The AO disallowed depreciation on windmills, but the CIT(A) allowed it, following earlier Tribunal orders for previous assessment years. The Tribunal upheld the CIT(A)'s decision, confirming the allowance of depreciation on windmills as per the consistent findings in the assessee's favor in prior years.

5. Eligibility for Deduction under Section 35D for Share Issue Expenses:
The AO disallowed the deduction of share issue expenses, considering them capital in nature. The CIT(A) allowed the deduction under Section 35D. The Tribunal, referencing the Supreme Court judgment in Brooke Bond India Ltd and its own earlier orders, held that share issue expenses that bring enduring benefit are capital in nature and not eligible for deduction under Section 35D. The Tribunal allowed the Revenue's appeal on this ground.

6. Deletion of Disallowance under Section 40(a)(ia) for Catering Charges:
The AO disallowed catering charges under Section 40(a)(ia) due to non-deduction of TDS. The CIT(A) deleted the disallowance, and the Tribunal, referencing the Special Bench decision in Merilyn Shipping and Transports, remitted the issue back to the AO to verify if any amount was outstanding at the close of the financial year and disallow only that portion.

7. Deletion of Disallowance under Section 40(a)(i) for Payments to Non-residents with Lower TDS:
The AO disallowed payments to non-residents, claiming the assessee deducted TDS at a lower rate without obtaining a certificate under Section 195(2). The CIT(A) deleted the disallowance, and the Tribunal upheld this, referencing its earlier orders and confirming that the assessee was right in effecting TDS considering Section 44BB of the Act.

8. Deletion of Disallowance under Section 40(a)(i) for Payments Made from Dubai Branch without TDS:
The AO disallowed payments made from the Dubai branch without TDS. The CIT(A) deleted the disallowance, and the Tribunal remitted the issue back to the AO for fresh consideration, referencing its earlier order for the assessment year 2007-08, directing the AO to pass a speaking order after considering relevant decisions.

9. Deletion of Disallowance under Section 40(a)(i) for Dry-docking Charges:
The AO disallowed dry-docking charges paid to Fairmount Marine BV Netherlands due to short deduction of TDS. The CIT(A) deleted the disallowance, finding the services covered under Article 8A of the India-Netherlands DTAA. The Tribunal remitted the issue back to the AO to examine if Article 8A was applicable.

Conclusion:
The assessee's appeal was allowed for statistical purposes, and the Revenue's appeal was partly allowed. The Tribunal directed the AO to reconsider several issues, providing detailed guidelines for fresh assessment and ensuring compliance with relevant legal precedents and provisions.